Press Release
LCQ13: Auditors' reports of listed companies
Wednesday, July 14, 1999
Following is a question by the Hon Cheung Man-kwong and a written reply by the Secretary for Financial Services, Mr Rafael Hui, in the Legislative Council today (Wednesday):
Question :
Regarding the following up of cases in which auditors have included qualifications or adverse statements in the accounts contained in the annual reports of listed companies, will the Government inform this Council whether it knows:
(a) The number of listed companies in the accounts of which auditors included qualifications or adverse statements over the past three years, broken down by categories of the qualifications and adverse statements;
(b) The criteria adopted by the relevant monitoring bodies in deciding on whether to follow up, and the way to follow up, the financial situation of such listed companies;
(c) The number of cases followed up by the relevant monitoring bodies over the past three years, and the outcomes thereof; and
(d) Whether the relevant monitoring bodies have planned to actively follow up such cases so as to give full effect to the auditors' monitoring of the accounts of listed companies?
Reply:
Madam President,
(a) According to the information provided by the Hong Kong Society of Accountants (HKSA), an auditor will issue qualified opinion when there is either a limitation on the scope of the auditors' audit (note 1), the auditors disagree with the treatment or disclosure of a matter in the financial statements or when there are doubts regarding the applicability of the going concern (note 2) concept in the preparation of financial statements. Moreover, an audit report is modified where the audit opinion is preceded by a paragraph drawing shareholders' particular attention to a fundamental uncertainty, although the matter may have been adequately disclosed in the financial statements.
According to the record of the Stock Exchange of Hong Kong (SEHK), the number of auditor's reports of listed companies containing qualified and/or modified audit opinions and the break down by categories of the qualifications and adverse statements for the past two years covering the accounting years ending 31 December 1997, 31 March 1998, 30 April 1998, 30 June 1998, and 31 December 1998 (note 3) are as follows :
Reporting Year endingTotal31/12/9731/03/9830/04/9830/06/9831/12 /98Qualified Fundamental uncertainty relating to going concern basis
6713926Limitation in audit scope
610131333Disagreement
1312512Others
010012Sub total1321382873
Modified (but not qualified) Fundamental uncertainty relating to going concern basis
411042140Fundamental uncertainty relating to other matters
5611619Sub total
917152759Total
223841355132Less:
Duplications (note 4)
614251441Total no. of qualified/ modified auditors’ reports1624284191
Information relating to earlier periods is not available as the SEHK only started to maintain such statistics with respect to reports covering accounting period ending on 31 December 1997.
The table above shows that approximately 50% (66 out of total of 132) of the qualified and modified audit opinions in the past two years relate to fundamental uncertainty on going concern basis on which the financial statements had been prepared. This is believed to be partly due to the Asian financial crisis that caused financial difficulties and/or significant losses for many listed companies.
(b) Under the Rules Governing the Listing of Securities on the SEHK ("the Listing Rules"), listed companies are required to provide details of the qualifications and modifications to the auditors' reports in the preliminary results announcement in the form of a paid announcement in a newspaper. Further, the Listing Agreement (note 5) requires a listed issuer to provide additional relevant information in its annual report where its financial statements do not give a true and fair view of the state of affairs and profit and loss for the reporting year.
The SEHK reviews, as part of its on-going compliance functions, results announcements and annual reports of listed companies. Such review covers problematic listed companies with qualified or modified audit opinions. The regulatory principle of the SEHK provides that while adverse financial situation and qualified or modified audit opinions per se are not a subject for disciplinary action, listed companies must ensure sufficient and prompt disclosure of such information to the shareholders and the public.
The SEHK will carry out initial examinations of all the cases involving qualified or modified audit opinion in financial statements to ascertain whether sufficient disclosure of information has been made to the market. Depending on the nature and the severity of the qualifications or modifications, the SEHK will decide whether it will seek further confirmation from the directors of the listed companies if in the preparation of the financial statements they had applied such degree of skill, care and diligence as may reasonably be expected and if they had complied with the Listing Rules.
The SEHK may also make further enquiries on a case by case basis by requesting the company and/or its auditors to provide such other additional information as may be required to ascertain whether the fo