Exchange Publishes Conclusions on Proposed Rule Changes Relating to Disclaimer or Adverse Audit Opinion on Issuer’s Financial Statements

• Listing Rules to be amended to set out specific suspension requirement for listed issuers with disclaimer or adverse audit opinions on their financial statements
• Changes will give better investor protection and safeguard the quality and reliability of financial statements published by issuers
• The new Listing Rules will apply to issuers’ preliminary annual results announcements for financial years commencing on or after 1 September 2019

 

The Stock Exchange of Hong Kong Limited (the Exchange), a wholly owned subsidiary of Hong Kong Exchanges and Clearing Limited (HKEX), today (Friday) published conclusions on its consultation paper on the proposed suspension requirements for listed issuers with disclaimer or adverse audit opinion on their financial statements¹.

The consultation forms part of the Exchange’s holistic review of the continuing listing obligations of issuers to address market concerns and maintain the quality and reputation of the Hong Kong market.

“This consultation was about improving the quality and reliability of financial information of issuers to safeguard market quality,” said David Graham, HKEX’s Head of Listing.

The Exchange welcomed a total of 62 responses² to the consultation paper from a broad range of stakeholders.  The Exchange has carefully considered these comments and made some modifications to the new Rule to reflect the market’s response.

“The new Rule encourages issuers to maintain appropriate and effective risk management and internal control systems, and where necessary, requires them to act promptly to resolve issues with their auditors,” said Mr Graham.

As part of the new Rule, the Exchange would normally require suspension of trading in an issuer’s securities if the issuer publishes a preliminary results announcement for a financial year and the auditor has issued, or has indicated that it will issue, a disclaimer of opinion or an adverse opinion on the issuer’s financial statements.

The suspension will normally remain in force until 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 disclosed sufficient information to enable investors to make an informed assessment of its financial position.

After considering comments received during the consultation, the Exchange has revised the proposed Rule so that the suspension requirement won’t apply where (i) the disclaimer or adverse opinion relates solely to going concern; or (ii) the underlying issue giving rise to the audit modification has been resolved before the issuer publishes the preliminary results announcement.

As well, the Exchange plans to modify the remedial period.  Under the Rules, the Exchange may delist a Main Board issuer after a trading suspension of a continuous 18 months (GEM issuer: 12 months).  Where the resolution of issues giving rise to the disclaimer or adverse opinion is outside the issuer’s control, a longer remedial period may be allowed, with the duration of the period to be determined by the Exchange on a case by case basis.

The Exchange will also provide a transitional arrangement where the remedial period will be extended to 24 months for both Main Board and GEM issuers that are suspended solely due to a disclaimer or adverse opinion on the issuers’ financial statements for the financial years commencing between 1 September 2019 and 31 August 2021.

“We believe that the new Rule has achieved an appropriate and good outcome, balancing the views of different stakeholders,” said Mr Graham.

The new Listing Rule will apply to issuers’ preliminary annual results announcements for financial years commencing on or after 1 September 2019 (Effective Date).

The Exchange expects issuers to act promptly to resolve their audit issues.  Of the 43 issuers with disclaimers of audit opinions in the 2017 financial statements, 19 issuers have already resolved their audit issues, and five have received disclaimer of opinions arising solely from going concern issues and do not require suspension under the new Rule³.

The Consultation Conclusions, copies of respondents’ submissions, amendments to the Main Board Listing Rules, and amendments to the GEM Listing Rules, can be downloaded from the HKEX website.

Also available, is an updated Guidance Letter on Long Suspension and Delisting, which provides further guidance relating to the suspension requirement and circumstances in which the Exchange may consider allowing a longer remedial period.

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