Special report: How CPAs specializing in IPOs ensure that going public is about company transformation, not just raising capital Issue 5 Volume 17 May 2021 DRIVING BUSINESS SUCCESS PLUS: PROFILE 6GTGPEG %JQY %JKGH 'ZGEWVKXG 1HƂEGT Asia, RBCWealthManagement ACCOUNTANT PLUS Gilbert Chan CPA, Managing Director and Co-founder at Giraffe Capital Limited SECOND OPINIONS How can audit data analytics generate value for organizations? LISTING SUCCESS
PRESIDENT’S MESSAGE APLUS May 2021 1 The Financial Reporting Council (FRC) has been the independent regulator of the auditors of public interest entities since 1 October 2019. A good relationship between the Institute and the FRC is important for ensuring both bodies work together effectively to enhance audit quality in Hong Kong. This month, the Institute and the FRC signed a new Memorandum of Understanding (MoU) to enhance our efficient and effective cooperation and coordination. The Institute has long advocated audit quality, and for an independent regulator of the auditors of listed entities to oversee their performance. I strongly believe that this MoU will contribute to the sustainable development of the Hong Kong audit profession. It is important for us to demonstrate to the government that our two bodies can work together closely and coordinate our activities, so that we are both effectively carrying out the roles entrusted to us. The agreement also helps us to serve other stakeholders in our society, including the accounting profession generally, investors in our listed companies, and the general public. By working together the Institute and the FRC can ensure that Hong Kong’s capital markets remain highly regarded, which will support the longterm development of Hong Kong and its continuing prosperity – serving the interests of all our important stakeholders. The CPA Virtual Run 2021 finished early in the month, and the winners have been announced and published on the run’s webpage. Congratulations to all the winners! I look forward to celebrating their success at a socially distanced prize presentation ceremony in June. I’m pleased that the competition inspired over 300 of our fellow members to take part by running with family, friends and by themselves. It’s important to stay fit and healthy, and I hope the run has inspired you to improve your own fitness. I know many people who say that running helps them to de-stress, and consider new solutions to problems. As a professional accountant, there’s always some matter that needs considering from a new angle. Maybe the solution will come to you when you lace up your running shoes and hit the road? Thanks to all the sponsors for supporting the event. Their sponsorship helped the Institute to put together the well-stocked finisher pack. If you took part in the race, make sure you collect your finisher pack from the Institute by the end of June. While the number of local cases of transmission of COVID-19 has been low recently, the threat of outbreaks still remains. While life is gradually returning to normal, full-scale community events, and less-restricted travel across the border to the Mainland and internationally, can only take place once the community is protected. The delay of the implementation in the travel bubble with Singapore proves this. The government’s COVID-19 Vaccination Programme offers the best chance for returning to a normality. Organizations across Hong Kong are offering various schemes and incentives to their staff to promote getting vaccinated including on-site vaccinations, annual leave, lucky draws and bonuses. Maintaining a safe and healthy environment at work is always a top priority for the Institute. This is why the Leadership Team has agreed a new policy this month of offering Institute staff vaccination leave to be used the day, or the day following, they receive a COVID-19 vaccination. We hope that Institute staff will play their part in keeping the community safe. I urge you to consider how you can promote the vaccination programme in your own organizations and within your families. We will only end this pandemic by taking care of ourselves and protecting society. Raymond Cheng FCPA (practising) President Dear members, “The Institute has long advocated audit quality, and for an independent regulator of the auditors of listed entities to oversee their performance. I strongly believe that this MoU will contribute to the sustainable development of the Hong Kong audit profession.”
CONTENTS Issue 5 Volume 17 May 2021 NEWS 01 President’s message 04 Institute news 06 Business news FEATURES 08 Making the journey a success A special report on the wide range of skills and expertise required from CPAs working in IPO advisory, and what needs to be done to successfully take a company public 18 Second opinions How can audit data analytics generate value for organizations? 20 Leadership: Terence Chow The Chief Executive Officer, Asia, RBC Wealth Management, on succeeding in the wealth management space, and how accountants can add value in this area 27 Thought leadership: John Chan and Josephine Kwan CPA (practising) The Financial Services Tax Partner, and Asset & Wealth Management Partner, PwC, on the city’s highly anticipated Wealth Management Connect 28 Accountant Plus: Gilbert Chan CPA The Managing Director and Co-founder of Giraffe Capital Limited on how he uses his skills to take small and medium enterprises to the next level of growth 35 How to Clancy Peiris, Senior Learning Development Manager, AICPA, on making the most out of online learning 37 Meet the speaker What to expect from two e-learning courses on SME-FRF & SME-FRS SOURCE 38 Commitment to ensuring audit quality The Institute’s latest Financial Reporting, Auditing and Ethics Alert covers the importance of audit quality and the Institute’s commitment to ensuring it 20 08 Making the journey a success Rich experience Terence Chow, Chief Executive Officer, Asia, RBC Wealth Management, on the growth of his company, and the deep sense of satisfaction that comes with helping families and individuals manage their wealth to benefit future generations
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, Erin Hale Art Director Ann Lee 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 Raymond Cheng Vice Presidents Rosalind Lee Ken Li Chief Executive and Registrar Margaret W. S. Chan Director of Corporate Communications Dr Wendy Lam 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 May 2021. Print run: 7,200 copies The digital version is distributed to all 46,165 members, 18-593 students of the Institute and 2,358 business stakeholders every month. 41 HKFRS 17 Insurance Contracts: Contractual service margin Introducing the Institute’s new guidance on determining coverage units and relative weighting for insurance contracts that provide multiple services 42 Technical news WORK-LIFE BALANCE 46 Masters of paddles CPA table tennis players on the agility and flexibility needed to dominate each game 52 Young member of the month Stanley Hui CPA, Accountant at the Airport Authority 54 Leisure Plus Spotlight on the best beaches to escape the city, what members are currently reading and listening to 56 Let’s get fiscal Make your kids work for their pocket money, says Nury Vittachi 28 In it for the long term Gilbert Chan CPA, Managing Director Co-founder of Giraffe Capital Limited, on the many challenges that come with guiding small and medium enterprises in Hong Kong through the initial public offering process 54 46 Masters of paddles Leisure Plus
NEWS Institute news Business news 4 May 2021 The Financial Reporting Council (FRC) and the Institute signed a Memorandum of Understanding (MoU) on 6 May to enhance efficient and effective cooperation and coordination between the two organizations. The move reflects how the FRC and the Institute will work even more closely together as part of the new independent auditor regulatory regime for listed entities in Hong Kong. Under the MoU, the FRC and the Institute agree to refer cases to each other, and to share information to assist each other in the timely exercise of their respective functions. It was signed by Marek Grabowski, Chief Executive Officer of the FRC and Margaret W.S. Chan, Chief Executive and Registrar of the Institute in the presence of Sam Hui, Deputy Secretary for Financial Services and the Treasury (Financial Services), Dr Kelvin Wong, Chairman of the FRC, Raymond Cheng, Institute President and senior management from both parties. Call for new QP workshop facilitators The Institute is recruiting workshop facilitators for the new Qualification Programme (QP) who will have a key role to play in unlocking the potential of the next generation of accountants. The facilitators are required to have a minimum of four years’ membership with the Institute; hold or recently held a responsible position in a professional, business, government or academic organization; have a working knowledge and demonstrated technical competence in the module subject matter; and good command of spoken English. The closing date for applications is 15 June. More details can be found on the Institute’s website. For enquiries, email workshopadmin@hkicpa.org.hk. Institute releases Hong Kong CPAs and the GBA survey The Institute’s Greater Bay Area (GBA) Committee has prepared a short survey to garner the views of members and Qualification Programme students about the GBA, and the opportunities they think are in the Mainland cities of the GBA for Hong Kong CPAs. The committee will use the survey results to inform and evolve the Institute’s GBA strategy and initiatives. Findings will also be published in a public report. The survey is open until 8 June. To take part in the survey, which should take less than seven minutes to complete, members and students should have received the survey invitation email. All responses will be anonymous. Standard Setting Department launches new webpage The Institute’s Standard Setting Department has launched its “What’s new” webpage, providing members a one-stop shop for its latest publications, webcasts, and comment letters. Members can also follow the department on LinkedIn for the latest updates on standard setting. CPA Virtual Run 2021 results announced The final results of the CPAVirtual Run 2021 are out now. They can be found on the “CPAVirtual Run 2021” section of the Institute’s website. Almost 330 members enrolled in the event. Congratulations to all the awardees and thank you all the runners, sponsors, supporting organizations and helpers for making this event a success. FRC signs MoU with the Institute (Front row, from left) Margaret W.S. Chan, Institute’s Chief Executive and Registrar; and Marek Grabowski, iv ÝiVÕÌÛi "vwViÀ v Ì i >V> ,i«ÀÌ} ÕV , ®Æ -iV` ÀÜ] vÀ ivÌ® ,>Þ` i}] ÃÌÌÕÌi½Ã *ÀiÃ`iÌÆ -> Õ] i«ÕÌÞ -iVÀiÌ>ÀÞ vÀ >V> -iÀÛVià >` Ì i /Ài>ÃÕÀÞ >V> -iÀÛViÃ®Æ and Dr Kelvin Wong, Chairman of the FRC
APLUS Resolutions by agreement Chan Tak Shing CPA Complaint: Failure or neglect to observe, maintain or otherwise apply section 800.3 under Chapter C of the Code of Ethics for Professional Accountants. Chan does not hold a practising certificate. Accordingly, Chan is not allowed to carry on a business, trade or profession in a name that includes the initials “CPA” or the characters “ึ ࠇ ࢪ ” Chan registered an unincorporated entity under the Business Registration Ordinance that he wholly owned, in a name that included those initials and characters, contrary to the requirements in the professional standard. Regulatory action: In lieu of further proceedings, the Council concluded the following should resolve the complaint: 1. Chan acknowledge the facts of the case and the areas of non-compliance with a professional standard; 2. Chan be reprimanded; and 3. Chan pay an administrative penalty of HK$10,000 and costs of the Institute of HK$15,000. Yu Chi Fat CPA (practising) Complaint: Failure or neglect to observe, maintain or otherwise apply the Hong Kong Standard on Auditing (HKSA) 200 Overall Objectives of the Independent Auditor and the Conduct of anAudit inAccordancewithHong Kong Standards onAuditing; HKSA 500 Audit Evidence and HKSA 700 Forming anOpinion and Reporting on Financial Statements. Yu was the engagement partner in an audit conducted by HLBHodgson Impey Cheng, a firmnow deregistered, on the consolidated financial statements of See Corporation Limited (now known as Emperor Culture Group Limited), a Hong Kong listed company, and its subsidiaries (collectively, group) for the year ended 30 June 2012. HLB expressed an unmodified auditor’s opinion on the financial statements. The Institute received a referral from the Financial Reporting Council about deficiencies in the audit. The financial statements included the group’s investment in a private group that was classified as an interest in an associate, and stated that the accounting policy for the investment was to incorporate the results and assets and liabilities of the associate using the equity method of accounting under Hong Kong Accounting Standard 28 Investments inAssociates. This stated accounting policy was inconsistent with the group’s accounting practice of stating the investment at fair value. Yu failed to carry out audit procedures to resolve the inconsistency between the group’s accounting practice adopted for the interest in associate and relevant accounting policy disclosed in the financial statements. Regulatory action: In lieu of further proceedings, the Council concluded the following should resolve the complaint: 1. Yu acknowledges the facts of the case and the areas of non-compliance with professional standards; 2. Yu be reprimanded; and 3. Yu pays the costs of the Institute and the Financial Reporting Council totalling HK$39,132. Disciplinary findings Yu Kung Shing CPA (practising) Complaint: Failure or neglect to observe, maintain or otherwise apply the fundamental principle of integrity in sections 100.5(a), 110.1 and 110.2 of the Code of Ethics for Professional Accountants (code of ethics), the fundamental principle of professional competence and due care in sections 100.5(c) and 130.1 of the code of ethics and Hong Kong Standard on Quality Control 1 Quality Control for Firms that PerformAudits and Reviews of Financial Statements, andOther Assurance and Related Services Engagements, and being guilty of professional misconduct. Yu is the sole proprietor of K S Yu &Co. He is responsible for the practice’s quality control systemand the quality of its audit engagements. The first practice review conducted on the practice identified significant deficiencies in its systemof quality control and in a number of its audit engagements. In addition, Yu was found to have provided untrue answers in the self-assessment questionnaire, made false representations to the practice reviewer and retrospectively created documents in an attempt to support his false representations. Decisions and reasons: The Disciplinary Committee reprimanded Yu and ordered the cancellation of his practising certificate, with no issuance of a practising certificate to him for 24 months, with effect from12May 2021. In addition, Yu was ordered to pay costs of the disciplinary proceedings of HK$55,331.50. Whenmaking its decision, the committee took into consideration the particulars of the breaches committed in this case, Yu’s early admission of the complaint and his pleas of mitigation. Yu Kung Shing CPA (practising) and K S Yu & Co. Complaint: Failure or neglect to observe, maintain or otherwise apply HKSA 500 Audit Evidence and HKSA 230 Audit Documentation. Yu is the sole proprietor of the practice that was the auditor of a private company limited by guarantee. Yu issued unmodified audit opinion on the financial statements of the company for each of the four financial years ended 31 December 2013 to 2016. In carrying out the audits, the respondents failed to design and performaudit procedures to obtain sufficient appropriate evidence and prepare sufficient audit documentation to support their assessment of the existence and recoverability of the amounts due from executive committeemembers of the company. Furthermore, the respondents failed to prepare sufficient audit documentation to support their audit conclusions on salary expenses. Decisions and reasons: The Disciplinary Committee reprimanded the respondents and ordered them to pay a penalty of HK$50,000 and costs of disciplinary proceedings of HK$72,892.50. Details of the resolutions by agreement and disciplinary findings are available at the Institute’s website. May 2021 5
NEWS Business HONG KONG’S CORPORATE GOVERNANCE STILL NEEDS WORK , ACCORDING TO NEW REPORT A new report issued by the Asian Corporate Governance Association (ACGA) has ranked Hong Kong joint second in Asia in its 2020 corporate governance market ranking, citing whistleblowing and anti-corruption enforcement as factors that could be improved. The city’s ranking, which is tied with Singapore, puts it behind Australia. The report, titled Future Promise: Aligning governance and ESG in Asia, identified a greater need for board diversity in Hong Kong, independent boards and a quality of governance reporting, but commended the city’s efforts in responsible investment and stewardship, and the Financial Reporting Council becoming the independent audit oversight board. AICPA AND CIMA RELEASE UPDATED AUDIT RISK GUIDANCE FOR CRYPTOCURRENCY U.K. FRC FINE FOR CHALLENGER FIRM CASTS DOUBT ON SMALL FIRMS AMID BIG FOUR BREAK-UP SEC GREEN LIGHTS NASDAQ PROPOSAL TO ALLOW DIRECT LISTINGS Nicolas Aguzin, the new Chief Executive Officer of the Hong Kong Exchanges and Clearing Limited, began his role on 24 May, and on his second day, gave a speech on bolstering the bourse’s position as a strong link between global and Chinese capital markets. “Hong Kong has a key role to play as China continues opening up its market,” Aguzin said at the annual LME Asia Metals Seminar organized by London Metal Exchange (LME), an HKEX unit. Aguzin, an Argentinian and former investment banker at JPMorgan Chase, succeeds Charles Li and is the first nonChinese person to helm the exchange since it was established in 2000. HKEX shares surged 5.4 percent to HK$474.60 the same day, the highest in four months. The U.S. Securities and Exchange Commission (SEC) has accepted a proposal by Nasdaq to allow companies to raise capital through direct listings. A direct listing is when employees and investors sell their existing stocks to the public. The SEC said Nasdaq’s proposed rule change was consistent with the watchdog’s rules and regulations and that it would provide investors with another option besides a traditional initial public offering (IPO), according to a filing dated 19 May. The move is a breakthrough for the exchange operator, which had been pushing for an alternative for companies to raise money. NEW HKEX CEO STARTS JOB The Financial Reporting Council in the United Kingdom has fined Haysmacintyre, a challenger firm, £125,000 (HK$1.37 million) for its faulty audit of engine parts maker Associated British Engineering (ABE). The watchdog also fined the head of the firm’s audit and assurance department David Cox £17,500 (HK$192,000). Cox led the audit of ABE. The penalty spotlights concerns regarding the ability of small firms to audit listed companies and comes amid the U.K. government’s consultations to propose breaking the dominance of the Big Four by giving small firms a share of the market for auditing FTSE companies. The American Institute of CPAs and the Chartered Institute of Management Accountants issued a joint guidance on auditing and accounting digital assets such as cryptocurrency on 25 May. Originally released in 2019, the guide Accounting for and Auditing of Digital Assets, includes new authoritative guidance on audit risk assessment, processes and controls, laws and regulations. The guide comes after a global decline in the value of cryptocurrencies this month and ongoing concerns from digital asset investors about increased regulation from the Securities and Exchange Commission and requirements from the Internal Revenue Service to improve reporting of cryptocurrency transactions to stem tax evasion and money laundering in the United States. 6 May 2021
Hong Kong and Chinese courts will recognize insolvency, bankruptcy and restructuring orders under each other’s laws following a new arrangement announced this month. Under the agreement, liquidators fromHong Kong may apply to Mainland courts for recognition of insolvency proceedings in Hong Kong, while bankruptcy administrators from the Mainland can apply to the Hong Kong High Court for recognition of bankruptcy proceedings in the Mainland. China’s Supreme People’s Court has designated Shanghai, Xiamen and Shenzhen as pilot cities for the scheme, which could be expanded to more Chinese cities in future. Lawyers believe the agreement will boost Hong Kong’s reputation as a platform for investing in Chinese companies, the Financial Times reported. The U.S. Public Company Accounting Oversight Board (PCAOB) has issued a draft rule to expedite the implementation of a law that would force Chinese companies listed on U.S. stock exchanges to delist in three years if they refuse to share their audit papers for review. The rule change would provide a framework to identify whether local authorities held back on its probes of foreign accounting firms that audit U.S. listed companies. “The rule addresses situations where overseas authorities have denied the PCAOB the access it needs to conduct its mandated oversight activities,” said PCAOB Chairman William Duhnke III. The rule is the result of U.S. officials demanding more transparency from listed Chinese companies and follows Luckin Coffee’s accounting fraud, which led to its delisting in June 2020. U.S. TURNS UP HEAT ON CHINESE COMPANIES REFUSING TO DISCLOSE AUDITS HONG KONG INSOLVENCY PROCEEDINGS TO BE RECOGNIZED IN MAINLAND CHINA JD.COM’S LOGISTICS UNIT GOES PUBLIC IN HONG KONG U.S. President Joe Biden signed an executive order on 20 May to force a range of U.S. banks and companies to disclose the risks they face from climate change. The order aims to bring the U.S. up to speed with a growing list of countries prioritizing the issue of climate change for financial regulators and central banks, and to strengthen the U.S. financial system against climate-related risks. The order will see U.S. Secretary of the Treasury Janet Yellen working with members of the Financial Stability Oversight Council to disclose how they plan to “reduce risks to financial stability.” The move comes four years after former U.S. president Donald Trump pulled out of the Paris Climate Accord. JOE BIDEN ORDERS U.S. BANKS AND COMPANIES TO DISCLOSE CLIMATE RISKS Shares of JD Logistics, the logistics arm of Chinese tech giant JD.com, rose by 14 percent when its listing debuted on 28 May. The company raised US$3.2 billion from the listing, giving it a stock market value of US$36 billion. Shares of the company opened at HK$46.05, the lower end of its expected range, compared to the HK$40.36 price in its IPO. The listing is the second largest listing in Hong Kong so far this year, according to Reuters, and the third to raise more than US$1 billion. “We are going to use the funds raised from the IPO to further improve our networks, including in the lower-tier and suburban areas in China, and the infrastructure of the overseas markets,” said Yu Rui, JD Logistics Chief Executive Officer, on the day of the listing. APLUS Shares of Oatly, the Swedish oat drink company, began trading following its public market debut on 20 May. The company, which priced its IPO in the United States at US$17 per share a day earlier, saw its opening trade climb to US$22.12 and its shares up 30 percent above its IPO price, giving it a market value of US$13.1 billion. Oatly, which produces milk substitutes made from oats, has seen rapid growth in recent years largely fuelled by health-conscious millennial and Gen Z customers concerned about the environmental impact of purchasing and consuming animalbased products. OATLY SHARES START TRADING ON NASDAQ May 2021 7
SPECIALISMS IPO advisory MAKING THE JOURNEY A SUCCESS SPECIAL REPORT: 8 May 2021
APLUS The path to a prosperous initial public offering (IPO) is no regular journey – it is pockmarkedwith challenges, and if executed incorrectly, could spell financial ruin for even themost promising company. But behind every successful listing is a hardworking teammade upof seasonedprofessionals and accountants who take full control of the entire situation and ensure every detail is fully acknowledged and addressedpre- andpostIPO. Nicky Burridge speaks toCPAs who specialize in IPOs about how they lend their expertise in theworld of listings, and howgoingpublic in a capital market as deep as HongKong’s nowdemands a diverse and highly sought-after skill set Illustrations by Gianfranco Bonadies Hong Kong is home to one of the most buoyant initial public offering (IPO) markets in the world. A total of HK$398 billion was raised through listings on the Hong Kong Stock Exchange (HKEX) in 2020, despite the economic turbulence caused by the COVID-19 pandemic. Its combination of deep capital markets, an extensive global investor base and strong regulatory standards has seen Hong Kong ranked as the world’s top IPO destination for seven of the past 12 years. The city also plays a key role as a gateway between Mainland China and the rest of the world through Stock Connect. The initiative, which gives investors in Hong Kong and Mainland China the opportunity to trade securities listed on each other’s exchanges, further increases the appeal of Hong Kong as an IPO destination. “Hong Kong plays a crucial role as the global connector between Mainland China and the rest of the world. With solid fundamentals, the Hong Kong market has shown its resilience in times of global uncertainty,” says Ivanka Huang CPA, Senior Manager, Capital Markets Group at KPMG China. Jacky Lai CPA (practising), Partner, Assurance at EY, points out that Hong Kong’s high regulatory standards, which offer strong investor protection, have also attracted and retained a diversified investor base for both IPOs and secondary fundraising. “Hong Kong is a unique market with an array of Chinese companies and overseas listed companies,” he says. HKEX regularly reviews its listing rules to ensure it remains competitive. In 2018, it made it easier for pre-revenue biotech companies and new economy companies to list. Since then, 128 new economy companies have listed, collectively raising HK$554 billion, including big names such as Alibaba and JD.com, and JD.com’s logistics arm JD Logistics, which went public on 28May. “The new listing regime has added to the diversity of companies that can list, increasing the demand for Hong Kong’s capital markets, creating more opportunities for the city’s financial industry, as well as those who offer professional services to listing applicants,” says Huang. Hong Kong’s status as a leading IPOmarket is attracting more CPAs to specialize in this area. Lai says: “A strong IPOmarket creates lots of career opportunities for CPAs: from the finance team built up in the pre-IPO stage, to the post-IPO stage with increased corporate governance and compliance needs, as well as the increased demand for consultancy services and auditing services. The stressful but fruitful IPO experience equips CPAs with various skills they need for their further career development.” May 2021 9
SPECIALISMS IPO advisory While raising funds is the primary reason companies embark on an IPO, the process also provides a range of secondary benefits. Lai explains: “The IPO process involves the complete transformation of the people, processes and culture of a company from a private enterprise to a public one. IPO candidates that are used to having a culture focused purely on financial success and growth will realize they need to formulate a more comprehensive long-term business strategy, giving a really clear roadmap for the company that can be communicated to the stakeholders.” Huang agrees, pointing out that through completing a holistic review of the company as part of the IPO process, the management will often gain a better understanding about its business and culture. She adds that another benefit is that listed companies can typically raise further finance more easily, while they tend to enjoy better terms for bank financing. Archie Fong CPA, General Manager at Yue Xiu Capital Limited, and a member of the Institute’s Corporate Finance Advisory Panel, points out that companies often need to restructure ahead of a listing. This refines their business operations and forces them to pay more attention to corporate governance issues, which will ultimately benefit their business over the long term. “For a private company, going public represents an uplift in the company’s corporate image and corporate governance measures,” he says. Fong adds that once an IPO is completed, a company is also more likely to be able to introduce strategic investors or partners to help it further develop its business. Kin Yung CPA, Associate Director at CCB International Capital Limited (CCBI), and a member of the Institute’s Corporate Finance Advisory Panel, adds that not only do companies enjoy an enhanced reputation through listing, but for those in certain sectors, it can also create opportunities to expand into new markets, as both investors and consumers are more familiar with their brand. He gives the example of Mainland restaurant chain Haidilao, which after raising more than HK$7.5 billion on the HKEX in 2018, went on to open a number of outlets in Hong Kong. Yung points out that an IPO can also help companies attract and retain high quality talent, as once they are listed, they can offer staff share options schemes. A typical IPO can be divided into three stages. The first is the preparation stage, which involves pre-IPO planning, conducting due diligence and preparing the prospectus and the related listing application documents. Next is the submission stage, during which the candidate submits the listing application pack to HKEX and the Securities and Futures Commission (SFC), and answers any queries they raise. The final part of the process is the post-hearing stage, during which the company must complete its prospectus, carry out roadshows and investor presentations, build a book of investors and price its shares. Fong points out that accountants may be involved in the IPO process in a number of different capacities, including as a chief financial officer of the company listing, its sponsor, a reporting accountant working on the IPO, and an internal control consultant or tax advisor. Yung adds that accountants acting as the reporting accountant will not only prepare the accounts report for the company, but will also assist with its feasibility study, and assess whether it can meet the profit test. In addition, they will also prepare a reliable and verifiable profit and working capital forecast memorandum. THE IPO JOURNEY A TRANSFORMATION OPPORTUNITY “For a private company, going public represents an uplift in the company’s corporate image and corporate governance measures.” 10 May 2021
APLUS The pre-planning phase is key to assessing whether a company is ready for an IPO, and should generally be started 12 to 24 months before its target listing date. Fong says: “Every IPO candidate has a different history, structure, business model and financial background, so every part of the pre-IPO process is unique and equally challenging. But this makes helping an IPO candidate to list exciting and rewarding.” Lai of EY explains that, unlike exchanges in some markets such as the United States, HKEX has a sponsor regime for IPOs, meaning applicants need to use a licensed investment bank to assist them with their listing application. As a result, the company will need to appoint a sponsor, as well as a reporting accountant and legal advisor. Companies generally create a project management office to oversee the IPO process and set the listing timetable, as well as to gather relevant documents and resources. In order to list on the Main Board, companies must meet one of two tests: a profit test or a market capitalization/ revenue/cashflow test. To demonstrate that they meet one of these tests, companies must submit their accounts for the past three years for assessment. Huang of KPMG says: “Companies should perform a holistic review to assess whether the business will meet the listing requirements and the readiness of its financial reporting systems, internal controls and corporate governance. They should also consider whether the group structuring is tax efficient as part of their reorganization planning.” She points out that audit firms can play a key role in this part of the process by identifying any potential issues ahead of the listing through reviewing the company’s existing accounting policies and the quality of its accounting records. “They can also review and advise on the accounting implications of different group restructuring options and provide a review of the key internal control procedures in relation to the financial reporting process, making recommendations to help the company identify and close any gaps,” Huang says. PRE-PLANNING CONSIDERATIONS May 2021 11
SPECIALISMS IPO advisory A key part of the pre-IPO process is having due diligence carried out on the company by the sponsor, reporting accountant and lawyer. Lai of EY describes this as being “an incredibly daunting exercise” for many companies. “They spend months compiling the documents in the data room and answering in-depth questions from the sponsor, accountants and lawyers. Before the due diligence begins, we need to hold in-depth discussions with both the sponsor and the company to understand their business better and ensure the restructuring won’t trigger any accounting problems or non-compliance with the listing rules.” Lai says many accounting issues can arise at this point, such as around the collectability of receivables and the value of intangible assets. He adds that issues can also occur with variable interest entities in Mainland China that may have been conducting restricted business, and they may have used structured entities for this arrangement. “The role of a CPA is very critical, and they have to be involved at the very beginning of an IPO,” he says. Lai adds that sometimes nonfinancial issues can arise during the due diligence process that the reporting accountant has to deal with. He remembers being involved in the IPO of a state-owned enterprise in the Mainland around 10 years ago, which, alongside its core business, included schools and hospitals. Some of these entities were not suitable to be included in the listing and needed to be spun off. Lai was told the employees had a strong attachment to many parts of the group and would protest if they were not included in the listed entity, but in the end they were excluded, as their non-profit making objectives made them unsuitable for a listed company. The due diligence process includes company site visits, as well as pre-site document reviews and post-site document cross-checking. Yung of CCBI says: “Due diligence A DAUNTING EXERCISE 12 May 2021
APLUS Given the tight deadlines they work under, professionals involved in the initial public offering (IPO) process have packed schedules. Archie Fong CPA, General Manager at Yue Xiu Capital Limited, and a member of the Institute’s Corporate Finance Advisory Panel, says his day typically starts at 5:30 a.m. when he checks his work correspondence, such as emails, andWhatsApp andWeChat messages. He then reads the news to stay on top of any financial or economic developments that may impact his clients. He arrives at his office at 9 a.m. and spends most of the day reading execution-related documents, due diligence reports and other reports relating to any ongoing IPO, as well as holding face-to-face and online meetings, both internally and externally, looking at different issues that have arisen and putting forward proposals on how to tackle them. Outside of office hours, he attends business dinners and events, often with clients. “At the end of the day, I hold an internal call to discuss the to-do list for the next day,” Fong says. Like Fong, Jacky Lai CPA (practising), Partner, Assurance at EY, also starts his day by catching up on the news, paying particular attention to regulatory developments and trends in other markets, such as the United States and Mainland China. Once in the office, he spends much of his time talking to different professional parties, including sponsors and lawyers, to see if there are any new business opportunities, as well as liaising with clients and answering any questions they may have. He adds that he is sometimes involved in giving feedback to Hong Kong Stock Exchange (HKEX) about the type of companies that want to list in Hong Kong and the challenges they encounter. Ivanka Huang CPA, Senior Manager, Capital Markets Group at KPMG China, describes a typical day as having to deal with ad hoc and urgent issues that arise during the IPO process. “There are many calls and meetings with different parties participating in the project, as we work together to deal with issues and respond to any comments from the regulators. There are certain key milestones, such as the Form A1 Listing Application Form submission, and the prospectus finalization.” Kin Yung CPA, Associate Director at CCB International Capital Limited, and a member of the Institute’s Corporate Finance Advisory Panel, points out that a signing principal may cover four to six deals at the same time. As a result, his day is divided between projects at different stages of the IPO process. For deals at an early stage, he spends his time reviewing the work plan, timetable and the scope of work being carried out by different parties. For projects at the middle stage, his time is taken up with reviewing the drafting of the prospectus, holding internal control discussions and looking at the draft reports issued by other parties. Once deals have reached the review stage, he is on standby to answer any queries raised by the regulator. “If we receive an enquiry from HKEX, we will arrange for all parties to have a discussion call immediately and review the proposed response,” he says. In addition, he also has to find time for pitching calls and meetings with potential IPO clients. “ The role of a CPA is very critical, and they have to be involved at the very beginning of an IPO.” is undertaken by sponsors to establish the completeness and accuracy of the information contained in the listing documents. As a result on-site due diligence is always an important step to sponsors.” But COVID-19-related travel restrictions, which have been in effect since early 2020, have created new challenges, as CPAs cannot always be physically present at the site to conduct this work. “Last year, I worked on the listing for China Bohai Bank. I left the clients’ office before Chinese New Year last year and I didn’t imagine I wouldn’t go back to it again. After Chinese New Year, when China was closed, all the meetings changed from being face-to-face to teleconference. We didn’t meet the client again before the listing in July,” Yung says. “Previously, I couldn’t have imagined doing an IPO without meeting the client but that is how we do many deals nowadays.” Fong of Yue Xiu says a common challenge in the preIPO stage is coordinating the different professional parties involved in the process, as many tasks are interlinked and if one is not completed on time, it can impact the whole process. “The IPO timetable is usually very tight. As a coordinator, we need to push all the parties to meet deadlines.” Huang of KPMG adds that it is particularly important that companies with a complex structure ensure they leave enough time for restructuring. While the pre-preparation process typically takes many months, it is sometimes carried out on a much tighter timetable. Fong remembers being involved in the IPO of Dah Chong Hong Holdings Limited, a spin off of CITIC Pacific Limited, in 2007. The conglomerate was active in a number of different areas, including motor vehicle sales and services, the sale of food and consumer products, and logistics services. Despite the complexity of the group, the IPO was done at an accelerated pace to take advantage of strong investor sentiment at the time, and took just four months from preparation to completion. “Under such a tight timeline, we had to do everything correctly the first time. We had to do on-site due diligence inspections, third-party interviews, review huge documents and work with the auditors to ensure all the figures stated in the prospectus were correct.” To meet the deadline, Fong says he worked 18 to 20 hour days, seven days a week, and was constantly communicating with the other parties involved to analyse documents, solve issues and keep everything moving. “I remember staying at the printing company for more than 40 hours non-stop to edit and verify all the listing application documents and the prospectus,” he says. His hard work paid off and the company successfully listed on 17 October 2007, 13 days before the Hang Seng Index reached a new peak of 31,638. A DAY IN THE LIFE May 2021 13
SPECIALISMS IPO advisory Maintaining good communication is key for companies working with accountants and other professionals during the initial public offering (IPO) process. Kin Yung CPA, Associate Director at CCB International Capital Limited, and a member of the Institute’s Corporate Finance Advisory Panel, says: “Communication is very important as the client needs to prepare a lot of the underlying documents for the professional parties. If they fully understand the other party’s request, it can save a lot of time.” Ivanka Huang CPA, Senior Manager, Capital Markets Group at KPMG China agrees, pointing out that the timetable for an IPO is usually very tight. “Regular and prompt communication among professional parties and with management is key to making sure the timetable stays on track,” she says. Archie Fong CPA, General Manager at Yue Xiu Capital Limited, and a member of the Institute’s Corporate Finance Advisory Panel, points out that it is also important that management builds up a good relationship with the other professional parties involved in the IPO. “Every single document needs to be scrutinized by the professional parties in detail. Therefore, it is important for the management of an IPO candidate to build up mutual trust with the professional parties and provide all the documents, contracts and accounts at an early stage of the pre-IPO process,” he says. Jacky Lai CPA (practising), Partner, Assurance at EY, suggests companies should focus on allocating a data room, so that they can quickly provide the documents needed by the other professional parties to verify their company’s history, business strategy and financial performance for the due diligence process. “The success of the IPO depends to a large extent on the seamless cooperation among the company and professional parties. It is therefore important that at the commencement of the IPO process, companies are already staffed with suitably qualified and experienced personnel who can work hand-in-hand with the professional parties.” He adds that the company’s directors must understand that they take ultimate responsibility for the contents of the listing document, and there must not be any material omissions that render themmisleading. “Details of any non-compliance incidents must be communicated at an early stage. No professional advisors like surprises that can cause problems to the IPO project,” he says. Lai also suggests that company executives learn how to handle the media and conduct investor relations sessions during the IPO process, including becoming familiar with the information they can provide to these groups without breaching the listing regulations. ADVICE FOR COMPANIES SEEKING TO LIST 14 May 2021
APLUS A crucial part of preparing a company for an IPO is creating its equity story for investors and other stakeholders. Lai of EY explains: “Investors won’t be interested in the story if they find it difficult to understand. The company’s business model and equity story must be supported by historical financial information demonstrating the trends underpinning it and the management’s business plan.” Yung of CCBI points out that CPAs have a key role to play in this area, as their training enables them to understand the financial performance of a company and demonstrate its financial capabilities and strengths. “It is like preparing a CV for the client. You have to extract the most interesting and attractive points of the company to demonstrate to the investors,” he says. It is important that the prospectus gives investors a clear understanding of the company’s business model to enable them to make an informed investment decision. The financial information in the prospectus is also audited by a CPA to ensure its accuracy. Fong of Yue Xiu points out that getting the prospectus right can help to attract more investors. “We see oversubscriptions for IPO candidates that have a sound business model and attractive business outlook,” he says. Fong adds that the experience CPAs have from serving numerous clients across different industries enables them to understand the business model of a company quickly and present financial information and a business description in the prospectus with reference to competitors in the same industry. “CPAs are important to present financial and accounting figures in a meaningful manner, so having an accounting background and good industry knowledge is definitely a plus to prepare the prospectus,” he says. TELLING THE STORY Putting good corporate governance structures in place is also an important part of the IPO process. Once a company is listed, it must comply with the relevant regulations, such as the Corporate Governance Code and theModel Code for Securities Transactions by Directors of Listed Issuers in HKEX’s listing rules. Huang of KPMG says: “After listing, good corporate governance is crucial for a company to meet stakeholders’ interests, so when a company goes public, it often needs to address its internal process and organization structure in order to meet the more stringent regulatory requirements and higher expectations from shareholders.” Given accountants’ central role in preparing corporate reports, Huang adds that the profession has much to offer in terms of building trust in environmental, social and governance (ESG) disclosures. “Audit firms are the professionals of choice in assuring ESG information, as they have the expertise in measurement, controls, assurance and reporting. They can help companies integrate financial and ESG information in reporting, and provide independent assurance for companies’ internal and external reporting systems to strengthen the credibility of the ESG information,” she says. “Newmetrics and measurements of progress that factor in ESGmeasures such as natural, social and human capital will be required for the effective management of a companies’ resources consumption and value creation. Accountants will need to develop methodologies to address these factors.” Lai thinks CPAs can play an instrumental role at all stages of corporate governance from informing decision-making with timely and accurate financial information and assessing investment scenarios, to designing effective internal controls, measuring performance, reporting and providing assurance. “The shareholdercentric governance model needs a CPA as a key change maker and entail a broader perspective on value creation, and fully integrating ESG factors with financial performance. CPAs can further leverage their expertise on how to help companies make the right changes to reduce their environmental footprint and costs. CPAs can help businesses to report on their performance in an integrated way using the International Integrated Reporting Council’s International Integrated Reporting Framework. This will help to measure transformative progress and share experience on issues that are of public interest,” he says. Huang adds: “During the IPO, audit firms can provide an IPO readiness assessment to evaluate the internal controls on corporate governance and the compliance gaps and needs, advice on the board/committee requirements and composition and assist in establishing an audit committee and better corporate governance. After the IPO, audit firms can provide companies with updates on the latest developments and changes in corporate governance requirements and other applicable regulatory matters. They can also act as corporate governance consultant to perform incremental compliance and transparency enhancements.” Fong points out that good corporate governance also encourages transparency, and helps to protect shareholders’ rights through setting up various systems to manage risks and promote internal controls, making it an important consideration for investors. Lai agrees: “Based on our experience, corporate governance is one of the most important factors considered by institutional investors.” He adds that as institutional investors drive the share price up, corporate governance is an important consideration. As a result, he suggests companies put good practices in place early, especially in terms of recruiting qualified independent non-executive directors, improving internal controls and forming a qualified audit committee. The Institute’s Best Corporate Governance Awards act as a good reference point for companies, with the winners showcasing what good corporate governance looks like. SOUND GOVERNANCE STRUCTURES May 2021 15
RkJQdWJsaXNoZXIy MTY3NjcxMA==