Singapore to tighten audit, valuation rules
SGX proposing second audit on listed companies if things seem amiss.
Auditors are to come under greater scrutiny in one of the biggest overhauls of accountancy oversight in Singapore, which could see the Singapore Exchange Regulation (SGX RegCo) ordering second audit on listed companies with clean audits if something does not smell right.
"SGX will be proposing a new power to require the appointment of a second auditor, on top of the existing statutory auditor, but only in exceptional circumstances," SGX RegCo's CEO Tan Boon Gin said in a media briefing.
"This will complement SGX's current power to require the appointment of a special auditor, who will typically only look into specific area, whereas the second auditor will jointly sign off on the year-end audit together with the first auditor."
Mr Tan, who has been busy strengthening SGX's gatekeeper role for listed companies, added: "The value of this is when you are not really able to pinpoint what is amiss but suspect something is amiss."
He explained: "There have been clean audit reports over the years and yet if you still suspect something is amiss, that's when this is most useful to us. Whereas if we knew exactly which area to focus on, we just appoint special auditor to look into that area.''
The intention is to hardcode this into the Listing Rules after consulting the market.
The collapse of the once-mighty Noble Group was an example of a troubled company given a clean bill of health for three years before its substantial write-down. That was despite SGX having put the auditor on notice for three key audit matters. Singapore authorities finally probed Noble in November 2018, more than three years after the first reports of accounting irregularities surfaced.
Starting from this audit cycle, for selected companies, SGX will play a much more active role, ex ante, in determining the scope of the year-end statutory audit.
"Our intervention ex ante is a clear signal of our expectations, that we expect audit committees and auditors to increase the thoroughness of the year-end audit, and also improve the disclosures relating to it for the benefit of shareholders," said Mr Tan.
SGX has already met the audit committees and auditors of about 15 listed companies, to highlight issues it is concerned about based on the regulator's review of the company, what it expects the audit to cover and discuss in the key audit matters of the annual report. The latter must include matters the regulator has been constantly querying the company about.
Key audit matters are a very important part of Singapore's disclosure based regime as they provide transparency to investors on any areas of concern arising from a company's audit, Mr Tan said.
"At the same time, they provide assurance that these matters have been brought to the attention of the board. Where the exchange has asked that specific issues be addressed, the auditors will have to describe the work they have done to address these issues...That will give a lot more assurance to people reading the audit report.''
And when problem areas do require further investigation, a special auditor or independent reviewer appointed for a listed company must have the gumption to take a professional stance on matters of concern including breaches of laws and regulations, instead of hiding behind their terms of engagement or expressing themselves in language so vague that "frankly speaking we as an exchange cannot take action on it".
SGX has recently begun to intervene more actively to change the terms of reference where they are not to its satisfaction and to require the special auditor to report directly or even exclusively to SGX.
"Those appointed to these roles who fail to carry out their responsibilities in a credible manner may find that we will stop them from being appointed again,'' Mr Tan warned.
Also on the cards are plans for all listed companies to appoint either a Singapore-based auditor, or in the case of companies with significant overseas operations with a foreign auditor, to have a Singapore-based auditor jointly sign off on the year end audit conducted by the foreign auditor.
"This will give us more regulatory traction, access to working papers and accountability. We are formalising this. Going forward, this will become a requirement," Mr Tan said. Currently, some 15-20 listed companies do not have Singapore-based auditors.
David Mason, a partner at Price Waterhouse Singapore for 18 years in the 1980s and 1990s, said the proposals were overall "sensible", but fears that SGX has its work cut out.
"Exceptional circumstances will have to be justified by SGX, probably with lawyers hanging around, waiting to pounce. The appointment of a second auditor will affect both the company's and its auditor's reputations, so it is very much a last resort. The assumption is that the auditor is either lacking capability or worse, suspected of some sort of collusion in figures/statements issued,'' he said.
Tham Tuck Seng, Capital Markets Leader, PwC Singapore, said:"The jury is still out among the international accounting communities on whether a joint audit really helps in strengthening audit quality by offering "a fresh pair of eyes" to detect and address problematic accounting issues, and consequently increase public trust of the audited financial statements. Some may even be concerned about added bureaucracy and cost."
But Mr Tan stressed that the measures will be very targeted: "They don't impose general compliance costs on companies across the board, but only on companies with issues and investors have a real concern. Then you would expect us to be more interventionist.''
Mak Yuen Teen, associate professor of accounting at NUS Business School and a corporate governance advocate, commended the move to require a Singapore-based auditor to jointly sign off audits by foreign auditors "as the independence of the foreign auditors and the quality of their work may be in question especially if there is little public oversight of the foreign auditors in their home country".
He suggested a more nuanced approach where, if the foreign auditors are in a developed market with robust regulatory oversight, the additional sign off may be less necessary.
SGX has also entered into a memorandum of understanding with the Singapore Accountancy Commission (SAC) for the Institute of Valuers and Appraisers, Singapore (IVAS) to promote the integrity of business valuations involving listed companies.
"Valuations are very important to a Reit-heavy ecosystem like ours... and also when it comes to valuations of mines," Mr Tan said.
Valuations by some companies have been questioned by minority shareholders in cases like Vard Holdings' delisting and ISR Capital's purchase of a Madagascar mining asset.
The Business Times understands that IVAS will be tapping on the expertise of Chartered Valuers and Appraisers who will be able help ask the right questions as well as advise on how to derive a more accurate valuation of assets, including the more challenging intangible ones.
Source: Business Times © Singapore Press Holdings Ltd. Permission required for reproduction.