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Wen-Horng interview: Taiwan market bounces back

Improved relations between Taiwan and Mainland China coupled with recent changes to domestic regulation are providing many benefits to the Taiwanese accounting market. PricewaterhouseCoopers Taiwan managing partner Kao Wen-Horng discusses the implications with Asia correspondent David Hayes.

The demand for accounting services is expected to grow in Taiwan following the recent announcement of an IFRS timetable, tax changes and government plans to expand the Taiwan Stock Exchange.

Warming relations with China, following the recent election of Taiwan’s Kuomintang (Nationalist Party), is also encouraging firms to further integrate their operations with mainland partners.

Local experts predict these factors could help lift the demand for professional services by 30 percent in three years.

Kao Wen-Horng is the managing partner of Taiwan’s second-largest firm, Pricewater-houseCoopers (PwC), which has a large portfolio of listed clients.

He says that recent government incentives to encourage more Taiwanese companies to list on the Taiwan Stock Exchange are beginning to bear fruit after the economy suffered a dip earlier this year.

“There has been a 46 percent increase in share trading in 2009 despite an economic drop, which was expected as Taiwan is export-dependent,” Kao remarks. “Most of our partners and our clients feel we touched bottom in April to May and we are going to bounce back from the third quarter this year.”

Although the volume of new listings has slowed down in most parts of Asia, IPOs continue to be issued in Taiwan. This has mainly involved Taiwanese companies undertaking business expansion in China and is producing more work for firms.

In a bid to increase the size of the local stock market, which currently consists of about 700 companies, the Taiwan Stock Exchange recently invited domestic companies that conduct most of their business overseas to list in Taiwan.

“Recently, PwC client China Want Want, a snack food company that had already listed in Hong Kong, also listed in Taipei,” Kao explains. “IPO business is important for our assurance, tax and advisory work. It grows those businesses. Also, we are gaining more cross-border tax business [from Taiwan companies invested in China].”

One of the reasons Taiwanese companies are beginning to list in Taiwan is a favourable price/equity ratio and share trading volumes in Taiwan are generally higher than elsewhere in Asia. The fact that administrations costs are lower for listed companies in Taiwan than Singapore and Hong Kong also encourages Taiwanese companies to list locally.

Building closer ties

In May, the Taiwanese government announced that Chinese companies are now permitted to invest in Taiwan through the Taiwan Stock Exchange. Almost immediately, the mainland’s largest mobile telephone company, China Mobile, made headline news with its offer to buy FarEasTone, one of Taiwan’s local cell phone companies. The government still has to approve the deal.

“We expect to gain new clients with the change in investment regulations. Chinese state-owned companies are interested in investing in Taiwan, either because of government instructions or they decide themselves. We will team up with our PwC China office to provide services. Taiwan finance companies want to set up joint ventures in China, so we can help them set up there,” Kao says.

Closer economic ties between Taiwan and China is resulting in closer co-operation between international accounting firms’ offices in Taiwan, Hong Kong and China. Kao says PwC’s Taiwan, Hong Kong and mainland offices have worked closely on listings for several companies on the Hong Kong Stock Exchange, including Taiwan’s food and drinks conglomerate, Uni-President.

“Most clients use the same accounting firm in China and Taiwan depending on the cost and their experience,” he adds. “PwC Taiwan will play a more important role in the future and create opportunities for our firm in other territories. We co-ordinate service opportunities. For example, Uni-President and PwC Taiwan co-ordinate the client’s service, including services in other offices. The key client relations management is here in our Taipei office.”

PwC Taiwan also co-operates with PwC China in running the mainland’s Xiamen office in Fujian Province where many Taiwanese companies have set up factories and other business enterprises.

“We hope the Xiamen office becomes a skills hub. We hope each PwC China office becomes a hub and that people are more mobile and not fixed in one office,” Kao says.

“Now a lot of PwC Taiwan people go to China to audit Taiwanese companies. The issue is how to enhance value to clients as they expect a co-ordinator from one PwC office. To achieve that target we have started to share our internal support service and keep the same operating standards.”

To support Taiwanese clients investing overseas, PwC Taiwan has set up Taiwan desks in PwC offices in Shanghai and Guangzhou in China, South Korea, Japan, Vietnam and the Netherlands. There are also plans to set up a Taiwan desk in the Czech Republic.

The tax carrot

An imminent change to the corporate tax rate is also part of government efforts to attract investment to Taiwan and to encourage Taiwanese companies to list their Chinese operations domestically. Next year, the corporate tax rate will be reduced from 25 percent to 20 percent.

“The idea is to attract foreign and local investment. The government has kept corporate tax at 20 percent so they still have room to give incentives. This tax reduction will benefit foreign investors,” Kao remarks.

“The government wants to attract hi-tech and financial services companies; also, R&D centres and logistics centres. The government is trying to attract regional corporate headquarters offices to Taiwan but it’s still difficult to compete with Singapore and Hong Kong. There is more chance to attract technology and R&D centres here. Taiwanese companies manufacture in China but their R&D facilities are still here.”

Growing fast

At present, 28 percent of PwC Taiwan’s fees are earned from multinational clients while 72 percent are from local business clients. The local client share of fees has grown in recent years due to sustained economic growth and clients’ increased investment in their China operations.

“Assurance is our main line, accounting for 64 percent of fees while 24 percent of our fees are for tax work. Advisory services are 12 percent,” Kao says. “Both tax and advisory work are growing fast. In four years time, we are targeting assurance to be 55 percent while 45 percent will be non-assurance work, to get a better balance.

“Tax work is growing because there are more cross-border clients while advisory is growing because we are the number one adviser in Taiwan for distressed assets and non-performing loans.”

Taiwan’s planned adoption of IFRS is expected to increase demand for accounting services. On 15 May 2009, Taiwan’s Financial Supervisory Commission (FSC) announced a two-phase timetable for public and non-listed companies to adopt IFRS, an exercise that normally requires a three-year period to complete.

Local companies listed on the Taiwan Stock Exchange or the GRETAI Securities Market along with financial institutions under FSC’s supervision must adopt IFRS no later than 2013. Exceptions include grassroot credit co-operatives, credit card firms and insurance agents.

In the second phase, non-listed companies, credit co-operatives, credit card companies and insurance companies will be required to adopt IFRS no later than 2015.

The announcement followed consultation by the government with business and accounting firms. Kao notes the government initially hesitated before announcing last year that IFRS would be adopted due to uncertainty in the US over IFRS adoption.

Big Four firms encourage the government to proceed due to increased foreign shareholding in Taiwanese companies, which has resulted in demands for higher standards of financial reporting.

PwC is helping Taiwan prepare for the radical shift by helping universities combine IFRS into course work

“We publish books and offer IFRS training to companies,” Kao says. “Most universities are to offer IFRS courses from September this year. There will be some difficulties in introducing IFRS so we will receive assistance from PwC South Korea.”

PwC Taiwan

PricewaterhouseCoopers operates the second-largest accounting practice in Taiwan after Deloitte, according to the firm’s managing partner Kao Wen-Horng. KPMG is third-largest firm in the market, followed by Ernst & Young.

PwC has eight offices in Taiwan and a staff of 2,200, including 360 CPAs and 81 partners. Three new partners were appointed in July while two partners will retire.

Currently 1,462 staff work in assurance, 436 in tax and legal services and 156 in advisory services.

PwC Taiwan recruits several hundred accountancy graduates each year, focusing on the top 20 of Taiwan’s 50 universities that teach accountancy.

Big Four firms employ an estimated 10,000 staff in Taiwan and audit about 80 percent of the Republic’s publicly listed companies, according to National Federation of CPA Associations of the Republic of China.

Mid-tier firms audit the remaining listed companies, while sole proprietors serve Taiwan’s estimated one million small and medium-size enterprises.

New CPA laws provides a boost to audit quality

Amendments to Taiwan’s Certified Public Accountants Law (CPA Law), which were passed during the previous administration, are expected to boost the quality of accounting services and bring Taiwanese accounting rules in line with international standards.

Some of the amendments to the CPA Law, of which many sections have remained unchanged for three decades, aim at ensuring auditors play their part in preventing fraud in corporate scandals, which occurred in the collapse of hardware manufacturer Procomp Informatics in 2005 and the China Rebar Group in 2007.

The most important change to the CPA Law involves clarifying accounting firm liability.

Medium and small accounting firms could be about to experience a wave of mergers as recent changes in professional liability regulation could force smaller firms to merge to achieve the economies of scale needed to operate viable practices.

Big Four and mid-tier firms in Taiwan are organised as partnerships. The revised accounting law allows for accounting firms to be recognised as legal person entities offering larger firms the advantage of limited liability.

Final details of the amendments are still being sorted out between the Financial Supervisory Commission (FSC) and the National Federation of CPA Associations of the Republic of China, which represents the accounting profession. The revised CPA Law is expected to have a greater impact on mid-tier and smaller firms than the Big Four.

Smaller firms will face difficulty converting to limited liability partnerships and require greater size and depth to match the quality offered by big firms. They could also struggle to afford expensive liability insurance.

Large practices have also commented to the FSC on areas of concern to them and are challenging the idea that accountants will have to set aside a legal reserve in the same way that companies do.

Large practices also are opposing proposals that they pay VAT on audit service fees in addition to VAT on tax work and advisory services, which they already pay.

“We are very optimistic about the future but of course we face challenges,” Kao Wen-Horng of PricewaterhouseCoopers commented. “We need more talented people to join us and to maintain our service quality to international standards.”

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