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Article 6
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Review Guidelines
The provisions of this Article apply to all reviews of applications for initial stock listings. Personnel assigned to handle an application for securities listing shall, after receiving the application, review the application, the supporting documents, and all information provided by the applicant company, underwriter, or CPAs, and take the particulars listed below into consideration:
- CPA Audit or Review Report:
- If there is a change of CPAs in the year of the application or the most recent three fiscal years preceding the application (or the year of the application and most recent two fiscal years in the event of an applicant for listing on the Taiwan Innovation Board), the issuing company, the original CPAs, and the succeeding CPAs shall submit a written report explaining the change of accountants, and the case handlers shall ascertain the facts and reasons underlying the change.
- Where the review report issued by a CPAs on the interim financial report for the most recent period of the year of application contains anything other than an unqualified conclusion, the reviewers shall take note of the facts and reasons underlying the report, and the extent to which such report affects the financial report.
- The accounting firms that audit the financial reports for the year of application and the most recent three fiscal years shall be the joint accounting firms approved by the competent authority. The accounting firms that audit the financial reports of an issuer applying for listing on the Taiwan Innovation Board for the year of application and the most recent two fiscal years shall be the joint accounting firms approved by the competent authority.
- The audit report shall state that it is prepared in accordance with the regulations prescribed by the competent authority governing the preparation of financial reports by each enterprise.
- The CPAs of the applicant company for the most recent two fiscal years shall issue an audit report with an unqualified opinion and without reference to any other accountant's audit, provided in the event of an applicant for listing on the Taiwan Innovation Board, its CPAs for the most recent fiscal year shall issue an audit report with an unqualified opinion and without reference to any other accountant's audit. If a major subsidiary of the applicant company is included in the CPA-reviewed financial report for the most recent period of the year of application, the CPAs shall issue a conclusion on the major subsidiary without reference to any other accountant's review.
- None of the following circumstances may apply to the CPAs engaged by the applicant company, but this restriction does not apply if the disciplinary action or disposition is a warning or reprimand, or a disposition of rejecting the CPA-attested financial reports of the listing applicant company for a certain period by TWSE or TPEx, and the cause in fact for such disciplinary action or disposition occurred five or more years before the date of application for listing:
- In the preceding three years, the CPAs have been subject to disciplinary action or disposition in the form of a warning or above.
- The CPAs have been subject at least twice to a public announcement by the TWSE or TPEx in the most recent year under the TWSE Regulations Governing the Handling of Errors by Certified Public Accountants in Auditing of Initial Applications for TWSE Listing or the GreTai Securities Market Regulations for Handling Deficiencies in Certified Public Accountants' Reviews of GTSM Listing Applications that the financial reports of TWSE or TPEx listing applicants that have been attested by the CPAs are rejected for a certain period.
- Content of financial reports:
- Whether the kind, format, and content comply with the regulations prescribed by the competent authority governing the preparation of financial reports by each enterprise.
- Overall analysis of the report by comparing it with those from other companies in the same industry, to ascertain emerging trends and possible irregularities in the applicant company's financial condition and its profitability.
- If unusual accounting items are found in the financial report and a large sum of money is involved, the item in question shall be audited to ascertain its composition and categorization.
- Status of adjustments or improvements required to be made to the financial statements as instructed in writing by the competent authority.
- If any special or irregular circumstances are found with respect to the following items, the case handler shall examine the matter in depth by reviewing the CPAs' working papers.
- Transactions between major related parties: any irregular financial arrangements or profits changing hands in large transactions between related parties.
- Any improper or irregular transactions with respect to the categorization, transfer, or accounting treatment of financial assets. Case handlers shall further determine whether there have been any irregularities pertaining to loss allowances set aside for receivables, and allowance for inventory valuation losses by the company's important subsidiaries, loans of funds to others, or endorsements or guarantees extended for others, and whether any financial statements must be adjusted.
- The status of application for loss allowance and the assessment of the auditing CPAs.
- Method of appraisal and basis of entering into the account books of inventory: where there are large surpluses or inventory losses, the reasons shall be investigated.
- Any irregular changes to property, plant and equipment involving transactions among related parties.
- The accounting treatment of capitalization of interest.
- Leasing: The accounting treatment and categorization of business leasing or financial leasing.
- Deferred assets: Those that shall be listed as expenses or losses for the current month, such as loss of profit due to suspension of work, start-up expenses, employee benefits, etc., may not be listed as amortization of deferred assets.
- Monetary transactions: The interest rates, terms, and payment status on large interest-free and low interest loans obtained from affiliates, shareholders, or related parties, and high-interest loans to affiliates, shareholders or related parties.
- Retirement rules and pension expense withholding status.
- Accounting treatment of income tax and off-settings of assets and liabilities with respect to deferred income tax.
- Circumstances of disclosure of contingent liabilities and status of lines of credit obtained jointly from banks by the applicant company and its affiliates.
- Assets obtained on installment plans and accounting treatment of sales.
- Gross profit margin on sales of inventory, inventory turnover rate, and accounts receivable turnover rate for the most recent two fiscal years (or most recent fiscal year in the event of an applicant for listing on the Taiwan Innovation Board).
- Reasons for any large non-operating revenue or expenses.
- Whether in the most recent fiscal year there have been any irregularities in the process of capital formation, or sources or use of funds.
- Whether the party billed for each account receivable is the party to whom the item in question was sold. If any mismatch is found, the case handler shall determine the reason and make a judgment as to whether the mismatch is legitimate.
- If any new client taken on by the applicant in the most recent two years (or most recent fiscal year in the event of an applicant for listing on the Taiwan Innovation Board) is a related party or ranks among the applicant's ten largest clients, the case handler shall audit the applicant's transactions with said client, ascertain whether the client is a related party, check for any differences and similarities between the terms of transaction contracts with the new client and terms offered to regular clients, and determine whether there were any major or irregular transactions around the date of the balance sheet, and whether there have been any subsequent recurring or material returns of shipments or any irregular subsequent receipt of funds, so as to verify that sums accounted for as sales revenue conform to the principle of realized revenue.
- Whether any of the enterprise's receivables are overdue. If they are, the case handler shall determine the reason and make a judgment as to whether there is any irregularity.
- Financial forecast information:
Gain an understanding of the applicant company's production of financial forecast data, and when necessary require the applicant company to provide financial forecast data for each quarter during the review period. The data shall be provided only for use as a reference in the review of the given case, and may not be made public or otherwise disclosed.
- Internal control mechanisms and declarations thereof, and project audit reports:
- Ascertain the status of the prescription and implementation of internal control systems.
- Inspect whether the applicant company has performed a self-inspection of the effectiveness of the design and implementation of its internal control system and produced an Internal Control System Declaration in compliance with the Regulations for the Establishment of Internal Control Systems by Public Companies, and obtained a CPA project audit report with an unqualified opinion.
- Self-inspection of internal control systems and performance of project audits by CPAs shall cover the following periods: For applications submitted from February through April, the period covered shall be 1 January through 31 December of the previous year; for applications submitted from May through July, the period covered for shall be from 1 April of the previous year until 31 March of the year of application; for applications submitted from August through October, the period covered shall be from 1 July of the previous year until 30 June of the year of application; for applications submitted from November through January of the following year, the period covered shall be from 1 October of the previous year until 30 September of the year of application. Two or more practicing CPAs of a joint accounting firm shall jointly perform the inspections or audits and issue a report. The TWSE shall separately adopt the Operating Procedures for Review of Internal Control Systems Inspection Reports Issued by CPAs. In the event of an issuer applying for listing on the Taiwan Innovation Board, the internal control systems and performance of project audits by CPAs shall cover the following periods: For applications submitted from February through April, the period covered shall be the third and fourth quarters of the year before application; for applications submitted from May through July, the period covered for shall be the fourth quarter of the year before application and the first quarter of the current year; for applications submitted from August through October, the period covered shall be the first and second quarters of the current year; for applications submitted from November through January of the following year, the period covered shall be the second and third quarters of the current year.
- During the review process, the case handlers shall note whether the CPAs have complied with the Auditing Standards Committee’s Engagement Standards, the Regulations for the Establishment of Internal Control Systems by Public Companies and all other applicable laws and regulations and shall, through scrutiny of the CPAs' working papers for the relevant fiscal year, fully ascertain the tests applied, scope, time frame, characteristics, whether there has been full factual disclosure, whether the accountant has omitted any procedural requirements (e.g. monitoring of remaining inventory, certification and reconciliation of bank account balances) and failed to adopt other substitute procedures. If it is determined that the auditing procedures executed by the CPAs are insufficient to reach the necessary conclusions, the case handlers shall request that the accountant provide supplementary explanations.
- The case handlers shall inspect the format and content of the underwriter's assessment report:
- Whether the report has been compiled in accordance with the requirements of the TWSE Directions Governing the Particulars to be Recorded in the Securities Underwriter's Assessment Report for Initial Listing of Securities and signed by the lead underwriter and sponsoring underwriter. The TWSE Directions Governing the Particulars to be Recorded in the Securities Underwriter's Assessment Report for Initial Listing of Securities shall be separately promulgated by the TWSE.
- Whether working papers have been prepared in accordance with applicable regulations of the TWSE.
- Whether a Declaration has been produced testifying that the assessment report is free of any misrepresentations or nondisclosures.
- Prospectus:
The case handlers shall examine the format and content of the prospectus to ensure that it has been compiled in accordance with the TWSE Regulations Governing the Particulars to be Recorded in Prospectuses for Initial Listing of Securities and other relevant regulations.
- Checklist of legal issues of issuers applying for a listing:
The case handler shall ascertain whether the lawyer filling out the checklist has compiled the working paper in accordance with the instructions on the preparation of the checklist and, if the contents of the comments section or results of review indicated in the checklist are not adequately confirmed by the lawyer’s working paper, shall request the lawyer to provide a supplementary explanation.
- The case handlers shall ascertain whether any of the negative criteria detailed in the TWSE Rules Governing Review of Securities Listings applies to the applicant company, whether it has complied with instructions contained in official notifications by the competent authority, and whether there were significant changes in the applicant company's most recent capital increase plan or any failure to carry out those plans. Such information shall be provided in detail in the review report and working paper. If any nonconformance with regulations is found, the case handlers shall attach their opinions on treatment, and submit them for further review by higher levels.
- The case handlers shall visit the sites of the applicant company's offices and factories and ascertain the operational experience and philosophy of the applicant company's responsible person. If irregularities are found during the documentary review, the case handlers shall examine the working papers prepared by the CPAs or other documentation provided by the applicant company, the CPA, lawyer and the underwriters. If after due examination of the above, the case handlers are still unable to gain a complete picture of the applicant company's operations, they shall gain an understanding during an on-site audit of the applicant company. If the applicant company is an investment holding company or a financial holding company, all above procedures shall be conducted for companies controlled by the applicant or for subsidiaries of such controlled companies. However, where the controlled companies or subsidiaries are located offshore, a documentary review shall suffice.
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