| Title： |
Taiwan Stock Exchange Corporation Procedures for Review of Financial Reports of Listed Companies(2007.03.29) |
| Date： |
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Article 1
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In order to improve the quality of information disclosure by listed companies, these Procedures are adopted pursuant to Article 34, paragraph 1, subparagraph 7 of the Regulations Governing Stock Exchanges, and letters of the Securities and Futures Commission, Ministry of Finance: 16 May 1995 Letter No. (84)-Taiwan-Finance-Securities-VI-01214; 29 July 1995 Letter No. (84)-Taiwan-Finance-Securities-VI-31749; 12 February 1997 Letter No. (86)-Taiwan-Finance-Securities-VI-76219; 26 April 1997 Letter No. (86)-Taiwan-Finance-Securities-VI-02787; 6 May 1997 Letter No. (86)-Taiwan-Finance-Securities-VI-28073; 8 October 1998 Letter No. (87)-Taiwan-Finance-Securities-VI-02515; and 4 February 1999 Letter No. (88)-Taiwan-Finance-Securities-VI-108824-1.
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Article 2
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These Procedures govern the review of annual, semi-annual, and quarterly financial reports of listed companies forwarded pursuant to Article 36, paragraph 4 of the Securities and Exchange Act or restated pursuant to Article 6 of the Securities and Exchange Act Enforcement Rules, and financial forecasts and relevant documents prepared, updated, corrected, or restated pursuant to the Regulations Governing the Publication of Financial Forecasts of Public Companies ("the Regulations").
Financial forecasts submitted by public companies in their first-time applications for listings of stock shall be reviewed in accordance with these Procedures, excluding Article 11, which shall not be applicable.
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Article 3
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The scope of review for the financial reports of the preceding article shall be, for annual financial reports, the CPA audit reports, financial statements, charts of major accounts, and important notes on the audit; for semi-annual financial reports, it shall be the CPA audit reports, financial statements, charts of major accounts, and important notes on the audit; for quarterly financial reports it shall be the CPA audit reports and financial statements; and for financial forecasts, it shall be the CPA review reports, projected financial reports, financial forecast statements, summaries of significant accounting policies, and summaries of major basic accounting assumptions.
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Article 4
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Reviews of listed company financial reports are categorized as either formality reviews or substantive reviews. Formality reviews of annual, semi-annual, and quarterly financial reports apply to all listed companies. For substantive reviews, selective audits are employed; based on the following criteria, at least 10 percent of listed companies will be selected for reviews of annual financial reports, at least five percent will be selected for reviews of semi-annual and third-quarter financial reports, and at least three percent will be selected for reviews of first-quarter financial reports. A listed company (listings of Taiwan Depository Receipts excluded) shall be selected for review at least once every 5 years.
1. The following criteria shall be used for selection:
(1) Financial criteria:
1. A significant year-on-year decline in operating revenues, operating income, or pre-tax income.
2. Investment losses on an equity-method investee company that reach a specified percentage of the company's current operating income, or total holdings by a subsidiary of parent company equity that reach a specified percentage of parent company equity.
3. Total current purchases (or sales) with related parties equaling 20 percent or more of total purchases (or sales) of the listed company, or, a year-on-year increase in the same of 50 percent or more, in an amount that also equals three percent or more of shareholder equity.
4. A period-end balance of receivables from related parties or advance payments to related parties equaling ten percent or more of shareholder equity, or that increases by 50 percent or more from the beginning of the period while also reaching three percent or more of shareholder equity.
5. Accumulated current asset trades (excluding purchase and sale transactions) with related parties accounting for three percent or more of total assets at period end.
6. A current-quarter increase in loans to others that equals three percent or more of shareholder equity, or accumulated loans to others at period end equal to ten percent or more of shareholder equity.
7. A current quarter increase in endorsements and guarantees equaling ten percent or more of shareholder equity, or accumulated endorsements and guarantees at period end equaling 30 percent or more of shareholder equity.
8. Poor financial ratios.
9. Non-current equity investment that accounts for 60 percent or more of shareholder equity.
10. Low net worth per share.
(2) Non-financial items:
1. Resignation of the chief financial officer.
2. Resignation of the chief accounting officer.
3. Resignation of the internal audit officer.
4. Resignation of the research and development officer.
5. Change of certified public accounts (other than internal accounting firm adjustments).
6. A change in director or supervisor shareholdings.
7. A change of directors or supervisors (including independent directors), or resignation of the chairperson or general manager.
8. A level of director or supervisor compensation found to be unreasonable according to screening criteria in cases where the board of directors is authorized to set compensation according to industry standards.
9. Information filed for the most recent month showing share pledges by directors and supervisors equaling or exceeding 50 percent of total collective director/supervisor shareholdings.
10. Litigation during the preceding year that materially affects the company's finances or business.
11. A financial officer or accounting officer within the second degree of kinship with any director or supervisor.
Any company selected for a review in the previous quarter pursuant to the aforementioned criteria may be exempted from selection in the current quarter.
2. A company selected for review according to any of the following criteria may be exempted if analysis indicates the review is not necessary:
(1) Irregularities are found at the company based on the formality review of its financial reports.
(2) There has been a material change in the managerial control of the company (such as a change in one more than one third of its directors).
(3) There has been a material change in the company's principal line of business.
(4) After becoming a public company, the company's financial reports for the five consecutive preceding years have been audited and certified by the same certified public accountant.
(5) The company has had deficits for the three preceding consecutive years or accumulated deficits have accounted for 50 percent or more of the capital stock listed in its financial reports.
(6) The company shows a year-on-year increase in pre-tax losses equal to 30 percent or more of the capital stock listed in the financial reports.
(7) The company meets any of the criteria specified in subparagraphs 3, 4, and 8 of the preceding paragraph, where the amount in question is material and the company's financial ratios are poor, and the company has also not received a special audit in the previous quarter.
(8) The company has issued corporate bonds whose payment at maturity is uncertain.
(9) The company's cash and cash equivalents account for too high a percentage of the capital stock listed in its financial reports, and it has no capital expenditure plan.
(10) The amounts of the company's prepayments, or changes therein, are material or unusual.
(11) The amount of current period unrealized losses in derivatives trades reaches NT$100 million and accounts for three percent or more of shareholder equity, or the amount of current period open interests for trading purposes accounts for 40 percent or more of the capital stock listed in the financial reports.
(12) The CPA issues an opinion in an annual financial report that reflects divided responsibility and adopts too high a percentage of audit work from other CPAs.
(13) The company has been newly added to the current-quarter Public Bulletin Board of Companies Whose Financial Status Requires Special Attention.
(14) The company is selected as one whose consolidated financial statement risk indicators are comparatively high.
(15) A review of the company is required by the TWSE due to other reasons.
3. During each selection, the TWSE will also randomly choose companies for review according to the following criteria:
(1) Companies that have not been subject to routine regulation, regulation by exception, or substantive review of financial reports during the preceding three years.
(2) Companies with comparatively high non-audit fees (for annual reports).
Formality review of financial forecasts also applies to all listed companies. Selective audits are used for substantive reviews. A company will be selected for review when any of the following circumstances applies, and a test audit may also be performed in each quarter as deemed necessary depending on the circumstances:
1. For listed companies that publicize complete financial forecasts:
(1) The statement is not updated in the current quarter, but in the following quarter.
(2) There is a decline of at least 30 percent in pre-tax income in the updated (or corrected) financial forecast relative to the original financial forecast, where the amount of decline also exceeds NT$200 million.
(3) A company's own un-audited figure for pre-tax income or CPA audited and attested pre-tax income, reported after fiscal year end, declines by at least 20 percent from the figure for pre-tax income in the most recently published financial forecast, while the amount of decline reaches NT$30 million and five-thousandths of the capital stock listed in the financial reports, and also declines by at least 30 percent from the pre-tax income in the original financial forecast and in an amount in excess of NT$200 million.
(4) Pre-tax income in the updated (or corrected) financial forecast changes from surplus to deficit, where the amount of discrepancy also exceeds NT$200 million or the updated (or corrected) pre-tax losses reach NT$50 million.
(5) Questions are raised by external parties about a change in basic accounting assumptions.
2. For listed companies that publish summary financial forecasts:
(1) Pre-tax income in the current quarter, as audited or reviewed by a CPA, has declined by at least 10 percent from pre-tax income for the current quarter in the most recently published financial forecast, with an amount of decline in excess of NT$50 million.
(2) There is a decline of at least 10 percent in pre-tax income for the current quarter in the updated (or corrected) financial forecast relative to the same figure in the original financial forecast, where the amount of decline also exceeds NT$50 million.
(3) Pre-tax income for the current quarter in the updated (or corrected) financial forecast changes from surplus to deficit, where the amount of the discrepancy also exceeds NT$100 million or the updated (or corrected) pre-tax losses for the current quarter reach NT$50 million.
3. Where pre-tax income forecast is presented in interval estimates, calculation of the decline in pre-tax income for companies selected pursuant to the preceding paragraph will use the arithmetic mean of the upper and lower limits of the intervals representing pre-tax income for the current quarter in the original and updated (or corrected) financial forecasts.
The competent authority of the companies selected for review pursuant to the preceding paragraphs may change or adjust the criteria as circumstances require.
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Article 5
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During review of the annual, semi-annual, and quarterly financial reports of a listed company, each item listed on the formality review checklist and substantive review checklist shall be thoroughly checked with respect to whether their accounting treatment violates relevant laws or Generally Accepted Accounting Principles. The following matters shall also be noted:
1. Whether investments in derivatives products have been duly disclosed.
2. Whether there are any irregularities in trades with related parties.
3. Whether there have been any loans granted to others due to financing needs other than company business transactions.
4. Whether there have been any irregularities in the purchase or sale of block assets.
5. Whether there have been any endorsements or guarantees for others based on needs other than company business transactions.
6. Whether the operations of the board of directors comply with regulations.
7. The status of improvement in deficiencies listed in the previous review, or follow-up review of irregularities listed in the previous review.
Items listed in the formality review checklist and substantive review checklist shall each be thoroughly checked during review of financial forecasts, and in addition, the following matters shall also be noted:
1. Whether there were any irregularities in the CPA review.
2. Whether the basic accounting assumptions in the financial forecast are reasonable.
3. Whether there was any irregularity in the timing of the update (correction) or restatement of the financial forecast.
4. Whether all necessary items are included in the summary of major basic accounting assumptions in the financial forecast.
5. The status of improvement in deficiencies listed in the previous review, or follow-up review of irregularities listed in the previous review.
The following matters shall be noted in evaluating whether a listed company has delayed the updating (or correction) of its financial forecast:
1. The discrepancy between the selected company's estimates before the update and its own un-audited figures shall be monitored on a monthly basis, and if the discrepancy has met the standard regarding time for a new update, the reason and the basis for the discrepancy between the standard update time and the actual update time shall be ascertained.
2. The time of occurrence of the cause for a financial forecast correction shall be monitored in order to discover the reason and the basis for the discrepancy between the cause and the actual time of the correction.
3. The supporting evidentiary materials and the reasonableness of the company's explanation regarding the cause of an update (or correction) shall be analyzed.
The following matters shall be noted when assessing the reasonableness of the basic accounting assumptions in the financial forecasts:
1. The major differences between the financial forecasts before and after the update (or correction) shall be compared and the main cause of the differences shall be ascertained, and the reasonableness of materials for evaluation of the basic accounting assumptions shall be analyzed item-by-item.
2. The selected company's historical financial information for the preceding two years shall be analyzed to determine if there are major discrepancies with the financial forecasts for the current year, and their causes and reasonableness shall be ascertained.
3. A relevant analysis report for the industry to which the company belongs shall be obtained, and financial reports prepared by other companies in the industry shall be compared in order to ascertain the nature of the industry's business cycle.
4. It shall be ascertained whether revenues have been overestimated or expenditures underestimated in the pro forma statement of non-operating revenues and expenditures. If the company being reviewed plans disposal of non-current financial assets or major assets, then an objective and accurate price reference or appraisal report shall be obtained as a basis for determining the reasonableness of the figures prepared by the company. When an evaluation uses estimates made according to the equity method for recognition of investment profits or losses, materials related to changes in relevant industries, the same industry, or the securities markets shall also be obtained to facilitate analysis and judgment.
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Article 6
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During the substantive review of annual reviews, semi-annual reviews, quarterly reviews, or financial forecasts, a CPA shall be hired to provide opinions, and the CPA's working papers may be requisitioned when necessary. When a company is listed as a company that must be reviewed pursuant to Article 4, paragraph 2, subparagraph 2, item 4, the CPA's working papers shall be requisitioned in order to ascertain whether the certifying CPA has audited or reviewed the company pursuant to the Regulations Governing Auditing and Certification of Financial Statements by Certified Public Accountants as well as Generally Accepted Auditing Standards or relevant Statements of Auditing Standards.
If a CPA is found after review to have violated the aforementioned regulations, relevant factual evidence shall in each case be submitted to the competent authority for further disciplinary action pursuant to the CPA Act, Securities and Exchange Act, and relevant regulations.
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Article 7
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Concrete methods or suggestions for handling a case shall be summarized and reported to the competent authority if, during the formality review of annual, semi-annual, and quarterly financial reports, financial reports are not submitted pursuant to regulations, the documents filed are incomplete, the CPA issues other than an unqualified opinion or issues a non-standard audit or review opinion and thereby affects fair presentation of the financial report to the extent that a restatement is required, or there are significant deficiencies in the internal control system; or if during formality revue of a financial forecast, the documents submitted are incomplete, publicly announced information is incomplete, the day of public announcement or report and/or the day of preparation are overdue, or the CPA produces a non-standard audit opinion.
After reviewing the financial reports, [the TWSE] shall provide an express opinion on the review conclusions and on concrete methods for handling the case. If any significant deficiencies or omissions are found, the TWSE shall handle the matter in accordance with the Securities and Exchange Act, or where there is a necessity to request the assistance of relevant organizations, the TWSE shall affix a review report for each case and draft an opinion on its handling to be reported to the competent authority, or suggest that the competent authority transfer the case for further investigation by the competent authority governing the relevant industry.
The TWSE may issue a letter requiring any company found to have material deficiencies under the preceding paragraph to send personnel to attend education classes held by an organization designated by the competent authority, and forward a copy of such letter to the aforementioned organization. If the company does not comply, then depending on the nature of the deficiencies, the TWSE may list the company as a first priority for subsequent substantive review of financial reports, routine regulation or regulation by exception, or internal control system audits.
If financial reports are reviewed and found to have certain deficiencies in common, a circular letter shall be regularly sent to listed companies as a reference for improvement, with a copy forwarded to the competent authority.
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Article 8
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If there are listed companies that fail to duly make a public announcement or filing of their financial reports within the prescribed deadline, [the TWSE] shall, within three business days after the deadline, summarize and submit the list of such companies to the competent authority.
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Article 9
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If, after formality review, any of the circumstances listed in Article 7, paragraph 1 are found, [the TWSE] shall, within 3 business days after the deadline for the submission of financial reports, summarize and report such findings to the competent authority.
After the companies for review are selected pursuant to Article 4, paragraph 2, [the TWSE] shall, within 20 days after the deadline for the submission of financial reports, submit the names of the companies and the reason for writing ad hoc reports to the competent authority for recordation. Ad hoc reports shall be completed by the end of the following month in the case of annual financial reports, within two months in the case of second-quarter financial reports, and within one month in the case of semi-annual and third-quarter financial reports, and then submitted for the competent authority's recordation. If the case being audited is complex and requires more time, [the TWSE] may file with the competent authority for an extension of the auditing period, provided that the extension may not be longer than one month.
Financial forecasts or explanations of changes filed pursuant to the Regulations Governing the Public Disclosure of Financial Forecast Information by Public Companies shall be summarized and filed with the competent authority on the day when the listed company forwards its financial reports, or by the tenth day of the month following the month when the information is filed. If [the TWSE] cannot summarize and file with the competent authority within the prescribed time limit, it may specify the reasons in the information summary, then complete the verification within two months and report it to the competent authority separately.
Where a listed company does not forward its financial reports or its restated, corrected, or updated financial forecasts within the time limit prescribed by the preceding paragraph, the time limit for the substantive review shall commence from the day the company forwards the reports or forecasts.
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Article 10
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Review reports shall be retained for a period of three years, and the competent authority may requisition the reports within that period.
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Article 11
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If any of the following circumstances is found to apply to a listed company after the revision of its financial forecast, the TWSE may issue a letter imposing a demerit on the company. Where the circumstances are serious, the company may also be subject to a default penalty of NT$30,000 and may become a candidate for routine regulation; the case shall also be submitted to the competent authority for recordation:
1. The company has not updated (or corrected) its financial forecast pursuant to the Regulations Governing the Public Disclosure of Financial Forecast Information by Public Companies.
2. The basic accounting assumptions in the financial forecasts have not undergone reasonable evaluation.
3. The financial forecast, without legitimate reason, has not been approved by the board of directors.
4. The company has not reported relevant documents pursuant to the Regulations Governing the Public Disclosure of Financial Forecast Information by Public Companies.
5. There is a material error or omission in a public announcement or report made pursuant to the Regulations Governing the Public Disclosure of Financial Forecast Information by Public Companies.
6. Matters notified for improvement or correction have not been improved or corrected within the time limit.
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Article 12
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These Procedures, and any amendments thereto, shall come into force following approval and recordation by the competent authority.
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