A Look at Public Company Accounting Oversight in Taiwan

In July of 2002, after the Enron affair, the House and Senate of the U.S. Congress passed the Sarbanes - Oxley Act, which was then signed into law by President Bush. The Act is the most important piece of securities market oversight legislation since the US enacted the Securities and Exchange Act in the 1930's. Also referred to as the Corporate Reform Act, its goals are to: 1) emphasize the responsibilities of companies and their executive officers; 2) strengthen disclosures of information; 3) raise accounting and auditing standards; and 4) increase penalties for illegal behavior.

Although Sarbanes - Oxley was enacted to reform enterprises and restore investor confidence in the US, America's position  -  its ability to lead the world economy around by the nose, so to speak  -  means that Sarbanes - Oxley will certainly produce deep and far - reaching effects on securities management in other countries. In Taiwan, since experiencing a string of corruption incidents at the end of the 20th century  -  incidents in which the people running public companies were found to have cleaned out those companies' assets  -  the securities authorities have already made very good progress at overseeing securities markets and protecting investors' interests. Recently, they have been more active in promoting corporate governance, and they are also considering the implications of Sarbanes - Oxley both in the implementation of securities market oversight and as a reference as they study the Securities and Exchange Law and the Business Entity Accounting Law. We have a saying: "Stones from other hills may polish gems", which means you can benefit from the experiences of others, and I suggest we do just that. For I believe we may use what is in the Sarbanes - Oxley Act to raise the accounting oversight of public companies in Taiwan to new heights.

• Give the securities authorities greater powers, responsibilities and resources.
  
  The Sarbanes - Oxley Act gave America's Securities and Exchange Commission (SEC) greater responsibilities, but the law also gave the SEC abundant authority and resources. In the case of authority, for instance: The SEC has the power to prohibit individuals with criminal convictions from serving in senior management positions in public companies. As for resources, Section 601 of the act stipulates:
  
  "In addition to any other funds authorized to be appropriated to the Commission, there are authorized to be appropriated to carry out the functions, powers, and duties of the Commission, $776,000,000 for fiscal year 2003, of which …$98,000,000 shall be available to add not fewer than an additional 200 qualified professionals to provide enhanced oversight of auditors and audit services … and to improve Commission investigative and disciplinary efforts … as well as for additional professional support staff necessary to strengthen the programs of the Commission involving Full Disclosure and Prevention and Suppression of Fraud, risk management, …market regulation, and investment management."
  
  The securities markets have a major impact on Taiwan's economy, and the securities authorities occupy a key position in those markets. This is why Taiwan should consider adopting the Sarbanes - Oxley Act approach: It should enhance the Securities and Futures Commission's official standing and authority, and give it greater resources and administrative powers so that its function can be fully exploited.
  
  On another matter, when it comes to enforcing the law in economic crime cases, some people have denounced the meting out of overly long sentences. But in the interest of sustaining the securities markets and protecting the investing public, I believe that the administrative bodies must impose certain and swift disciplinary sanctions in cases where the facts and the evidence are clear. By the same token, strictest care should be taken in deciding what should involve civil penalties and what should involve criminal ones.
  
  As for commercial and securities - related cases, another problem in Taiwan at present is that there are not enough judges who understand accounting and auditing, which drags out the time it takes to bring a case to trial, and, when judges do hear cases involving accounting and auditing they may, due to consequences after the fact, impose their own personal judgments and thereby lower the professionalism of the hearings. Solving this problem will require more than a stronger finance and economics program within university law programs. For judges currently undertaking business cases, some on - the - job training in accounting and auditing is also called for.
  
  
• Declarations by companies and their officers of their responsibility for financial statements.
  
  Section 302 of Sarbanes - Oxley, concerning the responsibilities companies have in presenting financial reports, stipulates that a corporation's principal officers (CEO and CFO) must certify in each annual or quarterly report that: 1) the officer that signed the report has actually read it; 2) in light of the circumstances prevailing at the time the financial statement was made, the report does not contain untruths nor has information been concealed that is necessary to prevent the statements made from being misleading; 3) the financial statement and the financial information contained in it serve to express in all material respects the financial condition and operating results for the period covered in the report; and 4) the signing officers of the financial statement have evaluated the effectiveness of the company's internal controls, and disclosed any deficiencies in the internal controls to the company's auditors and audit committee, and the signing officers are responsible for establishing and maintaining internal controls. Section 906 of the Act further stipulates that each periodic financial report a company files with the SEC must be accompanied by a written statement by the CEO and CFO certifying that the financial statement fully complies with the Securities Exchange Act and in all material respects fairly presents the company's financial condition and operating results. Violators of the above will be fined not more than  $1,000,000 or imprisoned for not more than 10 years, or both, and deliberate violators will be subject to fines of up to $5,000,000 and imprisonment of up to 20 years, or both. Moreover, if a company has to reissue a financial report because it did not initially comply with regulations, then those who attested to the veracity of the company's report (the CEO and CFO) must return all remuneration and profit from stock transactions in the period since the original financial information was made public.
  
  Sarbanes Oxley requires the principal directors of a company to endorse the truthfulness of financial statements, and the purpose, besides emphasizing the company's responsibility for preparing the reports, is to shift, legally, the burden of proof as to the veracity of the reports from those who raise accusations to the company and its principal officers (CEO and CFO).
  
  The current approach in Taiwan is to require the responsible person(s), the managers and the lead auditor to sign or affix their seals to the financial statement to signify their responsibility. Taiwan's Business Entity Accounting Law and the Securities and Exchange Law provide that, if a publicly listed company's financial /business information is false or conceals facts, the responsible person(s) of the company may be held liable for civil and criminal charges. However, Taiwan has no law at present requiring the responsible person(s) to swear to the veracity of financial statements, and there is no regulation stipulating that the principal officers must return remuneration received from the company in the event that a financial statement must be revised. As a result, a minority of corporate officers do not know, or do not believe, that they must take responsibility for their company's financial statement; and some even believe that because they do not understand accounting, therefore the preparation of financial statements is a matter for corporate accounting and auditors.
  
  To prevent a portion of corporate officers from holding such a mistaken belief, and to reduce accusations of false and inaccurate financial statements, the Executive Yuan has proposed an amendment to Article 174 of the Securities and Exchange Law which would toughen penalties for those who commit financial crimes or who are linked to serious cases of fraud. In my opinion, before imposing stiffer penalties, corporate officers ought to be made fully cognizant of the responsibilities they are obligated to fulfill under the law. Thus, for the accounting oversight of public companies in Taiwan, it seems one can invoke the spirit of the Sarbanes - Oxley Act, starting with companies and their principal officers swearing to their responsibility for the accurate preparation of their financial report, then stipulating that if these same officers do not abide by the provisions of the law, then in addition to fulfilling their legal obligations, they must also be made to return the income they received while their inaccurate financial statement remains uncorrected. This is the way to get at the root of the problem.
  
  
• Establish a reporting system for corporate attorneys to report evidence of material violation.
  
  In the accounting oversight of public corporations, corporate adherence to the law is clearly an essential link since, after all, most of the untruthfulness that shows up in financial reports has its origin in unlawful corporate transactions. Section 307 of the Sarbanes Oxley Act provides that, in order to safeguard the interests of investors and the general public, the SEC must, within 180 days after the Act is enacted, issue rules setting forth minimum standards of professional conduct for attorneys appearing or practicing before the SEC on behalf of issuers. On January 29 of this year (2003), the SEC announced its proposed standards of professional conduct for attorneys, and they include: 1) a requirement that an attorney report evidence of a material violation of securities laws or breach of fiduciary duty or similar violation to the chief legal counsel or the chief executive officer of the company; 2) if the chief legal counsel or the chief executive officer do not respond appropriately to the evidence, the attorney is required to report the evidence to the audit committee of the company's board of directors; 3) in the event that a company has already set up a Qualified Legal Compliance Committee (QLCC), its members must include at least one member of the company's audit committee, if it has one, and at least two independent board members. Then, if an attorney reports evidence of material wrongdoing discovered in the course of his or her work to the company's QLCC, the attorney's responsibility to report such information will have been discharged; and 4) if an attorney, after having reported the facts and evidence of a material violation of a regulation or fiduciary duty to the above - mentioned responsible parties in the company, finds that no appropriate remedial measures have been taken, and therefore believes there is a danger that material harm will come to the issuer or the investing public, then the attorney must announce his or her withdrawal from further representation of the issuer. Once that representation has been withdrawn, moreover, the attorney must disclose important information about the violation to the SEC.
  In Taiwan at the present time, attorneys need to submit opinions to securities administrators for such matters as establishing a company through the offer method, making a new share issue, using a new share issue as consideration for shares in another company, acquiring another company with cash or issuing convertible bonds; on these occasions, attorneys submit evaluation or review reports. To build up the investing public's confidence and protect investors' interests, it seems Taiwan can again find its inspiration in Sarbanes - Oxley by demanding that publicly issued companies rely upon the professional knowledge, objectivity and detached perspective of their attorneys, and establish a system for lawyers to report evidence of serious violations by the companies they represent.
  
  
• CPAs are public instruments of society. Objective independence is the foundation of their self - discipline.
  
  In the oversight of public corporations, CPAs play an indispensable role as validators. Admittedly, the Sarbanes - Oxley Act's approach to accounting management does, in response to Enron and the ensuing string of financial statement scandals, tend to lean away from self - discipline and towards external discipline. Yet, the accounting profession is one that places a great deal of emphasis on reputation and independent impartiality. Indeed, the value of its existence depends on impartiality and independence, and on the self - discipline of the vast majority of accounting professionals. Therefore, to turn to an ‘external discipline' approach to CPA management due to a small minority of cases would be as inadvisable as ‘giving up eating for fear of choking'.
  On the subject of CPAs, the environment in which they operate in Taiwan has already undergone a dramatic change, i.e., the accounting crisis  -  quite apart from the fact that the economy continues to languish and legal norms are becoming more stringent by the day  -  and key to breaking through that crisis will be unity and self - discipline within the accounting community. Consequently, when CPAs win the right to practice, they must also be well aware of the following trends:

1. Society's demands on CPA independence are certain to be stricter than before. Sarbanes - Oxley is one example. We know that there is research showing that engaging in non - audit work does not create a cause of audit failure, and some research even shows that providing their customers consulting services increases the ability of CPA firms to perform audit work. Thus, restricting such firms by prohibiting them from simultaneously providing non - audit services to their audit clients is not the best way to increase independence. Despite such evidence, Sections 201 and 202 of Sarbanes - Oxley nonetheless stipulate that, if a registered public accounting firm performs an audit for a particular issuer, it is prohibited from offering any non - audit services. From this one can see just how forceful the demands are abroad for strengthening auditor independence.
   
2. In so far as CPAs are public instruments of society, the financial statements they audit are offered for the use of the general public. Therefore, whether or not CPAs express proper audit opinions on financial statements is a concern for society as a whole, not (merely) for audit clients.
   
3. The value derived from having one's financial statement certified by an accountant comes from the heightened believability a financial report has once it has been subjected to an auditors objective and professional examination. For this reason, it is no longer sufficient to say, "general auditing principles have been employed to audit the Company's financial statements," and "generally accepted accounting principles have been used in their preparation". Rather, one must deeply understand the prevailing dynamics in the industry and in business, and make a penetrating analysis of how the enterprise's operating risks and internal control conditions may impact the firm's financial statement. By doing so, one expects audited corporate financial reports to more properly convey the company's financial condition and business results. For investors, the auditing of a financial statement indicates, to a certain degree, the absence of corrupt practices that would pose an investment risk.
   
4. Societal expectations, international trends and the emergence of investment guarantee institutions have led to a substantive increase in the individual accountant's legal responsibilities, and since liability for civil damages will spread from individuals to CPA firms, those firms need to make absolutely certain that their demands for quality and risk management are met one hundred percent.

Conclusion

In March 2002, after the Enron affair had occurred, US president George Bush put forward a set of ten suggestions on how to strengthen corporate management, accounting oversight and the protection of investors' interests. The main points included: 1. Investors have the right to receive timely information for evaluating a company's financial condition, operating performance and financial risks, and the SEC should make sure that public corporations be made accountable for the truthfulness of the information they provide investors; 2. A company's principal officers (CEO and CFO) must give their assurances as to the accuracy, timeliness and fairness of their financial statements, and the principal officers must not be allowed to make improper gains from faulty financial information; and 3. To build investor confidence in the fairness and independence of auditors, accounting firms should be prohibited from concurrently providing both audit and non - audit services. These suggestions were also worked into the Sarbanes - Oxley Act enacted in July of that year.

Although Taiwan continues to lag slightly in international rankings of corporate governance, there has been a very noticeable effort underway among government agencies and the people to upgrade the management of public companies, safeguard investors' interests and improve the transparency of information. The fact that there have been few so - called (in Taiwan) "landmine stocks" in the last couple of years may be taken as proof of this effort. Just as "stones from other hills may polish gems," the Executive Yuan may borrow liberally from the spirit of the Sarbanes - Oxley Act as it carries out the Council on Economic Planning and Development's resolution on strengthening enterprise accounting systems, and it may do so in ways that take into account Taiwan's unique political and economic circumstances. If the goal is to enhance Taiwan's accounting oversight system, we should not miss this opportunity to learn from the experiences of others.