Change of Auditor [ 中文 ]

Change of the auditor under new Companies Ordinance (Cap 622) that came into operation on 3rd March 2014. 
 

1. It is unlawful for the directors to pass a resolution approving the appointment of new auditor or 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 between new auditor and the predecessor auditor is necessary under the Hong Kong Standard of Auditing, but it is not sufficient. 

 

2. According to section 419(1) of the Companies Ordinance (C.O.), the Company should hold a general meeting of the members to pass an ordinary resolution to remove the auditor. If such an ordinary resolution is proposed or moved, Section 419(2) provides that the company must give the auditor a special notice of 28 days under section 578 of the C.O.
 

 

3. In accordance with section 425(2) of the C.O., 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.

 

Legal note:

As per section 425(1), except for the expiry of the term of office or re-appointment, "a person whose appointment as auditor is terminated ... must, on the termination, give the company - (a) if the person considers that there are circumstances connected with the termination that should be brought to the attention of the company's members or creditors, a statement of those circumstances; or (b) if the person considers that there are no such circumstances, a statement to that effect."

 

4. 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 breached professional rules, if not deception.