Potential fraud risks during IPO due diligence скачать в хорошем качестве

Potential fraud risks during IPO due diligence

Q: Bill, as part of your practical tips, you suggest looking for potential fraud risks. What kind of things are you looking for? A: There are many things we will be alert to when we are looking at an IPO candidate from a due diligence perspective. One of the things we look for would be complex corporate structures and extensive use of offshore entities. These may be indicators of trying to avoid tax payments. Another area is looking for evidence that company assets have been stolen. This is done by transferring to insiders, leaving shareholders with empty shell companies owning no assets. Numbers are an important thing in the IPO process, particularly employee numbers, revenue numbers, etc., so we look for any evidence that these are being manipulated, to boost up the figures and make them more agreeable to the IPO process. We have a very keen understanding of the other business interests, usually hidden business interests that many of the key principals may sometimes have. This could be indicative of conflict of interest issues, where there are setting up competing businesses, or businesses in readiness to compete with the IPO once it’s all gone through. Another area we look for is illegally obtaining VAT rebates, government grants and also low tax rates they may have received from local governments. This might be completely fine. There may be no problem with this, but we have got to look at the background and see if there is anything less than benign behind the reasoning, behind the advantages received. Other risk factors and red flags we look out for are large and frequent related-party transactions. If the background with the shareholders is opaque or murky, we’d want to find out more about the shareholders and their background. If the company has expanded rapidly, particularly in relation to its peers in the industry in the local area, we would want to know why – “Is it genuine or is there something not quite so honest about it?” If the company has had a switch of auditing firm, or several switches in some cases, that can be indicative that there have been problems; they are trying to hide something or have had disagreements with their auditing firm – “Why? What’s been happening?” Q: These days, we hear a lot about hacking. What part does cyber due diligence play in the IPO process? A: The SFC and the Hong Kong Exchange are certainly taking a more robust view of deficiencies in cyber-security, particularly as they relate to licensed corporations. There have been a number of SFC alerts over the past 12 months on cyber-security threats. The SFC is pressing home the need for licensed corporations to protect their own systems from attack, and similar messages are being seen from other financial authorities around the world. In relation to IPOs, currently, there is no specific requirement by either the SFC or the Hong Kong Exchange for a sponsor to conduct cyber due diligence on a candidate’s cyber security. However, the point can be made that it is part of the sponsor’s job to proactively look for a range of potential risks, including cyber, around a listing applicant’s business, without the SFC and the Hong Kong Exchange spelling it out for them. If sponsors don't start thinking about cyber due diligence, eventually one of their listing applicants will have a major breach; the public will lose out. It is not inconceivable that the SFC and the Hong Kong Exchange will go after the sponsor for not spotting the risk.