Issue 4 Volume 18 April 2022 DRIVING BUSINESS SUCCESS REAL POTENTIAL The metaverse and non-fungible tokens bring huge business and investment opportunities for companies, and challenges for CPAs ETHICS Common ethical issues CPAs face today and possible solutions to improving standards PROFILE Algernon Yau, Chief Executive Officer of Greater Bay Airlines SECOND OPINIONS What does the Northern Metropolis mean for Hong Kong? PLUS:
PRESIDENT’S MESSAGE APLUS April 2022 1 As confirmed cases in Hong Kong continue to dwindle and social distancing measures begin to ease, I am grateful for the frontline workers who are tirelessly protecting us as well as all those in society who continue to persevere despite the challenging circumstances of the fifth wave. Nonetheless, it is important we remain vigilant and maintain necessary measures to avoid another wave. As we slowly get back to some sense of normal in the month of April, I have been busy working with my colleagues to communicate the Institute’s refined strategic aims to our stakeholders, and to create avenues for members to make their views heard on the latest developments in the profession. Since the Institute set out its vision, strategic objectives, and initiatives in the previous Strategic Plan 2020-2022, there have been significant new and developing changes in circumstances and challenges that need to be addressed. Needless to say, the pandemic has had a profound impact on society and the profession. This has coincided with a fundamental change in the role and responsibilities of the Institute under the government’s further reform of the regulatory regime of the accounting profession, which will come into effect this autumn. Meanwhile, the growing recognition of the critical importance of climate change and broader sustainability matters is also shaping the future of accounting. Recognizing these challenges, the Council and management of the Institute have been hard at work identifying necessary revisions and additions needed for the Institute’s strategic plan and objectives to ensure the Institute, the profession and our members remain as recognized and valued contributors to the prosperity and well-being of Hong Kong. I am pleased to report that the Council has approved the latest Strategic Plan 2022. The new plan will identify the Institute’s renewed priorities and direct the allocation of our resources for the rest of the year and beyond. A new webpage with the details of the new strategic plan has been launched on the Institute’s website. There, you will also find a short video where I introduce some of the highlights of the plan. I encourage you to visit the webpage and find out more about our new objectives and corresponding key action items. As mentioned in last issue’s message, the government has proposed revisions to the election arrangements of the Institute’s Council. Further details were announced by the Financial Services and the Treasury Bureau (FSTB) in the Legislative Council during the Panel on Financial Affairs on 4 April. The Council election is an important governance provision of the Institute and the proposed changes will affect all members. We considered it to be of paramount importance to consult and collate your views on the government’s proposals. In this connection, the Institute launched a survey to all members to collect their views between 1 April and 18 April. We received 434 responses to the online survey questionnaire. The responses to these questions have been summarized and made available for members’ viewing on the designated webpage. We thank members for taking the time to respond to the survey and rest assured, your views will be shared with the FSTB for their consideration. I was also happy to join and give the opening remarks for the four members’ forums held in April which were on the review of the Council election arrangements and the further regulatory reform of the profession respectively. The recordings of the members’ forums as well as the presentations have been made available on the Institute’s website. If you were unable to attend, I encourage you to watch the presentations to gain a better understanding of how these changes will affect you. Properly addressing the evolving challenges is essential to ensure that the Institute and the accounting profession in Hong Kong remains sustainable and relevant for the future. As we continue to adjust and reposition the Institute, I look forward to hearing your views on how the Institute can further support and better connect with you. Loretta Fong CPA (practising) President Dear members, “ I am pleased to report that the Council has approved the latest Strategic Plan 2022. The new plan will identify the Institute’s renewed priorities and direct the allocation of our resources for the rest of the year and beyond.”
CONTENTS Issue 4 Volume 18 April 2022 NEWS 01 President’s message 04 Institute news 07 Business news FEATURES 08 Putting ethics first How can accountants uphold better ethics standards and practices? 14 Virtually limitless The many opportunities businesses can seize with non-fungible tokens within the metaverse 20 Leadership: Algernon Yau The Chief Executive Officer of Greater Bay Airlines on ensuring business growth amid turbulence 26 Second opinions What does the Northern Metropolis mean for Hong Kong? 28 How to Helen Li FCPA, President of The Institute of Internal Auditors Hong Kong and Group Chief Auditor at The Bank of East Asia Limited, on the best and most efficient ways to enhance your internal audit function 29 Thought leadership A snapshot of the environmental, social and governance assurance landscape among Hong Konglisted companies 30 Q&A with a PAIB Jethro Leung CPA, Tax Director, APAC and Intercontinental, at Gilead Sciences 31 Q&A with a PAIP Frank Lam FCPA (practising), Assurance Director and Leader of Family Office at BDO in Hong Kong 33 Meet the speaker What to expect from a webinar series on listing rules for entities looking to list on the Hong Kong Stock Exchange 08Putting ethics first The Code of Ethics for Professional Accountants is a benchmark for accountants to make informed decisions. But how well do accountants understand the Code and what can companies do to promote a more ethical culture in the workplace? 30 Q&A with a PAIB 31 Q&A with a PAIP
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 Managing Editor Jemelyn Yadao Copy Editor Jeremy Chan Associate Editor Nicky Burridge Contributor Thomas Lo Registered Office 2/FWang Kee Building, 252 Hennessy Road, Wanchai, Hong Kong Advertising enquiries Advertising Director Derek Tsang Email: derektsang@mandl.asia ISSN 1815-3380 President Loretta Fong Vice Presidents Roy Leung Edward Au Chief Executive and Registrar Margaret W. S. Chan Director of Corporate Communications Dr Wendy Lam Publication Manager Michael Wong 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 SOURCE 34 The ethical attitudes of CPAs in Hong Kong A look at the findings from the Institute’s Ethics Survey 2021 36 Technical news WORK-LIFE BALANCE 40 Furry friends Institute members share how their adorable pets have added new meaning to their lives 46 Young member of the month Midi Ying CPA, Assistant Manager at City Super Limited 48 After hours Institute members recommend their favourite ways to unwind 48 40 Furry friends Afterhours 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 April 2022. Print run: 6,960 copies The digital version is distributed to all 46,629 members, 17,114 students of the Institute and 2,358 business stakeholders every month. 20Soaring potential Algernon Yau, Chief Executive Officer of Greater Bay Airlines, on how he hopes increased demand for travel as well as recently-relaxed travel restrictions will pave the way for a smooth ascent for the start-up carrier
NEWS Institute news Business news 4 April 2022 The Institute has produced and released the Strategic Plan 2022, which serves as a blueprint for implementing the Institute’s strategic aims for the rest of the year and beyond. It comes following significant challenges and changes in circumstances that have developed since the Strategic Plan 2020-2022 was issued which need to be addressed. Aside from the impact of the COVID-19 pandemic on Institute members, another key disrupter is the further regulatory reform of the accounting profession announced by the Hong Kong government in 2021, which introduced legislation that moved all remaining regulatory functions from the Institute to the Financial Reporting Council with effect from 1 October 2022. The Institute recognizes that this brings significant changes and challenges to the responsibilities, functions and operations of the Institute, and so it is important for the Institute to redefine its positioning. To make sure the Institute and the accounting profession in Hong Kong remains relevant, Council and management have identified necessary revisions and additions needed for the Institute’s strategic plan and objectives. They confirmed that the Institute’s strategy should be refocused around three key areas: delivering member value; proud to be a CPA (branding and communication); and advocacy for the profession. Members can learn about the updated Strategic Plan 2022 by visiting the Institute’s website, where they can also find two webpages on the strategic objectives and initiatives and key action items to learn about the progress. Members’ forums The Institute jointly organized three members’ forums on the government’s further regulatory reform of the accounting profession on 4, 7 and 11 April, as well as a members’ forum on 8 April regarding the proposal to review the election arrangements of the Institute’s Council. The recordings of the members’ forums are now available for enrolment as e-Seminars. Links can be found on the designated webpages of the issues on the Institute’s website. Members’ survey on the government’s proposals for the election mechanism of the Institute’s Council The Institute launched a survey to all members to collect their views on 1 April. The survey closed on 18 April and the Institute received 434 responses to the online survey questionnaire. The responses to these questions have been summarized and made available for members’ viewing on the designated webpage. Quality assurance report The Institute’s Quality Assurance 2021 Annual Report is now available via the Institute’s website. The report summarizes the work of the Quality Assurance Department in practice reviews (including anti-money laundering and counter-terrorist financing compliance monitoring review) over the past year, and highlights common review findings of which members should be aware. Members-Help-Members technical enquiry service Members-Help-Members is a platform for members to obtain guidance and comments from the Small and Medium Practices Committee’s Working Group on Technical Issues about matters they are facing. Members may submit their enquiries through the Institute’s website, which may be addressed at an upcoming sharing session. Any enquiry received will be considered by the working group on a pro-bono basis. Council meeting minutes The abridged minutes from the March Council meeting are now available in the “Members’ area” of the Institute’s website. Strategic Plan 2022 now available
APLUS Resolution by agreement Kong Muk Yin CPA Complaint: Failure or neglect to observe, maintain or otherwise apply the fundamental principle of professional behaviour in section 110.1A1(e) and subsection 115 under Part A of the applicable Code of Ethics for Professional Accountants (Code of Ethics). Kongwas the executive director of ChinaMedical &Healthcare Group Limited. InMay 2021, theMarket Misconduct Tribunal (MMT) fined the company and its directors for late disclosure of inside information regarding unrealized profits and significant gains in 2014. At the relevant time, Kongwas responsible for the operation of the finance and accounts department aswell as company secretarial matters and administration. TheMMT fined Kong and disqualified him frombeing a director or being involved in themanagement of a listed company for sixmonths. Kongwas also ordered to undergo a training programme to be approved by the Securities and Futures Commission (SFC). Regulatory action: In lieu of further proceedings, the Council concluded the following should resolve the complaint: 1. Kong acknowledge the facts of the case and his non-compliance with a professional standard; 2. Kong be reprimanded; and 3. Kong pay costs of the Institute of HK$15,000. Disciplinary findings AngWing Fung CPA and Chan KamWah CPA Complaint: Failure or neglect to observe, maintain or otherwise apply the fundamental principle of integrity in sections 100.5(a) and 110 of the Code of Ethics, and the fundamental principle of professional behaviour in sections 100.5(e), 150 and 300.6 of the Code of Ethics, and being guilty of professional misconduct. W. Falcon Asset Management (Asia) Limited (Falcon) was a licenced corporation under the Securities and Futures Ordinance, which carried out regulated activities. In 2019, the SFC revoked the licence of Falcon due to itswindow-dressing of liquid capital and other failures, including providing the SFCwith false or misleading information in its licence application andmonthly financial returns. The SFC also banned Ang, a former director of Falcon, and Chan, a former chief financial officer and company secretary, fromre-entering the financial industry for life and three years, respectively, in connectionwith their roles inwindow-dressing the liquid capital of Falcon. The SFC found that Angwas the mastermind of thewindow-dressing scheme, and its operation was facilitated by Chan. In addition, the respondents failed to notify the SFC of Falcon’s insufficient liquid capital, and Ang failed to notify the SFC of his resignation as a director of Falcon. The SFC referred thematter to the Institute for action. Decisions and reasons: The Disciplinary Committee reprimanded Ang and Chan. The committee further ordered the names of Ang and Chan be removed fromthe register of CPAs permanently and for three years, respectively, with effect from 12 April 2022. In addition, Ang and Chanwere ordered to pay the costs and expenses of the disciplinary proceedings of HK$128,477 equally. Whenmaking its decision, the committee took into consideration the particulars in support of the complaints, and the conduct of Ang and Chan throughout the proceedings. Chan Chung Mo CPA (practising) Complaint: Failure or neglect to observe, maintain or otherwise apply the fundamental principle of integrity in section 100.5(a) and as elaborated under section 110 of the Code of Ethics, the fundamental principle of professional competence and due care in section 100.5(c) and as elaborated under section 130 of the Code of Ethics, Hong Kong Standard on Quality Control 1 QualityControl for Firms that PerformAudits andReviews of Financial Statements, andOther Assurance andRelatedServices Engagements, Hong Kong Standard on Auditing (HKSA) 220 QualityControl for an Audit of Financial Statements, HKSA 230 Audit Documentation, HKSA 240 TheAuditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements, HKSA 315 Identifying andAssessing theRisks ofMaterial Misstatement throughUnderstanding the Entity and Its Environment, HKSA 330 TheAuditor’s Responses to AssessedRisks andHKSA 500 Audit Evidence, and being guilty of professional misconduct. Chan practices in his own name. An initial practice review in 2018 found deficiencies in the practice’s audit engagements and quality control system. In 2019, a follow-up practice reviewwas conducted to evaluate if Chan had appropriately addressed the findings. During that review, the reviewer found significant deficiencies in the practice’s audit engagements and monitoring reviewprocedures in its quality control systemagain. Furthermore, the reviewer found that Chan provided, as he had done in the initial practice review, an incomplete client list, and false andmisleading answers in the electronic self-assessment questionnaire. Decisions and reasons: The Disciplinary Committee reprimanded Chan and ordered the cancellation of his practising certificate effective 20April 2022, with no issuance of a practising certificate to him for 18months. In addition, Chanwas ordered to pay a penalty of HK$50,000 and costs of the disciplinary proceedings of HK$64,727. Details of the resolution by agreement and disciplinary findings are available on the Institute’swebsite. April 2022 5
NEWS Business 63% The percentage of senior executives in Hong Kong and Mainland China that expect a pay rise, according to Hong Kong Executive Salary Outlook 2022. The survey, released by KPMG this month, found that companies were willing to increase salaries in a bid to retain staff. Staff in the financial services sector were most optimistic, with 55 percent anticipating a higher bonus this year. 55% The percentage of survey respondents who were aware of environmental, social and governance (ESG) investment and planned to invest in ESG products in the next 12 months, according to a joint survey conducted by Pictet Asset Management and the Hong Kong University of Science and Technology. US$44 billion The total transaction value of Elon Musk’s deal with Twitter this month, which saw the billionaire entrepreneur acquire the social network for US$54.20 per share in cash. The deal, which will take the company private, is expected to close this year. Financial Reporting Considerations for Closing Out 2021 The title of a publication issued by the Institute which highlights key accounting considerations for entities preparing their December 2021 financial statements. More details in Technical news on page 36. HK$2.67 billion The net profit of the Hong Kong Exchanges and Clearing (HKEX) for the first three months of 2022. The figure marks the exchange’s biggest decline in more than five years and is the result of fewer initial public offerings (IPOs). “We were not immune to global market sentiment which resulted in some softness in the IPOmarket,” the HKEX’s Chief Executive Officer Nicolas Aguzin said in a statement. The unemployment rate in Hong Kong rose to 5 percent for the January to March period. The figure is up 0.5 percent compared to the previous threemonth period ending February. It is the highest figure since the city recorded a 5.4 percent jobless rate for the rolling three-month period from April to June 2021, reports the South China Morning Post. April 2022 7 5.1% The percentage by which China’s benchmark Shanghai Composite Index plunged on 25 April, closing at a 22-month low. Meanwhile, the Hang Seng Index fell 3.7 percent. Global stocks fell amid fears that Beijing and other major Chinese cities could face a Shanghai-style lockdown. HK$15 billion The value of the initial tranche of Hong Kong’s inaugural retail green bonds, which was issued on 26 April. CMBWing Lung Bank said applicants had subscribed to HK$210,000 worth of bonds on average, while the highest subscription amount was HK$10 million. “There is strong public interest in seeking to align where possible the international and jurisdictional requirements for sustainability disclosures. We have a window of opportunity to do just that.” – Emmanuel Faber, the International Sustainability Standards Board (ISSB) Chair, said regarding working group meetings. The ISSB announced on 27 April the formation of a working group of jurisdictional representatives to establish dialogue for enhanced compatibility between the ISSB’s exposure drafts that are currently open for comment and ongoing jurisdictional initiatives on sustainability disclosures.
ETHICS Ethics Committee survey Whether auditing a company’s financial statements, valuing an entity for an acquisition, or investigating corporate fraud, the need to be trustworthy is at the heart of everything professional accountants do. The standards of behaviour professional accountants must follow is set out in the Code of Ethics for Professional Accountants (the Code), which, through its fundamental principles of integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour, details their responsibility to act in the public interest. Helen Tang CPA (practising), Managing Director of Moore Stephens CPA Limited, and Chair of the Hong Kong Institute of CPAs’ Ethics Committee, describes the Code as being the “foundation and cornerstone of a professional accountant’s work.” She says: “Without it, the quality and judgement of the work will be questioned, and unethical acts may be committed.” Horace Ma CPA (practising), Chief Financial Officer at S. Culture Holdings (BVI) Limited, and a member of the Ethics Committee, agrees: “The Code is very important to the accounting profession. If it was not in place, we would be building the foundations of the profession on quicksand; if we don’t practice the Code, the profession will be gone sooner or later.” PUTTING ETHICS FIRST 8 April 2022
APLUS The Code of Ethics for Professional Accountants is considered the cornerstone of a professional accountant’s work, but how well do they know its requirements? Nicky Burridge finds out about the profession’s current perception of the Code, common ethical issues that accountants face at work, and how companies can uphold a good ethics culture Illustrations by Gianfranco Bonadies April 2022 9
ETHICS Ethics Committee survey Despite the importance of the Code, the Ethics Survey 2021 carried out by the Ethics Committee between December 2021 and January 2022 found that many Institute members were not as familiar with it as expected. Maria Xuereb CPA, Partner Emeritus at Deloitte China, and Deputy Chair of the Ethics Committee, says: “From the survey results, it appears that the level of awareness is not as high as we were hoping. Only 67 percent of respondents reported they were aware of certain revisions made to the Code, while 33 percent reported they were not aware of any of the revisions made.” The study also found that accountants aged under 44 and those in junior positions were less likely to be aware of revisions to the Code, and were also less likely to see the Code as providing them with guidance to meet their responsibility to act in the public interest. “Instead, they considered it more as a practical tool to assess their decision-making, while the older and more senior accountants indicated that they see it as guidance to enable them to meet their public responsibility,” Xuereb says. Tang adds that the Code and recent provisions also seemed to be better understood and implemented by professional accountants in practice (PAIP), as their workplace strongly promotes and encourages a good ethics culture. “This is probably due to the requirements imposed on professional practice and the importance [of the Code] that is emphasized,” she says. Ethical issues The study found that the most common ethical issue professional accountants encountered in their work was conflict of interest. Ma explains: “For practising members, the central issue is whether they are perceived to be independent enough to perform their services for clients. This is the core ethical yardstick we are measured against.” Other ethical issues experienced by respondents in the past 12 months included undue bias, the manipulation of information (including fraudulent accounting, or altering income or expenses), distorting information by being overly optimistic in making judgements on accounting estimates, discount rates etc., and relying on information that they knew to be overly optimistic in making judgements on accounting estimates. 10 April 2022
APLUS Xuereb explains that conflict of interest or undue bias can lead accountants to manipulate information. “For example, if accountants are trying to achieve a certain result, they may do so by altering some figures, such as by reducing expenses, or some other manipulation of information.” She adds that relying on information that might be overly optimistic when making judgements on accounting estimates can also be an issue for professional accountants. “People tend to expect certain estimates, and, indirectly, they listen only to the part of the explanation that supports their bias on that aspect,” she says. “Auditors may have an undue bias if they have certain expectations, and that may result in them not considering certain negative information or information that doesn’t seem to support their initial expectation.” For PAIPs, Tang thinks the biggest challenge is the requirement to exercise professional competence and due care, and in particular, professional scepticism. “The breach of this has been seen in a lot of compliance cases presented by the regulators, a lot of which would result in disciplinary action in various forms,” she says. Pressure from above Unethical behaviour does not appear to be particularly widespread, with 87 percent of respondents indicating that they did not act unethically or know someone who did in the last 12 months, although 2 percent admitted they had acted unethically at work and 11 percent knew someone who had. The survey suggested the main cause of unethical behaviour was pressure from management, but insufficient ethical awareness at an organization, and a lack of ethics compliance policies and monitoring were also cited as reasons. The drivers for unethical behaviour can be both internal and external. Xuereb points out that during economic downturns, management could be under pressure and that pressure is then transferred to the staff. “For example, if in a downturn the company’s turnover or performance is poor or belowmarket expectations, management may put pressure on staff to inflate turnover or increase profits or reduce losses. Both internal and external factors will have an impact, but ultimately I feel the internal ones are critical to avoid and prevent ethical issues,” she says. Ma points out that both challenging and strong economic conditions can lead to unethical behaviour. “During poor economic times, there may be a tendency to ‘cosmeticize’ the financials. During good economic times, it is easier to make things look better than they are. Whatever the economy is doing, people can be greedy,” he says. Ma adds that conflicts of interest can arise during deals or mergers and acquisitions. “There are many parties of grave interests to deal with. Accountants may succumb to the biased influence of these parties under immense pressure. Ultimately, it is all about who gets the biggest benefits out of it,” he says. Anna Lam, Executive Director of the Hong Kong Business Ethics Development Centre (HKBEDC) at the Independent Commission Against Corruption (ICAC), and a member of the Ethics Committee, says the tone has to come from the top. “While the economic environment, social norms and cultural differences are some external factors that have an impact on organizational behaviour, management and corporate leaders play the biggest role in shaping the organizational values and ethics culture,” she says. “At the corporate level, an ineffective system of control, poor risk management and lack of determination of top management to uphold an ethical culture may be conducive to corruption and other unethical practices.” Lam adds that at the heart of most unethical practices, there is a bad decision driven by human behaviour at the personal level, likely due to ill intent, greed, heedlessness or ignorance of the law. “That is why organizations need to establish clear ethical guidelines and organize integrity training to enhance staff awareness of legal and regulatory requirements, as well as the grave consequences of non-compliance,” she says. Upholding standards Unfortunately, the most common response among members who encountered unethical behaviour was to do nothing, sometimes due to pressure from management. Professional accountants were also more likely to resign in the face of unethical behaviour than to report it to an appropriate external party, according to the survey. “Being submissive will encourage repeated unethical practices, which might lead to illegal activity and jeopardize one’s professional career,” Lam points out. Instead, she urges members to uphold a high standard of integrity by understanding and complying with the legal and professional requirements when discharging their duties. “When facing ethical dilemmas at work, one should always apply “ Both internal and external factors will have an impact, but ultimately I feel the internal ones are critical to avoid and prevent ethical issues.” April 2022 11
ETHICS Ethics Committee survey critical thinking and adhere to the fundamental principles of professional accountants. If the ethical dilemma could not be resolved, one should escalate the issue to a higher level of authority, such as the audit committee or to those charged with corporate governance inside the organization,” she says. Lam adds that members should also be prepared to recognize ethical crises or wrongdoing as issues that require their intervention. “For issues that might have legal implications, they should seek external guidance such as legal advice or report to relevant law enforcement agencies to avoid breaking the law.” Tang agrees, adding that professional accountants should never succumb to pressure to act unethically. “Instead, they should use the right channel to voice their concerns and also to report to their superiors, or the authorities where applicable.” Ma suggests professional accountants who encounter unethical behaviour should follow the “consult, consult, report” formula set out in the Code, consulting people in the company who are in charge of governance, before ultimately reporting the behaviour. But he concedes: “In Chinese culture it can be a bit awkward to report on your superiors or colleagues. Although the practice of whistleblowing has been in place for some years in Hong Kong, we don’t have a law that protects the whistleblower.” Building a strong ethics culture To promote ethical behaviour internally, Tang also suggests organizations need to set the tone at the top, encourage staff to speak up when necessary and have a good whistleblowing policy that enables informants to remain anonymous. She adds that they should also ensure their internal policies are up to date, changing them when necessary. Lam points out that the HKBEDC has developed a Corporate Ethics Health Checklist as a tool for organizations to review and enhance their ethics culture. She adds that business leaders should serve as role models, promoting ethical behaviour, facilitating open communication and adopting a zero-tolerance approach to unethical behaviour. Organizations should also have a code of conduct setting out the expected standards of behaviour and reflecting the company’s core values and culture. “In addition, they should organize regular integrity training and ethics promotion activities, and establish a sound internal control system, which is monitored and reviewed regularly,” Lam says. Xuereb thinks the solution to improving ethical standards also involves more guidance and training. The survey found that only 41 percent of respondents had attended an ethics-related training session in the past year, while 18 percent had not attended one in the past five years. “Training needs to move from being theoretical to being practical through using case studies and soliciting accountants’ own response to get them to think about what would be ethical, before telling them the correct ethical solution,” she suggests. She thinks it is also important that organizations have procedures in place to enable someone who encounters a fraudulent issue to escalate it in order to ensure the situation is remedied at an early stage. But Xuereb adds that staff must feel confident that there will be no retaliation if they act as a whistleblower, otherwise they may be deterred from reporting issues. Ma agrees that education is key to improving ethical behaviour. “You will not see an immediate effect, but you will see it over the long term,” he says. Promoting understanding The Institute’s Ethics Committee works hard to promote understanding of the Code and its revisions among members. Ma explains that the survey, which was first launched in 2019, acts as a gauge for the committee to see the level of understanding and application of the Code among members, and to help it plan future education initiatives. Xuereb adds: “The intention was for us to understand how the profession perceives the Code with regards to the relevant regulatory requirements. We were also interested to identify areas that have a higher risk of ethical noncompliance, as it helps us to focus any training we provide and any articles we issue.” The committee set up the Ethics Educational Materials Advisory Panel in 2021 to provide information on proposed changes to the Code, and issue guidance notes and education material on the application of the Code for members. It will also continue to publish articles and case studies on past disciplinary cases. Last year, it created a video introduction to the Code for members. “We have to let people know what is being punished, and what is going on in the real world, so they “ We have to let people know what is being punished, and what is going on in the real world, so they know where they need to pay more attention.” 12 April 2022
APLUS know where they need to pay more attention,” Ma says. Tang says ethics modules have been incorporated into auditors’ workshops, such as the Workshop for New Auditors and the Workshop for Audit Managers/ Seniors In-Charge, and the Institute’s Financial Controllership Programme, which are held regularly. In addition, the committee will host webinars on revised pronouncements, such as the one on Revised Non-Assurance Services and Fee-related provisions that it held recently. “We have also approved for the Institute to put in place a postimplementation review of major standards. The objectives are to determine whether the standards are being consistently understood and applied. It is an opportunity to identify how practical challenges and concerns are being addressed,” Tang says. Alongside the work of the Ethics Committee, Lam also advises members to look at the Ethics Resources for Accounting Professionals developed by the HKBEDC in consultation with the Institute. “The online resource, which can also be seen at the Institute’s New and Major Standards Resource Centre, features articles highlighting some common ethical risks faced by external auditors, internal auditors, financial accountants and management accountants, as well as the legal obligations and professional principles they should pay heed to in tackling ethical challenges,” she says. Lam adds that the Institute has also joined hands with the HKBEDC to provide continuing professional development (CPD) to members on topics relating to corruption prevention, professional ethics and ethical decision-making. Given the importance of ethics to professional accountants, Tang would like to see ethics training become a mandatory part of CPD. “When you are a professional, you must act professionally complying with the rules and regulations that a professional is required to follow. As CPD is an ongoing exercise, to make ethics training mandatory would raise the level of awareness and act as a reminder,” she says. Lam agrees: “Ethics-related training is essential to preserve a high standard of professional integrity. Mandatory ethics training in CPD programmes could help members update their technical and regulatory knowledge, and refresh themselves on the ethical standards to ensure their professional competence and standard in discharging their accounting duties.” According to the Ethics Committee’s survey, 87 percent of respondents did not act unethically or know someone who did in the last 12 months, although 2 percent had acted unethically at work and 11 percent knew someone who had. Find out more details about the survey results on page 34. April 2022 13
The metaverse and NFTs VIRTUAL REALITY VIRTUALLY LIMITLESS 14 April 2022
On 23 December 2021, PwC Hong Kong announced that it had decided to acquire new land to do business. Though it may sound unsurprising for the Big Four firm – which already has 742 offices in 157 countries globally – the new piece of land they purchased didn’t exist in the real world: it was virtual land located in a three-dimensional virtual world, known as the metaverse. The acquisition made PwC Hong Kong the first member of an internationally recognized professional services network to publicly enter The Sandbox, one of the largest metaverse platforms today. One definition of the metaverse is a virtual environment in which users can – after creating or choosing an avatar – freely roam around, attend events, purchase items and property, and interact with other users’ avatars. Users access the world through a virtual reality (VR) headset or through computers or smartphones. It is, however, somewhat different from typical VR games that have existed before. People can buy and then “own” virtual assets within the metaverse. This is made possible today largely through owning what is known as a nonfungible token (NFT) of that digital asset (such as images, music, videos and virtual creations like virtual land). An NFT is a non-interchangeable unit of data stored on a digital ledger, known as a blockchain, that can be sold or traded. In essence, it gives a person the right to digital ownership. PwC isn’t alone – companies and big banks also recognize the growing need to connect with customers and business partners through the metaverse, and prepare for a shift in interactions towards the digital world from physical branches. HSBC announced in March that it had also purchased virtual territory in The Sandbox, while JPMorgan Chase set up shop in Decentraland, another metaverse platform, in February. The hype has also led brands such as Adidas, Gucci and Samsung, and celebrities such as Paris Hilton and Snoop Dogg, to secure property in the metaverse. Space in these worlds come at a hefty price. Republic Realm, a company that develops real estate in the metaverse, purchased area in The Sandbox in November 2021 for US$4.3 million, the most expensive metaverse purchase to date, while an anonymous buyer forked out US$450,000 to own a spot next to hip-hop artist Snoop Dogg. The metaverse and non-fungible tokens have piqued the interest of people and businesses worldwide – all hoping to cash in on this growing trend. But with little regulation governing virtual assets, many risks still remain. Experts tell Jeremy Chan how companies can capitalize on this business opportunity, and how being able to own virtual assets is already paving the way for a new and lucrative digital economy Illustrations by Ibrahim Rayintakath APLUS April 2022 15
The metaverse and NFTs VIRTUAL REALITY Despite being a new concept that is still developing in terms of its form and practical application, there is a rush to have a presence within the metaverse. This can be attributed to the sheer size and potential of the metaverse economy in the next 10 years. According to Metaverse and Money: Decrypting the Future, a report released last month by Citigroup Inc., the metaverse economy could be worth up to US$13 trillion by 2030, and boast as many as five billion users by then. A new dimension of possibility Interest in the metaverse has skyrocketed within the last two years. This is partly due to more reliance on virtual meetings as a result of the COVID-19 pandemic, says Bosco Lin CPA, Co-founder and Chief Executive Officer of DTTD, a crypto wallet and financial services platform for NFTs. “With people having to work from home, people have found newways, such as Zoom calls, to do business and interact with others. But this obviously can’t replace in person interaction – so the metaverse fits in between,” he says. “The concept of owning of a virtual asset is also causing interest.” The metaverse will add another perceptible dimension to current video calls and conferences, says Timothy Shen FCPA, Chairman of Safari Asia Limited, and a member of the Hong Kong Institute of CPAs’ Corporate Finance Committee. “The rise of video conferences, such as through Zoom, Google Meet or Microsoft Teams, are solutions for people to meet virtually. But these are still two-dimensional meetings,” he says. “In the metaverse, instead of having a phone or video call, people could use an avatar to meet. People could choose to be themselves or have different identities in a 3D world.” Beyond offering a newway of communicating with family, friends or coworkers, the metaverse will resemble a “3D version” of the Internet, believes Tony Tong, Co-Chairman and Co-founder of the Hong Kong Blockchain Association. He says it will offer businesses a brand newway to market and sell their products or services. “In the next few years, we’re going to see more companies with a presence on the metaverse,” Tong says. “Think back to 20 years ago, when companies had to register their own domain name, and build their website on the Internet to then sell their products and services online. The next step of evolution is the metaverse, where I expect many companies to move their products to a 3D virtual shop, gallery or shopping mall.” Companies that want to venture into the metaverse and maximize its potential for growth will need to first determine how they can use a virtual presence to boost their business, and then learn how to “mint” their products into NFTs, or publish their token on the blockchain to make it purchasable within the metaverse. As Lin notes, it is up to businesses to decide what products will be useful in the form of an NFT. “The utility and real use case for NFTs is still expanding,” he points out. “Companies or professional bodies that are new to NFTs can start by issuing NFT memberships to their customers, for example. This is one easy way a company can engage with its users. Schools or educational institutions could also issue diplomas in the form of an NFT.” NFTs transactions take place on a blockchain, which makes it easy for users to track transactions. “Only through blockchain, can one be a unique identifier or true owner of a digital asset,” Tong explains. “NFTs allow you to create an identification for anything digital. Without blockchain, everything else is just an image or file. It can simply be copied and passed around, and there’s no way to differentiate the real version with a copy.” This enables NFTs to provide “proof of ownership.” Akin to a digital signature, NFTs are tokens marked with unique information that cannot be found on any other token in the blockchain, and are nonfungible, meaning they cannot be interchangeable with other tokens. Similar to blockchain, the metaverse is decentralized by nature and, like the Internet itself, does not rely on a single company or organization for control. Instead, it relies on its network of users and blockchain technology to operate, which facilitates the safe buying and selling of assets in the metaverse. For example, a user’s NFT would remain completely unaffected even if the user quit the metaverse, if there was an adverse event within the platform, or if the metaverse was deleted. Blockchain will act as an immutable record of how assets are created, altered, traded, and destroyed in the metaverse. The use of blockchain, Tong adds, is also what differentiates the metaverse from online virtual platforms or games that emerged in the early 2000s, where users interacted with others with a custom-made avatar. “Without blockchain, the metaverse is simply a VR or augmented reality game or experience. There’s no economics, or any way of authenticating the value of assets in the game or ownership,” he explains. Finding fair value The rise in prominence of NFTs and the metaverse presents challenges for the finance function, as there are currently no specific accounting rules or disclosure requirements for NFTs, notes Eileen Li CPA, Operations Manager at HashKey Capital. This will pose challenges for accountants who need to determine the valuation of an NFT. “When it comes to reporting, the lack of accounting standard guidance may lead accountants to either underestimate or overestimate the valuation of an NFT,” she says. NFTs are also more difficult to value because they are not frequently traded and their worth is often based on the level of supply or demand for the related market. Other factors that affect an NFT’s value include their utility (how they represent virtual 16 April 2022
APLUS assets such as land or items in the metaverse), tangibility (how they are used to verify real-world objects such as concert tickets), interoperability (whether the NFT can be used across different platforms), and its ownership history (the identity of an NFT’s previous owner or owners may impact its value), according to cryptocurrency news website Cointelegraph. This leads to large price fluctuations for NFTs, says Li. “Even if accountants try to value an NFT using the floor price or average transaction price of other NFTs on an NFT marketplace like OpenSea, for example, it’s still very challenging. This is because each NFT is unique,” she says. This will add another degree of uncertainty for stakeholders who view the financial statements of companies that have invested in or purchased a large amount of NFTs. “A listed company’s financial statements must be able to reflect the financial position of that company. But say a company purchases a significant amount of NFTs – this might affect stakeholders’ decisionmaking when they look at the financial statements and see that there is a large fluctuation in value between the reporting date and date the report is released,” Li points out. Currently, crypto-assets, which include NFTs, are classified as intangible assets in accordance with International Accounting Standard (IAS) 38 Intangible Assets. There is a need for more robust accounting requirements that represent the underlying transactions of cryptocurrency transactions, according to the Institute’s response to the International Accounting Standards Board’s (IASB) Third Agenda Consultation, which notes that accounting for cryptocurrencies under IAS 38 Intangible Assets and IAS 2 Inventories may not provide relevant information when these items are held for speculative or investment purposes. The response also states that the IASBmay consider amending the scope of International Financial Reporting Standard 9 Financial Instruments to include cryptocurrencies. Chief financial officers, Li adds, will need to weigh the pros and cons of delving into the metaverse and look into how it will benefit the company. “Companies also need to consider whether the cost of owning land and operating a business virtually will be profitable in the long term. Companies should pay attention to relevant regulations and check if there are any restrictions before making any investment decisions in this industry,” Li says, exemplifying how her company makes use of their land in Decentraland. “We have our portfolio companies, our blockchain research reports and NFT gifts for visitors on display in our virtual office building. It has acted as a good marketing channel. Because we have a presence in the metaverse, our investors have more confidence in us.” Companies that own NFTs, “ When it comes to reporting, the lack of accounting standard guidance may lead accountants to either underestimate or overestimate the valuation of an NFT.” April 2022 17
The metaverse and NFTs VIRTUAL REALITY Shen adds, should also be prepared to justify their purchases of virtual assets to auditors. “At the end of every fiscal year, an audit firmmay show up and ask ‘I noticed that your company spent HK$30 million in purchasing virtual land. Could you tell me how you came up with that value?’ If companies aren’t able to justify the cost, the auditors won’t take their word on the value of the transaction of the virtual land,” he says. “If the supposed value is higher than the cost of the transaction, auditors will only refer to the cost. So the valuation approach is still a bit too open for auditors, as they still aren’t experts in this area themselves.” Until an accounting guidance for cryptocurrency-related assets is written and released, Shen says that company heads may have to justify the value of their virtual purchases using the price trends of cryptocurrencies, bearing in mind that market fluctuations may affect value later on. Shen says that accountants should equip themselves with relevant knowledge in order to identify business opportunities for companies. “They should be able to identify how these technologies benefit the company. Accountants without knowledge in this area will quickly fall behind in the future,” he says. “Once they do, it will be very difficult for them to catch up. This is because of how blockchain, NFTs, and the metaverse are all interrelated.” Ensuring safety Though blockchain will ensure the transparency of transactions, there is a need to take the necessary measures to ensure one’s virtual assets in the metaverse are safe from cyberattacks. “Whenever someone has a large amount of wealth concentrated into a platform, people will find ways to hack into them,” Tong points out. For example, on 1 April, Taiwanese singer Jay Chou had his NFT stolen by a phishing website, which hackers were then able to 18 April 2022
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