Hong Kong’s AFRC Releases 2024-2025 Audit Inspection Report: Overall Audit Quality Improves, but Persistent Issues Remain

On July 28, the Hong Kong Accounting and Financial Reporting Council (AFRC, commonly referred to as "HKAFRC") released a report summarizing the results of its audit inspections for the 2024-2025 fiscal year (ending March 31 this year). The report states that while overall audit quality has improved significantly over the year, some long-standing issues still persist and require further efforts to address.

Liu Jianru, Head of AFRC’s Inspection Division, noted that the council selected 21 audit firms and examined 69 audit engagements during the year. Among these, 51 were annual audit engagements for listed companies or IPO-related audits, and 18 involved public interest entities. A notable positive change was seen in Category 4 cases—those requiring the most improvement under the "audit quality rating" system: such cases accounted for 46% of total inspections last year, but dropped to 28% this year, a nearly 50% reduction. However, Category 4 cases still commonly suffered from familiar shortcomings: insufficient evidence to support conclusions on matters like revenue recognition and impairment of accounts receivable, as well as frequent discrepancies in accounting records.

In terms of firm performance, the Big Four accounting firms and BDO Limited (Lixin Dehao) achieved the best results. By firm size, Category A firms (handling over 100 audit engagements annually) and Category B firms (handling 10 to 100 audit engagements annually) showed particularly significant progress. In contrast, small firms inspected for the first time—especially Category C firms (handling fewer than 10 audit engagements annually)—still have considerable room for improvement.

Beyond routine inspections, AFRC also completed 16 investigations during the year: 11 related to auditors of public interest entities, and 5 involving relevant professionals. Of these, 14 have been referred to the disciplinary department for further action. Both concluded cases and newly initiated investigations revealed recurring issues, including insufficient audit evidence, lack of rigor and professional skepticism during audits, and inadequate professional judgment.

The report also highlighted a notable trend: in both 2023 and 2024, the rotation rate of audit firms among Hong Kong-listed companies exceeded 10%, with some companies changing auditors more than once. More critically, approximately one-third of these rotations involved switching from large firms to small firms, primarily due to either failure to reach an agreement on audit fees or unresolved issues raised by the previous auditor. Liu Jianru cited an example: nearly 20% of Hong Kong-listed companies changed auditors last year, among which 13 audit engagements saw lower fees than in previous years, and 12 were rated as Category 3 or 4 (requiring improvement). Additionally, 8 cases involved hasty auditor rotations that compressed audit timelines—this could potentially undermine auditors’ independence and audit quality.

Sun Deji, Chairman of AFRC, emphasized that the council’s inspections and investigations are not merely for regulatory and law enforcement purposes, but more importantly, to support the healthy development of the auditing industry and enhance market confidence. When asked about audit issues related to mainland Chinese companies listing in Hong Kong, AFRC’s Chief Executive Officer, Lai Cuibi, responded that Hong Kong’s audit standards are aligned with international benchmarks, and that the council will initiate investigations in accordance with procedures if significant discrepancies in audit results are identified.

Overall, audit quality is moving in a positive direction. However, persistent long-standing issues and the risks posed by frequent auditor rotations among listed companies require close monitoring and effective resolution.