HK$70.00 Issue 2 Volume 16 February 2020 DRIVING BUSINESS SUCCESS Special report: The technology, methods, standards and skills shaping the work of auditors AUDIT PLUS: PROFILE Hugh Chow, Chief Executive Officer at ASTRI ACCOUNTANT PLUS Ivan Chan, Practising Director at Mazars Hong Kong THOUGHT LEADERSHIP New environmental, social and governance reporting requirements
PRESIDENT’S MESSAGE APLUS February 2020 1 New years bring new opportunities and challenges, but the spread of the COVID-19 coronavirus is one of the most challenging starts to a year I remember. Many of us have had to cancel or postpone family reunions, social activities and professional events, and adjust to working from home. While this is disappointing, we must all do what we can to overcome this unexpected challenge. At the Institute, we’ve been developing ways to help members in business and practice to adjust and thrive. To protect members’ health we’ve cancelled continuing professional development events until at least 8 March. The library is also closed and the counter service hours limited. We’ve also issued an alert for practising members on the impact of the coronavirus on audits, and are working on further alerts to address various auditing and financial reporting issues. For Qualification Programme (QP) students, the Institute will postpone some of the June 2020 examinations (the Final Examination and the newQP Associate level modules) and reschedule and condense the workshops. We will continue to take the appropriate measures to safeguard the health of our students, while taking into account the concerns of employers, and uphold the integrity of the examinations. For the latest information on the Institute’s activities, please visit the new COVID-19 – CPA Information Centre webpage. This epidemic has come at a challenging time for Hong Kong. The economy is in recession for the first time in a decade, as a consequence of the many difficulties faced over the past year. This is causing problems for businesses. Speaking as an insolvency practitioner, the lack of recourse to corporate rescue procedures for companies facing financial difficulties is a situation that the government should look at resolving. In my experience, many companies are forced into liquidation when they could likely have survived if the provisional supervision legal framework, which is being awaited for almost 25 years since 1996, was in place. This would be a long-term improvement to Hong Kong’s business environment and international standing. But before tackling the long term, the government needs to respond in the short term. I welcome the budget delivered by Financial Secretary Paul Chan on 26 February, and hopefully this will help to get our economy back on track through the expansionary fiscal policy and additional relief measures of HK$120 billion he proposed including the cash handout scheme and support for businesses particularly affected by the downturn, such as tourism, retail and other consumption related sectors. The Institute has long been advocating a holistic review of Hong Kong’s tax regime, and so to hear that the government plans to undertake one is good news. Before the Securities and Futures Commission and The Stock Exchange of Hong Kong Limited issued their joint statement on 4 February providing guidance on results announcements, the Institute had taken the lead and met the two bodies to discuss an extension to the upcoming 31 March reporting deadline for December 2019 year end listed companies affected by the outbreak. The joint statement issued provides a framework to handle the situation where the issuers are not able to publish the preliminary results in full compliance with the Listing Rules, but requires much further clarification and guidance. The Institute has been diligently following up with the regulators and other stakeholders on this as well as ascertaining the latest status and collecting statistics of the industry. We are very hopeful that the two regulators will issue further guidance shortly. Although Council’s away day was cancelled due to the coronavirus situation, work continues in preparing the Seventh Long Range Plan, and the aim is for it to be finalized in the first half of the year. The plan will enhance our member services and support, engagement with specific groups of members, improve our communications, and elevate the Institute’s image in society. I strongly believe that the Institute must be more engaged with the media in order to publicize our two key messages, firstly that accountants are leaders of our economy, and secondly that a career in accounting is a career for the future. This month, I was interviewed by many local media outlets, discussing the effects of the coronavirus epidemic on businesses and accountants, setting out how the Institute is helping its members, releasing our “Together for a Better Hong Kong” 2020-21 tax policy and budget proposals (see page 4), as well as promoting the Institute in general. It’s good to be able to talk with the media about how we help Hong Kong, and improve the opportunities available for our members and society. Also, to focus on the positive future rather than solely worrying about the difficulties we face today. Hong Kong is strong and resilient, and like with SARS, we will get through this difficult situation and come out stronger. Let’s stay healthy, maintain good hygiene and all work “Together for a Better Hong Kong.” “ At the Institute, we’ve been developing ways to help members in business and practice to adjust and thrive.” Johnson Kong President Dear members,
CONTENTS Issue 2 Volume 16 February 2020 NEWS 01 President’s message 04 Institute news 06 Business news FEATURES 08 Special report: An assuring future How emerging technologies and changing expectations are upending what it means to be an auditor today, and why auditors have to stay ahead in an age of tightening regulations 18 Second opinions What should companies and accounting firms do to tackle hiring difficulties? 20 Leadership: Hugh Chow The Chief Executive Officer of ASTRI on innovating Hong Kong’s future 27 Thought leadership: H erbert Yung The Director of Risk Advisory at Deloitte China on the implications of the new ESG reporting requirements 29 How to Maayan Schwartz, Content and Investor Relations at AngelHub, on the steps businesses should take before seeking funding from venture capital firms 31 Meet the speaker Edwin Choi, Legal Counsel at Cosmos Management Consultancy Limited, on how his series on strategic succession will help members navigate the various uncertainties in tax and asset protection 32 Accountant Plus: Ivan Chan The Practising Director at Mazars on the important lessons he has learned from over 20 years in the audit profession SOURCE 38 Economic substance law – the British Virgin Islands An overview of the implications of new economic substance laws on Hong Kong businesses 42 TechWatch 208 32 08 The trust builder An assuring future
DRIVING BUSINESS SUCCESS About our name A Plus stands for Accounting Plus. It represents a profession that is rich in career options, stays relevant amid rapid changes, and adds value to business. This magazine strives to present the global mindset and varied expertise of Institute members – Accountants Plus. Editor Gerry Ho Email: gerry.ho@mandl.asia Copy Editor Jemelyn Yadao Junior Copy Editor Jeremy Chan Contributors Nicky Burridge, Louise Tam and KateWhitehead Editorial Office G/F, Bangkok Bank Building, 18 Bonham StrandWest, SheungWan, Hong Kong Advertising enquiries Advertising Director Derek Tsang Email: derektsang@mandl.asia Tel: (852) 2164-8901 President Johnson Kong Vice Presidents L amChi Yuen, Nelson, FongWan Huen, Loretta Chief Executive and Registrar Margaret W. S. Chan Head of Corporate Communications and Member Services Rachel So Editorial Manager Paul Smith Editorial Coordinator Maggie Tam Office Address 37/F, Wu Chung House, 213 Queen’s Road East, Wanchai, Hong Kong Tel: (852) 2287-7228 Fax: (852) 2865-6603 Member and Student Services Counter 27/F, Wu Chung House, 213 Queen’s Road East, Wanchai, Hong Kong Website: www.hkicpa.org.hk Email: hkicpa@hkicpa.org.hk A Plus is the official magazine of the Hong Kong Institute of Certified Public Accountants. The Institute retains copyright in all material published in the magazine. No part of this magazine may be reproduced without the permission of the Institute. The views expressed in the magazine are not necessarily shared by the Institute or the publisher. The Institute, the publisher and authors accept no responsibilities for loss resulting from any person acting, or refraining from acting, because of views expressed or advertisements appearing in the magazine. ©Hong Kong Institute of Certified Public Accountants February 2020. Print run: 7,310 copies The digital version is distributed to all 45,323 members, 19,244 students of the Institute and 2,358 business stakeholders every month. WORK-LIFE BALANCE 46 Capturing the moment CPA photographers on the art of storytelling through photos, and what really goes on in the mind of a focused lensman 52 Young member of the month Thomas Sin, Manager, Legal and Compliance at Cigna Worldwide Life Insurance Company Limited 54 Leisure Plus Spotlight on Kuala Lumpur; what members are currently reading and listening to 56 Let’s get fiscal Working from home might be just as physically and mentally intense as going to the office, says Nury Vittachi 20 From idea to success Hugh Chow, Chief Executive Officer of ASTRI, went from cofounding his own chip company at the age of 30, to now leading the city in driving technological change and innovation 54 46 Capturing the moment Leisure Plus
NEWS The Hong Kong Institute of CPAs announced on 10 February its tax policy and budget proposals for 2020-21, under the theme “Together for a Better Hong Kong.” The proposals encompass 13 different measures that aim to help support the city’s economy amid global and domestic pressures, and improve the lives of residents. “Hong Kong’s economy is at a crossroad, facing various domestic challenges as well as a slowdown in global growth. The increasing pressure on public finances, coupled with intensifying competition for business from other jurisdictions in the region and globally, and the changing international tax landscape, all point to a need to take a harder look at the city’s long-term positioning and competitiveness. In order to maintain Hong Kong’s strength as a global financial hub, the government needs to conduct comprehensive review of business and tax policies to help secure Hong Kong’s future economic success,” said Institute President Johnson Kong. “For business owners, the government should consider introducing a mechanism for tax loss carryback into our tax system, as a means to help relieve the cash flow pressure that businesses face during economic downturns,” said KK So, the Past Chairman of Institute’s Taxation Faculty Executive Committee (TFEC). Tax loss carryback is available in many developed countries, and taxpayers who are making a current-year tax loss may be able to get a refund of tax paid in the prior year or years. The Institute asks the government to consider providing group tax loss relief to companies investing in start-ups. The proposals emphasize providing additional support for the middle-class and low-income people not receiving any government assistance. “While they may not benefit greatly from the recent raising of the ceiling for the 2018-19 tax rebate to 100 percent from 75 percent, because the cap remains at HK$20,000, providing an increased cap of HK$30,000 under salaries tax, and for individuals taxed under personal assessment, as well as for profits tax, would help the middle class in the coming year. The government should also consider giving out a cash subsidy to permanent residents aged 18 and above, who are not taxpayers and do not own any property, so as to benefit the so-called ‘N-nothings,’” said Curtis Ng, Convenor of the Institute’s Budget Proposals Subcommittee. The Institute reiterated the need for a holistic review of the Hong Kong tax system amid recent changes in the international tax landscape, as well as called for a better living environment for citizens that includes cleaner air. “One area that needs to be addressed is vehicular pollution. More needs to be done to cut pollution due to an aged vehicle fleet in Hong Kong”, said William Chan, TFEC Deputy Chair. Members can find the tax policy and budget proposals for 2020-21 at the Institute’s website. Institute launches new COVID-19 – CPA Information Centre webpage The Institute acknowledges that the current exceptional circumstances are posing a significant challenge to the profession and wider society. To help members, it has set up a webpage to share information with them on the Institute’s services arrangements and support, relevant messages, and links to regulatory and government measures, including health advice and other relevant resources. Institute news Business news Institute calls for more support for local businesses and citizens amid economic downturn Resolutions by Agreement Chan Wai Nam, William, CPA (practising), Jimmy Siu, CPA (practising) and Elite Partners CPA Limited Complaint: Failure or neglect by Chan and Elite to observe, maintain or otherwise apply Hong Kong Standard on Auditing (HKSA) 230 Audit Documentation, HKSA 500 Audit Evidence and HKSA 540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures. Failure or neglect by Siu to observe, maintain or otherwise apply HKSA 220 Quality Control for an Audit of Financial Statements. Elite audited the consolidated financial statements of China Finance Investment Holdings Limited (formerly (From left to right) William Chan, Johnson Kong and KK So 4 February 2020
APLUS known as Cypress Jade Agricultural Holdings Limited) (company), a Hong Kong-listed company and its subsidiaries for the year ended 31 December 2015 and expressed an unmodified auditor’s opinion. Chan was the engagement director and Siu was the engagement quality control reviewer. Under an agreement made with a third party during the year, the company acquired an option to require the third party to subscribe for the company’s convertible bonds up to a certain amount. The company recognized the option as a financial asset in the financial statements at a yearend fair value determined by an external valuer, with a corresponding gain on changes in fair value of the financial asset recognized in the income statement. The company did not eventually exercise the option. In the audit, the respondents failed to obtain sufficient evidence of the assumptions adopted by the valuer in valuing the option. The respondents also failed to prepare adequate documentation of their purported discussions with management concerning the option and other audit procedures purportedly carried out on it. In addition, the respondents failed to identify the inadequate financial statement disclosures of the fair value measurement and risks associated with the option. Regulatory action: In lieu of further proceedings, the Council concluded the following action should resolve the complaint: 1. The respondents acknowledge the facts of the case and their non-compliance with the relevant professional standards; 2. They be reprimanded; and 3. Chan, Siu and Elite pay an administrative penalty of HK$35,000, HK$20,000 and HK$50,000, respectively, and they jointly pay costs of the Institute and the Financial Reporting Council totalling HK$173,241.20. Ng Ka Hong, CPA (practising) Complaint: Failure or neglect to observe, maintain or otherwise apply HKSA 220 Quality Control for an Audit of Financial Statements. Ng was the engagement quality control reviewer in the audit of the consolidated financial statements of Superb Summit International Group Limited, a Hong Kong-listed company, and its subsidiaries (collectively group) for the year ended 31 December 2014 undertaken by a corporate practice that has now been deregistered. The audit engagement team failed to perform adequate procedures in respect of the group’s valuation of biological assets, prepaid land lease payments and impairment assessment of intangible assets. Those areas were material and involved significant judgements. Ng failed to perform an adequate engagement quality control review on those areas to ensure that the audit evidence obtained by the engagement team was sufficient and appropriate to support the audit conclusions. Regulatory action: In lieu of further proceedings, the Council concluded the following action should resolve the complaint: 1. Ng acknowledges the facts of the case and his noncompliance with professional standards; 2. Ng be reprimanded; and 3. Ng pays an administrative penalty of HK$20,000 and costs of the Institute and the Financial Reporting Council totalling HK$80,530. Disciplinary finding Chik Wing Kan, Peter, CPA (practising) Complaint: Failure or neglect to observe, maintain or otherwise apply Hong Kong Standard on Quality Control 1 Quality Control for Firms that PerformAudits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements; the fundamental principle of integrity in sections 100.5(a), 110.1 and 110.2 of the Code of Ethics for Professional Accountants; and the fundamental principle of professional competence and due care in sections 100.5(c) and 130.1 of the code and being guilty of professional misconduct. Chik is the sole shareholder of PCW CPA Limited (practice) and is responsible for the practice’s quality control system and the quality of its audit engagements. A first practice review conducted on the practice identified significant deficiencies in its system of quality control and in two of its audit engagements. In addition, Chik was found to have falsely or recklessly provided untrue answers in the self-assessment questionnaire and “Audit Health Screening Checklist” submitted to the Institute in relation to the practice review. Decisions and reasons: The Disciplinary Committee reprimanded Chik and ordered cancellation of his practising certificate with no issuance of a practising certificate to him for 15 months with effect from 3 February 2020. In addition, Chik was ordered to pay a penalty of HK$50,000 and costs of disciplinary proceedings of HK$41,802. When making its decision, the committee took into consideration the particulars of the breaches committed in this case and Chik’s conduct. The committee noted that Chik’s conduct shows serious disregard for regulatory requirements and raises doubt on his professional competence and integrity, and would have a detrimental effect on the confidence in the profession. Details of the Resolutions by Agreement and disciplinary findings are available at the Institute’s website. February 2020 5
NEWS Business HKEX DEMANDS MORE DISCLOSURE FROM IPO APPLICANTS The Hong Kong Exchanges and Clearing (HKEX) is demanding initial public offering (IPO) candidates to clarify the impact the coronavirus outbreak has had on their business and operations. Applicants must fully disclose whether they have experienced value chain disruptions and the extent to which they have been able to resume normal operations since the outbreak in January. The decision, announced on 25 February, will cause difficulties for companies looking to launch IPOs but is necessary “to protect investor interests,” said Wilson Chow, Global Technology, Media and Telecommunications Industry Leader at PwC. “Therefore, they are paying attention to whether the virus outbreak will dampen the prospects of IPO candidates,” he said. Despite the measures, Hong Kong and Mainland China expect more companies, especially technology companies to list in the second half of the year, according to financial advisors. 1.2 TRILLION YUAN Mainland China’s central bank pumped 1.2 trillion yuan into its financial markets on 2 February, as part of an effort by regulators to mitigate market volatility amid the coronavirus outbreak in the country. The People’s Bank of China said the decision was to “ensure sufficient liquidity supply.” It is the largest single-day reverse repo operation ever conducted and came a day after markets resumed following the Lunar New Year holiday. The injection is one of 30 measures announced to shield the economy against further disruption from the outbreak of COVID-19, another one of which includes subsidies on interest payments for some companies. ACCOUNTANTS IN THE U.K. URGED TO HELP FIGHT CLIMATE CHANGE The Institute of Chartered Accountants in England andWales (ICAEW) called on members of the Accounting for Sustainability Project (A4S) to integrate climate risk into audits to drive companies to set more sustainable business strategies. The ICAEWwants A4S’s global alliance of accountants, which includes the Institute, to use their skills to help prepare businesses for the risks posed by climate change. “Chartered accountants bring practical skills like measurement and management to the table, and can work with business to build green policies into their working practices,” said Michael Izza, Chief Executive of the ICAEW. The call comes a week after the Financial Reporting Council launched a review into whether companies and their auditors are adequately reflecting the financial risks of climate change in their annual financial accounts. The International Integrated Reporting Council (IIRC) announced plans to revise its current set of reporting principles, the Integrated Reporting (<IR>) Framework. The revision, which the IIRC hopes to launch before the end of this year, aims to emphasize how organizations can use the <IR> Framework more effectively, as they increasingly respond and adapt to megatrends, such as the United Nations’ 17 Sustainable Development Goals, climate change, inclusive capitalism and corporate governance. The IIRC has called for market feedback on three specific themes to inform the direction of the revision of its <IR> Framework by 20 March. It plans to release the consultation draft in May. This is the first major revision since the IIRC published the <IR> Framework in December 2013. U.K. WATCHDOG THREATENS FIRMS WITH REFORMS The Financial Reporting Council (FRC) in the United Kingdom announced plans on 27 February to break up the Big Four accounting firms in letters sent to their leaders. The letters indicated guidelines for the Big Four to separate their audit and consulting operations in the U.K. as part of the FRC’s efforts to improve audit quality. The FRC is calling for financially independent audit operations with separate boards led by independent chairs. “We are moving ahead under our own steam to push firms to make suitable changes to ensure sustainability and transparency in audit,” said a spokesperson for the regulator. CHINA INJECTS IIRC BEGINS REVISION OF <IR> FRAMEWORK TO STABILIZE MARKETS AMID CORONAVIRUS MYANMAR ADDED TO MONEY-LAUNDERING WATCHLIST “ We are moving ahead under our own steam to push firms to make suitable changes to ensure sustainability and transparency in audit.” The Financial Action Task Force (FATF) has added Myanmar onto its money-laundering watchlist or “gray list,” urging the country to boost its efforts to seize crime proceeds. In a statement issued on 21 February, the FATF noted that though Myanmar had made progress by introducing legislative measures to curb money-laundering and new regulations for its cash-based remittance system, it also found that the country still “faces extremely high levels of proceeds-generating crimes” and was “exposed to a large number of very significant money laundering threats.” 6 February 2020
Toy company Mattel has received a subpoena from the Securities and Exchange Commission in the United States seeking documents related to an anonymous whistleblower letter concerning allegations over accounting errors, the company announced in a regulatory filing on 25 February. The company’s audit committee launched an independent investigation into the allegations upon receiving the letter in August 2019. The company announced in October that “the investigation determined that income tax expense was understated by US$109 million in the third quarter of 2017 and overstated by US$109 million in the fourth quarter of 2017.” The probe also uncovered material weaknesses in its internal controls over financial reporting. Mattel said it’s now responding to that subpoena. APLUS Facebook went to trial on 25 February on charges of owing more US$9 billion in taxes linked to its decision to shift profits to Ireland to avoid paying higher taxes in the United States. The Internal Revenue Service (IRS) argues that Facebook understated the value of the intellectual property it sold to its Irish subsidiary in 2010 during its overseas expansion. The move is common among multinational companies in the U.S. due to Ireland’s lower tax rates, one which the IRS claims reduced Facebook’s U.S. tax bill. Under the arrangement, the Irish subsidiary paid its U.S. parent company more than US$14 billion in royalties between 2010-2016 in exchange for access to Facebook’s trademark, users and technology. The tech giant has defended its decision to sell intellectual property to its subsidiary, and attributes the low valuation to its international expansion, and development of a few profitable advertising products. FACEBOOK SUED US$9 BILLION FOR TAX EVASION CAYMAN ISLANDS ADDED TO EU BLACKLIST The European Union (EU) added the Cayman Islands to its tax havens blacklist on 12 February for failing to crack down on tax abuse. Blacklisted countries face difficulties accessing funding programmes from the EU, while European companies doing business in those jurisdictions have to take additional compliance measures. The EU said the Cayman Islands, which has no income tax, capital gains tax or corporation tax, does not have the appropriate measures in place to prevent tax abuse and allows companies to register there despite having minimal presence in the territory. SEC TO INVESTIGATE MATTEL’S ACCOUNTING 36% Only 36 percent of organizations say cybersecurity is involved at the initial planning stage of new digital initiatives, according to a new survey by EY. The EY Global Information Security Survey, released this year, also reported that one in five respondents’ companies spends less than 5 percent of their cybersecurity budget on supporting new initiatives. The study also found that a lack of communication with cybersecurity staff was common within companies. The results come amid increasing cyber and privacy threats, with 59 percent of the organizations surveyed found to have faced a material or significant incident in the past year. OF ORGANIZATIONS HAVE CYBERSECURITY MEASURES CONSOLIDATED HONG KONG GOVERNMENT BALANCE (HK$BN) 2019-20 BUDGET VS. 2020-21 BUDGET The Financial Secretary’s 2020-21 budget, on 26 February, included medium-term budget forecasts showing Hong Kong would enter a lasting structural deficit due to increased recurrent expenditure. This was a significant downgrade on the 2019-20 budget, with public spending as a percentage of gross domestic product up by 2 percentage points each year from 2021-22 onwards. 2019-20 (estimate) 2020-21 (forecast) 2021-22 (forecast) 2022-23 (forecast) 2023-24 (forecast) -38 -139 -17 -17 -16 17 28 8 6 5 2019-20 budget 2020-21 budget HK$bn -150 -100 -50 0 50 Fiscal year February 2020 7
SPECIALISMS Audit SPECIAL AN ASSURING REPORT: 8 February 2020
APLUS Audit has evolved. From a technological, regulatory and business standpoint, the ageold profession has seen remarkable developments, especially over the last five years. But one thing remains – the vital role CPAs play in the process. Jeremy Chan finds out how the role of auditors has expanded beyond the audit engagement, and how audit is more than just an entry to the profession, but a specialism that offers a career in building trust and building business Illustrations by Gianfranco Bonadies FUTURE February 2020 9
SPECIALISMS Audit The use of more specialist tools is improving the efficiency and effectiveness of audits. “We are currently moving from traditional to more modern ways of performing audits, from the manual vouching of invoices to the use of data analytics and AI,” Wong says. But he adds that technology only assists with repetitive tasks and that auditors still need to rely on their analytical skills. “Right now, it’s still a combination of traditional and modern approaches. Technology helps us to see the bigger picture behind a company’s transactions and also highlight anomalies. But it’s our job to identify whether the audit evidence is appropriate for their business.” Paul Lau, Partner, Head of Capital Markets at KPMG China and Chairman of the Institute’s Auditing and Assurance Standards Committee, agrees. “The audit profession is a very old one, but it is one that has evolved the most over the past decade. We’re adapting to the changes in the business model of our clients,” says Lau, who has been an auditor for over 30 years. Lau has employed the use of data analytics to help with audit sampling, which involves examining a representative selection of items in a dataset, to gain reasonable assurance regarding the entire dataset. Auditors perform sampling when data population sizes are large, such as the items within an account balance or class of transactions, as examining the entire population would be inefficient. “We might pick and focus on a sample of 60 out of a million transactions, and analyse the nature and frequency of this population,” says Lau. “But data analytics opens up a new world for us. We can now look at entire populations of data. If For most accountants, audit is something they are well aware of. They may have started their career as a junior auditor, be a sole practitioner, or worked with auditors in a corporate finance department. They will know that the fundamental principles behind audits have not changed – but they might not know that how auditors conduct their audits, and what is expected of them, have. Adam Wong, Senior Audit Manager at EY, and his team used to face the dizzying task of analysing hundreds of contracts during an audit engagement, which took weeks to complete. But now, the job takes days. Using artificial intelligence (AI) software, Wong and his team analysed over 200 rental lease contracts during a recent engagement. “A single contract could be 20 or even a hundred pages, and it could take hours to go through each one – so a case like this could require reading through more than 20,000 pages,” says Wong, a Hong Kong Institute of CPAs member. By scanning and then uploading all the rental agreements, the application uses a combination of optical character recognition (OCR) and AI to scan through and locate key information such as lease terms in each contract and then compiles the data into a spreadsheet for the team to then verify. Tools such as AI will continue to impact the way audits are done in the future. A 2018 study by the World Economic Forum predicts that 30 percent of all corporate audits will use AI in one way or another by 2025. Data analytics will also play a bigger role in audits. Already, almost a third of all audits employ the use of data analytics software, with 85 percent of the auditors surveyed deeming it crucial to audit coverage, according to a 2018 report by PwC. Technological advancements are a driving force behind the evolution of audit, but other factors are also reshaping the role and work of auditors. New auditing standards ref lect a greater expectation for transparency into the actions undertaken by auditors, while professional standards have also strengthened the required ethical foundations in auditors. Meanwhile, organizations increasingly acknowledge that business success depends on transparency into the internal processes of their operations. With that, there is greater demand for auditors to be business partners, collaborating with management to achieve audit objectives, and having a good understanding of the business and industry issues. To continue building public confidence in global markets, auditors must stay ahead of rapid changes in business models and regulations, and equip themselves with a broader range skills. Audit is now more than just a once-yearly review. Every company in Hong Kong needs an audit. This creates work for auditors of all sizes. The purpose of an audit is to form a view on whether the information presented in an organization’s financial report, taken as a whole, accurately ref lects the financial position of the organization at a given date. Auditors meet with management to discuss the scope of the audit engagement and prepare an audit plan to determine the extent of audit procedures they will perform. They also review the company’s internal controls and financial information. Throughout the process, the auditors maintain their independence. Finally, they prepare an audit report for the organization’s owners, or for larger companies, their shareholders, setting out their opinion. This special report looks at the various factors shaping the audit specialism. This includes the technologies and tools assisting auditors; the need to stay ahead of developing standards, added focus on audit reports and more stringent regulation; the new skills auditors need as the process continues to evolve; and why, even with all these developments, professional evaluation and judgement will remain pivotal in the future of audit. TECHNOLOGICALLY IMPROVED EFFICIENCY “The audit profession is a very old one, but it is one that has evolved the most over the past decade.” 10 February 2020
APLUS you have the data of all our client’s transactions – this could be millions – you can then perform an analysis and then quickly define the outliers. Auditors could then zone in and figure out what’s happening. This saves a lot of time.” Lau adds that auditors have also begun using AI to generate simple summary reports. One memorable banking audit saw his team using AI to scan through credit reports. “We have an AI-based tool which scans through thousands of credit reports in a matter of minutes to search for keywords, for example ‘default’ or ‘past due’ and then automatically generate a report. In the past, this was all done manually and would have taken almost a month.” Dilys Cheng, China South Operations Leader and China South Transformation Leader at PwC, employs the use of OCR and AI during audit engagements. “Twenty years ago, many tasks had to be done manually, but nowadays, we rely on automated controls,” Cheng says. She adds how her firm developed a tool in 2019 that uses OCR technology to analyse bank confirmations. “Some banks give us electronic confirmations,” Cheng says. “One time, we had to process over 250 electronic bank confirmations. With the push of a button, all the information from those confirmations were summarized into a single spreadsheet.” Matthew Li, Partner at NOVA CPA, says his firm has also been using OCR technology for the past two years. “As a small- and medium-sized practice (SMP), we are still doing audit work quite manually, but we are dealing with a lot more digital data than before,” Li says. “We use OCR with repetitive, routine processes, especially if we are dealing with a large volume of data that isn’t too complex.” He adds, however, that OCR technology hasn’t matured enough to keep up with physical documents written in Chinese or handwritten in English. Li says his firm also employs the use of cloud accounting to deal with bank feeds, which are automatically created lists of the spent and received transactions in a bank account. “Cloud accounting is extremely important, especially for SMPs right now,” he says. “When our team has to deal with bank feeds during audits, all the banking data is transmitted directly to the cloud accounting systems. The software also uses AI to determine whether certain banking transactions are reconciled with our transactions,” he says. “This also eliminates the need to print individual statements.” STAYING AHEAD Even with the various new technologies available, auditors still face challenges such as dealing with tighter regulations, increasingly complex businesses and client and societal expectations. According to Lau at KPMG, it is an auditor’s role to stay ahead of developments in business, regulation and corporate governance. “We’re currently in an environment where there is more regulatory scrutiny and higher expectation of our audits from the regulators,” he says. “The consequences that come with having a bad inspection could be quite large in terms of reputational and monetary risks. This requires us to beef up our work.” Auditors have to have a good understanding of their client’s business environment. “If you don’t know your client’s business or environment, you simply cannot do a good job assessing risk,” Lau says. “It’s our job to provide client service of the highest quality. Knowledge of the business and client allows auditors to sit down with the chief executive officer or chief financial officer and have a meaningful dialogue.” As Cheng at PwC notes, it is an auditor’s responsibility to keep clients informed of changes to regulations. “Changes take February 2020 11
SPECIALISMS Audit “Clients should seek advice from auditors on how to improve in the coming year.” Client cooperation Preparing for the audit is the best way to ensure it goes smoothly and efficiently for both the client and audit engagement team. Companies should aim to do their part long before the auditors arrive at the office. Months before the audit date, businesses could set a pre-planning meeting with the auditors to discuss client deliverables, timeline and expectations. Some companies schedule these meetings as far back as six months, while many will have met their auditors by three months before the onsite audit. To avoid any issues during the audit, companies should set aside adequate time to fully prepare accounts. “Clients must prepare all required financial information and supporting documents for an auditor’s inspection to ensure a smooth audit,” says AdamWong, Senior Audit Manager at EY. Companies should aim to have all accounts reconciled, including cash, accounts receivable, inventory, accounts payable, and accrued expenses. Ideally, this should be done quarterly or even monthly to avoid any reconciliation issues during the audit. Matthew Li, Partner at NOVA CPA, also advises companies to provide documentation detailing their internal control procedures. “Include details of your sales cycle, inventory management cycle and human resources procedures. This information can help auditors to better understand the flow of a company’s operations and controlling procedures.” While these steps do involve disclosure of a large amount of sensitive information, Dilys Cheng, China South Operations Leader and China South Transformation Leader at PwC, says clients need to put trust in their auditors. “Trust is essential,” she says. “Clients need to trust us and provide the necessary information for us to carry out the audit. They also need to trust the technology that we will use.” If the client has an electronic version of their entire ledger, that must also be made available to the auditor, adds Wong. “Since our audit approach uses more data analytics nowadays, clients are advised to arrange their dataset in advance.” Communication should not be limited to the financial reporting team, notes Rossana Ley, Technical Partner at Deloitte, “but should take place with the top management and different business units. Timely and good communication on key activities, changes in business can help auditors to identify issues earlier and to plan the appropriate audit plans and work much earlier.” To make the most of the audit towards the end of the engagement, clients are encouraged to ask more questions. “Clients should seek advice from auditors on how to improve in the coming year,” advises Li. “We may have a better understanding of your business situation and weaknesses, and problems related to the books and internal control systems. Our advice will help to improve efficiency in the long run.” place in business and regulations all the time and industry trends aren’t always easy to understand. Clients view us as interpreters or middlemen to advise or even coach them on the best approach.” Rossana Ley, Technical Partner at Deloitte and an Institute member, agrees. “This is a key role of every auditor. It’s not just about keeping in compliance with all these rules as well, but also informing clients of what is required from these standards, and how this can benefit their business development,” she says. Increased transparency With added complexities in audits, as well as in the companies being audited, regulators expect more transparency. For example, to communicate audit findings, auditors are now expected to produce more detailed and transparent audit reports. In 2016, a number of auditing standards were revised, affecting financial statements with year ends December 2016 onwards. This effectively changed the way auditors produced audit reports for listed entities and communicated key audit matters (KAMs), as investors and users of financial statements requested for a more informative auditor’s report and for auditors to provide more relevant information to users. Since the revisions, audit reports are disclosing more KAMs. In 2018, two years after the revisions, the Institute reviewed 479 auditor’s reports from companies included in the Hang Seng Composite Index (HSCI) and the Growth Enterprise Market (GEM). It found that 96 percent of the HSCI companies and 94 percent of GEM companies’ auditor reports disclosed one to four KAMs, with the average being 2.4 for HSCI companies and 1.8 for GEM companies. Companies with the highest number of KAMs reported 8 KAMs for HSCI companies and 6 KAMs for GEM companies. The study found improvements in reporting format, but noted that the language used in the auditor’s reports did not provide sufficient insight into the reported KAMs and the nature of work performed. “This was something completely new for auditors at all firms,” says Lau at KPMG. “I grew up with auditing standards stating that the audit report should not deviate in order to provide an unmodified opinion – this was very important. If you start writing a report without these guidelines, people might get confused and question whether it’s a qualified audit report. So this was a big change.” He adds how it was initially a challenge for him and his team to adjust to the new guidelines. “We now need to provide our readers with more in terms of how we consider and address KAMs through the audit procedure. We’re now in the fourth year of adoption and we’re much more familiar with the level of details to include.” Cheng adds the revisions do not increase the workload but promote greater transparency. “We want the public to know how we looked at the audit risks and the work we have done to address them,” she says. “We also have more open discussions 12 February 2020
APLUS with our clients to state how we are going to look at the audit and disclose it to the public. This is important.” Ley at Deloitte adds: “We also report to shareholders how we executed the audit, the critical areas for each particular client, and the procedures used in addressing the KAMs. We also make disclosures including going concern issues and management representation.” Wong at EY says he familiarized himself with the new requirements by studying resources provided by the Institute and attending training provided by his firm. He adds the revisions changed the way auditors planned reports, and also led to more communication. “We became more proactive in discussing audit matters within the firm. The process of determining KAMs involves not only the engagement team but also professionals from our technical and risk management teams. The revised auditing standards require auditors to provide key audit insights and discuss how their audit opinions are justified. As a result, our audit reports are much more transparent now,” he says. Independent auditors Auditors are also expected to maintain a strict code of ethics in working with clients and conducting audits. The Institute’s Code of Ethics for Professional Accountants was revised in 2018, based on the International Code of Ethics for Professional Accountants (including International Independence Standards) issued by the International Ethics Standards Board for Accountants that same year. The revised Code of Ethics brings together key ethics advances over the past four years and includes Non-Compliance with Laws and Regulations and Long Association provisions. Auditors note that the biggest impact is the revision requiring stronger independence regarding long associations of personnel with audit clients. Firms that are auditors of listed companies for seven years must now allow a cooling-off period of five years, instead of the previous two years, for individual auditors. “Auditors who have a long and close relationship with clients would create familiarity threats and increase the possibility of having audit deficiencies,” Wong notes. “So it’s important for auditors to maintain independence and exercise professional scepticism not only during the audit but also in day-today interactions with clients.” For SMPs like Moore, the revisions needed time adjusting to. February 2020 13
SPECIALISMS Audit “During the five-year coolingoff period, we aren’t allowed any engagement or contact with that particular client in order to maintain independence, so the client may choose to leave the firm,” explains Helen Tang, Managing Director at Moore and an Institute member. “It’s slightly challenging now. The longer cooling-off period is an issue for smaller firms if they do not have enough partners for the rotation.” To ensure auditor independence, Wong adds that his firm has been maintaining awareness of the newmeasures through regular training and questionnaires to test auditors’ knowledge. “We also urge teammembers to meet with their engagement executives prior to the start of each engagement to discuss how they can reduce familiarity threats,” he says. “We also rotate audit teammembers as part of our programme so each teammember looks at our client’s audit issues with a fresh and unbiased mindset.” Lau welcomes the changes and adds how it will further strengthen the fundamental notion of ethics in every auditor. “Ethics is the foundation in which we auditors make judgement and perform our duties,” he says. “The revised Code of Ethics provides clearer and more specific guidance to auditors on how to apply those fundamental principles in practice. It was also make it easier for auditors to not rationalize questionable behaviour.” Less complex audits Much of the focus on audits has been on those of listed entities, but changes are also being considered for the audits of less complex entities (LCEs), e.g. those with few owners, simple transations or few products. With existing requirements in the International Standards on Auditing (ISAs) developed from the public interest perspective, local SMPs may be required to perform procedures and documentation which may be unnecessary in the audits of LCEs. Following a discussion paper issued in April 2019, the International Auditing and Assurance Standards Board (IAASB) issued a feedback statement in December 2019 which included views and comments submitted by the Institute’s Auditing and Assurance Standards Committee in August 2019. It found that respondents welcome a combination of the three approaches – revising the ISAs, developing a separate standard, and guidance. Respondents also noted the need for a timely and global solution to the issue. A survey conducted by the International Federation of Accountants (IFAC) at the same time the IAASB discussion paper was out for consultation found the “The revised Code of Ethics provides clearer and more specific guidance to auditors on how to apply those fundamental principles in practice.” 14 February 2020
APLUS A day in the life The tasks of an auditor are diverse. A typical day can revolve around team and client meetings, in-depth research on a company’s financial history, making sure audit working papers are accurate, attending training, and of course, work on the actual audit itself. AdamWong, Senior Audit Manager at EY, says his typical day comprises of duties ranging from supervising engagement teams, to formulating audit plans to be communicated with clients. He also reviews audit working papers to ensure they are in compliance with the latest accounting and auditing standards. During audit engagements, Wong says he spends time evaluating how the latest accounting standards will impact his clients financially and enjoys suggesting ways to improve his client’s internal controls. Auditors work in teams on engagements throughout the year and gain different experiences through each one, which requires them to be team players as well as effective communicators. To achieve this, Matthew Li, Partner at NOVA CPA, ensures frequent communications with his team to track progress and address any problems at the onset. “This involves meetings with our management team to discuss issues concerning customer services, sales, or human resources management, for example,” he says. His day also consists of meeting new and existing clients to discuss industry updates, which he says, is an effective way of helping both parties updated on all developments. “I also meet with our relationship manager to keep track of their progress and understand their problems in meeting with clients.” As Managing Director at Moore, Helen Tang’s role involves less audit field work now, so she’s responsible with looking after her firm’s accounting, company secretarial, advisory and tax departments. This means starting most days with internal meetings to discuss updates, followed by conference calls with the global network, or treasury management. Her day might also include external meetings with clients or service providers, and staff training, which Tang says is crucial to development of a firm and maintaining staff integrity. “I have to make sure our audit staff working on the frontline are well trained and know what they are doing and facing, especially when it comes to dealing with regulators.” three most significant issues that currently make ISAs challenging to apply include: (i) requirements resulting in certain procedures being performed solely to comply with ISA requirements with no additional assurance or measurable increase in audit quality; (ii) extensive and onerous documentation requirements; and (iii) a lack of separate implementation of support or guidance in respect of the application of ISAs to the audit of LCEs. Lau at KPMG explains how new standards would eliminate some unnecessary work for auditors. “When we perform risk assessments, we are required to document it – but for many of these LCEs, it really isn’t that difficult to assess risk. So auditors face a burden when it comes to documenting and writing up why a particular LCE isn’t risky.” As LCEs are generally smaller in scale, Wong at EY adds how separate standards would save time. “In general, an LCE has fewer members of management, with each member in charge of a wider range of duties and that they also perform less complex transactions, have fewer products within their business line and fewer internal controls,” he says. “Separate auditing standards for LCEs would reduce unnecessary documentation and allow auditors to increase audit efficiency.” As Cheng at PwC notes, audits for larger companies include additional responsibilities. “During an audit of a listed company, we have to be responsible for the major as well as minor shareholders, so the level of scrutiny is very different,” she says. “For privately owned companies, the key person is the owner. That owner may want auditors to verify the accuracy of books and records to ensure they make sense, so the risk level isn’t the same.” Tang at Moore believes separate auditing standards for LCEs would also cut down on costs. “When we first adopted these international auditing standards back in 2005, we were honestly quite surprised they would apply to companies of any size – with no shortcuts or workarounds,” she says. “A practice like ours is midsized so we have a mixture of big, medium and small clients and have to look after them across the board. With smaller clients, we still need to go through the same audit procedures we would for a big client. It’s even embedded in our audit programme and software. It isn’t costeffective to go through the procedures that do not apply as much to an owner-managed company. This is a challenge we are facing.” She adds that the benefits will also extend to clients. “This would cut down auditor fees for LCEs. Since every company has to be audited, many companies consider auditing fees to be a burden. We hope new standards will lessen the burden for smaller clients and for auditors – who will also have less documentations to deal with,” Tang says. Ley at Deloitte welcomes revisions to the standards or separate standards altogether. “The current standards generate large compliance costs for SMPs,” she says. “Separate standards would directly address this issue and is likely to not affect the quality of auditors’ work.” “I have to make sure our audit staff working on the frontline are well trained.” February 2020 15
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