Consultation on Proposal Relating to Listed Issuers with Disclaimer or Adverse Audit Opinion on Financial Statements

The Stock Exchange of Hong Kong Limited (“SEHK”) on 28 September published a consultation paper on its “Proposal relating to Listed Issuers with Disclaimer or Adverse Audit Opinion on Financial Statements”.

When a listed issuer is to issue its financial statements, an auditor will offer opinions on the financial statements. There are occasions where an auditor concludes that a modification to its opinion is necessary. At the moment, there are three types of modifications.

Qualified opinion - The auditor (after obtaining sufficient appropriate audit evidence or due to the lack of sufficient audit evidence) concludes that the risk of misstatements, individually or in aggregate, is material, but not pervasive, to the financial statements.

Disclaimer of opinion - The auditor due to the lack of sufficient audit evidence concludes that the risk of misstatements could be both material and pervasive to the financial statements.

Adverse opinion - The auditor (after obtaining sufficient appropriate audit evidence) concludes that the misstatements are both material and pervasive to the financial statements.

Where an issuer publishes financial statements with a disclaimer of opinion or with an adverse opinion, investors cannot rely upon the issuer’s financial statement to properly assess its financial position.

To safeguard the quality and reliability of financial information published by listed issuers, SEHK proposes to add a new Rule 13.50A such that where an issuer has published the preliminary annual results announcement and its auditor has issued or has indicated that it will issue a disclaimer or adverse opinion on the relevant financial statements, trading in the securities will be suspended. Trading in the securities may resume once the issuer has addressed the issues giving rise to the disclaimer or adverse opinion, provided comfort that a disclaimer or adverse opinion in respect of such issues would no longer be required, and that sufficient information has been disclosed for investors to assess its updated financial positions.

The above consultation was considered by Council with the assistance of the Company Law Committee of the Law Society. The proposed amendments to the Listing Rules are supported, and a submission was rendered to respond to the Consultation. A copy of the submissions can be found on the Law Society’s website:

http://www.hklawsoc.org.hk/pub_e/news/submissions/20181128.pdf

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