HKUST Annual Report 2021-2022

Appendix V SUMMARY OF INTERNAL CONTROL AND MEASURES The University continues to adopt a system of internal control based on a framework issued by the Committee of Sponsoring Organizations of Treadway Commission (COSO). The five components of COSO Framework, namely Control Environment, Risk Assessment, Control Activities, Information and Communication, and Monitoring, are adopted by the University in ensuring the effectiveness of University governance. In order to provide assurance about the effectiveness of internal controls to the Council and Senior Management of the University, the following arrangements are in place: (a) Whistleblowing Policy is in place and operating to provide a safe and protective means by which staff, students and other stakeholders of the University are enabled to raise concerns with the appropriate University authorities against any malpractice within the University. (b) Internal Audit Office is responsible to prepare the annual risk-based audit plans and perform independent reviews to assess adequacy of the design and operating effectiveness of the internal controls as well as providing recommendations to streamline processes for efficiency enhancement. Co-sourced external service provider is engaged on a need basis to supplement in areas requiring deep industry expert knowledge, for example, cybersecurity. (c) In addition to the statutory annual audit of the University’s financial statements, the external auditors also carry out an independent assurance engagement on the University’s compliance with the guidelines, terms and conditions imposed by the Government’s University Grants Committee and performed review on HKUST’s tax exemption status under Section 88 of the Hong Kong Inland Revenue Ordnance. (d) The Audit Committee of the University Council approves the annual audit plan, supervises the scope of work performed by the Internal Audit Office and reviews internal audit reports and concerns on internal controls raised by the internal and/or external auditors. Furthermore, the Audit Committee has an oversight role on the appointment and performance of both internal and external audit team to ensure independence of the reporting line for the auditors and objectivity of the work performed by the auditors. HKUST STRATEGIC RISK MANAGEMENT The Strategic Risk Management Process (the “Process”) and related policy have an important role in University governance, as described in the University Grants Committee (“UGC”) Report on Governance in UGC-funded Higher Education Institutions in Hong Kong , commonly called the Newby Report , published in 2016. The University Council, as the supreme governing body, has to oversee University’s performance through proper management of risks in order to achieve the respective strategic objectives. In the past year, the University continued to face a fast-changing external environment and the risk landscape has contributed and impacted by prolonged waves of COVID-19 pandemic, demographic changes, and the “new-normal” operations around the world. The University has to pay extra efforts in handling issues arising from the lack of resources, including those related to search for additional land to facilitate University’s strategic development, talents recruitment and retention, and efficiency of administrative processes, etc. In this year, enhancements to the Process have been made by the adoption of a simplified risk assessment approach with broadened spectrum of engagement to facilitate consensus, and for achieving a more robust review and mitigation mechanism. Considering the opportunities and challenges of the operating environment, the University’s Risk Register as compiled would be adjusted according to the latest development directions and strategic objectives of the University. The following summary highlights the key aspects of risk assessment results: REPUTATIONAL RISKS As indicated in the Newby Report, “the management of risk is underdeveloped in Hong Kong universities, especially reputational risks” . Taking reference of the comments and observation of various stakeholders and benchmarking with both local and non-local institutions, the University monitors how the external environment and internal activities might pose risks to its reputation. Apart from the endeavors on strategic recruitment for both faculty and students, the Administration has identified ways to promote international collaborations to showcase its research impacts and developed new and innovative program disciplines such as those on Environment, Social and Governance to address major global challenges and future demand of society. In carrying out its mission, HKUST is committed to protecting its name and safeguarding its interests for the University’s long-term development. The establishment of The Hong Kong University of Science and Technology (Guangzhou) (“HKUST(GZ)”) is another example of how HKUST has been able to synergize with its partner on resources, innovative ideas and research collaborations to achieve a win-win situation for promoting HKUST’s overall competitiveness and international reputation in academic excellence, research and innovation. The University is equipped with extended strength under the “Unified HKUST, Complementary Campuses” principle for driving unprecedented opportunities, especially in the Greater Bay Area, as both campuses continue to strive cohesively in assisting in the economic, social, and cultural development of Hong Kong, as well as the Greater Bay Area and the Mainland. The University has also continued its efforts in enhancing and further developing proper cross-campus coordination framework on applicable activities and collaboration with HKUST(GZ). FINANCIAL RISKS Being a public-funded university, it is important for the University to ensure accountability and value for money by optimizing its resources while achieving its key strategic goals, as well as to maintain financial sustainability to support its future operations. Due to the extended impact of COVID-19 pandemic on the global market, the outlook for non-government funding sectors remains uncertain. The University seeks to deploy a prudent approach in financial planning and budgetary controls to maintain a sound and healthy financial status while staying bold in supporting key strategic initiatives, covering faculty recruitment and retention, capital projects and research infrastructure. Though HKUST and HKUST(GZ) are two separate legal entities and operating independently in terms of financial management, the synergy arising from the partnership, with proper oversight, has indeed created much more significant research impact while maximizing operational resources of HKUST. The University will continue to seek advice from external professional consultants from time to time in modifying its investment strategies to foster the University’s financial strength. Risks arising from investment activities in the volatile financial markets are also monitored and reviewed by the Council’s Finance and Audit Committees through the formulation of investment strategies with acceptable risk profile and return objectives, to be adjusted in tandem with evolving situations. Please refer to the University’s financial statements for details. 64