Taiwan’s accounting profession has entered a challenging period following the recent announcement of a timetable for the adoption of IFRS and an approaching deadline for accounting firms to decide their public liability status.
New standards and changes in tax laws are expected to generate additional work for accountants, yet there is increasing competition among the large number of small practices due to a trend for manufacturing clients to move operations out of Taiwan.
The Big Four and mid-sized accounting firms are poised to benefit from improved relations between Taiwan and Mainland China following the election of the Taiwan Nationalist Party (Kuomintang) president Ma Ying-Jeou last year on a pro-growth platform.
Ma, a Hong Kong-born former mayor of Taipei, won votes with plans for economic expansion after years of relatively slow economic growth under former president Chen Shui Bian, who failed to develop co-operation with Beijing.
Warming relations between Taiwan and China have lifted Taiwan’s economic outlook since the beginning of this year and given the local stock market an important boost.
Taiwan’s estimated 2,100 accountants could see a 25 percent increase in demand for their services within the next three years, according to the local newspaper Economic Daily News. The report forecasts a further 5 percent increase during this period if another 250 companies list on the Taiwan Stock Exchange in response to government tax incentives and other initiatives to persuade Taiwanese companies in China to list in Taiwan.
Big Four dominance
The Big Four audit about 84 percent of Taiwan’s public listed companies, according to the National Federation of CPA Associations of the Republic of China (NFCPAA). Medium-sized accounting firms audit the remainder as local regulations specify audit firms must employ a minimum of three CPAs to audit a public company.
Big Four firms employ about 18 percent of CPAs in Taiwan. Second-tier accounting firms employ about 15 percent of CPAs and sole proprietors account for the remaining 67 percent.
Taiwan’s planned adoption of IFRS will present accounting firms, especially sole practitioners, with new challenges.
In May, Taiwan’s Financial Supervisory Commission (FSC) announced a two-phase timetable for listed and non-listed companies to adopt IFRS.
Local companies listed on the Taiwan Stock Exchange or the Gre Tai Securities Market and financial institutions under FSC’s supervision must adopt IFRS by 2013.
Non-listed companies, credit co-operatives, credit card companies and insurance companies must adopt IFRS by 2015.
The Taiwanese government previously hesitated on IFRS adoption due to uncertainty over whether the US would adopt the international standards.
The Big Four encouraged the government to proceed due to increased foreign shareholding in Taiwanese companies, which has resulted in demands for higher standards of financial reporting. However, small businesses opposed IFRS adoption, saying they do not have the resources to meet the requirements.
“IFRS has recently become a hot topic between the government, academics and practicing accountants,” says Roger Shih, an international affairs and audit committee member at Taipei Provincial CPA Association, one of the three bodies that form the NFCPAA.
Amendments to Taiwan’s Certified Public Accountants Law that were passed on 1 January 2008 are expected to boost the quality of accounting services and bring Taiwanese accounting rules in line with international standards.
One amendment aims to ensure auditors play their part in preventing corporate fraud similar to that which occurred in the collapse of hardware manufacturer Procomp Informatics in 2005 and the Rebar Group in 2006-2007.
But the most important change clarifies accounting firm liability. This could cause a wave of mergers among small and medium accounting firms as they seek to achieve the economies of scale needed to operate viable practices. These mergers would be a new phenomenon in Taiwan where most businessmen want to retain their autonomy.
Final details of the amendments are still being sorted out between the FSC and NFCPAA, but the revised law is expected to have a greater impact on mid-tier and small firms than the Big Four.
“Under the new CPA Law, accounting firms are allowed until the end of 2009 to decide which status they will take,” Shih remarks. “Accounting firms are waiting, no one has made any announcements yet. They are thinking of their taxation exposure as they could be liable to pay business tax. At present accountants just pay personal income tax.”
The NFCPAA is currently campaigning for the government to waive business income tax.
Meanwhile, Taiwan’s policy of developing closer relations with China is encouraging the growth of closer ties between the Taiwanese and Chinese accounting professions.
This process is expected to continue as economic co-operation between Taiwan and the mainland expands. An economic co-operation agreement between the two countries is due to be signed this year.
The government is also reviewing Taiwan’s taxation system, including corporate tax rates and incentives. Corporate tax will be reduced from 25 percent to 20 percent from 1 January 2010 as part of government efforts to attract investment to Taiwan and encourage Taiwanese companies to list their China operations in Taiwan.
The Big Four and some mid-tier accounting firms in Taiwan and China already offer cross-border services to clients with business activities in both territories. Development of ties by Taiwan and China’s accounting professions is one of the topics discussed by NFCPAA and its CPA association members during regular meetings with the Chinese Institute of Chartered Public Accountants (CICPA) and the provincial CPA organisations across China.
“At present it is not possible for Taiwanese and mainland accounting firms to join or merge, but some accounting firms in Taiwan and China have co-operation arrangements for client referral, information sharing and other matters,” Shih explains. “Some Taiwanese accounting firms doing this are linked to a mid-tier international practice.”
The Taiwanese government has no restriction on Taiwanese accounting firms’ relations with mainland Chinese accounting firms but the Taiwanese government does not accept Chinese accounting firms’ audit reports except from the Big Four, Shih says.
Of Taiwan’s estimated 2,100 CPAs, about 1,800 work in the capital, Taipei. Most of the remaining 300 are in Kaohsiung.
Almost 95 percent of CPAs are thought to be in public practice. The Ministry of Finance, Ministry of Justice and other government departments employ a combined total of about 100 accountants. Relatively few qualified CPAs work for industrial or commercial organisations.
As a large number of manufacturing companies have moved operations from Taiwan to China during the past decade, the accounting profession’s workload has declined.
“There is an oversupply of accountants in Taiwan,” Shih notes.
“Sole practitioner accounting firms now do various jobs – they consult for private companies, do tax work, also personal finance, teach in schools and other things.
“They do not specialise in one area. They do many things.”
Another reason competition among accounting practices has intensified is accountants in Taiwan share the accounting market with bookkeeping specialists who do bookkeeping, tax work and accounting.
“They cannot do audit but they can do consulting for tax and accounting. Their market share is growing as they are cheaper than accountants,” Shih explains.
Many bookkeepers are early retirees from government departments who have good connections with government agencies and find it easy to attract private clients.
“Their clients think they can solve problems for them because of their connections in government. Since 2003 they must be licensed. They were not licensed before,” Shih says.
Most prospective accountants study accounting at local universities. About 40 universities offer accounting courses. Graduates then join an accounting firm for a minimum of two years in an accounting related position to get a CPA licence. The final CPA exam pass rate is about 16 percent each year.
With a pass rate that low, the profession may be over staffed and under-worked, but at least there are no floods of new entrants.
The profession will be looking forward with hope that the improved business environment will give them room to grow.
The changing shape of the profession
The Taiwanese accounting profession is represented by three associations operating under an umbrella federation. There are local government plans to consolidate this into one body, but this is receiving opposition from China.
The umbrella organisation is the National Federation of CPA Associations of the Republic of China (NFCPAA), which was founded in Nanjing, China, in 1946.
The three groups the NFCPAA is comprised of are the Taiwan Provincial CPA Association, Taipei City CPA Association and Kaohsiung City CPA Association.
CPA members pay an annual fee to the associations, which in turn fund the NFCPAA. There is no government funding. The three associations also appoint delegates to the NFCPAA’s committees.
The Taiwan Provincial CPA Association was set up in 1950 and covers the whole of Taiwan including the capital, Taipei, in the north and the second-largest city, Kaohsiung, in the south.
Following two decades of economic development that caused rapid growth in Taipei and Kaohsiung, Taipei CPA Association was set up in 1970 followed by Kaohsiung CPA Association in 1979. Practising CPAs must register with two of the three associations, which allows them to practice either in Taipei and other areas excluding Kaohsiung, or Kaohsiung and other areas excluding Taipei.
CPAs must register with all three associations to practice throughout the whole of Taiwan.
The role of NFCPAA includes overseeing the education of accountants and acting as a communications channel between the accounting profession and the government.
The associations provide staff for service centres in the offices of the Ministry of Finance, the Ministry of Economic Affairs, the Taipei and Kaohsiung national tax administration offices, and the main national tax administration offices throughout Taiwan.
Practising accountants are regulated by the Commercial Department of the Ministry of Economic Affairs. In addition, the government’s Financial Commission controls CPAs that audit listed companies. Consequently, some accountants are regulated by two organisations.
The Taiwanese government has plans to reorganise the accounting profession’s current structure, replacing the NFCPAA and three CPA associations with a single unified body representing Taiwan’s accounting profession. However, this remains stalled due to opposition from Beijing.
“It is impossible to merge as we have to have relations with China’s accounting profession and China wants to deal with three local accountant associations in Taiwan and not one island-wide body,” explained Roger Shih, an international affairs and audit committee member at Taipei Provincial CPA Association.
Staying in favour with the Chinese profession is important as the Taiwanese organisations undertake joint activities with the Chinese Institute of CPAs (CICPA) and want this to continue, Shih said.
The NFCPAA meets with the CICPA annually and also meets regularly with CICPA provincial associations.
“Most of the issues we discuss are how we should co-operate in business to serve Taiwanese companies in China; also, the tax situation, labour laws, customs regulations and other matters, and their impact on business,” Shih said.