Under normal circumstances, the preliminary financial results announcement for public companies in Hong Kong are based on the audited financial statements.1 However, owing to the recent circumstances, particularly due to the imposition of various travel restrictions and inability to access physical books and records, the preparation of audited financial statements might have been hampered. In response, The Stock Exchange of Hong Kong Limited (“SEHK”) and the Securities and Futures Commission (“SFC”) have jointly issued two statements2 and one set of frequently asked questions3 to provide guidance to public companies in Hong Kong and their auditors in relation to the disclosure of financial information in the midst of the COVID-19 situation. Through both the joint statements and the FAQs, it is clear that the SEHK and SFC are not granting blanket extensions on the publications of the preliminary financial results. Where a public company is unable to obtain agreement from its auditors but is otherwise able to publish its unaudited preliminary results in compliance with other requirements set out in the Main Board Rules or GEM Rules (as applicable), it should publish such preliminary results before the deadline. In such case, the SEHK will normally not suspend trading in its securities. In connection with this, the SEHK provided some suggestions on certain information that the public companies may consider to include when announcing their preliminary financial results. One of the suggestions is to include information on “whether the results have been agreed with the audit committee and if there is disagreement, details of the disagreement”. The inclusion of such information does not appear to be compulsory but certainly is considered best practice as endorsed by the SEHK. In other cases where the public company is unable to publish its unaudited preliminary results in compliance with other requirements set out in the Main Board Rules or GEM Rules (as applicable), the public company should consult the SEHK as soon as possible to discuss its individual circumstances.
Nonetheless, the SEHK and the SFC have granted a blanket extension for up to 60 days from 16 March 2020 (i.e. until 15 May 2020) to all public companies for the publication of their annual reports, provided that the preliminary results were published on or before 31 March 2020 in accordance with the Main Board Rule 13.49 or GEM Rule 18.49 (as applicable) or the FAQs.4 If any further extensions are required, the SEHK and SFC have invited public companies to apply on a case-by-case basis. Depending on the actual circumstances in Hong Kong leading up to the extended deadline of 15 May 2020, we expect further guidance to be published by the SEHK and SFC.
“Inside information” is any specific information, regarding the public company (or its shareholder, or officer, or its listed securities, or their derivatives), which is not generally known to the public and is likely to materially affect the price of the listed securities of the public company, including financial results. Additionally, apart from the financial results, the SEHK and SFC have also specifically reminded public companies of their disclosure obligations and to turn their minds to any material disruptions to business operations, reporting controls, systems, processes or procedures due to the COVID-19 outbreak and travel-related restrictions, which may constitute inside information.5
Section 307B of the SFO imposes a positive obligation for public companies to disclose, as soon as reasonably practicable after any inside information has come to its knowledge, such inside information to the public.6 Therefore, withholding financial information (even unaudited) may expose public companies to a risk of non-compliance of its disclosure requirements under the SFO.
Under section 307G of the SFO, directors and officers of public companies may also be held personally liable if their intentional, reckless or negligent conduct resulted in the breach of disclosure requirement, or if they have not taken reasonable measures from time to time to ensure that proper safeguards exist to prevent such breaches. If directors are found to have contravened section 307G, potential consequences include but are not limited to disqualification orders, prohibition orders and a monetary fine of up to HK$8 million.7
Potential discrepancies and implications for directors
Customarily, directors would have the reassurance of the auditors when fulfilling the financial reporting obligations of the public company. Without the external auditors being able to complete their audits, the foremost exposure to liability is shifted to the audit committee of the public companies, which comprises only non-executive directors, and reliance would be placed on its pre-existing controls and measures. Under the Main Board Rules and GEM Rules, the audit committee is required to have at least one independent non-executive director with appropriate professional qualifications or accounting or financial management expertise.8 Nonetheless, even with qualified audit committee members overseeing the financial reporting and disclosure process, the ultimate responsibility rests with all the directors – executive and non-executive.9
If the public company’s preliminary results are subsequently agreed by auditors and there are adjustments made to the financial results, the public company should publish a further announcement to clearly explain the adjustments and where appropriate, publish the revised results as agreed by the auditors.10 The SEHK and SFC have indicated that they will not take disciplinary action solely because of material differences between the published preliminary results and the later audited results.11 They will consider whether the public company and its directors have been diligent and reasonable in their treatment of accounts and whether there have been good faith efforts used in providing the available information.12 Ultimately, as the responsibility of external financial reporting is on the directors, the exposure and risks to disciplinary proceedings and other liability will be higher as the company’s internal controls and reporting systems are put to test.
In light of the above, it is vital for all members of the board of directors to be fully engaged and for such engagement to be properly documented. With reference to the advice from Hong Kong Institute of Directors, it is noted that:13
- all board members should pay attention to key issues that would affect the company’s financial position and cash flow situation;
- non-executive directors especially should have obtained adequate assurance in writing from the appropriate executive members that there have been no failures in internal control, no material inconsistency in financial record keeping, etc. and that there has been no unusual event or occurrence at relevant times that could affect the scope, accuracy and reliability of the financial information;
- the non-executive directors should especially be proactive in audit committee and board meetings to question and check on the information, assumptions and assurances given by management (including assurances on no failures in internal control, no material inconsistency in financial record keeping and no unusual event or occurrence as mentioned above); and
- each board member should ensure that the audit committee and board deliberations are well recorded in a way that demonstrates they have made the necessary inquiry and met their duty of care.
We would also like to thank Amanda Liu, Trainee Solicitor, for her contribution to this OnPoint.