In any contemporary operating organisation, progress that the company is making is recorded as basis for, among a host of other essential things, decision-making and as a benchmark for measuring the firm's performance for the period under scrutiny (Ali, A 1993 and Pike, R & Neale, B 1999). A financial situation analysis is one such yardstick that documents current and future financial situation in an attempt to determine a financial strategy to help achieve organisational goals. As formally defined by Riahi-Belkaoui in 1998, financial analysis 'is an information processing system used to provide relevant information for decision making' (p. 1). The main sources of information for such analyses are published financial statements of the concerned company. Various accounts from published financial statements are evaluated in relation to each other to form performance indicators, which are then compared to 'established' standards i.e. ASA570. These performance indicators are better known as ratios, and constitute the main tools of conventional financial analysis. For the last several years, businesses have seen the rapid growth of the number of firms offering financial situation analysis services. This serves as a proof that more and more organisations are realising the importance of the analysis of their financial situations in order to keep up with the demands of the business world nowadays.
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This paper evaluates and analyses the factors in auditing procedures of HSBC with respect to ASA570. The main purpose of this paper is to examine the factors and business risks involved in auditing procedures. Basically, this paper will be discussing the business risks countered and considered by HSBC.
The Hong Kong ad Shanghai Banking Corporation Group was established in 1865 to finance the growing trade between China and Europe, and is one of the largest banking and financial services organisations in the world. Its international network comprises over 9,500 offices in 76 countries and territories in Europe, the Asia-Pacific region, the Americas, the Middle East, and Africa ('Who is HSBC?' 2006). Through an international network linked by advanced technology, including a rapidly growing e-commerce capability, HSBC provides a comprehensive range of financial services, including personal financial services, commercial banking corporate, investment banking and markets, private banking, and other activities ('Who is HSBC?' 2008).
This company has been developed successfully to become a true global bank, being the largest bank in Hong Kong and the largest foreign bank in China. It emphasises the importance of building shareholders' value, and believes in the values and talents of its own employees, which are employed and spread all over the world. HSBC wishes to stay ahead in a very competitive global financial market, and by maintaining a great brand name, an established customer base, good and loyal employees, tight control over operating costs and constant adjustment of business strategy to cater to customers' needs, it maintains its success in its leadership position in Hong Kong's highly competitive banking industry.
International Financial Reporting Issues
In global business, financial reporting is one of the factors that need consideration not only by the business organization itself but also by the global community especially to those who are responsible in setting up the international financial reporting standard (IFRS) and GAAP. Currently, the Unites States are still using the old GAAP and the rest of the world uses the IFRS, but there is a convergence project. The objective of this project is to eliminate a variety of differences between the two.  Basically, there is an agreement between US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) to make a high quality, common accounting standards for use in the world's capital markets. From this convergence issues, the rise of an argument that both IFRS and GAAP has their weaknesses shows significant impact to business. Meaning to say, the convergence project of both IFRS and GAAP justified the fact that these standards are not the standard of all business. Thus, the cons and pros of IFRS and GAAP argued that whether or not one global standard is best for the investing community. Basically, some groups contest the convergence, saying that conflicting auditing and imposition of international rules make it hard to guarantee credible financial statements. Significant barriers still need to be conquered in accordance to the convergence to one international set of accounting rules. Those barriers include: expected corporate tax impacts, time necessary to convert existing accounts by CFO's and tax directors, outcome on the U.S. Uniform CPA Exam and sufficiency of training for U.S. investors as well as U.S. audit firms. Unless those obstacles are addressed soon, the convergence project will go on to run into resistance in the U.S. markets (Hunt, I. 2001).
Always on Time
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On the other hand, the idea of having one sole set of standards globally is appealing to others. This standard will finally lead to investment assessments on a global foundation as well as enable cross border business to be more reliable and transparent. But the continuing problem in convergence is that the International Accounting Standard Board lacks the resources and the legal authority for effective implementation actions. However, the SEC approved this convergence since they believed in the importance of effective oversight, not only in the development of high quality accounting and auditing standards, but also in reinforcing the application of accounting standards by registrants and their auditors in a rigorous and consistent manner and in ensuring a high quality audit function. In a recent speech, Commissioner Hunt of the SEC noted, "If we are going to set high standards to ensure transparency and comparability but then not enforce them, we have not accomplished our goal" (Hunt, I. 2001).
Enforcement seems to be a significant area of concern for the SEC in considering the global financial reporting framework. Through its review and comment process, the SEC is currently able to review and comment on US firms' application of GAAP and related SEC disclosure requirements and the same significant interpretive and enforcement role would occur if international standards were used to prepare financial statements included in SEC filings.
Global Development Strategy of HSBC
It has been reported that at the end of 2003, HSBC launched the 'Managing for Growth' program, which is a strategic plan that provides the company with a blueprint for growth and development from 2003 to 2008 ('Strategy' 2008). This strategy builds on the company's strengths and addresses the areas where further improvement is considered both desirable and attainable. HSBC's core values are integral to its strategy, in communicating them to customers, shareholders and employees, and comprise an emphasis on long-term, ethical client relationships, high productivity through teamwork, a confident and ambitious sense of excellence, being international in outlook and character, prudence, creativity and customer-focused marketing ('Strategy' 2008). In addition, there are several key elements in achieving HSBC's global development objectives, and these include accelerating the rate of growth of revenue, developing the brand strategy further, improving productivity, and maintaining the company's prudent risk management and strong financial position. Developing the skills of their employees is also given emphasis to ensure that all employees understand how they can contribute to the successful achievement of HSBC's objectives ('Strategy' 2008).
The global development strategies of HSBC would not be appreciated without the concrete examples of their projects, which indicate the changes and success in the market. Annesley (2008) reports that in 2004, HSBC spends more that 2.5 billion euros a year on IT systems and in-house application development, and set itself a target of cutting per-unit processing costs by 10% every year. In 2006, HSBC expects to make an 11% saving on transaction processing this year after cutting 8.8% off costs in 2005, after 370 successful system deployments in the past three years, and the continued expansion of its pool of global platforms (Annesley, 2008). In addition, the bank has also set up a single, self-managed global network and consolidated on four global data centres and two regional ones. Moving application development work to low-cost centres such as India is another key part of the company's strategy, leading the bank to estimate that 4.2% of its technology development work takes place in low-cost locations, such as India and the Philippines (Annesley, 2008).
In connection to this, Fair Isaac Corporation, the leading provider of analytics and decision management technology, announced that HSBC would utilise Fair Isaac's proven software technologies, analytic models and development processes for Enterprise Decision Management, and this integrated solution will help HSBC grow its ability to optimise profitability across the bank's consumer lending portfolios, and support its long-term growth objectives in the Asia-Pacific region ('Press Release' 2008). Moreover, to build upon rapid growth of its credit card portfolios and strengthen its leadership in Asia-Pacific's booming consumer lending market, HSBC required a highly scalable solution to roll out optimised decision strategies across products, countries and decision areas ('Press Release' 2008).
It is evident that the Hong Kong and Shanghai Banking Corporation or HSBC invest on software programs and applications, in response to the fast-paced technological changes today. With the use of the Internet and other web-based applications, it is easier for the company to reach their customers globally and serve them better and faster. With the pleasant response of consumers to the efficient use of the World Wide Web, HSBC will not have a hard time relating to their customers globally, and even implementing projects and new programs to serve and relate to their customers effectively.
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As shown in the Global Development Strategy of HSBC, the banking industry is fact becoming a major contributor to the business sector. Over the next years, online advertising continues to grow in importance as a mass marketing medium; attracting significant revenues away from other media. Thus these two shifts have large impacts in the marketing field. Marketers in the banking industry need focus on how to best present their services to an increasingly diverse and more informed customers, at the same time maximising the use of the Internet as a potent marketing tool. Additionally, globalisation calls for marketers to design strategies which will ensure that the largest scope of market is taken hold of. With customers increasingly willing to switch banking companies because of the wide variety of choice available, it is of paramount importance that the Internet be used to promote excellent marketing strategies. With this regard, ASA570 variables should be considered in HSBC, issues regarding financial and operating procedures must be evaluated. The financial concern of ASA570 is most likely related on the net liability or net current liability position. The fixed-term borrowings approaching maturity realistic prospects of renewal or repayment or excessive reliance on short-term borrowings to finance long-term assets should be also viewed by HSBC as part of their auditing procedures. The indications of withdrawal of financial support by debtors and other creditors, negative operating cash flows indicated by historical or prospective financial reports, adverse key financial ratios, substantial operating losses or significant deterioration in the value of assets used to generate cash flows and arrears or discontinuance of dividends must be considered since these are factors essential in ASA570. The inability to pay creditors on due dates, inability to comply with the terms of loan agreements, change from credit to cash-on-delivery transactions with suppliers, and inability to obtain financing for essential new product development or other essential investments must be considered by HSBC to make a good auditing procedures.
In accordance to this development, extensive auditing procedures must be practiced. This includes everything from external audits of risk management policies and procedures to internal reviews of quantitative exposure measurement models. In essence, this process involves the evaluation whether or not its risk management process is working properly and efficiently (Culp 2001). This must be done to assess if the company addresses the problems and risks being identified in the first process. Without this step, the HSBC would not be able to come up with policies and regulations regarding ASA570, and would not be able to know if their measuring, monitoring and controlling processes are effective enough to suggest improvement of their operation and profit.
From the given Financial Results (see appendix) and factors to be considered based in ASA570, HSBC countered the risk and classified it based on categories i.e. credit risks, liquidity and funding risks, market risks, operational risks, reputation risks, insurance risks and pension risks. The processes or steps could be a possible means of providing solutions or answers to the problems or crises being faced by the HSBC, and this includes the policies stated in ASA570.
Credit risk-Credit risk is the risk of financial loss if a customer or counterparty fails to meet an obligation under a contract. It arises principally from lending, trade finance, treasury and leasing business. It also arises when issues of debt securities are downgraded and the value of HSBC's holdings of assets falls.
Liquidity and funding risk- The objective of HSBC's liquidity and funding management is to ensure that all foreseeable funding commitments and deposit withdrawals can be met when due, and that wholesale market access is coordinated and disciplined.
Market risk- Market risk is the risk that movements in market elements, including foreign exchange rates, commodity prices, interest rates, credit spreads and equity prices, will reduce HSBC's income or the value of its portfolios.
Operational risk- Inherent in every business organisation, operational risk is the risk of loss arising from fraud, unauthorised activities, error, omission, inefficiency, systems failure or external events such as litigation risk.
Reputational risk-The safeguarding of HSBC's reputation is of paramount importance to its continued prosperity and is the responsibility of every member of staff. Reputational risks can arise from social, ethical or environmental issues, or as a consequence of operational risk events.
Insurance risk- The principal insurance risk faced by HSBC is that the cost of claims, along with the cost of acquiring and administering business, may exceed the aggregate amount of premiums received and investment income.
Pension risk- HSBC operates a number of pension funds throughout the world. The primary risks are that investments deliver a return below that required to provide the projected plan benefits, that interest rates or inflation cause an increase in scheme liabilities, or that scheme members live longer than expected.
Aside from these risks, HSBC needs to look and consider the following risks in order to continue and develop their business operation and enhance their financial status.
Regulatory and compliance risk- HSBC operates globally in which most of the greatest strategic challenge facing by global businesses is this type risk. With regards to this, HSBC needs to educate employees, implement a fraud reporting hotline, develop good policies that help to ensure ethical practice and keep corporate counsel on speed dial.
Global financial shocks- Global financial shock is also an issue in HSBC. Since HSBC is a global business, it is not exempted in this type of risk. Basically, global financial shocks are most like concerned to the inflation and deflation issues of certain countries in which HSBC was operating.
Aging consumers and workforce- According to the experts, aging consumers and workforce are really a factor in global businesses. This type of risks is also apparent in HSBC. Meaning to say, the company needs to reform their global strategies to maintain and enhance their appeal to consumers. Actually, areas such as asset management and insurance are experiencing dramatic shifts in demand as their consumer age. HSBC is facing severe competitive challenges as a result of their aging workforces. To be competitive, HSBC need to better understand specific needs of these new consumers.
Emerging markets- In accordance to growth, emerging markets also create great risks. Global companies like HSBC will need to partner/form networks with firms in many markets. There are also currency, regulatory, operational, cultural and language, risks in these countries, especially as firms manage outsourced business and supply chains in these markets.
Industry consolidation/transition- As part of the development in business, HSBC would continue to create a key strategic challenge because of the changes in underlying structural trends, GDP growth, such as population growth, restructurings, consolidation and spin-offs, mergers driven by competitive pressure, and need for acquisitions to meet growth targets.
Energy shocks- Shocks in energy prices and access to supplies are challenging not only to the energy sector but also to other business organisations like HSBC since it can also trigger economic shocks that could impact the business operation of HSBC.
Execution of strategic transactions- In accordance to this factor, there is an ultimate risk that transactions undertaken in response to business consolidation may fail to deliver, not because they are poorly envisioned, but because of a failure to meet business challenges.
Cost inflation- The return of high inflation is a major risk. HSBC carefully considered this type of risk to avoid business failure as considered in ASA570.
Radical greening- HSBC should consider this risk since there are only little efforts that the company given in this type of variable. Increasing environmental concerns from the voluntary world of corporate social responsibility - to hard regulatory and economic necessity. Radical greening is a strategic risk, partly driven by the consumer and regulatory responses to climate change, and also by the weather events resulting from climate change.
Consumer demand shifts- The failure to foresee and react to consumer demand shifts driven by demographic shifts, such as rising consumer aging could be a strategic risk when the changes are significant, quick or unexpected.
Risks and ASA570
In accordance to the impact of business risks to the overall operation of HSBC, risks evaluation within the company should comply with the imposed accounting policies e.g. ASA570. From the discussion, HSBC is subject to numerous financial directives and regulations, as well as legislation and accounting standards of a more legal nature. The legislation and consideration of accounting standards in HSBC needs to cover the areas of discussed risks. Basically, risk is not only a source of randomness on the return of investment but also a measure of this variability because the probabilities of various outcomes are known (Stickney & Weil 1997). Meaning to say, risks measures is very vital to the financial stability and application of ASA570 not only to HSBC but also to other business companies.
With regards to the accounting standards of HSBC e.g. ASA570, auditing practices should conform to the identified risk. ASA570 role is for inspection and verification of the accuracy of financial records and statements. Private businesses and all levels of government conduct internal audits of accounting records and procedures. Internal audits are conducted by a company's own personnel to uncover bookkeeping errors and also to check the honesty of employees. In large companies, internal auditing is an ongoing procedure. A company that trades stock on a registered stock exchange or is preparing to issue new shares of stock must submit to an external audit. These companies are known as publicly traded companies (Solvell. O & Zander, I 2000). An external audit is used to give the public a true statement of a company's financial position. It is made at least once a year by public accountants who are not regular employees of the company. The auditors make sure that the company has followed proper accounting procedures in its financial records and statements in accordance to risks so that the company will counter the possible business failure. They compare the current financial statements with those of the previous year to determine whether the statements are calculated consistently. If they are not, they present a distorted picture of the company's financial position. In global context, auditing models used by different companies is affected by implementation of global accounting standards.
Suggested Auditing Strategies
Given the threats and the risk management procedures it must pass through, it is essential to discuss some possible strategies its implementation. From the policies given by ASA570, HSBC may manage them by using existing assets or existing resources as a counter risk, and involves improvements to existing methods and systems, changes in responsibilities, improvements to accountability and internal controls. In addition, the strategy would be helpful in building awareness of risk management initiatives and culture, in widening their skills through formal and informal training, in increasing the knowledge of employees through sharing best practices and experiences, and in building capacity, abilities and skills to work in teams ('Integrated Risk Management Implementation Guide' 2004).
Another strategy is through contingency planning, which allows the HSBC to take action immediately, with the minimum of project control (From 'Risk Analysis & Risk Management' 2007). In the event that a serious unpleasant incident happens, HSBC has the responsibility to recover from the incidents in the minimum amount of time, with minimum interruption, and at minimum costs, which requires careful preparation and planning ('Contingency Planning and Disaster Recovery Guide' 2002). The primary step to be undertaken in using a contingency plan is to develop a team representing all functional areas of the company. The second step is to prepare a complete list of the potentially serious events, which could influence the normal operations of the business. Third, is the development of the plan, which involves the identification of effects or aftermaths of the incidents, involving emergency services and agencies that could help the company, and identifying the company's functions that should continue functioning during the incident. Fourth is testing and experimenting with the plan under appropriate conditions to produce reliable results. Fifth involves personnel or employee training, to make them aware of the changes in the company, and to effectively distribute information and knowledge to the whole company. Lastly, contingency planning involves maintaining the plan, to update business events and accommodate further changes ('Contingency Planning and Disaster Recovery Guide' 2002). The use of the contingency plan as a risk management strategy in the operation of HSBC would be important, because with contingency planning, HSBC will be able to assess the importance and the utilisation of ASA570 policies, and the allocation of resources for its operation. An additional strategy to consider is through investment of new resources, which includes insuring the risk ('Risk Analysis & Risk Management' 2008).
From the business strategies, risks and auditing procedures of HSBC, this shows that HSBC is obsessed with customer value and strives to be an "all-weather umbrella" to its customers, by adopting different strategies for different situations. It had to diversify in order to balance revenue and expenditure, minimise risk and stay profitable, with an equal importance in its ability to anticipate change. The investment banking business of HSBC has begun a strategy of significant expansion and development with one clear objective, which is to establish themselves as one of the world's top three investment banks, and these strategies are based around a philosophy of organic growth and a transition towards becoming a client-oriented investment bank.
With this information, the company must continue to find innovative software programs and relate effectively to other companies that produce these software programs to become updated with the latest improvement in the World Wide Web. The company must efficiently and effectively create a good relationship with their customers and shareholders, to continually operate. HSBC must continually conceptualise and implement good projects to be able to set trends in the banking industry. Aside from developing marketing strategies and evaluating the auditing procedures, the company must focus on building employee and customer relationships, in accordance to strategic marketing concepts, for it is essential to determine and focus on the needs of the customers, as customers are the reason for being alive in the business and marketing industry.
On the other hand, as the accounting information particularly in HSBC has many shortcomings, it can be used as a tool in achieving and supporting improved business outcomes. The central issue is whether financial accounting and reporting standards should be a scrupulously neutral exercise, self-disciplined to measure and report business activities as objectively as possible in order to provide information that can be used with confidence as a basis for making business decisions. Or should it be directed instead by concern for the society at large? In other words, should the primary concerns of accountants and accounting standard setters be the reliability and objectivity of reported information, or should they focus first on the possible environmental and social consequences of the information? That question, of course, raises others regarding the nature and uses of information in general.
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