The virus keeps forensic auditors on their toes
Virus-control measures such as border shutdowns and travel restrictions in many places around the world have hampered some listed companies in Hong Kong in preparing key financial information, especially those whose businesses are primarily based on the Chinese mainland. The travel restrictions have made it almost impossible for auditors to go to the mainland to carry out on-site auditing work.
There were 1,241 mainland companies listed in the SAR at the end of last year, making up half of the 2,449 members of the Hong Kong Stock Exchange, according to Hong Kong Exchanges and Clearing data. They also accounted for 73 percent of the exchange's market capitalization and 83 per cent of the average daily turnover, a sign of their dominance and importance in the Asian financial hub over the years.
The Securities and Futures Commission and Hong Kong Exchanges and Clearing decided in mid-March against offering a blanket exemption for listed companies to put off their financial reporting beyond the March 31 deadline.
Publicly listed companies have been asked to get in touch with regulators and provide explanations to assess whether they can release preliminary results on or before March 31, followed by their annual results after the 60-day grace period. If they're unable to do so, the regulators said they'll approve any further delay on a case-by-case basis based on a company's circumstances.
"We're of the view that, since the responsibilities of the board of directors are collective, the board of directors of issuers are reminded to work closely with their senior management in these difficult times to minimize the disruption to business operations and corporate governance compliance under any Hong Kong regulatory requirement required by the SFC and the stock exchange," international law firm Withers Partner Mike Suen told China Daily.
"The regulators may be more flexible now by allowing listed companies to make some forms of disclosure, or permitting the issue to be discussed on a case-by-case basis," said Chris Fordham, managing director at global management consulting firm Alvarez & Marsal.
Amid the coronavirus outbreak, work-from-home arrangements, travel bans, lockdowns and mandatory quarantines on travelers have remained in place, disrupting supply chains, hampering access to customers, and impeding many workers' efficiency as businesses struggle to keep themselves afloat.
Corporate governance practices of locally-listed companies may also be hindered as they're unable to send employees on field trips to extract and evaluate business data.
This could prompt employees to accept or offer bribes, misappropriate assets themselves and, more significantly, resort to fraud involving financial statements. Remote working has the potential to curb the effectiveness of fraud detection mechanisms within organizations, and put pressure on individuals with the opportunity to commit occupational fraud.
"We expect the situation to persist in the next couple of months until it gets better," said Fordham.
Hence, companies should adopt forensic accounting to detect financial fraud or financial crime, thus placing less stress on corporate governance teams.
Keith Williamson, Alvarez & Marsal's Asia head of disputes and investigations, warned: "Against a backdrop of companies spending less money on corporate governance and compliance, plus the restrictions managements face due to quarantines and working-from-home measures, there'll be more opportunities for these issues to develop."
Forensic accounting is a specialty of the accounting profession that emphasizes accounting and investigation skills simultaneously to detect financial fraud, such as bribery, or financial crime, such as corruption, and helps companies mitigate risks, rectify the situation, work with regulators and assist in corporate governance matters. This area of specialty is also applied to provide litigation support in legal disputes, or give assessable data in criminal investigations.
Fordham is worried that if Hong Kong's economic situation deteriorates, corporate fraud at the external and management level may rise.
"Third-party external fraud, such as overbilling incomes, and management fraud, such as inflated revenues, may happen if the economic hardship situation puts pressure on the management level," Fordham said, adding that it requires more accounting and investigation skills and technologies to detect such kind of fraud because these it may be harder to extract fake data.
Mainland companies listed in the United States, such as Xiamen-based beverage chain Luckin Coffee and Beijing-based tutoring company TAL Education Group, were found to have fabricated their revenues and profits, leading to recent share price plunges in the US stock market.
Currently, whistle-blowers in Hong Kong do not enjoy full legislative protection. The city should consider establishing a mechanism to protect corporate fraud whistle-blowers from retribution or prosecution, Fordham reckons. An ethical company not only attracts talents, but is also likely to retain capital and enjoy a good public image.
He's optimistic about Hong Kong's forensic accounting discipline, but such accounting specialty desperately needs more talents. The talents must cultivate the ability to extract the growing number of business data, as well as to investigate and mitigate the emergence of cyber risks.
