Dispatch (Asia version)

• banking on China business
• Islamic investment and insurance inroads
• review of standards finds gaps
• companies act amended
• organic growth
• mid-east moves
• what workers want
• accounting hub

banking on China business

After years of dipping their toes into China’s financial markets, Standard Chartered Bank appears to be the first international bank to dive ceremoniously in by opening a back-office operation in the mainland.

Foreign bank presence in China is not new. Standard Chartered has been there for more than 150 years, and is among many foreign banks currently accelerating their China business. Earlier this year, it was one of the first four foreign banks – along with Citibank, HSBC and Bank of East Asia – approved to set up local entities in a move towards beginning retail operations in the Chinese currency.

But Standard Chartered’s decision to open an operation centre in Tianjin takes its mainland business to the next level. According to group chief executive, Peter Sands, the opening marks a new era of development for the bank, and ‘is reflective of our commitment to China’.

The move comes during a boom time for foreign bank business in China. According to a PricewaterhouseCoopers report on China’s fast-changing financial services environment, the majority of foreign banks surveyed predict annual revenue growth rates of at least 20% for 2007. The optimism of the 40 CEOs and other top banking executives surveyed was ‘very evident’ going forward; only four of them expect their growth would be less than 20% over the next three years. The banks’ assets are expected to double by 2010 to over US$100bn, PwC’s Foreign Banks in China survey found.

Mervyn Jacob, PwC’s financial services leader for China and Hong Kong, said the further opening up of China’s financial regulatory environment under World Trade Organisation rules will be a key driver of the sector’s growth. The survey showed that China’s market potential and improved profit performance were encouraging foreign expansion and new entrants, he said.

Over the next three years, the respondents expect that credit cards, investment products and mortgages would be their most important new retail products. The most important new wholesale products would be RMB denominated interest rate and currency swaps, structured products and debt capital markets, they said.

Jacob added that nearly all of the 40 foreign banks surveyed said they currently face staffing shortages. Today the banks employ a total of some 16,752 staff, but this number is expected to grow to 35,685 by 2010 – an increase of 113%.

Islamic investment and insurance inroads

A recent move by the CIMB Group will see it strengthening its position in the UK investment market. In line with the Malaysian Government’s objective to spur Malaysian companies to extend their Islamic banking activities abroad, CIMB Group signed a Commodity Murabahah agreement and a foreign exchange forward agreement with the European Islamic Investment Bank (EIIB).

The Commodity Murabahah (CM) is the first ever commodity-based instrument that utilises crude palm oil as its underlying asset. CM is one of the instruments applied by the Malaysian Central Bank to manage short-term liquidity in the Malaysian Islamic Inter-Bank money market.

CIMB’s collaboration with London-based EIIB will enable it to offer a more varied range of financial instruments in the UK Islamic money market and foreign exchange segments. Murabahah operates on the concept of deferred payment, where a buyer requests the financial institution to purchase assets at purchase price on the understanding that the asset will be purchased from the financial institution at an agreed profit margin which will be incorporated into the selling price.

Besides the agreement with EIIB, CIMB has also signed a share sale agreement with Aviva Plc, allowing Aviva a 49% share of Commerce Life Assurance Bhd and Commerce Takaful Bhd, subsidiaries of the CIMB Group, for RM500m. ‘Takaful’ indicates Shariah-compliant insurance.

Under the terms of the agreement, Aviva’s partnership with CIMB will enable it to distribute life insurance, accident and health insurance, investment-linked products and retirement offerings to CIMB’s 4.5 million customers. Opportunities abound as the Malaysian population is considered relatively under-insured.

review of standards finds gaps

Releasing the findings of its first public review of the profession, Singapore’s Accounting and Corporate Regulatory Authority (ACRA) found that one-third of the 110 public accountants it had monitored needed to undergo ‘remedial action’. Five public accountants had their registration suspended or cancelled.

The remedial action includes having the public accountant’s audit work reviewed by a suitably qualified person, known as a hot review.

ACRA’s deputy chief executive, Ow Fook Chuen, said common lapses ACRA found in its review, which may materially affect the financial statements and the validity of the audit opinion, were ‘insufficient or no documentation’ of audit opinions, insufficient inventory count procedures, as well as a lack of follow-up on subsequent events up to the date of the audit report.

According to the report, in some cases audit procedures were updated as ‘noted’ or ‘done’ without actual audit work or assessments having been carried out. Some accountants did not have documentation to justify why the subsequent events review was not performed, while in other cases the auditor’s report had been dated prior to the completion of work papers.

Still, ACRA stressed it was not alarmed. Its chief executive, Juthika Ramanthan, said: ‘We don’t see a concern at this time, as the results found no significant departures from similar programmes conducted by international regulators.’

Ow added that the problems highlighted were not unique to public accountants in Singapore, but were also issues that affected regulators in developed countries.

Similar reports have been produced in countries such as the UK and Canada. The latter, for example, reported this year that 57 deficiencies were found in 241 audit engagements and restrictions were placed on three firms, while one Canadian firm was deregistered.

ACRA plans to scrutinise all of the 790 public accountants who are registered in Singapore in a programme that should be completed by 2011.

companies act amended

The auditors themselves will not be liable to be sued or subject to any crime or disciplinary reports made in good faith.

Originally mooted by the Companies Commission of Malaysia (CCM), the bill was almost two years in discussion before being passed by Parliament on 23 May 2007. It is now awaiting royal assent before being enforced.

The amendments include the repeal of Section 132G, which was considered as impeding genuine company business transactions. To prevent unscrupulous individuals from capitalising on the repeal of Section 132G, a provision has been inserted that requires a director or substantial shareholder of a company to obtain the other shareholders’ approval before buying or selling company assets.

In general, the amendments are widely seen as timely and a means to compel companies which have long been allowed to govern or administer themselves, to institute a system of internal controls that will ultimately tighten corporate governance.

organic growth

Giant retail chain Marks & Spencer has announced plans to convert entire product lines to organic woollen fibre, and is looking to Australia to provide it. On a recent buying trip to New South Wales, M&S sustainable textiles and cotton specialist, Graham Burden, said the quest for organic wool was part of the retailer’s new focus on social responsibility. ‘We know [organic wool] costs more, but it’s part of our strategy. We will absorb that cost, but we won’t pass it on to our customers,’ he said.

Burden’s remark that ‘other UK retailers are doing the same’ is backed by the industry body, Australian Wool Innovation Limited (AWI), whose research shows that consumer interest in environmentally assured natural apparel fibre is a major trend, not a fashion fad. ‘This trend represents an opportunity for Australian wool as an authentic, premium, natural apparel fibre,’ said AWI’s CEO, Craig Welsh.

Certified organic production is likely to be difficult and expensive for many Australian growers, while for some it is relatively straightforward. Due to a lack of historical demand, organic wool currently represents only 0.01% of the clip, he said.

Sustainable growth of this sector requires partnership between growers, processors and retailers, and allowance for the additional costs incurred, Welsh added, citing a sustainable price premium for certified organic wool of around 5%–15% above the norm.

‘For this reason, our expectation is that production of organic fibre will grow, but will be mostly in the pastoral country where production is largely chemical-free. Longer term, 5%–10% (14-27 million kgs per annum) of the clip is seen as potentially certifiable organic, given consistent retail demand. AWI is working with growers and major wool selling brokers in Australia to ensure that Australian growers and purchasers of Australian wool are well-informed and responsive to demand signals in this area.’

mid-east moves

A joint venture between two Malaysian construction companies, SPK and Bina Puri, has been awarded a contract to design, construct and complete Phase 1 B1 and B2 of the residential, commercial and recreational development of the United Arab Emirates’ largest development project, Al Reem Island. The contract is worth about RM444m.

SPK and Bina Puri will join other Malaysian companies that have already made inroads into the Middle East, like Ahmad Zaki Resources Bhd (AZRB), which is involved in the construction of Saudi Arabia’s Alfaisal University. AZRB intends to bid for another RM1bn worth of projects in Saudi Arabia as it has expertise in the construction of buildings, highways and hospitals.

Another company that is eyeing the Mid-East market is interior fit-out specialist LCL Corp Bhd, which specialises in interior construction, fit-out works, installation of metal fittings and fixtures and the manufacture of customised furniture. It has so far submitted bids totalling about RM1.4bn in the Middle East.

Likewise, Muhibbah Engineering (M) Bhd, whose area of expertise is infrastructural development, intends to bid for projects worth RM10bn over the next two years. Muhibbah’s construction, crane, shipbuilding and ship repair divisions will be marshalled for oil and gas, marine and infrastructural projects.

Water project specialist Loh & Loh Corp Bhd recently announced that it will be looking for partners in Abu Dhabi and Dubai this year, to undertake lucrative water projects – extremely high-risk ventures in a region where water costs more than petrol.

On the high-tech front, information and communication technology services provider Heitech Padu Bhd is in discussions with authorities to provide electronic government applications, but a major surprise was sprung by Saudi Arabia’s biggest telecommunications provider, Saudi Telecom Company (STC). In a move that kind of reverses the trend, STC has bought up 25% of premier Malaysian telecoms company Maxis Communications Bhd for a whopping US$3.05bn (RM11bn) – making it one of the largest Middle Eastern investments ever in south-east Asia.

what workers want

For one company, it is allocating certain days where workers can do nothing but stay home in bed with the manager’s blessing. Another encourages workers to take months of time off without affecting their career status. A third provides a nursery so workers can be close to their children.

Such perks are groundbreaking in Hong Kong, a city where unpaid overtime is the norm, and whose leave options are among the lowest in the world. Yet initiatives to reverse this trend are proving fruitful.

Last year Community Business Limited, a non-profit organisation set up to advise on matters of corporate social responsibility, identified employee well-being as a major issue facing most businesses in Hong Kong. University of Hong Kong research had found that a work/life balance was important to 84% of employees, yet less than half of them had achieved it. A third of workers felt their productivity suffered as a result of long working hours, and 31% reported work-related health problems.

This year, Community Business has released case studies on 18 firms who have implemented successful work/life balance programmes. Among them:

• TNT Hong Kong capped its employees’ work time at 48 hours per week, and found sick leave and absenteeism reduced by half as a result
• Text 100’s ‘duvet days’ lets workers take two days off for no reason at all. They return refreshed, relaxed and more energetic for work
• Goldman Sachs’ flexible maternity, paternity, adoption, family emergency and family care leave options make staff feel valued and happy
• Fleishman-Hillard allows employees to take a sabbatical for up to 13 weeks. They return refreshed and more creative, without losing any benefits
• Shell provides a confidential counselling service for its Hong Kong staff, runs tai chi classes and ‘lunch and learn’ sessions as ways of reducing workplace stress
• HSBC provides a nursery for its employees’ children, addressing a need identified through focus group discussions
• ABN-AMRO boosts employee wellness through regular health talks, nutrition advice, team sports and reduced gym membership fees.

accounting hub

She pointed to the popularity of Singaporean accountants in China because of their bilingual skills. However, to achieve this goal, recruitment and retention of talent will need to be improved given the current labour market shortage. As such, the Government is looking at facilitating the entry of foreign accountants with specialised expertise practice, as well as making it easier for mid-career professionals to switch to accounting. To attract new entrants, the Big Four accounting firms have taken the lead to ensure that starting pay for fresh graduates is competitive, she noted. Entry level pay has been raised from about S$2,000 a month to S$2,400 in the past year.

in brief...

PwC concedes on Yukos
PricewaterhouseCoopers has accepted the evidence of Russian prosecutors resulting from criminal investigations into audit client Yukos. PwC has now withdrawn its audit reports of Yukos for the years from 1995 to 2004. The move ends a stand-off between the Russian authorities and PwC that involved a police raid on the firm’s Moscow offices. PwC said that it now believed that past statements provided by Yukos management may not have been accurate.

E&Y censured
The Securities and Exchange Commission (SEC) has censured Ernst & Young for allegedly ‘engaging in improper professional conduct’ in connection with multiple audits and periodic reviews of the Irish company SmartForce. Audit lead partner Denis O’Hogan, based in Dublin, has been suspended for two years from practising before the Commission. E&Y has agreed to pay US$725,000 in penalties – equivalent to its audit fees – although both it and O’Hogan neither admit nor deny the SEC findings. Software company SmartForce overstated revenue by US$113.5m and net income by US$127m during a three-and-a-half year period.

Deloitte pays up
Deloitte is to pay US$167.5m to former audit client Adelphia, to settle claims relating to the company’s operations before it entered Chapter 11 reorganisation. The trust overseeing the recovery says that action will still be taken against former Adelphia staff who were alleged to be responsible for frauds and against the company’s banks.

Moore Stephens faces claim
Moore Stephens failed in an attempt to strike out a claim for negligence filed by creditors of former audit client Stone & Rolls. But Moore Stephens succeeded in having the claim reduced from US$174m to US$93m. Creditors argue that Moore Stephens was negligent in not detecting a fraud conducted through Stone & Rolls of a Czech bank, a claim denied by the accountants. The costs of the legal action are being met by third party litigation funders, who would take a share of the proceeds if the plaintiffs win the case.

Parmalat auditors escape charges
Deloitte, Grant Thornton, Citigroup and Bank of America have all avoided facing charges in the US over the collapse of Parmalat, after a federal judge ruled that the case was outside the remit of the US courts as most of the alleged offences occurred outside the country.

‘Focus on biggest tax losses,’ says NAO
HM Revenue & Customs’ (HMRC) use of a more open approach in working with large companies is proving effective, says a report from the National Audit Office (NAO). But HMRC could make further improvements by concentrating on where the highest amounts of tax are at risk, it says. HMRC should move away from its traditional approach of automatically opening enquiries whenever tax is at risk, without taking into account the total amount at risk, which leads to an excessive focus on small and old cases.

Hector Sants takes over FSA
Hector Sants, the Financial Services Authority’s (FSA) managing director of wholesale and institutional markets, has been appointed its chief executive, following the resignation of John Tiner. In a statement issued on his appointment, Sants said that he supported the FSA’s move to a more risk-based and principles-based approach to regulation.

IAASB in convergence push
ACCA has congratulated the International Auditing and Assurance Standards Board (IAASB) for pushing forward with convergence of international standards by approving nine proposed standards for public comment. Sara Harvey, chair of ACCA’s Auditing Committee, said: ‘The next step is for the European Commission to move towards an appropriately early adoption of the clarified ISAs, and ACCA encourages all jurisdictions not currently using ISAs to follow a convergence strategy.’

Pensions accounting warning
New guidance on the balance sheet treatment of pension fund surpluses could affect investment decisions, pensions consultants Mercer warn. The latest guidance from IASB on IAS 19 states that companies can only take credit for a pension fund surplus if they have the ‘unconditional’ right to a refund of the surplus, or if they can use it to reduce future employer contributions. Mercer says the strongest impact of this will be felt in countries, such as the UK, that have strong minimum funding rules for pension funds.