Scrutiny on corporate governance
The issue of corporate governance among mainland companies is still a touchy subject and regulators have yet to tackle the issue head-on. In the past few years, several mainland firms listed in New York have been investigated by the Securities and Exchange Commission (SEC).
As recently as June, the SEC said it was launching an investigation into certain accounting firms over their audits of Chinese companies whose shares trade in the United States. The SEC indicated it was going to examine accounting and disclosure issues related to mainland companies that engaged in reverse mergers, which is the acquisition of a public company by a private company.
Last June, the Toronto-listed Sino-Forest came under scrutiny after a research house said the company had exaggerated the amount of timberland it owned and overstated its revenues. The Canadian regulator said Sino-Forest appeared to have engaged in self-dealing as well. The securities regulator said Sino-Forest had raised about US$3 billion in equity and debt through Canadian markets. Douglas Lau, regional director for Greater China at the Institute of Chartered Accountants in England and Wales (ICAEW), says recent issues with certain US-listed mainland companies may again raise a question about the standard of corporate governance.
'The main priority for China should be to prevent the occurrence of practices which led to the scandals in the first place,' Lau says. 'This needs the enforcement of other Chinese regulators on top of the auditing profession.'
Daniel Lin, managing partner at Grant Thornton Jingdu Tianhua, says a number of mainland companies under scrutiny by the US Securities and Exchange Commission (SEC) have been investigated for reverse mergers. Lin points out there were no investment banks or auditors involved in such situations. Most of the filing by such companies was not thoroughly vetted by the SEC.
A key theme that accountancy professionals and consultants harp on about is that mainland companies should strengthen risk management techniques and train management to understand the regulations of foreign jurisdictions, where they intend to list.
Patrick Rozario, partner at BDO, a global accounting network, says legislation drafted by the Ministry of Finance and the China Banking Regulatory Commission is comprehensive. But there needs to be tighter implementation.
Lau says having strict rules is one option. 'But it is also critically important for senior management personnel of companies [who are charged with governance responsibilities] to keep abreast of the latest developments in the listing rules and corporate governance requirements, not only during the company's IPO [initial public offering] but also post-listing as well on a continuous basis.'
Rozario adds that education can play an important role in inculcating a sense of governance among the directors and employees.
Mainland companies face increased difficulty in fulfilling their financing requirements, as foreign investors are exercising significantly higher scrutiny and non-financial due diligence. Adherence to corporate governance standards will become more important for Chinese companies, accountancy professionals say.
Several initiatives have been launched to address the issue. A new corporate governance handbook for Chinese companies has been developed in collaboration with the Asian Corporate Governance Association, Allens Arthur Robinson and ChinaVest. The handbook addresses the financial challenges and outlines tools to manage special risks and challenges.
Lin says that the mainland regulatory authorities are taking steps to compel state-owned enterprises to comply with listing regulations in overseas markets. 'It's a step in the right direction,' he says.
Rozario says that he has seen positive developments in the enforcement of legislation.
The ICAEW has signed a memorandum of understanding with the Hong Kong Institute of Certified Public Accountants (HKICPA) to offer reciprocal membership, co-operation and support. It allows HKICPA members, who qualified through the Qualification Programme, to apply for membership of the ICAEW without the need for further exams.