The auditor’s report is very vital in ascertaining the credibility and transparency of the annual financial statements of the company after Hong Kong company incorporation. So, the discussion on auditors report is itself very needed and of vital importance. While, discussing the contents, jurisdiction and format of the auditor’s report we shall have a look at the rights of auditors so as to minimize the probability of abuse and misappropriation.
As per the Section 405 of Cap. 622 auditors are supposed to prepare their report on the submitted financial reports to the members of the company after Hong Kong company incorporation. Basically, auditor’s reports contain the views of auditor on the authenticity and transparency of the financial reports sent to the members in compliance with the Section 430 of Cap. 622 and it is the obligation to present financial statements in the general meeting of the company, under Section 429 of Cap. 622. The auditors duty is not confined to just submit reports on the annual financial statement of the company instead auditor is supposed to submit its report on any circulated, published or issued financial statement by the company, during his/her term of office.
As per the Section 406 of Cap. 622 the auditor’s report should clearly states whether the annual financial statements of the company submitted in general meeting or any other published, circulated or issued financial statement is in compliance with the provisions of ordinance. As per the Section 406 (1) (b) of Cap. 622 the auditor should state firmly that; whether in the opinion of auditor, financial statements of the company give true and fair view or there is something concealing and misappropriating in financial statements of the company.
It may sound absurd to you, but in fact if auditor is of the opinion that; after company formation Hong Kong financial statements of the company are in compliance with the companies ordinance and that financial statements gives true and fairer view then such opinion of the auditor shall consider to be the unqualified opinion. If auditors report gives opinion other than this opinion then such opinion of the auditor shall consider to be the qualified opinion.
Auditors report is not just confined to the opinion on the financial statements but has, to some extent regulatory authority over the director’s report. So, if auditor notes that there is something wrong in the director’s report and that information given in the directors report about the financial statements of the company seems to be inconsistent with the financial statements of the company then auditor must state these opinions in the auditor report.
Now the question arise that what sort of investigation should auditor do in order to prepare auditors reports. So, under the Section 407 (1) of Cap. 622 in order to prepare auditors report, auditor is supposed to undergo investigation so that he or she may ascertain:
If auditor find that accounting records were not kept fairly by the company and financial statements of the company are not in compliance with the Section 407 (2) of Cap. 622 then auditor needs to state the facts of these conclusions in its report. If due to any reason auditor fails to get the required information that is necessary for the effectiveness and authenticity of audit then auditor must state the faced difficulties and reason of his/her failure in its report under Section 407 (3) of Cap. 622. These provisions are not new and predecessor companies ordinance has similar provisions but now have been repealed except the provisions in relation to “materiality” requirement. However, criminal liability of the auditor under Section 408 of Cap. 622 is something which not has been covered by predecessor companies ordinance and is something which is new in the legislation. As per the Section 408 of Cap. 622, a person shall commit an offence who recklessly or intentionally caused the omittance of the certain information from the auditor’s report, which should otherwise be made part of the auditor’s report. As per the Section 408 of Cap. 622 such liable person would be the auditor of the company, specific person within the auditing firm or any person who took part in occurrence of this offence, shall be held liable to the criminal liability under Section 408 of Cap. 622. This provision is although new but not something which is unmatchable and unrelatable and one can easily find the alike provision in UK legislative system. It was basically introduced in Hong Kong just to enhance the accountability and credibility of the auditor and integrity of financial reporting system after starting doing business in Hong Kong.
Now one may think that there have been onerous effects of this criminal liabilities on the auditors but in fact, criminal liability shall arise only in the situation where auditor reserves the opinion that accounting records have not been kept by the company and subsequently someone tried to influence the report and paved ways for the omittance of certain information from the auditor’s report. But where auditor is of the view that there was not any litigation and irregularity in the manner of keeping records then there shall be no grounds for the imposition of criminal liability under Section 408 of Cap. 622, even though the auditor is found to be negligent in reaching this opinion. Moreover, liability to make statement under Section 407 (3) of Cap. 622 shall only arise if auditor thinks that necessary and required information and explanation was not provided. But, where auditor is of the view that all necessary and required explanation as well as information was given then there shall neither be liability under Section 407 (3) of Cap. 622 nor any criminal liability under Section 408 of Cap. 622, even if auditor’s conclusion was reached erroneously and negligently.
Criminal liability seems vital and thus there is the need to look into this matter. For the person who is eligible to be criminally liable for the prosecution under Section 408(1) of Cap. 622, following are credential of such person:
These credentials and the persons are clearly specified in the para (a) to (c) of the Section 408 (2) of Cap. 622.
Regarding the appointment of auditor, we have heard that practice units and learnt that under the script of Section 393 (1) of Cap. 622 only “practice units” are eligible to be appointed as auditors of the company. Now you may be wondering that what exactly is “practice unit” and what it does implies? Basically, Practice Unit is the certified public accountant who is practising at her own account or a firm having certified practising public accountants and a corporate practice. Some legal commentators argue that Sub section 408 (2) (b) and 408 (2) (c) of Cap. 622 cannot be applied in the situation where partners of a firm or the officers of the firm are not eligible to be appointed as the auditors of the company because they shall only be eligible if they practice on their own account and not where they are partner of the firm or the officer of the corporate practice. Generally, this argument is negated as the matter of eligibility is concerned with the qualification of the auditor. The general intention of the legislation refers solely to the qualification of the auditor as the certified public accountant and that he or she should practice it, thus where he or she practices and in what capacity, it does not matter. The only thing that matters is just the appointing auditor to be certified and practising public accountant on his own account under the Professional Accountants Ordinance.
Rights of the Auditor
To make sure the effectiveness and efficiency of the auditors there are certain rights which companies ordinance confers to the auditors so that they may function well. Following are some of those rights:
Right to Access
Under the Section 412 (1) of Cap. 622; auditor is entitled to access company’s accounting records all the time and is allowed to ask explanation from any officer of the company regarding any matter he or she assumes that, is needed to carry out her or his functions. Apart from just officers, auditor is entitled to hold any person accountable for questioning regarding accounting records of the company and to seek explanation or required information. If during such investigations, the investigated officer or accountable person fails to satisfy auditor and fails to provide the required information or explanation then as per the script of Section 413 (1) of Cap. 622, an offence shall consider to be committed. To escape this offense, it is required from the defendant to provide evidence that it was not practically possible for him or her to provide required information or explanation. Not only this, but wherever the investigated person or officer gives any such statement which is false, misleading or deceptive whether or not done, recklessly, even then that person committed an offence and shall be held liable accordingly.
Right to attend Meeting
Under the Section 411 (1) (a) of Cap. 622, auditor is entitled to attend every general meeting of the company and to receive the notice and any other communication related to the general meeting as on the same pattern as if member of the company shall receive. As per the script of Section 411 (1) (b) of Cap. 622, auditor has the prerogative to be heard at every general meeting or any business meeting he or she attends as the auditor of the company.
Right to information about Subsidiary undertaking
For the situation of holding company, an auditor may need the information regarding subsidiary undertaking, in lieu of obligation of the holding company to prepare consolidated financial statements. As per the Section 412 (2) of Cap. 622, if the undertaking of the subsidiary is the company incorporated in the Hong Kong then the company and the auditors of it are supposed to provide information and explanation to the auditors of the holding on grounds of the fact that auditors of the holding company may need this information and explanation to carry out their task. For the situation where the undertaking of the subsidiary is the company incorporated outside of Hong Kong to setup offshore company in Hong Kong then under the Section 412 (4) of Cap. 622 auditors of the holding may require holding company to fetch the required information or details, which the auditors of the holding company may require to fulfil their duties reasonably after setup offshore company in Hong Kong.
Right of defence of qualified Privilege
Under the Section 410 of Cap. 622 defence of qualified privilege is conferred to the auditor for the actions pertaining to defamation against the auditor. Where there is the absence of malice then auditor shall not be held liable to any actions against defamation, especially where such situation arises in light of statements of the auditor while performing duties as of an auditor.
Right to receive information from Predecessor
Where there is the change of auditor, an outgoing auditor is liable to provide and pass on information to the incoming auditor so that he or she may perform duties, effectively. There shall be no breach of duty on the part of outgoing auditor while passing on information to the incoming auditor, as long as outgoing auditor is acting in good faith and fairly believes that this information shall be beneficial for the incoming auditor.