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What is a “relevant non-compliance”?

The Financial Reporting Council (FRC) may initiate an enquiry into a possible relevant non-compliance with financial reporting requirements on the part of listed entities.

A relevant non-compliance exists if a relevant financial report of a listed entity does not comply with a relevant requirement. A relevant non-compliance is defined in section 5 of the Financial Reporting Council Ordinance (FRCO).

Relevant financial report

For a listed entity (other than a listed collective investment scheme), a relevant financial report generally refers to its financial statements, which comprises its annual and interim financial statements as required under the Companies Ordinance and/or the Listing Rules. It also includes accountants’ reports required for a listing document, for example, a prospectus.

In relation to a listed collective investment scheme, a relevant financial report generally refers to the financial statements of the scheme published for the purposes of the relevant SFC Codes or guidelines or Listing Rules. It also includes accountants’ reports in a listing document.

For further information, please refer to Part 1 and Part 2 of Schedule 1 to the FRCO.

Relevant requirement

A relevant requirement refers to accounting requirements as provided in:

(a) the Companies Ordinance (applicable for listed corporation only);
(b) the standards of accounting practices issued or specified by the council of the Hong Kong Institute of Certified Public Accountants (i.e. the Hong Kong Financial Reporting Standards);
(c) the International Financial Reporting Standards issued by the International Accounting Standards Board;
(d) the Listing Rules;
(e) any generally acceptable accounting principles allowed for usage under the Listing Rules; or
(f) the relevant SFC Codes or guidelines (applicable for listed collective investment scheme only).

For further information, please refer to Part 1 and Part 2 of Schedule 1 to the FRCO.


Procedures

1. The FRC may initiate an enquiry into possible non-compliance with relevant requirements on the part of listed entities in their financial reports, in its own right or upon receipt of a complaint.
2. In order to decide whether or not an enquiry should be initiated, the available information and evidence will be reviewed. The auditor, reporting accountant, and/or listed entity concerned may be asked to provide additional information and an explanation on the matters.

Discretion to initiate an enquiry

3. Where the FRC considers that it appears that there is or may be a question whether or not there is a relevant non-compliance, and certifies in writing to this effect, the FRC may initiate an enquiry.
4. The FRC will normally appoint a Financial Reporting Review Committee (FRRC) to act as the enquirer and conduct an enquiry but in exceptional circumstances, may decide to conduct the enquiry itself.
5. Where the FRC appoints a FRRC to conduct an enquiry, the FRC will specify the terms of reference and will notify the listed entity in writing of the names of the members of the FRRC.

For further information, please refer to section 40 of the FRCO.

Exercising general powers of enquiry

6. Once an enquiry is initiated, the FRRC1 may, in writing, require certain persons such as auditors, listed entities and their officers or employees to produce records or documents and to give information or explanation. The FRRC1 is required to certify that it has reasonable cause to believe that the relevant records or documents, or the relevant information or explanation are relevant to the relevant non-compliance.

For further information, please refer to section 43(1) of the FRCO.
7. Where any person, without reasonable excuse, fails to comply with a requirement imposed on him, the FRRC1 may apply to the Court of First Instance for an inquiry into this failure. Any person, without reasonable excuse, fails to comply with a requirement may be guilty of contempt of court.

For further information, please refer to section 45 of the FRCO.

Concluding an enquiry

8. As soon as practicable after the completion of an enquiry, the FRRC1 will prepare a written report on its findings.
9. The FRC may adopt an enquiry report and may take or order further action as appropriate before the report is adopted. If before the adoption of a report, the FRC is of the opinion that any person named in the report will be adversely affected by its publication or disclosure, that named person will be given a reasonable opportunity of being heard.
10. The FRC may decide to publish a report or any part of it. In deciding whether or not to publish an enquiry report, or any part of it, the FRC will consider:

(a) whether or not the publication may adversely affect any criminal proceedings or any proceedings before the Market Misconduct Tribunal or under the Professional Accountants Ordinance that have been or are likely to be instituted;
(b) whether or not the publication may adversely affect any person named in the enquiry report; and
(c) whether or not the enquiry report, or any part of the report, should be published in the interest of the investing public or in the public interest.
11. The FRC may close a case, suspend an enquiry, secure the removal of a non-compliance or carry out other follow-up action including referral to appropriate regulatory bodies and/or law enforcement agencies as it considers appropriate. The FRC will notify the relevant listed entity once it comes to a decision unless it is satisfied that the notification may prejudice the enquiry, or any other action which the FRC or a regulatory body and/or a law enforcement agency intends to take in relation to the enquiry.

For further information, please refer to section 48 of the FRCO.

Issuing a notice to rectify a relevant non-compliance

12. Where the FRC finds that there is a relevant non-compliance, the FRC may give a notice to the listed entity concerned to remove the non-compliance in the manner and within a period as specified in the notice.
13. In the event that a listed entity does not rectify the relevant non-compliance within a specified period, the FRC may:

(a) apply to the Court of First Instance for a declaration that there is a relevant non-compliance and an order requiring the director of the listed corporation to cause the relevant non-compliance to be rectified.

This action is only applicable when there is a relevant non-compliance in relation to a breach of an accounting requirement as provided in the Companies Ordinance. Please refer to section 5(2) of the FRCO; or
(b) take any other action as it considers appropriate including referral to the appropriate regulatory body for follow-up action.
For further information, please refer to sections 49 and 50 of the FRCO.

Footnote:
1In a case where the FRC decides to conduct the enquiry itself, the references to “the FRRC” should be replaced with “the FRC”.

Page last updated: 21 January 2016