Issue 11 / Volume 13 / November 2017

WHAT’S IT WORTH?

Optimistic financial forecasts and business plans are sometimes blindly

being accepted during valuations. How can CPAs help?

Plus:Greater Bay AreaBenefits of China’s developing economic powerhouse

ProfileMonica FoersterIFAC SMP Committee’s Chair

Cross harbour raceCPAs dive in

HK$70.00

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President’smessage

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November 2017 1

Dear members,

One of the most rewarding aspects of being president of our Institute is the ability to meet with stakeholders and impart on them the views of our profession.

Mid-month the Institute had the great honour of hosting Dr. Tan Tieniu, Deputy Director of the Cen-tral Government’s Liaison Office in the HKSAR, for a discussion on the accounting profession in Hong Kong. Alongside representatives from 18 other accounting bodies with members in our city, we dis-cussed how to develop the profes-sion and the support our accountants can provide the central government’s plans such as the Belt and Road Ini-tiative and Greater Bay Area.

I also met representatives from other national accounting bodies and the management of the Interna-tional Federation of Accountants at their annual Council Meeting. We discussed how changing regulations and the impact of new technologies are affecting our profession, and the concerns they are causing. I shared how Hong Kong has responded to these changes and dealt with the concerns.

The world is rapidly changing. The rise of China and the increasing importance of Asian markets glob-ally mean we are at the cusp of a new era, and international coopera-tion is vital for success in this new world. Through these meetings I am able to learn from our international peers, and I try and bring back what I learn to share with all members.

Another group that I want to connect more with is students, through the various mentorship programmes organized by the university accounting associations. This month I was invited to be the guest of honour at the Baptist University Career Mentorship event and I felt humbled at the opportunity to connect with and motivate the next generation of accountants.

We should all work to ensure the next generation have the best chance to succeed in our profession and with that in mind I would implore our veteran members (with seven or more years of experience) to be mentors in the Institute’s Mentorship Programme, which has opened applications for the 2018-19 session. Applications close on 31 December, more details can be found on our website. At the same time, I hope our junior members take the opportunity to be mentees and learn from our experiences.

The fifth membership survey has been released and I hope you will take a few minutes from your day to provide your important views on employment prospects, CPA qualification and earning power. The Institute uses the results of the survey to identify the opportunities to better serve your needs so your responses are very important. There are also prizes available, so who knows? You might win a new iPad! The survey closes on 15 December.

The Institute has also recently begun a process of reenergizing the

brand. It has been over 10 years since the last update and the world has changed significantly since. As part of the process, the Institute is inviting a selection of members from different sectors, age groups and backgrounds to focus group discussions and in-depth interviews. I hope that if you are asked you are able to join one of the activities and make your views known.

I was interested to read the findings of a report on the revised auditor’s reports, produced by the Standard Setting Department. The new requirements to include key audit matters are a step in the right direction for enhancing the value added of an auditor to investors and stakeholders. You can read a summary of the report in this month’s Source section.

I wanted to congratulate the nine teams of the Institute who completed the Oxfam Trailwalker this month, taking between 17.5 and 41.5 hours. Hiking 100km through Sai Kung and the New Territories over a weekend takes great zeal and determination. The teams should be proud of the money they have raised for good causes, and I am sure donations would still be well received now.

Finally, preparations are well underway for our annual dinner next month. I look forward to seeing many of you there and hope to have fun “sparking the smart era” with you all. The event is a regular highlight in the year.

“ We should all work to ensure the next generation have the best chance to succeed in our profession.”

Mabel Chan President

ContentsIssue 11 / Volume 13 / November 2017

01NEWS

01 President’s message

04 Institute news

06 Accounting news

10FEATURES

10 Bay of plenty The Greater Bay Area has obstacles to overcome to become a major driver of economic growth for China

17 Thought leadership: Fred Nieto The Head of Investor Engagement at the IASB on the implications behind the soon-to-be implemented IFRS 15 Revenue from Contracts with Customers

18 Leadership: Monica Foerster The Chair of IFAC’s Small and

Medium Practices Committee on how the global organization is spreading awareness of the increasing value of SMPs

23 How-to The Chief Executive Officer of CLiX International King Leung on why using big data can help businesses generate tangible results

24 Finding true value How CPAs can help take on the challenges behind inaccurate business valuations

30 Success ingredient: Edward Coultrup The Regional Head of Internal Audit at international cement maker LafargeHolcim discusses the measures that the multinational is taking to create a stronger company image

36 Cross harbour hustle Institute members talk about their experience of swimming across the Victoria Harbour

42SOURCE

42 First year experiences with revised auditor’s reports A look at the reception to the changes to auditor’s reports since launch nearly a year ago

46 New SFC guidance on valuations for listed company directors and financial advisors Examining how the SFC plans to keep watch over the business strategies and valuations for Hong Kong’s listed companies

48 Cybersecurity Fortification Initiative – An infrastructure prospective How network segmentation can lower the risk of meticulous cyberattacks for organizations

18Making small talkSmall and medium practices are taking on a significantly evolved role, says the Chair of IFAC’s SMP Committee Monica Foerster

18small talkSmall and medium practices are taking on a significantly evolved role, says the Chair of IFAC’s SMP Committee Monica Foerster

About our nameA PLUS stands for excellence, a reference to our top-notch accountant members who are success ingredients in business and in society. It is also the quality that we strive for in this magazine — going an extra mile to reach beyond Grade A.

Editor Gerry HoEmail: gerry.ho@mandl.asia

Copy Editor Jemelyn Yadao

Contributors Julian Hwang, Nicky Burridge, George W. Russell

Junior Content Editor Queenie Lee

Production Manager Jasmine Hu

Editorial Office G/F, Bangkok Bank Building, 18 Bonham Strand West, Sheung Wan, Hong Kong

ADVERTISING ENQUIRIESAdvertising Director Derek TsangEmail: derek.tsang@mandl.asiaTel: (852) 2164-8901

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 November 2017. Print run: 7,190 copiesThe digital version is distributed to all 41,843 members, 17,391 students of the Institute and 2,358 business stakeholders every month. Subscription: HK$760 for 12 issues per year.See www.hkicpa.org.hk/aplus for details.

President Mabel Chan

Vice Presidents Eric Tong, Patrick Law

Chief Executive and Registrar Raphael DingEmail: ce@hkicpa.org.hk

Director, Marketing & Communications Terry Lee

Head of Corporate & Member Services Margaret Lam

Editorial Manager Paul Smith

Editorial Coordinator Maggie Tam

Office Address37/F, Wu Chung House, 213 Queen’s Road East, Wanchai, Hong KongTel: (852) 2287-7228 Fax: (852) 2865-6603

Member and Student Services Counter27/F, Wu Chung House, 213 Queen’s Road East, Wanchai, Hong KongWebsite: www.hkicpa.org.hk Email: hkicpa@hkicpa.org.hk

50 TechWatch 181

52AFTER HOURS

52 Books Architect of Prosperity: Sir John Cowperthwaite and the Making of Hong Kong, and interview with author Neil Monnery

54 Life and everything From the return of AIA’s Great European Carnival to a musical of Charles Dickens’ renowned A Christmas Carol

56 A life in the day Nury Vittachi meets the auditor whose dreams have literally brought her up to the skies

36Cross harbour hustle

Members share how taking part in the Cross Harbour Race is both physically and mentally rewarding

Book review

About our nameA PLUSa reference to our top-notch accountant members who are success ingredients in business and in society. It is also the quality that we strive for in this magazine — greach beyond Grade A.

President

Vice Presidents

Chief Executive and RegistrarEmail: ce@hkicpa.org.hk

Director, Marketing & Communications

Head of Corporate & Member Services

Editorial Manager

Editorial Coordinator

Office Address37/F, Wu Chung House, 213 Queen’s Road East,Wanchai, Hong KongTel: (852) 2287-7228 Fax: (852) 2865-6603

News Institute news Accounting news

Institute news

Annual report highlights Hong Kong innovationThe Institute’s 2017 annual report, which is available on the Institute’s website, features Hong Kong’s innovation industry as a theme. It is inspired by the reality of technological disruptions, such as artificial intelligence, big data and Internet of Things, which are reshaping the accounting profession and the city’s business landscape.

The report includes a photo essay featuring various Hong Kong companies and individuals embracing fresh ideas, as well as short stories on how Institute

members are contributing during these innovative times.

The Institute’s 45th annual general meeting (AGM) will take place on 14 December, where the full Council election results will be announced. After the AGM, the new president and vice presidents will be elected at a special Council meeting. More information relating to the AGM, including the AGM booklet with summary financial statements, is available on the Institute’s website.

In this photo, a student at the Hong Kong University of Science and Technology’s Robotics Institute plays a game of chess against Baxter, a three-foot tall industrial robot. It is part of the photo essay featured in this year’s annual report.

Credit: Juliet Shayne Lui

4 November 2017

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Disciplinary finding

Tam Tak Kuen, Alfred, CPA (practising)

Complaint: Failure or neglect to observe, maintain or otherwise apply professional standards issued by the Institute and being guilty of professional misconduct.

Tam is the sole proprietor of Alfred T.K. Tam & Co. (“Practice”) and is responsible for the Practice’s quality control system. While carrying out a practice review, the reviewer found that the Practice failed to establish, maintain and document an effective system of quality control. In addition, Tam was found to have provided false or misleading answers and/or furnished information recklessly in the electronic practice review

self-assessment questionnaire which was submitted to the reviewer.

Decisions and reasons: The practising certificate issued to Tam is to be cancelled with effect from 21 November and no practising certificate shall be issued to him for two years. In addition, Tam was reprimanded and ordered to pay a penalty of HK$50,000 and costs of disciplinary proceedings of HK$51,628. When making its decision, the Disciplinary Committee took into consideration the particulars in support of the complaint, the parties' submissions, and the conduct of Tam throughout the proceedings.

Details of the disciplinary findings are available at the Institute’s website: www.hkicpa.org.hk

Mentorship programme 2018-19 now open for applicationsMembers who are interested in being mentors or mentees can now apply to join the Institute’s 2018-19 mentorship programme. The mentor- mentee cycle will begin on 1 April 2018 and lasts for one year.

Now in its fourth year, the programme reflects the Insti-tute’s on-going focus to pre-pare members for the future. It provides an opportunity for young members to learn from their seniors for the purpose of their career development through regular consultation and experience sharing.

In response to members’ feedback, the admission criteria of mentees will

be broadened to include members with four to six years of post-qualification experience (PQE). Previously, it was up to three years of PQE.

Members looking to become mentors must have seven years or more PQE and be enthusiastic about nurturing young accountants. Those who are interested in experiencing the benefits of a mentor-mentee relationship should register online by 31 December. Visit the mentorship programme webpage for further details.

Views on CPA life wantedThe Institute is currently conducting its fifth membership survey to gain further insight into

the professional lives of members. The survey seeks input in the areas of employment prospects, CPA qualification and earning power. Taking the responses into account, the Institute will be able to better support members’ career advancement, and make strategic action plans to attract and retain the best talent in the profession.

Survey participants can register for a lucky draw for the chance to win prizes, including a camera, Apple watch or iPad. The survey, which takes a few minutes to complete, ends on 15 December.

If you have any problems with the survey, please send an email to membership_survey@hkicpa.org.hk.

464The number of

mentor- mentee pairs formed through the Institutes’

Mentorship Programme since 2015.

Credit: Juliet Shayne Lui

November 2017 5

NewsAccounting

6 November 2017

The United States’ Securities and Exchange Commis-sion last month approved rules requiring companies to disclose how long their auditor has been on the job in a bid to break up long-lasting auditing relationships, reported the Financial Times. U.S. audit reports will also have to include “critical audit matters” (CAMs), which will give shareholders insight into the specific issues that made a material difference to financial statements.

“This is going to have a direct impact on the audit profession: accountability,” Public Company Accounting Oversight Board Chairman James Doty told

the FT. “Changes may not occur overnight, but they will occur.”

The U.S. is the latest to take steps to achieve audit transparency, with the European Union already requiring companies to put their audit contracts up for bids every 10 years.

According to the newspaper, all but three of the 500 largest companies in the U.S. use the Big Four, and many of them have used the same firm for decades. Critics say such long-term relationships lead to auditors losing their scepticism.

Rule approved to keep auditors sceptical, encourage rotation

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Accountants will not get lower rate under U.S. tax billAccounting firms will not benefit from the lower 25 percent tax rate under the tax reform bill, which was passed by the United States House of Representatives on 16 November, Accounting Today reported. According to Brent Lipschultz, Tax Partner at PwC’s personal financial services practice in New York, service industries will not get the benefit of the lower rate despite service industries comprising the majority of U.S.’s gross domestic product. “This was just a way to appease the small business group out there. In general, partners at accounting firms will not get the benefit of the lower rate,” he added. The benefit for pass-through service businesses is not applicable for individuals with incomes above US$75,000 and couples with combined earnings of US$150,000 a year.

China’s statistics bureau to take control of provincial GDP accounting to combat fraudRegional-level data collection in China will be taken over by the National Bureau of Statistics starting in 2019, reported the South China Morning Post. Follow-ing criticism that the output of the nation’s provinces has long exceeded the official figure for the country as a total, the change is expected to result in significant reduction in the discrepancy between national and regional gross domestic data, said Li Xiaochao, the bureau’s deputy head. The country has taken steps to unify the accounting systems between national and local authorities, with increased inspections of poten-tially fraudulent data.

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South African mid-tiers firms mergeBDO will take over Grant Thornton’s offices in Cape Town and Port Elizabeth starting on 1 March 2018, reported Economia this month. The process will bring 413 new staff into BDO, including 35 partners and directors, and will raise the firm’s total South African workforce to more than 1,000. “Critical to this merger is our ability to scale up and to leverage the opportunities created by the changes in the auditing profession, including the introduction of mandatory audit firm rotation,” said Mark Stewart, Chief Executive Officer of BDO South Africa.

U.K. calls for quality reports by SMEs The United Kingdom’s Financial Reporting Council has taken a “step-change in the quality of reporting by smaller companies” in areas of shareholder concern, reported the Financial Times. The disciplinary body has made plans to write to 40 companies before their year-end to review two specific accounting disclosure areas of their next published reports. It wants “companies to tailor accounting policies appropriately and consider whether new policy disclosures are required for large and unusual transactions.” The reviews will cover the ways companies present their strategic report and alternative performance measures, accounting policies, cash flow statements, tax and pensions.

November 2017 7

The percentage of United States respondents who feel there is

difficulties in hiring and retaining information technology workers,

according to a Duke University and CFO Magazine Global Business Outlook survey.

40%

A world of numbers

The number of new blockchain-related projects that were created on code repository

GitHub in 2016, according to a news report from Deloitte.

However, only 8 percent of these projects were considered active and had been updated at least

once in the last six months.

26,000

The percentage of Hong Kong-listed companies that plan to

change their environmental, social and governance reporting budget in the coming year, according to a recent survey findings report by BDO. Most small- and mid-cap companies reported spending

HK$100,000 or less when preparing for an ESG report.

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aplusNewsAccounting

Big Four criticized over Paradise PapersThe “Paradise Papers” scandal, which exposed the widespread use of offshore tax avoidance structures, revealed the role the Big Four played in helping multinationals and the rich minimize their tax bills, the Financial Times reported. John McDonnell, Shadow Chancellor of the Exchequer, criticized the firms, saying that “too many of the big accountancy firms in the U.K. are facilitating and profiting from tax dodging.” The Financial Reporting Council said it has “been made aware by some firms that details of advice on tax arrangements were among the Paradise Papers,” and that it was monitoring the situation. The Papers are a huge leak of financial documents, which lifts the lid on the offshore dealings of politicians, multinationals, celebrities and other high-net-worth individuals.

Nations fight over climate financing During the UN Climate Change conference, experts were in debate over the flow of finances from the developed to the developing world, reported Business Standard. Wendel Trio, Director of Climate Action Network Europe, said that limited progress has been made on the issues related to climate finance and how to deal with the cata-strophic impacts of climate change, such as those witnessed recently including the hurricanes in the Caribbean. “The current snail’s pace of the talks does not match the urgency of climate action nor the speed of the renewable energy transition on the ground,” said Trio.

Obsidian Energy settles fraud chargesCanadian oil and gas producer Obsidian Energy has agreed to pay US$8.5 million to the United States Securities and Exchange Commission following a lawsuit accusing it of accounting fraud, reports The Globe and Mail. In a statement, Obsidian Energy said it agreed to pay the financial penalty without admitting or denying any of the allegations against it. Formerly known as Penn West Petroleum, the company’s executives allegedly created a scheme that ran from 2012 to 2014 to deceive investors about its financial condition by understating operating expenses.

HSBC to pay €300m to settle tax evasion probeAfter a long-running investigation into tax evasion, HSBC’s Swiss Private Bank agreed this month to settle the probe by paying €300 million to French authorities. The investigation began in 2014 following a data leak by a former IT employee that involved thousands of French customers. According to the French financial prosecutor’s office, HSBC’s Swiss private banking unit had helped clients to evade their taxes. HSBC has acknowledged “control weakness” and has taken measures to address them, reported BBC News. Despite the case against HSBC being closed, former chief executive of HSBC’s Swiss Private Bank Peter Braunwalder and executive Judah Elmaleh remain under investigation and could face potential legal action.

November 2017 9

John McDonnell

ChinaGreater Bay Area

View of high-rise buildings along the Guangshen Expressway in the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone in Shenzhen in August 2014.

10 November 2017

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BAY OF PLENTYHong Kong, Macau and Guangdong are working together to form a unified “Greater Bay Area” that could create a global economic powerhouse, reducing duplication and cutting down on red tape. However, as George W. Russell discovers, there are obstacles to achieving a streamlined region despite obvious opportunities

AFP

W ith a bridge linking Hong Kong to Zhuhai and Macau under

construction, high-speed rail putting Guangzhou just 48 minutes away from Hung Hom and a high-tech science park planned for an area that was a no-go borderland just 20 years ago, it seems Guangdong and Hong Kong are on an inexorable path towards greater integration.

Indeed, both China’s central authorities and the Hong Kong government are constantly promoting a more seamless interchange of business, people and ideas in the increasingly dynamic southern region of China.

The conurbation has been given many names in past decades – Pearl River Delta, Zhujiang Delta, Yuegang’ao Greater Bay Area – but China’s National Development and Reform Commission settled on the term Guangdong-Hong Kong-Macau Greater Bay Area (GBA) in the English-language version of the 13th Five-Year Plan, published in December 2016.

By whichever name it is known, the GBA encompasses almost 40,000 square kilometres and 120 million people, making it the third-largest trading economy in the world, outranked only by the United States and Germany, according to Bank of America Merrill Lynch data.

Angello Chan, Research Analyst at the U.S. bank in Hong Kong, says the region is already a world leader in trade, logistics and innovation. “The Greater Bay Area is a prime candidate for city cluster development because it already has good integration across the region with concen-trations of economically robust industries.”

For Tony Fong, Chief Financial Officer of Hong Kong-listed New Sports Group, the GBA is a potential windfall. In June this year, New Sports’ Mainland subsidiary signed a deal to acquire two property development projects within the area – in what is known as Chaoshan, the agglomeration of the cities of Chaozhou, Jieyang and Shantou in eastern Guangdong.

November 2017 11

ChinaGreater Bay Area

Fong, a Hong Kong Institute of CPAs member, says his company’s board believes the GBA will function as a positive driver for the attractive prospects of the real estate market in Guangdong. “Considerable income will be generated from the sale and lease of the commercial, residential and retail units after completion of such prop-erty development projects.”

New Sports is not the only listed property developer getting in on the GBA action. Sun Hung Kai Properties says in its most recent annual report that the GBA “will be conducive to the demand for residential properties,” while China Electronics Optics Valley Union is upbeat

about its industrial parks, and announced in its 2017 interim report that it made a “breakthrough” in the GBA in April by acquiring land for projects in Hengqin.

Itching to auditThe GBA includes several free-trade areas, including pioneers such as the Shantou Special Economic Zone, set up in 1981, and relative newcomers such as the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone, established in 2010.

Qianhai, with its focus on financial services, should be the centre of atten-tion for Institute members. “We expect

Qianhai to be the linchpin for the GBA as a financial and logistics centre,” says Chan at Bank of America Merrill Lynch. Within Qianhai, Guiwan will focus on finance and trade, while Qianwan is for technology and information services, and Mawan is a logistics, shipping and supply chain management hub.

The area’s development has not been without criticism. In February, Hong Kong Legislative Councillor Christopher Cheung, representing the financial services func-tional constituency, criticized the area for focusing primarily on big players such as HSBC and Tencent and ignoring small- and medium-sized enterprises.

12 November 2017

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“ Individual Institute members could seek more challenging management positions looking after the financial operations of new business entities in relation to investment projects within the GBA.”

At an August seminar, Witman Hung, Principal Liaison Officer for Hong Kong at the Shenzhen Qianhai Authority, said the previously implemented capital requirements of HK$5 million have been removed to make it easier for smaller companies. “Many SMEs may not know about the change in the requirements,” he told the seminar.

Hung has said that allowing Hong Kong CPAs to work in Qianhai without requiring Mainland qualifications remains a goal, but unlike architecture and engineering, auditing is a centrally supervised profession and reforms are expected to take some time.

“One of the hurdles for CPAs in Hong Kong to practise audit or taxation in China is the lack of mutual recognition of professional qualification between the two places,” says Jeremy Choi, Tax Partner at PwC and an Institute member.

Clement Chan, Managing Director of BDO and a past Institute president, earlier this year noted the tight restric-tions on Hong Kong CPAs practising in the Mainland. He said allowing Institute members to become partners at Qian-hai’s accounting firms would attract more Hong Kong firms to the area.

Fong at New Sports Group says there are opportunities despite the regula-tory curbs. “CPA firms will be offered participation into various projects such as audit and financial due diligence in connection with cross-border acquisi-tions by listed companies in Hong Kong and multinational corporations,” he forecasts.

“Individual Institute members could seek more challenging management positions looking after the financial operations of new business entities in relation to investment projects within the GBA,” he adds.

Porous boundaryThe Mainland part of the GBA is one of the most cohesive regions in China. “The Yangtze River Delta and Beijing-Tianjin-

Hebei region, the GBA stands out in trade openness, transport and high-tech industries,” Chan at Bank of America Merrill Lynch wrote in a September report.

However, Hong Kong and Macau, with their semi-autonomous statuses, different laws and currencies, and even traffic on the opposite side of the road to the Mainland, present many struc-tural obstacles. “One of the potential challenges for the GBA initiative is how various administrations – Guangdong province, Hong Kong, Macau and the National Development and Reform Commission – work together,” says Den-nis Lam, Equity Analyst at UBS Wealth Management Chief Investment Office.

Chinese authorities have long sought closer integration of Hong Kong and Guangdong. Despite the official closing of the Hong Kong border after the 1949 revolution, the mass exodus of Mainland Chinese to Hong Kong at that time, and again after the economic opening-up of China in the late 1970s, meant contacts between the regions have stayed strong, notes Richard Yue-chim Wong, Chair of Economics at the University of Hong Kong and a prolific author on cross-boundary issues.

Since then there have been several initiatives to more closely integrate Guangdong with Hong Kong and Macau.

What will be the world’s longest cross sea-bridge at 55 kilometres, the Hong Kong-Zhuhai-Macau Bridge, under construction in Zhuhai city, in May. The bridge will be completed by year-end and fully open to vehicular traffic in 2018, authorities told foreign media on 17 May. It will let travellers drive from Hong Kong to Macau or Zhuhai in just half an hour. Work began in late 2009 and the bridge was originally planned to open in late 2016 but ran into delays.

AFP

November 2017 13

ChinaGreater Bay Area

In January, Hong Kong and Shenzhen announced a plan to jointly construct an international scientific and technical innovation centre on previously disputed land at the Lok Ma Chau Loop area near Yuen Long.

Some accounting firms, such as Deloitte, say they have already taken steps to coordi-nate their Hong Kong and Guangdong busi-nesses. “We manage our resources from a southern China regional perspective,” says Edward Au, Co-leader of the National Pub-lic Offering Group at Deloitte China and an Institute member.

Many administrative obstacles straddle the Hong Kong-China boundary due to the former’s status as a special administrative region since 1997. “The existing immigra-

tion and customs clearance arrangements between Guangdong and Hong Kong are not smooth enough,” Legislative Council-lor Holden Chow observed during a June session.

Although Hong Kong is a free-trade port, Chow pointed out that individual travellers often wait for more than an hour at the land boundary control points. But the government is keen for change with then Secretary for Constitutional and Mainland Affairs Raymond Tam responding that the government was considering suggestions to facilitate the entry of people and vehicles.

Closer relationsChoi at PwC says there are a number of areas requiring better intergovernmental

coordination to make the GBA function properly. “The governments of the Mainland and Hong Kong can improve business and tax policies that could benefit [both] Hong Kong and China companies and individuals running businesses in the GBA,” he says.

His suggestions include allowing Hong Kong companies to set up branches in the Mainland side of GBA to reduce their financing costs and tax burden in the Main-land; reduce individual tax burden of Hong Kong residents who work in the Mainland side of the GBA; and reduce the corporate income tax burden on Hong Kong compa-nies with permanent establishments on the Mainland side of the GBA.

Choi says the Mainland and Hong

This picture, taken in July, shows the construction site of the West Kowloon terminus of the express rail link, which will connect the city to Guangzhou, as Hong Kong’s skyline looms in the background.

14 November 2017

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Kong governments should also enter into a social security agreement so that Hong Kong residents in the GBA who are required to make contributions to Hong Kong’s Mandatory Provident Fund are exempt from social contributions in the Mainland.

Au at Deloitte says the infrastructure developments could change the way Hong Kong and Guangdong businesses deal with each other. “With the high-speed train you could go [from Hong Kong] to Guangzhou in 48

minutes and to Shenzhen in only 20 minutes,” he points out. “The Hong Kong-Zhuhai-Macau Bridge will be a very important connection to mobilize Hong Kong CPAs travelling to Guangzhou. Despite new technology the best approach is face-to-face meetings.”

Moreover, Au adds, authorities have proposed free fund flows between Hong Kong and GBA cities in Guangdong. “More efficient fund flows would open up business to more collabora-tion and cooperation. This will lead to more openness among city governments.”

Hong Kong can capitalize on the opportunities arising from the GBA to reinforce and enhance its status as a global financial centre, an offshore yuan hub and an international asset manage-ment centre. “We can con-tinue to enhance the two-way

flow of cross-border yuan funds and deepen the mutual financial market access between Hong Kong and the Mainland,” suggests Choi.

Hong Kong, he adds, should be positioned as the premier financing plat-form for new businesses and investment in the GBA region. “This will in turn help to source new markets and diversify the investment prod-ucts for the financial services industry in Hong Kong.”

The GBA has the potential to be game-changing on a national level. “While special zones tend to serve a single purpose on a small scale, we believe the GBA will develop into a world-class metropolis,” says Lam at UBS. “Through greater integration and better resource allocation, the GBA could become a major driver of economic growth for China.”

Earlier estimates put

the construction cost of the Hong

Kong-Zhuhai-Macau Bridge at 110 billion yuan

(US$15.9 billion). However, Hong

Kong’s Transport and Housing Bureau said that the project

has gone over budget by around

10 billion yuan, according to media reports this month.

Two high-speed trains of the Guangzhou-Shenzhen-Hong Kong-Express Rail Link open for journalists at the Shek Kong depot on 9 July.

AFP

AFP

November 2017 15

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Thought leadershipby Fred Nieto

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November 2017 17

I nvestors don’t analyse invest- ments in a vacuum. Comparing a company’s financial performance

with that of its peers is a critical step in making informed investment decisions. After all, it’s difficult for an investor to argue that a company’s financial perfor-mance was “good” without clarifying the basis for comparison.

Weaknesses in existing revenue recognition requirements have been responsible for diversity in companies’ revenue accounting practices, accord-ing to various stakeholders including preparers, various national standard setters, auditors and investors. The diversity resulted, in part, from com-panies having to use judgment in the absence of clear principles or guidance. Consequently, the financial reporting outcome may not be comparable across companies. Investors may not be aware of this, and as a result may end up com-paring apples to oranges – reminding us of a popular quote that’s relevant to investment analysis: “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so” – Mark Twain.

For this reason, we believe inves-tors can look forward to a time when results are prepared under a single comprehensive standard – Interna-tional Financial Reporting Standard (IFRS) 15 Revenue from Contracts with Customers. IFRS 15 is effective from 1 January 2018 with earlier appli-cation by companies permitted.

Revenue recognition – previous standardsIFRS 15 replaces the previous revenue standards: International Accounting Standard (IAS) 18 Revenue and IAS 11 Construction Contracts, and the related Interpretations from the IFRS Interpretations Committee (IFRIC) and the Standard Interpretations Committee (SIC): IFRIC 13 Customer Loyalty

Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers and SIC-31 Revenue – Barter Transactions Involving Advertising Services.

Principles and guidance – a balancing act in support of comparabilityThe core principle of IFRS 15 is simple and intuitive. A company should recognize revenue when the promised goods or services are transferred to the customer and the revenue recognized should reflect any performance objec-tives built into contracts. To enable entities to apply that core principle, IFRS 15 provides a comprehensive and cohesive set of steps to follow and related application guidance for deter-mining when and how much revenue to recognize.

We believe that the principles and the related application guidance in IFRS 15 provide company management with sufficient tools to exercise appro-priate judgment enabling companies to reach consistent conclusions in recog-nizing revenue in economically similar situations. Reducing diversity in prac-tices should ultimately benefit inves-tors seeking to compare companies’ reported revenues – within or across sectors, and within or across jurisdic-tions that use international financial reporting standards.

For example, a company may struggle to determine if it should recognize revenue for some goods or services at a point in time, or over time, because of a lack of clear and comprehensive guidance today.

A case in point is the sale of residential real estate unit in multi-unit developments. Currently, a company may have difficulties determining whether the construction of such assets is a service that is provided over time

(and, hence, revenue is recognized over time) or a good that is transferred to the customer when construction is completed (and, hence, revenue is recognized at that point in time). IFRS 15 clarifies this by providing specific criteria which must be met for a company to be able to recognize revenue over time. If the criteria are not met, a company will recognize revenue at the point in time when the customer obtains control of the promised good or service.

Disclosures – giving investors insight into management’s judgmentsTo provide investors with a better understanding of the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers, IFRS 15 not only requires quantitative information about revenues (e.g. disaggregation of revenues into appropriate categories, for example, by type of good, service, geography, or market) but also qualitative information about the significant judgments and changes in judgments made in applying the revenue recognition requirements.

By not only requiring management to explain its decision to apply a certain accounting treatment, but also to dis-cuss the reasons behind that decision. We believe the new disclosure require-ments should provide investors with enhanced transparency into manage-ment’s decision-making.

Closing the loopThrough the combination of a single comprehensive revenue recognition framework and specific disclosure requirements, we believe that IFRS 15 will help investors better understand and compare a company’s revenue – across reporting periods and with its peers. Find more details on IFRS 15 by going to the List of Standards page of www.ifrs.org.

The Head of Investor Engagement at the International Accounting Standards Board, on the major impacts arising from IFRS 15 Revenue from Contracts with Customers, which takes effect next year

Judgments and estimates in revenue recognition

Leadership profileMonica Foerster

D espite social media channels opening new opportunities for accountants to communicate with clients, some companies continue to prefer

an approach more personal than a tweet. According to a recent research report by the International Federation of Accountants (IFAC), The Role of SMPs in Providing Business Support to SMEs – New Evidence, small and medium entities (SMEs) prefer face-to-face meetings, and for small accounting firms this is good news.

“SMPs have a unique advantage,” says Monica Foerster, Chair of the IFAC Small and Medium Practices Committee, “because their interactions are often long-term and centred on personal relationships based on trust and reliable communication.”

However, trust has three dimensions: integrity, ability, and empathy, and is not easy for SMPs to obtain, notes the report. To help SMPs build trust and capacity, Foerster, together with committee members and IFAC leadership and staff, has been busy directing activities, including responding to formal exposure drafts and consultations issued by the International Auditing and Assurance Standards Board (IAASB) and the International Ethics Standards Board for Accountants (IESBA).

“On the audit side, we recently responded to the proposed new standard on auditing accounting estimates. On the ethics side, we recently responded to the proposed changes related to professional scepticism and judgment, and the IESBA strategy and work plan beyond 2018. In all three instances, we considered how, or if, the propos-als would affect SMPs and their ability to support their clients,” she tells A Plus.

“We are also finalizing the fourth edition of the Guide to Using International Standards on Auditing in the Audits of SMEs and updating the Guide to Practice Management for SMPs, which will feature a new chapter on technology as its importance to practices of all sizes is increasing.”

Indeed, technology and innovation, together with hiring and talent retention, are key trends impacting SMPs today,

Monica Foerster is the SMP Director and Coordinator of the SMP Working Group at Instituto dos Auditores Independentes do Brasil (Ibracon).

Monica Foerster, Chair of the IFAC Small and Medium Practices (SMP) Committee, tells Jemelyn Yadao about the work the strategic advisory body is doing to raise global awareness of SMPs’ evolving role and ability to create value

“ [SMPs�] interactions are o�en long-term and centred on personal relationships based on trust and reliable communication.”

18 November 2017

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MAKING SMALL TALKPhoto by Tiago Coelho

November 2017 19

Leadership profileMonica Foerster

notes Foerster. “SMPs must be willing and able to change and evolve their business models,” she says. “SMPs’ daily practices are directly related and involved with technology, although the extent will vary in different jurisdictions.” Technology devel-opments provide them with opportunities to offer services in emerging areas, such as cybersecurity assurance, she adds.

Foerster has been playing an active role in SMP and SME affairs, both in her home country of Brazil and internationally, for more than 24 years. She is a partner at Confidor, an accounting, tax, and law firm, which has offices in São Paulo and her birthplace of Porto Alegre in southern Brazil. She is also the SMP Director and Coordinator of the SMP Working Group at Instituto dos Auditores Independentes do Brasil (Ibracon), the Brazilian Institute of Independent Auditors, and Counsellor at the Brazilian Accounting Council, one of Brazil’s regional accounting boards.

In 2014, she was nominated to be a representative from Latin America on the IFAC Small and Medium Practices Com-mittee, became its deputy chair in 2015 and was appointed chair at the start of 2017. The committee’s goal is to enhance SMPs’ recognition through regular input to the

international standard-setting process, ensuring the relevance of international standards to SMPs and their SME clients, and by developing materials that help them meet client needs. “It has been fulfilling to contribute to the work IFAC does on the global stage to support and advocate for SMPs and SMEs, and to bring my personal and professional perspective as a female Brazilian accountant,” says Foerster.

SMP spotlightActive participation in discussions with a range of stakeholders, including regulators, helps SMPs to be heard both locally and globally, says Foerster. “One of the really useful elements of the Global SMP Survey is providing IFAC member organizations with country-level data to help inform them of the local challenges facing SMPs and SMEs and provide a basis for advocacy and dialogue. “One of the most important things IFAC member organizations can do to help raise SMP visibility is to nominate qualified professionals to the international, independent standard-setting boards and IFAC committees. Our voices need to be included in all aspects of their work.”

The recent progress made by these boards in accommodating SMPs has been

promising, says Foerster, highlighting how the IAASB in particular has enhanced its SMP and SME focus in 2017-2018. In January, the board co-hosted a working conference on the challenges of SMPs using International Standards on Auditing and stakeholder needs relating to services provided to SMEs. “You can see the results of our efforts in board work plans, such as the IAASB quality control and IESBA restructure projects,” says Foerster.

One of the top challenges SMPs face worldwide is keeping up with new regulations and standards. Foerster notes that the committee’s work ties directly to this concern, particularly through its input to the boards. “Our work is key to helping ensure the standard-setting boards continue to give due consideration to SMP and SME issues and I encourage all professional accountancy organizations, including the Hong Kong Institute of CPAs, to prioritize providing responses to the boards’ various consultations.”

Trusted advisorsIrrespective of jurisdiction, accountants, especially SMPs, continue to be the preferred advisors to SMEs, says Foerster. In recent years, the proportion of SMPs

Foerster is also a Partner at Confidor, an accounting, tax, and law firm with offices in Porto Alegre and São Paulo, Brazil. Here, she is speaking during the IAASB’s event “Addressing the Unique Challenges of SMPs and SMEs” in Paris in January, covering the guides developed by IFAC to help SMPs implement international standards.

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of SMPs provide some form of

consulting services with the three most commonly provided

being corporate advisory, management

accounting, and human resources

policies, procedures and employment

regulations. Source: 2016 IFAC Global SMP

Survey.

There are a number of helpful articles, videos and resources featured

on the IFAC Global Knowledge Gateway

(www.ifac.org/gateway).

undertaking audits of SMEs in some countries has fallen, partly as a result of the introduction, or rise, of audit thresholds, she adds. At the same time, the advisory role of SMPs continues to evolve. While most of SMPs’ revenue is generated by traditional services, including audit, last year’s IFAC Global SMP Survey found that the fastest growing service area is advisory and consult-ing services, with 35 percent of SMPs reporting fee increases in this area in 2016 and 45 percent predicting increases for this year.

According to Foerster, the most frequently provided services include corporate advisory (financing, mergers, due diligence, valuations and legal); management account-ing (planning, performance and risk management and internal control); and, human resource procedures and employment regulatory services (hiring and firing, employee contracts, maternity, paternity, sick pay and remuneration structures). “The wide range of services really highlights the potential for future revenue growth through business advisory services – it’s a significant opportunity for SMPs.”

Offering financial report-ing services tailored to the needs of SME clients is another opportunity. The 2016 survey found that 14 percent of SMPs provided some form of enhanced corporate reporting service (e.g. integrated reporting and corporate social responsibility reporting). Sustainability report-ing as a service area for SMPs is new but fast growing, given that SMEs are keen to realize the financial benefits of integrating

sustainable practices into their business strategy. To help SMPs better advise clients in this area, the committee released the publication Creating Value for SMEs through Integrated Think-ing in August. “It highlights how smaller organizations and the professional accountants serving them can benefit from integrated thinking and develop a better understanding of how their business creates value.”

In order for SMPs to dif-ferentiate themselves from competition, Foerster urges them to think about diversification and supporting the international-ization of SMEs. “An important ingredient for SMPs’ success is the right service portfolio with value-added services and deliv-ering excellent quality. I believe that a multidisciplinary approach is essential,” she says. “An international perspective is also important. In some cases, local markets are limited but opportu-nities for SMEs to change their business model and look interna-tionally are increasing.

“SMPs need to consider mergers, associations, or other means of expanding their capabilities to convince potential clients their practice can meet their needs.”

Big ambitionsServing SMEs has been a focus of Foerster since she was very young. Coming from a family of accountants and working at a family member’s small practice, she had been engrossed in discussions over accounting and audit issues. “From early on, I understood I could make a difference and help – as an accountant – my clients and

their future. This became a life choice.”

She started her career as a trainee at the family firm just as she was starting a degree in accounting at the Universidade Federal do Rio Grande do Sul. “Since the firm had, indeed, still has, several SME clients with international associations, and since the firm is a member of an international alliance, I developed a strong expertise in international standards from the beginning of my career. This was especially unusual in Brazil more than 20 years ago.”

When it comes to her per-sonal life, one thing keeps her driven to take on the daily work challenges: “My whole family – husband and children. They give me all the energy and emotional support I need, and help me to keep positive and proactive to achieve consistent results.”

Her early experience in international liaison exposed her to different cultures, which built upon her upbringing – Brazil being a well-known melting pot of nationalities and cultures. “This mix of different cultures and habits generates a unique experience – both for my personal and professional life.”

This continues to help her today in her role at her firm and as an IFAC committee chair. “It has enabled me to identify and appreciate the diversity and breadth of skills and talent in practice and on the SMP committee, whose activities are driven not only by myself as chair but through the great dedication of all the members and technical advisors as well as the IFAC staff team.”

83%

November 2017 21

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How to...by King Leung

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November 2017 23

Big data has been a hot topic among the c-suite executives of market leading companies since 2013. But its momentum reached another level in 2017 after AlphaGo, an artificial intelligence (AI) developed by Google DeepMind, beat world number one board game Go player Ke Jie.

I was very honoured to be invited back to the Hong Kong Institute of CPAs to share my experience on big data monetization to a large audience during a seminar on 6 November. Attendees were exceptionally enthusiastic and had some thought-provoking questions such as whether Hong Kong has the right conditions to play a significant role and win in the big data era; and how companies can increase sales with big data. In answering these questions, we need to first look at the landscape of the big data sector.

Firstly, as data volumes continue to increase at an exponential rate, mas-sive amounts of data storage is needed. The major players including Amazon, Microsoft and Aliyun (the cloud services arm of Alibaba) have already made significant strides towards this.

Secondly, the total number of market-ing technology, or MarTech, companies engaged in the sales and marketing appli-cation of big data has mushroomed from around 100 in 2011 to over 5,300 this year. MarTech software handles almost every-thing from analytics to marketing auto-mation to data management platforms. According to industry insiders, this segment is already fairly crowded with MarTech companies finding it difficult to differentiate. So industry consolidation has begun where major players like Salesforce are buying up promising niche players.

Finally, as soon as data is collected and cleaned, one of the primary goals is to extract business value from it – this is where most companies are struggling.

There are three critical factors behind companies’ success in monetizing their customer (big) data for sales and marketing:

Leadership and expertise in customer data analytics The Chinese word for knowledge is 學問, which literally means “learn to ask.” The primary aim for most c-suite executives is to increase sales and profits. But they often lack experience in dissecting this objective into more granular questions for further data analyses. These analyses have the potential to uncover enormous business opportunities that were not exposed to business leaders in the past.

Typically, and especially in Hong Kong, it is very difficult to hire business leaders who have a unique mix of skills – strong business acumen; past experience in leading analytics projects; strong understanding of sales and marketing execution (to ensure that the analytics results can be used); and, a broad understanding of the latest technologies (to work with the internal IT team to ensure all customer and operational components are integrated and automated). On top of all this, the leader needs to have strong communication and interpersonal skills.

Hence, many companies typically hire a specialist consulting firm like ours or large multinational consultancies to help get things started. As the business benefits become more concrete and the internal teams understand how everything works together, the appropriate headcounts are often gradually added to build out the internal capabilities.

A repeatable mechanism for turning insight into actionEven if useful insights are successfully discovered, they are often presented in the form of powerpoint documents for senior executives. It can easily take most

companies months from the time that an analysis is done to the point when a decision is made and action is taken, and by then the action may no longer be relevant and effective.

To solve this problem, manual data analyses need to be upgraded to “real-time algorithms” where insights also become data that can be used right away.

Upgrade your mindset behind marketing campaignsWhen data insights can be generated in real-time, customer interactions also need to be in real-time in order to maximize the highest possible response rate. However, many marketing teams are still stuck in the old days of manual marketing campaign management – manual extraction of marketing lists, manual execution of marketing campaigns where campaigns are done one at a time, etc. This should no longer be the bottleneck as marketing automation technology is becoming more mainstream, allowing marketers to, among other things, automate campaigns across multiple channels.

The key first step is to take action – select a technology (and perhaps a con-sultancy that can help guide your internal team for the first six to 12 months) and pilot automated marketing campaigns. Test, learn and improve. It won’t be per-fect on day one, but when you look back after one year, you will be amazed by how far you have come along.

Too good to be true? Pioneers such as Pizza Hut Hong Kong, which I have had the privilege in serving, have done just that since mid-2015 with phenomenal business results. Its social customer relationship management program has won awards in innovation, technology and marketing.

Some courageous business leaders have already blazed the trail, so what are you waiting for? Taking action is the first step to success.

…turn big data concepts into business results

The Chief Executive Officer of CLiX International, a provider of customer relationship management solutions, shares his experience in helping companies with big data-powered sales generation

FinanceValuation

24 November 2017

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Earlier this year, the Securities and Futures Commission issued a guidance note after being increasingly concerned that some listed companies are acquiring assets at unreasonably high prices or selling assets that are undervalued. CPAs explain to Nicky Burridge the challenges in business valuation

FINDINGTRUE VALUE

Illustrations by Simone Altamura

A Hong Kong-listed company managed to lose HK$125 million through a string of disastrous

acquisitions and disposals over a three-year period. Despite its core business involving advertising and marketing services, Inno-Tech Holdings decided to acquire three hotels and a gold mine in Mainland China, only to dispose of them around 18 months later.

At the heart of the loss was not poor timing, a market downturn or even simple bad luck, but rather a failure to ensure the assets were correctly valued and the purchase price justified.

A subsequent investigation by the Securities and Futures Commission (SFC) led to four of Inno-Tech’s directors being disqualified and pursued for compensation.

The case, while an extreme example, is by no means an isolated one, with the SFC saying it was seeing far too many transac-tions announced with unusual valuations.

Its concern about the issue became so great that in May this year it issued guidance on corporate transactions and valuations, reminding directors of their responsibilities to ensure acquisition

targets were properly considered and assessed.

“The details of some transactions announced by companies suggested that the directors did not appear to have acted properly when assessing targets or dispos-als,” says Michael Duignan, Senior Direc-tor, Corporate Finance, at the SFC. “Large sums were being paid for apparently poor-quality assets or businesses, and the value of these assets was being written off in the subsequent annual accounts.”

He adds that when the SFC raised enquiries about some transactions, the justification given for the purchase price often included a report giving a valuation. But, he explains, it was described as being a “calculation report” rather than a valua-tion report. “The valuations set out in the report were often based on unquestioned, unverified and often wildly ambitious assertions about future performance, which was in stark contrast to the actual historical performance achieved by the target,” Duignan says.

He adds that the assertions upon which they were based were often made by the vendors, who were somewhat self-interested, with this valuation then used by

the acquiring company as justification for the transaction.

Uncritical acceptanceIn the case of Inno-Tech, the HK$99.5 million purchase price for a 81.5 percent share in a gold mine was based on a feasibility study report provided by the vendor stating that the maximum mining capacity was 1,200 tons per day.

In its investigation, the SFC noted that there was no indication that the vendor was asked to justify the figure, even though a separate feasibility study put the capacity significantly lower at just 150 tons per day.

Despite their lack of previous experi-ence in mining, there was no documentary evidence that the directors of Inno-Tech had made any site visits or had meetings or telephone conferences with geologists, accounting experts, technical mining specialists or mining operators.

Instead, the SFC concluded the direc-tors relied “uncritically” on the valuation provided by the vendor. Inno-Tech sold its stake in the mine 17 months later at a HK$84.5 million loss.

Duignan says in some cases reviewed by the SFC, the companies being acquired

November 2017 25

FinanceValuation

26 November 2017

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had never made a profit, had only been in existence for two years or less, and had no assets.

“It was also unlikely to be a coincidence that when the SFC raised enquiries in rela-tion to such transactions, the timetable for the transaction was often extended, and as the enquiries became more detailed, the transactions were cancelled,” he says.

In its guidance note, the SFC empha-sized that directors should not blindly and unquestioningly accept financial forecasts, assumptions or business plans provided to them, typically by a vendor or the man-agement of the target, but must carry out independent due diligence.

It also warned financial advisors appointed by listed companies to conduct their own assessments and verify the reasonableness of the forecasts, assump-tions, qualifications and methodologies of any valuation.

The note added that if any forecasts or assumptions appeared to be unrealistic, financial advisers should bring this to the attention of the directors.

Valuation challengesThe reasons why companies may be overpaying for acquisitions are many and varied. Duignan says there is a tendency for some companies in Hong Kong to try to expand their way out of difficulties by starting a completely new line of business. “We saw a rash of companies buying coal mines and writing off the value within a year after deciding it wasn’t worth what they paid for it,” he says.

But he adds that in other cases: “The suspicion is that the directors were in some way going to benefit from the process, that there is some connection between the vendors and the buyers.”

Raymond Cheng, Managing Director of HLB Hodgson Impey Cheng, points out that a significant number of listed companies in Hong Kong are characterized by high concentrations of shareholdings,

providing opportunities for abuse. “A small minority of companies are buying high and selling low to the detriment of their minority shareholders, while benefiting their controlling shareholders,” says Cheng, a Council member of the Hong Kong Institute of CPAs.

But even when company directors do carry out due diligence, valuations are not always straightforward. Eugene Liu, Managing Partner and Head of Consulting at RSM Hong Kong, points out that valuation is both a science and an art, and values should be thought of as being reasonable rather than correct. He adds that there are technical difficulties involved in valuing certain types of assets, such as mining or biological ones, or structured financial products with complex terms and conditions.

Different valuation methods can also sometimes give significantly different results, while what is considered a reasonable assumption or interpretation of an assumption is likely to vary from valuer to valuer. But Liu, a member of the Institute and the National Association of Certified Valuation Analysts, adds: “The valuer’s ethical standards, independence,

and the extent to which the valuer is susceptible to being influenced by management is also a factor.”

Wiley Pun, Associate Director, Business and Financial Instrument Valuation, at Savills, agrees that a “lack of professional scepticism” on the business valuer’s side is an issue, as is adopting the forecasts provided by the target’s management without question.

“Another possible cause is the lack of thorough technical understanding of the coherence of the valuation approaches and parameters, which would lead to erroneous conclusions,” says Pun, an Institute member.

An extreme example, he adds, would be a “pure textbook follower,” where all the calculations may be technically correct, but do not make commercial sense.

The fact that many business valuations involve forecasts, which are inherently uncertain, is also an obstacle. “You are looking at the future of sales and profitability and the market, therefore the challenge will be what support can you find to substantiate and back up those assumptions as the input into the valuations,” says Cheng.

He adds that in many instances information may not be available and the valuer will have to study historical analysis and comparable companies to form an opinion.

Pun points out that if a valuer was using a market approach, they would have to carefully select comparable companies for the derivation of implied valuation multiples, such as price to earnings, but sometimes there may be a lack of comparable companies.

Janet Cheung, Partner and Head of Valuation Services, KPMG in China, notes that sometimes when merger and acquisition activity is high, it becomes a sellers’ market, leading to pricing being higher than normal. But Duignan at the SFC says: “There are transactions where

“ You are looking at the future of sales and profitability and the market, therefore the challenge will be what support can you find to substantiate and back up those assumptions as the input into the valuations.”

November 2017 27

FinanceValuation

28 November 2017

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those factors are in play, but they are less likely to be the sort of transactions we have big concerns about.”

Low entry barrierAside from the technical dif-ficulties involved in valuations, the low entry barrier to become a valuer is also an issue.

Liu says that in recent years a number of valuation firms have emerged in Hong Kong that are hiring graduates without appropriate qualifications and experience to carry out complicated valuations, competing on ever-lower fees.

He suggests the way forward would be for a regulatory body to create a licensing system and enforceable valuation standards to ensure valuers are technically qualified and fulfilling the requirements to be independent and ethical.

He points out that auditors and accountants are supervised by the Financial Reporting Council and Hong Kong Institute of CPAs, while surveyors fall under the Hong Kong Institute of Surveyors or Royal Institution of Chartered Surveyors, but there is no comparable body for valuers.

Pun agrees that one major problem with the business valuation industry in Hong Kong is the lack of regulation and entry barriers. “Unscrupulous companies may engage an

unscrupulous valuer to sign off a valuation report that may under or over value the target as the company requested,” he says.

He adds that in Mainland China, valuation firms have to be registered and they are reprimanded if they fail to comply with standards set by the China Appraisal Society, China’s professional valuation organization, but there is no similar system in Hong Kong.

In an interview with the Malaysian Institute of Accountants in September, Sir David Tweedie, Chairman of the International Valuation Standards Council, suggested that the entry requirements for valuers need to be as rigorous as they are for accountants. He would like to see professional bodies set up for valuers that would only admit people with the right qualifications, experience and ethics, and would discipline members who failed to live up to these standards. He has also called for the introduction of global valuation standards, which all valuers would use.

Some in the industry are making changes to their operating models. William Yuen, Director at Ascent Partners Valuation Service, explains that his firm has taken a number of steps to ensure its valuations are accurate.

He says: “We have developed automated valuation tools which

not only increase work efficiency but also reduce inadvertent human errors. All valuation works also have to go through three levels of reviews before being sent out to clients and other professional parties.” These reviews include a peer review and a final review by a supervisor or manager, and aim to ensure that valuations are rational and stand up to criticism.

The role of CPAsCPAs have a role to play in help-ing to ensure valuations are cor-rect. Cheung at KPMG points out that CPAs are increasingly being involved in valuations, in par-ticular because of the financial reporting requirement of IFRS 13 Fair Value Measurement.

Pun agrees. “CPAs understand businesses from the inside out,” he says, “they can help to make sure a valuation is accurate.”

He adds that professional scepticism and business acumen are built into the DNA of CPAs, which make the CPA qualification a suitable designation for business valuers. “CPAs have been evaluating the truth and fairness of financial statements and the health of businesses for decades in the capacity of an auditor. For those of us who are business valuers as well as CPAs, we can help ensure valuations are reasonable right from the start.”

“ CPAs understand businesses from the inside out. They can help to make sure a valuation is accurate.”

In July, accountants and brokers urged

Hong Kong’s Securities and

Futures Commission to issue standards for qualifying the

value of non-property assets, reported

South China Morning Post. “The financial statements of some companies contain valuation reports

of their investment assets. The valuations

of these assets affect their financial

performance, but then there’s no standard for valuation. It’ll be great if valuations can follow

a similar standard [as with global

accounting],” Clement Chan, past president of the Institute, and

Managing Director of BDO Hong Kong, told

SCMP.

November 2017 29

Success ingredientEdward Coultrup

Edward Coultrup was destined to become an engineer. That was his father’s profession, and his brother’s.

It seemed inevitable once he had acquired a degree in mechanical engineering from the University of Sheffield in the United Kingdom.

He had even applied for what many would consider a dream job in the field: an engineering position with a Formula 1 racing team. Then he had second thoughts. “When I graduated I wanted to do something differ-ent,” he tells A Plus. “I wanted to learn about business and do something broader.”

Coultrup decided that accountancy hit the spot. “Motor racing engineering would have been a great job,” he says reflectively. “But, you know, I would have been looking at finite element analysis and aerodynamics and it would have been all very technical. I wanted to do something broader.”

Today, 17 years later, Coultrup is Regional Head of Internal Audit at Lafarge-Holcim, the world’s biggest cement maker, and a Hong Kong Institute of CPAs member.

In the company’s Singapore offices, he looks out from a 31st floor conference room with a view over the skyscrapers of Downtown and the Straits of Singapore beyond.

While Singapore’s 5.6 million people con-stitute a relatively small market for the global giant, the company has made a considerable imprint on the built environment of the is-land nation’s skyline. Local landmarks made with its products include the Supertree Grove at Gardens by the Bay, a vertical botanical installation; Reflections at Keppel Bay, a residential complex designed by “starchi-tect” Daniel Libeskind; and the undulating Henderson Waves Bridge across the island’s Southern Ridges.

More importantly for the company, Singapore serves as one of three regional headquarters. From his Beach Road office, Coultrup oversees the company’s internal audit for South Asia, South East Asia, China and Australasia. Counterparts in Miami and Zurich oversee the company’s operations in the Americas and Europe, Middle East and Africa, respectively.

The cement industry has been buffeted by recent scandals involving price-fixing, corruption, pollution and even alleged links to terrorism. LafargeHolcim, the biggest cement maker in the world, hasn’t been immune to controversy, but, as Regional Head of Internal Audit Edward Coultrup explains to A Plus, the company is moving steadily towards instilling best practices

Photography by Juliana Tan

CONCRETERESULTS

30 November 2017

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CONCRETERESULTS

Edward Coultrup worked previously as an auditor at KPMG. After five years at the Big Four firm, he moved to mid-tier firm Moore Stephens, working in both its Monaco and Hong Kong offices.

November 2017 31

Success ingredientEdward Coultrup

The regional system had been set up by a former KPMG partner, with whom Coultrup had worked in Hong Kong. “He had just taken the group head of internal audit role and called me up to open the office in Singapore.” For Coultrup it was a chance to work in an organiza-tion where internal audit was highly regarded. “We audit the key risks that the organization faces,” he says.

Concrete jungleIn return, LafargeHolcim’s management expects the Singapore team, including Coultrup, to be on top of the issues. “We’re a regional office and the idea is that we bring specialist support to the region,” he says. “We have internal audit, regional procurement and industrial functions to support the countries, and other regional heads such as human resources, legal and compliance.”

In his internal audit role, Coultrup says there are three main lines of responsibility. “We have the ‘standard’ role to provide assurance over the significant risks and controls. We are also here to be a change agent within the context of the merger of Lafarge and Holcim, which took place in 2015 and guide the legacy companies to become LafargeHolcim.”

The team’s third role is talent development. “The idea is that we don’t just recruit people like me, with an accountancy background. Instead, we hire top talent from operations and put them in internal audit for three years, and send them out, hopefully, at a more senior level such as a country executive committee member, given the exposure a stint in internal audit gives them.”

The new talent will be needed. The €42 billion (HK$380 billion) Lafarge-Holcim merger, creating a company with €26 billion in 2016 sales and about 90,000 employees at more than 2,000 plants worldwide, is part of a continuing transformation in the global cement sector. “This industry is changing, especially in this part of the world, where we see China bringing on capacity,” says Coultrup.

Traditionally, most of the Asia-Pacific market has been cement sold in bags, for the construction of buildings, which involves a massive transport enterprise. “We have a relatively low-price material that is heavy, so logistics is a significant cost for us,” says Coultrup.

The company has sought to optimize its logistics network, but, “it’s a challenge,” as Coultrup acknowledges. “Generally a cement plant is built near limestone reserves and within driving distance of a big population. When we have hundreds of truckers outside the plant and they’re all tiny subcontractors it brings its own set of risks and challenges.”

That could mean concentrating more on higher-value niche products. “We produce special cement to be used in oil wells, and for high rises, and special solutions like quick-drying cement for applications such as airport runways.”

Hard decisionsThe global cement industry has something of an image problem. The production process contributes about 5 percent of total anthropogenic carbon dioxide emissions, according to a 2017

report by the Centre for International Climate Research (CICERO).

There are other environmental effects, from the deposit of waste concrete in landfills to the huge amounts of energy required for its production. “To make cement we have to heat a kiln to 1,400 degrees Celsius, so it’s hugely energy intensive and we consume significant amounts of energy – mainly fossil fuels,” says Coultrup. “So it’s a big cost for us, and, more importantly, it brings sustainability challenges.”

Coultrup says the company is taking industry leading initiatives to be more sustainable. “We have a big business called Geocycle, which is where we put

32 November 2017

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“ To make cement we have to heat a kiln to 1,400 degrees Celsius, so it’s hugely energy intensive and we consume significant amounts of energy – mainly fossil fuels.”

waste in our kilns that either has calorific value or that cannot be destroyed by other means.”

Novel substances with high calorific value – i.e. the amount of energy produced through burning that helps the cement production process – include biomass. “We started using biomass – rice husk is a great source of energy for us and we are moving more into the use of municipal waste.”

Other substances impede the production process but are used for the public good. For example, in South East Asia soil contaminated by the oil industry is fed into the company’s kilns where the toxins are removed. “We also have regulated businesses where we destroy counterfeit

currency, hospital waste or drugs in our kilns,” Coultrup says.

“We have to look at the risks,” he says. “There’s an equation in there. The more non-cement-making materials we put in the kiln, the worse it is for the cement. We have to compensate for it – it affects the temperature of the kiln, it affects the output, so it’s a balance.”

In addition, there are compliance risks in the countries LafargeHolcim operates, Coultrup points out. “We are a multinational and must maintain the highest standards of compliance – the risks of not doing so are huge in the modern business environment.”

To be sure, LafargeHolcim has faced some controversy in recent months – the

In his internal audit role, Coultrup is in charge of providing assurance, being a change agent and talent development.

November 2017 33

Success ingredientEdward Coultrup

34 November 2017

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“ We’ve moved from the days of digging out invoices to see if they were approved. We extract data from the group’s systems, and see out of the whole population of thousands of invoices how many were approved.”

LafargeHolcim was founded in July 2015, following the

merger of French industrial company Lafarge and Switzerland-

based cement and aggregates

company Holcim.

company faces a French judicial inquiry into whether it paid armed militias to protect its business in Syria, the Financial Times reported in June. Coultrup says: “The group maintains a very high level of compliance and internal audit plays an important role. We perform audit procedures designed to assess the effectiveness of the group’s compliance programme, providing an independent opinion as to whether the expected high standards are being maintained.”

Distant horizonsSuch issues are part of the attraction of Coultrup’s role as a professional accountant in business. “In a job like this, you’re more in the details of an industry,” he says, contrasting his present job as a business partner with his earlier positions in auditing.

After graduation, Coultrup began his career with BDO in Chelmsford, in the southeast of England. “I was there for three years until I qualified and then I joined PKF.” But with a brother who had worked for a non-government organization in the Philippines, the wider world beckoned. “I’d come to Asia a couple of times on holiday and always enjoyed it.”

In those early-Internet days, Coultrup could not rely on the job sites popular today. Instead, he flicked through an

accounting magazine and saw advertisements from the Big Four firms for positions in Hong Kong. “I had an interview with KPMG and they hired me. I spent five years with them, which was really a great time and where I learned a huge amount as a young professional. However, I’d come from the mid-tier and I’d just got married and my daughter was born and thought I’d aim for a more balanced life.”

But as any young auditor knows, the hours are tough. “I was a senior manager working on a major account and on Valentine’s Day I didn’t go home. I worked through the night and through the next day,” Coultrup recalls. He moved to Moore Stephens, working in the mid-tier firm’s Monaco office for the first eight months before moving back to Hong Kong for personal reasons. After two years there, he was contacted by what was then Holcim, which he joined in May 2014. He worked between Singapore and Hong Kong for the first few months, and in August that same year, he and his family relocated to the Lion City.

Coultrup became an Institute member in 2011. “I pursued it as I could convert my U.K. qualification to the Hong Kong Institute of CPAs qualification. Also, being based in Hong Kong for so many years, it keeps me close to what is happening with

the profession in Hong Kong and gives me credibility in Hong Kong, and Asia as well,” he says.

Looking to the future, Coultrup sees data analytics as the future. “Firstly there’s the analytics tools that the business uses: what’s up and what’s down in budgets, sales, logistics, volumes, prices, all in real time. We can click into the tool and it’s quite powerful.”

More relevant to Coultrup, the data has an internal audit role. “We’ve moved from the days of digging out invoices to see if they were approved. We extract data from the group’s systems, and see out of the whole population of thousands of invoices how many were approved. It means we will have time for other things – less time pulling individual invoices and delivery notes – it’s more interrogating the system.”

Given the relative lack of regulation compared with external auditing, Coultrup sees internal audit as a more flexible role giving advisory and business partnering opportunities. “It’s nice that we can be flexible in the engagements we perform and deliver controls based audits as well as work of a more consulting and advisory nature. We have that freedom. At the end of the day our customers are internal, so it’s nice to have flexibility to really add value to the business.”

November 2017 35

Work and lifeCross Harbour Race

36 November 2017

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Early Sunday mornings possess a certain element of tranquility. Apart from the occasional jogger or car driver, the majority of the city’s population can be found at home sneaking in an extra wink

of sleep. Sunday 29 October, however, was different. Chattering loudly and teeming with anticipation, thousands of swimsuit-clad people of different ages and walks of life – including a few Hong Kong Institute of CPAs members – gathered around the Tsim Sha Tsui Public Pier as they prepared to dive into the waiting harbour.

Douglas Cheung, Corporate Finance Manager at CLC International Limited, was among one of the 2,940 participants who crossed the Victoria Harbour as part of the 1-kilometre New World Harbour Race (also known as the Cross Harbour Race), to the Wanchai Golden Bauhinia Square Public Pier. “When I was young, I always crossed the harbour by ferry,” recalls Cheung. “I think being able to swim across the body of water that helped shape Hong Kong into a global trading centre is a really special privilege.”

Cheung swims as a hobby and has participated in triathlons and other long-distance sporting events in the past, including the Standard Chartered Marathon and cycling marathons. “Swimming is a lifetime sport that’s good for all ages, and there’s also less chance of an injury compared to competitive contact sports like football,” he says.

Before becoming a swimmer, he suffered from chronic neck pain due to long hours at the office combined with an improper sitting

CROSS HARBOURHUSTLEThe annual Cross Harbour Race brings together thousands of avid and recreational swimmers, giving them a chance to traverse the waters of Victoria Harbour. Julian Hwang talks to Institute members who took part in one of the Hong Kong’s most famous sports event about what gets them diving

Photography by Anthony Tung

Photo credit: Hong Kong Amateur Swimming Association

Participants of the New World Harbour Race swim towards the Golden Bauhinia Square Public Pier in Wanchai on 29 October.

November 2017 37

Work and lifeCross Harbour Race

Julia Cheung is confident in her physical abilities despite being a first time participant at an open sea event.

38 November 2017

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posture. “I went to see many doctors and physicians, but nothing they prescribed or recommended would work,” he explains. “Then I met a physical therapist who suggested I follow a strict swimming routine, and all the stretching from swimming helped drive away the pain.”

Cheung is well aware of both the thrills and dangers of ocean swimming. “At a pool, safety is rarely a concern because there’s bound to be lifeguards and other swimmers around you,” he says. “You’re introduced to different elements when you swim at sea, including water currents and the lack of swim lanes to guide you in a direction.” Similar to previous years, the race organizers this year implemented extensive precautions, including multiple lifeguards posted along the swimming route, mandatory ankle trackers and a safety float tied around each participant’s waist. “These measures give us better peace of mind so we can stay focused on the race,” says Cheung.

While some participants may choose to treat the cross harbour event as an opportunity to compete for the best time, Cheung preferred to participate in the Leisure Group. “I’m at a bottleneck with my current swimming speed,” explains Cheung. Even after consulting his coach and tweaking his strokes and swimming posture to become more efficient, he noticed that his speed could not be improved any further, potentially due to physical or fitness reasons, according to Cheung. “Until I’m able to breakthrough that limit, I think aiming to complete in the harbour race and maintain my time of about 30 minutes will be my goal for next year’s event.”

Swimming with purposeIn June 2014, Ricky Hung saw an advert promoting the Cross Harbour Race. “The race back then was 1.5km that spanned from Kwun Tong to Quarry Bay,” recalls Hung, Associate Director of Relationship Management at Standard Chartered Bank Hong Kong. “It was only this year that they changed the route to Tsim Sha Tsui to Wanchai.”

Before signing up, Hung had enjoyed swimming in pools until doing repetitive, meaningless laps became uninspiring. Having a concrete goal reignited Hung’s interest. “With the convention centre’s large size, it is very easy to identify. I think having a big target to swim towards motivates participants more compared with just swimming in a general direction,” says Hung.

The experience of swimming across the Victoria Harbour is an empowering one, he adds. “This race lets us legally cross the harbour without riding on a ferry or driving through the cross harbour tunnel.”

Hung has also participated in running events such as the 10km Standard Chartered Marathon in 2016. But after he sustained a knee injury towards the latter half of the run, Hung, determined to keep

fit, decided to take up swimming instead. Being in the water is his way of

unwinding and enjoying a bit of personal time. “I usually swim at pools early on weekend mornings, as it works best with my family’s schedule,” he says. “Being the only person there, swimming with the entire lane to myself is quite relaxing.”

Hung says it’s essential for all participants of the Cross Harbour Race to ensure that their body is in good shape and capable of handling the long-distance swim before signing up. For members thinking of participating in the Leisure Group of the race next year, Hung recommends timing their laps at a pool first to see if they can meet the race’s entry requirements. “People who haven’t participated in the race before need to pass a time trial first,” he explains. “You’ll have to demonstrate that you can complete multiple laps totalling 1.5km within 45 minutes or less to qualify.”

As the try-outs begin in September, starting to train around April should provide sufficient time to build up the necessary strength and endurance needed to swim that distance, according to Hung. “The Institute usually organizes swimming classes in collaboration with Hoi Tin Swimming Consultant during this time,” says Hung, who used to be a regular participant of those classes. “I wasn’t too familiar with most of the swimming styles before I signed up in 2014, so I mainly did breaststrokes.”

Hung completed the 1km race this year in 30 minutes, beating his time of 50 minutes for the 1.5km race in 2014. “Apart from the sea being a bit cold, the water conditions this year were great,” he says.

“ Having a big target to swim towards motivates participants more compared with just swimming in a general direction.”

November 2017 39

Work and lifeCross Harbour Race

A personal achievementJulia Cheung, a first-time participant of the race, felt a great sense of satisfaction when she reached the finish line. “I’ve never participated in these large-scale events before, but I’m proud to have completed it because it shows that my body is still capable, even at the age of 55,” says Cheung, Vice President of Finance and Company Secretary at Skyfame Realty (Holdings) Limited, a Mainland property developer and listed company in Hong Kong.

Cheung swam occasionally during her school days, but dropped it due to an overly packed work schedule. It wasn’t until 10 years ago that she decided to pick it back up for leisure. “Swimming helps me to relax and refresh myself after work,” says Cheung, “and while you have your mind focusing on something else, you may

even get new solutions for work-related problems.”

However, after several years of swimming again, she felt that her technique was wrong and was eager to learn more swimming styles. At the same time, she found out that the Institute was organizing swimming classes and signed up straight away.

It was at one of these classes that Cheung learned about the New World Harbour Race. “The coaches suggested that I give the Leisure Group a try in 2016, but I wasn’t able to pass the time trial,” she recalls. Keen to improve, she sought a coach for one-on-one or two-on-one training sessions, and later passed the time trials this year without problem.

Cheung had trained to the best of her ability for the race, but there were some things that she couldn’t anticipate, such as the lengthy wait time at the starting point. “Before we are given the signal to go, we needed to enter into the water and wait within the starting point’s boundary,” recalls Cheung. “Treading water quickly became taxing especially with so many people crammed into one small area, so ac-cidental kicking or pushing was inevitable.”

“ I’m proud to have completed it because it shows that my body is still capable, even at the age of 55.”

Douglas Cheung enjoys swimming at sea for an unique experience that cannot be found at pools.

40 November 2017

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The first cross-harbour swimming

race was held in 1906. The original

route was 1.6 kilometres and between Tsim

Sha Tsui and the former Queen’s Pier in Central.

After the race started, Cheung also noticed that she had followed the wrong people and was swimming a suboptimal route. “The event organizers had recommended swimming along a curved path for an easier time against the water current,” says Cheung. The people she had followed had made a beeline for the finishing point. While the distance was less than the suggested path, pushing against a current made the journey much more tiring. “To ensure that I was swimming in the right direction, I used breaststroke most of the time during the race rather than freestroke, which is the preferred style

in long races,” says Cheung. “This left me with a minor backpain after the race, but despite so, completing it in about 30 minutes has given me mental satisfaction and confidence.” Cheung is considering signing up again next year and for more open-sea events.

She still enjoys attending the Institute’s swimming classes for the consistent exercise and the chance to meet new friends, and even share career advice with younger members. “I met Ricky Hung at the classes,” she says, “and we’re currently discussing potential work collaborations.”

“ Swimming is a lifetime sport that’s good for all ages, and there’s also less chance of an injury compared to competitive contact sports like football.”

Ricky Hung keeps a strict swimming regiment during weekends for both physical and mental fitness.

November 2017 41

Since December 2016 auditor’s reports of listed entities are required to describe key audit matters (KAMs), enhancing the communicative value of the report to shareholders and other interested parties.

The Hong Kong Institute of CPAs car-ried out a review of 423 auditor’s reports of Main Board entities and 33 reports from the Growth Enterprise Market (GEM) of The Stock Exchange of Hong Kong Limited. Samples were taken from entities on the Hang Seng Composite Index which repre-sent 95 percent of market capitalization while the entities from the GEM represent the 25 largest and 25 smallest companies by market capitalization – of which 33 had reports available at time of review.

Range of KAMs reportedAt least one KAM is reported by auditors except when a disclaimer of opinion is issued. Hong Kong Standard on Auditing (HKSA) 705 (Revised) Modifications to the Opinion in the Independent Auditor’s Report forbids the auditor from communicating KAMs when the auditor disclaims an opinion on the financial statements, unless required by law or regulation. The majority of auditor’s reports present the KAMs and how they have been addressed in a table.

The number of KAMs reported by Main Board entities ranged from zero to eight and the average number reported was

between two and three (see diagram 1). The average number of KAMs reported was 1.8 for GEM samples (see diagram 2).

Types of KAMs reportedFor Main Board samples, impairment of receivables, property valuation, goodwill, impairment of non-financial assets, and revenue recognition make up 58 percent of KAMs reported (see diagram 3).

For GEM samples, 55 percent of KAMs related to impairment of receivables, acquisition, and revenue recognition (see diagram 4).

These KAMs broadly reflect areas that typically involve significant management judgement, and typically require signifi-cant auditor attention.

Other observationsSeven of the Main Board samples and two GEM samples disclosed going concern matters either in a separate section or in KAMs. One Main Board and two GEM samples disclosed going concern in the “basis for disclaimer of opinion.”

Paragraph 15 of HKSA 701 Communi-cating Key Audit Matters in the Independent Auditor’s Report highlights that a material uncertainty related to going concern is a KAM by its nature, but would be com-municated in a separate section of the auditor’s report in accordance with HKSA

570 (Revised) Going Concern. Nonetheless, the International Auditing and Assur-ance Standards Board acknowledged that sometimes matters relating to going concern (including “close calls”) may be KAMs, in part because there may be a significant or difficult auditor judgement required in forming their opinion.

In extremely rare cases, where there are multiple uncertainties significant to the financial statements, the auditor may express a disclaimer of opinion rather than including the statements required. Guidance can be found in Paragraph 10 of HKSA 705 (Revised).

A separate section on “Other Information” is required to be included in the auditor’s report. This section identifies the accompanying information provided with the financial statements in an annual report and reports on any material inconsistency. In the study 13 Main Board samples indicated that management had not provided certain information prior to the date of the auditor’s report. There were no reports of material inconsistency or material misstatements.

For GEM samples, two reports had a disclaimer of opinion and two stated that there was insufficient evidence for the auditors to conclude whether the supplementary information was materially misstated.

First year experiences with revised auditor’s reports

42 November 2017

SourceRevised auditor’s report

2

Note: The charts illustrate the number and type of KAMs reported by the entities sampled. They should not be regarded as indicative of an appropriate or correct number or types of KAMs. The key purpose of reporting KAMs is to provide transparency about the areas of a business that were most significant to the auditor, and this may vary year by year, between entities and between industry sectors. Auditors are responsible for determining and reporting entity-specific KAMs as they see fit.

10

14

7

KAMs reported by GEM samples

0

1

2

3

4

5

6

7

8

2

3.3

5

2

3.1

4

1

2.1

4

1

2.5

4

1

2.2

5

1

2.4

4

1

2.4

5

1

2.4

5

1

3.2

8

2.4

4

1

2.3

6

Telecommunications

ConglomeratesEnergy

MaterialsUtilit

ies

Information technology

Consumer services

Industrials

Financials

Properties and construction

Consumer goods

KAMs reported by Main Board samples by industry sector

Minimum Average Maximum

0

0 KAM

1 KAM

2 KAMs

3 KAMs

Diagram 1

Diagram 2

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November 2017 43

Top 10 KAMs reported by Main Board samples

Impairment of receivables, loans and advances

Property valuation

Goodwill

Impairment of non-financial assets

Revenue recognition

Financial instruments (excluding receivables, loans and advances)

Inventories

Acquisition

Taxation

Controls 32

42

42

66

85

93

115

116

117

139

0 20 40 60 80 100 120 140 160

Types of KAMs reported by GEM samples

Impairment of receivables, loans and advances

Acquisition

Revenue recognition

Impairment of non-financial assets

Goodwill

Inventories

Financial instruments (excluding receivables, loans and advances)

Property valuation

Contingent liabilities

Taxation

0 2 4 6 8 10 12 14 16 18

1

2

3

3

6

6

6

8

9

17

Diagram 3

Diagram 4

44 November 2017

SourceRevised auditor’s report

Stakeholder surveyThe Institute’s analysis of responses from the survey of practitioners, preparers and users indicate four broad themes related to the implementation of the revised auditor’s reports.

Additional timeThe survey found that the revised auditor’s reports take longer to draft as they are more detailed and carefully written audit reports and require greater levels of communication with the company.

Responses to the survey indicated that some preparers may still not fully understand the objective of including KAMs in an auditor’s report. Instead, they have a tendency to compare with peers and “negotiate” the number of KAMs to be reported and how much detail is included. The Institute does not support this practice as it does not meet the aims of the new standards. Auditors are responsible for determining and reporting KAMs as they see fit.

FeesAudit fees are a discussion between an auditor and its clients. The survey indicates that there has been a wide variation in the way audit fees have been affected in the first year of implementation. The Institute will continue to study the impact of the new requirements on added time spent, added value provided and fees.

Understanding of requirementsInvestors in general found that the revised auditor’s report to be a step in the right direction for enhancing the value added work of an auditor. Some auditors and preparers also believe that the revised auditor’s report now assists management

and investors in having higher quality discussions, for example, regarding risks.

However, the survey found that investors, preparers and some practitioners still need to be educated on the aims of the new requirements. Continuous education for the profession and all stakeholders is therefore needed to ensure all parties fully understand the new audit requirements. In particular:• Auditors need to build on their

communication protocols with clients for a smooth audit. Auditors also need to learn how to apply judgement on what could be a KAM and improve communication through the auditor’s report.

• Preparers must understand that auditors are responsible for determining and reporting KAMs from the matters communicated with those charged with governance. There is a misconception amongst respondents that the management and those charged with governance are allowed to influence the number and types of KAMs reported. Whilst it is useful to have a robust two-way dialogue between auditors and those charged with governance, providing those charged with governance an opportunity to obtain further clarifications, the determination of KAMs is solely the auditor’s responsibility.

• Investors may not fully understand that KAMs are based on the results of the audit on historical financial statements and are not intended to provide insights into other matters, such as corporate governance or forward-looking information. Communicating KAMs is in the context of an auditor having formed an opinion on the financial statements

as a whole and not about divulging a company’s secrets.

Support and co-operation from relevant bodiesIn the interest of maintaining Hong Kong’s relevance as an international financial centre, regulators of auditors, listed companies and directors; standard setters; accounting firms; and professional bodies should cooperate to ensure that the revised auditor’s report achieves its intended objectives. Ideally, regulations for corporate governance, corporate reporting and auditor reporting should be considered together to improve transparency about the judgements made by management and auditors in the preparation and auditing of financial statements.

The Institute will use these findings to facilitate education efforts for all stakeholders and cooperation among relevant bodies. The Institute will continue to study and survey the effects of applying the new requirements to assess improvement areas and further needs. Findings from this study will also be shared internationally.

The full report can be read at: http://ow.ly/T1sM30gAyba

This article is

contributed by

the Institute’s

Standard Setting

Department.

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November 2017 45

In 2016, the mergers and acquisitions (M&A) market involving Hong Kong-based companies was valued at over US$152.4 billion, according to statistics from Thomson Reuters. Hong Kong topped the global initial public offering (IPO) market by the number of offerings in 2016, with just over US$39.4 billion raised through IPOs, share placements, rights issues and other offerings. However, despite this positive financial result, Hong Kong regulators have become concerned about a growing number of irregular listed company transactions.

Notably, the Securities and Futures Commission (SFC) has focused its attention on deemed incidences of Hong Kong-listed companies that have entered into material transactions to acquire assets at unreasonably high prices, or sell assets that are substantially undervalued. The economic value of these transactions does not always appear to equate to the price paid. A key overriding concern raised by the SFC is that the parties to the transaction may not have taken reasonable steps to verify the deal valuation, given the duty directors have to determine whether the terms of the transaction are fair and reasonable, including the consideration paid. The following represents two extremes whereby the directors of a listed company:• May not have appointed a professional

valuer to value the target company or assets of a planned transaction; or

• May have appointed a professional valuer, but placed too much reliance on the valuation, without a sufficient level of review of the valuation methodologies or the reasonableness of the financial projections underlying the valuation, including any key assumptions or qualifications on which the valuation has been based.

The SFC has concluded that as a result, shareholders and listed companies may have suffered losses due to ill-advised transactions in which valuations may be deemed not to have been fair. To address the above concerns, the SFC in May issued the following public documents: i. A guidance note on directors’ duties in

the context of valuations in corporate transactions;

ii. A circular to financial advisors regarding valuations in corporate transactions; and

iii. A statement on the liability of valuers for disclosure of false or misleading information.

These announcements reassert the SFC’s expectations about the responsibility of company directors and the professional duties of financial advisors and valuation practitioners when handling corporate

transactions of listed companies.The guidance note to directors included

the following key points:• The need for a professional valuer,

when the directors do not have sufficient knowledge or expertise in the industry of the investment or disposal.

• Should directors place unquestioning reliance on valuation reports in circumstances where there is no exercise of independent judgment, and it is unreasonable to do so, this will likely be a breach of the directors’ duty of care, skill and diligence owed to the company.

• Due diligence by the directors includes “being satisfied that financial forecasts and assumptions provided in relation to the asset/target company are reasonably justified.”

The SFC’s circular to financial advisors set out some clear reminders to financial advisors on their responsibilities under the Corporate Finance Adviser Code of Conduct (CFA Code), with specific guidance on the steps that they should take to discharge their obligations. Under these guidelines, a financial advisor should:• Not rely solely on representations

made by the directors, their delegates or other third parties;

• Conduct their own assessment and undertake reasonableness checks

New SFC guidance on valuations for listed company directors and

financial advisors Kenneth Yeo and Daniel Martin look at how the regulator is taking a stronger stance in overseeing the mergers and

acquisition activity of Hong Kong-listed companies

46 November 2017

SourceValuation

as appropriate on the forecasts, assumptions, qualifications and methodologies of the valuation and the directors’ decision on whether or not to appoint a professional valuer. In certain circumstances, it may be appropriate for several valuation methodologies to be utilized in arriving at the final valuation result;

• Bring to the attention of the directors any incidence where it deems a financial forecast to be unduly optimistic, for the directors’ consideration and appropriate action.

The SFC set out a liability statement that provides guidance to valuers on their potential liability for false or misleading information in relation to their valuation report. This is relevant given valuation reports are often included in listed company publications. The SFC will likely investigate the involvement of a valuer in the disclosure of false or misleading information by a listed company if it appears to the SFC that:• The valuer knew or should have known

that the valuation and/or any of the underlying assumptions was not reasonable and fair;

• The valuer has made an obvious mistake in the valuation;

• The valuer has not exercised the degree of skill and care that is ordinarily

exercised by reasonably competent members of the profession; and

• The valuer has lost independence or impartiality in performing the valuation — for example, a valuer would not be impartial if they, who the listed company instructed to produce the valuation, advised the vendor of the target company to amend key terms of sales agreements, e.g. the unit price and transaction volume of the sales agreements, which formed the basis for the revenue projection used in the valuation of the target company.

The announcements are an example of the stronger stance taken by the SFC in regulating the M&A activity of listed companies. The SFC and the announcements aim to ensure that listed companies acquire or sell assets at prices that are in the best interests of the shareholders and the listed company. The transacted prices should be fully supported by a robust valuation report and with due diligence conducted on the target by the directors and financial advisors.

The SFC’s current initiatives raise the required standards and responsibilities of directors, financial advisors and valuers. We note, regulators have and will continue to take action on directors or professional firms for alleged breaches of duties or misconduct. Earlier this year, the Hong

Kong Independent Commission Against Corruption charged the directors of two listed professional services firms for alleged unannounced issues.

Ongoing changes to listing rules and accounting standards globally have increased the demand for high quality valuation and financial information. The accounting profession, alongside other professional bodies in Hong Kong, should also take on the responsibility for ensuring the quality of valuations for financial reporting.

This would help lift standards and aid the SFC’s work to minimize the irregularities in company transactions and protect investor interests.

Kenneth Yeo is Director

and Head of Specialist

Advisory and Daniel Martin is Principal of

Specialist Advisory at

BDO Hong Kong

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November 2017 47

The Cybersecurity Fortification Initiative (CFI), which was announced by the Hong Kong Monetary Authority in 2016, has been a hot topic in the Hong Kong banking industry, and financial institutions are working very hard to comply with the initiative. Financial institutions are going through a cycle that Deloitte defines as “Secure, Vigilant and Resilient” to reassure the requirements are being addressed. However, it is also important to look at it from the operation side by implementing necessary controls and technologies.

Technology risk frameworkDeloitte’s technology risk framework incorporates key cybersecurity areas and is built on industry leading practices and regulatory expectations. It allows our clients to take stock of current capabilities to manage cybersecurity risk.

A computer network is a fundamental element of the business environment and it is important to secure it and set that as the priority.

Improvements in cybersecurity posture are possible as network segmentation can be used to reduce the risks and impact of cyberattacks. By taking a pragmatic approach to introduce network segmentation, financial institutions can minimize business disruption and reap benefits, such as limited exposure after an intrusion, reductions in lost productivity, remediation costs, and reputational damage from actual loss of personally identifiable information (PII) or financial data. As part of a layered security

philosophy, network segmentation enables financial institutions to survive intrusions and minimize or even prevent successful data breaches. In the end, this allows for a speedy return to business as usual.

Network segmentationNetwork segmentation is a “tried and true” technique that has been implemented through the years to address an assortment of issues in information technology (IT) infrastructure environments. Network segmentation ultimately leads to improved availability of the entire network by localizing the impact of faults when they do occur. Extending this concept to cybersecurity, network segmentation can restrict lateral movement of malware or malicious actors if or when a PC or server is compromized. With network segmentation, the cyberattacker is contained to a localized portion of the network to minimize the opportunities to find valuable information or resources. Network segmentation is a key element in a layered defense model for cybersecurity. However, it requires collaboration among business and technology leadership in order to be adopted across an organization.

Current stateIn spite of the near universal consensus on the value of network segmentation for improved cybersecurity posture, actual implementations are still rare on internal networks. Many financial institutions have essentially “flat” networks, as far as security is concerned. This puzzling

inconsistency between the mindset related to and the practice of network segmentation is actually easy to explain. For many years, the primary concern was to protect the network perimeter. The outside was “dirty” and the internal network was “clean.” The objective was simply to keep the undesirable traffic out.

Moreover, there was and still is insufficient knowledge of applications and traffic flows inside the network.

Consequently, this necessitates an open internal network to allow communications to occur freely in support of business applications. This places too much reliance on the legacy controls at the network perimeter of the financial institution, which are not entirely effective against the sophisticated attacks of today.

Challenges to reach the desired stateFinancial institutions have complex networks that encompass remote offices, retail branches, campus sites, third-party partners and e-commerce environments, and there are concerns over the introduction of internal network segmentation for cybersecurity. These include:• Incorrect or incomplete identification

of required traffic flows would lead to potential disruptions to business applications.

• To properly implement network segmentation in a “brownfield” environment is a significant undertaking that will require cooperation from stakeholders in the security, application development,

Cybersecurity Fortification Initiative –

An infrastructure prospectiveThomas Lee and Wickie Fung explore the ways to develop cyber resilience under the

Cybersecurity Fortification Initiative

48 November 2017

SourceCybersecurity

network, compute, storage and business functions.

• The creation of a governance process for new or modified applications will be required to sustain the network segmentation.

• Updates to the security policies will be needed as traffic patterns change due to movement of infrastructure components, modifications in applications themselves, or the introduction of new applications.

• There is a cost in both capital and operating expenses associated with the initial deployment of segmentation gateways as well as with the ongoing management of those devices.

Business driversPerimeter network security alone is not completely effective against the increased sophistication of advanced persistent threats and the multiple attack vectors facing financial institutions. In spite of the challenges associated with network segmentation, some key business drivers in support of it are:• Minimize the time, effort, and resources

associated with audits (e.g. PCIDSS)by reducing their breadth through compartmentalizing related resources on the network.

• Limit exposed resources to constrain cyberattackers ability to find critical data or intellectual property even if they gain a foothold in the network.

• Prevent the movement of malware from end-user systems to more sensitive systems and data center resources.

• Supplement the capabilities of perimeter security controls with another layer of defense on the interior of the network.

• Avoid or minimize the lost productivity, remediation costs, credit monitoring costs, reputational damage, and class-action lawsuits in the aftermath of data breaches.

Mechanics of network segmentation• Identify applications, including their

traffic flows and dependencies.• Architect the segmented network. • Construct security policies.• Enable additional security capabilities.• Continuously monitor and update.

Practical approachesImplementing network segmentation is a non-trivial effort in an existing environment. However, this should not deter a pragmatic approach to adopting some degree of segmentation in the internal network. The ideal would be to achieve a “Zero Trust” network, as defined by research and advisory company Forrester. Every organization will need to determine how much network segmentation is appropriate for its situation. With that in mind, here are some practical considerations for introducing this concept to an internal network:• Select low-risk environments as proofs

of concept. Compartmentalizing all servers used for an application test environment would bring minimal risk to the overall business.

• Deploy initially in locations with easier physical or topological considerations. The access layer of the network, where end-users reside, only transports data required by that population.

• Separate the data centre from the portions of the network where end-users reside. This is essentially providing north-south controls over traffic from the entire user population to the services in the data centre.

• Leverage cloud initiatives to segment resources. New private or public cloud projects provide an ideal situation to impart controls over application and data flows inside and out of those environments.

• Prioritize which data and workloads to segment. Any portions of the network

that warrant special consideration due to audit or regulatory concerns should be prioritized.

• Establish governance for new applications or modified workloads. Visibility and knowledge of new or changing traffic patterns is required to adjust the security policies accordingly.

ConclusionNetwork segmentation has been a boon to network performance and availability over the years – enabling effective use of business applications. In a cybersecurity context, network segmentation will protect financial institutions from being completely exposed after an initial penetration by malicious actors. Containing the intrusion to a portion of the environment reduces the overall risk to the institution. Implementing network segmentation across the entire estate is a major undertaking. However, a practical approach to introducing this in a controlled and strategic manner that is consistent with the institution’s overarching security architecture will minimize any potential business disruptions. Network segmentation adds another layer of protection that will partition the enterprise network into manageable, secure segments to reduce the attack surface, limit data exfiltration, and reduce the scope of audits and compliance.

Thomas Lee is Risk

Advisory Partner at

Deloitte China and

Wickie Fung is

General Manager,

Hong Kong and Macau

at Palo Alto Networks

aplus

November 2017 49

Audit and assurance

Institute’s Audit and Assurance Standards Committee meeting minutesThe minutes from the 364th meeting of the Audit and Assurance Standards Committee held on 25 April are now available.

Annual auditing update 2017Around 900 members attended the Annual Auditing Update 2017 “Broad-ening the Horizons” on 21 October. Hot topics discussed include the Institute’s update on the first year of implementing the revised auditor’s report, the use of data analytics in audits, understanding root cause analysis and implementing the new ethical standards on long asso-ciation and non-compliance with laws and regulations.

International updateThis International Auditing and Assurance Standards Board (IAASB)webinar discusses the proposed changes to the International Standard on Quality Control (ISQC 1) which will change the current approach to quality control for firms using the IAASB’s international standards.

Financial reporting

Institute’s comment on IASB discussion paperThe Institute commented on the

International Accounting Standard Board’s (IASB) discussion paper DP/2017/1 Disclosure Initiative – Principles of Disclosures.

Open invitations to commentThe Institute is seeking comments on the IASB Exposure Drafts ED/2017/5 Accounting Policies and Accounting Estimates and ED/2017/6 Definition of Material. Comments should be submitted by 15 December.

International updates• The IASB published narrow-scope

amendments to IFRS 9 Financial Instruments and IAS 28 Investments in Associates and Joint Ventures.

• The IASB Investor Update discusses performance measures, the new revenue standard, and other IASB project updates.

• The IFRS Foundation case study report explains how six companies have improved communication by making more meaningful disclosures in their IFRS financial statements.

• The October IASB Update and the IASB Work Plan are now available.

• New IASB staff webcasts are available now: - IFRS 9 Financial Instruments

highlights key new disclosure requirements, which differ significantly from IAS 39;

- IFRS 16 Leases discusses four implementation questions on lease term requirements.

Professional accountants in business

HKEX reports on listed issuers’ corporate governance practicesThe Hong Kong Exchanges and Clearing (HKEX) has recently published the findings of its latest review of listed issuers’ corporate governance practices. The review analysed the disclosures made by 1,428 issuers in their 2016 annual reports, covering the financial period from 1 January to 31 December 2016. Key findings included:• 34 percent complied with all 78 Code

Provisions (CPs) in the corporate gov-ernance code and corporate govern-ance report part of the Listing Rules

• 94 percent complied with 75 or more CPs

• Nearly all complied with 70 or more CPs

• Issuers with a larger market capitalization achieved a higher overall compliance rate than those with a smaller market capitalization

Read the report Analysis of Corporate Governance Practice Disclosure in 2016 Annual Reports for further details.

Taxation

Announcements by the Inland Revenue Department (IRD)Members may wish to be aware of the following matters:• The publication of Departmental

The latest standards and technical developments

TechWatch 181

50 November 2017

SourceTechWatch

Interpretation and Practice Notes No. 54 on taxation of aircraft leasing activities

• The Chief Executive’s plan to diversify Hong Kong’s economy and create more opportunities for the city

• A tax summit held to formulate forward-looking tax policies and foster economic development, and the remarks made by the Financial Secretary

• A Legislative Council question on measures to cool down residential property market

• Hong Kong and Switzerland entered into an agreement on automatic exchange of financial account information in tax matters

• Notices on business registration, and changes of addresses

• Fraudulent emails purportedly from the IRD

• Stamp Duty statistics (September 2017)

• List of Qualifying Debt Instruments as at 30 September

• IRD annual report 2016-17

Legislation and other initiatives

Institute comments on AML/CFT Bill and Companies Bill 2017The Institute issued a submission to the Legislative Council on the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) (Amendment) Bill 2017 and the Companies (Amendment) Bill 2017 on 23 October, and the Institute’s

chief executive attended a Bills Committee meeting on 30 October. The submission indicates support for legislative measures to minimize the risk of abuse of Hong Kong’s financial system by money launderers or terrorists. While the Institute believes that anti-money laundering legislation more tailored towards accountants and other “designated non-financial business and professions” would be preferable, the submission notes that amending the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (Cap. 615) should be workable, as long as sufficient clarity and refinements regarding concepts, terminology and scope are provided. At the same time, the submission also draws attention to possible regulatory gaps and proposes various technical and drafting changes.

As regards to the Companies (Amendment) Bill 2017, the Institute considers that, in principle, enhancing the transparency of company ownership and control will help Hong Kong to comply with its international obligation to implement the Recommendations of the Financial Action Task Force.Meanwhile, the submission also seeks more clarity on certain provisions and raises several technical and drafting points.

Anti-money laundering noticesMembers should note the following notices and publications in relation to anti-money laundering/counter-

financing of terrorism:• Government notice 7412: An updated

list of terrorists and terrorist associates has been specified under the United Nations (Anti-Terrorism Measures) Ordinance.

• Government notice 7654: An updated list of terrorists and terrorist associates has been specified under the United Nations (Anti-Terrorism Measures) Ordinance.

• Legal notice 151: The United Nations Sanctions (Libya) Regulation 2011 (Amendment) Regulation 2017 has been published in the Gazette.

• Specially designated nationals and blocked persons list, published by the United States Treasury’s Office of Foreign Assets Control. More details on the Resource Centre of the Treasury.

Please refer to the

full version of

TechWatch 181,

available as a PDF on

the Institute’s website:

www.hkicpa.org.hk

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November 2017 51

Whether Hong Kong, with its stratospheric property prices and oligopolistic busi-nesses, is the world’s freest economy is debatable, but there’s no denying that its open markets roots run deep.

The light-touch policy that opened Hong Kong to global business was a response to the devastation of World War II and the influx of capital and ideas after the subse-quent Communist revolution in China. But it wasn’t until the 1960s that “laissez faire” was formalized.

It was the crowning achievement for the public service career of Sir John Cowperth-waite, Hong Kong’s financial secretary from 1961 to 1971. Though later tweaked by his successor, Sir Philip Haddon-Cave, into “positive non-intervention,” the princi-ples and effects were largely the same: the government would leave business decisions to the business people, but provide a policy framework under which they could thrive.

Management consultant Neil Monnery, in Architect of Prosperity: Sir John Cow-perthwaite and the Making of Hong Kong, tells how a young economist ran contrary to established thought. When industrialized societies – including the United Kingdom, Hong Kong’s colonial power – were focus-ing on nationalization, central planning and increased public spending financed by higher taxes, Cowperthwaite took the opposite path and rebuilt Hong Kong on the principles of small government.

Cowperthwaite created the foundation for policies such as low taxes, fiscal pru-dence and free trade that helped transform a poor backwater of Britain’s dwindling empire into an international centre for business, finance and trade.

He had arrived in Hong Kong after liberation in 1945 and was assigned to the Department of Supplies, Transport and Industry, scouring the Asia-Pacific

region for essentials such as coal and rice, managed distribution and enforced price controls.

While that statist approach might have been necessary after the war – Hong Kong was run in 1945-46 by a military govern-ment – Cowperthwaite, as he rose through the civil service ranks, became convinced that long-term prosperity hinged on capital-ism unfettered by bureaucratic policy.

Cowperthwaite, a follower of the clas-sical economics of Adam Smith, admired Hong Kong entrepreneurialism. When he banned the export of scarce glass, compa-nies exported bottles. When he banned bot-tle exports, they exported broken bottles. When he banned all empty-bottle exports, they exported bottles of coloured water. He was more impressed than angered, says Monnery.

The admiration wasn’t always returned. In office, he refused to subsidize private

Book review

After hours Book review Life and everything A life in the day

Title: Architect of Prosperity: Sir John Cowperthwaite and the Making of Hong KongAuthor: Neil Monnery Publisher: London Publishing Partnership

52 November 2017

Legacies of laissez-faire

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companies, sparking anger from business people. When Hong Kong’s earliest indus-tries – wig-making and cotton-spinning – hit trouble, he let them die. Forced to innovate, entrepreneurs shifted to toys, then electronics.

Yet Cowperthwaite could be unneces-sarily dogmatic, banning economic data. “[The] leverage exercised by government on the economy is so small that it is not neces-sary, nor even of any particular value, to have these figures available for the formula-tion of policy,” he once said.

His trust in the markets enabled him to eschew official responsibility for setbacks. In a clash with executive councillor Yuet-keung Kan over the 1965 banking crisis, Cowperthwaite rejected suggestions that the government should have seen a credit and real estate bubble forming.

Another criticism levelled at Cowperth-waite is that he lacked affinity with the poor. Public housing support was kept to a minimum, leading to tiny flats. Cowperth-waite was unrepentant, arguing that state spending should focus only on the very needy. “Rapid growth of the economy… produces a rapid and substantial redistribu-tion of income [and] makes it possible to assist more generously those who are not… sharing in the general advance,” he said.

On retirement, Cowperthwaite became an adviser to Jardine Fleming until 1981, when he returned to his native Scotland where he died in 2006 aged 90.

Cowperthwaite’s policies have reso-nance today. The high price of property and the lack of competition in areas such as retailing and telecommunications are directly related to his laissez faire princi-ples. Well-heeled companies simply pushed smaller rivals into extinction.

The present government appears to be leaning more towards “positive interven-tion” with its overt promotion and fund-ing of innovation. Hong Kong businesses – whether selling artificial flowers in the 1960s or luxury goods in the 2010s – have traditionally spent little on research and development. Could an earlier nudge from government have steered them into better preparation? Sir John Cowperthwaite would have given a resounding “No.”

It is perhaps ironic that a career based on crunching numbers should have led Neil Monnery to the famously data-averse Sir John Cowperthwaite. Monnery, a management consultant and corporate strategist, discovered the former Hong Kong financial secretary while researching recoveries from the global financial crisis that began a decade ago.

He had been struck by how few economies had seen robust growth. “I know there’s a lot of people talk about nominal gross domestic product growth but we were really much more interested in real GDP per capita and median incomes,” he says during a stop in Washington, D.C., while promoting his book.

One exception, Monnery noticed, was Hong Kong, and he started to delve into possible historical reasons for the territory’s resilience. Combing through records, his eye quickly settled on Cowperthwaite and the critical period in which he held the top financial job, encompassing the 1967 riots sparked by the Cultural Revolution in China and numerous banking crises.

Educated at Oxford University and Harvard Business School, Monnery spent more than two decades with the Boston Consulting Group. Since 2011, he has been Director of the Ashridge Strategic Management Centre, a think tank in London focused on corporate performance. He published his first book, Safe as Houses? A Historical Analysis of Property Prices, in 2011.

Cowperthwaite’s reticence about his achievements made research into his life difficult. He had died in 2006 and had not written down any significant memoirs. Monnery is

grateful for archival material in Hong Kong. “The Hong Kong archives are absolutely wonderful and staffed by wonderfully helpful people.”

Despite his self-assurance and somewhat prolix public speaking, Cowperthwaite saw himself operating

behind the scenes. “The reasons were perhaps twofold,” says Monnery. “One was his character, his shyness, but also because he believed the people of Hong Kong created the success. He never saw himself as the primary agent… it was done by entrepreneurs [and] people working in factories.”

Monnery believes the heart of Cowperthwaite’s story is the transformation of an interventionist bureaucrat into a supporter of free markets. “He faced accounting problems, management problems, and realized that he had to pull back,” he says.

He says libertarians should not read too much into Cowperthwaite’s overall economic philosophy. “He was not doctrinaire… he was very concerned where market failure occurred, like monopolies. He was also of the Adam Smith view that companies and private enterprise act in their own interests.”

Author interview: Neil Monnery

November 2017 53

Life and everythingAs recommended by A Plus editors

54 November 2017

Christmas carnival

Here’s an alternative if you’re deciding to go without the office party this holiday season. Gather the colleagues after work and head to the AIA Great European Carnival, which returns to the Central Harbourfront for its fourth year running.

The carnival, which runs throughout Christmas, New Year and Chinese New Year, promises to be bigger and better than ever before. Apart from new thrill rides, there will be over one million cuddly toys to be won at game booths, sports activities, entertaining live performances, and a seasonal European market. Grab a hot dog between rides or enjoy a variety of food from all over the world.

A GREAT EUROPEAN CARNIVAL RETURNS

Dates: 21 December 2017 – 25 February 2018 (except Friday 12 January 2018)Time: 11:00 a.m. – 11:00 p.m.Location: Central Harbourfront Website: www.TGEC.asia

THE MANAGEMENT BOOKUsing a variety of stories and examples, Ego is the Enemy by author and media strategist Ryan Holiday offers lessons on how to fight ego and the desire for recognition to help you become a successful and humble leader.

Ego is the Enemy, HK$143, Hong Kong Book Centre

Read

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November 2017 55

SCROOGE! – THE MUSICAL

Get the family in the festive mood with a musical adapted from the well-loved Charles Dickens story, A Christmas Carol. Ebenezer Scrooge gets transported, thanks to some ghostly intervention, from the past to the present then future, to learn valuable lessons such as the truth about happiness and the importance of family.

The show, sponsored by Chan Dang Social Services Foundation, has previously won three awards at the Hong Kong Drama Awards, including Best Actor (Tragedy/Drama), Best Makeup and Image Design and Top 10 Most Popular Productions. The musical is performed in Cantonese with song lyrics in English, and with Chinese and English surtitles.

COAT SEASONNow that the notorious humidity levels have dropped, it’s time to layer up and bring out the coat – or find a new one.

COS’s clean, slightly A-line single-breasted wool coat is made from a wool blend with silk, and features wide kimono sleeves. Available in cool mint and go-with-everything black.

Perfect for both work and weekends, COS’s oversized trench coat features a large collar and statement cuffs that can be tapered with removable bow ties. It’s designed for an oversized fit, with lightweight nylon.

Buy

Dates: 16 December 2017 – 1 January 2018Venue: Lyric Theatre, The Hong Kong Academy for Performing ArtsTickets: www.hkticketing.com

Theatre

Oversized nylon trench coat, COS, HK$1,750

Single-breasted wool coat, COS, HK$1,900

Phot

o cr

edit:

Che

ung

Chi

Wai

Scrooge! – the Musical in 2011

Hong Kong’s humorist meets Institute member Joyce Kee

56 November 2017

A life in the day…. with Nury Vittachi

I n 1950, after years of war, the Chinese aviation industry had been destroyed. Airfields and

airports had been demolished, and every single airline closed down.

But a couple living in Chaozhou, a coastal city in Guangdong, decided to find a new life for themselves elsewhere – and they were willing to travel overland.

They took huge risks, dealing with human traffickers, but man-aged to get to Hong Kong before 1960, where they lived in one small room in the Walled City in Kow-loon – a lawless area of no-man’s-land, governed by neither Hong Kong nor Mainland China.

The couple were soon blessed with five children, but life remained hard. They were given public housing in Kwai Hing, but their home was tiny, just 300 square feet. The parents worked day shifts and night shifts in facto-ries to earn money to buy rice for the children.

But folk from Chaozhou (also known as Chiu Chow or Teochew) are famous for being highly determined achievers – and this seemed to have been the case with this family.

It was definitely true of the youngest child, Joyce. For her, life changed when she worked really hard at school and managed to get into the University of Hong Kong in 1989.

Joyce Kee had no mentors, so she had to go with her gut instinct – and that told her that accounting and finance would be the key to a professional career for someone who was not scared of hard work.

And so it turned out. After university, she joined Price Water-house as an auditor and received

excellent training. After three years, she left to join Inchcape, the car distribution company, but stayed only six months before headhunters poached her to play a key role as finance manager of a leading Hong Kong property com-pany. She stayed there for several years, but felt that she was destined for an even bigger challenge.

But what would it be? Joyce got married in 2001, and at the same time quit her job. She needed to find a new direction.

She contacted many companies, and the most interesting response came from a pair of aviation companies run by Hong Kong’s famous Kadoorie family: Metrojet and Heliservices. She started as the finance and administration manager for the two companies, and was soon promoted to executive director, and then, in 2011, she moved to another firm: Hong Kong Jet.

This was her new direction: aviation. In 2013, she took another huge step – she formed a new company with an existing business partner and an investor, and called it Aegle Aviation.

Today, Aegle Aviation is an industry leader in the boutique air-line space, and manages a fleet of nine aircraft. Joyce’s job is exciting and unpredictable. She’s moved a long way from auditing. Now she has to solve technical problems, and be aware of a huge number of issues, from safety to engineering to personnel to international law.

But she finds it hugely satisfying to solve tricky problems, and the company has grown into a solid, sustainable business in the past four years.

Yet she makes sure she never forgets that there’s more to life than work. She has a husband and daughter at home, and also values her health. She built a home exercise room so she has no excuse to skip a workout session.

And the future? Joyce and her colleagues are “working on a plan to launch an innovative technological system to subvert the traditional way of doing business in the industry.” But she is not yet ready to reveal details.

This (literally) high-flying aviation business leader has come a long way – especially considering that her family’s story begins in a country where, in aviation terms, the skies were entirely empty.

Nury Vittachi is a bestselling author,

columnist, lecturer and TV

host. He wrote three story-

books for the Institute, May

Moon and the Secrets of the

CPAs, May Moon Rescues

the World Economy and

May Moon’s Book of Choices

Sky’s the limit

“ Folk from Chaozhou are famous for being highly determined achievers – and this seemed to have been the case with this family.”

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CM

MY

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CMY

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HKICPA_Cork_Back cover.pdf 1 12/29/14 5:38 PM

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