Stock Exchange proposes to suspend issuers with disclaimer or adverse audit opinions

On 28 September 2018, The Stock Exchange of Hong Kong Limited (Exchange) published a two-month consultation paper on a proposed suspension requirement for listed issuers with disclaimer or adverse audit opinions on their financial statements. 

Concerns about disclaimer or adverse audit opinions

Auditor would modify the opinion in the auditor’s report when (a) it concludes that, based on the audit evidence obtained, the financial statements as a whole are not free from material misstatement; or  (b) it is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement. There are three types of modified audit opinions, depending on the level of misstatements, pervasiveness and sufficiency of audit evidence:

• qualified opinion – indicating that the misstatements are, or (due to the lack of sufficient audit evidence) the risk of misstatements could be, material, but not pervasive, to the financial statements;
• disclaimer of opinion – indicating that due to the lack of sufficient audit evidence, the risk of misstatements could be both material and pervasive to the financial statements; and
• adverse opinion – indicating that the misstatements are both material and pervasive to the financial statements. 

The Exchange’s two most recent annual reviews of disclosures in issuers’ annual reports covered, as one of the areas of focus, financial statements with auditors’ modified opinions. It reminded issuers with auditors’ modified opinions on their financial statements to enhance their disclosure in annual reports to enable shareholders to better understand the audit modifications, their actual or potential impact on the financial position and the proposed plans for addressing the modifications. The Exchange may enquire with issuers which may not have provided sufficient information regarding the audit modifications in their annual reports and may require supplemental announcements to be made following such enquiries.

Proposed suspension requirement

With a view to affording better investors’ protection by safeguarding the quality and reliability of financial information published by listed issuers, the Exchange proposes to add a new rule 13.50A providing that:

• the Exchange will 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 or adverse opinion on the issuer’s financial statements; and
• 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 positions.

Once suspended, the issuer must take action to resolve the issues giving rise to the disclaimer or adverse opinion to bring itself into Rule re-compliance and resume trading, or otherwise under the existing delisting rules, the Exchange may delist a Main Board issuer after a trading suspension of a continuous period of 18 months (or 12 months for a GEM issuer). 

The proposed rule would not apply to financial statements with a qualified opinion or a clean opinion with an emphasis of matter.

Proposed effective date of new rule

The Exchange proposes that new rule 13.50A be applied to preliminary results announcements of listed issuers for the financial years commencing on or after 1 January 2019.  

In respect of issuers currently with disclaimer or adverse opinion on their financial statements, unless the issuers continue to receive such opinion on their financial statements for the financial years commencing on or after 1 January 2019, they will not be required to suspend trading under the proposed rule. 

The consultation period will end on 30 November 2018.

Key Contacts

Ronny Chow

Partner | Corporate Finance

Email or call +852 2825 9435

Alexander Que (Alex)

Partner | Corporate Finance

Email or call +852 2825 9770

Rhoda Yung

Partner | Corporate Finance

Email or call +852 2825 9624

Sabrina Fung

Partner | Corporate Finance

Email or call +852 2825 9478

Gary Wong

Partner | Corporate Finance

Email or call +852 2825 9798

Maynard Leung

Partner | Corporate Finance

Email or call +852 2825 9415

Eugina Chan

Consultant | Corporate Finance

Email or call +852 2825 9786