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Earlier intervention, tougher action needed from regulators
SINGAPORE'S financial market regulators can and should do a better job of holding management and companies accountable for misinformation.
They should consider tougher and more targeted sanctions for wrongdoing, and look into earlier intervention measures, such as imposing tighter checks and balances on problematic companies when there is sufficient reason for concern.
The Singapore Exchange (SGX) and Monetary Authority of Singapore (MAS) have come under fire for not intervening enough to protect investors from listed companies where aggressive accounting and other grey-area activities have taken place.
The most recent complaints came from Iceberg Research, the outfit that for the past two years has been raising questions about the accounting practices at commodity trader Noble Group.
Iceberg argued that regulators did not do enough to prevent Noble from raising more capital from the market, and failed to shield investors from ongoing exposure to the company's over-optimistic assessment of its financial health.
Perceived regulatory inaction is not restricted to Noble. Just to name a couple of examples, shareholders have also expressed frustration about Singapore Post, where the issuer failed to disclose potential conflicts of interest between a director and strategic investments, and YuuZoo Corp, where the company's aggressive accounting policies led to significant restatements, write-offs and impairments.
If the criticism holds any ground, it is with the perception that companies and management are rarely taken to task when there is a problem with inaccurate or misleading information. In instances when they are held responsible, the sanctions are often trivial compared to the loss to investors.
At Noble, for instance, nobody from the company has been held accountable for the group's early insistence on the strength of its business, which has turned out to be flimsier than previously indicated.
YuuZoo, which for several quarters painted a picture of its finances that was too rosy for auditors to accept, has not been taken to task for its aggressive accounting practices.
ISR Capital continues to be able to pursue deals, including one riddled with conflicts of interest and wildly inconsistent valuations, even as investigations continue into whether the company was previously under the surreptitious control of external parties.
At SingPost, former director Keith Tay received an advisory from the Accounting and Corporate Regulatory Authority (see amendment note) after the company failed to disclose his potential conflicts of interest related to certain deals.
Some of the criticism about weak penalties is admittedly dated. It was only in 2015 that rule changes broadened the powers of SGX's independent Disciplinary Committee. The new rules, which allow the imposition of fines, will help.
But perhaps the regulators can also consider some form of collective action available to investors. This would not only deter wrongdoing, it would also allow investors affected by the action to get some compensation. The threat of stronger sanctions, especially against individuals, might deter companies and management from trying to stretch the limits of proper disclosure and accounting.
It may also be worth looking into enforcement actions that can mitigate concerns with-out having to resort to full-blown sanctions. This could be in the form of more stringent checks and balances when there is sufficient cause for concern but not enough for full-blown sanctions. For example, at Noble, regulators could have forced the company to disclose more information about its valuation methods and assumptions on a regular basis. At ISR, regulators could lower the hurdle for when proposed deals must obtain shareholder approval, or insisted that the company use a different independent adviser on the deal.
Ultimately, however, critics need to recognise that it is impossible for the regulators to prevent questionable practices, and when those occur, to prevent losses by stakeholders.
Take Noble, for example. In the two years since Iceberg issued its first critical report on Noble, the company's business has taken a hit as a number of the key valuation concerns raised by Iceberg turned out to be correct. But the circumstances that gave rise to those concerns and the subsequent impact on business existed before regulators and the broader market were aware of them, and even if the regulators had tried to step in, shareholders would still have lost value eventually.
Contrary to Iceberg's griping, SGX's use of "trade with caution" notices and disclosable queries has evolved over the years into a highly useful enforcement tool.
Just like compulsory checks and balances, "trade with caution" and exchange-initiated queries allow the exchange to signal to the market whenever it is uncomfortable with some issue, without running into the realm of false accusations. With queries in particular, SGX has gotten companies to disclose more information about certain issues that the exchange felt was worth highlighting. While SGX has never given an opinion on whether the replies to its queries are logical or rational, just the fact that there is a response from the company allows the market to make up its own mind on the issue being discussed.
Investors need to recognise these red flags when they are put up. If they continue to buy into these companies without proper regard for the risks, they have only themselves to blame if those warnings eventually become reality.
Amendment note: In an earlier version of this article, we wrongly said that it was a reprimand that former Singapore Post director Keith Tay received after the company failed to disclose his potential conflicts of interest related to certain deals. It should have been an advisory from the Accounting and Corporate Regulatory Authority.