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Issue 10 Volume 16 October 2020 DRIVING BUSINESS SUCCESS EMBRACING CHANGE PLUS: TECHNOLOGY The state of blockchain today and current use cases ACCOUNTANT PLUS Michael Teh, Financial Controller at blockchain organization Algorand Foundation SECOND OPINIONS What’s the best way to keep Gen Z employees engaged? Curtis Ng, Regional Tax Partner-in-Charge, Northern Region, at KPMG China, on relocating to Beijing during a global pandemic HK$70.00

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PRESIDENT’S MESSAGE APLUS October 2020 1 Congratulations to our fellow members who were awarded honours and appointed as Justices of the Peace on 1 October. It is pleasing to see members being commended for their activities in our community and demonstrating the commitment of our profession to our home. This year two Past Presidents, Roger Best and Clement Chan, received a Medal of Honour and were made a Justice of the Peace (JP) respectively. Current Council members were also among the recipients. Vice President Nelson Lam was appointed a JP, and Council lay member Wilfred Wong received a Bronze Bauhinia Star. We are grateful for their service. Finally, I want to congratulate the other Institute members who were decorated. Brian Chiu Kwok-kit, JP received a Bronze Bauhinia Star; Ho Ka-Yee and Ma KaHei who received the Chief Executive’s Commendation for Government/Public Service; and Andrew Weir, and Chan Yuen-sau, Kelly who were appointed as JPs. All of these members serve as fine examples of our profession. I look forward to welcoming members to the two online Members’ Forums we will hold in mid-November. These forums follow on from the success of the ones held last year. During the events, the Chief Executive and Registrar and I will update members on the latest developments of the Institute, and you will be able to tell us your thoughts about the development of the profession. If you are unable to attend the forums, they will be recorded so you can still hear our update and contribute your views through a survey. As well as the Members’ Forums, November also features the symposium for small and medium practices (SMP) and the Young Members Conference for our members. This year, as is the new normal, both events will be held virtually – but will still deliver the information members need. At the 2020 SMP Symposium, I will discuss some of the developments at the International Federation of Accountants’ SMP Advisory Group – of which I am a member – and which has been busy with preparing guidance for SMPs. Other speakers will cover important considerations for SMPs, including taxation, accounting standards, licensing regimes and anti-money laundering. The Young Members Conference will feature a mix of young and seasoned speakers from different fields sharing their experience on working outside Hong Kong or in specialisms besides auditing and accounting. I urge young members to watch the session and consider how it can help your career. As a long-time nonassurance specialist, I extol the virtues of looking beyond auditing! Recruitment consultants will also provide tips on career planning and an overview of the current job market. The Financial Industry Recruitment Scheme for Tomorrow, a scheme to create 1,500 jobs in the finance industry supported by the government through the Anti-epidemic Fund, received applications from almost 700 companies during its batch application period. Accounting firms comprised a significant proportion, and I hope that our firms will use the support offered by the government to create jobs for our younger generations, many of whom are struggling in the face of an unemployment rate not seen since in Hong Kong the SARS crisis. As business leaders, we have an important role to play in supporting Hong Kong through this challenging time. The disruption of the past year has impacted us all in many ways. Slowly, the world is learning how to handle the pandemic, and the focus of many is turning to preparing for a better future. For the Institute, 2021 will be an important year in the implementation of our Strategic Plan 2020-2022 and helping Hong Kong to recover. That’s why I urge members to consider nominating themselves to serve on the Institute’s committees or as a co-opted Council member. Join a committee relevant to your interests or sector and help to build the trust needed for a better tomorrow. Members who are currently on committees must also submit their nominations. Members received an email in October about the nomination process, and nomination forms should be completed before Friday 20 November. As we head into winter, thoughts turn to our Annual Dinner. Members have been asking me about whether the dinner – one of our most important functions – will go ahead this year, due to the restrictions on group gatherings. As these restrictions have been easing recently, the Institute is working on ways to hold the dinner, and members will be informed when the decision is made. “For the Institute, 2021 will be an important year in the implementation of our Strategic Plan 2020-2022 and helping Hong Kong to recover.” Johnson Kong President Dear members,

CONTENTS Issue 10 Volume 16 October 2020 NEWS 01 President’s message 04 Institute news 06 Business news FEATURES 08 The business of blockchain With blockchain gaining traction, what’s in it for businesses? 14 Second opinions What’s the best way to keep Gen Z employees engaged? 16 Leadership: Curtis Ng The Regional Tax Partner-inCharge, Northern Region, at KPMG China on his work as a tax practitioner and relocating to Beijing 22 How to Astrid Merkt, Clinical Holistic Psychologist and Performance Coach at Balance Health, on how to sleep better each night 23 Meet the speaker What to expect from the Annual Accounting Update 2020 live webinar 24 The Best Corporate Governance Awards at 20: Setting bold goals How the adoption of sustainability practices keeps organizations relevant 30 Accountant Plus: Michael Teh The Financial Controller of Algorand Foundation on his foray into blockchain 36 Thought leadership: Jeff Thomson The President and Chief Executive Officer of IMA® on how to infuse ethical behaviour SOURCE 37 Responsibility of CPAs who prepare corporate financial statements Guidance for CPAs who serve as directors or senior financial executives 38 Views exchanged during the 2020 annual meeting with the IRD A look at the matters discussed at the Institute’s Taxation Faculty’s annual meeting with the IRD 24 08The business of blockchain Setting bold goals A look at how the Best Corporate Governance Awards have led to better sustainability initiatives and targets across different companies

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, Liana Cafolla Registered Office 2/FWang Kee Building, 252 Hennessy Road, Wanchai, Hong Kong Advertising enquiries Advertising Director Derek Tsang Email: derektsang@mandl.asia President Johnson Kong Vice Presidents LamChi Yuen, Nelson, FongWan Huen, Loretta Chief Executive and Registrar Margaret W. S. Chan Director of Corporate Communications Dr Wendy Lam 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 October 2020. Print run: 7,340 copies The digital version is distributed to all 46,372 members, 18,106 students of the Institute and 2,358 business stakeholders every month. 41 The interaction of the accounting standards with the tax laws – HKFRS 15 and HKFRS 16 A look at tax principles for determining whether and when accounting profits or losses are taxable or deductible 44 Technical news WORK-LIFE BALANCE 46 Calling the shots CPA snooker players on the precision and practice needed to play and win each game 52 Young member of the month Lawrence Leung, Director of Corporate Internal Audit at adidas AG 54 Leisure Plus Spotlight on weekend getaways; what members are currently reading and listening to 56 Let’s get fiscal Accountants are definitely superheroes, at least in the movies, says Nury Vittachi 30 Building with blockchain Michael Teh, Financial Controller of Algorand Foundation, on his experience being at the helm of a blockchain start-up, and why working in blockchain requires him to stay on top of it all 54 46 Calling the shots Leisure Plus

NEWS The Institute’s annual Young Members Conference this year will be held as a live webinar on 21 November. With the theme “Out of the box – options for young accountants,” the conference will include a mix of young and seasoned speakers from different fields, sharing their personal experiences of working outside Hong Kong or in specialisms outside of audit and accounting. During the two-hour event, recruitment consultants will also provide tips on career planning and an overview of the current job market. The conference aims to keep young CPAs abreast of topical issues relevant to the accounting profession and equip them with the right knowledge and tools for their career development. Those interested should enrol online by 20 November. Annual SMP Symposium The 2020 SMP Symposium will be held as a live webinar on 27 November. Two sessions will provide participants updates on current issues affecting small and medium practices, including taxation, major financial reporting and auditing standards, the TCSP licensing regime and anti-money laundering and counter-financing of terrorism requirements, Limited Partnership Fund Ordinance, adoption of technologies during the pandemic, practice review and compliance matters, as well as recent development of the Institute and the International Federation of Accountants. More details of the webinar can be found on the Institute’s website. Mandatory CPD requirements for 2021 membership renewal Members who joined the Institute before 1 December 2017 are required to complete 120 hours of continuing professional development (CPD) in the three years ending 30 November 2020, of which 60 hours must be verifiable. Members facing difficulties in achieving the CPD requirements for their 2021 membership renewal, particularly due to the COVID-19 pandemic, may apply for an extension up to 31 May 2021 to make up for the shortfall in CPD hours. Applications for extension should be made to the Institute via the CPD declaration in the online Annual Return on or before 15 December. More details can be found on the Institute’s website. Council meeting minutes The abridged minutes from the September Council meeting are now available for members to read. They can be found in the “Members’ area” of the Institute’s website. Institute news Business news Young Members Conference goes virtual Disciplinary findings Lo Yip Tong, CPA Complaint: Failure or neglect, without reasonable excuse, to comply with a direction issued by the Practice Review Committee under section 32F(2)(b) of the Professional Accountants Ordinance, and in breach of the fundamental principle of integrity in sections 100.5(a) and 110 of the Code of Ethics for Professional Accountants. Lo was the sole proprietor of Y.T. Lo &Co., which was subject to a follow-up practice review in May 2018. As a result of Lo’s failure to cooperate, the committee issued a direction requiring him to provide the necessary information to enable the practice review to be conducted in the third quarter of 2018. Lo failed to comply with the committee’s direction, claiming falsely that his office was in disarray due to a recent typhoon. As a result, the follow-up practice review could not be conducted. Decisions and reasons: Lo was removed from the register of CPAs for one year with effect from5 October 2020. In addition, Lo was ordered to pay costs of disciplinary proceedings of HK$64,012. Whenmaking its decision, the Disciplinary Committee took into consideration the particulars of the breaches committed in this case, Lo’s conduct throughout the proceedings and his personal circumstances. Ng Ka Kuen, CPA (practising) Complaint: Failure or neglect to observe, maintain or otherwise apply (i) the fundamental principle of professional competence and due care in sections 100.5 (c) and 130 of the Code of Ethics for Professional Accountants, and (ii) Hong Kong Standard on Quality Control 1 Quality Control for Firms that PerformAudits and Reviews of Financial Statements, and 4 October 2020

APLUS Other Assurance and Related Services Engagements. Ng was the sole practising director of UC CPA (Practising) Limited (practice) and was responsible for the practice’s quality control system. The practice was selected by the Institute for practice review in 2016. The practice reviewer identifiedmultiple breaches of auditing standards in two audit engagements selected for the review. The breaches show that Ng did not carry out the audits with the level of professional competence and due care expected of him. In addition, the breaches show that the practice failed to have an adequate system of quality control to ensure that it had adequate human resources to uphold audit quality and that it performed audit engagements in accordance with professional standards. Decisions and reasons: The Disciplinary Committee reprimanded Ng and ordered that the practising certificate issued to Ng be cancelled and no practising certificate shall be issued to him for 16months. In addition, Ng was ordered to pay costs of the disciplinary proceedings of HK$52,977. Whenmaking its decision, the committee took into account the particulars of the breaches committed in this case, Ng’s conduct throughout the proceedings and his personal circumstances. Ng lodged an appeal against the committee’s order but subsequently he withdrew the appeal, whereupon his practising certificate was cancelled for 16months with effect from21 September 2020 pursuant to the order. Wong On Yee, CPA (practising) and CWC CPA Limited Complaint: Failure or neglect by Wong and CWC to observe, maintain or otherwise apply Hong Kong Standard on Auditing (HKSA) 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Hong Kong Standards on Auditing, HKSA 230 Audit Documentation, HKSA 500 Audit Evidence, HKSA 560 Subsequent Events and Hong Kong Standard on Assurance Engagements 3000 Assurance Engagements Other than Audits or Reviews of Historical Financial Information. Refusal or neglect by Wong and CWC to comply with the Corporate Practices (Registration) Rules. Further, Wong and CWC have been guilty of professional misconduct. CWCwas the auditor of W. Falcon Asset Management (Asia) Limited, a licensed corporation under the Securities and Futures Ordinance (Cap. 571) providing investment dealing and advisory services, for each of the three years ended 31 March 2015 to 2017. CWC expressed unmodified auditor’s opinions on the company’s financial statements for each of the three years. CWC also issued compliance reports on the company for each of the three years for the company’s submission to the Securities and Futures Commission (SFC) and expressed unqualified conclusions. Wong was the engagement director in those audit and compliance reporting engagements. In July 2017, the SFC issued a restriction notice to prohibit the company from carrying on any regulated activities, and later in February 2019 the SFC revoked the company’s licence and disciplined the company. In the course of the SFC’s investigations, it was found that the company had window-dressed the liquid capital reported in its monthly financial returns, in that certain personal cheques issued by one of the company’s directors in favour of the company were dishonoured on the first business day after the end of the month. The SFC referred the matter to the Institute concerning the conduct of the company’s auditor. The Institute’s investigation discovered a number of deficiencies. In the 2016 and 2017 audits, the respondents were found to have failed to perform sufficient appropriate audit procedures in respect of the dishonoured cheques at the beginning of various months, and failed to document a purported enquiry with management concerning the issue. Also, in respect of a bank account balance where the ledger amount varied significantly from the bank confirmation amount, the respondents failed to evaluate the implications of such a variance on the financial statements, and failed to document the associated reconciliation. Further, in the 2015 and 2016 auditor’s reports, the respondents failed to state the name of Wong as the engagement director and her practising certificate number. In the 2015 to 2017 compliance reporting engagements, the respondents failed to plan and perform procedures on the company’s compliance with the regulatory requirements concerning the sufficiency of liquid capital, and failed to issue qualified conclusions for the years 2016 and 2017 in view of the circumstances surrounding the dishonoured cheques. Also, the respondents failed to plan and perform sufficient procedures on the company’s control over client monies held and its compliance with the relevant regulatory requirements. Further, they made an incorrect statement in the 2016 and 2017 reports about the company being subject to a limiting condition to hold client assets, when in fact such a condition was removed in June 2015. Decisions and reasons: The respondents were reprimanded. In addition, the practising certificate of Wong was ordered to be cancelled with no issuance of practising certificate to her for 12 months, effective from 5 October 2020. In addition, the respondents were ordered to jointly pay a penalty of HK$200,000 and costs of the Institute of HK$73,428. When making its decision, the Disciplinary Committee considered the particulars in support of the complaint, Wong’s personal circumstances and the conduct of Wong and CWC throughout the proceedings. Details of the Disciplinary findings are available at the Institute’s website. October 2020 5

NEWS Business KPMG U.K. TO SELL ITS RESTRUCTURING UNIT KPMG in the United Kingdom is looking to sell its restructuring arm in a bid to inject capital into the firm, which has seen its bottom line affected by the coronavirus pandemic this year. The firm, according to the Financial Times, is in talks with private equity firms about a possible auction before the end of the year. The plans come two years after KPMG rejected interest from private equity company Permira in acquiring its restructuring division. The sale of its restructuring practice, which is a significant fee-earning operation at KPMG, would also end conf licts of interest that have made it increasingly difficult for the firm’s restructuring partners to take on new clients. The announcement follows Deloitte in the U.K., which also put its restructuring unit up for sale in September, but was later stopped by its global parent company. US$180 BILLION NEEDED TO SAVE AILING AIRLINE INDUSTRY The International Air Transport Association (IATA) has warned that more global airlines will go bankrupt without another cash injection to stay afloat amid the coronavirus pandemic. The airline industry, which has seen an unprecedented decline in passenger flights this year, is expected to burn through a further US$77 billion in the second half of 2020, according to the IATA. This is despite US$180 billion in support which includes direct aid, wage subsidies, corporate tax relief and fuel tax relief already made by governments across the world. Hong Kong’s flagship carrier Cathay Pacific, which this month announced it will cut 8,500 jobs and axe its Cathay Dragon brand, will undergo a HK$2.2 billion restructuring in the hopes of riding out the pandemic. At least 30 to 40 airlines have entered bankruptcy restructuring since the beginning of the pandemic, according to the IATA, and more are expected to go bust over the next six to 12 months. Goldman Sachs (Asia) has been fined US$350 million, the highest fine ever imposed by Hong Kong’s Securities and Futures Commission, for its role in arranging bond sales for 1Malaysia Development Berhad (1MDB). 1MDB is a state fund founded by former prime minister Najib Razak in 2009 to drive new development in the country. More than US$4.5 billion was eventually stolen from 1MDB during Razak’s term, leading to his fall from grace and conviction in July 2018 over charges related to abuse of power, money laundering and criminal breach of trust. The Hong Kong unit of the bank collected US$210million of the US$581.5million in fees from1MDB, inclusive of US$567million in commission, from three bond sales from2012 to 2013 that raised US$6.5 billion for 1MDB, according to the city’s regulator, adding that Goldman Sachs (Asia) in Hong Kong had significant involvement in the origination, approval, execution and sales process of the three 1MDB bond offerings. GOLDMAN SACHS FINED FOR 1MDB INVOLVEMENT The trial of Jay Y. Lee, Samsung’s Vice Chairman, who is accused of accounting fraud and stock-price manipulation, held its first hearing on 23 October. The court previously denied prosecutors’ arrest warrant request for Lee in June, stating that even though they had secured a “considerable amount of evidence,” it was still not enough to detain Lee. Prosecutors allege that the value of Cheil Industries, an electronics materials provider, was artificially inflated before its merger with Samsung’s holding company five years ago to create a more favourable rate for Lee, who was then Cheil’s largest shareholder. Lee is also one of 11 current and former Samsung executives indicted by South Korean prosecutors last month over charges that they inflated the assets of biotechnology company Samsung BioLogics, in which Cheil held a major stake. Digital finance giant Ant Group is expected to raise US$34.5 billion from its initial public offering (IPO) in Hong Kong and Shanghai. The dual listing by Ant Group, an affiliate of Chinese business tycoon Jack Ma’s Alibaba Group, will debut on Shanghai’s Star Market and the Hong Kong Stock Exchange on 5 November. Ma, who owns a controlling stake in Ant, billed Ant Group’s share sale on 24 October. The Hangzhou-based fintech company priced its 1.67 billion A shares at US$10.27 per share and the Hong Kong stock at US$10.32 each. The listing is expected to top the valuation of JPMorgan Chase, the world’s biggest bank and outdo Saudi Aramco’s US$29.4 billion IPO last December. US$34.5 BILLION ANT GROUP TO RAISE FIRST HEARING INVOLVING SAMSUNG VICE CHAIRMAN OVER ACCOUNTING FRAUD TAKES PLACE IN WORLD’S LARGEST IPO 6 October 2020

General Electric Co. (GE) noted that it may face enforcement action from the Securities and Exchange Commission (SEC) in the United States over possible violations of securities laws related to its accounting practices for its insurance operations. Authorities are looking into how GE accounted for the run-off of some of its legacy insurance businesses that sat inside its GE Capital division. The probe is an ongoing investigation by the SEC into GE’s alleged accounting malpractices in 2018 in which GE revealed a US$6.2 billion loss in its portfolio of long-term care insurance. APLUS Robert Brockman, the billionaire Chief Executive Officer of software company Reynolds and Reynolds Co., has been indicted on charges of tax evasion, wire fraud and money laundering, in the largest tax charge ever seen in the United States. The charges involve roughly US$2 billion allegedly hidden away in offshore accounts and laundered between 1999 and 2019 to conceal assets from the Internal Revenue Service and defraud investors in his company’s debt securities, according to the Department of Justice in the U.S. on 15 October. Brockman made an initial federal court appearance on 16 October, where he pleaded not guilty on all counts and was released on a US$1 million bond, according to a report from The Wall Street Journal. If convicted, Brockman faces “a substantial period of incarceration,” authorities said. BILLIONAIRE CEO OF SOFTWARE COMPANY ACCUSED OF EVADING US$2 BILLION IN TAXES GENERAL ELECTRIC FACING SEC ACTION FOR ACCOUNTING MISCONDUCT MAZARS LAUNCHES REBRANDING Mazars has unveiled a new global brand identity said to reflect the firm’s aspiration to position itself as an alternative to the Big Four for large multinational clients. The rebranding includes a new logo, a revamped website and pledges to always act with integrity and pursue a “commitment to a fair and prosperous world.” This comes after the firm recorded a revenue of €1.8 billion this year, a 10.4 percent increase compared to last year. Globally, Mazars’ revenue has doubled in size since 2010. “The rebranding has been two years in the making, and it’s part of a broader evolution of Mazars globally and here in the United States. It’s designed to reinforce howwe work together as one team and across all 90 of the countries that we operate in,” said Victor Wahba, Chairman and Chief Executive Officer of Mazars U.S. John McAfee, Founder of cybersecurity company McAfee, was arrested this month at an airport in Barcelona on tax evasion charges. McAfee is accused of failing to file tax returns from 2014 to 2018 in the United States and concealing assets such as real estate, a vehicle and a yacht, according to prosecutors. Officials allege that McAfee earned millions of dollars through the promotion of cryptocurrencies, speaking engagements, consulting jobs and the sale of rights to his life story for a documentary, but never filed his tax returns. Prosecutors also say his income was instead transferred into accounts under different names. McAfee faces five years in prison if he is convicted of tax evasion and a year for failing to file taxes. It is the latest legal issue involving McAfee, who was previously detained in the Dominican Republic in 2019 for attempting to enter the country with firearms and ammunition. SOFTWARE COMPANY FOUNDER JOHN MCAFEE ARRESTED FOR TAX EVASION The Tokyo Stock Exchange (TSE) halted trading for the whole of 1 October following a hardware breakdown, pausing buying and selling in thousands of companies. A failure to switch over to back-ups led to the system crash, according to bourse operator Japan Exchange Group. The TSE, which resumed trading the following day after its hardware was replaced, set up a panel of external board members a week later to investigate the crash. It is the TSE’s first all-day stoppage of trading since the exchange shifted to a fully electronic system in 1999, with previous glitches only affecting part of the trading day. “We have caused great inconvenience to many market participants, investors and listed companies. We will take thorough steps to prevent a recurrence,” said Koichiro Miyahara, President of the TSE. TOKYO STOCK EXCHANGE HALTS TRADING FOLLOWING HARDWARE GLITCH The Financial Reporting Council (FRC) in the United Kingdom has proposed enhanced requirements on auditors to identify fraud in company accounts following a spate of scandals that have damaged the profession’s reputation in recent years. The FRC has launched a review into International Standard on Auditing 240 The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements, an auditing standard first adopted in the U.K. in 2004 that sets out an auditor’s obligation to detect fraud. The standard currently only requires auditors to “identify and assess the risks of material misstatement of the financial statements due to fraud.” The proposed new standard, which will be consulted on until January 2021, will clarify that auditors are required to look for fraud, with one new paragraph stating that the objective of an audit is to “obtain reasonable assurance about whether the financial statements as a whole are free frommaterial misstatement due to fraud.” U.K. REGULATOR PROPOSES MEASURES TO FIGHT FRAUD October 2020 7

TECHNOLOGY Blockchain 8 October 2020

APLUS THE BUSINESS OF BLOCKCHAIN Illustrations by Roberto Cigna In its relatively short life, the usefulness of blockchain technology has broadly been a success. Blockchain first emerged in 2008 as the enabler of Bitcoin, the digital currency that allows transfers of money without the need for an intermediary. But besides using it to handle digital currencies, it was being hailed a technology only a few years ago that would quickly transform many business processes and industries, including the accounting profession. But globally, that is not yet the case. The storm of dramatic predictions has calmed, as complex realities including implementation difficulties, regulation, privacy rules and security concerns have taken a toll on the pace of adoption. In the meantime, though, blockchain has been making itself useful in a range of different commercial environments, often in less visible ways. It can be helpful to consider blockchain as a type of spreadsheet that allows data to be stored in a way to prevent tampering through blocks that are linked together using codes. In traditional spreadsheets, one person is usually in charge of inputting, editing and removing data. In a blockchain, no single person is in charge, and data can only be viewed or input; it can’t be changed or deleted. The main attraction of blockchain is that it addresses an age-old problem found in human transactions. “Blockchain solves the issue of trust,” says Peter Woo, Founder of Hong Kong Blockchain Society and Co-founder of EMALI, a fintech company that specializes in blockchain, artificial intelligence (AI) and cryptography. Woo adds Blockchain is making its presence felt in a range of business processes. Liana Cafolla takes a look at where it is proving useful, some of the barriers to wider adoption, and how it could lead to deeper changes in the future October 2020 9

TECHNOLOGY Blockchain that blockchain provides a way to enhance trust among a group of stakeholders who don’t necessarily know each other, but have reached a consensus on how they need to proceed in order to complete a task. Blockchain also makes life easier for business owners who need to be able to rely on the data of several business partners, explains Adam Stuckert, Partner and Blockchain Lead at KPMG China. “Previously, if you wanted to share data with five or 10 of your ecosystem participants – say you’re a retailer and you need to share data with manufacturers, warehouses, retailers, shippers, logistics – tying your digital system into their digital systems was a one-by-one process,” he says. “Every time you did it, you needed to define the standards and work with that company and so on. Blockchainbased data records allow participants to remove a lot of those complexities. It lets you trust the data without necessarily trusting on a one-byone basis all the parties that are interacting with it.” Blockchain in action Blockchain-based applications are already in use in areas including contract management, healthcare certification, loyalty programmes and banking. One example of how blockchain can be used to solve real world problems is EY and Microsoft’s Blockchain Royalty Application, which allows traditional methods of invoicing for software or intellectual property royalty accounting to be eliminated. The application generates invoices and statements, and allows royalties to be calculated accurately and in real time for each participant, replacing a manual process that used to take 45 days or more to do the same job. The application is also being used to handle license agreement contracts for game publishers such as Microsoft’s Xbox Game Studios. “It is the first enterprise use of blockchain technology as a system of record,” says Benson Ng, Hong Kong Business Consulting Leader at EY, adding that the technology is also progressively eliminating intercompany transaction documentation and reconciliation. “In one case, we took the advantages of blockchain to resolve contract disputes for an oil and gas client with their jointventure partners,” he says. “More than 2,000 working hours on audit were saved.” As the COVID-19 pandemic continues to affect economies around the world, certification of health has become a hot topic, as it may be the only way people are able board planes or return to work in the near future. EMALI has been working with Immunodex, a multidisciplinary technology initiative founded by healthcare and tech experts in Hong Kong and Canada, to build digital health certificates (DHC), to show, for example, that a person has tested negative for the virus. “The immunity passport is a trusted, verifiable record of a person who has done the test and has antibodies,” explains Woo. “We have several programmes. One of them is a back-to-work programme, another one is a back-to-school immunity passport and the third is for the airline industry. All of these are ready.” The DHC, which was launched in June, is a collection of health information on a blockchain issued by an attesting party – such as a medical laboratory or a doctor – verifying that the holder has a low risk of being infected by a disease, as shown by diagnostic assessment or immunization, if available. All data registered on the certificate is owned by the patient and is only shared with other verifying parties with the patient’s consent. The system has the potential to replace the handwritten selfdeclaration health forms that are being used widely at venues and airports, and paper-based diagnostic test results issued by a hospital or testing site, says Chloe Chan, Programme Director at Immunodex. “Currently, there is no way to present this information in a way where we can absolutely trust its authenticity,” she says. “This is where blockchain comes in. It is a way to ensure that information is unaltered from its original state and issued by trusted parties to begin with, such as an approved testing site or hospital.” Sustainability is another area where blockchain is being used, and one that is likely to grow as part of a growing focus in environmental, social and governance (ESG) reporting. In late September, the World Economic Forum released a new reporting framework for ESG metrics and disclosures that all companies can use to report their non-financial disclosures and their contributions to the sustainable development goals. The measures, organized around the pillars of principles of governance, planet, people and prosperity, were developed by the World Economic Forum, Bank of America and the Big Four. The move aims to encourage about 130 major international companies to adopt the standards for their 2021 accounts. KPMG’s Stuckert says blockchain can help with this kind of reporting. “One of the classic problems is when we want to ensure that companies in a supply chain, say for garment manufacturing or production of industrial goods, are treating workers and the environment well, we have to go on the word of suppliers,” he says. “Maybe we can hire a firm to go and audit that supplier once a quarter or once a year, or maybe they have some certifications, but it’s very difficult to prove that it’s always the case, that they’re always giving workers good conditions. This is an area that we in KPMG are working on.” In practical terms, blockchain can be used to keep track of temperature levels in garment factories located in hot countries, such as Bangladesh and Indonesia, where air conditioning is needed, says Benjamin Usinger, Co-Lead “In one case, we took the advantages of blockchain to resolve contract disputes for an oil and gas client with their joint-venture partners,” he says. “More than 2,000 working hours on audit were saved.” 10 October 2020

APLUS for KPMG’s Blockchain and Crypto Advisory Service in Hong Kong. “For example, what happens, unfortunately, is that air conditioners are only turned on when an audit is happening or someone from the producer side comes in,” he explains. To counter that, small temperature sensors can be installed to monitor temperature levels constantly. “With a blockchain as the underlying data record, we can track and have a perfect audit trail that those conditions have been met throughout the year, and the ESG auditors can focus on more quality interaction with the workers.” Blockchain and audit A few years ago, predictions were rife about the sweeping changes that blockchain would bring to the profession, particularly in audit, but so far changes have been modest. Is the speed of technology really outpacing changes being made in auditing standards? “Businesses are still in the early stages of technology adoption – for example, invoices still need to be issued, except that the details may be uploaded to a distributed ledger rather than sending the physical invoice via mail or email,” says William Gee, Partner, Digitalization, PwC China and Hong Kong and a member of the Hong Kong Institute of CPAs. “That being said, existing auditing standards and guidelines have not been updated to address how digital documents should be audited and retained. As the information is on an immutable chain, technically the auditor no longer needs to take a copy as audit evidence. The advance in technology and the update of auditing standards and guidelines are not in sync, and thus we are unlikely to feel the full impact on audits until such time as the profession re-examines the core principles and standards.” More needs to be done to update auditing standards and two key aspects need to be considered, Gee says. “The first is the need to review existing standards for the audit of financial reports, as some of these may not necessarily apply in circumstances where emerging technologies are used. An example could include determining whether data on a blockchain is inherently reliable for audit purposes, or if the use of a public blockchain constitutes reliance on a “third party service organization” – my view is that this is not the case. The second is in relation to the other assurance engagements – for example, Hong Kong Standard on Assurance Engagements (HKSAE) 3000 – where one or more sets of “criteria” should be developed to cater for the use of emerging technology such as blockchain.” Where it has had an impact is in pushing practitioners to upskill its practitioners to meet the demands of blockchain as well as other October 2020 11

TECHNOLOGY Blockchain technologies, such as the Internet of Things, AI and robotics, in preparation for the potential for role changes in the profession. “Accountants’ traditional role as trusted advisors could be eroded as new industries and new business orders emerge,” Gee says. Until now, accountants have provided trust by issuing reports, such as on a set of financial statements. Now, though, increasing use of new technology is leading to new areas where trust and assurance may be needed, such as the “smart contracts” used in some blockchain platforms to automate one or more processes. “As of today, none of the organizations offering “smart contract audits” are professional accounting firms,” says Gee. “There are two reasons for this: the lack of a suitable set of criteria that is required under HKSAE 3000, and its global equivalent, and the lack of the necessary technical capability to undertake such a review or audit.” The changes taking place are happening “progressively” and the amount of time saved by eliminating intercompany transaction documentation and reconciliations are notable, says EY’s Ng. The technology is proving effective, but adoption is not happening quickly. “The progress of change is not as fast as what we expect, as it needs a major portion of business on trade networks to adopt blockchain to make the shift worthwhile,” adds Ng. Barriers to blockchain Other hindrances are also slowing the pace of adoption. As with other technological advances, disruption to current business processes is a major barrier to full implementation of blockchain, say Ng and Gee. “The challenge to any technology adoption is the integration with business operations, but for blockchain adoption, there is an added dimension: the ability and willingness to redefine the industry,” says Gee. “As of today, few adoption efforts are demonstrating this aspect, with the exception of DeFi or decentralized finance, being a completely new domain, and consequently, we are yet to see the full disruptive impacts of the blockchain technology.” Echoing Gee, Ng foresees changes to traditional roles in the profession. “Current industry leaders could see their dominant positions challenged,” he says. “As with any new system of automation, some business services, jobs and career paths could also become obsolete, while new ones could be created.” Blockchain’s widespread adoption could cause disruption to regulation by necessitating important amendments to finance and trading regulations. While regulators are rising to the new challenges of the digital age in some areas – for example, the European Union’s General Data Protection Regulation is a wide ranging regulation that came into force in 2018 to protect data and “The challenge to any technology adoption is the integration with business operations, but for blockchain adoption, there is an added dimension: the ability and willingness to redefine the industry.” 12 October 2020

APLUS privacy – blockchain poses more challenges, Ng says. “Financial service providers also need to work with regulators and central banks to ensure the innovation and regulation works in harmony with existing legal and regulatory frameworks, not least because blockchain, like the Internet, transcends regulatory jurisdictions and national borders,” Ng says. Security and privacy protection are other sources of concern. Major hacks of large organizations have already lead to huge amounts of personal, financial and health data being leaked or stolen, creating widespread public concern. Deloitte’s report, Blockchain 2020: From promise to reality, says that blockchains are subject to the same risks of hacking that have plagued legacy systems, because “attacks can emanate from anywhere at key access points to the blockchain system.” PwC’s Gee says two major scenarios will test blockchain’s resilience and the potential for its future adoption: “Legal enforceability – whether transactions conducted on a blockchain network are enforceable – in the event of a dispute, and whether it is acceptable for auditors to place reliance on public blockchain platforms without performing any audit procedures on such platforms.” Future potential In banking processes, each financial institution currently maintains its own ledgers to record their own view of agreements and positions with respect to its customers and counterparts, explains Immunodex’s Chan. Each counterpart, in turn, maintains their own ledgers with their views. This duplication can lead to inconsistencies, leading to costly matching, reconciliation and fixing of errors by and among the various parties to a transaction, as well as being a source of risk. Blockchain technology offers to the opportunity to replace this system with an authoritative record system that is shared securely between firms. “The vision is to transform the economics of financial firms, particularly but not exclusively in post-trade services, by implementing a new shared platform for the recording of financial events and processing of business logic: one where a single global logical ledger is authoritative for all agreements between firms recorded on it,” says Chan. Broader signs of adoption of blockchain are appearing on the horizon. Ng at EY says many companies in Mainland China, particularly Internet companies, are already adopting blockchainbased supply chain finance to solve financing issues. “Blockchain ensures the credibility, traceability and trustworthiness of information from small- and medium-sized suppliers or distributors, in exchange for them to get financing and easier access to capital,” he says. “Once they have a more efficient financial ecosystem, companies can get access to the proprietary data from these small- and medium-sized suppliers, and benefit from tighter control over their entire supply chain.” Ng gives an example of a telecommunications equipment company that sources chips, power supply, displays and cases from suppliers. “Chip suppliers will draw capital or loans from a bank based on the telco equipment company’s purchase order as collateral and use it to fund materials, labour and lab facility needed to design and manufacture the chips,” he says. “Blockchain can facilitate the bank to access the validated, controlled and full credibility history (in the form of a blockchain distributed ledger) of chip suppliers from its telco equipment and other customers. Hence, this establishes trust on business performance of the chip suppliers to provide higher credit line and better credit terms. With blockchain, this can all be done electronically in minutes or hours instead of having suppliers, customers and bank exchange certified documents in days or weeks.” Trade finance is one of the areas that is starting to be explored, and some results are impressive, says KPMG’s Stuckert. “Now, we’re starting to settle into that period where cases that were developing over the last three to five years are starting to gain real traction and have an impact on businesses. In trade finance, most if not all of the banks are working on platforms here. One bank was able to create a trade finance platform using blockchain technology underneath. The blockchain technology facilitated the transfer of what was formerly paper documents and reduced the processing time from up to a month down to a few hours or less.” Experts see blockchain’s potential for greater and deeper changes. “In the era of globalization being challenged and unilateralism rising, blockchain can help build a better future by being the cornerstone of “coopetition” – cooperative competition – in a multilateral world,” says EY’s Ng. “Blockchain’s distributed ledger can become a distributed policy to help establish trust among “coopetitive” nations, corporations and individuals. Blockchain’s smart contract can assure transparency and social responsibility of trade.” It’s future impact could transform financial services, says Gee. He says its power lies in the way it combines technological features to solve business challenges, as shown in the conception of Bitcoin. “Blockchain is native to all things digital, and can therefore be deployed hand-in-hand with other existing or emerging technologies to create real impact (and disruption) to current business orders. Then there is the financial aspect of blockchain application: distributed finance; digital assets, and so on, which is likely to create significant and lasting impact to the entire financial services sector as we know today.” According to Deloitte’s report, Blockchain 2020: From promise to reality, which polled about 1,500 senior executives and practitioners in 14 countries in the first quarter of the year, 55 percent of respondents said blockchain was one of their top five strategic priorities for the next two years. “Leaders no longer consider the technology groundbreaking and merely promising, they now see it as integral to organizational innovation,” says the report. More than 85 percent of respondents saw a strong business case for adopting blockchain technology, though 54 percent also said “blockchain is overhyped.” October 2020 13

SECOND OPINIONS: WHAT’S THE BEST WAY TO KEEP GEN Z EMPLOYEES ENGAGED? SECOND OPINIONS Generation Z JACKY LAI ASSURANCE PARTNER, EY AND AN INSTITUTE MEMBER The next decade will be shaped by the maturation of the largest generational cohort in history – Gen Z. This cohort, born from the mid-1990s onwards, now makes up 30 percent of the global population, or around two billion people. Gen Z’s fundamental commonality lies in how they thrive in the digital age. Compared with their predecessors, this generation will likely bring very different assumptions and expectations related to society. Therefore, companies and business leaders are now facing the challenge to engage, collaborate and retain these post-millennial employees. To unlock Gen Z’s full potential, we must understand the environment that nurtured them and how they are distinct from the previous generations. Different from millennials who were brought up by protective and helicopter parents, Gen Z grew up adopting a more coach-like mindset. They are often the first adopters of new technology and are setting new rules for new innovations. For example, they rely heavily on social media to stay in touch, build connections and find opportunities. Here are three ways we can better engage with Gen Z: 1. As employers, companies need to recognize that Gen Z is used to instant access and are motivated by efficiency. Thus, companies need to make better use of tools that are simple and easily accessible. They also need to motivate Gen Z with tasks that are more intuitive and less processheavy. Despite Gen Z’s tech-savviness, they also crave human interaction, openness and collaboration. While companies advance technologies to enable a more virtual workforce, managers have to take into account Gen Z’s desire to build “real” relationships with the people they work with. 2. Transparency and trust are key. Transparency is the first step in establishing strong bonds with Gen Z. Being transparent about motivation and organizational purpose will help companies gain trust from Gen Z and provide them with a platform to remain authentic, connected and fulfilled. 3. Diversity and inclusion come in many forms. Gen Z reflects the change and diversity that exist in our society today. Companies have to be at the forefront to understand what drives and motivates each individual, while creating an environment that embraces collaboration and inclusiveness. Companies that recruit without segmentation, or continue to adopt the one-size-fits-all approach instead of individualization, will fail to attract or retain talent who are most likely to become the leaders of tomorrow. 14 October 2020 “DespiteGen Z’s tech-savviness, they also crave human interaction, openness and collaboration.”

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