In Section 1, we have briefly explained the idea of EAI. The following is the principal reasons to perform this vital area of work :
- Holding company in Hong Kong needs to comply with the Companies Ordinance and standards and regulations issued by The Institute of Hong Kong Certified Public Accountants.
- If the holding company in Hong Kong has sought bank credit facilities, the lending bank will surely require complete, true and fair audited financial statements for credit review.
- There might be an ultimate holding company on top of the Hong Kong investment corporation. The ultimate holding is required to prepare audited group financial statements and therefore, EAI is definitely required.
- In general, there is a “transfer pricing” mechanism between the Hong Kong and PRC corporations. The tax authorities of both territories certainly have concern to judge whether the allocation of profits between the corporations is appropriate or not. In fact, the tax authorities have cooperative arrangements to detect tax avoidance and evasion. If found, the consequences could be very serious.
- Should there be merger, acquisition, share transfer or even IPO, then EAI is an inevitable foundation work.
- According to PRC custom laws, any non-compliances in accounting and improper inventory records might be regarded as “smuggling” which would have very serious consequences.