Audit Committees (Hong Kong SAR)

The major function of an Audit Committee is to assist the Board of Directors in providing an independent review of the effectiveness of the financial reporting process, internal control and risk management system of the company, overseeing the audit process and performing other duties and responsibilities as assigned by the Board.  This section provides a range of useful publications relating to the audit committee's operations and oversight responsibilities. 

Audit Committee Structure

In Hong Kong, all listed companies must establish an audit committee. Audit committees must be comprised of non-executive directors only and must have at least three members. At least one of the members must be an independent non-executive director, who has appropriate professional qualifications or accounting or related financial management expertise. The majority of its members must be independent non-executive directors and the chairman of the audit committee must be an independent non-executive director as well.

For details, please refer to:
Main Board Listing Rules (Section 3.21 of Chapter 3)
GEM Board (Growth Enterprise Market) Listing Rules (Section 5.28 of Chapter 5)

The work of the Audit Committee

General Information – Hong Kong Exchange Recommendations

The Hong Kong Stock Exchange has set out principles and recommendations for leading audit committee practices in its Code on Corporate Governance Practices. For details, please refer to:

General Information – HKICPA Audit Committee Guide

The Hong Kong Institute of Certified Public Accountants (HKICPA) has issued a guide covering various aspects of the implementation of an effective Audit Committee and the disclosure of its work. This guide provides useful guidance to companies that have or will set up an audit committee. Download the Hong Kong Institute of Certified Public Accountants ("HKICPA"): A Guide for Effective Audit Committee via this link.

Financial and other reporting

The Audit Committee is required to monitor the integrity of financial statements, annual reports, interim reports and quarterly reports, if prepared. The review should focus on the completeness, accuracy, appropriateness and fairness of disclosures and statements given by directors.

 

 

The Hong Kong Institute of Directors: The 21st Century Director: Financial Statement Challenges and How to Face Them

The Hong Kong Institute of Directors conducted a luncheon and invited The Hon Paul Chan, Legislative Councillor for the accounting functional constituency to give a speech over the current financial statement challenges.Find a link to this publication here.

 

Hong Kong Institute of Certified Public Accountants ("HKICPA"):  Subprime and Credit Crunch – Financial Reporting and Auditing Issues

HKICPA has issued an article highlighting financial reporting issues related to the recent financial market conditions. Find a link to this article here.

External audit

Another role of the Audit Committee is to make recommendation to the Board on the appointment, reappointment and removal of the external auditor, to approve the remuneration and terms of engagement of the external auditor, to review and monitor external auditor's independence and objectivity, and to develop and implement policy on the engagement of an external auditor to supply non-audit services.

The Standards and Quality Division of HKICPA has issued an alert to update members on the proposed new Hong Kong Standards on Auditing (HKSAs), which will be part of the ongoing policy of convergence with International Standards on Auditing (ISAs).  Find a link to the report from the Hong Kong Institute of Certified Public Accountants ("HKICPA") here: Financial Reporting and Auditing Alert (Issue 4 – June 2009):  Updates to Hong Kong Standards on Auditing for the new International Standards on Auditing

Risk Management & Internal Control

The Audit Committee has the responsibility to oversee the risk management and internal control systems of the company.  It should obtain assurance that management has identified key risks in relation to business objectives and that appropriate measures have been in place to mitigate the risks identified. The Audit Committee should also ensure that management has discharged its duty to have an effective internal control system and consider any findings of investigations conducted by internal audit or issues raised in the external auditor's management letter. 
According to Section C2.1 of the Code of Corporate Governance Practices, listed companies should at least annually conduct a review of the effectiveness of the system of internal control and the review should cover all material controls and risk management functions. According to the Corporate Governance Code’s requirements, listed companies are also required to prepare a report on corporate governance practices.  In this report, listed companies are required to disclose the work performed during the year in discharging its responsibilities in its review of the system of internal control.

Securities and Futures Commission ("SFC"): SFC Enforcement and Fraud


Mark Steward, SFC’s Executive Director of Enforcement gave a speech in the Conference on Fraud Risk Management.  The content of the speech included how SFC responded to fraud cases and what should be done to prevent and detect fraud.

Find a link to this speech here.

Hong Kong Institute of Certified Public Accountants ("HKICPA"): Internal Control and Risk Management - A Basic Framework

The Stock Exchange of Hong Kong Limited invited HKICPA to issue guidance to help Hong Kong listed companies understand and implement the Code on Corporate Governance Practices requirements relating to internal control and to devise their internal control procedures.  Find a link to this report here.

Asian Corporate Governance Association ("ACGA"): Presentation on "Corporate Governance Failures in Asia: How can Directors and Corporate Counsel Help to Manage Risk?"

Jamie Allen, ACGA Secretary General, gave a presentation in the luncheon seminar conducted by the Hong Kong Corporate Counsel Association.  The topics of the presentation included the rating of corporate governance quality in Asia, case studies of governance failures and discussion on how directors and corporate counsel can help to manage risk. Find a link to this presentation here.

The Hong Kong Institute of Directors (HKIOD): The 21st Century Director: Acknowledging the Reality of Risk

The HKIOD has conducted interviews with recipients of past Director of the Year Awards, focussing on the importance of risk management. Find a link to these interviews here.

The Hong Kong Institute of Directors (HKIOD): The 21st Century Director – Risking It All

Deloitte Hong Kong has conducted an enterprise risk management (ERM) survey with the support of the HKIOD. In one of HKIOD's regular publications, it summarizes the results of the survey and discusses the ERM landscape in Hong Kong. Find a link to this publication here.

Going Concern

Current economic volatility is creating challenges both for directors in assessing the company’s ability to continue as a going concern, and for auditors as they evaluate that assessment. The audit committee should pay particular attention to management's use of the going concern assumption in the financial statements.

HKICPA Financial Reporting and Auditing Alert (Issue 2 – March 2009):  Going concern – Assessing an Entity's Ability to Continue as a Going Concern

The Standards and Quality Division of HKICPA has issued an alert in March 2009 which emphasises the importance of carrying out an appropriate assessment of an entity's ability to continue as a going concern. The alert is directed to preparers and auditors of financial statements. Find a link to this alert here.

Disclosure of Audit Committee Information

Section 2(i) of the Corporate Governance Code stipulates the disclosure requirements of Audit Committee information in the Corporate Governance Report.  Such disclosure should include the following:
• Role and function of the Audit Committee;
• Composition of the Audit Committee;
• Number of meetings of the Audit Committee and record of attendance of its members; 
• Summary of work performed by the Audit Committee; 
• Details of non-compliance with rule 3.21 (for Main Board) / rule 5.28 (for GEM Board) and an explanation of any remedial steps.
For details, please refer to 

Remuneration Committees (Hong Kong SAR)

In Hong Kong, the key objectives of establishing a remuneration committee are to assist the Board of Directors to maintain a formal and transparent procedure for setting policy on directors' remuneration and to determine an appropriate remuneration packages for all directors. The Remuneration Committee should ensure that remuneration arrangements support the strategic aims of the business and enable the recruitment, motivation and retention of senior executives while complying with all rules and regulations. 

Remuneration Committee Structure

According to Section B of the Code on Corporate Governance Practices, all listed companies should establish a remuneration committee and a majority of its members should be independent nonexecutive directors.
For details, please refer to 

The work of the Remuneration Committee

The Stock Exchange of Hong Kong has set out principles and recommendations for effective remuneration committee practices in Section B of the Code on Corporate Governance Practices. Listed companies should develop a written terms of reference to properly document the roles and responsibilities of remuneration committees and the authority delegated to them by the Board of Directors.

Determination of Directors' and Senior Management's Remuneration

The remuneration committee of a listed company is responsible for making recommendations to the board on policy and structure for all remuneration of directors and senior management and on the establishment of a formal and transparent procedure for developing this policy. It is also responsible for determining specific remuneration packages for executive directors and senior management, including compensation payments and benefits in kind.  It should also make recommendations to the board of directors for the remuneration of non-executive directors as well.  When considering remuneration structure and policy, it should consider salaries paid by comparable companies and responsibilities of directors and it should have access to professional advice, if necessary.  It is important to ensure that no director or any of his associates is involved in deciding his own remuneration.
In addition, Remuneration Committee should be delegated with the authority to review and approve the following:
• Performance-based remuneration by reference to company's goals and objectives;
• Compensation payable to Executive Directors and senior management in connection with any loss or termination of office or appointment; and
• Compensation arrangements relating to dismissal or removal of directors for misconduct.

The Chamber of Hong Kong Listed Companies ("CHKLC"): Balancing Senior Management Compensation Arrangements with Shareholders' Interest


The CHKLC has published an article about the determination of senior management's remuneration in its quarterly newsletter called "Momentum". The article provides useful guidance for designing a value-added and balancing compensation structure for senior management.

Find a link to "Momentum" here.

Directors' Remuneration Disclosure 

Disclosure requirements for director remuneration are stipulated in the Hong Kong listing rules.  Listed companies are required to disclose in their annual reports all details of current and past directors’ pay, including:
• Director fees for the financial year;
• Director basic salaries, housing allowance, other allowance and benefits in kind;
• Contributions to pension schemes for directors;
• Bonuses paid or receivable by directors;
• Amounts paid or receivable as an inducement to join or upon joining the listed company; and
• Compensation paid or receivable for loss of office. 
For details, please refer to:

Directors' Remuneration Disclosure  - Committee Practices

In addition to the above requirements, Section 2(f) of Corporate Governance Code also stipulates the disclosure requirements for remuneration committee practices in the Corporate Governance Report.  Such disclosure includes information relating to directors' remuneration policy:
• Role and function of the remuneration committee;
• Composition of the remuneration committee;
• Number of meetings of the remuneration committee and record of attendance of its members; and
• Summary of work performed by the remuneration committee, including determining the remuneration policy, assessing performance, and approving the terms of service contracts for executive directors.
For details, please refer to:

HKIOD Report:  ‘The 21st Century Director – Is Your Remuneration Committee Serious?’

The HKIOD has published an article about duties and leading practices of remuneration committees in Hong Kong. The article provides useful guidance to companies that have or will set up a remuneration committee. Find a link to this article here.