SMPs Combined Accounting firms are teaming up with business service companies to broaden their offerings. George W. Russell looks at how some partnerships evolved and what they offer the Institute s small- and medium-sized practitioners Illustrations by Alan Ho 32 October 2013
operations Early in 2008, Matthew Li was facing a dilemma. The Hong Kong Institute of CPAs member was working for a small accounting firm in Hong Kong that was finding growth hard to achieve. For a small CPA at the beginning stage it s very difficult to find any clients, Li says, looking back. Most of them are through referrals. Sure, the firm had some audit and taxation clients and it helped a few companies incorporate. But whenever a client asked about other services arranging working visas, for example Li would have to refer them to another company. It was frustrating for Li, and a common problem for small- and medium-sized practitioners. He says SMPs need to think harder in order to grow as the 10 biggest firms dominate the market. So Li had an idea for a different kind of CPA firm: Institute members would supply accounting, audit and tax services, while a separate unit would provide a range of corporate services, from renting out conference rooms to mail redirection, to offer a virtual office to clients. Li called the new venture Nova. His aim was to give small- and medium-sized enterprises a one-stop shop for all their business needs. To be sure, it wasn t an entirely new idea: Business service providers have been in Hong Kong for a generation but very few offered the broad range of professional services that a CPA can provide. Not even the global financial downturn, which occurred soon after Nova s launch, could dampen Li s enthusiasm. Indeed, he found that it actually created some work. A lot of people who were laid off or forced to resign set up their own consultancy firms to keep their networks active, he recalls. I helped them with that. The idea behind Nova was to increase the number of possible avenues by which clients could approach the firm and then try to crosssell them services. An existing audit client might need advice on company formation or virtual office services such as a switchboard or mailroom to handle its increased presence in Hong Kong. Conversely, a different type of company might not want CPA services at least initially but Nova could provide them with virtual office space to hold a business meeting or provide financial advice. We ve got different channels to provide services, says Li. You can still offer them initial services and in doing so you learn what their needs are. Your client relationship can be built up and they rely on you. October 2013 33
SMPs Careful combinations While the Institute supports the growth of SMPs, there have been concerns that such combined corporate service providers have blurred the lines of auditor independence. One has to be extremely vigilant on this principle, says Clement Chan, a vice president of the Institute and a former SMP committee member. Noting that CPAs have to be cautious, he explains the independence requirements under the Code of Ethics for Professional Accountants. This is so that the audit services to be provided will not be impaired by the services provided to the clients in their capacity as business partners, he says. Indeed, if the ethical aspects are taken care of, tie-ups between CPAs and corporate service providers could be a source of revenue, adds Chan, who is also managing director, assurance, at BDO Hong Kong. As long as clear principles are well communicated and appropriate safeguards are established to avoid the sensitive and highrisk areas that might cause independence impairment such as involvement in the management decisions of the clients mutually beneficial cooperation is perfectly possible, Chan says. The Institute is also concerned that cooperative ventures adhere to the rules covering independence. CPAs should be mindful that merely the appearance of a lack of independence may preclude them from accepting an engagement, says Linda Biek, the Institute s director of compliance. A wise approach before accepting any business opportunity is to identify potential threats to independence and determine the safeguards needed to reduce those threats to an acceptable level, she adds. Sections 290 and 291 of the code of ethics should serve as CPAs go-to guide when considering independence issues. Li at Nova says overcoming the ethical 34 October 2013
A PLUS A wise approach before accepting any business opportunity is to identify potential threats to independence and determine the safeguards needed to reduce those threats to an acceptable level. challenges of creating a broad-based service provider with a CPA component required some thought. We are separated into two companies with totally different kinds of shareholding, he says. The virtual office team and specialist teams for company secretary work and the auditing teams are clearly separated in ownership, management and control. The final result, says Li, has enabled Nova to attract a wide range of clients. Most, he says, are from outside Greater China and have interests in manufacturing, trading, or services. Li adds that retaining clients has become more important than attracting new ones. Once your customer service is good and your price is not too high, your clients will not leave you, he says. Furthermore, Li appreciates the diversity of work that a firm such as Nova attracts. I enjoy doing consultancy work, he says, whether it s business advice, tax consulting, real estate planning or wealth management planning. The clients talk to us a lot and I can learn a lot from them. Organizing talent While Nova is an example of a Hong Kong CPA firm that embraced corporate services, the reverse process also occurs. SBC is a business management services provider, established in 1995, that now has five offices in Hong Kong. A decade ago, the firm decided to offer professional accounting and auditing services, and brought in Johnny Wong, a civil engineerturned-cpa, to manage the operations. Wong, an Institute member, says the company now employs more than 10 CPAs, of whom five have practising certificates. He says the key to success is allowing CPAs to concentrate on what they do best and farming out other work to others. Most [small] CPA firms are having difficulties expanding their markets because they take so much of their time negotiating other issues with clients, such as contracts and pricing [due to their limited resources], says Wong. He says SBC s sales and marketing teams focus on client generation and negotiate contracts, allowing the CPAs to concentrate on the professional work at hand. While this frees the CPAs from unnecessary focus, Biek points out that professional standards require auditors to maintain some contact in order to understand their client s business and to follow up on issues discovered during fieldwork. CPAs would want to maintain the unfettered ability to interact with the client as needed, she says. SBC is divided into three business units, comprising technical, sales and administrative staff, with each managing 300 or so clients. A fourth unit is being established due to growth. (As with Nova, the accounting firm of SBC CPA is established as a separate entity.) While the firm concentrates on SMEs as diverse as from a bus manufacturer to a supplier of components to China s space programme, some of its customers are surprisingly large. One client, a shipping company, reported turnover of HK$20 billion last year, Wong says. Companies of that size are usually the clients of larger corporate service providers such as Compass Offices, which has a presence in Hong Kong, Singapore, Tokyo and Melbourne. Compass launched its CPA service branded as Encore Professional Services in 2010 with the recruitment of Karson Che from Deloitte as a finance manager. It was more a natural chain of events rather than a conscious business decision to expand or complement our core business with accounting and CPA services, says Che, an Institute member. We have seen a positive effect to the group s overall revenues due to the inclusion of this new service, Che adds. While it is still not the focal point of the group, it is continuing to grow and has become a consistent new stream of revenue. October 2013 35
A PLUS Small CPA firms can offer a range of services if they set up the right model. They can include company secretarial matters, trusts, restructuring and insolvency management. A question of growth With an estimated 60 corporate management service companies in Hong Kong, although no more than a dozen provide CPA services, competition is intense and growth prospects are a concern for the smaller providers. Margins are thin, Li at Nova points out, while costs are rising. Corporate service providers offer office space to their clients, a premium commodity in Hong Kong. Rental is the big cost issue, says Li. You cannot raise your prices by as high a rate as your landlord can. Our main strategy is to pay our rent on time and try to negotiate our contract earlier and for a longer term. SBC is less affected as it owns its five properties in Hong Kong. We are very stable in terms of our finances and we can control our costs, says Wong. Salary rises are manageable but rent is not. Li doubts whether the Chinese domestic market can provide his firm with any growth. We find it very difficult to develop business in China, he admits, citing the different systems between or even within provinces. We are not too familiar with them, he adds. We find there are difficulties even in incorporating in China so how can we do in-depth jobs? Wong at SBC is more optimistic. The corporate services side of the company has 18 offices in China, although none provide CPA services. We plan to have accountants in China one day, he says. SBC also hopes to grow through a broader range of services, such as working with banks to offer financial advisory services and establishing a legal retainer service with local law firms. Compass, meanwhile, has diversified into fundraising and investment opportunity analysis. We also can refer clients to other business partners, such as those in private equity, says Keith Moy, another finance manager and Institute member at the firm. However, Hong Kong s entrepreneurial mindset and the continuing global obsession with the China market are enough to give CPAs at corporate service providers cause for celebration. Li believes the best growth prospects are from international companies seeking a foothold in Asia. There are a lot of foreigners still interested in developing new markets, he says. They may not be first movers like some international or multinational brands but there s still a lot of interest in China and East Asia projects. For such companies, Hong Kong remains an ideal beachhead. It is a very strong place for them to come in, he says, citing the simple tax and company laws, proficiency with foreign languages and the well-developed infrastructure. As the Institute s Biek points out, small CPA firms can offer a range of services if they set up the right model. They can include company secretarial matters, trusts, restructuring and insolvency management, corporate governance and risk management, and management, commercial and other consultancy work. Li agrees, noting the newcomers into the market. But despite the inevitable competition, Li believes the model of a corporate services provider combining in some form with a CPA practice has potential for growth. It s a trend, he says. I think both of them need each other. October 2013 37