Understanding Accounting and Financial Reporting Council (AFRC) Investigations in Hong Kong
The Accounting and Financial Reporting Council (AFRC) serves as the regulatory body overseeing the accountancy profession in Hong Kong.
Its role is to maintain high standards of financial reporting and ensure stakeholders’ confidence. Investigations conducted by the AFRC can have significant implications for audit firms and Certified Public Accountants (CPAs).
This article aims to provide an overview of key elements of AFRC investigations, including cooperation during investigations, potential sanctions, review and appeal mechanisms, and how professionals can prepare for such inquiries.
What is the AFRC?
Established under the Accounting and Financial Reporting Council Ordinance (Cap. 588), the AFRC operates as an independent regulatory body in Hong Kong. Its primary responsibilities include:
- Public Interest Entity (PIE) Auditors: These are auditors of listed corporations whose securities include shares or stocks, or those of a listed collective investment scheme.
- Non-PIE Auditors: These auditors focus on listed corporations whose securities do not include shares or stock.
- Responsible Persons Associated with Registered PIE Auditors: This includes individuals recorded in the PIE auditor register as responsible persons, such as engagement partners, engagement quality control reviewers, or quality control system responsible persons.
The AFRC achieves its regulatory objectives through investigations into any misconduct and taking follow-up action against identified irregularities. Irregularities may range from falsifying documents, making materially false statements, failing to observe professional ethics and standards, to refusing to comply with directions from the AFRC.
Cooperation During Investigations
Cooperation from regulatees during AFRC investigations is essential. Early engagement and cooperation can influence the severity of sanctions if disciplinary action is considered necessary.
The AFRC considers early cooperation as a mitigating factor that can lead to lesser penalties. Conversely, lack of cooperation or refusal to comply with deadlines set by investigators can be considered aggravating factors leading to more severe sanctions.
Cooperation by regulatees involves answering inquiries and attending interviews where they must respond directly to questions posed by the investigator. Failure to cooperate, such as missing deadlines or providing incomplete information, can result in harsher penalties.
Investigation Process
The investigation process undertaken by the AFRC comprises several stages:
1. Information Gathering:
The AFRC collects information about potential misconduct from various sources, including public complaints, referrals from other regulators, whistle-blower reports, inspections, and reviews of financial statements.
The AFRC assesses this information to identify any potential misconduct or irregularities and determines whether sufficient evidence exists to initiate an investigation under the AFRCO.
2. Conducting Investigations:
If an investigation is warranted pursuant to Sections 23 and 23A of the AFRCO, the AFRC issues written directives to their investigators.
Investigators may require relevant parties to produce documents, provide information, and attend interviews as per Section 25(1)(c) of the AFRCO. While interviewees are permitted to have their legal advisers present during these interviews, they should answer the investigator’s questions directly.
Information secrecy is enforced under Section 51 of the AFRCO. Any person who discloses information during an investigation without consent from the AFRC commits an offense unless the information is already public, is for seeking legal advice, is related to legal proceedings involving the person, or is required by law.
Penalties for breaching secrecy obligations include fines up to HK1,000,000 and imprisonment for up to two years on conviction.
3. Draft Report Preparation:
Once the investigation is completed, the investigator prepares a draft report and sends it to the regulatees before submitting the final report to the AFRC.
Parties have an opportunity to respond to the draft report and make representations regarding its content. If they disagree with aspects of the report, they should specifically identify the contested issues, provide explanations, and furnish supporting evidence.
4. Further Actions:
On submission of the investigation report to the AFRC, the council may take a number of actions based on the findings.
These include closing the case without further action, referring issues to other regulators or law enforcement agencies, or imposing sanctions on the regulatees investigated under the AFRCO.
Sanctions
The AFRC has the authority to impose sanctions for general CPA misconduct as outlined in Section 37CA of the AFRCO.
These sanctions may include publicly or privately reprimanding the professional person, imposing pecuniary penalties, and revoking or suspending the individual’s registration. Additionally, the AFRC can cancel a practicing certificate and prohibit the issuance of a new certificate for a specified period.
For PIE auditors and registered responsible persons found guilty of financial reporting misconduct, additional sanctions may apply.
These can include revoking or suspending the auditor’s registration or recognition, imposing conditions on their registration, and reprimanding them either publicly or privately.
The AFRC may also direct remedial action and prohibit applications for registration as a PIE auditor for a specified period. Financial penalties may reach up to HK$10,000,000 or three times the profit gained or loss avoided due to the misconduct.
Before imposing any sanctions, the AFRC provides the individual with an opportunity to respond. If sanctions are imposed, the AFRC informs the individual in writing, with the reasons for the decision, the effective date of the sanctions, and the details of the imposed penalties.
Review and Appeal Mechanisms
If a regulatee feels aggrieved by a disciplinary decision made by the AFRC, they have the right to apply for an independent, fresh review by the Accounting and Financial Reporting Review Tribunal.
This application must be submitted in writing within 21 days from the day following the issuance of the AFRC’s notice.
Should a party be dissatisfied with the Tribunal’s decision, they may pursue an appeal to the Court of Appeal on matters involving law, facts, or both, as outlined in Section 37ZF of the AFRCO. However, such an appeal can only proceed with the Court of Appeal’s permission, granted through leave to appeal.
Applications for leave to appeal must be made within 30 days of the Tribunal’s determination.
The Court of Appeal will only grant leave if it believes the appeal has a reasonable prospect of success or if there are other justifiable reasons for the appeal to be heard.
When hearing an appeal, the Court of Appeal has various powers. It may allow the appeal, dismiss it, vary or set aside the Tribunal’s determination, or remit the matter back to the Tribunal with directions.
Preparing for an AFRC Investigation
To reduce the impact of an AFRC investigation, accountants and auditors should prioritize accurate record-keeping, adhere to professional standards, and promptly address any issues that arise at an early stage.
This article’s author is a Fellow of the Association of Chartered Certified Accountants (ACCA) and has experience in the areas of accountancy and finance.
It is advisable for professionals to consult with experienced lawyers with a particular focus on finance-related regulatory matters if an investigation occurs.
Legal representation can offer valuable guidance throughout the process, helping to ensure the rights of those involved are protected.
Disclaimer:
The information provided in this article is for general reference only and should not be construed as legal advice. For specific guidance related to your individual circumstances, it is recommended you seek professional legal advice.
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