Analysis of HSBC's Financial Reporting and Corporate Governance

This report provides a comprehensive analysis of HSBC's financial reporting practices, corporate governance mechanisms, and the independence of its external auditors, primarily based on the 2017 annual report. It examines the roles of the board of executives and independent auditors in the financial statement production process, highlighting the significance of auditor independence and its impact on financial reporting quality. The analysis delves into the quantification of non-financial issues and their influence on corporate financial reporting, exploring the strategic report's role in clarifying financial statement components. Furthermore, it illustrates the impact of business model reporting and the influence of non-financial information on the overall quality of HSBC's corporate reporting. The report utilizes examples from the annual report to support its arguments and discusses how various aspects of HSBC's operations, governance, and risk management practices contribute to the accuracy, transparency, and reliability of its financial disclosures.

Corporate Governance & Ethics

Introduction
HSBC is considered to be one of the largest financial and banking services companies in the
world. It carries out its operations in 66 territories and countries. The aim of the organization
is to expand the business operations by assisting people in fulfilling their hopes and
ambitions. The global business of the organization serves more than thirty-eight million
customers through a network of more than 3800 offices in the world. The international
network links emerging and developed markets in an appropriate manner. The main objective
is to determine and examine whether the external auditors are independent or not. The
auditors carry out their roles and responsibilities in ensuring whether the organization
providing a fair and true view of their operations.
Main Context
Roles of the board of executives and independent auditors
The Group Chief Executive and other Group Management Board reviews the operating
activities on the basis of geographical region and global business. Global businesses are
reportable segments under operating segments of IFRS 8 (Armstrong et al., 2010). The board
is being satisfied that the GAC each member is independent as per SEC criteria that can be
considered as the audit committee as per the section 407 of Sarbanes Oxley Act. The board is
responsible for internal control which assists in the preparation of the financial statements on
the basis of rules and regulations. The non-executive in GAC is responsible to review the
matters related to financial reporting consisting of internal control systems and pillar 3
disclosures. The independence of the internal audit function is also safeguarded by the
committee. The financial statements cannot be approved by directors under the company law
unless they are satisfied that they have provided a fair and true view of the organization
(Annual Report, 2018). They are required to select appropriate accounting policies, make
estimates and judgements, following IFRS and financial statements prepared on the going
concern basis. The board plays a significant role in detecting frauds and ensures accurate
preparation of financial statements.
The independent auditors want that the HSBC Holdings plc's parent organization financial
statements and Group financial statements should give a fair and true view of the state of
parent company's and Group's affairs. The financial statements need to be prepared as per the
IFRS as implemented by the European Union. It has also been prepared as per the Companies
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Act 2006, IAS and article 4 regulations (Ball, 2006). The independent auditor confirms that
the PricewaterhouseCoopers is independent as per the ethical requirements which are
pertinent to the audit consisting of ethical standard of FRC. They examined all the members
of PwC who are involved in the process of an audit of the organization. The operational
processes are important to the financial reporting carried out by the operations centres. The
financial reporting processes need to prepare financial statements which are carried out in the
financial operations centres of HSBC. The processes assist in determining the material
balances, transactions classes and disclosure within the financial statements. The internal
auditors also examined the disclosures within the remuneration report of directors, oversight
controls and litigation exposures and provisions. The independent auditor examines the audit
process, determines any errors and ensures a true and fair view of the financial statements of
HSBC.
Relevance and importance of auditors’ independence
It is necessary for the external auditor to be independent of the client company because the
opinion of the audit should not be affected due to any relationship between them. It is
expected from the auditors to provide an impartial and sincere professional thinking
regarding the financial statement to the shareholders. Sometimes the doubts need to be
expressed in regards to the independence of the external auditors (Soderstrom and Sun,
2007). The judgment and opinions of an audit can be achieved by the firm of auditors that are
affected in order to keep maintaining a good relationship with the company of the client. In
these conditions, the auditors cannot be considered as an independent and their opinions
might not require to the shareholders.
The non-executive responsibilities are being maintained by the GAC, such as monitoring the
matters related to financial reporting, the effectiveness of internal financial control system
and Pillar three disclosers (Correia et al., 2015). The independence of the Group Internal
Audit is also being protected by the GAC and supervises their performance.
The approach, police for the audit findings and annual audit for the external auditors are
being reviewed by the GAC. External auditors supply related to all non-audit services which
already been approved by the GAC according to the auditor independence policy to make
sure that these services do not build any dispute. There is a policy which is being maintained
by the GAC on hiring staffs or the ex-employees of the external auditor (Eun and Resnick,
2014). The GAC organize meetings with the external auditors frequently, these meetings use
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to be extremely private and a regular contact is being maintained by the GAC chairman with
the audit partners throughout the year.
A fee has been paid to PwC by the year-end 31 December of 2017, the total amount was
$129.7m, of which $44.9m or 34.6% was paid for the non-audit service. The Financial
Reporting Council's quality of the audit has been reviewed by the GAC, bring off the audit of
2016 and the approval was declared regarding PwC's suggested plan in response (Greuning,
Scott and Terblanche, 2011). PwC has been considered to become independent by the GAC
and according to professional ethical standards, give a confirmation in writing about its
independence to the GAC for 2017. A recommendation was made by the GAC to the Board
for reappointing PwC as an auditor. There was a concern regarding the reappointment of
PwC and their charge for the audit service of 2018 will be suggested to the shareholders at
the 2018 AGM.
Quantification of non-financial issues
The quantification of the non-financial issues is considered to be very much important for an
organization. The non-financial issues can impose a significant impact on the business
operations of the organization. Thus, the measurement of the non-financial issues needs to be
carried out for determining and evaluating its impact on the business operations (Dechow and
Schrand, 2010). An inappropriate management of the non-financial issues can affect the
financial performance of the organization. Appropriate and detailed information about the
non-financial issues can assist the stakeholders to understand the risks faced by the
organizations and steps taken for overcoming it.
A tool is being used by HSBC for monitoring and directing the non-financial risks which also
includes risk to appetite, map and most arising risks and a process to test stress. A program of
Operational Risk Transformation has been completed by HSBC in 2017. The motive for this
program was to make it uncomplicated in managing operational risk continually in HSBC.
This was also including the execution of a new operational risk management framework
(ORMF) and a record system (Holton, 2012). The new operational risk management
framework is helping in monitoring non-financial risks. And also enhanced focus on related
controls and the principals being hold by HSBC. A platform is being provided by operational
risk management framework to move ahead-monitoring risk consciousness and help
management focusing. The risk desire of HSBC contains a reflection of financial and non-
financial risks and has been demonstrated in qualitative and quantitative terms.
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HSBC has appropriately maintained the conservative risk profile which is being depicted in
the reporting. The emerging and top risks are being determined and monitored in an
appropriate manner. The weak growth in many nations has affected the business operations.
Thus, the geopolitical and economic shocks have to lead to an increase in the cash flow
volatility (Land and Lang, 2002). The portfolios and operations are also exposed to the risks
which are being associated with the civil unrest, military conflict and political instability
which results in the disruption to the operations, physical damages to the assets and physical
risk to the employees. The credit environment has depicted there is a decree in the loan
impairment charges. The unauthorised access and cyber threat are also considered to be a
major risk for the organization. The non-financial issues impose an impact on the preparation
of the financial statements. The risk of following the laws, rules and regulations are also
managed by the organization in an appropriate manner.
Strategic Report
The strategic report of HSBC depicts the financial overview during a period of time. It has
depicted the profit before tax which amounts to $17.2bn which is higher than the previous
year. The revenue has been reported of amount $51.4 bn which is higher than the previous
year. The loan impairment charges and credit risk provisions amounted to $1.8bn. The
operating expenses are $34.9 which is less than the previous year (Lumby, 2015). The net
operating income, operating profit and profit before tax is $49676m, 14792m and 17167m.
The reported results are being used for the preparation of the consolidated income statement.
The consolidated income statement shows the profit or loss of the organization during a time
period. The report includes income from joint ventures and associates which is $2.4bn and
dividends amounting to $0.21 per ordinary share. It has depicted the adjusted performance
measures for aligning external and internal reporting, determining and quantifying items and
providing a view of how the management examines the performance of each year. The assets
amount reported is $2.5tn, distributable reserves are $38bn, capital ratio is 14.5% and returns
on equity is 10%. It is used for preparing and examining the balance sheet of the financial
statements.
Business Model Reporting
The business model of HSBC has remained flexible through business cycles and ensures
stable liquidity and funding. The measurement and classification of financial assets depend
on the business model of the organization and their contractual flow of cash characteristics.
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The factors identify whether the assets are measured at fair value, amortised cost through
profit or loss or other comprehensive income (Needles and Powers, 2012). The combined
impact of applications of contractual flow of cash characteristics and business model leads to
a difference in the measurement of assets at fair value or amortised cost. The operating model
shows a diversified and sustainable earnings mix in order to ensure consistent returns for the
shareholders. The model consists of a wide range of purposes to manage the business
including stress testing, regulatory capital calculations, credit approvals, financial reporting
and financial crime risk management (Bushman, Piotroski and Smith 2011). All the
employees of the organization are responsible to determine and manage risks within the
scope of their role. The operating mode includes a corporate centre and four global business
supported by 11 global functions and operations services and technology. A balanced
banking model is there which operates in both retail and wholesale businesses. It has resulted
in lower earnings volatility and lower risk profiles in comparison to global peers.
Non-financial information
The values define the business of HSBC and how it is distinctive from others. The
organization stands for the right things and delivers on commitments. The non-financial
information depicted that the organization is open to different cultures, ideas and diverse
perspectives. HSBC is connected to its communities, customers and regulators. The strategic
actions of the organization are also been depicted (Peng., 2013). Corporate governance is
considered to be important which provides detailed information about the senior management
and board of directors and their approach to remuneration and corporate governance. The
non-financial risk consists of stress testing, risk appetite, emerging and top risks and risk
map. The operational risk management framework, global conduct programme, corruption
and anti-bribery policies are implemented for managing risks and following the global legal
standards. The climate change is being reflected across the activities of the group. The non-
financial information also depicted the high priority projects, employee diversity, customer
satisfaction and complete succession which is being focused on by the organization. The
capital management framework is also depicted to be implemented across the Group for
external and internal reporting. The non-financial information has depicted the performance
of HSBC in the internal and external environment (Bradshaw and Miller, 2007).
Non-executive directors’ responsibilities/functions
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John Lipsky is an independent non-executive director of HSBC. He is a member of the Group
Risk Committee and he is responsible for risk management, internal control system and risk
governance. His responsibilities are to monitor risks of financial crime, anti-bribery, cyber-
crime and also for conduct and culture. He is also a member of Remuneration Committee and
as a part of a group, he is responsible for meeting the restriction, principals and the
remuneration policy of governance framework of the Group (Roode and Leith, 2009).
Philip Ameen is an Independent non-executive director of Hong Kong Shanghai Banking
Corporation. He is a member of the Audit Committee and his responsibility is to monitor the
matters related to financial reporting, discloser of pillar three and to internal financial control
system's effectiveness. The independence of the Group Internal Audit is also being protected
by the Committee members and reviews their performance.
Laura Cha is also a non-executive Director had she has been appointed in March 2011. Being
a member of the Conduct and Values Committee she is responsible for the risks related to
conducting and culture. The committee member's responsibilities are to maintain the policies,
excellence and strategies of the Group. And also verify that the business is being conducted
responsibly and continually by the Group (Sharma, 2010).
Conclusion
The annual report of HSBC has depicted the financial and non-financial performance of the
organization. It has provided detailed information to the stakeholders to the organization. The
external auditors are independent in HSBC ensuring the true and fair view of the
organization.
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