AFRC Report Reveals Surge in Fraudulent Financial Statements in Hong Kong: Calls for Improved Auditor Response

[Hong Kong, 4th September 2023] - The Accounting and Financial Reporting Council (AFRC) of Hong Kong released its 2023 Annual Investigation and Compliance Report, detailing a significant increase in investigations related to fraudulent financial statements, particularly among Public Interest Entities (PIEs).

Key Findings from AFRC’s 2022/23 Report

• The AFRC processed 253 complaints, handled 154 investigations, and 33 enquiries in 2022/23.
• 87% of complaints with pursuable allegations and 71% of investigations represented an increase from the previous year.
• The AFRC attributes these increases to heightened public awareness, identified issues from inspections, collaboration with other regulators, and public confidence in its role as the sole regulator of the accounting profession.

Fraudulent Financial Statements: A Growing Concern

From the investigations into listed entity financial statements, the AFRC identified common areas of potential misconduct and non-compliance for PIE auditors:

1. Obtaining sufficient appropriate audit evidence: 87%
2. Performing engagement quality control review: 71%
3. Exercising professional skepticism and professional judgment: 63%
4. Performing audit work on accounting estimates: 48%
5. Meeting their responsibilities relating to fraud in their audits: 30%

The AFRC expressed grave concern over the increase in investigations of PIE auditors’ inadequate response to potential fraud risks. Fraud can significantly impact financial statement reliability, potentially leading to misinformed investment decisions with severe consequences for investors and the market.

Expectations for PIE Auditors

The AFRC expects PIE auditors to comply with relevant auditing standards, familiarize themselves with common fraud types, understand conditions that may indicate fraud occurrence, and design audit procedures to address identified fraud risks.

Misconduct among Professional Persons

From investigations into professional persons (CPAs and practice units), the AFRC identified the following common areas of misconduct:

1. Maintaining integrity and proper professional conduct: 59%
2. Complying with auditing and assurance standards: 42%
3. Exercising professional competence and due care: 17%
4. Maintaining independence and complying with ethical requirements: 17%

Head of Investigation and Compliance, AFRC, Florence Wong, noted, “The AFRC will escalate our efforts to address auditors’ failure to adequately respond to financial statement fraud risks. This issue holds serious implications for the reliability of financial statements and investor confidence.”

AFRC’s Priorities

The AFRC will continue prioritizing risk-focused identification and investigation of auditing misconduct and accounting non-compliance, taking swift and robust regulatory actions to protect the public interest.

Contact Details

For media inquiries, please contact Celian Cheung or Chelsy Chan at +852 2236 6025 or +852 6066; fax: 2810 6320, or email celiancheung@afrc.org.hk and chelsychan@afrc.org.hk.

About the Accounting and Financial Reporting Council

The AFRC was established under the Accounting and Financial Reporting Council Ordinance to promote the highest level of quality among professional accountants to protect the public interest. For more information, visit www.afrc.org.hk.