Ministry Of Finance intends to increase the responsibility of CPAs in the assurance of financial statements

From Enron to WorldCom, a string of accounting scandals has shaken investor confidence and slowed economic recovery in the US and its trading partners. With this in mind, Taiwan’s Ministry of Finance (MOF) has proposed revising the Certificated Public Accountant Law to increase the responsibility of CPAs in the assurance of financial statements.

The MOF has already required the relative authorities to take steps to increase the quality of financial and tax assurance in Taiwan: The MOF is asking banks to rely mainly on the findings of outside audits as opposed to borrowers’ collateral, while tax offices are being asked to use audits in lieu of the usual review process. The MOF expects the whole proposal to have been implemented by the end of this year.

As accounting is practiced in Taiwan, the function of assurance has not been properly exploited. Currently, most of the business done by CPAs is dedicated to meeting legal requirements, as companies are required by law to provide audited financial statements annually or quarterly. Recently however, the MOF has tried to find other incentives for businesses to improve the quality of CPA assurances. The MOF believes that this change in emphasis will increase the reliability of CPA assurance services and eventually reduce the incidence of untruthful financial statements. In particular, Ministry officials hope that better audits will prevent the emergence of so-called "landmine stock".

Officers of the Securities and Futures Commission also pointed out that when banks issue credit, their primary concern is the value of the borrower’s collateral, not their credit rating or their operating results. The amount of collateral basically determines how much credit a company can obtain from a bank. According to past experience, banks typically have large amounts of collateral at hand when loans are issued. However, in an economic downturn, the value of collateral falls and this eventually damages the banks. Instead of relying mainly on collateral, the MOF is asking banks to take the borrower’s financial position as their primary criterion when considering loans. The MOF is essentially encouraging banks to manage their risk by means of external experts, namely CPAs.

In the case of tax offices, better audits can eliminate the need for lengthy review procedures and increase efficiency. At present, financial statements for tax purposes are audited by CPAs, and off-balance adjustments are posted according to the difference between GAAP and tax regulations. However, MOF officers think that if the reliability of CPAs' assurances can be increased, then tax office review procedures can be greatly simplified.