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CFO’s duty to “report and protect”

On 30 September 2024, the Court handed down the Reasons for Decision (HCMP 736/2019, the “Fujian Nuoqi Case“) in relation to the disqualification order against the former CFO of Fujian Nuoqi Co., Ltd. (“Fujian Nuoqi“). The CFO was disqualified from being involved in the management of any corporation in Hong Kong for three years and was ordered to pay the Securities and Futures Commission’s (“SFC“) costs.

In the SFC’s press release dated 18 October 2024, the SFC’s Executive Director of Enforcement emphasized the importance of CFOs in safeguarding business assets, ensuring accurate financial disclosures, and reporting suspicious transactions to the boards. In particular, the SFC commented that the Fujian Nuoqi Case has made it clear that CFOs have “supervisory duty to make proper enquiry about suspicious transactions and promptly report them to the boards“.

In the Fujian Nuoqi Case, according to the SFC’s investigation, RMB225 million from Fujian Nuoqi’s IPO proceeds was withdrawn shortly after the listing of Fujian Nuoqi shares in January 2014 without proper approval and not for genuine commercial purposes. In giving the disqualification order, the Court remarked that there was a marked degree of incompetence and negligence on the part of the CFO but there was no allegation of dishonesty. It was a case where the chairman and CEO of Fujian Nuoqi withheld information from the CFO.

It may be beneficial to compare the Fujian Nuoqi Case with an earlier case (HCMP 1462/2019, the “Changgang Dunxin Case“) in which the SFC successfully obtained disqualification and compensation orders against the former CFO of Changgang Dunxin Enterprise Company Limited (“Changgang Dunxin“). In this instance, the former chairman and executive director of Changgang Dunxin had misappropriated funds from share and bond placements. The CFO not only failed to notify the auditors, the audit committee, and the board about the chairman’s misappropriation of HKD163 million but also took actions to conceal the misappropriation. As a result of his serious misconduct, he was disqualified for 10 years and ordered to repay the misappropriated sum plus interest, along with covering the SFC’s costs.

Such cases relating to the CFO’s duty to “report and protect” highlight the importance of corporate governance and the CFO’s expanding role. The scope of the CFO’s duties has expanded far beyond traditional finance, necessitating a more comprehensive grasp of new challenges and risks. Historically, the CFO’s main role centred on financial stewardship, ensuring the company’s financial health and ability to meet its obligations. Although this remains a crucial responsibility, today’s CFO must navigate a broader range of tasks. The modern CFO needs to be well positioned to address various matters beyond a company’s finances, including corporate governance, risk management, and maintaining robust internal control systems.

Date:
24 October 2024
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