Change of the auditor under new Companies Ordinance (Cap 622) that came into operation on 3rd March 2014.
1. It is not okay for the directors to pass a resolution for the appointment of new auditor / the removal of existing auditor, except that the directors may appoint the first auditor after the incorporation of the Company. Exchange of professional enquiry and clearance letter is necessary under the Professional Accounting Ordinance (Cap 50), but it is not sufficient. According to section 419 of the Companies Ordinance (C.O.), the Company should hold a general meeting of the members to pass an ordinary resolution to do so by giving the existing auditor a special notice of 28 days under section 578 of the C.O.
2. the existing auditor must make a statement of circumstances to the company in general meeting setting out his grievance if any or stating that there is no special matters that he may bring to the attention of the members.
3. Section 429 of the C.O. provides that the directors must present the directors’ report, the financial statement and the auditor’s report at the annual general meeting for every financial year. If the auditor’s report is not valid due to the absence of legal base of the auditor’s appointment, the directors cannot discharge their legal duty under section 429. Thus they will be subject to a fine of $300,000.
4. Non-compliance with the C.O. will have great consequence when there is a change in the shareholders, the company being acquired or an IPO exercise in future. In the absence of a valid appointment, the auditor is considered to have breach professional rules, if not deception.