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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 certified public accountants, and take the particulars listed below into consideration:
(1) Certified Public Accountant's Audit Report:
(i) If there has been a change in certified public accountants in the most recent three fiscal years preceding the application date, the issuing company, the original certified public accountants, and the succeeding certified public accountants shall submit a written report explaining the change of accountants, and the case handlers shall ascertain the facts and reasons underlying the change.
(ii) Where an audit report issued by a certified public accountant contains anything other than an unqualified opinion, the reviewers shall take note of the facts and reasons underlying the report, and the extent to which such report affects the financial report.
(iii) The accounting firm(s) that audited the financial reports for the most recent three years shall be an accounting partnership comprising licensed certified public accountants and approved by the competent authority.
(iv) The audit report shall state that the report is prepared in accordance with the regulations prescribed by the competent authority governing the preparation of financial reports by each enterprise and with Generally Accepted Accounting Principles.
(v) When the applicant’s financial report for the most recent accounting year or the most recent period in the year of application (including financial forecasts) reveals any of the following circumstances, its financial report must conform to the applicable regulations:
a. Fifty percent or more of the applicant’s pre-tax income is from returns on investment in a single overseas company.
b. A single overseas company in which the applicant has invested has suffered an after-tax loss of fifty percent of capital stock as listed in its financial report or 100 million New Taiwan Dollars or more for the current period.
c. Fifty percent or more of the applicant’s operating revenues, gross profits, or total purchase amounts are from a single overseas company in which the applicant has invested.
d. The output value of a single overseas company in which the applicant has invested accounts for fifty percent or more of the applicant’s gross output value (including internal production, external production, and outsourcing).
e. The original investment in a single overseas company by the applicant company cumulatively totals twenty percent or more of the applicant’s capital stock as listed in its financial report or 300 million New Taiwan Dollars or more.
The term "must conform to the applicable regulations" as used above means:
a. When the applicant company adopts the equity method for listing gains and losses on investments in a given overseas company, if the financial statements of that overseas company are audited and certified by a different CPA and the applicant company bases the listing of gains and losses or the preparation of consolidated financial statements on that overseas company's financial statements, then the certifying CPA of the applicant company must submit an auditing report with an unqualified opinion and without reference to any other accountant’s audit before the TSEC will accept its financial report. The TSEC shall also examine the materials related to the certifying CPA's assessment and verification to gain an understanding of whether those assessment and verification procedures were comprehensive and in conformance with Taiwan's Statements of Auditing Standards.
In addition, another CPA shall be engaged to perform the auditing and certification when a company applying for market listing employs the same CPA for auditing and attestation as an overseas company in which it has invested, and when, in the preceding three years, disciplinary action has been taken against that CPA by the competent authority, or a disposition against the CPA has been issued under Article 37, paragraph 3 of the Securities and Exchange Act, providing that this shall be inapplicable when the disciplinary action or disposition was a warning or a reprimand and the event that was cause for the warning or reprimand occurred five or more years prior to the date of application, or when the CPA has accumulated two or more demerits within the preceding year in accordance with the TSEC’s "Regulations Governing the Handling of Errors by Certified Public Accountants in Auditing of Initial Applications for Market Listing" and the GreTai Securities Market’s "Regulations for Handling Deficiencies in
Certified Public Accountants' Reviews of OTC Stock Listing Applications."
b. The provisions of the preceding paragraph need not be applied to an applicant company that does not use the equity method for listing gains and losses on its investments in overseas companies.
(2) Content of financial reports:
(i) Whether the kind, format, and content (including the notes and itemized statements) comply with the regulations prescribed by the competent authority governing the preparation of financial reports by each enterprise and with Generally Accepted Accounting Principles and the requirements of applicable laws and regulations.
(ii) Overall analysis of the report both on its own merit and 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.
(iii) If unusual accounting items are found in the financial report (such as dealings with competitors, dealings between shareholders, temporary transactions, start-up costs, unappropriated expenses) and a large sum of money is involved, the item in question shall be audited to ascertain its composition and categorization.
(iv) Status of adjustments or improvements required to be made to the financial statements as instructed in writing by the competent authority.
(v) 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 certified public accountant's working papers.
a. Transactions between major interested parties: any irregular financial arrangements or profits changing hands in large transactions between related parties.
b. 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 allowances set aside by the company's important subsidiaries for bad receivables or losses on reduction of inventory to market, loans of funds to another party, or endorsements or guarantees extended on behalf of another party, and whether any financial statements must be adjusted.
c. The status of application of reserve funds to offset bad debt and the assessment of the auditing certified public accountant.
d. 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.
e. Any irregular changes to fixed assets involving transactions among related parties.
f. The accounting treatment of capitalization of interest.
g. Leasing: The accounting treatment and categorization of business leasing or capital leasing.
h. Deferred assets: Those that should be listed as expenses or losses for the current month, such as loss of profit due to suspension of work, extraordinary losses, start-up expenses, employee benefits, etc., shall not be listed as amortization of deferred assets.
i. 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.
j. Retirement rules and pension fund withholding status.
k. Accounting treatment of income tax and off-settings of assets and liabilities with respect to deferred income tax.
l. Circumstances of disclosure of contingent liabilities and status of lines of credit obtained jointly from banks by the applicant company and its affiliates.
m. Assets obtained on installment plans and accounting treatment of sales.
n. Gross profit margin on sales of inventory, inventory turnover rate, and accounts receivable turnover rate for the most recent two fiscal years.
o. Reasons for any extraordinary losses or gains, or large nonoperating income or expenditures, and the treatment and presentation of extraordinary losses and gains.
p. Whether in the most recent fiscal year there have been any irregularities in the process of capital formation, or sources or use of funds.
q. 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.
r. If any new client taken on by the applicant in the most recent two years 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.
s. 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.
(3) Financial forecast information:
(i) A case handler shall check whether financial forecast information includes at least a condensed balance sheet and a condensed income statement, whether it provides a concrete opinion regarding future prospects for the overall economy, for the industry, and for the company's main products, and whether it indicates the basis and content of important basic assumptions. In addition, as needed for review purposes, the TSEC may also request from the underwriter a more detailed assessment regarding the reasonableness of the assumptions underlying the aforementioned financial forecast information and the likelihood that the forecast will be realized, and attach the related information for reference in the review.
(ii) During the period covered by the financial forecast information, the applicant company shall conduct a monthly check of the difference between actual figures and forecast figures, and if it discovers a material difference or finds that there will in the future be a material change in the original financial forecast information, it shall promptly update (correct) the financial forecast information and submit related materials for auditing reference.
(iii) The quarterly financial forecast information that an applicant company submits on an ongoing basis before requesting a review by the Committee for Review of Stock Exchange Securities Listings, is only to be used in connection with the review of the exchange listing, and shall not be externally disclosed or revealed.
(iv) After the Committee for Review of Stock Exchange Securities Listings has approved an application for exchange listing but before the securities have been listed and begun trading, if a case handler discovers that the financial forecast information submitted by the applicant company differs materially from the actual figures for the financial report covering the same period, and that the exchange listing is likely to be unallowable pursuant to any clause under the TSEC Regulations for Review of Securities Listings, the case handler shall determine the facts and handle the matter as quickly as possible.
(4) Internal control mechanisms and declarations thereof, and project audit reports:
(i) Ascertain the status of the prescription and implementation of internal control systems.
(ii) 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 certified public accountant's project audit report with an unqualified opinion.
(iii) 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 TSEC shall separately adopt "Operating Procedures for Review of Internal Control Systems Inspection Reports Issued by CPAs."
(5) During the review process, the case handlers shall note whether the certified public accountant has complied with Generally Accepted Accounting Principles, 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 certified public accountant's 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 certified public accountant are insufficient to reach the necessary conclusions, the case handlers shall request that the accountant provide supplementary explanations.
(6) The case handlers shall inspect the format and content of the underwriter's assessment report:
(i) Whether the report has been compiled in accordance with the requirements of the TSEC 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 TSEC 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 TSEC.
(ii) Whether working papers have been prepared in accordance with applicable regulations of the TSEC.
(iii) Whether a Declaration has been produced testifying that the assessment report is free of any misrepresentations or nondisclosures.
(7) Prospectus: The case handlers shall examine the format and content of the prospectus to ensure that it has been compiled in accordance with the TSEC Regulations Governing the Particulars to be Recorded in Prospectuses for Initial Listing of Securities and other relevant regulations.
(8) The case handlers shall ascertain whether any of the negative criteria detailed in the subparagraphs of Paragraph 1 of Article 9 of the TSEC's Regulations for Review of Securities Listings, or any of the circumstances in Paragraph 3 of Article 18 of the same Regulations, 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.
(9) 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 certified public accountant or other documentation provided by the applicant company, the accountant, 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, an on-site inspection of the applicant company may be undertaken. 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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Review Process:
(1) After they have been delegated a securities listing case, the case handlers shall complete the following review procedures:
(i) Application Documents: Check all application documents received and complete a "Stock Listing Application Receipt Record." (Attachment 1).
(ii) Prospectus: Examine each item detailed in the content of the prospectus according to the TSEC Regulations Governing the Particulars to be Recorded in Prospectuses for Initial Listing of Securities and other relevant regulations and re-examine a Checklist of Legal Issues to be Examined upon Application by Issuers for Exchange Listings of Stock (Attachment 2) provided by a lawyer.
(iii) Underwriter's Assessment Report:
Review the underwriter's assessment report and its abstract and check whether each item is assessed in accordance with the rules and regulations of the TSEC and whether it draws clear and definitive conclusions. Any matters relating to the requirements of the TSEC's Regulations for Handling Deficiencies in the Assessment Report or Other Relevant Information Submitted by a Securities Underwriter shall be handled, after obtaining signed approval by the TSEC's president, pursuant to the provisions of Article 8 of said Regulations.
The above-mentioned Regulations for Handling Deficiencies in the Assessment Report or Other Relevant Information Submitted by a Securities Underwriter shall be separately issued by the TSEC.
(iv) Internal Control Systems
(a) Gain an understanding of the results and attached assessment opinion from the certified public accountant's internal control system investigation, and of the certified public accountant's recommendations regarding internal control systems as stated in the recommendation report, in compiling the Record of the Internal Control System Documentary Review (Attachment 3).
(b) Carry out the review in accordance with the TSEC's "Procedures for Reviewing Internal Control System Audit Reports Issued by Certified Public Accountants," and complete Attachment 2 of said Procedures, the "Opinion Form for Review of the Internal Control System Audit Reports Issued by Certified Public Accountants."
(v) Comprehensive Analysis of Financial Information:
Review the annexed survey report for related industries, explanations of major changes in accounting items published in the prospectus, analytical data from the certified public accountant's permanent records, and the underwriter's assessment report to ascertain and assess the financial condition and trends of the applicant company and excerpt important items or irregularities to compile the "Comprehensive Analysis of Financial Data" (Attachment 4).
(vi) Certified public accountant auditing procedures and financial report: Review the certified public accountant's permanent files, the working papers for the internal accounting control system for the most recent fiscal year and the audit working papers for the most recent three years preceding the date of application and re-examine the "Certified Public Accountant Auditing Procedure Checklist" (Attachment 5) completed by the certified public accountant to ensure compliance with Statement on Auditing Standards No. 3 ("Audit Working Paper Standards"), Statement on Auditing Standards No. 5 ("Investigation and Assessment of Internal Accounting Control Systems"), the Regulations for Auditing and Attestation of Financial Statements by Certified Public Accountants, and all other applicable regulations. Include excerpts or photocopies of important or irregular items in the report. Examine the audit reports from a certified public accountant for the most recent three fiscal years and the notes and itemized breakdowns of each accounting item therein to ensure that the content of the applicant company's financial reports is in compliance with the Regulations Governing the Preparation of Financial Reports by Securities Issuers, the Regulations Governing the Preparation of Financial Reports by Securities Firms, Generally Accepted Accounting Principles, and all other applicable regulations. [After completion of the above] the case handlers shall note their opinion in the opinion column of the Certified Public Accountant Auditing Procedure Checklist. If the applicant company is found in violation of any of the requirements of the TSEC Regulations Governing the Handling of Errors by Certified Public Accountants in Auditing of Initial Applications for Market Listing, the case handlers shall refer the matter to the Review Committee and execute the resolution passed by the committee. The above-mentioned TSEC Regulations Governing the Handling of Errors by Certified Public Accountants in Auditing of Initial Applications for Market Listing shall be separately issued by the TSEC.
(vii) Dispersion of Shareholding and Custodial Undertaking: Examine the following items"":
a. Whether the ratio of shares to be publicly offered is in compliance with the regulations of the TSEC.
b. Whether shareholding dispersion after public offering is in compliance with the provisions of the TSEC's Regulations for Review of Securities Listings.
c. Whether the ratio of shares held by directors and supervisors is in compliance with the regulations of the competent authority.
d. Whether the undertaking regarding the ratio of shares in centralized custody to total issued shares complies with regulations.
(viii) Examine whether the applicant company is in compliance with each of the items listed in Article 9, Paragraph 1 of the TSEC's Regulations for Review of Securities Listings and complete the "Regulations for Review of Securities Listings Article 9, Paragraph 1 Itemized Checklist" (Attachment 6).
(ix) The case handlers shall consolidate all the above review data and relevant documentation (Attachments 1 through 9) into a binder.
(x) To ascertain the actual status of the financial and business operations of the applicant company or gross irregularities left unresolved by the relevant review data, the case handlers may conduct the following procedures:
a. Seek briefings to ascertain the following:
The past business achievement and philosophy of the applicant company's responsible person.
Changes in the shareholdings of directors, supervisors, and shareholders with a greater than 10 percent share of the company's total issued equity during the most recent three fiscal years and random checks of actual shareholdings when necessary.
Management and operational objectives of the company.
Financial structure and management policies.
Production processes.
Production status.
Analysis of sales income and costs and the state of competition in the industry.
The system for taking stock of and valuating inventory, and warehousing management.
Dealings among affiliates.
Salary and benefit regime.
b. Inspect factories, paying particular attention to the operational status of machinery and equipment.
c. Where on-site inspections are necessary to understand other significant irregularities discovered in the documentary review, the case handlers may draft an inspection plan and then conduct an on-site inspection of the irregularities.
d. Findings of on-site inspections shall be recorded in detail in the "On-Site Inspection Record" (Attachment 7).
(2) Compilation of working papers: The case handlers shall consolidate and record in detail all review items and findings of the review, together with all relevant information and number them in order for cross-referencing. Upon completion of the review, the case handlers shall compile all review information (Attachments 1 through 7) and supporting documentation into a binder to serve as the working papers and file it together with other public issuance approval information and keep it in the custody of the Listing Department (for a minimum of five years) for future reference and case management.
(3) After completion of the working papers, the case handlers shall set forth the key findings, and may as necessary solicit the opinions of relevant experts and examine other relevant information. The case handler shall then compile this information into a"" proposal for reference during the review and deliberation of the case.
(4) Review Period: Applications for initial stock listing shall be submitted for deliberation by the Review Committee within six weeks after their receipt. Under extraordinary circumstances, however, the Listing Department may, based upon review requirements or at the request of the applicant company and no less than 10 days prior to the Review Committee meeting, extend the deadline for submission to the Review Committee, subject to the signed approval of the president of the TSEC. Extensions granted at the request of the applicant company shall be limited to a maximum period of one month and shall not extend into to the following year.
(5) Force of the Securities Listing Review: The findings of the review of an application for securities listing reflect the financial and business condition of the applicant company during a specified period of time only, and should not be taken as a reflection of the overall or future performance of the applicant company. The results also depend largely on whether the applicant company has made full disclosure of information relating to its financial and business condition. The review results do not provide a guarantee of the quality of the applicant company and shall not be taken as a substitute for the functions and status of [reports of] securities underwriters and certified public accountants. Therefore, case handlers reviewing applications filed by first-time applicants shall:
(i) Carry out the review work with a positive service attitude and full rely on all information and opinions provided by the applicant company, certified public accountants, and securities underwriters, unless any nondisclosure, fraud, falsehood, or error is discovered.
(ii) Where information or statements of opinion provided by the applicant company, securities underwriter, or certified public accountant is found to contain any nondisclosure, fraud, error, falsehood, or otherwise seriously violate applicable laws or the rules and regulations of the TSEC, those responsible shall be held fully liable under the law, and the matter shall be duly reported to the competent authority after handling by the TSEC pursuant to relevant regulations. The TSEC undertakes only the review and deliberation of applications. Case handlers shall, at the time of processing applications, act in accordance with the provisions of the TSEC's Disciplinary Standards for Securities Listing Review Personnel and Matters for Mutual Compliance by Securities Listing Review Committee Members, and remain detached, impartial, and objective to ensure compliance with all the procedural requirements of these Procedures and other applicable regulations. In the event of any violation or negligence, where verified through investigation, personnel shall be responsible for matters that fall within the scope of their duties.
(iii) Where any concerns arise during the review period, the case handlers shall contact the applicant company, securities underwriter, and certified public accountant and request that they take the initiative to collect relevant information in timely fashion and provide explanations.
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