Waiting on the regulatory platform

A recent ACCA/CFO Asia Research Service survey into the benefits of regulation has opened the debate on whether a robust regulatory framework enhances shareholder value. In two articles, accounting & business sought comments from finance professionals worldwide on what regulation means to them

A majority of company finance professionals in Asia believe that a correlation exists between enhanced shareholder value and increased regulation, according to a recent survey. John Church reports

Although it might be presumptuous to draw too many conclusions from the recent ACCA/CFO Asia Research Service's survey of 176 senior finance executives in China, Hong Kong, Singapore and Malaysia, the results do offer a fresh slice of valued opinions on the direction of regulation in the region - what is effective and what is not.

The June report has also stirred some strong debate, as company leaders and finance chiefs consider the merit in the findings.

And there is a picture developing on why Asian countries might favour further regulation, as opposed to views in the West. In a region where many countries still lag behind the efficiency of Western markets, where political, religious and cultural freedoms are often fewer, regulation at least promotes transparency for business, which encourages vital foreign investment.

'This report is giving a timely indicator to groups like ours, letting us know this is where we are now, but also showing us where the work is to be done,' observed ACCA Hong Kong's President, Morison Chan.

The report, entitled A Critical Connection: Making the Link Between Regulation and Shareholder Value, looked at how well regulatory frameworks in Hong Kong, China, Singapore and Malaysia were working - whether they were helping or hindering business.

Defining shareholder value as 'the organisation's ability to deliver sustained, steady growth in the share price and cash flow over the long-term', the report also asked questions about the relationship between regulators and business, and whether regulation is actually of benefit to the public and company shareholders.

In essence, there were five key findings.

• Regulation is enhancing shareholder value, according to 59% of respondents. (Just 22% believed regulation hindered growth).
• Some regulations are more helpful than others. Financial reporting standards, tax regulations and stock exchange regulations were viewed more favourably, while Sarbanes-Oxley compliance, eXtensible Business Reporting Language (XBRL) reporting and social and environmental rules were least helpful.
• A total of 64% of those surveyed said regulations helped them keep a strategic focus.
• The respondents felt the complexity of regulations has meant they have not been as successful at public interest objectives, as in protecting shareholders.
• Regulations create parity for businesses, but only if mandatory and with consistent enforcement. Otherwise the compliant business can be disadvantaged.

The findings have provoked some interesting responses from finance experts in the four countries surveyed.

Regina Wong, managing director of RAAB International Capital Ltd in Hong Kong, disagrees with the concept of regulation improving shareholder value, which she defines as 'the value of equity held by shareholders'. 'I've read the report and my view is whatever regulation or financial reporting standards, they are not directly related to equity. What creates the value of equity is the fundamental business performance itself,' she says.

'All these regulations I see as a platform, a game plan, where business performances are reported, or regulations guide the behaviour of reporting the investment behaviour.

'From this angle, I don't see regulations enhancing the value of equity. I don't see value and regulation as having a direct relationship.

'Regulations can protect shareholder value, but not totally. Fundamentally, shareholder value depends on management performance and integrity.'

Wong recognises a 'definite difference' between regulatory operations in East and West. 'For Hong Kong, most of the big companies are from China and the SE revises rules from time to time to fit the environment here [in Hong Kong], and also how China itself is changing. They have tax and foreign investment rules changing, as well as QFII and QDII. This is quite different from the UK and US, where they are more focused on their own market - with the Enron case, that was how Sarbox was introduced.'

Elaine Loh, Vice President, Corporate Reporting for DFS Venture Spore (Pte) Ltd, says many Asian finance directors are working in countries where the regulatory frameworks are lagging behind, or trying to keep pace with, their rapidly developing economies.

'They probably appreciate the importance of proper and effective regulation and guidelines more than their counterparts in the mature economies in Europe and the US,' she says.

Loh also notes that some compliance regulations, in particular Sarbanes-Oxley, are onerous and require heavy investment in time and resources, which burden many small and even medium-sized businesses, an observation consistent with the report's findings that larger companies were more likely to report that complying with regulation had had a positive effect on financial statements and socially responsible business practices.

She also agrees with findings that the level playing field scenario only works with mandatory regulation and active enforcement, adding that Singapore is a 'very pro-business economy, with regulations clearly communicated and enforced consistently'.

In addition, she sees distinct advantages in instruments like IFRS. 'As businesses are operating more and more in an increasingly globalised and boundary-less environment, there is a crucial need for standardisation in the application of accounting rules and guidelines, and interpretation of financial statements,' she says.

The disadvantage is complexity, especially 'if different countries introduce diverging opinions and exceptions to suit their own environment. We need a very effective international governing body that has the influence and muscle to keep everyone in check!'

Tony Lo, financial controller for COSCO International Holdings Limited, says that in the long-term, regulation will help to improve shareholder value in China. 'But in the short- term, every new regulatory law, because of a lack of planning, will result in a lot of trial and error, and a lot of cost to companies, because they [lawmakers] cannot plan ahead,' he adds.

'This is the cost of doing business in China - and management is tolerant of this. We won't be blamed for inaccuracies because the elements of government regulatory change and policy change are so big in their impact.

'It's unlike in Western countries, where everything is well planned - if there are any inaccuracies, the blame is on the company and the FD. But for Chinese corporations, it's always difficult to be that precise.'

Lo emphasises that new regulations being introduced are good for business in intent - it is the lack of systematic implementation that is letting the system down.

'For example, income tax, unifying it to 25%. As companies, we try to work out the impact, but the difficulty is that tax administration is so varied around the country that each subsidiary has to look to their local tax authority for a detailed explanation, and whether some pre-existing preferential treatment will apply to them,' he says.

The new income tax laws were announced in March, but companies are still waiting for details. 'We should have been getting this much sooner because we have to do a budget for next year.'

Dr Ng Boon Beng, FD for Oracle Corporation Malaysia, believes regulation in Asia is not as heavy a burden as in the West.

'Research I have seen recently indicated that, since 1981 in the US, there have been 114,000 pieces of regulation or amendments implemented by government. That's a lot of burden on business,' he says.

'Comparatively in Malaysia, and Asia, compliance regulations are viewed much more positively - IFRS, for example - and are welcomed. We are not as regulated in this part of the world, and we need further regulation to build investor confidence.

'Traditionally, we are perceived to have not much integrity in our financial reporting.' Dr Ng says the problem for Malaysia is that regulations are only as good as the people who enforce them, and those who observe and practise them.

'The modern business process is underpinned by a system, and if you build in best practice compliance, you should be able to achieve what is required under Sarbox, IFRS or even local company acts and requirements.'

The differences in terms of the political and economic systems of the four countries, and the ambiguities of interpretation of uniform international standards, cannot be overstated. However, all those interviewed concurred with the survey's findings that nearly half of FDs surveyed thought regulations were too complex for shareholders - with the exception of institutional shareholders - to understand or appreciate the benefits.

For Chan, the survey shows the crucial need for ACCA's work in Asia - in education and awareness on IFRS - via its workshops and award programmes supporting sustainable reporting, through to a new syllabus incorporating the same from December 2007.

'To my knowledge, this is the first report of this kind, and I hope there will be more to encourage this rapport with FDs in China and other countries in the region.'

John Church is a journalist with 22 years' experience in Australia, the UK and south-east Asia. He now manages a freelance and media consultancy business, JC Media, in Hong Kong.