The World Health Organisation has declared a global health emergency over an outbreak of a novel coronavirus (“COVID-19”) since December 2019. As COVID-19 continues to spread across the globe, governments and organisations in various countries have implemented measures such as the closure of borders and travel restrictions to control the spread of the virus. As a result, the outbreak is affecting the preparation of financial information of some issuers’ results announcements, especially those whose businesses are primarily based in the People’s Republic of China (PRC). The travel restrictions make it almost impossible for the auditors to travel to the PRC and conduct any on-site audit works.
On 4 February 2020, the Securities and Futures Commission (the “SFC”) and The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) issued a joint statement (the “Joint Statement”) providing guidance to issuers and their auditors in relation to the disclosure of financial information in results announcements in view of travel and other restrictions that have arisen due to the COVID-19 outbreak.
Annual results reporting obligations under the Listing Rules
Rule 13.49(1) of the Rules Governing the Listing of Securities on the Stock Exchange (the “Listing Rules”) requires an issuer to publish its preliminary results for the financial year not later than three months after the end of the financial year. Rule 13.49(2) of the Listing Rules further stipulates that the preliminary results announcement should be based on the issuer’s financial statements which have been agreed upon with its auditors.
Rule 18.49 of the Rules Governing the Listing of Securities on GEM of the Stock Exchange (the “GEM Listing Rules”) requires GEM issuers to fulfil similar obligations of Rules 13.49 (1) and 13.49 (2) of the Listing Rules. Rules 18.03 and 18.48A of the GEM Listing Rules further require an issuer to publish its audited financial statements within three months after the financial year end in addition to the publication of its preliminary results.
According to the Joint Statement, travel and other restrictions resulting from the COVID-19 outbreak may disrupt the reporting or audit processes of issuers. Issuers should publish their preliminary results in full compliance with the relevant deadline or reporting requirements under the Listing Rules unless prior consensus has been reached with the Stock Exchange. If an issuer is able to publish its preliminary results in full compliance with the other reporting requirements but is unable to obtain the agreement of its auditor to the financial statements as required by Rule 13.49(2) of the Listing Rules (Rule 18.49 of the GEM Listing Rules), it should publish such preliminary results (without the agreement of its auditors) on or before the deadline. Any subsequent disagreement by the auditor will not attract disciplinary action from the SFC and the Stock Exchange unless there is element of fraud or other serious misconduct found in the issuer.
No blanket extension or waiver on the deadline or reporting requirements of the results announcement was given. Issuers which believe there is a real possibility that they will be unable to adhere to the requirements of the Listing Rules should contact the Stock Exchange as early as possible to discuss the situation. The Stock Exchange will consider each matter on a case-by-case basis.
Business operation disruption and profit warning
Section 307B of the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) (the “SFO”) provides that, subject to certain specified exceptions, a listed corporation must, as soon as reasonably practicable after any inside information has come to its knowledge, disclose the information to the public. If an issuer’s business operations or reporting procedures are materially disrupted by the COVID-19 outbreak and/or the travel or other restrictions, its management should be vigilant as to whether any inside information (such as business operation disruptions and profit warning) has arisen and, if so, issue a separate announcement as soon as reasonably practicable, independent of any applicable requirements under the Listing Rules.
Role of the board of directors
On 7 February 2020, the Hong Kong Institute of Directors issued a statement on the COVID-19 outbreak with some advice to directors of an issuer:
- All the directors, including both executive and non-executive directors, and not just those on the audit committee, should bear in mind that the responsibilities of the board of directors are collective.
- All directors should pay attention to key issues that would affect the issuer’s financial position. This may often involve the valuation of assets, the recognition of revenue, the classification of liabilities in relation to loan covenants, etc. The issuer’s cash flow situation is another area to take note of.
- Non-executive directors, in particular, should obtain adequate assurance in writing from the appropriate executive members (such as the Chief Financial Officer and Chief Executive Officer of the issuer) that there has been no failure 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. Whenever possible, they should maintain close contact with key members of the audit team to get help with identifying the areas to focus on.
- Non-executive directors should participate in a proactive manner in audit committee and board proceedings to question and check on the information, assumptions and assurances given by management. Non-executive directors who are not audit committee members may consider sitting in audit committee sessions to help their understanding.
- Non-executive directors, and even executive directors, who may be prevented from travelling to a committee or board meeting, should be provided with the required information if they are unable to fully grasp the whole picture in order to form an accurate opinion on the subject matter. Although video-conferencing technology could enable committee and board meetings to take place without members being physically present together, this meeting mode could mean they are less able to spot and detect nuances in a dialogue and exchange than they otherwise could in an in-person meeting.
- Directors 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.
As many members of the Hong Kong Institute of Certified Public Accountants (the “HKICPA”) are listed issuer directors, especially non-executive directors who often take up the role of chairman of audit committees, the HKICPA has also expressed concerns about the development of COVID-19. In an e-mail to its members on 11 February 2020, the HKICPA noted its worry that, although ultimate responsibility for a listed issuer’s financial statement rests with the board of directors, the auditors of issuers may be pressurised by their issuer clients to agreeing to the release of provisional financial information before sufficient audit work has been completed. The HKICPA emphasised that as the situation continues and has a wider impact on Hong Kong IPOs and issuers (especially on those with a financial year ending 31 March), it will continue to monitor the development of COVID-19 and, where necessary, reflect the views and concerns of its members as well as other professionals to the Stock Exchange and/or the SFC.
To sum up, the board of directors and the senior management are reminded to work closely with each other in such difficult times to minimise the disruption to the business operations and corporate governance compliance under any Hong Kong regulatory requirement including the Listing Rules and the SFO.
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