Mr. Chan, the finance editor of a local newspaper, interviewed Mr. Wong, Chairman of a listed company in Beijing, on 15 September 2015. During the interview the following dialogues were recorded by Mr. Chan:

Mr. Chan: Mr. Wong, recently many financial analysts criticised that your company is performing badly over the last two years, and it is because you have not maintained a good management as well as accounting system. Do you agree to these criticisms? Mr. Wong: Of course, I will not be bothered by those nave comments. In fact, many analysts in China even do not really understand the contents of a published financial report prepared by the listed companies. They even have not studied a major in accountancy or finance, and they dare to claim themselves as finance experts. Mr. Chan: Are you saying that many financial analysts are not qualified to give expert or professional opinion on the financial performance of Chinese listed companies, arent you?

Mr. Wong: You do not believe in this, do you? Let me ask you a question as the finance editor of a reputable newspaper. How many financial reporters and analysts in China holds a degree in accounting or finance, or that they are professional accountants?

Mr. Chan: Well, we do not have any formal statistics in this regard, although based on my personal connections I guess that about 40% of the financial reporters and analysts meet your desired requirement.

Mr. Wong: That means more than half of these reporters and analysts do not hold relevant qualifications. How can they make sensible comments without the pre-requisite knowledge?

Mr. Chan: I do not think that we need to be professional accountant or chartered financial analyst before we can comment on the accounts of a company. In fact, my personal view is that every person could comment accordingly.

Mr. Wong: If this is your view, then when will you opine that a company is performing badly from the finance and accounting perspective?

Mr. Chan: Well, I will go through its published accounts in each year and see if most of the accounting data and calculated financial ratios are indicative to dissatisfactory performance for that year.

Mr. Wong: That is it! Have you ever thought about that a company can perform badly in the current year because it is expecting more than enough compensation for future years?

Mr. Chan: I know what is trend analysis, as I have studied courses on financial reporting and analysis before. But I still think that even if a corporation is giving up some current returns for the future, management of that corporation should not allow the corporation to reach the brink of insolvency. Am I correct?

Mr. Wong: And you are accusing me that I risk my own corporation to the brink of insolvency. I can assure that my corporation will not have any liquidity problem at all.

Mr. Chan: First I must say that I have never intended to say that your corporation has experienced liquidity problem. Then, Mr. Wong, I would like you to explain why the liquidity ratios of your corporation are quite unacceptable in accordance with the general prescriptions of the financial analysis texts. For example, current ratio for the present year is just 1.3. Is there any serious problem?

Mr. Wong: What is wrong with a current ratio of 1.3? I cannot see anything wrong at all. Tell me why you think 1.3 is not acceptable for my corporation. Remember, our accounts have been audited by a Big Four Firm, and we have obtained the auditors opinion that our accounts show a true and fair view and there is no reservation from the auditors.

Mr. Chan: Yes, I know. But personally I do not think that the report is perfectly true and fair. Anyhow, this is beyond the scope of my interview. Thank you, Mr. Wong. Thanks for your kindness in accepting my interview. Have a nice day.

You are required to:

A.Identify the various issues of financial reporting and analysis as mentioned in the dialogue between the finance editor and the chairman of the company.

(Note: You are NOT required to comment on any of these issues for this part of the question alone.)

B.Choose just one issue that you have identified in (A) above, and comment to what extent you agree with Mr. Chan, the editor, or Mr. Wong, the chairman.