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SGX needs more regulatory bite to improve oversight

Singapore's frontline capital-markets regulator, Singapore Exchange Regulation, armed itself with greater supervisory powers this week by announcing a host of ways in which it hopes to keep on top of risky and troubled listed companies via their audit function.

SINGAPORE'S frontline capital-markets regulator, Singapore Exchange Regulation (SGX RegCo), armed itself with greater supervisory powers this week by announcing a host of ways in which it hopes to keep on top of risky and troubled listed companies via their audit function.

This greater oversight is very much welcomed, and a needed step in the right direction. But if SGX RegCo truly hopes to prevent another debacle like that which involved Noble Group, it may want to consider outfitting itself with more regulatory teeth as well.

Let us start by looking at the key changes to regulatory oversight it announced this week and the impact they are likely to have on capital markets here, before going into why these measures might be inadequate on their own.

The key changes

  • SGX will take a proactive stance in helping companies manage the scope of their audit and the key audit matters (KAMs) they need to disclose.

SGX RegCo chief Tan Boon Gin said the regulator has already embarked on this by meeting with the audit committees (ACs) and external auditors of some 15 listed companies - "with more to come". In these meetings, it highlights to ACs and auditors the issues it is concerned about, based on its own review of the company, as well as what it expects the audit to cover and discuss in the KAMs portion of the company's annual report. SGX also expects the KAMs to include matters it has been constantly querying the company about in the course of the year.

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This allows the exchange to play a part in setting the direction and scope of an audit of a company, and ensure that the issues it wants to highlight are placed front and centre in the company's disclosure to shareholders.

  • Special audit: SGX already has the power to compel a special audit but Mr Tan revealed this week that it has also 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 where appropriate.
  • The next two are initiatives it is considering:

(i) SGX wants to take a leaf from the United Kingdom's ongoing review of its audit sector and have the power to require the appointment of a second auditor, on top of the company's existing statutory auditor, in exceptional circumstances.

(ii) SGX is also proposing 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.

These last two initiatives were discussed to some extent by my colleague (BT, Jan 29, "Guarding the guardians of financial probity"), so let me just tackle them first by adding to her thoughts.

These measures - the first, in particular - will not be popular either in the boardroom or among the Big Four accounting firms, who dominate the auditing landscape here and elsewhere. That's no reason not to go ahead with them but the SGX needs to be prepared to handle the pushback it will face from companies and auditors on these fronts.

Some have opined that the appointment of a second auditor is less than practicable, the implementation of which would be fraught with problems. I think such concerns are overblown. SGX has said this would be done only in exceptional circumstances, so it would be little different from when it impels the appointment of a special auditor.

The second auditor would likely start off by looking only at specific areas of concern flagged by the SGX; if need be, the SGX might then expand the scope of its work to encompass the year-end financial statements, after which the second auditor would then be the second sign-off on the audit report.

I think any wrinkles in the implementation of these latter two initiatives will be minor and easily ironed out along the way.

The successful implementation of the first two changes, however - that is, SGX's discussion with ACs and auditors over the scope of an audit and KAMs, and the increased power over a special audit - will require the support of some added firepower, even as the changes are under way.

Mr Tan said this week that he was taking a leaf from the UK in proposing a new power for the SGX to require the appointment of a second auditor in certain instances - and I say he shouldn't stop there. I would suggest that he borrow further from that book: by proposing regulation that will hold company directors to account for their actions, as the Kingman Review in the UK has done.

More competitive

I know there's a general wariness about adding further rules and regulations to our capital markets but I believe these measures would benefit them in the long-term, by making our markets more competitive, globally.

In the case of special auditors, for example, Mr Tan said this week that those "who fail to carry out their responsibilities in a credible manner may find that we will stop them from being appointed again". Such actions can also be extended to directors on ACs.

In other words, in addition to meeting with ACs and auditors to discuss the scope of the audit and issues to be included in KAMs and so forth, the SGX should also impose penalties on directors who fail to carry these responsibilities. These could range from fines, to removals from the board, or prohibitions from further board appointments, depending on the nature of the transgression.

I recognise that the Companies Act currently defines directors' duties and the resulting penalties for breaches of such duties. But if the SGX wants to ensure that their new proposals have the effectiveness and bite it is hoping for, it needs to amend its Listing Rules so that it will have the power to act against recalcitrant or irresponsible directors directly in these specific areas.

Mr Tan said that "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".

But signalling one's expectation won't be enough; the regulator needs to also exact a price to ensure that such individuals are held accountable for their actions - especially when the end result involves public trust.

Such measures would work hand-in-hand with the SGX's efforts to improve its ability to take greater pre-emptive measures - preventing the bottom from falling out, even as it exerts additional pressure from the top.

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