In Chiang Sham Lam Anthony v Accounting and Financial Reporting Council (CAMP 124/2025, [2026] HKCA 391)[1], the Hong Kong Court of Appeal dismissed an application for leave to appeal against the determination of the Accounting and Financial Reporting Review Tribunal (“AFRRT”)[2], which upheld two decisions of the AFRC sanctioning a sole‑practitioner auditor and his firm for professional irregularities and misconduct.
Background
Mr Chiang and his firm audited the financial statements of five private companies between 1996 and 2021. During the course of those audits, Mr Chiang, his wife and/or his mother acted and were registered as directors or company secretaries of the audited companies or held financial interests in them. Those companies continued to be audited by him and his firm for over 20 years despite these interests.
Following enquiries initially made by the HKICPA in 2022, Mr Chiang admitted in written representations that he and his firm had audited companies in which he was a director but that he had “inadvertently” failed to comply with the ethical requirements to maintain audit independence. The matter was subsequently transferred to the AFRC after it took over the HKICPA's powers in 2022.
After investigation, the AFRC found that the applicants had committed professional irregularities and misconduct. Sanctions imposed included public reprimands, financial penalties, cancellation of registrations and, critically, suspension of both the individual and the firm from registration for three years.
The applicants sought a review of the suspension orders by the AFRRT which conducted a full merits review but upheld the same.[3] The applicants then applied to the Court of Appeal for leave to appeal and, separately, a stay of execution pending determination of the application for leave.
Court of Appeal’s decision
Nature of disciplinary proceedings and applicable principles
The applicants’ primary argument was that disciplinary proceedings by the AFRC and before the AFRRT amounted to “suits at law” for the purposes of Article 10 of the Hong Kong Bill of Rights, requiring the application of established criminal sentencing principles, including a structured “starting point” and detailed calibration of mitigating factors.
The Court of Appeal unequivocally rejected this submission. It confirmed that disciplinary proceedings under the AFRCO are civil, not criminal, in nature. Although a pecuniary penalty may be imposed the mere imposition of a fine did not transform the proceedings into criminal ones. The court endorsed the AFRRT’s reasoning that disciplinary sanctions serve a “preventative and protective” purpose, namely to uphold standards of the profession in the light of the state of the profession at the time.
Use of disciplinary guidelines and legitimate expectation
The applicants argued that the AFRRT was obliged to apply the “Guideline to Disciplinary Committee for Determining Disciplinary Order” published by the HKICPA in October 2017 and that they had a legitimate expectation that it would govern the assessment of sanctions.
The court held that there was no evidential basis for such an expectation and in any event, the Disciplinary Committee guideline was not in force during much of the period of misconduct. The Disciplinary Committee guideline was expressed to be non‑binding and its existence did not fetter the AFRC or the AFRRT in determining the appropriate sanction to be imposed on the facts. Disciplinary proceedings were seen as being primarily preventative and protective in nature. Appropriate sanction may therefore be determined by reference to what is necessary to uphold standards of the profession in the light of the state of the profession at the time of imposition.
Seriousness of independence breaches and proportionality of sanction
Addressing whether the sanctions were excessive, the court accepted that the applicants’ breaches were grave. The breaches went to the “very nature of an auditor’s role” and demonstrated a fundamental disregard for professional duties and independence, particularly given they continued in each audit engagement over 22 years.
Crucially, the court rejected the notion that independence breaches are less serious where the audit clients are small or private companies. The court stated that independence is critical to every audit, and that a breach is equally serious regardless of whether the client is listed or privately held. What matters is the character of the misconduct.
In light of these factors, the court found that the three year suspensions were within the permissible range of sanctions open to be imposed by the AFRC and could not be characterised as plainly excessive or disproportionate.
Comments and practical takeaways
As the first Court of Appeal decision arising from an appeal against an AFRC decision, this judgment maintains the status quo on the basic principal that so long as disciplinary sanction falls within the range available to a regulator in the circumstances, it is unlikely that it will be disturbed. The court confirmed, in unequivocal terms, that auditor independence is “of fundamental importance” and that prolonged or systemic conflicts of interest will attract severe sanction, even in the absence of fraud, dishonesty or proven financial loss. The court viewed the breaches in this case as being particularly grave and egregious and was satisfied that the sanction imposed was well within the range imposable by the AFRC.
The judgment also illustrates how the seriousness of breaches is decided. The applicants emphasised that the audit clients were small private companies, that no audit fees had been charged in later years, and that no actual harm or financial loss had been identified. Despite the seemingly inconsequential nature of the breaches, the court endorsed the AFRC’s view that the fact that no loss was caused to any party did not diminish the seriousness of misconduct that was “precisely what is prohibited”. The private status of audit clients does not mitigate breaches of independence which are fundamental to maintaining public confidence in auditors and the audit industry. This demonstrates the difference between regulatory and disciplinary proceedings which tend to focus on the industry and public at large whilst civil proceedings look to address actual loss caused to parties identified.
Overall, the judgment represents a welcome reinforcement of Hong Kong’s strict approach to audit quality and independence, reflecting the importance placed on maintaining public confidence in the accountancy and auditing professions and the integrity of Hong Kong’s financial markets.
[1] https://legalref.judiciary.hk/lrs/common/ju/ju_frame.jsp?DIS=178321&currpage=T
[2] Determination dated 21 May 2025; Proceeding No.: AFRRT-3-2024.
[3] Please find the corresponding determination at https://www.afrrt.gov.hk/en/deter_n_rd.html.
