Court of Appeal affirms the fundamental importance of auditor independence and endorses the AFRC and AFRRT’s prior sanctions against regulatees

On 12 March 2026, the Court of Appeal (CA) handed down a judgment (Judgment) dismissing the applications of Chiang Sham Lam Anthony (Chiang) and Anthony S L Chiang & Co (a firm) (Firm) for: (i) leave to appeal against the Accounting and Financial Reporting Review Tribunal’s (AFRRT) determination (Determination)[1] upholding two decisions of the Accounting and Financial Reporting Council (AFRC) sanctioning Chiang and the Firm (Auditors) for professional irregularities and misconduct; and (ii) stay of execution pending determination of the appeal (Applications). In doing so, the CA recognised auditor independence as a cornerstone of the accounting profession and highlighted the Court’s reluctance to interfere with the AFRRT and AFRC’s decisions in determining and sanctioning professional misconduct. 

Background

Chiang first registered as a member of the Hong Kong Institute of Certified Public Accountants (HKICPA) in 1996. The Firm was first registered as a CPA firm in 1997. Chiang was the sole proprietor of the Firm. 

Between 1996 and 2021, the Auditors audited the financial statements of five companies (Companies). However, Chiang, his wife and/or his mother acted as company secretary and/or held a directorship and/or had a direct or indirect financial interest in the Companies at various times between 1993 and 2022.

On 18 June 2024, the AFRC handed down two decisions with sanctions imposed against the Auditors for professional irregularities and misconduct. 

On 21 May 2025, the AFRRT handed down its Determination of a review application (see further details in our previous publication[2]). The Auditors only sought to review the AFRC’s sanctions to suspend registrations of the Auditors for 3 years, and cancel and debar the issuance of a practising certificate to Chiang for 3 years (Exclusionary Sanctions). The AFRRT’s Determination involved a full merits review of the Exclusionary Sanctions, as if the matter had come before it for the first time and that it was the original decision maker instead of the AFRC. The AFRRT upheld the Exclusionary Sanctions. 

On 20 June 2025, the Auditors made the Applications to the CA.

Application for leave to appeal

Under the Accounting and Financial Reporting Council Ordinance (AFRCO)[3], the Auditors may appeal to the CA against the Determination if the CA granted leave to appeal. 

For leave to be granted, the Auditors were required to demonstrate that:- 

1. the appeal has a reasonable prospect of success (i.e. more than fanciful, but not necessarily probable); or
2. there is some other reason in the interests of justice why the appeal should be heard (e.g. the question is one of general principle and decided for the first time, or a CA’s decision would be to the public advantage).

Grounds of appeal

 The Auditors relied on five grounds of appeal:

• Ground 1: There was an error of law in failing to recognise proceedings before the AFRC and AFRRT as being “suits at law” under Article 10 of the Hong Kong Bill of Rights and thus an entitlement to fair proceedings. Established principles and methodology should have been applied, such that there is a clearly defined starting point of sanctions and proper consideration of mitigating factors so as to arrive at proportionate and justified sanctions.
• Ground 2: The AFRRT failed to identify a recognised category of seriousness under the “Guideline to Disciplinary Committee for Determining Disciplinary Order” published by the HKICPA in October 2017 (2017 Guideline) as a starting point in determining sanctions.
• Ground 3: The Auditors were justified to have a legitimate expectation that the 2017 Guideline would continue to apply.
• Ground 4: The AFRRT should have reduced the Exclusionary Sanctions, as it did not agree with the AFRC that the Auditors’ breaches were “deliberate” or in “blatant disregard” of the professional standards and ethical requirements.
• Ground 5: Sanctions imposed in previous cases should have been used as a reference point for this present case.

The CA considered these five grounds of appeal to constitute a case that the AFRC and AFRRT (i) approached the determination of Exclusionary Sanctions in an unprincipled manner (Unprincipled Manner Ground) and (ii) imposed plainly excessive sanctions (Excessive Sanctions Ground).

Unprincipled Manner Ground

The CA confirmed that disciplinary proceedings before the AFRC are civil, and not criminal, proceedings. Although a pecuniary penalty was imposed in this case, it is disciplinary in nature. The CA agreed with the AFRRT’s conclusion that criminal sentencing principles are accordingly not applicable.

Further, the CA reinforced the preventative and protective nature of disciplinary proceedings. It recognised the need for the accountancy profession to maintain standards of conduct and public confidence, as well as to protect the public and prevent future misconduct. The CA therefore explained that sanctions could be decided by reference to what is necessary to uphold proper standards of conduct according to the state of the accountancy profession at the time.

The CA was not persuaded that the 2017 Guideline was applicable, nor that the Auditors had a legitimate expectation that the 2017 Guideline would apply. In fact, the CA noted the AFRRT’s recognition of there being no evidential basis for the Auditors to rely on the 2017 Guideline, which was not in force during the majority of the period of Auditors’ misconduct.

The CA therefore concluded that the AFRC and AFRRT did not approach the determination of Exclusionary Sanctions in an unprincipled manner. 

Excessive Sanctions Ground 

The CA assessed the gravity of the Exclusionary Sanctions. It endorsed the AFRRT’s reasoning that the Exclusionary Sanctions were necessary, given that the Auditors’ misconduct was serious, and the breaches were persistent, flagrant and egregious.

The CA also emphasised that it was wrong to view a breach of independence to be more serious if the audit client is a listed company. The character of misconduct is most relevant. Since the independence of an auditor is critical to every audit, a breach of independence by an auditor is equally serious even if the audit client is a private company.

The CA concluded that the Exclusionary Sanctions were within the AFRC and AFRRT’s range of sanctions and not excessive. 

Accordingly, the CA dismissed the Auditors’ application for leave to appeal.  

Application for stay of execution

Given the dismissal of the Auditors’ application for leave to appeal, the CA also dismissed the application for stay of execution of the Exclusionary Sanctions. That said, the CA remarked that the Auditors should have applied to the AFRRT (instead of the CA) for stay of execution, as the AFRRT should be in a better position to decide on whether a stay of execution should be granted.

Takeaways

This is the first published Court of Appeal decision of an appeal against a AFRRT's determination of AFRC disciplinary actions. The Auditors’ misconduct has been thoroughly reviewed by three levels of adjudicative bodies, namely the CA, AFRRT and AFRC. They all reached similar conclusions on the gravity of the Auditors’ misconduct and confirmed the appropriateness of the Exclusionary Sanctions. 

This Judgment is a useful reminder that independence is crucial to the role and integrity of an auditor, regardless of whether an auditor is handling audits of a listed company or a private company. The reputation of the accounting profession is a key aspect of the integrity of Hong Kong’s financial markets and Hong Kong’s reputation as an international financial centre. It is clear from the Judgment that the CA, AFRRT and AFRC would not hesitate to step in where the function of an auditor is clearly compromised. 

This Judgment also demonstrates that the AFRC’s investigation and disciplinary action can span over a long period of time. A regulatee’s communication with the AFRC often involve multiple rounds of submissions and representations, as well as comments on investigation reports prepared by the AFRC based on these earlier submissions and representations. In this case, the Auditors corresponded with the HKICPA and the AFRC since mid-2022. By the time of the hearing of the AFRRT in November 2024, the Auditors and the AFRC have entered into a Statement of Agreed Facts, which was largely based on the Auditors’ earlier submissions and representations between 2022 and 2024. The Statement of Agreed Facts was frequently cited by the AFRRT and CA. Since a regulatee’s submissions and representations to the AFRC would be regarded as evidence of intention and knowledge and the Court will not interfere with the AFRRT’s (and the AFRC’s) decisions lightly, a regulatee should seek assistance from lawyers at the earliest juncture on its responses and submissions to AFRC’s enquiries, investigation and disciplinary proceedings.