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Guarding the guardians of financial probity

SGX Regco's bold proposal for new power to order a second audit allows for a more pre-emptive stance

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The controversy engulfing auditing firms over alleged failures, such as the scrutiny put on EY Hong Kong's part in the collapse of Singapore-listed Noble Group, have ignited calls for major action to halt the loss of investor confidence in the profession's credibility, and more importantly, in Singapore's capital market.

THE controversy engulfing auditing firms over alleged failures, such as the scrutiny put on EY Hong Kong's part in the collapse of Singapore-listed Noble Group, have ignited calls for major action to halt the loss of investor confidence in the profession's credibility, and more importantly, in Singapore's capital market.

In a bid to address auditor failure to spot trouble - one that is being wrestled with globally - Singapore Exchange Regulation (SGX RegCo) on Monday made a bold proposition for a new power to order a second audit, on top of the existing statutory auditor, for listed companies in exceptional circumstances despite their clean audits. The second auditor will jointly sign off on the year-end audit together with the first auditor.

SGX has also proposed that all listed companies 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. The more interventionist approach is a bid to bring back public trust in companies, directors and the work of auditors and, hopefully, valuations will not suffer and trust in the ecosystem returns.

Not surprisingly, the proposals have upset the audit community - a market dominated by the Big Four international accounting giants of Deloitte & Touche (DT), Ernst & Young (EY), KPMG and PricewaterhouseCoopers (PwC). David Mason, a partner with PwC Singapore in the 1980s and 1990s explained the rattled nerves: The assumption is that the auditor is either lacking capability or worse, suspected of some sort of collusion in figures/statements issued.

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What happens when the second audit differs from the other? Who will decide then which one is acceptable? After all, whether the audit evidence obtained is sufficient and appropriate to support the auditor's opinion is a matter of professional judgment. There is an element of subjectivity in audits. This could lead to a situation where an audit report may never get issued, unless one side gives way. And that may never happen, especially if the two auditors are from the Big Four, where the principal auditors are well-known names and assumed to have high standards already.

And if the two audits are in sync, then it's back to square one: You still have a suspicious company given a clean bill of health. Then what? If something is fishy, wouldn't it be more effective for the regulator to step in immediately?

Let's say if SGX had been endowed with this power three years ago, auditors doubt that the regulator would be able to find a willing second audit outside the Big Four, given the amount of resources and capabilities needed to undertake the monstrous task at short notice.

SGX RegCo needs to spell out clearly what "exceptional circumstances" are, so that companies don't fall into those situations.

Despite these concerns, one can understand SGX RegCo's push to address the trust deficit in light of several cases like Yuuzoo, Midas and Noble. There is now no strong arsenal in SGX's weapons to tackle irresponsible and sloppy audits, except to refer cases to professional bodies.

Based on its current power, the regulator is unable to do anything if the audit report has been signed off by the auditor, who is typically appointed by shareholders in a general meeting. Traditionally, the scope of a company's audit plan is reviewed by the audit committee and agreed with external auditors. Any intervention by SGX is ex post, such as through the appointment of special auditors to follow up on findings of concerns from the year-end audit.

Neither can the Accounting and Corporate Regulatory Authority (ACRA) or the Institute of Singapore Chartered Accountants (ISCA) take action on a foreign auditor. The former is the national regulator of business entities, public accountants and corporate service providers in Singapore. The latter is the national accountancy body of Singapore.

The reality is by the time SGX intervenes and orders a special audit, chances are listed companies with shenanigans would be halfway to ruin. Noble is a case in point.

Therefore, by seeking this new power to order a second audit in exceptional cases, SGX should be lauded for trying to catch mischief earlier than what is possible now.

For the new powers to work, SGX must ensure that proper considerations were given to identify "exceptional circumstances", as well as the clear basis and grounds to act. Doing so, the proposals should not suffer any backlash.

As Adrian Chan, a senior partner at Lee & Lee, noted:"Having this in its book will enable SGX to act ahead of the curve and be more pre-emptive."