THE NAKED TRUTH
Hong Kong may join Singapore in a move to quarterly reporting. Abe De Ramos explains why CFOs shouldn't be dismayed.
By Abe De Ramos

Their reasoning ranges from practical to paranoid, but any way you slice it local CFOs' reaction to a proposal by the Stock Exchange of Hong Kong to force companies to report quarterly is anything but cordial. Some detractors quibble that more company disclosure turns the market over to speculators and unnecessary volatility. Others rue the likely time and cost needed to prepare financial statements every three months. Others say that most local companies are small, and that small companies will bear an unreasonable cost.

Hard cheese, says Duncan Fitzgerald, a partner at PricewaterhouseCoopers in Hong Kong. "It's the price of being listed in a leading stock market," he says, "which should adhere to best practice in corporate governance." CFOs of public companies anywhere would probably have a tough time defeating his logic. But there's consolation. The right tools - with a little discipline - can ease this necessary, painful task for CFOs and their finance teams.

Hard to Handle?

There's no denying the cost of conversion to quarterly reporting will be high for small- to medium-sized enterprises. SK Lee, executive director in charge of accounting at Hong Kong-based Karrie International, is already racking his brains for ways to meet the proposed requirements within reasonable cost. Karrie is an original equipment manufacturer, making casings for personal computers and other products for brands such as IBM, Compaq and Canon. While Lee understands the value of transparency, time is his biggest enemy in meeting quarterly reporting requirements. "We serve different customers with different types of products, so valuation of inventories is time-consuming," he says. "Also, if you have 4,000 workers, the calculation of the WIP (work in progress) is quite difficult," he adds.

Having manufacturing facilities entirely in China also presents language barriers that can bog down the reporting process, even with regards to a simple item in an income statement like cost of goods sold. Factories in the mainland have decision-making capabilities in terms of purchasing raw materials from Chinese suppliers. Karrie's accounting system can automatically translate the item "total purchase of raw materials" in English, but important details that management needs have to be translated by its accountants in Hong Kong. "For example, the system records the amount of metal sheets, but there are various kinds of metal sheets recorded in the inventory system. If we want to look at the details, we have to go through them in Chinese," Lee says.

The process almost negates the fact that the Hong Kong office has fiber-optic links with the mainland factories, and that Karrie uses MFG/PRO, a leading accounting software designed for manufacturers to consolidate data. "There is integrated software to handle accounts payables, receivables, inventory valuation. In theory, it can work out, but there are quite a lot of transfer pricing issues, so it's not as simple as buying software," says Lee.

With revenues of HK$893 million (US$114 million) and earnings of HK$26 million (US$3.3 million) in fiscal 2001, Karrie also worries about the financial cost of having the accounts reviewed by external auditors. Currently, Lee spends HK$900,000 (US$115,000) for its external auditors and HK$200,000 (US$26,000) for its lawyers before announcing interim and annual results. He estimates he would pay an additional HK$150,000 for each extra quarterly report. Granted that the Hong Kong proposal does not require external auditing for quarterly reports, its proposed alternative is to have them audited by an audit committee, which in turn requires hiring accountants who will report directly to these independent non-executive directors.

Given these difficulties, Karrie barely meets the Stock Exchange of Hong Kong reporting deadlines, which are three months and four months after the cut-off period, respectively. To report financials every quarter, Lee says, might require a trade-off with accuracy. "For example, we may use standard costing in calculating inventory, cost of goods sold, gross profit margin. But to show the real picture, you're going to have to use actual costing," he says.

Soft Solution

To colleagues in Singapore, who will adopt quarterly reporting in 2003, that compromise doesn't have to be made if the accounting process is streamlined in the first place, and then backed by strong accounting software. "The most fundamental issues that need to be addressed are in the internal workflow process support, and the reporting deadlines," says Chia Song Hwee, CFO at US$463 million-a-year Chartered Semiconductor.

Buying the right tools is easy, but streamlining the accounting process is difficult because it involves not just one department; every part of the organization that generates purchase orders is involved. "How do we automate the update of inventory records, from the time a purchase requisition is raised, to the time that goods are received? The whole process involves at least four departments, so each of the activities are going to be looked at in order to streamline the process," says Chia.

As a relatively young company, Chartered structured its organization in such a way that it would be able to meet quarterly reporting deadlines, and it has done so since day one. "For example, a piece of month-end close activity - does it have to be performed after the month-end, or could it be performed earlier? Determining that involves not only finance, but the back-end office as well," says Chia.

Kuah Boon Wee, CFO of S$2.5 billion-a-year (US$1.4 billion) ST Engineering, which makes military equipment, stresses the importance of instilling discipline in his finance staff. That may sound abstract, even mundane, but is one area when a CFO's leadership is critical. "Every quarter, all our finance managers need to spend time and effort to get the necessary accruals right, to review all their costs and revenues for the quarter," he says. "Further up the chain, you need to have your board of directors geared up to review, and you need to set a very clear timetable that everybody knows every quarter," Kuah says. Chia adds: "Without revisiting the entire process, it's difficult for you to reduce the time spent to get the processing done in time for you to do whatever is necessary to close your books."

Typically, companies adopt an earlier cut-off in closing a book, and make estimates for the remaining days in the quarter to close the gap. Chia says CFOs will be better off in presenting more accurate figures to shareholders if they instead reengineered the work process. "In the case of Chartered, we don't have earlier cut-off. For example, we recognize revenue to the very last day, so as we ship wafers on the last day of the month, whether or not public holiday or weekend, those activities continue, because it's system-based," he says.

That system is based on Oracle software, which allows him to close his books in three days or less. Kuah, on the other hand, just reported ST Engineering's first quarter earnings ending March 31 on April 8. As a company with four business groups, ST Engineering uses an ERP system for each of these units, and then consolidates the data with the integrator software Frango. "To be able to analyze a lot of numbers at the group level, we need strong consolidation software," he says.

To Louis Tang, group financial controller of commodities trading firm Noble Group, quarterly reporting should not be too much of a workload given that companies are supposed to have monthly financials to help management make business decisions in the first place. In Noble's case, these monthly statements do not incorporate mark-to-market positions of some of its assets. Its in-house accounting system, however, enables Tang and his team to accomplish the task easily. In fact, the Hong Kong-based, Singapore-listed company, is already capable of producing quarterly reports in days, although the board has yet to decide whether or not to pre-empt the 2003 requirement.

At the end of the day, Fitzgerald of PricewaterhouseCoopers says, the ultimate beneficiaries of quarterly reporting - and the discipline it takes to meet it - are the companies themselves. "Surely you need this information to run the business in any case," he says, "because otherwise, it might reflect that you're not running the business properly."

Abe De Ramos is a senior writer for CFO Asia based in Hong Kong.