The Accounting and Financial Reporting Council (AFRC) of Hong Kong is ramping up efforts to strengthen the quality of financial reporting as part of a broader push to cement the Special Administrative Region’s status as a global financial powerhouse, according to its CEO and executive director, Janey Lai.
Since its evolution from the Financial Reporting Council (FRC) in 2006, the AFRC has established itself as Hong Kong’s full-fledged independent auditor regulator. In 2019, it gained comprehensive oversight powers, including direct authority over inspections, investigations and disciplinary actions for auditors of public interest entities (PIEs), and oversight of the Hong Kong Institute of Certified Public Accountants (HKICPA). In 2022, it became the independent regulator of the accounting profession.
‘Audit malpractice can damage Hong Kong’s financial reputation’
‘Our mission is twofold: maintaining high standards in financial reporting and protecting public interests, while driving the development of Hong Kong’s accounting sector to strengthen its position as a competitive international financial and business hub,’ Lai says.
Inspections
The AFRC operates a robust system to oversee the accounting profession. Central to its operations is the inspection team, which makes up a third of its staff and has its work cut out overseeing the quality of audits in a market of 2,600 listed companies. ‘We look at whether audits meet required professional standards, the impact , and whether quality control systems of the firms are compliant,’ Lai says.
Investigation comes in where potentially serious issues are identified, whether from complaints by the public, through inspection, or through information-sharing by other regulators and law enforcement agencies. The investigation team also sampled 130 sets of financial statements of listed entities last year to check for potential financial reporting and auditing issues.
Cases that potentially call for sanctions are handled by the discipline team, which consists primarily of lawyers. They assess the sufficiency of the evidence and recommend appropriate actions and penalties to the board.
Throughout this oversight, due process is followed, and the firms and personnel concerned are given full opportunities to be heard. ‘Fairness and proportionality runs through our system of oversight and the entire regulatory cycle,’ Lai says.
‘Firms that prioritise business over quality won’t be sustainable’
Improvements
The audit watchdog has seen marked improvements across the industry, particularly in documentation quality. ‘In our field, there’s a saying: “If it’s not documented, it’s not done.” Firms that prioritise business over quality won’t be sustainable in the long term,’ Lai says.
Through its policy, registration and oversight team, the AFRC works closely with the industry to evaluate ways to improve financial reporting standards. Its 2023 annual inspection report – the regulator’s fourth comprehensive review since it took over inspections in 2019 – scrutinised financial statements, identified key weaknesses in audit practices, and offered practical recommendations to strengthen audit quality across Hong Kong’s accounting profession.
Late auditor resignations and trading suspensions emerged as major concerns affecting market credibility. ‘The timing of auditor changes is crucial,’ Lai says. ‘Late auditor changes approaching the year-end create risks for the audits. Proliferation of this practice could trigger a domino effect across the industry. We have to closely monitor these situations.’
‘Trading suspensions shake investor confidence and damage company reputation’
Trading suspension due to failure by listed companies to announce their preliminary audited annual results is also a persistent challenge. ‘The failure may be due to different kinds of reasons – missed reporting deadlines, suspicious transactions and problems with their auditors,’ Lai says. ‘These suspensions do more than just freeze trading – they shake investor confidence, damage company reputation and point to deeper issues in how companies manage their financial reporting and audit relationships.’ Earlier this year the AFRC published a report of its analysis of the reasons behind the failure of listed companies to announce their annual results on time.
SMPs
Understanding that small and medium practices (SMPs) may require a different approach, the regulator is adopting tailored support to help drive sustainable growth. ‘We’re focused on supporting smaller firms, which often lack the resources to stay current with accounting and auditing standards,’ she says. ‘We’ve created bite-sized videos and quick reference guides for year-end auditing. Everything we do is carefully tailored to our target audience.’
Given the city’s role in handling massive capital flows, Hong Kong cannot afford to compromise on the quality and credibility of its financial reporting, she says. ‘Audit malpractice can damage Hong Kong’s reputation as an international financial centre. Without strong credibility, companies will simply take their businesses elsewhere.’
Talent and tech
The AFRC also oversees the HKICPA’s activities related to listed-entity auditors – registration, professional standard-setting and continuing professional development requirements.
Amid today’s competitive talent market, the regulator is working with universities and other stakeholders to see what can be done to attract fresh talent to the profession. ‘There’s this outdated perception that auditing is dull and boring, but the reality is that accounting skills open doors across many exciting fields, from forensics to IT to ESG,’ Lai says. ‘We need different stakeholders to come together and better communicate the value and diversity of our profession.’
‘AI is a valuable tool, but it won’t replace human auditors and accountants’
Technology uptake is equally important. ‘Our industry must embrace new technologies, or we risk appearing even more old-fashioned to junior staff and graduates,’ Lai says. While acknowledging the role of artificial intelligence (AI), she says that human expertise will still be essential. ‘AI is a valuable tool, but it won’t replace human auditors and accountants. We still need people to analyse and evaluate the results that AI produces.’
According to Lai, enhancing audit quality and the profession at large goes beyond just technical oversight – it is a complete cultural shift. She says: ‘The tone at the top is crucial in our industry, where professional judgment plays such a vital role. This responsibility isn’t just about audit partners, it extends to chairmen and top management too.
‘Staffing pressures sometimes create difficulties for audit firms in maintaining quality. Despite that, we must maintain the momentum in raising standards and practices that keep Hong Kong at the forefront of international finance.’
AFRC regional regulatory forum
In December 2024, the AFRC hosted its first ever regional regulatory forum for the accounting and audit profession. The event’s five panel discussions covered: fostering a resilient financial ecosystem; the evolution of corporate reporting; accounting and accountability; the role of accountants in shaping a sustainable future; and the next era in talent management.
The forum attracted more than 370 participants. They included international, mainland and local stakeholders such as accounting and financial regulators, law enforcement agencies, global chairs of international network firms, professional bodies, practitioners, investors and senior business leaders.
