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SMPs and SMEs ost small- and medium-sized enterprises in Hong Kong have a simple, if unchallenging, relationship with their accounting firm. Each year an accountant – usually a sole proprietor or a partner in a small firm – files the company’s audited financial statements and tax returns. Occasionally, a more ambitious company seeks a loan from a third party, which might involve the accountant presenting the company’s audited accounts to the prospective lender. Few SMEs demand much more from their accountant; few small accounting firms are able to provide much more, anyway. In most cases, it appears that small- and medium-sized practitioners have been content to continue with the business they have – afterall, all incorporated companies in Hong Kong have to be audited regardless of size. “SMPs in Hong Kong continue to rely heavily on audit and tax services as their main engines of growth,” says Albert Au, chairman and chief executive officer of BDO Hong Kong and a past president of the Hong Kong Institute of CPAs. However, SMPs are facing a changing world, especially since the global financial crisis unfolded. Accounting firms increasingly have to compete with cheaper alternative service providers that can undertake bookkeeping, tax and other non-audit functions not statutorily required to be performed by 16 December 2012 CPAs. Such companies can charge up to 30 percent less than a CPA firm for a typical corporate tax filing, accountants estimate. Au, who is also a member of the Institute’s SMP leadership panel, says small firms will have to change their business model if they are to flourish. “SMPs need to adjust and find life after audit,” he urges. However, SMPs say diversification isn’t as simple as it sounds. “We all try to diversify into non-audit work,” says Erik Cheng, an Institute member who heads Erik Cheng & Company CPA, an SMP in Wanchai. “However, this is very difficult.” The Institute’s definition of an SMP covers a wide range of firms, from sole proprietorships to medium-sized firms. As of 31 October, 1,054 firms (85.5 percent of the Institute’s 1,233 member firms) are sole proprietorships. A further 163 (13.2 percent) have four or fewer CPAs as partners. Size does matter, say CPAs, arguing that diversification means adding to a firm’s headcount. “We are not able to diversify into nonaudit assignments owing to the lack of a supporting workforce,” says Institute member David Ng of K. H. Ng & Co CPA in Mongkok. Business challenges SMPs rely on business from Hong Kong’s SMEs, a client base still feeling the effects of the global economic downturn. “SMEs have had to brace themselves for a challenging 2012 in the wake of the euro crisis and the U.S. economic recession,” says Albert P. K. Lau, vice chairman of the Hong Kong Small and Medium Enterprises Gen- eral Association, the city’s small business chamber of commerce. The Hong Kong government defines a SME as any manufacturing business employing fewer than 100 people in Hong Kong, or any non-manufacturing business employing fewer than 50 people. That definition fits about 98 percent of all Hong Kong businesses, which together account for the employment of 60 percent of the city’s workforce, the association says. While the 2012-13 government budget alleviated some financial burdens on SMEs through profits tax rebates and a waiver of business registration fees, lobbyists, such as the association, argue that most small businesses in Hong Kong are under pressure. The cost of professional services is a concern for SMEs, according to Cliff Chan, chief
executive officer of TeleEye, a medium-sized company in Lai Chi Kok that develops video surveillance products. Chan, who is also chairman of the SME committee at the Hong Kong General Chamber of Commerce, says the smallest of SMEs rely on simple cash accounting and use CPAs mainly for tax advice. However, he says that some are looking to grow with the help of their accounting firm. “Some want to become bigger – maybe they want to find an investor – then they will need more services.” There already are accounting firms and professional services firms responding to those expansion needs by connecting SMEs with funding sources. Another in-demand niche that smaller CPA firms can fill is corporate secretarial services. This covers a wide range of tasks, from managing personnel and maintaining company records and registers, to ensuring that the company complies with regulations or providing advice on corporate governance matters. Exploring avenues Many SMEs have considered listing on the stock exchange but few SMPs are equipped to handle the process for them. That forces SMEs to seek the services of larger accounting firms. Chan says he found the fees quite expensive when TeleEye sought its own listing on the Growth Enterprise Market. He says he would have used an SMP if it had the expertise. Cheng of Erik Cheng & Company points out that there are regulatory obstacles to some fields. CPAs, he says, cannot undertake bookkeeping services for audit clients, due to conflict-of-interest concerns. Complex tax investigations tend to go to larger CPA firms, he adds. While there is no blanket ban on providing non-audit services to audit clients, Institute members should ascertain exactly what services they are able to perform and adhere to the code of ethics. Cheng says that providing audit or other services to listed companies tends to be offlimits to SMPs, citing the elevated risk and compliance factors and a heavier regulatory burden. “That leaves the company secretarial area as the most logical growth area,” he says. “But there are many corporate secretarial firms operating at very competitive prices already.” Reporting on solicitors’ accounts can be a lucrative field for SMPs, as only the largest December 2012 17
Page 1 and 2: ISSUE 12 VOLUME 8 DECEMBER 2012 Acc
Page 3 and 4: REGULARS 01 President’s message 0
Page 5 and 6: Two lay members named to Council Th
Page 7 and 8: Talks over European Union budget en
Page 9 and 10: NEWS GREATER CHINA eBay to embark o
Page 11 and 12: CCB chairman defends Mainland bank
Page 13: As audit work becomes less profitab
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Page 19 and 20: GUNS Roy Leung Partner, audit and a
Page 21 and 22: PHOTO: ALAN CHEUNG AND SUNNY YU wat
Page 23 and 24: Alpha Tsang Senior manager, assuran
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Page 27 and 28: was a really huge step up and a com
Page 29 and 30: 38 million The number of electronic
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Page 33 and 34: maintain a diversified visitor port
Page 35 and 36: CPAs make a difference Giving back
Page 37 and 38: CPAs make a difference Patrick Lo C
Page 39 and 40: CPAs make a difference Richard Chen
Page 41 and 42: Fair value How your property valuat
Page 43 and 44: 121 TechWatch The latest standards
Page 45 and 46: Tech Q&A The Institute has issued a
Page 47 and 48: Events Your guide to courses, works
Page 49 and 50: Previous page: The Tivoli Gardens T
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