In today’s capital markets, trust is not a sentiment — it is an engineered outcome. At the heart of that engineering lies an institution often underestimated — the audit.

Audits give investors confidence that financial statements are credible. They are not merely a compliance exercise — they are core market infrastructure and a cornerstone of financial stability. When audits fail, confidence erodes, capital is mispriced, and risks can spread across the system.

Hong Kong provides a compelling illustration. The market hosts more than 2,700 listed companies with a total capitalization of about HK$46 trillion ($5.87 trillion), supported by a dense ecosystem of banks, brokers, insurers, and global investors. The entire structure rests on a simple premise: Financial information can be trusted.

What audits safeguard

At this scale, inaccuracies in financial reporting can have profound consequences. A seemingly “small” misstatement in a HK$46 trillion market can translate into tens of billions of dollars of misallocation — affecting pensions, sovereign funds, and household savings.

Audits underpin the integrity of the entire market. They are as essential as trading, clearing, and settlement systems. When they fall short, the consequences extend beyond any single company — eroding investor confidence, increasing the cost of capital, and elevating systemic risk.

Supervision and accountability

In Hong Kong, auditors are independently supervised by the Accounting and Financial Reporting Council. This oversight helps ensure audit quality is upheld, not assumed. It provides external discipline alongside firm-level controls, enables earlier detection through inspection and investigation, and reinforces transparency across the system.

When audits fall short, proportionate and credible regulatory sanctions play an important role — not only in addressing individual cases, but in reinforcing accountability, deterring poor practices, and signaling the importance of audit quality.

Audits as a shared responsibility

Audits occupy a unique position: They are paid for by companies, relied upon by investors, and essential to the public interest. They are, in effect, a “public good” delivered through private firms.

This makes the role of management, shareholders, and audit committees critical. Strong corporate governance and oversight matter. Their choices can either strengthen audit quality — or allow it to erode over time.

What audit committees should evaluate

To protect investors, the focus must shift from price to quality, across four dimensions:

People and leadership: Audit quality begins with people. It requires technical excellence and principled leadership — professionals with the integrity, skepticism, and courage to challenge management when it matters most. Auditors are gatekeepers, guided by rigorous professional standards and sound judgment. Effective leadership inspires teams by instilling a sense of purpose and pride, promoting ethical conduct, and reinforcing the importance of accountability, thereby supporting sustainable growth.

Culture and controls: Strong firms embed quality through culture and systems: Tone at the top that prioritizes audit quality alongside commercial considerations; robust governance, ethical conduct, and operational discipline; effective controls to detect and address deficiencies, with clear accountability and remediation. Quality is strongest when it is designed into the system, rather than left to individual discretion.

Audits underpin the integrity of the entire market. They are as essential as trading, clearing, and settlement systems. When they fall short, the consequences extend beyond any single company — eroding investor confidence, increasing the cost of capital, and elevating systemic risk

Independence and governance: Independence is best assessed in substance, not just form. Audit committees play an important role through oversight of internal control and financial reporting — by asking probing questions, challenging assumptions, and seeking evidence. Key considerations include: Economic dependence on major clients; incentives shaping partner and staff behavior; the balance between audit and non-audit services; and whether firms meaningfully measure and reward quality.

Independence also requires ongoing attention. Over time, long tenure can affect judgment and professional skepticism. Appropriate safeguards help ensure independence remains robust in practice.

Cross-border capability: Audits today increasingly require cross-border capability and technological depth. In Hong Kong, over 1,500 of the 2,700 listed companies have significant Chinese mainland operations. Audit firms need to demonstrate consistency in practices across global networks; ability to operate across regulatory environments; and effective cross-border data access and coordination. They also need to leverage data analytics and artificial intelligence, and maintain a strong track record with regulators. Weakness in any one area can affect the overall integrity of the audit.

In a global financial center such as Hong Kong, depth of audit capacity matters. Audit firms with the integrity, quality, and reach to operate across jurisdictions play an important role in supporting market confidence.

The fee fallacy

There is a persistent misconception that audits are expensive. In reality, audit fees are small relative to the value they protect — well below 0.01 percent of market capitalization.

Fees should therefore be proportionate to the scale and complexity of the audit. Larger, more complex, and cross-border businesses require deeper expertise and greater resources.

None of this diminishes the importance of efficiency and cost discipline. But selecting audit firms based primarily on fees can be misguided — and, at times, risky. Over time, excessive cost pressure may lead to under-resourcing, weaker skepticism, and poorer outcomes.

Conclusion

In a market of Hong Kong’s scale and interconnectivity, the audit is not a compliance exercise. It is central to market credibility.

Companies and audit committees should ask not, “What does the audit cost?”, but “What is the cost of getting it wrong?”

Because ultimately, audits are not just a line item — they underpin trust in markets.

David Sun is chairman of the Accounting and Financial Reporting Council and Janey Lai is its CEO.

The views do not necessarily reflect those of China Daily.