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SGX RegCo's second audit proposal: a second opinion is clearly warranted

SGX RegCo's second audit proposal: a second opinion is clearly warranted

Source: Business Times
Article Date: 28 Jan 2020
Author: Tay Peck Gek

SGX RegCo may want to take a look at the structure of Singapore courts.

The Singapore Exchange Regulation (SGX RegCo) is seeking public feedback to enhance the current regulatory regime, with proposed measures that may include directing the appointment of a second auditor under exceptional circumstances. The second audit - akin to a re-audit - will review the overall financials of the company and provide a second opinion.

While SGX RegCo's objective for a second audit is to restore confidence in a company in a timely manner, the proposal warrants a thorough think-through.

Auditing is an art as well as a science.

Auditors, in forming their opinion, assess the appropriateness of selection and application of accounting policies as well as the reasonableness of estimates and assumptions used by management. Passing an opinion on a company's statements requires judgment on whether the statements are compatible with accounting frameworks.

SGX RegCo acknowledges that when a second audit opinion differs from the first, it does not necessarily mean the first opinion is incorrect. So, instead of restoring faith, this is going to confuse the market even more, according to Themin Suwardy, associate professor of accounting practice at Singapore Management University, who shared his views earlier with The Business Times.

Also, a company's management might be able to argue and persuade the first auditor to accept its estimates and assumptions, but the second auditor tasked with a "review" mandate might be more sceptical and stringent, and therefore fail to be persuaded even if the estimates and assumptions could be reasonable.

Moreover, if the first opinion is not necessarily incorrect, and now there is a differing second opinion, which should prevail?

Who decides which of the two opinions reflects a truer and fairer view of the company's financial position and performance?

SGX RegCo may want to take a look at the structure of Singapore courts.

The Court of Appeal is usually made up of three judges, but at times five or any greater odd number of judges. Having an uneven number of judges for a hearing, understandably, is to serve as a tie-breaker, if necessary.

Proceedings in the High Court are heard before a single judge, who has general supervisory and revisionary jurisdiction over all state courts in any civil or criminal matter.

But the second auditor that SGX RegCo has in mind does not seem to have supervisory or revisionary powers over the first auditor.

So, if SGX RegCo directs a second audit, it has to decide who would determine which opinion is to accept as well as provide a mechanism for appeal by the first auditor, whose reputation could be at stake.

Perhaps the Commercial Affairs Department or the Accounting and Corporate Regulatory Authority is in a better position to review or re-perform the audit if SGX RegCo suspects that a clean audit is not that squeaky-clean.

Apart from these issues, there is also the question of who is going to foot the bill of the second audit.

Unless there are lapses in the first audit and they are a result of an errant management or auditors, shareholders would have to incur the costs for both the first and second audits.

Granted, a second audit is expected to be an exception rather than a norm, the issue of cost is not to be underestimated as an audit is a costly and time-consuming process. Audit fees can run from the tens of thousands of dollars to the hundreds of thousands or more, depending on the size of the company.

A second opinion on the proposal for a second audit - even under exceptional circumstances - is clearly warranted.

Source: Business Times © Singapore Press Holdings Ltd. Permission required for reproduction.

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