Due Diligence Guidelines –
2. Scope of Work
Typical due diligence inquiries in relation to the new applicant’s accounting and management systems … include:
(a) assessing the new applicant’s accounting and management systems that are relevant to:
(i) the obligations of the new applicant and its directors under the Exchange Listing Rules and other legal and regulatory requirements, in particular the financial reporting, disclosure of notifiable and connected transaction and inside information requirements; and
(ii) the directors’ ability to make a proper assessment of the financial position and prospects of the new applicant and its subsidiaries, both immediately before and after listing.
This assessment should cover the new applicant’s compliance manuals, policies and procedures including corporate governance policies and any letters from the reporting accountants to the new applicant commenting on the new applicant’s accounting and management systems or other internal controls; and
(b) interviewing all directors and senior managers with key responsibilities for ensuring compliance with the Exchange Listing Rules and other legal and regulatory requirements (including the staff responsible for the accounting and financial reporting function, company secretary and any compliance officers) to assess:
(i) their individual and collective experience, qualifications and competence; and
(ii) whether they appear to understand relevant obligations under the Exchange Listing Rules and other relevant legal and regulatory requirements and the new applicant’s policies and procedures in respect of those obligations. [Paragraph 15 of Practice Note 21 to the Listing Rules]
2.2 Recommended Steps
2.2.1 The sponsor should discuss with the listing applicant’s management, and in particular with its CFO and senior accounting staff in respect of accounting and financial reporting related matters and the internal controls systems and procedures in place within the listing applicant.
2.2.2 The sponsor should conduct a meeting with the listing applicant’s internal audit team, if any, to understand their resourcing, authority, role and reporting line. The sponsor should discuss with the internal audit team its general approach to the internal audit, including ascertaining, for example, the frequency of the internal audit, scope of work performed, how it is performed, the types of reports generated and the approach to following up on findings. The sponsor should request copies of, and should review, reports issued by the internal audit team.
2.2.3 The sponsor should, during the course of its due diligence with the listing applicant’s external auditors, discuss any observations they had on the listing applicant’s internal controls during their audit and whether they have historically provided any management letters or similar letters to the listing applicant commenting on accounting or management systems or other internal controls and, if so, discuss with the auditors and the listing applicant’s management the content of those letters and any steps taken to address any issues identified in those letters.
2.2.4 The sponsor should request that the listing applicant provide, and should review the following, covering at least the track record period:
(a) copies of compliance handbooks, manuals and policies;
(b) copies of anti-money laundering and anti-bribery policies;
(c) copies of management letters or similar letters issued to the listing applicant commenting on accounting or management systems or other internal controls;
(d) copies of audit committee reports; and
(e) copies of representation letters provided by the listing applicant’s management to the auditors in connection with audits or reviews.
2.2.5 The sponsor should review the proposed membership and terms of reference of the audit committee, remuneration committee and, if there is one, the nomination committee and risk committee. In addition, the sponsor should review any internal policies prepared in respect of the general obligation to disclose inside information pursuant to Part XIVA of the SFO and any internal corporate governance policies prepared for the listing applicant.
2.2.6 For further details on the due diligence which the sponsor should perform in respect of anti-money laundering and anti-bribery policies of the listing applicant, sponsors should refer to Chapter 15 “Due Diligence Guidelines – Anti-Corruption, Anti-Money Laundering and Sanctions”.
2.2.7 Sponsors should refer to section 1 of Chapter 7 “Due Diligence Guidelines – Knowing the Listing Applicant and its Management” for details of the due diligence steps to be taken in respect of the Directors and senior management of the listing applicant for the purpose of making the assessment in paragraph 15(b) of Practice Note 21 to the Listing Rules.
HKCFEF Limited and the contributing law firms, accountants and sponsors are not offering these due diligence guidelines as legal, financial or professional advice or services and they should not be relied upon as such. These due diligence guidelines should not be used as a sole basis for any decision, action or inaction and are not meant to serve as a substitute for the advice of qualified professionals. See here for the full terms and conditions.