SFC publishes review on SEHK’s performance in regulating listing matters

The Securities and Futures Commission (SFC) today released a report on its review of the performance of The Stock Exchange of Hong Kong Limited (SEHK) in regulating listing matters during 2024 (Note 1).

During the review, the SFC conducted an in-depth assessment of SEHK’s performance in vetting listed issuers’ internal control reviews and their handling of late auditor resignations (Note 2). The SFC also reviewed the general operations, processes and procedures of SEHK’s Listing Division.

The latest report noted that SEHK had taken steps to respond to the recommendations made in the previous report published in late 2024. In the meantime, the SFC made further recommendations in the several areas for improvement identified on this year’s topics.

When an issuer fails to publish financial statements due to corporate or accounting irregularities, the SFC considers it important that SEHK ensure the issuer has fully addressed the material internal control deficiencies and put in place effective measures to comply with the Listing Rules while safeguarding its assets and interests.

The SFC recommends that SEHK enhance its vetting of issuers’ internal control reviews. Instead of relying on the confirmation from directors who have failed to maintain proper controls, SEHK is recommended to consider requiring the issuer’s independent consultant to issue an opinion on the adequacy and effectiveness of the issuer’s internal controls.

To address late auditor resignations, which hinder issuers’ timely release of quality financial information, the SFC recommends that SEHK update its guidance to the market to reduce the frequency of late resignations. Its recommendations include requiring issuers to obtain shareholders’ approval when they request their auditors to resign (Note 3), and promoting earlier discussion and clarity on audit fees to prevent late resignations stemming from fee disagreement.

SEHK is also recommended to further scrutinise how the issuers’ audit committees discharge their duties to actively manage the financial reporting and audit process, resolve audit issues, oversee audit timeliness and quality, and make accurate disclosures.

The review report, which summarises the SFC’s findings and recommendations along with certain listing market data, has been published on the SFC website.

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Notes:

1. The SFC has a statutory duty under the Securities and Futures Ordinance to supervise, monitor and regulate the activities carried on by SEHK. To discharge this function, the SFC conducts periodic reviews of SEHK in its regulation of listing-related matters.

2. As stated in the open letter on late changes in auditor appointments issued by the Accounting and Financial Reporting Council in October 2022, a late auditor resignation occurs when the auditor resigns one month before or even after the end of the reporting period of a listed entity. This raises concerns as to whether the incoming auditors can perform quality audits within limited time frame (ie, four months before the deadline for the publication of the annual results).

3. Although the Listing Rules currently require issuers to obtain shareholders’ approval before removing their auditors, some issuers have bypassed the requirement by requesting their auditors to resign without shareholders’ approval.