AFRC presents key findings and insights from its Annual Inspection and Enforcement Reports for 2025-26

The Accounting and Financial Reporting Council (AFRC) today released its Annual Inspection Report and inaugural Annual Enforcement Report for the year ended 31 March 2026. The reports provide an overview of the AFRC’s regulatory priorities, findings and observations for the reporting year, drawing on insights from its inspection and enforcement activities.

Dr David Sun, Chairman of the AFRC, said, “The AFRC is committed to strengthening confidence in financial reporting by enhancing audit quality through robust independent oversight and fostering sound governance practices within firms and listed companies. Through a proactive and risk-based regulatory approach, we identify issues early, drive timely remediation, and take proportionate enforcement action where necessary. We reinforce accountability and uphold the principle that audit quality is non-negotiable.”

Overview of the 2025-26 Annual Inspection Report

Marking the completion of its second three-year inspection cycle (2023-24 to 2025-26), the AFRC publishes the sixth edition of its Annual Inspection Report. The report outlines the progress made by the audit profession in enhancing audit quality over recent years, while also identifying key areas that firms should continue to focus on to ensure delivery of quality audits.

Over the past year, the AFRC has conducted inspections of 39 audit firms, focusing on their systems of quality management and a selection of 90 completed audit engagements. These included 58 listed-entity audits completed by 25 public interest entity (PIE) auditors. To further strengthen the profession’s ability to identify and address financial crime risks, the AFRC also conducted additional inspections at 27 firms to assess their compliance with the Guidelines on Anti-Money Laundering and Counter-Terrorist Financing for Professional Accountants issued by the Hong Kong Institute of Certified Public Accountants, which form part of the Code of Ethics for Professional Accountants.

Nevertheless, progress among firms remains uneven. Although larger firms typically demonstrate established technical capabilities, the profession continues to face challenges in complex, judgment-intensive areas, including revenue recognition, asset impairment assessments, going concern assessments, and fraud risk identification.

As audit quality standards continue to evolve in response to increasing market complexity, the AFRC expects firms to take prompt action to address the following five areas that continue to attract significant attention:

• Resources management: Ensure engagement teams are adequately staffed with members who possess the necessary skills and relevant industry experience. In addition, firms should rigorously manage partner workloads to ensure they can effectively fulfil their responsibilities as engagement partners and/or engagement quality reviewers.
• Audit fee and market competition: Ensure audit fees are fully commensurate with the resources required to execute a high-quality audit. Commercial pressures must never compromise auditor objectivity.
• Professional scepticism: Firm leadership (including the firm's chairman and managing partner) must consistently champion a quality-first culture that empowers auditors to exercise strong professional scepticism and rigorously challenge management’s key assumptions.
• Group audit oversight: In cross-border audits, it is critical that auditors exercise rigorous direction, supervision and review over component auditors, particularly given the growing number of overseas issuers in Hong Kong’s capital markets.
• IT governance and emerging technology application: Elevate auditors’ capabilities to identify and address complex IT and cybersecurity risks in IT-intensive environments. Amid rapid AI adoption, firms must enforce robust IT governance, safeguard data integrity, and apply rigorous professional judgment when deploying technological audit tools.

Firms must exercise discipline in client acceptance and proactively address recurring audit quality issues. When such issues persist, firm leadership should undertake comprehensive root-cause analyses that target underlying cultural and structural factors, rather than simply treating the symptoms without addressing the root causes. The AFRC will continue to engage closely with firms, hold them accountable for audit quality outcomes, and promote a resilient profession that upholds public trust.

Overview of the 2025-26 Annual Enforcement Report

In its first Annual Enforcement Report, the AFRC presents a transparent and integrated overview of its enforcement process — from complaint handling, investigation, to the final resolution of disciplinary matters — alongside key priorities, milestones and regulatory outcomes.

The Annual Enforcement Report is intended to inform not only the AFRC’s regulatees — auditors and professional accountants — but also other stakeholders, including financial statement preparers, approvers, and the public of the AFRC’s key regulatory messages. The enhancement of governance, compliance and audit quality benefits all participants in the financial reporting ecosystem and serves the public interest.

The AFRC adopts a strategic and risk-based approach to enforcement, placing emphasis on case prioritisation and thematic enforcement. In particular, the AFRC continued to prioritise high-profile cases involving significant public interest, as well as those concerning serious audit deficiencies in PIE engagements. The AFRC’s enforcement approach remains agile, responsive, and dedicated to delivering positive and effective regulatory outcomes for the profession.

During the reporting year, the AFRC completed 81 investigation and enquiry cases and 22 disciplinary cases, delivering timely, proportionate and effective enforcement outcomes. Sanctions imposed included public reprimands, pecuniary penalties exceeding HK$11.7 million in total, and, where appropriate, suspension of registration and cancellation of practising certificates. 17 disciplinary cases published during the reporting year related to misconduct involving PIE auditors or listed entity engagements and accounted for a significant portion of the total pecuniary penalties imposed (i.e. around HK$10 million).

The AFRC identified key enforcement themes during the past year, reflecting some of the more prevalent, serious, and impactful forms of misconduct affecting stakeholders and the public, and aims to send the following key messages:

• Deficient systems of quality management and control: Robust firm-wide quality management and control systems, including appropriate leadership, governance, monitoring and remediation, are fundamental to sustainable audit quality.
• Significant audit deficiencies and inappropriate audit opinions: Significant audit deficiencies can undermine the reliability of financial reporting and market confidence. The AFRC remains focused on addressing significant audit failures, particularly where deficiencies call into question the appropriateness of audit opinions.
• Systemic late file archiving and backdating of audit working papers: The integrity of audit documentation is fundamental to audit quality. Systemic late file archiving and backdating practices undermine the reliability of audit records.
• Non-compliance with registration requirements: Registration requirements play a key role in upholding high standards of accountability and transparency in audit engagements by ensuring practitioners are properly qualified and possess the requisite experience to undertake the work.
• Breach of auditor independence requirements: Auditor independence is a bedrock principle of auditing and professional ethics that underpins the objectivity and reliability of an auditor’s work. Breaches of independence requirements, whether actual or perceived, could materially undermine the credibility of audits.
• Non-compliance with Guidelines on Anti-Money Laundering and Counter Terrorist Financing for Professional Accountants: Compliance with these requirements is a core professional obligation of auditors and professional accountants to assist with the detection and reporting of suspected criminal conduct.

The Annual Enforcement Report identifies the above recurring issues and emerging risks that require proactive attention and timely corrective action, and draws attention to potential pitfalls and weaknesses in existing practices.

Looking ahead, deficiencies in systems of quality management and control, significant audit deficiencies in PIE engagements, particularly in cases where deficiencies lead to inappropriate audit opinions, will remain key regulatory priorities. Apart from PIE audits, non-PIE engagements involving a high degree of public interest, such as audit and assurance work for regulated entities, are also a part of our enforcement focus. The AFRC will take timely, proportionate action to uphold audit quality, reinforce accountability, and safeguard public trust in Hong Kong’s financial reporting ecosystem.

Ms Janey Lai, Chief Executive Officer of the AFRC, said, “Audit fees should not be regarded as costs to be minimised — they are an investment in trust. High quality audits underpin good governance, investor confidence and safeguard market integrity. The accounting profession serves a vital public interest role, and its value must never be undermined by short-term commercial pressures. We urge firms and boards to move beyond cost-driven thinking and put quality first.”

The AFRC remains committed to raising awareness across the financial reporting ecosystem through its findings and reports, encouraging proactive engagement and communicating clearly our regulatory expectations. By strengthening stakeholders’ understanding of their respective responsibilities and fostering greater transparency of the key areas of note, the AFRC aims to further enhance the integrity and reliability of financial reporting and sustain trust in Hong Kong’s capital markets.