In recent months, the number of suspended listed companies in Hong Kong has grown at an alarming rate. According to a recent study by our team, as of 12 April 2023, 133 listed companies are suspended due to their failure to publish audited financial results in a timely manner, up significantly from about 80 before the deadline of 31 March. Out of the total number of listed companies in Hong Kong, 133 listed companies account for approximately 5.1%.
This surge in suspensions highlights several critical issues:
1. Understanding the Increase in Suspended Companies
This surge in suspensions may indicate a decline in corporate governance or financial reporting practices among Hong Kong-listed companies. However, it is also possible that regulatory bodies, particularly the Audit and Financial Reporting Council (AFRC), have become more stringent in enforcing compliance with financial reporting deadlines. The AFRC has openly expressed its concerns and reiterated its expectations for transparent and high-quality audits, which may have led auditors to be extra cautious.
2. Causes of the Surge in Suspensions
It is difficult to pinpoint the exact cause of the increase in suspensions. However, it is possible that the AFRC has become more proactive in enforcing financial reporting standards (which was previously carried out by HKICPA). Since 1 October 2022, the new regulatory regime of the accounting profession has been in effect, transforming the AFRC into a fully independent regulatory and oversight body for the industry. This change grants the AFRC the authority to investigate potential misconduct by certified public accountants and scrutinize possible non-compliance with regulatory requirements for financial reports of listed entities.
3. The Outlook for Companies with Limited Time Remaining Before Delisting
Listing Rule 13.24 requires that a listed issuer must maintain a sufficient level of operations to warrant its listing. Our research indicates that approximately 45% of the suspended listed companies have less than half of the 18-month remediation period remaining (or 12 months for GEM listed companies) to resume trading. Those companies may face greater challenges in fulfilling the requirements for resumption and avoiding delisting. With limited time and resources, implementing substantial changes and attracting new investors may prove challenging, impacting the companies’ ability to improve their financial position and corporate governance. To avoid the severe consequences of delisting, these companies must prioritize swift and effective action to enhance their operations and rectify any deficiencies, thereby increasing their chances of resuming trading and retaining their listing status.
4. The Capacity of CPA Firms to Address Multiple Suspensions
From our observation, some CPA firms are responsible for 10 suspended listed companies or more. These firms may face resource constraints in addressing the complex resumption process and engaging with regulators. If these firms lack the necessary resources, particularly that they are not geared for multiple rounds of Q&A with regulators, including HKEx, SFC and AFRC, it may further delay the resumption of trading for the listed companies they represent.
In conclusion, the significant increase in suspended listed companies in Hong Kong raises concerns about corporate governance, financial reporting practices, and the capacity of CPA firms to effectively handle multiple resumptions. Stakeholders, including listed companies, controlling and minority shareholders, CPA firms, and regulators, must work together to overcome these challenges.
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