The Hong Kong Stock Exchange (“HKEX”) has issued a comprehensive Guidance Letter (the “Guidance”) on independent investigations for listed companies suspended from trading due to allegations of accounting or corporate irregularities. The Guidance sets out the HKEX’s expectations on the investigation scope and procedures, independence and transparency requirements and how listed issuers can work towards resumption of trading as soon as practicable.

Here are some key takeaways from the Guidance:

Constitution of an independent committee

The Guidance emphasises the considerations that should be taken into account when forming an investigation committee to ensure its independence. The HKEX requires that each member of the independent committee to provide written confirmation of their independence, and the committee should not consist of directors whose independence may be reasonably questioned, including those potentially involved in or aware of the irregularities. For accounting-related matters, at least one committee member must possess appropriate professional qualifications or accounting expertise.

The Guidance expressly provides that it would not be appropriate for an independent committee to engage advisers who act for the issuer, its connected persons, or individuals involved in the irregularities.

Considerations when appointing an investigator

An investigator engaged by the independent committee must have the necessary expertise, competence, resources and time to perform the engagement. Consideration should be given to the investigator’s experience and reputation in handling inquiries of comparable scope and intricacy.

When irregularities involve potentially fraudulent activities, the committee should engage forensic investigators with appropriate expertise. The Guidance points out that changing investigators in the middle of an investigation is discouraged. In the event that a change becomes unavoidable, the issuer must publicly announce the change setting out full justification for the decision.

Planning, monitoring, and critical review

Independent committees must agree with the investigator on clear objectives, scope, and methodology, and to establish regular reporting mechanisms to monitor progress. For cases involving accounting irregularities, the HKEX emphasises the importance of maintaining regular communication with the issuer’s auditors and providing regular updates on any additional accounting-related issues or irregularities identified during the investigation. The committee must also ensure that the auditor is satisfied with the methodology and findings of the investigator.

An independent committee is expected to exercise appropriate scepticism rather than accepting findings at face value. For instance, when evaluating denials of involvement in unauthorised transactions, the committee must take into account the interviewee’s position and responsibilities. If an interviewee had transaction approval authority, investigators must thoroughly examine how they could have remained unaware of the questioned transaction.

Common defective investigations

The HKEX specifically identifies several common investigation deficiencies, including:

• Unclear selection criteria for investigation samples
• Inadequate investigation scope that fails to cover all material irregularities
• Insufficient alternative procedures to address investigation limitations

It is not uncommon that an investigation reveals areas in the issuer’s internal control system which could be further enhanced. If this occurs, an independent committee must critically assess whether there is any need to expand the scope of investigation and to sufficiently address any systemic issues.

Reporting and disclosure requirements

After the investigation results are ready, the issuer should publish the findings in a timely manner and to summarise the contents of the investigation report. The Guidance makes clear that the announcement should at least cover the independent committee’s assessment on the following matters:

• Whether the irregularity identified is an isolated incident, a recurring incident and/or a systemic failure and the basis of that view;
• The adequacy of the investigation conducted (including any limitations encountered during the investigation and how these were addressed or mitigated); and
• Any recommended remedial action.

The board of directors should also state its assessment of the impact of the irregularities on the issuer, and to set out a  timeline for implementing any remedial measures.

At MinterEllison, we have ample experience advising both issuers and independent committees on independent investigations and assisted a number of prolong suspended issuers to successfully resume trading. Please feel free to reach out to any of our team members if we can be of assistance.