Plus:SuccessPure Group FC Charlie Yeung

PropertyInvestors face tax crackdown

ProfileAICPA CEO Barry Melancon

Factories forge a shiny future

HK$70.00

China’s manufacturing sector rises to challenges of higher input costs, more competition

President’sMessage

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June 2015 1

Dear members,

Dennis HoPresident

This month sees this magazine’s 10th anniversary under the A Plus name. Since June 2005, A Plus has been striving for the quality that shows how our members are success ingredients in business and society, and how they contribute to Hong Kong.

To commemorate the anniversary, we have refreshed the content and design starting this month, hoping to continue bringing you an enjoyable reading experience.

You will find new content including a thought leadership column giving significant global and local views on professional issues, a how-to arti-cle bringing you practical tips on enhancing your career, a broadened lifestyle section highlighting a variety of work-life balance interests, and a new-look humour column featuring an interest-ing day in the life of a CPA.

We hope you continue to enjoy reading A Plus and we welcome your feedback.

Constructive meetingsLast month, the Mainland’s Ministry of Finance issued the “Provisional regulations on CPA practices carrying out audit services relating to the listing of Mainland enterprises outside Main-land,” which will take effect from 1 July.

Under the provisional regulations, Hong Kong CPA practices auditing Mainland companies listed outside China will have to enter cooperation ar-rangements with Mainland CPA practices. Hong Kong CPA practices will be responsible for the scope of arrangements.

It has been more than a year since the MoF issued the exposure draft in April 2014. Over the course of the consultation, the Institute has actively engaged with the MoF to reflect our members’ concerns, explain the potential impact on Hong Kong, and present our proposals on how to practically address the intended objec-tive of tackling illegal cross-border auditing. The meetings were constructive and the MoF was receptive and open to our views.

If you have any questions about the new

regulations, please send them to us and we will seek clarification from the MoF as appropriate.

In the meantime, the Institute is working on a tool that will be available soon to help our members manage the relationship of the coop-eration arrangements between their practices and Mainland CPA practices. The Institute will also keep in close contact with regulators and market operators in Hong Kong and the Main-land to help ensure the smooth implementation of the regulations.

Important updatesOne new initiative this year is a series of semi-nars devoted to current events, which will kick off on 22 June with Tong Xiaoling, Deputy Commissioner of the Commissioner’s Office of Ministry of Foreign Affairs of the PRC in the HKSAR. She will explain the “One Belt, One Road” initiative and the establishment of the Asian Infrastructure Investment Bank, and how they will impact Hong Kong’s development. The free-of-charge series aim to extend our members’ reach as well as enable them to participate in the discussion of broader issues facing the city, and update our members on public affairs while en-hancing their business and global acumen. Stay tuned for future topics.

Lastly, three more events you should not miss: the IFRS conference, taking place on 12-13 October, is bringing international experts to Hong Kong to explain the latest accounting standards. Enrol before 30 July to enjoy the early bird discount.

If you are a small- and medium-sized practitioner, you should join the specially or-ganized members’ forum on 26 June at which the Institute will update you about new devel-opments in the profession. On the same day, there is a young members cocktail when we celebrate the “Totally awesome 80’s.”

You can also tell us your needs and expecta-tions on how the Institute should support and better connect with you.

“ To commemorate the anniversary, we have refreshed the content and design starting this month, hoping to continue bringing you an enjoyable reading experience.”

ContentsIssue 6 / Volume 11 / June 2015

01NEWS

01 President’s message

04 Institute news

06 Accounting news

10FEATURES

10 Still made in China Beijing plans to upgrade its manufacturing sector amid rising costs and increased competition

17 Thought leadership: Hans Hoogervorst International Accounting Standards Board Chairman previews his Hong Kong visit

18 Success ingredient: Charlie Yeung The Financial Controller of Pure Group talks about the pressures of a competitive gym market

25 How to… Pallavi Anand explains how team leaders can drive office productivity

26 Tax agencies build obstacles for foreign buyers Australia, New Zealand and the United Kingdom try to cool property markets by taxing non-residents

30 GAA leadership: Barry Melancon President and Chief Executive Officer of the American Institute of CPAs

36 Dedicated dads In honour of Father’s Day, A Plus asks CPAs what they learned from their fathers and vice-versa

42SOURCE

42 Management The role of managerial ability in post-acquisition integration

44 Litigation Dismissals of securities fraud claims against auditors in the United States

46 Technical update Issues surrounding common signing arrangements of an auditor report

48 TechWatch 151

51 Events

30GAA leadershipBarry Melancon, President and Chief Executive Officer of the American Institute of CPAs, tells how his organization works with international partners, including HKICPA, to ensure CPAs’ global relevancy

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.

President Dennis Ho

Vice Presidents Mabel Chan, Ivy Cheung

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

Head of Corporate Communications Stella To

Editorial Advisory Group Daniel Lin (Convenor), Eric Tong (Deputy Convenor), Eugene Liu, Edward Tsui, Yip Ka-ki, Stanley Yuen, Raphael Ding, Chris Joy

Editorial Manager John So

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 Kong Email: www.hkicpa.org.hk Website: hkicpa@hkicpa.org.hk

Editor George W. Russell

Managing Editor Gerry HoEmail: gerry.ho@mandl.asia

Copy Editor Jemelyn Yadao

Contributor Tigger Chaturabul

Production Manager Jasmine Hu

Designer Trevor Cheng

Editorial Office 2/F, Wang Kee Building, 252 Hennessy Road, Wanchai, Hong Kong

ADVERTISING ENQUIRIESAdvertising Director Derek TsangEmail: derek.tsang@mandl.asiaTel: (852) 2656-2676

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 June 2015. Print run: 6,900 copiesThe digital version is distributed to all 38,461 members, 18,477 students of the Institute and 699 business stakeholders every month. Subscription: HK$760 for 12 issues per year.See www.hkicpa.org.hk/aplus for details.

52AFTER HOURS

52 Books Exposure: Inside the Olympus Scandal reviewed. Interview with author Michael Woodford

54 Life and everything Where to eat and what to wear as recommended by Institute members

56 A life in the day Nury Vittachi gets the lowdown on Mat Ng, Managing Director at JLA Asia

26 Tax agencies build obstacles for foreign buyersForeign buyers face new obstacles from increasingly complicated tax systems

Book review: Exposure: Inside the

Olympus Scandal

The Institute and the IFRS Founda-tion will jointly host an IFRS Con-ference on 12 and 13 October at the JW Marriott Hotel in Hong Kong.

The conference brings together leaders in financial reporting from the private sector, regulatory bodies and members of the International Accounting Standards Board, as well as accounting professionals and oth-ers with an interest in International Financial Reporting Standards.

The conference will focus on the implementation plans for new stan-dards, particularly IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers.

Other parallel sessions will ex-

plore the forthcoming requirements for leases and insurance contracts. There will also be panel discussions on IFRS disclosures – innovations and IFRS measurements and other crosscutting issues.

IASB Chairman Hans Hooger-vorst, Vice Chairman Ian Mack-intosh and members will update participants on active projects and future plans in financial reporting, including the Conceptual Frame-work, macro hedging, rate-regulated activities, implementation projects and research initiatives.

Carlson Tong, Chairman of the Securities and Futures Commission, will give the keynote address.

Following the conference, a half-day workshop on implementing the IFRS for SMEs will be held on 13 October in the afternoon. During this event, participants will be able to join in the discussion about applying the small and medium-sized entities hierarchy, implementing the stan-dard, and considerations when next amending the standard.

Make your reservation before 30 July to enjoy early bird discounts. For more information about the conference and how to register, visit the Institute website, or contact us via email at ifrsconference@hkicpa.org.hk or by phone at 2287-7074 or 2287-7220.

Joint conference with IFRSis scheduled for October

Hans Hoogervorst, IASB Chairman Carlson Tong, SFC Chairman

News Institute news Accounting news

Institute news

4 June 2015

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MoF issues provisional regulations The Ministry of Finance last month issued “Provisional regulations on CPA practices carrying out audit ser-vices relating to the listing of Main-land enterprises outside Mainland (會計師事務所從事中國內地企業境外上市審計業務暫行規定),” which will take effect from 1 July.

Under the provisional regulations, Hong Kong CPA practices auditing Mainland companies listed in Hong Kong will have to enter cooperating arrangements with Mainland CPA practices and Hong Kong CPA prac-tices will be responsible for the scope of arrangements.

“The Institute will be in close contact with regulators and market operators in both Hong Kong and the Mainland to help ensure the smooth implementation of the new regulations,” says Raphael Ding, the Institute’s Chief Executive and Registrar.

He added that the Institute is working on a tool that will be made available soon to help members to manage this relationship.

Questions should be sent to hkicpa@hkicpa.org.hk so the Institute can collate members’ queries and seek clarification from the MoF as appropriate.

Council visit to Beijing and Shanghai The Institute’s annual Mainland visit took place on 6-8 May with meet-

ings with senior officials from the Ministry of Finance, Hong Kong and Macau Affairs Office of the State Council, China Securities Regulatory Commission, State Administration of Taxation, Shanghai Stock Exchange and the Chinese Institute of CPAs.

The Institute also hosted cocktail receptions in Beijing and Shang-hai during the time, which were attended by guests from these orga-nizations, Mainland offices of the Hong Kong government and Hong Kong Trade Development Council, chambers of commerce, Mainland universities and CPA practices, and Institute members and Qualification Programme students working and residing there.

The events helped further strengthen the Institute’s coopera-tion with Mainland stakeholders as it strives to support members to expand their career and business in Mainland.

Beijing office relocation The Institute’s Beijing office has been moved to Room 1507, 15/F, Zhongkun Plaza, No. 59 Gaoliangqiaoxiejie, No. 1 yard, Haidian District, Beijing (北京市海淀區高梁橋斜街59號院1號樓中坤大廈15層1507室). The new telephone and fax numbers are (86) 10-5650-0551 and (86) 10-5650-0552 respectively.

ObituaryThe Institute notes with regret the passing of Sim Se-ke.

Ng Man Chung, Siman, CPA (practising) and Elite Partners CPA Limited (corporate practice)

Complaint: Failure or neglect to observe, maintain or otherwise apply Hong Kong Standard on Auditing 500 Audit Evidence, HKSA 200 Objective and General Principles Governing an Audit of Financial Statements, HKSA 315 Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatements, and HKSA 700 The Independent Auditor’s Report on a Complete Set of General Purpose Financial Statements.

The corporate practice audited the financial statements of a listed company in Hong Kong and its subsidiaries for the year ended 31 December 2008 and 2009 and expressed an unmodified auditor’s opinion in each of the years. Ng was the engagement director of the audits.

The Institute received information from the Financial Reporting Council about non-compliance with professional standards in the audit work carried out by Elite Partners CPA Limited on the recognition and valuation of mining and exploration rights acquired by the company. After considering the information available, the Institute lodged a complaint against the two respondents under sections 34(1)(a)(vi) of the Professional Accountants Ordinance.

Decision and reasons: The respondents were reprimanded and ordered to pay a penalty of HK$100,000 each to the Institute. In addition, they were ordered to pay the costs of the disciplinary proceedings of the Institute and FRC investigation amounting to HK$113,351.40. When making its decision, the Disciplinary Committee took into consideration the particulars in support of the complaint, the nature of the breaches and the conduct of the respondents throughout the proceedings. Details of disciplinary findings are available at the Institute’s website: www.hkicpa.org.hk

Disciplinary finding

The Institute in numbersMobile profession Embracing digital

of members travel outside their home base to carry out responsibilities

(2014 membership survey)

pages of digital A Plus were viewed in 2014

(Google Analytics)

40% >1 million

June 2015 5

James Schnurr, the Chief Accountant of the Securities and Exchange Commission in the United States, last month reversed his earlier view that the regulator should allow U.S. companies to provide revenues and other information using International Financial Reporting Standards.

Schnurr had made the suggestion – that IFRS be used as a supplement to U.S. generally accepted accounting principles without requiring reconciliation – in December 2014 at an American Institute of CPAs conference.

His subsequent U-turn, he told a New York financial reporting conference on 7 May, resulted from his staff finding that there was virtually no support among stakeholders for having the SEC mandate IFRS. He said he would make a recom-mendation to SEC Chair Mary Jo White on how to proceed with IFRS “in the near future.”

Schnurr said there was continued sup-port for a single set of high-quality, glob-ally accepted accounting standards and that the U.S. Financial Accounting Standards Board and the International Accounting Standards Board should continue to work together on that goal.

SEC official backs away from support of IFRS plan

NewsAccounting

Illus

trat

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by H

arry

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rison

6 June 2015

The amount by which Toshiba Corporation expects to revise down its combined operating profit for the

three years ended 31 March 2014. The company last month announced an

independent panel would investigate accounting irregularities that led the electronics giant to overstate profits.

That’s the EY salary gap versus other U.K. firms, according to British salary

benchmarking outfit Emolument. A recent survey indicated EY pays

both its junior and senior staff more than fellow Big Four firms in London.

Depending on position and experience, EY pays up to £25,000 more annually,

according to salary data from 504 consultants and auditors.

The amount in donations to a concert by Irish rock band U2 (disguised as buskers) in Grand Central Terminal

last month – unlikely to attract scrutiny from tax officials. The band

last month defended their use of overseas tax havens to shield millions of dollars of their income. Lead singer Bono told Britain’s Sky News that the

band happily paid “a fortune in tax.” He added: “It is just some smart people we have working for us trying to be

sensible about the way we are taxed."

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Mainland gold traders face auditsChina’s State Administration of Taxation plans to audit all the country’s gold traders, according to media reports last month. The programme is part of the government’s plan to clamp down on the practice of using fake precious-metals exports to hide capital outflows. “To my knowl-edge, it’s the first time such a sweeping audit has been performed on the gold industry,” Liu Xu, Investment Director at Shanghai Jiuhe Asset Management Co., told Bloomberg.

Cash shortfall amid the outfallSewage treatment firm Sound Global announced last month that Deloitte China, its auditor, discovered a shortfall in the cash balance amounting to 2 billion yuan. The Beijing-based company, which earlier denied allegations by short seller Emerson Analytics that it had misstated revenues, told the South China Morning Post that it would engage an “independent professional firm with competent experience and expertise in corporate investigations” to look into the matter.

A world of numbers

Gimmicks “defrauded law firm lenders”The trial of three former executives accused of using accounting gimmicks to defraud lenders to the defunct Dewey & LeBoeuf law firm began in New York last month. Ex-chairman Steven Davis, Stephen DiCarmine, formerly executive director, and Joel Sanders, who was chief financial officer, are charged with larceny, fraud and falsifying re-cords. Prosecutors say loans were reclassified as fees, cheques were backdated and partner capital contributions were classed as revenue.

NYU offers new master’s degreeNew York University’s Stern School of Business will offer a one-year, full-time degree starting from the autumn semester of 2016. This programme will satisfy the 150-credit-hour education requirement needed as a prerequisite for New York State’s CPA certification. NYU Stern’s accounting department is consistently ranked among the top 10 accounting programmes in the United States, according to U.S. News and World Report.

AFP

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AFP

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Banks concerned over IFRS 9: surveyGlobal banks are increasingly concerned about the impact of IFRS 9 Financial Instruments on their loan loss provisioning, according to a Deloitte survey released last month. The Global IFRS Banking Survey indicated that most banks anticipate that the standard’s rules on credit exposures will cause the amount of loan loss provisions to increase by 50 percent. IFRS 9, com-pleted in July 2014, comes into effect on 1 January 2018.

Ukraine PM wants Big Four for utilities auditUkrainian Prime Minister Arseniy Yatseniuk urged last month that the local offices of Deloitte, EY, KPMG and PricewaterhouseCoopers should audit the country’s energy tariffs. Yatseniuk said political infighting over the indexation of wages and pensions would be ended by an independent professional audit over the cost of utilities, the Interfax news agency quoted him as saying.

Merger with Stone Carlie adds bulk to BDOBDO USA announced last month that it had acquired the 68-year-old Stone Carlie & Company, enabling it to expand into the St. Louis market and putting its 2015-16 annual revenues over US$1 billion for the first time. The merger, which took ef-fect on 1 June, added eight partners and 100 other employees to BDO’s roster. Stone Carlie earned more than US$13 million in 2013, Accounting Today reported.

IFRS Foundation announces appointmentsThe trustees of the IFRS Foundation, responsible for the gover-nance and oversight of the International Accounting Standards Board, appointed two members to its interpretations committee from 1 July: Jongsoo Han, Vice President of the Korea Ac-counting Association and Korea Accounting Standards Board member, and Robert Uhl, National Director of Accounting Standards and Communications at Deloitte in the United States.

IFRS Foundation, London

Banks in Canary Wharf, London

Ukrainian PMArseniy Yatseniuk

NewsAccounting

BDO headquarters,New York

June 2015 9

Cover storyManufacturingCover storyManufacturing

10 June 201510 June 2015

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The Chinese government has unveiled an ambitious plan to upgrade the country’s manufacturing sector to industrialized-nation standards and see off competition from other Asia-Pacific locations. George W. Russell reports on how CPAs can help keep a lid on expenditures and boost efficiencyIllustrations by Alex Nabaum

D espite their reputation in some quarters for being re-pressive sweatshops, many

Chinese factories compare favour-ably with those in industrialized nations: some boast well-equipped dormitories, with gymnasiums, multiple food outlets, karaoke rooms, and even – in the case of a very few such as Apple contractor Foxconn – employee-run radio and television stations.

Mainland manufacturing has come a long way since 1978, when then-leader Deng Xiaoping began the economic transformation of China into the “factory of the world.” It was little surprise then that, last month, China unveiled a plan to revamp and upgrade its manufacturing sector to bring it up to industrialized-nation standards within 10 years.

Under the “Made in China 2025” plan, Chinese manufacturers are expected, within a decade to have boosted productivity through innovation and created multina-tional companies in 10 focus areas: information technology; controls and robotics; aerospace; shipping and offshore engineering; railways;

alternative energy; power equip-ment; new materials; biotechnol-ogy; and agricultural machinery.

The ambitious agenda comes as Chinese manufacturing enters a crucial period. Rising wages and other costs – as well as competi-tion from neighbouring countries – have challenged the Mainland’s pre-eminence. “China’s manufac-turing industry is undergoing a transformation,” says Ricky Tung, Managing Partner of Manufactur-ing at Deloitte China and a Hong Kong Institute of CPAs member.

Manufacturers are keen to advance modernization to the next level, data suggest. A recent KPMG survey found a majority were willing to increase research and development expenditure in order to adopt new manufacturing technologies and drive growth.

China’s manufacturing sector has been incrementally moving up the value chain for decades, while strategies such as R&D empha-sis are aimed at accelerating the process (see Handling high-tech remains a challenge on page 15). “A number of toy, textiles, consumer electronics and other labour-inten-

sive manufacturers have already re-located to Southeast Asian nations as the production cost in China is too high,” says Tung.

Already China’s rapidly grow-ing infrastructure gives it an edge over rivals (see Competitors don’t have track record on page 12). Another plus is that despite rising wages, China has a skilled labour force with a wealth of experience that can help manufacturers shift towards higher-value items.

That is reflected in trade data: the value of Chinese high-tech elec-tronics exports to the United States rose 24 percent between 2011 and 2013, while exports of lower-value clothes and footwear rose just 5 percent in the same period.

Focusing skill setsMany Institute members work in China’s manufacturing sector, and their skills are expected to be instru-mental in transforming the sector by influencing costs and produc-tivity. “You can make operational improvements – even if that might require a one-off capital expendi-ture – that creates a more efficient workplace,” advises Bob Partridge,

STILL MADE

IN

CHINA

Beijing’s One Belt, One Road trade

and development strategy, which is designed to bridge Europe and Asia, is also likely to

benefit exporters, with continuous investments in research and development.

June 2015 11

Cover storyManufacturing

Greater China Transaction Advisory Ser-vices Leader at EY.

One operational improvement is im-proving utilization rates in factories. “If you drive more output, you do extract some margin improvements,” says Partridge. “Sometimes those margin improvements are just enough to offset higher costs, such as a renminbi appreciation if you’re largely doing export.”

CPAs might have little control over labour costs but can still help boost ef-ficiency. “I face a 14-15 percent increase in labour costs every year, but I can drive more than 15 percent efficiency,” says Eric Yuen, Chief Financial Officer of Dometic Group Asia Pacific, a maker of electrical appliances and an Institute member.

As business advisers, CPAs should first look at measuring organizational efficiency, Tung at Deloitte advises. “Find out your

company’s current position, benchmark best practices from local peers as well as the leading multinational corporations, then identify the key areas for improvement.”

Companies need to be responsive to marketplace changes and customer de-mands, Tung adds. “An increasing number of companies will put more emphasis on information technology and automation in order to shorten process and response times,” he says, adding that introducing “smart manufacturing” is the final stage for companies maximizing efficiencies.

“Smart manufacturing aims to create an agile and less labour-intensive manufactur-ing environment that can quickly respond to changes in the marketplace,” says Tung. “It applies IT solutions to the production process to calculate the best allocation of various resources and time and utiliz-ing advanced technology such as sensors, controls and robotics.”

The long-term key to China’s future, say

some analysts, is making better products. Yi Ping, Shanghai Partner at Strategy&, the PwC-owned consultancy, says China can no longer rely on low costs to gain competitive advantages. “In the past, China successfully used its labour cost advantage and manufacturing skills,” says Yi. “To maintain such a position, China now has to adopt different strategies in the next economic cycle.”

Making better products actually can reduce costs, argues Mark McKay, As-sociate Dean of the School of Business at Trinity Western University in Vancouver. “This is counter-intuitive.” He recom-mends introducing modern methodologies such as the Lean manufacturing system, which eliminates wastage, and Six Sigma, which eliminates defects. “With these techniques, companies can improve overall productivity, which offsets future rising costs.”

High-tech hurdlesThere are still many obstacles to China’s manufacturing ambitions. Logistics is one area that requires streamlining. “Look at how much it costs to ship something from A to B, including cargo, financing, and administration,” says Jonathan Woetzel, Director of McKinsey & Co. in Shanghai. “In China, it’s about 12-13 percent as a share of gross domestic product. It’s 5 percent in the U.S.”

Another problem that particularly affects multinational corporations with manufacturing operations in China is that they have concentrated on higher-priced exports, leaving them ill-prepared to compete with local companies for domestic Mainland consumers as the economy rebal-ances away from exports.

CPAs in the front line agree, pointing to low domestic demand for the multina-tionals’ high-end, locally made products. “Chinese consumers are still very price-sensitive and the domestic demand for high-quality products is limited,” says In-stitute member George Tang, CFO of Cree, a U.S.-based maker of lighting products with extensive China operations.

More importantly, China’s manufactur-ing sector has had difficulties making the transition to higher-value capital goods. Machinery exports – a crucial indicator of a country’s ability to make and sell complex manufacturing products – have stagnated as a share of total exports in recent years.

When the Chao Phraya River burst its banks in October 2011, it wasn’t just flooded rice paddies that crimped Thailand’s exports. Seven industrial estates in Ayutthaya province were ravaged, severely impacting the automotive and electronics industries’ global supply chains.

The floods underscored the difficulty of diversifying manufacturing out of an increasingly expensive China and into its cheaper neighbours, such as most of the 10 members of the Association of Southeast Asian Nations.

“I think the flooding, coupled with recent political unrest, showed that while Thailand might be cheaper than China, there are other factors to consider,” says Bob Partridge, Greater China Transaction Advisory Services Leader at EY.

Another potential competitor, Vietnam, has its own issues, Partridge adds. “Vietnam might have a very low cost base, but you’ve got a limited pool of skilled labour,” he points out.

Nevertheless, the lure of lower costs amid an increasingly expensive Chinese manufacturing environment is prompting manufacturers to move some operations to both those countries, as well as to Indonesia and Myanmar.

“However, they are now faced with new challenges, including inconsistent product quality, supply variability and poor supporting infrastructure,” says Peter Liddell, Partner and Asia Pacific Head of Strategy and Operations, KPMG China.

Companies will continue to keep most of their eggs in a basket in China, Partridge adds. “I don’t think we’ve seen people shutting down plants in China and moving them,” but, he adds, companies that are adding production lines are splitting them between China and ASEAN countries.

South Asia is also offering potential competition as a manufacturing location. “Global supply chain managers are beginning to see benefits in operating within India as a regional manufacturing hub with similar demographics as China,” says Amit Kumar Sarkar, Partner at Grant Thornton in Mumbai.

Competitors don’thave track record

“ Smart manufacturing aims to create an agile and less labour-intensive manufacturing environment that can quickly respond to changes in the marketplace.”

12 June 2015

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Cover storyManufacturingCover storyManufacturing

14 June 201514 June 2015

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“From the 1980s, there was a steady im-provement in the kinds of goods China was manufacturing and exporting, as it moved away from making lower-value consumer goods to making higher-value capital goods,” Andrew Batson, Lead Analyst at GK Dragonomics in Beijing, observed in a February research note. “That transition has more or less stalled, with the composi-tion of China’s exports today little different from what it was in 2008.”

Batson says that is “bad economic news” with serious implications for China’s future. “Making the transition to higher-value and more capital-intensive exports is part of the way that successful developing countries, like South Korea and Japan, earned their way to the high-income status they enjoy today,” he notes, adding that capital-inten-sive goods mean rising labour costs are less important.

China’s export advantage has also been affected by the appreciation of the renminbi. “I think 10 years ago China was the best low-cost hub,” says Partridge at EY. “But the appreciation of the renminbi means buying goods in China is not as cheap as when it was fixed at 8.277 to the U.S. dollar.” (The rate as of 31 May was 6.20 to the U.S. dollar.)

Challenges aheadThe future of China’s manufacturing sector has profound implications for Hong Kong, because of its proximity to Guangdong, where older established factories are con-centrated. “The industrialization era, while providing very positive economic benefits, also created a number of challenges, such as environmental issues,” says Peter Lid-dell, Partner and Asia Pacific Head of Strat-egy and Operations at KPMG China.

The government, Liddell notes, is re-sponding to these challenges through poli-cies that discourage investment in “dirty” manufacturing. “New manufacturing clus-ters are emerging, especially in the western and northern regions,” he says. “Therefore many historical manufacturing clusters in the southern and eastern provinces will need to seek alternative industries to sup-port local employment.”

The changes have already caught the attention of companies that sell and lease industrial property in the Pearl River Delta. “There will be less demand for small fac-tory facilities, given the decrease in export-oriented manufacturing,” Frank Chen,

Executive Director and Head of Research at CBRE China, says of China’s traditional manufacturing clusters.

The nature of manufacturers will also change, analysts predict. Tung at Deloitte forecasts that manufacturing companies will evolve away from the idea of simply providing a product. “There is an increas-ing demand for ‘solutions,’ which blends the concepts of ‘products’ and ‘services,’ better addressing customers’ needs.”

Meanwhile, China is expected to gradu-ally change from a “manual” to an “auto-matic” manufacturing process, according to Yi at Strategy&. “The Internet and automation will be very important, cover-ing not only the manufacturers themselves but also their suppliers, distributors and customers,” she says.

Automation will not eliminate human workers, but might mean that different skills will be sought. As Chinese manufac-turing moves up the value chain, will there continue to be enough skilled workers able to keep pace? “A major issue for China is that more than 74 percent of highly skilled technicians with national certification are above 46 years old,” says Liddell. “The government has announced that it would study an incremental extension of the retirement age and [that] will help solve the labour shortage.”

The size and competitiveness of the workforce are likely to maintain China’s status, some analysts forecast. “China is likely to continue to play a major role in global manufacturing for some time,” says Paul Gillis, Professor of Practice at Peking University’s Guanghua School of Manage-ment. “The key to its continued success in manufacturing will be continuing to increase the skills of Chinese workers. China won’t be able to compete on price, but they can win on quality and efficiency.”

“ There is an increasing demand for ‘solutions,’ which blends the concepts of ‘products’ and ‘services,’ better addressing customers’ needs.”

Handling high-techremains a challenge

When the global financial crisis crippled world trade, cutting the revenue and value of many multinational corporations, some Chinese manufacturing companies saw an opportunity.

Since then, they have been on an overseas acquisition spree to obtain advanced technology as well as access to new markets. “This enables Chinese manufacturers to move up the value chain and better position themselves to compete with global brands,” says Ricky Tung, Managing Partner of Manufacturing at Deloitte China and a Hong Kong Institute of CPAs member.

Mainland manufacturers are also likely to be helped by a favourable regulatory environment under the “Made in China 2025” plan to boost the high-tech sector.

Large, mostly state-owned Chinese manufacturers – with crucial government support – have had some success in making military aircraft and space exploration vehicles as well as integrated power plants. In April, railway company CSR announced it would bid to build and run the United Kingdom’s proposed London-Birmingham high-speed link.

There have also been setbacks in some sectors. “China has built a plane of its own and that by itself has fuelled tremendous investment in the aviation sector, likewise the whole push on high-speed rail,” says Bob Partridge, Greater China Transaction Advisory Services Leader at EY. “However, the public is concerned whether that’s been done with less than full regard for public safety.”

Smaller Mainland companies have also excelled in several high-tech fields, says Gordon Orr, Director at McKinsey & Co. in Shanghai. “Biotechnology, pharmaceuticals, consumer electronics, medical technology, drones, grapheme products and telecommunications equipment are just some of the sectors where aggressive Chinese midsize companies lead the way in their field,” he says.

June 2015 15

Thought leadershipHans Hoogervorst

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June 2015 17

I nternational Financial Report-ing Standards are still on their path towards becoming the set

of global accounting standards. This journey has lasted longer than most travels but it is probably also more exciting. Indeed it began back in 2001, when the Inter-national Accounting Standards Board, was first established. Back then, very few countries required or allowed the use of IFRS.

Fast forward one and a half de-cades and the situation is very dif-ferent. So far, 116 countries require IFRS for all or most listed compa-nies. Several others permit IFRS and some are in the process of adopting or converging their standards.

This means that the same ac-counting language is spoken almost all over the world – in line with our vision of one set of high-quality, enforceable, global standards. Achieving that vision takes global leadership. The Hong Kong In-stitute of CPAs demonstrated that kind of leadership when Hong Kong moved to IFRS reporting a decade ago.

We are nearing our destination and that is why I thought the time was right to take a new look at

where we are for the benefit of A Plus readers. Our recently issued mission statement says that we are here to develop standards that bring transparency, accountability and efficiency to financial markets around the world.

Take the forthcoming lease ac-counting standard as an example; it will bring transparency by put-ting leases onto the balance sheet in clear view of investors. That, in turn, will give investors a better chance of holding management to account – they will be better in-formed and can therefore allocate money more efficiently.

In addition to developing standards and pursuing further adoption, we are also working to support their consistent application and implementation.

However, we cannot do this on our own. We have a lot of help from stakeholders around the world; the Hong Kong Institute of CPAs has always been an active contributor in the development of IFRS both directly and through the Asian Oceanian Standard-Setters Group.

That input and support help us reach important milestones on our journey. Last year’s milestones

were the completion of two major standards projects: IFRS 9 Finan-cial Instruments and IFRS 15 Revenue from Contracts with Cus-tomers. The next waypoint on the horizon – in addition to the new leases standard – is the new insur-ance contracts standard.

We have also just published a revised Conceptual Framework for consultation. While not a standard, it will form the foundations on which the IASB will build future standards. For example, it touches on some of the most-debated top-ics in accounting; what are the strengths and weaknesses of his-toric cost and fair value, and when should each be used? I invite the Institute in Hong Kong and its members to think about these pro-posals and offer us feedback. After all, we cannot do this work on our own – collaboration is key.

I visit Hong Kong every year and look forward to coming back to your vibrant city for the joint IFRS Foun-dation and Hong Kong Institute of CPAs conference in October. I hope to hear your thoughts on all these topics as well as your views on what the IASB should be focusing on dur-ing the next leg of our journey.

“I invite the Institute in Hong Kong and its members to think about these proposals.”

Chairman, International Accounting Standards Board on IFRS's journey up to now

We’ve come far, but we’re not there yet

Sucess IngredientCharlie Yeung

Keeping finances

fighting fitA growing number of people in Hong Kong crave healthier lifestyles. Charlie Yeung, Financial Controller at the Pure Group, talks to Jemelyn Yadao about meeting their needs and competing in a crowded fieldPhotography by Marcus Oleniuk

A t the ifc mall in Central, the typical lunchtime rush can be enough to

make anyone turn the other way. What’s more surprising is that a fitness centre on the third floor is just as crowded, thanks to those who prefer to spend the lunch hour breaking out a sweat.

One person who has witnessed a growing number of people seeking a healthy lifestyle in Hong Kong – no matter what time it is – is Charlie Yeung, Financial Controller of the Pure Group, whose holdings include two of the top major fitness companies in the city – Pure Fitness and Pure Yoga.

“This place is completely full during lunch. If I wanted to use the running machines, I would have to wait,” says Yeung, a member of the Hong Kong Institute of CPAs, observing the more than 20 types of exercise equipment laid out in front of him at the Pure Fitness branch. “There has been a consis-tent increase in Pure members, so hopefully that means people here are becoming more aware of the importance of being healthy.”

It’s possible that the com-pany’s aggressive expansion over

recent years has helped develop this awareness. Beginning with a single yoga studio in Hong Kong with just two teachers in 2002, the Pure Group today has grown with locations in Hong Kong, Shanghai, Singapore, Taipei and New York.

“I joined Pure 10 years ago when it had only four clubs in Hong Kong. Now, Pure has more than 20 clubs [worldwide],” says Yeung. “This is far less than many retail stores, but if you talk about size, each club has occupied at least 20,000 to 30,000 square feet, which is 10 times bigger than a normal retail shop.”

According to Colin Grant, the group’s Chief Executive Officer, Pure clubs in Hong Kong serve around 7,000 people a day. At-tempts to drive up this figure can be seen at the heart of Lan Kwai Fong where a new Pure Fitness branch, occupying 25,000 square feet over six full floors, opened in April. It is also the location of the world’s first 270° Immersive Fitness studio where participants pedal in sync with music and futuristic graphics on a floor-to-ceiling screen. Yeung likens the experience to being inside a video

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June 2015 19

Sucess IngredientCharlie Yeung

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Fitness boomHong Kong has an estimated 940,000 gym

members, according to the

South China Morning Post.

The Hong Kong fitness industry

is estimated to be worth US$300

million, according to data from the

International Health, Racquet and Sportsclub

Association.

game. “This new studio aims to bring something more interesting and exciting to the spinning class,” he says.

With management ramping up further growth and renova-tion plans, Yeung notes that his thoroughness and proactive nature allows him to meet the demands. “Here, I’m always told that we are going to open a new site here and there,” he says. “It’s more straight-forward opening a club in Hong Kong, but a bit more complicated in Singapore and it can take a long time in Taiwan and China due to different regulatory regimes, so I have to work closely with other parties, such as the project direc-tor, and deal with the legal side internally.”

But like most financial control-lers, the majority of his time is spent helping to turn “dreams” into reality. “First you have to convert your fancy ideas into a plan, and that plan isn’t a piece of paper with words, it has to include numbers,” notes Yeung, who achieves this through strong communication and people skills. “To a certain extent, you have to educate the [bosses]... You have to translate all those complicated, commonly accepted accounting principles into layman’s terms to explain to them that we can’t do certain things in the way they want because we have to fol-low the rules.”

Matching upAs well as effectively communicat-ing with colleagues, Yeung consid-ers the task of managing banking relationships as an important and fascinating part of his role. “A lot of people don’t realize that it’s not so simple opening a business bank account for a company if you are a small business proprietor,” he says, digging up past experiences.

He reluctantly goes even further back to the days of the 2008-2009

global financial crisis when banks tightened credit to businesses that relied on prepaid memberships, which were at that time halted by consumers. This was followed by a spate of closures among gyms and retailers in the Asia region.

“I still have that terrible letter from the bank,” says Yeung. “A banking relationship means talking to each other, but instead they sent us a letter saying, ‘we want this collateral by this day or we’ll put an end to the credit card service.’ I’m glad to say that, financially, Pure has always been healthy.”

One of the reasons for Pure’s post-financial-crisis success is that it has maintained a business model where prices are never discounted, Yeung notes, allowing it to success-fully secure its market position as a premium brand. “In fact, it raises the price every year,” he says. “I’m not saying we’re trying to be expen-sive, but that we attract a different level of customers. People who care about having a healthier life and who are not price-sensitive come to Pure.”

Ensuring that the premium pric-ing matches the service provided isn’t taken lightly, he stresses. “Our members may not be price sensitive but if they’re not given the level of service they expect, they won’t pay and this is fair,” says Yeung.

Attention is paid to every detail, from the up keeping of the latest in cardio and strength training equipment to offering complimen-tary towels. “Some gym operators limit it to one towel for one member, whereas a few of our members actu-ally take our towels out to the beach in the summer and it doesn’t matter,” says Yeung. “If you offer this level of service, people will feel relaxed and can focus more of their time on improving their health here.”

The same goes for maintaining a culture of quality among staff in order to keep clients coming

back, he adds. “We keep recruit-ing qualified trainers, whether it’s yoga teachers or personal trainers, offshore, as Hong Kong is so small. This also creates the norm of us continuously offering new classes in a range of styles.”

Great importance is placed on retaining quality instructors and lengthening their career prospects, particularly after an internal survey found that most trainers’ careers start when they’re in their early 20s and end no later than 40. “At that point, they have their own family. We try to help them manage their work schedule so that they can work here longer and be able to build up their own customer base,” Yeung explains. “This is what we want to do and what we’ve yet to achieve.”

Fitness challengeCompetition in Hong Kong con-tinues to be intense, and extends beyond the other major fitness companies, including Fitness First, California Fitness, Physical and Seasons Fitness. These big names face an increasing number of smaller fitness and wellness com-panies that offer alternatives to the gym scene, for example Epic MMA Club, Hong Kong’s first high-end mixed martial arts club, and XYZ Studio, a popular boutique spinning studio in Central.

Apart from new operators enter-ing the market, the city’s soaring rental rates pose another challenge. While most Pure clubs sit above ground in office buildings, a couple of its clubs occupy prime shopping

“ First you have to convert your fancy ideas into a plan.”

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mall floors and have rents of up to 10 times higher, according to Yeung.

Yeung takes on the issue by utilizing his CPA skills to think systematically and develop problem-solving strategies. “Whenever we have a rental offer, we plug it into a financial model and see if it is work-able, not just the rental charge but also the leasing terms,” says Yeung, adding that long leases and office building rents have been instrumen-tal in keeping fixed costs manage-able. “Our starting [tenure] is longer than any other operator in Hong Kong,” he says. “We ask for at least five years. For Singapore, Taipei and Shanghai we can ask for as much as 15 years.”

Even with the competitive gym markets, Yeung expresses opti-mism, particularly as Hong Kong appears to have great potential as a growth hotspot for fitness in the longer term. “The penetration rate in

Hong Kong is far less than the rate in the United States, it’s around 10 percent but Hong Kong’s rate is only around 0.1 percent,” says Yeung, cit-ing the company’s internal research.

Knock out stressYeung’s appointment to his current role reflects Pure’s search for a finance professional who knew membership-type services. After moving up the ranks at KPMG China to audit manager, the Hong Kong Baptist University graduate decided to leave the Big Four firm after nine years to join local cosmetics retail chain The Beauty Group International, which owns a portfolio of beauty and lifestyle brands.

“The company operates a French skincare brand called Ingrid Millet with more than 40 retail stores selling mainly facial and spa treat-ments,” explains Yeung. “Working

for them gave me the experience that allowed me to join Pure.”

He left The Beauty Group as its financial controller after three years, with a desire to try something new. Yeung’s open-mindedness about challenges hasn’t really extended to the gym, however. “I don’t usually work out, but I’ve tried doing yoga twice and found it really difficult,” Yeung says with a laugh. “You don’t work that hard but you sweat a lot. And after a 45-minute session, you feel totally relaxed.”

Indeed, Yeung is now well versed in the benefits of stress-busting exercise thanks to a work environment that instils a passion for building a healthier and bal-anced life, he notes. “I remember having a bad day at the office and at lunchtime, I went to one of our gyms to box by myself. It’s amazing how much better you feel afterwards.”

June 2015 23June 2015 23

How to...Pallavi Anand

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June 2015 25

T he ability to motivate a team to work efficiently is critical to organiza-

tional success. This is especially true amid intense competition to keep talent in companies. Strong organization, solid procedures and a focus on motivating staff are keys to keeping productivity high.

Here are six tips:

Encourage regular honest and open communicationEmployers need to communicate with employees so they know what the company’s goals are. This will make them feel involved and part of a team. Team members should also be encouraged to openly ex-press their concerns, observations and suggestions. Knowing that their opinion is valued is a strong moti-vating factor.

Give clear directionsOne of the most common reasons why team members lack motiva-tion is because they are not given the directions they need. Managers should give clear instructions and help the team understand how their responsibilities align with business goals. But they should take care not to come across as heavy-handed. Many employees won’t ask for more details for fear of appearing incompetent and they will become frustrated if they don’t seem to be making progress with a project. Ev-ery project must have a reasonable deadline so that your team knows what they are working towards.

Offer the right incentivesWhile money is important, it is not the only way to motivate staff. Con-sider using a range of incentives to keep the team hungry for success. For example, offering an overseas secondment as an opportunity to gain valuable cultural experience. The chance to receive mentoring will also be appealing for people looking to build their career. Others will be excited by the opportunity to enjoy more flexible work hours or the chance to work from home.

Recognize staff for a job well doneStaff recognition is often overlooked but it is an extremely effective and low-cost way to improve workplace motivation. Acknowledge a specific person or team’s contribution, which has gone beyond everyday expecta-tions. A celebratory drink at the end of a well-executed project will help keep spirits up and promote bond-ing. It’s all about showing employ-ees that their hard work is valued.

Manage absenteeism proactivelyRegular absenteeism of team mem-bers, whether because of illness or personal commitments, can often have a demotivating impact on other employees. Other team members forced to pick up the slack may feel they are being overburdened. While some leave is unavoidable, there are ways to minimize the impact of a staff being out of the office such as offering flexible working options, redirecting workflow and bringing

in temporary professionals to cover longer absences.

Choose your words carefullyHow supervisors communicate with staff will have a big impact on mo-tivation. While it’s advantageous to be as transparent in the communica-tion as possible, finding the right mix of straight talk, criticism and praise will boost the team’s produc-tivity – and the employer's reputa-tion as a capable manager. Some-times, the method is the message.

With these strategies in place, staff members would be better motivated, consistently delivering the results the business needs and ultimately ensuring the organization stays one step ahead of the competition.

...retain talent by maintaining motivation in the workplace

Managing Director at Robert Half Hong Kong, explains how team leaders can keep staff satisfied

TaxReal estate

Hong Kong and Mainland investors have been snapping up properties in several overseas markets, raising fears that speculation is pushing purchases out of reach of locals. Tax systems are becoming complicated as a result, prompting potential buyers to seek professional advice from CPA firms

Tax agencies build obstaclesfor foreign buyersIllustrations by ID WORKSHOP

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F rom London, England, to London, Ontario, property in-vestment from China and Hong

Kong is being demonized as an unfair land grab pushing real estate prices out of reach of local homebuyers.

As a result, taxes and other deterrents have been introduced or are being considered in a number of jurisdictions, further complicat-ing tax systems and increasing the reliance of clients on accountants. “There has never been such demand for professional advice related to global taxation obligations,” observes tax adviser Laurence Lipsher, a Hong Kong Institute of CPAs member based in Guangzhou.

The increasing complexity reflects the difficulty of policing residential property purchases. No govern-ment wants to deter foreign invest-ment – for instance Chinese buyers could pump up to A$60 billion into Australian housing over the next six years, according to a Credit Suisse report issued last month – yet there are concerns that foreign purchasers are driving locals out of the market.

Obstacles to investmentIndeed, Australia is the second-most popular destination for Chinese prop-erty buyers after the United States, according to data released in April by the Mainland real estate website Juwai.com. (Canada, the United King-dom, New Zealand, Portugal, France, Spain, Germany and Singapore round out the top 10 target markets.)

While the U.S., with its abundance of available property, has not any significant new measures, countries with more overheated residential real estate markets have seen steps taken to rein in foreign investors.

Sunny Kan, Australian Tax Consul-tant at Australasian Taxation Services in Hong Kong and an Institute mem-

ber, says more Hong Kong and Chinese clients are seeking advice related to investment in Australian property. “There are a few new regulations as a result of the 2015-16 federal budget,” he says.

As investors from China and Hong Kong become more prominent in the residential property market – such as the March purchase for A$25 million for an as-yet-unbuilt 100th floor penthouse in Melbourne – Kan notes that some clients are unaware of their Australian tax position, such as one who failed to record tax credits after the sale of an investment property. “This is a serious error and I asked the client to provide necessary documents for me to lodge an amendment,” says Kan. “He received a refund of several thousand Australian dollars.”

Kan describes another Hong Kong client in a very strong equity posi-tion with an investment property in Australia with no mortgage. “But this also means he has to pay Australian tax each year and he does not receive tax credits for future retirement use,” he explains. “I immediately suggested that he draw out equity from his in-vestment property and obtain another mortgage to purchase a second invest-ment property, not just to improve his tax efficiency but also provide a golden investment opportunity.”

Last year, the Australian govern-ment announced new charges related to foreign property buyers. Kan has already advised clients on buying Australian residential properties under revised rules from 1 December, which will require an extra A$5,000 in fees for deals worth less than A$1 million and A$10,000 for every A$1 million over that.

Neighbouring New Zealand has also seen soaring housing prices, especially in Auckland, the country’s largest city. However, no hard data is

“ There has never been such demand for professional advice related to global taxation obligations.”

June 2015 27

TaxReal estate

available on how many Chinese and Hong Kong investors have purchased properties. Andrew Bruce, President of the Auckland Property Investors’ Association, told The New Zealand Herald last month that there needs to be a better understanding of exactly how many foreign buyers there are and to what extent they impact the housing market.

Nonetheless, there have been widespread calls for the taxing of property purchases by non-residents. Gina Wallace, Managing Director of NZ-US Tax Specialists in Auckland and a member of Chartered Accoun-tants Australia and New Zealand, says the government needed to act. “It has fended off criticism most recently by the Reserve Bank of New Zealand relating to the government’s inertia around what is now a housing crisis.”

Wallace says Chinese clients are seeking advice in the wake of last month’s announcement by Prime Minister John Key that the govern-ment would institute a capital gains tax on residential property sold within two years of purchase. It was aimed at foreign non-residents but few expect the new tax to have a major effect on property prices.

Tax on capital gainsOne of the most significant changes is in the U.K., where Asia-Pacific in-vestors are major players in the resi-dential property market. According to Knight Frank, those from Hong Kong were the second largest buy-ers of property in London in 2012, representing 16 percent of the total value of purchases by overseas inves-tors. Mainland citizens accounted for another 5 percent of deals.

CPAs are increasingly required by clients to negotiate the British property tax system, which is now the most complex in the world, according to a recent PwC study. “There are now four regimes dealing with capital gains tax on residential property for both domestic home-owners and overseas investors,” says Paul Emery, Partner at PwC in

London and a member of the Institute of Chartered Accountants in England and Wales.

The U.K.’s new capital gains tax regime introduced on 6 April will have a significant impact on overseas owners of British residential prop-erty. “Capital gains tax, which up to now has not affected most non-U.K. residents, will now apply across the board, regardless of the property’s value and irrespective of whether it is let or owner-occupied,” says Carlo Gray, Partner and Head of the Hong Kong office of Buzzacott, a U.K. tax advisory service.

He says the new laws have created concern, not just among Hong Kong and China clients who have invested in British property, but also Asia-Pacific-based U.K. citizens. He is advising investors to first obtain a valuation as of 5 April. “Because when you sell that property you’re going to need to prove to Her Maj-esty’s Revenue and Customs what the market value of that property was at that date,” he adds.

The new rule will affect not just individuals who own property in their own name, but also people who own them through companies, Gray adds. “That’s very popular here in Hong Kong,” he says. “The usual structure would be to have a British Virgin Islands-incorporated com-pany to own U.K. property.”

Accounting professionals are able to guide clients through the maze of U.K. regulations that cover offshore vehicles, both in the wake of a crack-down on suspected money laundering and a change in stamp duty. “The stamp duty rules changed in April 2013 with regards to individuals purchasing property through offshore properties,” Gray points out. “The rate for companies that own property that are disposed of after 5 April is going to be 20 percent versus 28 percent if you own the property directly.”

Gray cautions that investors should be aware of the Annual Tax on Enveloped Dwellings rules that came into effect in April 2013.

While Chinese citizens are under the spotlight in some overseas markets, its own authorities are poring over the tax obligations of non-Chinese residents. From this year, foreign nationals working in the Mainland can expect to face more scrutiny over their earned income.

A new individual income tax audit scheme is being rolled out in Beijing and will initially target foreigners, says Guangzhou-based tax adviser Laurence Lipsher, a Hong Kong Institute of CPAs member.

“The State Administration of Taxation has determined [that] there is such an abundance of non-Chinese living there that tax officials can use them as a pilot scheme to perfect the individual income taxes audit process,” he says.

The audit programme has already begun in the capital’s Chaoyang, Dongcheng, Xicheng, Haidian and Shunyi districts, says Lipsher. “The law went into effect at the end of 2013 and in 2014 the SAT started displaying interest in it, and now they are auditing,” he says.

Foreign residents of China who earn more than 120,000 yuan a year must file a tax return. Lipsher notes that under many employment contracts in China, education, relocation, home leave and housing allowances mean a substantial portion of income is not taxable.

Fans of China’s one-page individual income tax return are in for a shock in the next two or three years, Lipsher warns. “That is going to change,” he says. “Sad to say, the SAT is using a role model to develop its forms, and the SAT has said that model is the complex code of the United States Internal Revenue Service.”

Lipsher notes the U.S. tax code covers more than 400,000 pages of legislation.

China to complicatetax for expatriates

CPAs are increasingly required by clients to negotiate the British property tax system, which is now the most complex in the world, according to a recent PwC study.

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“That’s effectively a wealth tax,” says Gray. “If individuals are owning U.K. residential property through an offshore company, then unless they qualify for exemption or relief, they will effectively pay an annual wealth tax that ranges from £7,000 to £218,000 a year, depending on the property value.”

Gray advises some clients to obtain life assurance, which can be as little as £25 a month, to pay for any resulting inheritance tax. “That is definitely something for clients to think about if they want to use a property and not rent it,” he says.

In Canada, governments have been pressured to impose restric-tions on property buying by non-residents. Last month, British Columbia Premier Christy Clark said her administration was trying to tackle the growing challenge of home

ownership. An online petition calling on the province to restrict sales to foreigners garnered nearly 25,000 signatures as of 31 May.

Some believe it is unlikely any discouragement will be imposed, given its price-dampening effects on Canadian homeowners and investors. “There is no policy directed towards cooling off foreign investments in Canada, especially real estate,” notes Eva Lau, Senior Manager for Tax and Business Advisory Services at the Russell Bedford accounting firm in Hong Kong and an Institute member.

However, CPAs with Canadian experience say opposition is mount-ing to foreign residential property purchases in British Columbia, espe-cially in Vancouver, the province’s biggest metropolitan area, and the situation could well change in the near future.

According to Knight Frank, those from Hong Kong were the second largest buyers of property in London in 2012.

June 2015 29

GAA leadership prof ileBarry Melancon

Melancon began his accounting career in 1979 at a small CPA firm in Louisiana. In 1984, he was elected partner

30 June 2015

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Barry Melancon, President and Chief Executive Officer of the American Institute of CPAs, explains to George W. Russell how his organization works with international partners, including HKICPA, to ensure that CPAs remain globally relevant

T he chief accountant of the Securities and Exchange Commission suggested in

December 2014 that companies in the United States should be given the option to use International Financial Reporting Standards. Last month, however, he distanced himself from his original comment, citing a lack of support for the idea.

For Barry Melancon, President and Chief Executive Officer of the American Institute of CPAs, the equivocation came as no surprise. “We have traditionally supported moving to a single set of high-quality standards globally,” he says of the official AICPA position. “We remain supportive of that goal.”

However, Melancon says the international accounting com-munity has to be cognizant of two important factors. “First, that it will be a process in the U.S., not a flip of the switch,” he says of any move embracing IFRS. Secondly, he adds, that a move towards IFRS is not merely technical. “Any deci-sion is both political and emotional in nature.”

It is also worth noting, Melancon says, that IFRS has been making quiet inroads into the U.S. for some time. “Importantly, IFRS already sees significant use in the U.S. by subsidiaries of foreign-owned com-panies and by foreign companies that dual list here. In addition, IFRS is covered extensively in the U.S. CPA examination.”

Such developments illustrate that the U.S. does not operate in a self-obsessed domestic bubble, as has sometimes been suggested. “We have numerous international strategies and partnerships, and the Global Accounting Alliance is a very important one,” he says of the 11-nation body. “Our members have varied interests and interna-tional issues are a more critical need for some of them, although it is growing universally.”

As a result, Melancon says, AICPA members expect the organi-zation to be an international leader on their behalf through its relation-ship with the GAA and with its member institutes. “Our relation-ship with the Hong Kong Institute

of CPAs is strong and long term,” he stresses, noting that the U.S. and Hong Kong have jointly addressed issues affecting accounting, audit-ing and regulation of the profession in their respective jurisdictions.

Collaboration extends to individuals through the mutual recognition agreement between the AICPA and the National Association of State Boards of Accountancy, a united voice for U.S. state regulators. “Through this agreement, qualified CPAs from Hong Kong can practise in the U.S. without having to completely re-credential, and similar recognition is given to U.S. CPAs who wish to practise in Hong Kong.”

Fragmented authorityIn a recent comment setting out his priorities for 2015, Melancon high-lighted diversity as critically im-portant in a melting pot such as the U.S. “We have not done a good job of bringing different ethnic groups into the profession,” he said. “There is a huge gap between the make-up of our profession and of our society

STARS OF ALL

STRIPES

June 2015 31

GAA leadership prof ileBarry Melancon

and… there’s a business imperative to find ways to be a profession that is inclusive.”

With more than 400,000 mem-bers from Alaska to the Atlantic, not to mention thousands more outside the U.S., it’s no surprise that the AICPA wants to be a standard bearer for diversity. Domestically, there is a wide range of members from the Big Four to 44,000 other firms and more than 30,000 sole practitioners.

Accountants are regulated in the U.S. at a state level, which means the AICPA also coordi-nates with 55 state and territo-rial institutes, ranging from the 42,000-member California Society of CPAs to the 49-strong Virgin Islands Society of CPAs. “We work hard to maintain productive relationships with each of the state societies,” says Melancon.

He says the state societies partner on regional and nation-wide initiatives to promote the profession and protect the public interest. “Frankly, there are more similarities than differences among U.S. CPAs,” he says, adding that the societies also collaborate with NASBA on the administration of the Uniform CPA Examination.

Melancon notes that the federal nature of the U.S. can complicate

legislation. “On the regulatory side, we are working with NASBA on the Uniform Accountancy Act, which is a model bill for state legislatures to reference in regulating the practice of public accountancy,” he says.

Another priority is mobile work-force legislation, being considered by the U.S. House of Representa-tives and Senate. “This would create a uniform national standard to limit taxation of the compensation of an employee whose work takes him or her over state lines,” says Melancon.

The agenda continues the AICPA’s long tradition of working with legislators. “We have a strong track record,” says Melancon. “It’s really a joint effort of the AICPA and state CPA societies and we’ve been influential in the advocacy or passage of certain pieces of legislation.”

One recent example is the Digital Accountability and Transparency Act of 2014, which requires the fed-eral government and agencies to re-port financial information in a way that the public and interested parties can easily access. “This law began with eXtensible Business Reporting Language, which was created by the profession.” Melancon notes efforts by China’s Ministry of Finance and stakeholders in Hong Kong to promote the adoption of XBRL.

Regulatory reformRegulation of the profession has evolved significantly over the course of the past decade, par-ticularly since the establishment in 2002 of the Public Company Accounting Oversight Board, a non-profit corporation established by Congress to oversee the audi-tors of U.S. listed companies.

“The PCAOB is still a relatively young organization,” says Melancon. “Through the Center for Audit Quality and other avenues, we work extensively with the board, and I believe a mutual respect exists. We have identified proposals that we can be supportive of, and some we cannot. The PCAOB listens with an open, but independent, mind, in my view, and I suspect this process will continue to mature.”

Melancon believes overall audit quality in the U.S. has improved “tremendously” in the past decade. “However, the profession must strive to improve quality for all audits, be they public, private, for employee benefit plans or of gov-ernmental entities,” he adds. “With that goal in mind, the AICPA last year launched the Enhancing Au-dit Quality initiative, [which] is a holistic effort to consider auditing of private entities through multiple

“Our relationship with the Hong Kong Institute of CPAs is strong and long term,” Melancon

stresses, noting that the U.S. and Hong Kong have jointly addressed issues affecting

accounting, auditing and regulation of the profession in their respective jurisdictions.

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“We work extensively with

the [PCAOB]... and I believe a mutual

respect exists. We have identified proposals that we can be supportive of, and some we

cannot. ”

touch points, especially where quality issues have emerged.”

The AICPA, like its Hong Kong counterpart, has taken the initia-tive to contribute to proposed new auditor’s reporting models: in the AICPA’s case, after intensive ne-gotiations with the PCAOB. “We have said – and PCAOB Chairman James Doty has now agreed – that we must be careful that the auditor is not disclosing information in the report that is original – that’s the responsibility of management,” he says.

Much of the institute’s legisla-tive influence is however directed at the complex U.S. taxation re-gime. Melancon says the AICPA puts in vigorous efforts to advocate on behalf of small firms on tax issues. “AICPA and its member volunteers monitor or advocate on more than 100 different legislative, regulatory and administrative tax issues,” he says. “The prospects for tax reform may be dim in our

political environment, but we have actively participated in the dialogue on Capitol Hill and will continue to do so.”

Tax battles will rage on: The AICPA opposes recent proposals that would require service com-panies with gross annual receipts greater than US$10 million to change to the accrual method of ac-counting for income tax purposes. “The AICPA strongly opposes lim-iting use of the cash basis method,” Melancon says.

He cites the AICPA’s work on tangible property regulations. Usually referred to as “repair regulations,” these affect depreciation and capitalization of tangible property, including commonly incurred expenses such as replacing equipment. “We are pleased that our advocacy efforts prompted the Internal Revenue Service to allow small businesses to apply the new regulations on a prospective basis and make certain

changes without having to file another form,” Melancon explains.

Future prospectsMelancon believes the long-term challenge for the profession is find-ing and recruiting talent that is com-mitted to the relevancy of financial reporting amid growing complexity and rapid change, while regulation of business and of the profession is at an all-time high. “Therefore, it’s critical that we make sure our ser-vices are useful to the marketplace,” he says.

The AICPA is hoping to meet some of the challenges through constant evolution. “One of the Institute’s largest membership segments is its business, industry and government section,” says Melancon. “Over the past three years, we’ve significantly increased resources available to them.”

One result has been a new designation, the Chartered Global Management Accountant, through

June 2015 33

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“We’ve created a competency framework to help management accountants understand

the skills employers around the world expect now and into the future.”

a joint venture with the Chartered Institute of Management Accoun-tants. “We’ve created a competency framework to help management accountants understand the skills employers around the world expect now and into the future.”

The institute is also seeking to widen horizons for smaller firms. “Small firms are an essential part of the CPA profession,” says Melan-con. “As the core services of tax preparation and audit gain greater efficiencies due to technology, small firms are looking to modify the service they provide clients.”

Tax-focused firms now provide more consulting services than preparation, Melancon notes. “A

lot of them are leveraging cloud computing, doing some financial statement preparation as a service line, and building on the role of trusted business adviser.”

Research by the AICPA indicates that the profession in the U.S. continues to score highly on trust. “Business decision-makers continue to rank CPAs first among financial professionals in terms of positive perception,” says Melancon. “They also receive high marks in overall satisfaction for their work and the value they add to their organizations.”

That, he says, enabled the profes-sion to ride out the global financial crisis in reasonable shape. “While

the U.S. unemployment rate rose as high as 10 percent in the wake of the recession a few years ago, the rate in the accounting field held steady at roughly 3.5 percent, according to the U.S. Bureau of Labor Statistics.”

That same government research organization helps Melancon speak optimistically about the future. “What’s more, the bureau has forecast a 13 percent growth rate in the profession from 2012 to 2022,” he says. “I’m confident because we are a profession that meets our challenges head on. There will always be an important role for the CPA in this world – be it in Hong Kong or the United States.”

At only 37 years old, Melancon was named the CEO of the AICPA and is now the longest serving CEO in the organization's history

The Global Accounting

Alliance facilitates

cooperation among

11 of the world's leading

professional accounting

organizations, including the AICPA and

the HKICPA.

June 2015 35

Work-life balanceFather's day

For Barry Tong, breakfast is the most important meal of the day for more than one

reason. The Hong Kong Institute of CPAs member sacrifices his sleep to spend an extra half-hour with his son Adrian every day before he goes to school.

As Advisory Partner at Grant Thornton, it’s not always easy for Tong to find time to spend with his son, but nine years of fatherhood has taught him to prioritize his schedule to maintain a better work-

life balance. “I get up at six to have cornflakes, sausages and eggs with my son and wife,” says Tong. “It’s only a simple half-hour of interac-tion, but even that is very valuable to me.”

Many CPA fathers like Tong spend a large chunk of their early careers trying to strike the right balance between earning money to support their families and actually being present in the daily lives of their children. As they simulta-neously train to be both skilled

CPAs and ideal fathers, some learn important lessons from each role that can be applied in the other, boosting their performance as CPA dads.

As Adrian grows up, he helps his father reinforce the importance of two-way communication, whether it’s between a father and son or among colleagues. “It’s not just about a father trying to teach his son, or a boss educating a team member. It’s about listening to the other party to really manage the relationship

To be a great father and a successful accountant requires both practice and patience. Tigger Chaturabul talks to Institute members about how they balance the demanding responsibilities of both rolesPhotography by Juliet Shayne Lui

DEDICATEDDADS

36 June 2015

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“ It’s only a simple half-hour of interaction, but even that is very valuable to me.”

and learn from each other’s experi-ences,” says Tong.

As an accountant, Tong believes in instilling the value of money into Adrian’s habits from an early age. Tong helped his son open a bank account so that he could save his red pocket money, a lesson he says he was able to teach his then five-year-old with the help of the bank’s attractive promotion that involved popular cartoon characters.

Tong is especially proud of Adrian’s love for reading, which he

encourages by taking him to the Central Library on weekends. On days when he can leave the office early, Tong looks forward to taking up the role of bedtime story-reader, a daily activity usually led by his wife. “Even if I still have some work to finish before a deadline, it’s important for me to engage in interactive reading with him,” says Tong. “After he goes to bed, I can get back to my work without having to sacrifice these little precious moments.”

Barry Tong and Adrian on the steps of the Central Library

June 2015 37

Work-life balanceFather's day

A happy handfulFor Ted Ho’s children, the best place to be is in their father’s arms. However, with four toddlers vying for his attention, Ho can’t help but feel outnumbered every day, since the start of fatherhood.

The Audit Partner at Deloitte China and an Institute member wel-comed his fraternal triplets, Mark, Megan and Moses (in that order), into the world two years ago. “It was great to find out we were having triplets,” says Ho, “but it did add an extra layer of worry over my wife’s pregnancy so we had to be very cau-tious the entire time.”

Multiple prenatal checkups weren’t the only concern for Ho while preparing to be a father. In ad-dition to the logistical challenge of sorting out resources and rearrang-ing his home, Ho also had to do a lot of administrative work to consider the different equipment, supplies

and help he would need to care for all three babies at the same time. “My wife and I only had two hands each to hold a child,” he says. “We had to figure out how to also care for the third child.”

While some working fathers take a step back from the daily care of infants, Ho knew he had to get involved with everything from feeding time to nappy changes. “Being a father really helped train me to be more patient and empa-thetic in terms of understanding and meeting the needs of my fam-ily,” says Ho. “It’s a priority for me to be there when my kids are get-ting vaccinations or doing school interviews, even if that means rearranging my schedule.”

Now, with the latest addition of seven-month-old Marcus, Ho has four children with four unique per-sonalities to nurture. “It’s almost like working with colleagues or

with clients. They are all different and we need to understand their characters in order to meet their needs,” says Ho.

The growth and development of his children never ceases to amaze him. Whether it’s going to a playground or playing with a simple box, the ways they respond to the interaction fascinate him. “They are always asking me to hold them or carry them around the house,” says Ho. “As I walk around with them, I can teach them little things like how to turn on and off the lights – to my wife’s displeasure – and they love it.”

“ They are always asking me to hold them or carry them around the house.”

Ted Ho and his wife Vince, with Marcus, Megan, Mark and Moses (from left to right)

38 June 2015

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Teaching by exampleAlthough Anthony Leung’s two daughters are as different as black and white, the Paul McCartney fan and Institute member hopes that Ebony and Ivory can live in perfect harmony just as the 1982 number-one song by Paul McCartney and Stevie Wonder suggests.

The Partner and Deputy Assurance Leader at EY remembers the transition he went through when Ebony was born 10 years ago. “I definitely became more mature when I realized I needed to start being a role model all the time,” says Leung. “Being a CPA and a father actually have a lot of similarities because you need

to love, protect and create a good environment for both your family and your career.”

Patience is one of the virtues Leung exercises often at home, a trait that he imparts to Ebony when she interacts with her younger sister. “Ivory is five or six – you know fathers are terrible at remembering these things – and the gap between them means both girls have entirely different needs,” says Leung. “You really have to stay focused while interacting with them and not allow your mind to drift off, no matter how tired or busy you are.”

To show his daughters the unique beauty of Hong Kong, Leung takes them on easy hikes along nature

trails. “There’s a misunderstanding that Hong Kong is all buildings,” he says. “There are so many trails just minutes away from the city, which is something they can’t find in other parts of the world.”

One of the most important lessons Leung teaches his children is the power of determination and hard work. “I joined the Oxfam Trailwalker event for charity and had to hike the 100-kilometre MacLehose Trail within 48 hours,” says Leung. “My kids knew I trained hard for it and it was great to have them meet me at the finish line, where they saw what I was able to achieve through dedication and perseverance.”

“You need to love, protect and create a good environment for both your family and your career.”

Anthony Leung and his wife Loretta, with Ebony and Ivory in Victoria Park

June 2015 39

Work-life balanceFather's day

Dynamic duoBusiness has always mixed with family for KK Yeung, Founder of CPA firm KK Yeung Partnership, and an Institute member. With 45 years of being a practising CPA and 44 years of fatherhood under his belt, Yeung has come to understand the common denominator between the two roles: working hard for others.

Yeung introduced the CPA profession to his three children when they were in their infancy, bringing the entire family together with clients to have lunch or dinner throughout the week. “I remember when I brought my eldest daughter, Angela, with me in her baby carrier to meet some of my clients,” says Yeung, thinking back. “We were all practically family.”

Angela, who now works with her father as Partner at KK Yeung

Partnership and is also an Institute member, feels fortunate to have been exposed to the industry from an early age. “By allowing us to join these social gatherings, my siblings and I gained a lot of experience on how to interact and deal with different people,” she says.

Her best memory of her father involves one of her first big projects after joining his firm: a debt rescheduling scheme that

involved proposals for business improvement programmes and adept negotiation skills. “My father led a meeting with more than 20 banks that all had different point of views on the situation,” she says. “The way he handled the project and put things in the client’s favour made a huge impression on me.”

Yeung believes in teaching through a hands-on approach, a technique that his daughter agrees is very effective. But although Angela has clearly benefitted from her father’s coaching, she has also developed her own working style that complements her father’s to form the perfect CPA team. “Angela is more patient and analytical, and thinks from the start, while I think from the outcome,” explains Yeung. “She helps me figure out how to get to the results.”

“ We talk about everything, from business to clients, even about how to fix a light if one goes out at home.”

KK Yeung and Angela at their firm

40 June 2015

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Despite the busy schedules of Yeung himself, his wife and three children who all work in different fields, the entire family reserves one o’clock on Friday afternoons for their weekly family lunches at their favourite dim sum restaurant in Wanchai. “We talk about everything, from business to clients, even about how to fix a light if one goes out at home,” he laughs. Special connectionRegardless of the physical distance between Kenneth Morrison and his four children, the Practising Direc-tor and Chairman of the Board of Greater China at Mazars and Insti-tute member, makes his priority to stay in touch with his family.

Through Facetime and WhatsApp on his mobile devices, Morrison can connect to his loved ones at the touch of a button. “It’s a miracle really,” he says. “When I was a

child at boarding school, it would take a week for a letter to reach my family.” The Hong Kong-born accountant studied overseas in Scotland, an experience he provided his own children when they were young.

Now, his eldest son Andrew works in the United States, while Graeme, Kirsty and James reside in the United Kingdom. “I travel often as a CPA and whenever I find myself nearby, I try my best to see my children and grandchildren,” says Morrison.

Just before he was interviewed for A Plus, Morrison’s second son Graeme had just welcomed a baby girl to the family. “It’s perfect because I will be in London next week to see baby Ellie, my third grandchild,” he says with a smile.

Even while he is at the office, Morrison keeps his family close, surrounding his workspace with family portraits. “Here we are,

the whole motley crew together,” he says, pointing to a framed photo. “It was taken at Graeme and Sarah’s perfect wedding last year in northern Scotland and we all had such good fun together.”

Fatherhood has taught Mor-rison that he can always learn something from people, no matter how young they are. “Through my children, I moved away from seeing the world in black and white and instead became more flexible on the things that weren’t impor-tant enough for me to firmly take a stand on.”

Morrison is proud knowing that no matter what direction his children’s lives have gone into, they bring their sense of right and wrong with them. “Integrity and doing the right thing, no mat-ter what the cost, are important values to uphold, not only as a CPA, but as a father as well,” he says.

“Through my children, I moved away from seeing the world in black and white.”

Kenneth Morrison holding a collage of his son Graeme's wedding photos

June 2015 41

SourceManagement

Recent trends show that the bulk of corporate value comes from intangible rather than tangible assets. The rise of the Internet and the increasing importance of intellectual property all point to a focus on creative, “value-added” activities rather than routine or repetitive activities.

When considering an investment, plac-ing a value on an intangible asset is often a complex exercise, especially as the asset may quickly become obsolete as a result of a change in consumer behaviour or with the introduction of disruptive technology. The demise of MySpace and the success of Facebook would have been hard to predict only a handful of years ago.

Importance of managerial abilityArguably, one way of judging the value of an asset (and especially an intangible asset) may not be to look at the asset itself and instead ask how the value was created, and by whom? An able management team capable of developing, marketing, enhanc-ing, and protecting an asset should surely provide more comfort to a buyer of the en-during value of the investment, as opposed to investing in a standalone asset.

Without a strong management in control, there may be little ability to respond to change, either in a pro-active or a reactive manner. Even a product as ubiquitous as Coca-Cola has endured many ups and downs in the century or so it has been in existence, and one of the reasons for its success can be attributed to its ability to reinvent itself constantly by developing new markets, targeting new audiences and associating itself, through careful marketing, with events

from Christmas season to the football World Cup.

When assessing an investment, other things being equal, it is therefore important to be able to differentiate and rank the ability of management in order to provide a better return on investment.

Ranking management abilityIt is often hard to determine the ability of management and a number of different metrics seek to do so. I have considered the Managerial Ability score – developed by Pe-ter Demerjian of Emory University, Melissa Lewis of the University of Utah and Sarah McVay of the University of Washington and set out in a 2012 research paper – which assigns a higher score to managers that produce more revenues given a certain set of inputs.

As an investor, this intuitively seems like an attractive way of differentiating invest-ment opportunities. The researchers fol-lowed a data envelopment analysis within specific industries to develop a measure of managerial ability that was derived from easily available financial data on a broad cross-section of firms. They calculated the efficient frontier of each industry by measuring the mix and amount of corporate resources used to generate revenue by the firms within each industry. Firms operat-ing on the frontier were assigned a score of one. Therefore, the score of firms further away from the frontier were lower.

Company efficiency was derived from a series of revenue-generating resources, such as net property, plant and equipment, net operating leases; net research and development expenditure; purchased goodwill; other intangible assets;

inventory cost; and selling, general and administrative expenses.

In my research, I analysed the success or failure of acquisitions depending on the Managerial Ability score of both target and buyer. The outcome of an acquisi-tion was determined based on operating performance. Accounting information has been used in previous research to measure the long-run performance of acquisitions, based on the belief that any benefits aris-ing from acquisitions will eventually be reflected in the firm’s accounting records.

Furthermore, the impact shown in the accounting information will be direct, and it is expected to be less biased towards market volatility and sentiment. However, most studies on merger performance examined abnormal stock returns. This is partly because of the susceptibility of accounting information, which could easily be subject to earnings management and changing accounting policies. Furthermore, it is more difficult to compare accounting performance measures because other fac-tors may drive the numbers.

Therefore, I examined the association between the acquiring firms’ managerial ability one year prior to the event announce-ment date and the change (improvement or deterioration) of the operating performance of the combined firms one to three years af-ter the completion of the merger, whereby the period prior to the merger effective date and after the merger announcement date is taken out.

I considered the one-year to three-year event window appropriate for operating synergies to crystallize and to be reflected in the acquiring firm’s accounting records. The effects of earnings management and

The role of managerial ability in post-acquisition integration

Danny Po argues that one way of judging the value of an asset (especially an intangible one) may be to assess the process through which it arose and the robustness of the business model behind it

42 June 2015

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change in accounting policies, which are more likely to appear in the year of the transaction, were removed.

A number of statistically significant relationships can be established based on my research. In particular, it is interest-ing to note the positive effect of M&A for a buyer with a relatively low Managerial Ability Score. In this case, it seems that acquiring a target with a high Managerial Ability Score (i.e. scoring above its peers) would still yield a positive outcome. This relationship effect is an interesting yard-stick by which to assess the relative likeli-hood of successful M&A by a relatively less able management team.

Should such less able buyers focus on trying to acquire able and experienced targets, especially for a first acquisition? It is possible to rationalize this result through a process of cross-pollination, where the target’s high managerial ability ends up spreading to the buyer, improv-ing the corporate culture of the buyer and resulting in improving not only the target but the entire new overall unit. One danger for the buyer may however be that the focused and hungry management of the target ends up effectively “taking over” the less able buyer.

In any case, one of the conclusions to be drawn is that any buyer should have a plan in place to identify able management and keep such key resources in place to maxi-mize the value derived from an acquisition. A careful post-merger or post-acquisition “100 day” plan should consider how best to retain and incentivize able managers. An even more sophisticated approach would involve trying to integrate such key manag-ers into buyer’s management team in order for them to “teach” the less able or less sophisticated buyer.

Post-merger integration and managerial abilityThe focus on key people throughout the M&A life cycle is obviously critical, in order to smooth integration by relying on moti-vated management. Such motivation may be increased through carefully structuring the compensation of key management by

aligning their financial interests with those of the acquirer.

A smooth integration process can avoid costly delays, especially as the disruption to the buyer’s business of “digesting” a large acquisition can sometimes lead to problems further down the road. Fifteen years on from the disastrous US$164 billion merger between AOL and Time Warner, branded “the biggest mistake in corporate history” by current Time Warner Chairman and Chief Executive Officer Jeff Bewkes, the risks associated with merg-ing businesses without a clear integration plan should be taken into account by any ambitious CEO. This seems to be the case especially where target and buyer are in dif-ferent jurisdictions or in different industries.

On the other hand, a well-planned and smoothly executed large transaction can be hugely beneficial. The pharmaceutical industry had a busy 2014, with the largest deal being the acquisition of Botox-maker Allergan by Actavis, another pharmaceuti-cal giant. It is useful to look back at earlier tie-ups between pharmaceutical groups, such as GlaxoSmithKline, whose name is a reminder of some of its earlier separate components (Glaxo and Smith, Kline & Co.).

The success of their integration may have been helped by the fact they operated in similar industries, albeit with different focuses and strengths. The ability to achieve synergies and forecast future revenues may be simpler in this case, making management’s role a lot easier.

Another example to consider is the in-tegration of YouTube into Google. This now seems so seamless and integrated that it is hard to remind oneself that they were previ-ously separate businesses.

Having the right “generals”Regardless of the size of an acquisition, it is clear that putting in place a careful acquisi-tion process is critical, especially with a focus on getting the support of “key people” onside post-acquisition. All such projects are complex and competitive endeavours and one should look no further than Sun Tzu in the Art of War (who certainly knew about the importance of able generals) to support

the importance of planning: “Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win.”

From a practical perspective, the difference between a successful and an unsuccessful transaction can often be established early on in the process, by identifying the right target. Detailed plan-ning with a focus on identifying key people certainly increases the chances of a suc-cessful transaction.

Danny Po

is Asia-Pacific and

China National Leader

of M&A Tax Services at

Deloitte China

June 2015 43

Two United States federal appellate courts have affirmed dismissals of securities-fraud claims filed against independent audit firms that audited Chinese reverse-merger companies because the plaintiffs did not adequately plead scienter, or guilty knowledge, under the heightened pleading standard imposed by the Private Securities Litigation Reform Act of 1995.

Under the act, plaintiffs must “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind” with respect to each act or omission of the defendant that is al-leged to violate the securities laws.

The Second Circuit’s opinion in In re Advanced Battery Technologies Inc. and the 11th Circuit’s opinion in Brophy v. Jiangbo Pharmaceuticals Inc. both held that to allege scienter on a recklessness theory against an independent audit firm under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, a plaintiff must allege facts showing that the audit firm’s auditing practices were so deficient as to amount to “no audit at all” or that the audit firm disregarded signs of fraud that were “so obvious” that the audit firm must have been aware of them.

In Brophy, the 11th Circuit adopted the “no audit at all” standard for the first time; in Advanced Battery, the Second Circuit adopted the “no audit at all” test for the first time in a published opinion. Advanced Battery is significant in its own right because it is the first fed-eral appellate case to expressly reject scienter arguments based on the alleged discrepancy between a company’s filings with the U.S. Securities and Exchange Commission and with China’s State Ad-ministration of Industry and Commerce, a

regulatory agency to which Chinese com-panies must submit financial statements as part of an annual examination.

Taken together, the decisions in Ad-vanced Battery and Brophy reflect a grow-ing trend: courts rejecting securities-fraud claims filed against independent audit firms in the context of Chinese reverse-merger companies. For example, in In re Puda Coal Securities Inc. Litigation, the U.S. District Court for the Southern District of New York granted summary judgment in favour of an independent audit firm on a Section 10(b) claim under the “no audit at all” standard.

In re Advanced Battery Technologies Inc.In Advanced Battery, the plaintiff moved for leave to file an amended complaint after dismissal of the previous complaint for failure to adequately plead scienter. In the proposed amended complaint, the plaintiff alleged that the two defendant audit firms that audited the financial statements of Advanced Battery – a Delaware corporation with primary operations and subsidiaries in China – falsely represented that they performed their audits in accordance with professional standards and that Advanced Battery’s financial statements were fairly presented.

Among other things, the proposed amended complaint alleged that the audit firms were reckless and committed an “extreme departure from the reasonable standards of care” by failing to identify several purported “red flags,” including: (1) conflicts between Advanced Battery’s financial statements filed with the SAIC and SEC; and (2) the unreasonably high profits that Advanced Battery reported in

its SEC filings, in contrast to the significant losses that it reported in its SAIC filings. The district court denied leave to amend and the Second Circuit affirmed.

The Second Circuit agreed with the district court that the proposed amended complaint, like the previous complaint, failed to adequately plead the audit firms’ scienter under the theory of reckless-ness and that amendment would be futile. The appellate court explained that the plaintiff was required to allege conduct “that is highly unreasonable, representing an extreme departure from the standards of ordinary care,” such that the conduct “must, in fact, approximate an actual intent to aid in the fraud being perpetrated by the audited company as, for example, when a defendant conducts an audit so deficient as to amount to no audit at all, or disregards signs of fraud so obvious that the defendant must have been aware of them.”

Much of the Second Circuit’s analysis focused on the plaintiff’s argument that the audit firms acted recklessly by failing to inquire about or review Advanced Battery’s financial filings with SAIC. In rejecting these arguments, the court noted that none of the “standards on which [the lead plaintiff] relies – the Generally Accepted Auditing Standards, Statements on Auditing Stand-ards, or Generally Accepted Accounting Principles – specifically requires an auditor to inquire about or review a company’s foreign regulatory filings.”

The court declined to adopt the general rule, urged by the plaintiff, that allega-tions of an audit firm’s failure to inquire about or review such foreign filings are adequate to plead recklessness under the act. Although the court noted that “such a legal duty could arise under certain

Two U.S. appellate courts uphold dismissals of securities fraud claims

against auditorsBrian J. Massengill looks at the implications of two federal

appeal court rulings in the United States relating to securities fraud claims filed against independent audit firms

44 June 2015

SourceLitigation

circumstances” (which it did not explain), it concluded that those circumstances were not pleaded here.

In addition, the Second Circuit held that Advanced Battery’s report of high profit margins in its SEC filings triggered, at most, a duty to perform a more rigorous audit of those filings, not of the company’s SAIC filings. The court declined to infer recklessness from the allegations that one of the audit firms had access to, and “presumably relied” on, the financial data underlying Advanced Battery's SAIC filings but failed to see that the data contradicted the company’s SEC filings. Instead, the court found another inference more compelling – that Advanced Battery maintained different sets of data for its Chinese and U.S. regulators and provided the audit firm with false data.

Brophy v. Jiangbo Pharmaceuticals Inc.In Brophy, the plaintiff-investors had alleged, among other things, that the former chief financial officer and the independent auditor of Jiangbo Pharmaceuticals – a company with China operations that became public through a reverse merger with a U.S. shell company – misrepresented the company’s cash balances and failed to disclose a material related-party transaction in Jiangbo’s public filings with the SEC. The district court granted the CFO’s and the audit firm’s motions to dismiss, holding that the complaint did not sufficiently plead scienter, and entering final judgment as to both the CFO and the audit firm. The court entered judgment against those

defendants under Rule 54(b), and the plaintiffs appealed.

In affirming the district court’s ruling, the 11th Circuit explicitly adopted the standard applied by the district court for evaluating an inference of scienter as to an independent audit firm: “[Plaintiffs] must prove that the accounting practices were so deficient that the audit amounted to no audit at all, or an egregious refusal to see the obvious, or to investigate the doubtful, or that the accounting judgments which were made were such that no reasonable accountant would have made the same de-cisions if confronted with the same facts.”

Applying this “no audit at all” standard, and having already concluded that the plaintiffs’ allegations against the CFO and her oversight of several purported “red flags” failed to achieve more than a tenu-ous inference of scienter, the 11th Circuit concluded that the corresponding inference against the audit firm was even more at-tenuated. As an external auditor, the court determined, the audit firm was “a step more removed” than the CFO from any alleged indicators of the fraud.

Ultimately, the court concluded, the plaintiffs’ allegations against the audit firm, like their allegations against the CFO, “failed to articulate a theory of the fraud with any particularity.” The court pointed out that the complaint did not (1) identify the ways in which the audit was deficient; (2) allege that the audit firm had extensive involvement with the company beyond what was required to conduct a single audit; or (3) allege facts sufficient to support a connection between the SEC’s informal, non-public investigation of Jiangbo and the audit firm’s state of mind.

In light of these and other deficiencies, the court concluded that the complaint, at most, established negligence but not a “strong inference of scienter” under the “high bar” of the act’s pleading standard.

ConclusionThese opinions are significant because they illustrate the high burden plaintiffs face in pleading recklessness in Section 10(b) cases against independent audit firms. Under these cases’ holdings, plaintiffs filing suit within the Second Circuit and 11th Circuit must plead with particularity facts alleging that the audit firm’s work was so deficient as to amount to “no audit at all.” Also, the Second Circuit’s determination that allegations that an audit firm failed to review SAIC filings is not sufficient to meet this high burden for pleading scienter is significant, as such allegations are frequently pleaded in matters involving audits of the financial statements of Chinese companies listed on U.S. securities exchanges.

Brian J. Massengill is Partner and

Co-Leader of the

Professional Liability

Practice Group at the

Mayer Brown law firm

in Chicago. Partner

Dana S. Douglas

and Associate Justin A. McCarty, also of

the Chicago office,

contributed to

this article

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June 2015 45

It is not uncommon for practices to have arrangements in place for a partner or director who is not the leader of that engagement to sign the auditor’s report. The following are three common scenarios found in practices: a. A signing partner or director signs an

auditor’s report for an engagement led by an engagement leader who does not hold a practising certificate issued by the Institute.

b. A signing partner or director, who is a senior or an equity partner or director of the practice, signs an auditor’s report for a high-risk engagement (e.g. a listed company engagement) led by an engagement leader, who is a junior or salaried partner or director with a practising certificate, due to quality control or client relationship reasons. In this case, the signing partner or director is named in the engagement letter or recognized by the client as the engagement partner.

c. A signing partner or director signs an auditor’s report for an engagement led by an engagement leader with a practising certificate when the engagement leader is temporarily unable to physically sign the auditor’s report (e.g. away from Hong Kong or medical reasons).

The above signing arrangements give rise to the following issues:• What is the role of a signing partner or

director?• What should be the extent of

involvement of the signing partner or director in the audit engagement?

The Institute’s Practice Review Commit-tee (a statutory committee responsible for exercising the powers and duties given to the Institute as the regulator of audi-tors in Hong Kong under the Professional Accountants Ordinance) has recently con-sidered these issues. The relevant analyses are highlighted as follows:• HKSQC 1 Quality Control for Firms that

Perform Audits and Review of Financial Statements, and other Assurance and Related Services Engagements states that the engagement partner is the partner or other person in the firm who is responsible for the engagement and its performance, and for the report that is issued on behalf of the firm, and who, where required, has the appropriate authority from a professional, legal and regulatory body.

• HKSA 220 Quality Control for an Audit of Financial Statements specifies that the engagement partner should, through a review of the audit documentation, in particular documentation on critical areas of judgment and significant risks, and discussion with the engagement team, be satisfied that sufficient appro-priate audit evidence has been obtained to support the conclusions reached and for the auditor’s report to be issued. In addition, he or she should document the extent and timing of reviews.

• Section 29 of the Professional Account-ants Ordinance provides that except for a practising certificate holder or a corporate practice, no other person shall hold any appointment or render any services as an auditor in respect of a set of Hong Kong statutory financial

statements. The Hong Kong Listing Rules also recognize that Hong Kong primary listed audit engagements must normally be performed by CPAs qualified under the Professional Ac-countants Ordinance for appointment as auditors.

Accordingly, it is considered that only a practising certificate holder can normally be the engagement partner or director for a Hong Kong statutory or a Hong Kong primary listed engagement and sufficient documentation is required to evidence his or her extent and timing of involvement in the engagement.

Based on past disciplinary cases, in the event of an audit failure, the signing part-ner or director in arrangements (a) and (b), as mentioned above, would be named as the defendant in the disciplinary process. For arrangement (c), the signing partner or director would be named in the discipli-nary process unless he or she can provide evidence that his or her role is limited only to signing of the audit report on behalf of the engagement leader under the name of the practice.

Therefore, while signing arrangements allow a practice to use its resources more efficiently and effectively, the signing part-ner or director should properly discharge his or her duty as the practising certificate holder recognized by the Professional Ac-countants Ordinance or the listing rules to be responsible for the engagement in the event that the engagement leader is not a practising certificate holder.

Accordingly, a practice with signing ar-rangements (a) and (b) is expected to have

Signing arrangements of an auditor’s report

46 June 2015

SourceTechnical update

“Practices are expected to take appropriate actions to address the above matters if they have signing

arrangements in place.”

policies and procedures in place to ensure there is evidence that the signing partner or director has properly discharged his or her responsibility under the engagement as the responsible practising certificate holder in signing arrangement (a) or the engagement partner in signing arrange-ment (b). As a minimum, there should be evidence on file that the signing partner or director has performed a review of audit documentation on critical areas of judg-ment and significant risks (that normally includes the planning and completion memoranda) and, based on the review and communication with the engagement team, is satisfied that sufficient appropri-ate evidence has been obtained to support the opinion to be given.

For signing arrangement (c), as a minimum, the practice is expected to have

evidence on file that the engagement leader has confirmed with the signing partner or director that he has undertaken procedures expected of him or her as the engagement partner for the engagement, including a file review to ensure sufficient appropriate evidence has been obtained to support the audit opinion, and shall take full responsi-bility for the engagement before the signing partner or director signs the audit report.

If practices have auditor’s report signing arrangements that do not exactly match any of the three scenarios, they should still make reference to the above and develop appropriate policies and procedures.

Furthermore, practices are advised to avoid having signing arrangements that create independence issues. For example, it would be inappropriate to have arrangements for the engagement

quality control reviewer to act as the signing partner or director as it would give a perception that the engagement quality control review is not independent from the engagement team.

To conclude, practices are expected to take appropriate actions to address the above matters if they have signing arrangements in place. The Institute’s Quality Assurance Department will give more attention to signing arrangements in future practice reviews and communi-cate with members when further issues are identified.

This article is

contributed by

the Institute

June 2015 47

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48 June 2015

SourceTechWatch

The latest standards and technical developments

TechWatch

Members’ handbook

Handbook updates no. 167 to 168(i) Update no. 167 contains revised

preface to HKFRSsOn 3 March 2014, the new Hong Kong Companies Ordinance (Cap. 622) came into effect. Under section 380 and the Companies (Accounting Standards (Prescribed Body)) Regulation (Cap. 622C), the new ordinance now gives statutory backing to accounting standards by requiring Hong Kong incorporated companies to prepare their financial statements in accordance with accounting standards issued or specified by the Institute.

The Institute’s Financial Reporting Standards Committee considered that it would be advisable to amend the preface to Hong Kong Financial Reporting Standards to include spe-cific reference to this new statutory backing in order to clarify the relevant accounting standards to be applied under section 380(4)(b) by Hong Kong incorporated companies not eligible for the reporting exemption.

The amendments, which are effective upon issuance, provide explicit guidance on whether a Hong Kong incorporated company which is not eligible for the reporting exemp-tion may choose to prepare its finan-cial statements in accordance with a basis or standard of accounting other than HKFRSs.

(ii) Update no. 168 contains revised PN 740 Auditor’s Letter on Continu-ing Connected Transactions under the Hong Kong Listing RulesPractice note 740 has been revised as a result of the Listing Rules

amendments relating to continuing connected transactions published by Hong Kong Exchanges and Clearing in March 2014.

These amendments were made to implement proposals in the consulta-tion conclusions on review of con-nected transaction rules and pro-posed changes to align the definitions of connected person and associate in the Listing Rules. These amendments were effective from 1 July 2014.

There is no material change in the reporting requirements of PN 740 ex-cept for the changes in the reference numbers and wordings of the revised Main Board Listing Rules and GEM Listing Rules. The revised PN 740 is effective upon issue.

Financial reporting

Institute comments on IASB exposure draftThe Institute commented on the Inter-national Accounting Standards Board’s exposure draft Disclosure Initiative (pro-posed amendments to IAS 7).

The Institute appreciates the IASB’s work undertaken as part of the Disclo-sure Initiative, particularly the effort to improve the effectiveness of disclosures in financial statements. The Institute

therefore supports the IASB’s proposal to improve disclosures relating to an entity’s liquidity.

However, the Institute has significant concerns on the proposal to require a reconciliation of cash flows that have been or would be classified as “financing activities” in the statement of cash flows, except for equity items, and accordingly is compelled not to support this proposal.

Institute’s letter to IASB Chairman on effective date of IFRS 15The Institute sent a letter to the IASB Chairman to convey the Institute’s support for deferring the effective date of IFRS 15 Revenue from contracts with Customers.

The Institute was aware that the IASB is already considering making limited amendments to IFRS 15 as a result of deliberations to date and expect that the Revenue Transition Resource Group will continue to receive more implementation issues as reporting entities progress with their implementation projects.

In addition, the Institute noted that the Financial Accounting Standards Board has delayed the effective date of the new, converged revenue recognition standard, and that the IASB was con-sidering requests to defer the effective date of IFRS 15 to maintain convergence.

In light of these developments, the Institute is concerned that the remaining time allowed for implementation may prove too short for an orderly transition. The Institute would therefore support deferring the effective date of IFRS 15 until the work of the Revenue Transition Resource Group is advanced.

From a convergence and global comparability perspective, the Institute also agreed that it is desirable for the IASB and the FASB to require the

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June 2015 49

same effective date for their converged standards. If the effective date of IFRS 15 were to be deferred, the Institute would expect to make equivalent amendments to the effective date of HKFRS 15.

Audit and assurance

Institute comments on IAASB exposure draftThe Institute commented on the International Auditing and Assurance Standards Board’s exposure draft on ISA 800 (Revised) Special Considera-tions – Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks, ISA 805 (Revised) Special Considerations – Audits of Single Financial Statements and Specific Ele-ments, Accounts or Items of a Financial Statements and proposed conforming amendment to another International Standard on Auditing.

The Institute supports the approach in applying the enhancements in the proposed ISAs 800 and 805 resulting from the new and revised Audit Report-ing standards. The Institute agrees with the approach that ISA 701 on key audit matters should only apply when law or regulation requires the communication of key audit matters in an ISA 800/805 engagement, or when the auditor de-cides to communicate key audit matters on a voluntary basis.

Restructuring and insolvency

Attestation sessions and quotas in the Official Receiver’s Office The Official Receiver’s Office currently provides an attestation service for debtors who file a petition for their own bankruptcy. With effect from 4 May, the attestation sessions and quotas in the Official Receiver’s Office will be changed as shown in the table above.

Taxation

Inland Revenue Department announcementsMembers may wish to take note of the following matters:• The gazette of Inland Revenue

(Amendment) (No. 2) Bill 2015, implementing the concessionary revenue measures proposed in the 2015-16 Budget;

• The consultation on automatic ex-change of financial account informa-tion in tax matters in Hong Kong. The Institute’s Taxation Faculty is studying the consultation paper. If members wish to refer views to the faculty’s executive committee, comments can be sent to commentletters@hkicpa.org.hk by 1 June;

• Press release about the issuance of individual tax returns for 2014-15;

• A reminder to file Employer’s Returns of Remuneration and Pensions (Form BIR56A); and

• List of qualifying debt instruments as at 31 March.

Legislation and other initiatives

Anti-money laundering noticesMembers may wish to note the follow-ing notices and publications in relation to anti-money laundering and counter-terrorist financing:• Government notice 2689: An up-

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

• Government notice 2811: An up-dated list of terrorists and terrorist associates has been specified under the United Nations (Anti-Terrorism Measures) Ordinance;

• Government notice 2937: An up-dated list of terrorists and terrorist associates has been specified under the United Nations (Anti-Terrorism Measures) Ordinance; and

• United States executive order 13224: The list relating to “Blocking prop-erty and prohibiting transactions with persons who commit, threaten to commit or support terrorism.”

For more background information on related current law in Hong Kong, see the Institute’s recently revised Anti-money Laundering Bulletin 1 Requirements on anti-money-laundering, anti-terrorist-financing and related matters, and the revised supplement on suspicious trans-action reporting.

Land Registry circular memorandum on street index and New Territories lot or address cross-reference tableThe 47th edition of the street index and the 16th edition of the New Territories lot or address cross-reference table on compact disc are available for sale at the Land Registry customer centre. In addition, an online version of the new editions of the street index and the cross-reference table is available for free browsing on the Land Registry’s website, www.landreg.gov.hk, or through the hyperlink on the Integrated Registra-tion Information System Online Services website, www.iris.gov.hk. View the Land Registry circular memorandum No. 1/15 for more details.

Please refer to the

full version of

TechWatch 151,

available as a PDF on

the Institute’s website:

www.hkicpa.org.hk

Day Session time Quotas available

10:00 a.m. - 12:00 noon 25

2:00 - 4:00 p.m. 25Monday to Friday

Official Receiver's Office attestation service

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June 2015 51

SourceEvents

Accounting and financial reporting

Credit management: risk mitigation and financing options in China trade will examine tools for marketing expansion, financing improvement, bank credit enhancement and balance sheet protection and various financing options for China trade.Date: 19 JuneTime: 6:30 – 9:30 p.m. CPD hours: 3Language: Cantonese

Latest implementation guidance on the application of Part 9 of the new Companies Ordinance will talk about issues relating to the preparation of financial statements that may arise when companies adopt the requirements of Part 9 of the ordinance for the first time.Date: 23 JuneTime: 12:00 – 2:00 p.m.CPD hours: 2Language: English

Workshop on accounting for income taxes is designed to help participants apply HKAS 12 Income Taxes as well as develop their understanding of the key requirements. It will cover practical issues that are likely to be present in the Greater China context, disclosures, and interaction with other accounting standards.Date: 26 JuneTime: 9:00 a.m. – 1:00 p.m.CPD hours: 4Language: English

Auditing and assurance

Quality assurance forum will focus on practice review outcomes and preparation as well as explore common findings and action plans to help participants enhance the quality of audits.

Date: 24 JuneTime: 6:30 – 8:00 p.m.CPD hours: 1.5Language: English

Forensic accounting

Global asset recovery and tackling action to undermine the arbitration process will examine the threats posed and the forensic and other tools that can be used to address abuse of the arbitration process.Date: 22 JuneTime: 1:00 – 2:00 p.m.CPD hour: 1Language: English

Industry knowledge

Insider trading will review the relevant law in the United States. It will also discuss recent federal court decisions that present new challenges to prosecutors pursuing charges against investors in “expert network” cases and its potential implications for Hong Kong investors and business executives.Date: 18 JuneTime: 10:00 a.m. – 12:00 p.m. CPD hours: 2Language: English

Insolvency

Can Hong Kong learn from Singapore’s experience in corporate insolvency law reform? will explore the licensing of insolvency practitioners, corporate rescue, wrongful trading and cross-border cooperation. A panel of leading insolvency lawyers will share Singapore’s experiences as Hong Kong proceeds with its own corporate insolvency law reform.Date: 30 JuneTime: 1:00 – 2:00 p.m.CPD hour: 1Language: English

Management accounting

What are the risks and opportunities for managing suppliers in China? will talk about the main challenges Chinese suppliers are facing and how buyer should work with suppliers to achieve a win-win result.Date: 22 JuneTime: 6:30 – 9:30 p.m.CPD hours: 3Language: English

Taxation

Challenges in PRC tax risk management will provide an overview of the various measures to counterfeit tax evasion arrangements that the Chinese tax authorities have introduced over recent months, and their impact on companies or individuals investing or operating in China.Date: 24 JuneTime: 6:30 – 8:00 p.m.CPD hours: 1.5Language: English

EventsYour guide to courses, workshops and member activities

Visit the Institute's

website for other

programmes and to

enrol and pay online:

www.hkicpa.org.hk

In Exposure: Inside the Olympus Scandal British businessman Michael Woodford charts his 30-year career at the optical equipment manufacturer, from salesman to management trainee and his rise up the ladder to eventually become the first gaijin, or foreign, president of a Japanese listed corporation.

Then the narrative turns dark: in October 2011, just months into the top job, Woodford was sent an article from Facta, a small Tokyo-based business newsletter, that questioned the corporate strategy at Olympus. The company, Facta noted, had spent more than US$1 billion to acquire

three struggling companies with no relevance to its core businesses, including a face cream manufacturer and a company that made microwaveable plastic plates.

The company had also paid US$700 million to a mysterious Cayman Islands entity related to its US$2 billion takeover of Gyrus Group in 2008. While Gyrus, a suc-cessful maker of medical equipment, was a relatively sensible acquisition, the “advisory fee” was both absurdly high and secretive.

Woodford did some digging and dis-covered from another employee that the payments were an attempt to hide heavy losses suffered more than a decade before in

a risky venture into securities. When Wood-ford confronted then Olympus chairman Tsuyoshi Kikukawa and the board, he was fired and ostracized, while Japan’s business establishment did its best to ignore what was going on.

Woodford was vindicated in the end: the board resigned, the company was fined (although no one served any jail time) and Olympus gave him a US$15 million payout. He was subsequently lionized as the man who shocked corporate Japan out of its corporate slumber, although that point is debatable (see interview on opposite page). Even The Sunday Times

How the “Southend Samurai”took on cosy corporate Japan

Book review

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

Illus

trat

ion

by E

RGra

fix

52 June 2015

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portrayed Woodford (born in Liverpool but a longtime resident of the Thames Estuary) as the “Southend Samurai.”

The bull fights backThe heart of Exposure is Woodford’s painstaking attempts to get to the bottom of the financial dealings. At first fearing the company was laundering money, Woodford instead discovers deep flaws in Japan’s cor-porate culture. Fans of financial history are treated to an exposition on the 1985 Plaza Accord, which devalued the yen and drove export-driven corporations to manipulate off-balance-sheet liabilities.

Woodford criticizes KPMG and EY’s Ja-pan affiliates for their auditing of Olympus. (PwC, authors of a critical forensic audit of Olympus’s dodgy deals, bathe in a warmer light). Woodford’s conclusion: He supports compulsory auditor rotation.

First published in the United Kingdom in 2012, Exposure quickly became a best-seller. Now available in Chinese translation, Woodford’s book should have a particular resonance in Asia-Pacific markets.

Exposure moves along at a fair clip, and Woodford’s style is frank to the point of driven. It is somehow understandable that there were portrayals – particularly in the Asian media – of Woodford as the loud European bull stampeding all over the deli-cately positioned nuances of the china shop that is corporate Japan.

However, Woodford was not a voice in the wilderness, one angry man: Olympus was leaking all over, in North America and Europe, with concern and dismay over its odd acquisitions. The initial leak to Facta was from a Japanese employee, seeking not fame, film or a career of public speaking, but concerned over his future, and that of his family, should the errant company collapse.

Some have argued that Woodford should have laid low, smiled for the cameras and let the scandal blow over: eventually the losses would have dissipated through the vari-ous companies and Olympus could make a fresh start. But who is to say if the company, missing US$1.7 billion, was not fatally weakened? Given a lack of accountability, what was to stop Kikukawa and his cohorts repeating their fraud?

Ask Michael Woodford about the likely legacy of his whistleblowing in Japan and the response is a resigned sigh. On the day he is interviewed for A Plus the embattled electronics manufacturer Toshiba Corporation announces that an independent third-party committee has been formed to investigate accounting irregularities.

Contacted by phone at his home in England, Woodford, the former chief executive officer of Olympus Corpora-tion, chuckles at the news. “It made me smile, because creat-ing independent third-party committees is what the Japanese do,” he says. “Olym-pus did that two years before I exposed the scandal.”

He says Hong Kong and Singapore are exceptions when it comes to corporate governance in Asia. “It means a lot there,” he says. “But I’m very cynical about Japan. They made a lot of clucking noises and made some rules about independent non-executive directors.”

Unlike countries where whistleblow-ing is seen as a positive force, Japan places high importance on loyalty to one’s company and colleagues. “Under Japanese legislation you can be pros-ecuted if you, as a whistleblower, don’t go to your company first,” Woodford says.

After OlympusOther institutions also serve the es-tablishment interests, he adds. “Japan

has a self-serving, self-censoring, deferential media,” he says, reminding readers that it was the efforts of an ag-gressive but hitherto largely unknown business newsletter, Facta, which first drew attention to Olympus’s unusual acquisitions.

The Japanese accounting profes-sion also performed disappointingly, Woodford says, with few consequences for their complicity in hiding Olympus’s

losses.Woodford has

stayed away from the corporate arena since his 30-year career with Olympus came to a spectacular end in 2011. “I’m 55 and I thought at one point that I was going to be assassinated, so it changes your life.”

Instead he has devoted his working hours to philanthropy, helped by an eight-figure settlement with Olympus for wrongful dismissal. “I run a road safety

charity in Thailand, I’m involved in hu-man rights and I’m patron of the British whistleblowing charity Public Con-cern at Work.” Last year he sat on the British Whistleblowing Commission, which recommended a formal code of practice to protect people who report corporate wrongdoing.

Writing Exposure was a catharsis, says Woodford. “I want people to know just what happened to me, and for them to gain a real insight into the foggy, murky world of corporate Japan. I’m trying to make it easier for the next person who blows the whistle.”

Author interview:Michael Woodford

June 2015 53

Life and everythingAs recommended by Institute members

Atmospheric dining by Michael Mak, Finance Director at Pizza Express

Penthouse by Harlan Goldstein30/F, Soundview Plaza 2 Midtown, 1-29 Tang Lung Street, Causeway BayIt’s rare for a restaurant in Causeway Bay to have a view as spectacular as that of the Penthouse by Harlan Goldstein. Located within the same building that houses other much talked-about restaurants, the Penthouse stands out, not only for its stunning view of the harbour, but also for its contemporary Western cuisine. Meat lovers should definitely try the tender Striploin Steak. But, if that’s too heavy, the chef’s signature Lobster Risotto (with Arborio rice, Maine lobster and Sakura shrimp) or the New York Chopped Salad are very delicious. After dinner, head to the open-air rooftop bar for a drink from the impressive wine menu. Beef & Liberty2/F, 23 Wing Fung Street, WanchaiBeef & Liberty is known for its burgers and is owned by the company I work for.

It serves only hormone-free, grass-fed Tasmanian beef, which is never frozen. To ensure maximum quality and freshness, the beef is minced and burgers are made daily in-house. With its super high ceiling and down-to-earth atmosphere, this is a great place for lunch, dinner or even a happy hour gathering.

The Verandah at The Repulse Bay109 Repulse Bay Road, Repulse BayThe Repulse Bay Hotel was the setting for Chinese novel Love in a Fallen City (傾城之戀), written by Eileen Chang in 1944. While the original Art Deco building was demolished long ago, the space that inspired Chang is replicated at The Verandah. There, diners can enjoy a great view overlooking the bay as part of a weekend brunch, peaceful high tea or romantic anniversary dinner. I particularly appreciate the warm and attentive service provided by everyone from the waiters to the restaurant manager.

Lucerne, Switzerland by Viking Yuen, Accountant at Travelzen

Walking around Lucerne for me feels like being a part of an idyllic painting, with its historic architecture and breathtaking natural scenery. One of the main attractions is the 14th century Kapellbrücke (or Chapel Bridge), the oldest wooden covered bridge in Europe that connects the old and the new district. By day, see the bridge decorated in vibrant blossoms, and at sunset, take a cruise out on Lake Lucerne. Unlike in Hong Kong, you rarely see people in Lucerne in a rush: the slow-paced nature of this city makes it the perfect relaxing getaway.

54 June 2015

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How to dress smart for summer by Caroline Sze, Founder and Corporate Image Styling Director of Seasoning

Best business apps by Simon Tang, President of CyberUAA

The hot and humid weather has rolled in, which means it’s time for both male and female professionals to strike that perfect balance between dressing smart and looking comfortable. For women, the good news is that loose fitting trouser suits with a cool edge are currently on-trend. Nevertheless, in most cases, suits and trousers are advised to be tailored for a sharp look. Women can choose handsomely unrestrained wide legged trousers and pair them with structured shirts. Meanwhile, a silk or light-weight shirt contrasts well with structured trousers or suits.

Men should steer away from suits that are too dark and opt for more tones or suits featuring subtle lines or checks. I also always encourage male professionals to wear accessories for an added twist, for example coloured buttonholes or a white “James Bond-fold” pocket square that peeps out from a light navy suit. This stylish detail will show your attention to detail in your profession as well as project your individuality. This summer, women should add a pop of colour to their work outfits consisting of a neutral dominant colour with a vibrant scarf, sleek belt or bag.

Womens1. Crossover V-neck

top, Cos2. Matt buckle belt,

Cos

Mens1. Check suit,

Paul Smith 2. Silk pocket square,

Paul Smith

2

1

1

2

When it comes to being more productive and organized, two apps comes to mind. The first one is Evernote, which is like a digital notebook that stores photos, audio clips, web pages, notes and files. Notes with attached images or voice memos can be shared efficiently with teammates, and checkboxes can be created to serve as virtual to-do lists. The app’s ability to search for text within images – using optical character recognition technology is also a plus.

The second is Mind Tools, which is a handy app for CPAs who are constantly looking to build skills. It offers quick refreshers on a variety of business and management topics, for example, how to undertake group brainstorming sessions, as well as decision-making techniques, in a creative way. The app features 12 groups of so-called toolkits, including leadership skills, team management, strategy tools, problem solving, decision making and project management.

Evernote

Mind Tools

June 2015 55

56 June 2015

A life in the day…. with Nury Vittachi

They call him The Liquidator. He cleans up busted organi-zations. He eats intractable

financial problems for breakfast.My wife used to call me The

Liquidizer. I went through a phase of obsessive kitchen-blender use. I’d have a yummy glass of toast for breakfast.

The Liquidator and The Liquid-izer met one Monday afternoon when this journalist began a series of meetings to investigate the claim that not only were accountants not boring, but frequently had the cool-est, most exciting jobs in town.

The first tip-off led me to the Hong Kong office of The Liquidator as evidence.

Mat Ng, who is also nicknamed “the corporate undertaker”, walks into the room like a suspiciously normal person. He is a skinny, 40-something East Asian man with a neat, dark suit and glasses. He looks like an accountant.

I ask about his life, and he seems even more boringly ordinary: he went to school in Hong Kong, uni-versity in Australia, and now works at a desk in an office building next to the Standard Chartered Bank headquarters in Central.

But when I ask about his typical day, clues start to leak out that he and I are very different. He rises at six and begins the day with a work out (probably bench-pressing his wife and two children). In contrast, I don’t actually “wake up” as such. “Come to” would be a more accu-rate description.

Mat gets to the office at eight and spends time “doing desk work and

having meetings.” So far, so normal. “But sometimes I travel for work.”

Aha! That’s the lead-in to a flood of stories that confirm what my source told me: Mat and his team-mates at JLA Asia untangle some astonishing assignments in Hong Kong and the region.

The people he negotiates with are usually stressed and sometimes dan-gerous. A businessman told one of Mat’s counterparts: “I can give you the million U.S. dollars you are ask-ing for. Or I can pay a hundred U.S. dollars and have you killed.”

When Mat was on assignment in China, sitting in a hotel lobby hidden behind a newspaper, a group of scary-looking men walked in. “They’re sending up some guy from Hong Kong,” he heard one of the men growl. “And they’re going to meet in this hotel.” Mat, who is flu-ent in English, Mandarin, Cantonese and Shanghainese, escaped, moving the meetings to a secret location.

But is Mat (who has The Liqui-dator emblazoned across the back of his sports shirt) a fearless, steely fixer all the way through?

When asked for details of his

most memorable case, a softer, gen-tler Liquidator leaks out. Part of a building collapsed in Hong Kong, causing death and destruction, he says. The law said the residents were liable for a significant lump of money. He met some of them, and found they elderly, illiterate and penniless. They were also hostile, believing that men in dark suits were the enemy.

There appeared to be no solution. But the administration team had a stroke of genius. The only value in the scenario lay in the old folks’ property, yet no one wanted to take their homes from them. Mat facili-tated the use of “reverse mortgages” which would only be payable on the death of the residents. Result: legal demands satisfied, old folk safe and secure, everyone happy.

“At heart, we’re really just prob-lem-solvers,” Mat says, modestly.

This is true, of course. Perhaps the differences between liquidators and journalists are just a matter of scale. For example, I’m sure he has a six-pack under that business suit. I have a keg. It’s not that different.

Nury Vittachi is a bestselling author,

columnist, lecturer

and TV host. He wrote

three storybooks for

the Institute, May

Moon and the Secrets

of the CPAs, May Moon

Rescues the World

Economy and May

Moon’s Book of Choices

The Liquidator opens upA new feature in which the Hong Kong humourist gets up close and personal with Institute members. This month

he meets insolvency practitioner and forensic accountant Mat Ng, Managing Director of JLA Asia

“ He rises at six and begins the day with a work out (probably bench-pressing his wife and two children).”