New requirements for trading suspension

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trading suspension
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The Stock Exchange of Hong Kong (SEHK), on 24 May 2019, published its consultation conclusions on the proposed trading suspension requirement applicable to issuers with disclaimer or adverse audit opinion on their financial statements. The new suspension requirement will apply to issuers’ annual results announcements for financial years commencing on or after 1 September 2019.

New suspension requirement. The SEHK will normally require suspension of trading in an issuer’s securities if it publishes an annual results announcement and the auditor has issued, or has indicated that it will issue, a disclaimer or adverse audit opinion on the issuer’s annual financial statements.

Trading will remain suspended until the issuer has addressed the issues giving rise to the disclaimer or adverse opinion, provided comfort that such disclaimer or adverse opinion would no longer be required and disclosed sufficient information for investors to make an informed assessment of its financial position.

The new suspension requirement does not apply to (a) financial statements with a qualified opinion or a clean opinion with an emphasis of matter, or (b) interim financial statements.

Rationale. A disclaimer (or adverse) audit opinion on the financial statements indicates that the risk of misstatements could be (or the misstatements are) both material and pervasive to the financial statements, and therefore raises concerns about the reliability of the financial information. The SEHK considers the current regime cannot adequately address such concerns and a relatively large number of issuers have not taken prompt and adequate actions to address audit issues, resulting in repeated disclaimer of opinions. The new suspension requirement aims to enhance investors’ protection by improving the quality and reliability of financial information published by issuers. SEHK considers it would also encourage issuers to strengthen their risk management and internal control systems, and to act promptly to resolve audit issues with their auditors.

Exceptions to the new suspension requirement. The SEHK emphasizes that a suspension decision is not automatic based solely on a disclaimer or adverse audit opinion. The new suspension requirement will not normally apply where the disclaimer or adverse opinion relates solely to a going concern (and not any other issues), in which case additional disclosure (namely, details of the audit modification, the facts giving rise to the modification and the actions taken and/or to be taken to address the modification) must be made in the annual results announcement. Further, the new suspension requirement may not apply where the issuer has addressed all the issues giving rise to the disclaimer or adverse opinion before the publication of the annual results announcement, and disclosed sufficient information to enable investors to make an informed assessment of its financial position.

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