As 2024 began, we have done a round-up of the disciplinary decisions from the Accounting and Financial Reporting Council (AFRC) in 2023. As at the time of writing, since August 2023, the AFRC has published three disciplinary decisions. Whilst these inaugural disciplinary decisions serve as a signal to the industry the new regulator's serious intention to take robust action, our view is the AFRC understandably would want to publish eye-catching cases as their first disciplinary decisions to set the tone. We would therefore reserve judgment on whether these cases are the norm or 'shock and awe' exceptions and will continue to watch this space in the new year.
The AFRC published its first disciplinary decision in August 2023 (link), reprimanding Centurion ZD CPA Limited, the engagement partner and the engagement quality control reviewer and imposing financial penalties of HK$350,000, HK$250,000 and HK$100,000 respectively. The engagement partner also had his practising certificate cancelled for 12 months. It should be noted that the audit engagement was completed prior to 1 October 2019, hence the transitional arrangements and the financial penalty cap of HK$500,000 for each CPA misconduct applied. The breaches of professional standards were considered by the AFRC to be "serious", involving failure to obtain sufficient appropriate evidence in relation to the recognition of goodwill arising from the listed audit client's acquisition of a subsidiary and the impairment assessment of goodwill. The engagement team was said to have performed "limited or no audit procedures" in its assessment of the fair values of identifiable assets (apart from buildings and the associated land use rights) acquired and liabilities assumed in the acquisition.
The second decision, against Chan Kam Kwan (link), sees the AFRC imposing its first-ever permanent non-issuance of practising certificate order. The AFRC also imposed a financial penalty of HK$300,000. The respondent was a sole proprietor and was found to have "blindly signed off and issued 11 auditor's reports of private companies" and "provided false and/or misleading information to the HKICPA" in relation to a practice review. Such conduct was considered to have breached the fundamental principle of integrity under the Code of Ethics for accountants.
The last of these disciplinary decisions was of a slightly different kind (link). The AFRC reprimanded CCTH CPA Limited and imposed a financial penalty of HK$80,000 for failing to complete corrective actions within the specified timeframe following an inspection by the AFRC's Inspection Department. The firm failed to comply with some of the deadlines and gave inconsistent explanation for the delay. The failure to comply with remediation requirements was considered to be misconduct under section 37A(c) of the AFRCO. The sanction imposed was a result of early admission and settlement.
What does this mean for accountants?
While the sanctions imposed in these inaugural disciplinary decisions of the AFRC appear to be on the high side, they should be understood in the proper context. In the Centurion case, the respondents were said to have failed to conduct any audit procedure in one aspect of the audit and some of the respondents had previous disciplinary records with the HKICPA. The Chan Kam Kwan case goes to the fundamental principle of integrity for accountants, and in the case of CCTH CPA, the firm had been subject to corrective actions which it then failed to take.
The AFRC understandably would want to publish eye-catching cases as their first disciplinary decisions to set the tone. As stated in its press release about the Centurion case, the sanctions were intended to send a strong deterrent message.
We would reserve judgment on the sanctions imposed in negligence-type cases that firms may more commonly be investigated for and will continue to watch this space in the new year.
