The Financial Supervisory Commission (FSC) plans to more strictly supervise foreign-registered Taiwanese companies listed on the Taiwan Stock Exchange (TWSE) and the Taipei Exchange after several “KY companies” caused heavy investor losses and damaged confidence in the local markets due to fake accounts and other financial problems.
From Pharmally International Holding Co and TOPBI International Holdings Ltd to Enterex International Ltd, VHQ Media Holdings Ltd and Kayee International Group Co Ltd, KY companies have made the headlines over the past few months, affecting as many as 42,100 investors and prompting the financial authorities and certified public accountants (CPAs) to examine their business operations and financial disclosures with greater caution.
To improve KY companies’ corporate governance, the FSC would raise the required number of Taiwanese on their boards and require that independent directors supervise their implementation of internal controls, capital loans and endorsements, a report to the legislature’s Finance Committee said last month.
To enhance transparency, the commission urged KY companies to hold more conference calls and advised them to have the chairperson or an independent director personally participate in the calls. From the second quarter, the financial statements of KY companies must be audited, the report said, highlighting key audit items to be inspected.
After a KY company is listed, the financial authorities would extend the compliance period for the equity underwriters from two years to three. The FSC advised underwriters to gain a fuller understanding of the firms’ business operations and fund management.
The report said that the TWSE and Taipei Exchange must collect more credit information from KY companies and promptly comprehend when information might affect their financial situation so that investors can be better protected.
In 2008, the government encouraged overseas Taiwanese businesses to seek a primary listing on the TWSE or the Taipei Exchange to expand the equity markets’ scale, promote their internationalization and explore potential investment opportunities. The TWSE has so far listed 76 KY companies, while the Taipei Exchange has listed 33, with a total market value of NT$1.6 trillion (US$56.27 billion).
Despite increasing concern, the financial authorities want KY companies to continue to list locally, while tightening supervision before they list.
A listing is an opportunity for businesses to upgrade or transform themselves. When a KY company lists in Taiwan, the nation benefits from their upgrades and transformations, such as business expansions, the creation of research and development teams, and the establishment of service centers.
The main issue in the supervision of the firms is ensuring the authenticity of their financial statements when their operations are mainly abroad. Of the 109 KY companies listed locally, 78 are based in China, 14 are in countries covered by the New Southbound Policy and 17 are elsewhere, FSC data showed.
For the government, it is a “jurisdiction” issue. When Taiwanese regulators cannot conduct on-site inspections, the burden falls on the CPAs.
However, due to COVID-19, accountants are performing most audits via e-mail or videoconferencing. Such practices once again call into question whether the financial information is accurate.
A Taiwanese accounting firm could commission overseas accountants to conduct on-site audits for them, but this would generate additional costs and put in question whether the Taiwanese firm can claim accountability for the results.
The financial authorities must develop detailed, feasible measures for effectively supervising KY companies. For the time being, investors should avoid such firms if they do not have a deep understanding of their circumstances.
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