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August 2, 2009

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.”

FIRM PROFILE
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.

REGULATION
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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