Interview With Pricewaterhousecoopers Chief Partner Li Dan: Accountants Need To Keep "Skill Panic" All The Time Under The Registered System

In China's capital market, intermediary institutions, including accounting firms, are important participants in market investment and financing activities, and "gatekeepers" for effective implementation of information disclosure and investor protection system. From the examination and approval system to the approval system and then to the registration system, the regulatory authorities and the capital market require more and more responsibilities and capabilities of intermediaries.

Among the accounting firms active in the capital market, PricewaterhouseCoopers Zhongtian Certified Public Accountants (special general partnership) (hereinafter referred to as "PwC") has always been the leader. Since 2003, the Chinese Institute of Certified Public Accountants released the top 100 industry rankings, PwC has been ranked first for 17 consecutive years. In the past 30 years in China's capital market, PwC has participated in the audit of a number of pioneering projects, such as the first red chip company that has been listed overseas on the science and technology innovation board, and the first B-share company listed in Shanghai and Shenzhen stock markets.

How can accounting firms follow the development of China's capital market? What challenges does the establishment of the science and technology innovation board and a large number of technology companies go public? What does the registration system mean to the office? Recently, 21st century economic reporter interviewed Li Dan, chief partner of PWC Zhongtian accounting firm, on the above issues.

Li Dan joined PricewaterhouseCoopers in 1993. Since then, he has led the firm to provide audit services for many large listed companies. He has assisted a number of Chinese enterprises in financing, debt restructuring and M & A transactions in domestic and overseas capital markets. At present, Li Dan is the vice president of the Chinese Institute of certified public accountants, and he often advises on the formulation of laws and regulations related to finance and auditing, capital market, CPA industry, economic construction and other fields in China. In addition, Li Dan also served as a member of the 13th CPPCC Shanghai Municipal Committee and a member of the review committee of Shanghai Stock Exchange. In 2015, the Ministry of Finance awarded Li Dan the honorary title of "national advanced accounting worker".

On the development of accounting profession: accounting firms can assist domestic enterprises to establish modern enterprise system

21st century: this year marks the 30th anniversary of China's capital market and the 32nd anniversary of the founding of the Chinese Institute of certified public accountants. It can be said that the growth of China's CPA industry and capital market is accompanied by each other. In the past 30 years, as an important intermediary organization, what changes have taken place in its own business and industry environment?

Li Dan: the domestic capital market has developed rapidly to the size of more than 4000 listed companies. From the traditional main board, small and medium-sized board and gem to the science and technology innovation board launched in recent two years, each plate bears the transformation needs of China in different stages of economic development. In the past 30 years, the type, volume and main business scope of listed companies have undergone great changes.

For accounting firms, the past 30 years have also kept pace with the times. In the future, the reform of the capital market registration system will continue to move forward, and the construction of the multi-level capital market system will go further, which will put forward higher requirements for the practice of accounting firms. Especially, the complexity of emerging industries and the full implementation of the registration system have put forward greater responsibility and ability requirements for our industry, and brought new challenges.

Taking the development history of PWC as an example, the firm was established in 1993, initially mainly serving foreign-invested enterprises. The senior management of the firm has always adhered to the localization construction and vigorously cultivated domestic talents and leadership echelons. In 2013, the firm actively responded to the restructuring requirements of the Ministry of finance, and took the initiative to restructure it five years in advance, from a Chinese foreign cooperative enterprise to a special general partnership invested by domestic partners. As a result, the firm has successfully transformed into a Chinese domestic firm that has joined the global network of PWC. 80% of the members of the Management Committee of the firm are Chinese certified public accountants. Its business focus has also shifted to serving domestic enterprises, including large-scale central enterprises, financial institutions, high growth private enterprises, etc., to assist domestic enterprises in listing and financing, merger and acquisition in domestic and foreign capital markets Establish global brand, etc. Since the restructuring of the firm in 2013, PwC has assisted domestic enterprises to list on the global capital markets, and the total amount of financing has reached 1 trillion yuan.

21st century: what role do you think accounting firms have played in helping domestic enterprises establish modern enterprise systems?

Li Dan: in addition to the role of "gatekeeper" in the capital market, the role and value of Certified Public Accountants in assisting enterprises to establish modern enterprise system mainly include the following four aspects:

First, assist enterprises to meet the requirements of financial compliance, including the truthfulness and fairness of financial reports, compliance with accounting standards and disclosure rules. Secondly, in the corporate governance structure, we should assist enterprises to improve the relevant governance system and internal control in the financial field, sort out the key nodes of enterprise internal control, and ensure that the key internal control design related to financial reporting is reasonable and effective. Third, help enterprises to control risks, improve quality and efficiency, and develop steadily in business operation. Fourth, assist enterprises to achieve strategic landing, and provide one-stop professional services such as merger and acquisition, tax planning, management consulting, etc.

On the registration system and the science and Technology Innovation Board: accountants need to keep "skill panic" and constantly update their knowledge structure

21st century: the number of A-share listed companies exceeded 4000 in September this year. Recently, a special meeting held by the financial committee of the State Council proposed to implement the registration system in an all-round way. It can be predicted that the number of listed companies and reserve projects will be more and more in the future. What does the ever expanding registration system mean to audit institutions?

Li Dan: the introduction of the registration system is an important decision of the Party Central Committee and the State Council, and an important measure to promote the real economy through the support of the capital market. We very much agree with and welcome this.

The full implementation of the registration system in the A-share capital market will first bring more business opportunities related to listing audit for audit institutions. With the diversified inclusion of listing conditions under the registration system and the dislocation development among different listing sectors, it is easier for enterprises to find the plate suitable for their own listing. Moreover, with the continuous improvement of the audit efficiency of the stock exchange, the average audit rhythm of six to nine months will become the new normal of future A-share listing, and the listing schedule of enterprises will be more controllable.

Secondly, the registration system also means that the requirements and expectations of audit quality are improved accordingly. Under the registration system, all parties in the capital market return to their positions and fulfill their responsibilities, which embodies the principle of "supervision belongs to supervision, and market belongs to market". Regulatory agencies will pay more attention to in-process and post-mortem supervision and special inspection on major issues; and the task of ensuring high-quality financial reports and information disclosure when enterprises are listed falls on the intermediary institutions such as accounting firms.

Under the registration system, the diversity of issuers also puts forward higher requirements for the professional level of audit institutions. Before the reform of registration system, A-share market is more suitable for traditional enterprises with clear business model and profit model and sustainable profitability. After the reform of registration system, many enterprises with technological innovation and business model innovation are qualified for listing. Among them, the basic science and underlying technology involved in some enterprises are difficult for ordinary investors to understand, such as the integrated circuit, semiconductor equipment manufacturing, biological medicine and other enterprises which are supported by the science and technology innovation board; some enterprises' profit models are not stable, and even have not found a clear profit model, such as Internet mode innovation enterprises. These new problems under the registration system will test the professional level and competence of audit institutions. If the auditor does not understand the nature of the business of the auditee, there will be no high-quality audit work and reliable audit results. Therefore, auditors need to keep "skill panic", constantly update their knowledge structure, and pay attention to the development of innovation industry and the application of scientific and technological progress in economic life.

21st century: with the establishment of the science and technology innovation board and the development of the new economy, more and more innovative companies in the fields of science and technology, finance and Internet are listed, and new business models and profit models emerge in endlessly. In this regard, what are the current challenges faced by the audit work? Moreover, does the listing of a large number of innovative companies promote the innovation of accounting work in turn?

Li Dan: one of the characteristics of scientific and technological innovation enterprises is its scientific and technological innovation attribute, which is what we often call hard core technology. Science and technology enterprises usually have complex business models, which are deeply related to information systems, and have operational characteristics of business data and data business. The high growth of business has brought geometric growth of data scale and thorough change of data form. Traditional audit methods pay more attention to financial data, while the audit of science and technology innovation enterprises must analyze and verify business data in addition to financial data, especially the ability to audit the information system related to business operation of enterprises, otherwise the authenticity of the underlying financial data provided by enterprises can not be ensured.

Modern enterprises pay attention to the integration of industry and finance. In the process of audit, financial and non-financial (business) data should be paid attention to at the same time. The establishment of the science and technology innovation board and the listing of more science and technology enterprises put forward higher ability requirements for our certified public accountants. The accounting firms need to strengthen the investment, build the information system audit ability, and build a team of experts focusing on the information system audit. If we don't invest in audit innovation and improve information technology audit skills, we can't effectively identify audit risks and prevent financial fraud, and we can't guarantee audit quality.

At present, each firm is using emerging information technology to increase the construction of information infrastructure and application system. Most of the accounting firms have realized the informatization of their own management process, and are actively exploring and practicing the specific application scenarios for the audit operation platform and automation tools. Some large-scale accounting firms have begun the road of digital transformation. In the process of information construction, the office should pay attention to the protection of information system and network security to ensure the information security of the office and customers, and the data will not leave the country. PricewaterhouseCoopers attaches great importance to information security and actively expands investment to improve network security construction. In June 2020, PwC took the lead in passing the Ministry of public security network security level 2.0 three assessment, which is the highest level of network security evaluation of domestic non-financial institutions, and is the only accounting firm that has passed the certification.

On small and medium sized firms' participation in securities service business

21st century: Recently, the China Institute of Certified Public Accountants released the information of the top 100 accounting firms in the comprehensive evaluation of 2019, and PricewaterhouseCoopers ranked first in the industry for 17 consecutive years. As head accounting firm, what successful experience does PwC have that is worth learning from peers?

Li Dan: it's a great honor that PwC has been ranked first in the industry for 17 consecutive years, ranking first in terms of comprehensive evaluation and operating income. As of the first half of this year, the total market value of listed companies on the Shanghai Stock Exchange was about 41 trillion yuan, of which the market value of listed companies audited by PwC was about 7 trillion yuan, accounting for about 17%. These listed companies are the ballast stone of the capital market, and this audit responsibility is also heavy.

The audit industry has a characteristic: Although the audit work is a customized service for a specific enterprise, the audit opinions issued by the audit firm are all template, and it is difficult to reflect the service quality from the audit report issued. How to identify the service value of audit institutions? Why are so many quality companies willing to continue to choose the professional services of PricewaterhouseCoopers? As a service provider, PwC takes "solving important problems and building social integrity" as its corporate mission, attaches great importance to the high quality of professional services, and is committed to providing customers with "cooperation, understanding, value-added and harmonious" service experience.

21st century: according to the filing list released by the Ministry of Finance on November 2, 46 accounting firms have been registered to engage in securities service business. Some accounting firms that have not engaged in securities services will enter the capital market to practice, and even small firms with 9 registered accountants. How do you see more and more small and medium sized accounting firms participating in securities services?

Li Dan: we have also noticed from media reports that small and medium-sized domestic firms have begun to engage in securities services. We agree with the regulatory authorities' policy of further opening up the capital market and foresee that more and more firms of various types will participate in the securities services business in the future.

The implementation of securities service business record management is in line with the requirements of the market, which is conducive to the long-term development of the audit industry. From the perspective of the market, the securities business of accounting firms has higher business risks, which requires relevant practitioners to have rich practical experience, excellent professional skills, high risk awareness and professional prudence. These conditions are the natural threshold for accounting firms to engage in securities service business. The capital market is no longer based on whether the accounting firm has the qualification of securities service. The capital market needs firms that can provide high-quality audit services and meet the quality requirements of the capital market. From the perspective of supervision, the implementation of record management only changes the form of supervision, not to relax the supervision, not to reduce the professional standards, but actually puts forward higher requirements for accounting firms participating in securities service business.

For small and medium-sized firms that want to participate in the audit business of capital market and listed companies, I have two suggestions: first, we should pay attention to whether they have the competence to audit the complex business of listed companies. The scale and nature of the business of listed companies are relatively complex. The audit work involved not only relies on accounting and audit knowledge, but also needs professional experience and teams such as information-based audit technology, tax planning, valuation model, etc.; second, we should pay attention to whether we have the corresponding risk bearing capacity. The current legal environment of capital market has put forward higher requirements for accounting firms, including some legal proceedings that have occurred, civil compensation, as well as the new securities law, the soon to be issued CPA Law and so on. The punishment for financial fraud or audit failure of related enterprises has been greatly increased. Therefore, before undertaking the business related to the capital market, the accounting firm should fully and carefully assess the corresponding audit risk and do a good job of preparation. In a word, we suggest that "diamond diamond first, then porcelain work".

On the "right and responsibility matching" of intermediary organizations: front line accountants have the obligation to transfer new things, new problems and new risks to the regulatory level

21st century: Recently, chairman Yi Huiman of China Securities Regulatory Commission pointed out that in the future, China will improve the rules system of audit, evaluation, legal services and credit rating, compact the responsibilities of intermediary agencies, and build a capital market intermediary system with matching rights and responsibilities. How do you think audit institutions do a good job of "matching rights and responsibilities" in the future? How to better maintain communication with the regulatory authorities?

Li Dan: we fully agree with Chairman Yi. On the matching of rights and responsibilities, we should first distinguish the so-called "accounting responsibility" and "audit responsibility" in the financial field, that is, enterprises are responsible for the preparation of financial reports and information disclosure, and assume the accounting responsibilities; the accounting firms are responsible for the audit and assume the audit responsibilities. Under the future capital market system, intermediary agencies will return to their positions, perform their duties and fulfill their duties, which puts forward higher requirements for the audit responsibility of the accounting firms.

On the one hand, accounting firms should continue to strengthen the management of audit quality and increase the investment in audit quality, including the institutional construction, personnel training, science and technology investment, etc. On the other hand, audit business has the attribute of social public goods, and CPA's audit service also bears corresponding social responsibility. From this perspective, the communication and coordination between the accounting firm and the regulatory layer is not contradictory, but complementary. The supervision's guidance and support to the firm and the benign communication mechanism between the two sides can effectively promote the audit of accounting firm to become a part of social governance. In addition, in the capital market, we should strengthen the publicity of the accounting profession, so that all sectors of the society can fully understand the important role and value of high-quality audit services for the effective operation of the entire economic system and the healthy development of the capital market; we should also enable all sectors of the community to understand the essential differences between accounting and auditing, and reach a certain consensus on the responsibility boundary between accounting responsibility and audit responsibility.

21st century: under the background of the gradual implementation of the registration system, how do you think the accounting firm as an intermediary should maintain communication with the regulatory authorities?

Li Dan: in the context of gradually implementing the registration system, we believe that the capital market still needs to maintain "strong supervision". This is an important prerequisite to ensure that the audit industry has a good practice environment, is the institutional guarantee to safeguard the interests of investors in the capital market, and is also the consistent practice of major capital markets in the world.

In the audit process, it is an important embodiment of high-quality audit service that auditors keep timely, unimpeded and sufficient communication with enterprise management and management. Under certain circumstances, timely communication among auditors, enterprises and regulators is needed to ensure accounting compliance and audit quality. Certified Public Accountants struggle in the front line of national economic construction, which can be called "the eyes of the market". They have the obligation to transmit new things, new problems and new risks to the regulatory level. Once the common problems or potential market systemic risks are found in all kinds of audit, the CPA needs to communicate with the regulatory level in time, so that the regulatory level can make a quick response to the market situation, and also play a guiding role in improving the quality of the audit industry.

The regulators that auditors usually need to communicate with include the Ministry of finance, China Securities Regulatory Commission, China Banking and Insurance Regulatory Commission, SASAC, and the Institute of certified public accountants. How to establish an effective communication mechanism with these regulatory agencies also requires the relevant departments to issue clear guidelines. In a word, CPAs hope to maintain smooth communication with regulatory agencies and enhance the transparency, independence and social credibility of the audit industry.

On Overseas China capital stocks: to manage the main business well, we should pay attention to compliance and make emergency plans

21st century: this year, the US regulators strengthened the supervision of China capital stock. How should Chinese enterprises that have been listed in the United States or are willing to go to the United States to list?

Li Dan: at present, the US capital market is still the largest capital market in the world. For Chinese enterprises, the U.S. capital market can play an important role in financing, going global market and establishing international brands. In particular, many of the more active new economy enterprises in the market chose to list in the United States. The listing conditions of the US registration system are relatively loose, focusing on the information disclosure of enterprises, and a considerable number of investors can better understand the business model of new economy enterprises 20 years ago, and are optimistic about the future development of these enterprises.

Even in the current complex environment of Sino US relations, we can see that many Chinese enterprises still choose to go to the United States for listing. In the first 10 months of 2020, there are still more than 30 Chinese capital stocks entering the US capital market, the number of which is the same as that of last year. The total amount of financing is equivalent to about 78 billion yuan, and the amount of fund raised has reached 4 times of that of last year. Among them, new energy vehicles, financial technology, Internet services and other industries are particularly favored by American investors, and the amount of funds raised by a single listing is more than $1 billion.

In the past two years, some American listed companies have chosen to list in other capital markets at the same time or separate their businesses. This is an inevitable trend for China's enterprises to integrate into economic globalization after their development and growth, and is also the result of the continuous reform of listing system and the promotion of listing convenience in mainstream capital markets all over the world. It can be said that the diversification of capital markets around the world has given quality enterprises more choices. In particular, Hong Kong, Shanghai and Shenzhen stock exchanges have been actively reforming the listing system in recent years, which has become a popular choice for domestic enterprises to list.

I have three suggestions for companies that have been listed in the United States and are still willing to go to the United States. First, it is necessary to "forge iron by ourselves", and we should continue to operate the main business well and do a good job in compliance, especially information disclosure; second, we should choose professional intermediary agencies with good market reputation and high professional quality to cooperate to assist enterprises to complete various compliance requirements and win the trust of investors and regulators; third, we should pay close attention to the regulatory dynamics of the US capital market and be aware of various uncertainties For example, we can consider returning to the capital market of the mainland or Hong Kong for secondary listing.

Nowadays, the capital market has been highly globalized, and there are common principles to be followed, such as promoting the matching of capital supply and demand, attracting high-quality enterprises to go public, improving the quality of information disclosure, cracking down on securities violations, protecting the interests of public investors, strengthening cooperation in global regulation, and so on. I believe that these long-term principles are resilient and inclusive enough to withstand the impact of some short-term adverse factors and create a good environment for the healthy and orderly operation of the global capital market.

On financial fraud and financial risk of listed companies: cash flow fracture is the most important financial risk to be prevented

The 21st century: in recent years, the financial fraud of listed companies and the lax control of audit institutions have occurred from time to time. What do you think of it?

Li Dan: in recent years, the global and domestic capital markets have witnessed some serious financial fraud events, which have attracted the attention of all sectors of the market.

At home, the State Council and various regulatory agencies attach great importance to this, and have made it clear that there is a high-level tone of "zero tolerance" for counterfeiting in capital market enterprises. Subsequently, the regulatory authorities carried out special inspection on the relevant fraud incidents and severely investigated and dealt with. I think it is very timely and necessary for the high-quality and healthy development of the capital market for the regulatory authorities to set such a tone and adopt thunderous measures, which also reassures the capital market. In addition, various regulatory agencies have also formulated technical guidelines for the audit industry, specially training industry practitioners to deal with professional suspicion of financial fraud and audit measures; some regulatory agencies are cooperating with large banks to develop and pilot new audit methods such as e-mail platform by means of technology. Bank letter is a very important procedure in the process of audit. In some cases of fraud in enterprises in the past, it was found that some enterprise personnel made use of the manual link in the bank letter. The pilot operation of e-mail platform is conducive to further promote the overall quality of the audit industry.

At the level of accounting firms, we should actively improve the governance structure, increase the training of business skills, promote the construction of information technology, and enhance the voice of quality control departments, so as to comprehensively improve the audit ability. We hope that the accounting firm, as an intermediary organization, can stick to the original intention of audit, strictly control the audit quality, regard independence as the lifeline, and do a good job as the "gatekeeper" of the capital market.

21st century: from personal experience, what kind of financial risks do you think Chinese listed companies need to guard against?

Li Dan: there are many financial risks that enterprises should guard against and deal with. The financial activities of listed companies are complex and diverse. In the four major links of fund raising, use, recovery and distribution, financial risks may arise in each link, including financing risk, investment risk, operation risk and income distribution risk, etc.

In my opinion, listed companies should first properly manage their cash flow to ensure their sustainable operation ability. The capital market pays special attention to the cash flow management of enterprises. Listed companies should actively deal with all kinds of uncertainties and possible adverse effects in the complex economic environment, and guard against cash flow interruption or debt default, otherwise it will be disastrous for listed companies and market investors. Ensuring sufficient cash flow and the healthy and sustainable development of enterprises is the top priority of the management of listed companies.

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