The IVSC and partner organisations are seeking feedback on a proposed ‘standards and professionalism framework’ to support improved business valuation practices in Hong Kong. The framework, which is set out in a downloadable consultation document, is the result of extensive engagement with stakeholders across the business valuation and related sectors in Hong Kong. It has been developed in consultation with leaders from the accounting, valuation, audit, and business advisory sectors, together with regulators, professional bodies and business chambers. Responses are sought by 15 November 2019 to [email protected]
Why is the IVSC consulting on a proposed framework for business valuation in Hong Kong?
Globally, the increasing volume and complexity of business valuations, particularly in the area of intangibles, has left the sector with a shortfall of qualified valuers and a gap in service standards among certain segments of the market, largely the lower end of the valuation sector. The burgeoning demand is led by increases in corporate transactions, including mergers and acquisitions as well as divestitures, compounded with the rise in fair-value measurements used in financial reporting.
Hong Kong is a major financial centre, and it is important that there is confidence in business valuations for both listed companies as well as private companies. Despite this, there is a lack of accepted technical and professional standards in the Hong Kong market which has meant that not all valuation work is appropriate for the valuation purpose, and there is a wide spectrum in terms of the quality of output. This has been the case for 15+ years, and previous efforts to create a professional body for business valuation in Hong Kong have failed because the interests of some of those involved were too narrow and lacked a broad public interest remit.
Valuation clients are frequently enterprises owned by Hong Kong or People’s Republic of China families, particularly start-ups; their leaders can be more speculative and overly optimistic in their entrepreneurial outlook, and sometimes lack experience of the due diligence that would ensure quality reporting, independence and robust risk-advisory services. This presents a risk to shareholders at large, and especially minority shareholders.
Mixed performance by business valuers therefore requires duplication of efforts by company directors, financial advisors, auditors and regulators to screen a questionable work product, spreading the costs and responsibilities for businesses across a variety of individuals, each struggling to take adequate responsibility for their own performance.
Auditors in particular are relied on heavily to identify issues, yet they lack the proper valuation training to employ effective professional scepticism.
According to JLL, among the circulars published by Hong Kong listed companies from 1 Jan 2017 to 30 Jun 2019, 135 contained or quoted a business valuation report to which the listed companies referenced their proposed corporate transactions. Thus, emphasis on the importance of quality business valuations and the need for better corporate governance of Hong Kong listed companies cannot be underestimated.
Some company directors still lack proper understanding of their duties, and do not possess an informed approach to valuation, particularly in the area of intangibles, to effectively question reports. In addition, directors do not perform adequate due diligence on prospective financial information before providing such forecasts to valuers, who rely on information provided by directors and generally assume prospective information will materialise. Lack of consequences for poor performance across all responsible parties, including limited regulation and a non-litigious environment, fails to foster high performance. This can create a false sense of assurance in the minds of valuers that their performance is satisfactory even when this is not the case.
In contrast, competing countries in the region such as Singapore have established business valuation standards and a profession with regulatory backing. Other major countries in the region have also either taken or begun to take action in relation to business valuation to provide confidence for investors and they are in many cases looking to attract inward investment.