1. The Accounting and Financial Reporting Council (“AFRC”) is an independent body established under the Accounting and Financial Reporting Council Ordinance (Cap. 588) (“AFRCO”).

2. Under Part 3A of the AFRCO, the AFRC is empowered to carry out inspections in relation to PIE engagements completed by PIE auditors (“Regulatees”) on or after 1 October 2019 for the purpose of ascertaining whether the Regulatees have complied with, or are likely to be able to comply with (i) a provision of the AFRCO, or (ii) a professional standard. A PIE auditor is a recognized or registered PIE auditor.

3. Please note that a registered PIE auditor is also a practice unit (as defined in section 2(1) of the AFRCO) and is therefore subject to the AFRC's inspection powers under Part 3AA of the AFRCO (other than any PIE engagements conducted by a registered PIE auditor). For details of the AFRC's policy for inspections of practice units with respect to engagements other than PIE engagements, please refer to the “Policy Statement for Inspection of Practice Units with respect to engagements other than PIE Engagements”, which is available on the AFRC’s website (www.afrc.org.hk).

Definitions

4. In this Policy Statement, the following terms have the meanings defined in the AFRCO as set out below (the definitions in the AFRCO shall prevail in case of any inconsistency):

Purpose of this document

5. The purpose of this Policy Statement is to provide an overview of the legal regime of the inspection function of the AFRC for Regulatees.

6. For details of the AFRC’s inspection process in relation to PIE auditors, please refer to the “Outline of the AFRC’s Inspection Process for PIE Auditors”, which is available on the AFRC’s website (www.afrc.org.hk).

Objectives of an inspection

7. The AFRC is entrusted with the statutory duty to regulate the accountancy profession. An effective regulatory regime of the accountancy profession is crucial for the business community and is essential for maintaining Hong Kong’s status as an international financial centre. This is particularly the case for auditors of PIEs, as investors may rely upon the audited financial statements of PIEs when making decisions.

8. Pursuant to section 21B of the AFRCO, the AFRC may direct an inspector to carry out an inspection in relation to the PIE engagements completed by a Regulatee on or after 1 October 2019 for the purpose of ascertaining whether the Regulatee has complied with, or is likely to be able to comply with (i) a provision of the AFRCO, or (ii) a professional standard. (Section 21B of the AFRCO)

9. The objectives of an inspection are to monitor and promote audit quality. An inspection focuses on how a Regulatee conducted PIE engagements and on the effectiveness of a Regulatee's quality control system to determine whether the applicable professional standards and legal and regulatory requirements have been complied with.

Circumstances in which inspections may be conducted

10. Pursuant to section 21B of the AFRCO, an inspection may be carried out by the AFRC in relation to the PIE engagements completed by a Regulatee on or after 1 October 2019 to ascertain whether the Regulatee has complied with, or is likely to be able to comply with: (Section 21B of the AFRCO)
11. 1. a provision of the AFRCO; or
    2. a professional standard.

11. Pursuant to section 2(1) of the AFRCO, professional standards include but are not limited to any statement of professional ethics, or standard of accounting, auditing or assurance practices, issued or specified, or deemed to have been issued or specified, under section 18A of the PA Ordinance. Professional standards include the “Code of Ethics for Professional Accountants” published by The Hong Kong Institute of Certified Public Accountants, which contains the “Guidelines on Anti-Money Laundering and Counter-Terrorist Financing for Professional Accountants”. (Section 2(1) of the AFRCO)

12. The AFRC may specify that an inspection is for the purpose of ascertaining compliance with a particular professional standard(s).

13. The AFRC may also determine the practices and procedures to be followed for the inspection.

14. Pursuant to section 21E of the AFRCO, the AFRC may require a Regulatee to provide various information for: (Section 21E of the AFRCO)

1. 1. determining the frequency of inspections;
   2. specifying the professional standard(s) the compliance with which is/are to be ascertained in an inspection; or
   3. determining the practices and procedures to be followed for the inspection.

Powers of an inspector

15. Pursuant to section 21C of the AFRCO, an inspector has the power to, at any reasonable time: (Section 21C of the AFRCO)
16. 1. enter any business premises of a Regulatee;
    2. inspect, and make copies or record details of any record or document related to the PIE engagement(s) under inspection;
    3. make inquiries of a Regulatee, or any person whom the inspector has reasonable cause to believe to have the information being sought or to be in possession of any record or document being sought (if such information, record or document cannot be obtained from the Regulatee), concerning (i) the abovementioned record and document, or (ii) an activity that was carried out in the course of or may affect the PIE engagement(s).

16. An inspector may require a Regulatee or any person whom the inspector has reasonable cause to believe to have the information being sought or to be in possession of any record or document being sought (if such information, record or document cannot be obtained from the Regulatee), to (i) give access to the record or document requested, (ii) produce to the inspector within the time and at the place specified the record or document requested, or (iii) answer any question regarding such record or document, or an activity that was carried out in the course of or may affect the PIE engagement(s). An inspector may also, by written notice, require the person to verify his answers by a statutory declaration within the time specified. (Section 21C of the AFRCO)

17. For the purpose of ensuring compliance, an inspector is also empowered under the AFRCO to seek the necessary orders from the Court of First Instance (section 32), and to obtain a Magistrate's warrant (section 34). (Sections 32 and 34 of the AFRCO)

18. Regulatees shall cooperate with the AFRC in all its regulatory processes, including the inspection process, and to comply with any specified requirements of the AFRCO imposed by the inspector pursuant to sections 21C and 21D of the AFRCO. Section 21F of the AFRCO sets out various offences for failure to comply in an inspection process. (Sections 21C, 21D and 21F of the AFRCO)

Inspection report

19. At the conclusion of an inspection, an inspector is required by section 21G of the AFRCO to prepare and submit to the AFRC a written report. If required by the AFRC, an inspector must also prepare and submit to the AFRC a written report at any other stage of the inspection. (Section 21G of the AFRCO)

20. Before submitting an inspection report to the AFRC, the inspector must send a dated draft of the report to (i) the Regulatee concerned, and (ii) any other person(s) named in the draft report, and give them a reasonable opportunity of being heard. Please refer to the “Outline of the AFRC’s Inspection Process for PIE Auditors”, which is available on the AFRC’s website (www.afrc.org.hk) for details in relation to the opportunity of being heard. (Section 21G of the AFRCO)

21. After submitting the inspection report to the AFRC, the inspector will send the same to (i) the Regulatee concerned, and (ii) any other person(s) named in the report. (Section 21G of the AFRCO)

Follow-up action

22. Pursuant to section 21H, the AFRC may, having regard to an inspection report in relation to a Regulatee: (Section 21H of the AFRCO)
23. 1. decide no follow-up action is required;
    2. require a Regulatee (or a registered responsible person, if applicable) to take a measure or corrective action regarding compliance with a provision of the AFRCO or a professional standard in relation to the Regulatee;
    3. direct an inspector to carry out a further inspection under Part 3A Division 2 of the AFRCO;
    4. initiate an investigation under Part 3A Division 3 of the AFRCO in relation to a Regulatee (or a registered responsible person, if applicable); or
    5. impose a sanction on, or take an action in relation to a Regulatee (or a registered responsible person, if applicable) under sections 37D, 37E, 37F or 37I(1) of the AFRCO.

23. The AFRC may also, having regard to an inspection report in relation to a Regulatee, take any other follow-up action in accordance with the AFRCO that the AFRC considers appropriate. (Section 21H of the AFRCO)

24. This document provides a summary for reference only. It is not legal advice. Regulatees should seek their own legal advice. In the event of any inconsistency between this document and the AFRCO, the AFRCO shall prevail.

1. The Accounting and Financial Reporting Council (“AFRC”) is an independent body established under the Accounting and Financial Reporting Council Ordinance (Cap. 588) (“AFRCO”).

2. Under Part 3AA Division 2 of the AFRCO, the AFRC is empowered to carry out inspections in relation to a practice unit (“Regulatee”) for the purpose of determining whether the Regulatee has observed, maintained or applied PAO professional standards.

3. Please note that a registered PIE auditor is also a practice unit (hence a Regulatee). However, it should be noted that the AFRC has separate powers of inspection under Part 3A of the AFRCO in relation to “PIE engagements” (as defined in section 3A(1) of the AFRCO), and this Policy Statement is not applicable to such inspections. For details of the AFRC's policy for inspections in relation to PIE auditors with respect to PIE engagements, please refer to the “Policy Statement for Inspection of PIE Auditors with respect to PIE Engagements”, which is available on the AFRC’s website (www.afrc.org.hk). 

Definitions

4. In this Policy Statement, the following terms have the meanings defined in the AFRCO as set out below (the definitions in the AFRCO shall prevail in case of any inconsistency):

Purpose of this document

5. The purpose of this Policy Statement is to provide an overview of the legal regime of the inspection function of the AFRC for Regulatees, under Part 3AA Division 2 of the AFRCO.

6. For details of the AFRC’s inspection process in relation to practice units that are not PIE auditors, please refer to the “Outline of the AFRC’s Inspection Process for Practice Units that are not PIE Auditors”, which is available on the AFRC’s website (www.afrc.org.hk).

Objectives of an inspection

7. The AFRC is entrusted with the statutory duty to regulate the accountancy profession. An effective regulatory regime of the accountancy profession is crucial for the business community and is essential for maintaining Hong Kong’s status as an international financial centre.

8. The AFRC may direct a CPA inspector to carry out an inspection in relation to a Regulatee for the purpose of determining whether the Regulatee has observed, maintained or applied a specified PAO professional standard. The objectives of such inspections are to monitor and promote the quality of professional accounting work in Hong Kong, by ensuring Regulatees are acting in accordance with PAO professional standards.  

Circumstances in which inspections may be conducted

9. Pursuant to section 20ZZB(1)(a) and (1)(b) of the AFRCO, the AFRC may specify a PAO professional standard in relation which an inspection is to be carried out, and direct a CPA inspector to carry out an inspection in relation to a Regulatee for the purpose of determining whether the Regulatee has observed, maintained or applied the PAO professional standard. Pursuant to section 2(1) of the AFRCO, a PAO professional standard means any statement of professional ethics, standard of accounting, auditing or assurance practices, issued or specified, or deemed to have been issued or specified, under section 18A of the PA Ordinance.  PAO standards include the “Code of Ethics for Professional Accountants” published by The Hong Kong Institute of Certified Public Accountants, which contains the “Guidelines on Anti-Money Laundering and Counter-Terrorist Financing for Professional Accountants”.  (Section 2(1) and 20ZZB of the AFRCO)

10. An inspection may cover specific aspects of an engagement of a Regulatee, or the system of quality control and practice of a Regulatee generally.

11. Pursuant to section 20ZZB(1)(c) of the AFRCO, the AFRC may also determine the practices and procedures to be followed for the inspection. (Section 20ZZB of the AFRCO)

Powers of a CPA inspector

12. Pursuant to section 20ZZC of the AFRCO, a CPA inspector has the power to require a specified person (a "Specified Person") to: (Section 20ZZC of the AFRCO)

1. 1. produce to the CPA inspector, or give the CPA inspector access to, within the time and at the place specified in the requirement, any specified document in their possession or under their control, that the CPA inspector has reasonable cause to believe to be relevant to the inspection (a "required document");
   2. give to the CPA inspector such explanation or further particulars in respect of the required document as the CPA inspector specifies; and
   3. give to the CPA inspector all assistance in connection with the inspection that the Specified Person is reasonably able to give.

13. A CPA inspector may also inspect, examine or make copies of a required document, and take any abstract of, or extract from, a required document. (Section 20ZZC of the AFRCO)

14. A Specified Person is any of the following persons, whom the CPA inspector has reasonable cause to believe to be in possession of, or in control of, a required document: (Section 20ZZC of the AFRCO)

1. 1. if the practice unit to which the inspection relates is a CPA (practising) who practises accountancy on the accountant's own account, that accountant;
   2. if the practice unit to which the inspection relates is a firm of CPA (practising) or a corporate practice, a certified public accountant working in the practice unit; and
   3. any person who is employed by, or whose services are engaged by, the practice unit to which the inspection relates.

15. A specified document means any record or document specified by the CPA inspector, or any record or document that is of a class or description specified by a CPA inspector. (Section 20ZZC of the AFRCO)

16. Regulatees shall cooperate with the AFRC in all of its regulatory processes, including the inspection process, and to comply with any requirements imposed by a CPA inspector under section 20ZZC of the AFRCO. A failure on the part of a professional person without reasonable excuse to comply with a requirement imposed under section 20ZZC constitutes a professional irregularity under section 3B of the AFRCO, and may result in the imposition of disciplinary sanctions. (Section 3B of the AFRCO)

Inspection report

17. At the conclusion of an inspection, a CPA inspector is required by section 20ZZD of the AFRCO to prepare and submit to the AFRC a written report. If required by the AFRC, a CPA inspector must also prepare and submit to the AFRC a written report at any other stage of the inspection. (Section 20ZZD of the AFRCO)

18. Before submitting an inspection report to the AFRC, the CPA inspector must send a dated draft of the report to (i) the Regulatee concerned and (ii) any other person(s) named in the draft report, and give them a reasonable opportunity of being heard. Please refer to the “Outline of the AFRC’s Inspection Process for Practice Units that are not PIE Auditors”, which is available on the AFRC’s website (www.afrc.org.hk), for details in relation to the opportunity of being heard. (Section 20ZZD of the AFRCO)

19. After submitting the inspection report to the AFRC, the CPA inspector will send the same to (i) the Regulatee concerned, and (ii) any other person(s) named in the report. (Section 20ZZD of the AFRCO)

Follow-up action

20. Pursuant to section 20ZZE, the AFRC may, having regard to an inspection report in relation to a Regulatee: (Section 20ZZE of the AFRCO)

1. 1. decide no follow-up action is required;
   2. require a Regulatee to take a measure or corrective action regarding compliance with a PAO professional standard;
   3. direct a CPA inspector to carry out a further inspection under Part 3AA Division 2 of the AFRCO;
   4. initiate an investigation under section 20ZZH of the AFRCO; or
   5. impose a sanction on, or take an action in relation to, the Regulatee or any CPA to which the inspection relates under sections 37CA or 37I(1A) of the AFRCO.

21. This document provides a summary for reference only. It is not legal advice. Regulatees should seek their own legal advice. In the event of any inconsistency between this document and the AFRCO, the AFRCO shall prevail.

1. The Accounting and Financial Reporting Council (“AFRC”) is an independent body established under the Accounting and Financial Reporting Council Ordinance (Cap. 588) (“AFRCO”).

2. The purpose of this Policy Statement is to provide an overview of the legal regime of the AFRC's powers to conduct inspections in relation to compliance with the anti-money laundering and counter-terrorist financing requirements applicable to accounting professionals.

Definitions

3. In this Policy Statement, the following terms have the meanings defined in the AFRCO as set out below (the definitions in the AFRCO shall prevail in case of any inconsistency):

Inspections regarding compliance with anti-money laundering and counter-terrorist financing requirements

4. The AFRC is entrusted with the statutory duty to regulate the accountancy profession. An effective regulatory regime of the accounting profession is crucial for the business community and is essential for maintaining Hong Kong’s status as an international financial centre.

5. The Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) (“AMLO”) is one of the key legislations setting out Hong Kong's legal framework on anti-money laundering and counter-terrorist financing.

6. The AMLO imposes various AML/CTF requirements, including customer due diligence (“CDD”) and record-keeping requirements, with which financial institutions and “designated non-financial businesses and professions” (“DNFBPs”) must comply. (Section 5A of the AMLO)

7. Under the AMLO, DNFBPs are defined to include an “accounting professional” (“accounting professional”), which in turn is defined to mean a CPA, a CPA (practising), a corporate practice or a CPA firm. As the definition of “accounting professional” in the AMLO and the definition of “professional person” in the AFRCO cover the same range of persons and entities in the accounting profession, the rest of this policy statement will, for the sake of clarity, refer only to “professional persons” in the context of AML/CTF requirements. (Schedule 1, Part 2, Section 1 of the AMLO)

8. The AFRC and the Hong Kong Institute of Certified Public Accountants (“HKICPA”) have both been designated as a “regulatory body” under AMLO in respect of compliance by professional persons with the CDD and record-keeping requirements under AMLO. The AFRC would carry out inspections for the purpose of ascertaining compliance with such CDD and record-keeping requirements and the HKICPA may publish any guideline that it considers appropriate for providing guidance in relation to the operation of such CDD and record-keeping requirements. (Schedule 1, Part 2, Section 1 of the AMLO)

9. In this regard, the HKICPA has published its “Guidelines on Anti-Money Laundering and Counter-Terrorist Financing for Professional Accountants” (“AML Guidelines”), which form part of the HKICPA’s “Code of Ethics for Professional Accountants” (“Code of Ethics”).

10. The Code of Ethics (including the AML Guidelines) constitutes a PAO professional standard (hence also a professional standard) under the AFRCO. (Section 2(1) of the AFRCO)

11. Therefore, the AFRC may make use of its powers under the AFRCO to carry out inspections under both Part 3A (of PIE auditors in respect of PIE engagements) and Part 3AA (of practice units in respect of engagements other than PIE engagements) for the purpose of ascertaining compliance with the AML Guidelines.

12. For the AFRC’s policy and high-level procedures for inspections, please refer to (i) the “Policy Statement for Inspection of PIE Auditors with respect to PIE Engagements”; (ii) the “Outline of the AFRC’s Inspection Process for PIE Auditors”; (iii) the “Policy Statement for Inspection of Practice Units with respect to engagements other than PIE Engagements”; and (iv) the “Outline of the AFRC’s Inspection Process for Practice Units that are not PIE Auditors”, which are available on the AFRC’s website (www.afrc.org.hk).

13. Pursuant to section 3B of the AFRCO, a failure by a professional person to comply with an applicable AML/CTF requirement constitutes a professional irregularity, and may result in the imposition of disciplinary sanctions. (Section 3B of the AFRCO)

14. Pursuant to section 4 of the AFRCO, a failure or neglect to observe, maintain or otherwise apply the AML Guidelines (which, as indicated above, constitutes a professional standard) by (i) a PIE auditor or non-PIE auditor (whether it is a corporate practice, a CPA (practising), or a firm of CPAs (practising)), or (ii) a registered responsible person of a registered PIE auditor, in relation to PIE engagements completed on or after 1 October 2019, constitutes a practice irregularity, and may result in the imposition of disciplinary sanctions. (Section 4 of the AFRCO)

15. This document provides a summary for reference only. It is not legal advice. Persons concerned should seek their own legal advice. In the event of any inconsistency between this document and the AFRCO, the AFRCO shall prevail.

1. Under Part 3A of the Accounting and Financial Reporting Council Ordinance (Cap. 588) ("AFRCO"), the Accounting and Financial Reporting Council (“AFRC”) is empowered to carry out inspections in relation to PIE engagements completed by PIE auditors (“Regulatees”) on or after 1 October 2019 for the purpose of ascertaining whether the Regulatees have complied with, or are likely to be able to comply with (i) a provision of the AFRCO, or (ii) a professional standard. A PIE auditor is a recognized or registered PIE auditor.

2. Under Part 3AA of the AFRCO, the AFRCO is empowered to carry out inspections in relation to practice units for the purpose of determining whether the practice units have observed, maintained or applied a PAO professional standard(s).

3. A registered PIE auditor is also a practice unit and is therefore subject to the AFRC's inspection powers under both Parts 3A and 3AA of the AFRCO.

4. Pursuant to section 2(1) of the AFRCO, professional standards include PAO professional standards. Professional standards include the “Code of Ethics for Professional Accountants” published by The Hong Kong Institute of Certified Public Accountants, which contain the “Guidelines on Anti-Money Laundering and Counter-Terrorist Financing for Professional Accountants” (“AML/CTF Guidelines”). Therefore, inspections under both Parts 3A and 3AA of the AFRCO may consider compliance with the AML/CTF Guidelines.

5. For information about the AFRC's inspection powers, please refer to the AFRC’s (i) “Policy Statement for Inspection of PIE Auditors with respect to PIE Engagements”; (ii) “Policy Statement for Inspection of Practice Units with respect to engagements other than PIE Engagements”; and (iii) “Policy Statement for Inspection of Practice Units with respect to compliance with Anti-Money Laundering and Counter-Terrorist Financing Requirements” which are available on the AFRC’s website (www.afrc.org.hk).

6. This document is intended to provide a brief overview of the AFRC’s process for inspections under both Parts 3A and 3AA of the AFRCO in relation to Regulatees, which has been designed to ensure that all Regulatees are treated fairly and impartially.

7. For an outline of the AFRC’s inspection process in relation to practice units that are not registered PIE auditors, please refer to the “Outline of the AFRC’s Inspection Process for Practice Units that are not PIE Auditors”, which is available on the AFRC’s website (www.afrc.org.hk).

Definitions

8. In this document, the following terms have the meanings defined in the AFRCO as set out below (the definitions in the AFRCO shall prevail in case of any inconsistency):

This document provides a summary for reference only. It is not legal advice. Regulatees should seek their own legal advice. In the event of any inconsistency between this document and the AFRCO, the AFRCO shall prevail.