New rules require auditors to highlight issues like valuations

Singapore

WRITEDOWNS on the valuations of investments could soon be on the cards for some Singapore-listed companies in commodities and other sectors, which are treading more carefully in the wake of new rules on audit report disclosures unveiled by the accountancy regulator on Thursday, market observers said.

But they pointed out that the upcoming changes to auditor reporting here - aimed at boosting transparency for investors and other stakeholders - may not necessarily help to avert future accounting furores similar to the recent Noble saga.

Some Singapore-listed companies may theoretically be able to escape the new requirements. The changes apply only to Singapore-listed companies with Singapore auditors, so it is now unclear whether Singapore-listed firms with foreign auditors, such as commodities trader Noble Group, will have to comply.

The main change to auditor reporting standards for Singapore-listed companies will be in the introduction of a "key audit matters" (KAM) section in the company's audit report, said a joint statement by the Accounting and Corporate Regulatory Authority (Acra) and the Institute of Singapore Chartered Accountants (Isca).

In this new section, auditors will be required to disclose significant audit-related issues beyond their usual "pass/fail" audit opinion, the two bodies said. For instance, auditors may point out the parts of a listed company's financials that are most susceptible to mis-statement; they may also highlight the company's major transactions during the year that required "extensive" auditing efforts, or areas that depend on management estimates such as the valuation of investments.

The topic of valuation has been in the limelight ever since mainboard-listed commodities trader Noble Group came under fire earlier this year from Iceberg Research; the research outfit had accused Noble of accounting malpractice and claimed that the value of some of Noble's assets had been inflated.

Noble's auditors are Ernst & Young in Hong Kong, where regulators have not said yet that they will require a KAM section. Singapore is the first economy in the Asia-Pacific to mandate that.

Market observers said on Thursday that the introduction of the KAM section may make listed companies here more careful with their valuations. Firms that might be affected include those in commodities, real estate and banking - sectors with a lot of intangibles or assets that are difficult to value, they added.

Corporate governance specialist Mak Yuen Teen, an associate professor at National University of Singapore Business School, said: "It (the KAM section) may make companies and auditors more conservative, so I do expect more writedowns. Of course, this then begs the question of whether some companies have been too aggressive in their valuations and auditors have been too accommodating."

Noting that greater disclosure tends to make companies more accountable, Singapore Institute of Directors chairman Willie Cheng said: "More gaps will be closed as a consequence of this, especially if the company hasn't been as careful."

David Gerald, president of the Securities Investors Association of Singapore, said that in the case of Noble or Olam, auditors "will probably spend a lot of time looking at the valuation of the commodities or the biological assets" when pinpointing the key audit matters.

That said, Prof Mak pointed out that how well the KAM section works in practice will depend partly on the auditor's independence and whether regulators will hold auditors accountable for their audit reports, especially if the company is later found to have accounting problems.

"There is a risk of the boilerplate short-form report that currently exists being replaced by boilerplate long-form reports and clients may exert pressure on auditors on disclosures of key audit matters," he said. "Client-friendly auditors may yield, although they will need to be more careful now," he added.

On their end, auditors said on Thursday that they did not expect listed companies here to revalue their investments or assets solely due to the KAM section, adding that companies ought to have already been doing their valuations properly.

Hans Koopmans, assurance partner at PwC Singapore, said in a phone interview: "If you have a company that was fairly aggressive, then they may have another look at valuations, but I would be surprised if they did it just because of the new regime."

Taking a writedown just because of the KAM section also "really shouldn't be the case if auditors have done their job properly", he added.

KPMG Singapore audit head Roger Tay echoed this, saying in an e-mail: "Companies which have not revalued their investments previously are unlikely to do so because of the new auditor reporting requirements."

Shariq Barmaky, audit partner at Deloitte Singapore, noted that KAMs were a matter of judgment on the auditor's part, and it was "very subjective" as to whether having a KAM section would improve the quality of valuations.

An Acra spokesman said in an e-mail on Thursday that auditors will be held responsible if a matter that should have been reported as a KAM was not included.

However, she acknowledged that an auditor's report would not need to have a KAM section if the listed company is foreign, is audited by foreign auditors and the audit is conducted under the standards of a jurisdiction that does not require a KAM section.

A Singapore Exchange spokesman told The Business Times on Thursday that it was "not ruling out" extending the KAM rule to companies with foreign auditors.

Besides KAM, the other audit reporting change that will be imposed is that auditors must make sure a company has disclosed enough information on its viability if any major mishap such as the loss of a big customer occurs, Acra and Isca said.

Both changes will take effect for audits of financial statements for periods ending on or after Dec 15, 2016.