Chapter 13

Due Diligence Guidelines –

Internal Controls

5. Timing of Internal Controls Due Diligence

5.1 Standard

5.1.1 Before submitting an application on behalf of a listing applicant to the Stock Exchange a sponsor should come to a reasonable opinion that : … the listing applicant has established procedures, systems and controls (including accounting and management systems) which enable the listing applicant and its directors to comply with the Listing Rules and other relevant legal and regulatory requirements on an ongoing basis. [Paragraph 17.4(c)(ii) of the Code of Conduct]

5.1.2 Before submitting an application on behalf of a listing applicant to the Stock Exchange a sponsor should come to a reasonable opinion that : … the listing applicant has established procedures, systems and controls (including accounting and management systems) which provide a reasonable basis for the directors to make a proper assessment of the financial position and prospects of the listing applicant on an ongoing basis. [Paragraph 17.4(c)(iii) of the Code of Conduct]

5.2 Guidance

5.2.1 The Listing Rules include requirements for governance structures, procedures and systems that apply only once an entity becomes listed (e.g., the appointment of independent non-executive directors and the formation of various board committees). It is therefore possible that some may not have become operational when the listing application is made. For these purposes, it would suffice if the procedures have been formulated and agreed and that adequate measures have been taken to ensure that they will become fully operational once listing takes place.17

5.3 Recommended Steps

5.3.1 As mentioned in paragraph 1.2.4 above, sponsors and the listing applicant should agree the approach to internal controls due diligence and commence the process at a very early stage in the listing process. It should be noted that the review process is time consuming (requiring in general at least four weeks to carry out relevant review work and prepare the Preliminary Report, with a further 4 weeks to address any material deficiencies and prepare the Follow-up Report). This time period could be significantly greater if a Comprehensive Long Form Report exercise is carried out. The sponsor should bear in mind at the outset the need to address any material deficiencies in the internal controls (together with any other control deficiencies which the sponsor considers should be resolved prior to listing) prior to filing the listing application and should, together with the Internal Controls Consultant, ensure that the listing applicant is fully aware of the timing implications of this process (and the possibility that it may delay the timetable for filing the listing application if material deficiencies are identified). The listing applicant should appreciate the importance of allocating sufficient time and resources to the internal controls diligence process to ensure its timing can be effectively managed.

5.3.2 The sponsor should conduct the due diligence steps set out in these due diligence guidelines, as appropriate, prior to the submission of the listing application. The sponsor should, therefore, discuss the appointment of an Internal Controls Consultant with the listing applicant as soon as possible after commencement of the listing application process. Upon appointment of the Internal Controls Consultant, the sponsor should discuss the timeline for the conduct of its review of the internal controls systems of the listing applicant as soon as practicable, noting the amount of time typically required to complete the process as set out in paragraph 5.3.1 above.

5.3.3 The proposed timeline should normally provide for the Internal Controls Consultant to complete both its Preliminary Report and any Follow-up Report sufficiently in advance of the submission of the listing application to allow the sponsor to review and assess the reports and reach the view set out in Paragraphs 17.4(c)(ii) and (iii) of the Code of Conduct before filing the listing application.

5.3.4 Where certain of the procedures and systems required by the listing applicant upon listing have not yet become operational when the listing application is made, the sponsor should discuss such matters with the listing applicant and the Internal Controls Consultant to confirm that relevant procedures have been formulated and agreed with the listing applicant. The sponsor should also discuss the measures taken by the listing applicant to ensure that they will become fully operational once listing takes place.

5.3.5 Sponsors should also refer to Chapter 4 “Due Diligence Guidelines – Submission Readiness”.

5.3.6 Where material deficiencies in the internal controls systems and procedures of the listing applicant cannot be remedied prior to the submission of the listing application to the Stock Exchange, the sponsor should have regard to section 6 of this chapter below.

5.3.7 The sponsor should also consider whether disclosure is required in the listing document in respect of any historical non-compliance issues. Please see paragraph 1.2.11 above.

Endnotes

17. Paragraph 123 of the Consultation Conclusions on the Regulation of Sponsors.

Disclaimer

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.

Accounting and Management Systems Enable Listing Applicant to Comply with Listing Rules

Listing Applicant Internal Controls

Material Deficiencies in the Internal Controls Systems and Procedures of the Listing Applicant

Timing of Internal Controls Due Diligence

Requirements for Governance Structures, Procedures and Systems

Comprehensive Long Form Report

Submission of Listing Application

Internal Controls Consultant

Material Deficiencies in the Internal Controls Systems and Procedures

Timeline for Review of Internal Controls Systems of Listing Applicant

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