The Hong Kong Exchange and Clearinghouse (HKEX) has implemented new requirements that make it difficult for listed companies to change auditors without shareholder approval.
According to a Bloomberg report, The move aims to improve corporate governance standards in the $7.5 trillion market.
Under the new guidance, HKEX now requires listed companies to appoint or dismiss their auditors only at general meetings. Board-driven changes will no longer be permitted without a shareholder vote.
The exchange has also asked companies to detail “specific audit fees or ranges” in their disclosures. The intent is to limit the scope of citing disagreements over compensation as a reason for dismissing an audit firm.
With these measures, HKEX is closing a loophole that previously allowed boards of directors to put pressure on auditors to resign without immediate investor involvement, according to the publication.
Going forward, any company action that leads to the resignation of an auditor will be treated as a dismissal, triggering the need for a formal vote.
The rule change comes amid a fight against “opinion buying,” where issuers pressure auditors to resign when filing deadlines approach and then hire a more accommodating firm through an informal vacancy process.
The Hong Kong Securities and Futures Commission has also warned that late resignations are warning signs of governance and internal control problems.
In a recent review, the regulator noted that auditors at 89 publicly traded companies resigned within four months of annual reporting deadlines, and 66 of those departures were related to “rate disagreements.”
Regulators maintain that overt financial fraud is not widespread in Hong Kong, but they are stepping up checks on the quality of listed companies in an effort to attract and retain investors.
“HKEX Strengthens Governance with Stricter Auditor Change Rules” was created and originally published by International Accounting Bulletin, a brand owned by GlobalData.
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