T K Lo & Co

Hong Kong CPA Firm


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Audit - Oversee



Credit Management

Liability Management

Differences between accounting and auditing services
     
   

Credit Management

Business selling or providing service for cash only will limit its availability of customers, but there are possible credit scams or credit customers in trouble of which may lead to the failure of the business. Therefore, business should have a continuous and systematic scheme of credit management to reduce the chance of having delinquent debts.

Business should segregate its credit customers and have appropriate review to status of them before extending credit. For material segregation or individual customer, credit investigation must be performed beforehand. If there are no any form of valid guarantee of payment obtained from their bankers, e.g. letters of credit, or from their reliable owners and management, such credit investigation may need to be performed periodically to ensure the status of existing customers be still satisfactory. Special attention should be pay to the rush or large deals with new customers and with customers without up-to-dated and clear credit records. Slowdown of recent payments, prolonged debt aging analysis, increasing of excuses for not paying on time, hiding of financial information, non-satisfactory business performance, etc are danger signs of credit customers.

The key to reducing delinquent debts is to use a systemic strategy with a timetable for action. The longer a debt outstanding, the less likely to get paid.


Liability Management

The main purpose of formation a limited liability company to do business is to avoid the liability of a business extend to its owners or management. However, there are a number of ways to break this limited liability function of a body corporate and many persons do not aware their existence.

 First of all is Guarantee:

 Bank Guarantee:

Most of the bankers will ask for personal guarantee from all directors of a company, whenever a credit line is arranged for loan, overdraft or other facilities. Hints:

  • Do not act as director unless it is necessary

  • Do not provide personal guarantee to banker as far as possible

  • If the guarantee is unavoidable, set a limit of it as low as possible

 Other Guarantee:

Personal Guarantee may exist in other forms and be unnoticed. Examples:

  • Business Contract

  • Tenancy Agreement for leasing of commercial property

  • Hire Purchase Agreement for acquisition of a company's assets

  • Signature on commercial documents, e.g. cheque or bill of exchange as an additional party to the drawer (Note B)

Note A:    In fact, the giving of personal guarantee is a negotiable term. You should always ask for the deletion of such sorts of request as far as possible. Whenever signing business documents, you must make sure that no guarantee or similar term appear on them, in particular for standardized agreement.

Note B:    By Section 28 of Bills of Exchange Ordinance – Accommodation party: If a person has endorsed a cheque (e.g. at the request of banker in clearing a cheque) in addition to his normal signing off to issue the cheque on behalf of the company, the person becomes personal liable on the cheque to a holder for value, even the holder does not know the existence of such endorsement.

Second is Position

The higher the post of a person, the higher his personal liabilities. In Hong Kong Companies Ordinance and the Articles of Association of a company, the liabilities of Directors are well defined and regulated. In many occasions, a director may make himself or herself personal liable for the company's matter, if he/she has not duly followed the regulations in law or the Articles to discharge his/her duties.

Third is Ownership of Valuable Assets

The higher the value of assets of a company, the higher the possibilities be claimed for compensation in doing business. In short, the high value company makes the function of limited liability meaningless, as its assets always trigger the attacks of outsiders. Every company should maintain a balance between its assets value with its corresponding risky level. A company should keep its retained earnings as low as possible by distribution of dividends to shareholders. Otherwise, these distributable profits may need to pay for future liabilities of the company.

Management

Other than the above separation of liability of a company from its owners or management, a business should manage its liability from time to time due to the uncertainties in business operation. The following are some key areas:

  • Insurance coverage

  • Organizational features

  • Industrial characteristics

  • Staff supervision

  • Data protection

  • Development crisis 

  • Market competition


Differences between accounting and auditing services

Accounting involves identifying, measuring, recording, classifying and summarizing events. The outcome is the preparation of financial statements in accordance with a reporting framework. The objective of accounting is the communication of relevant and reliable financial information for decision making. Directors have ultimate responsibility for the financial statements.

The auditor is responsible gathering and evaluating evidence on financial statements’ assertions and issuing an auditor’s report that contains the auditor’s conclusion based on auditing standards. This conclusion is expressed in the form of an independent  opinion on the financial information.  Instead of creating new information, auditing adds credibility to the financial statements prepared by the management.

Auditor’s involvement in preparing records of a client is not allowed, unless there are no prohibitions for the circumstances, e.g.relevant law, regulations or Code of Ethics and the professional independence is duly considered. The client must take responsibility for the financial records, and the auditor makes no executive decisions by any chance involving in assisting the client to do their records.