SingPost should not have picked PwC as special auditor

I REFER to the announcement by Singapore Post (SingPost) on Jan 19, providing an update on the special audit and corporate governance review.

While I have no reason to doubt the professionalism of PricewaterhouseCoopers (PwC) - the firm appointed to undertake the special audit - market perception is critical, given the circumstances that SingPost has found itself in.

PwC has been SingPost's external auditor since its listing. It also received fees for non-audit services amounting to 28 per cent of total fees in FY2015. Even though SingPost has said in its annual report that this is not substantial, it is not immaterial. The special audit will now add to the services provided by PwC.

Further, questions have now arisen about conflict of interest for three acquisitions in particular. Such conflicts of interest may raise questions about the value of the consideration paid by SingPost and the accounting for such acquisitions.

For example, for the Famous Holdings acquisition, which includes a payment of S$60 million for 62.5 per cent of the shares and a contingent consideration of S$50 million for the remaining 37.5 per cent, the entire fair value of the consideration was for goodwill, which stood at S$89.41 million at the time of acquisition and was later revised to S$80.51 million. SingPost attributed this large amount of goodwill to the "management capabilities in the business of freight forwarding in the Asia-Pacific and the synergies expected to arise from the economies of scale in combining the operations of the Group with those of the Famous Group". The accounting for these acquisitions, which the external auditor has already audited in the course of expressing an opinion on the financial statements, may be called into question - although I note that the scope of the special audit does not cover the accounting for these acquisitions.

Even though SingPost said that it is satisfied that PwC has "performed its own internal procedures to determine that no conflict of interest exists" and that it has "required that no partner or auditor of the Special Auditor who has performed an audit or acted as consultant to the Company shall be involved" in the special audit, it would have been better for SingPost to have appointed another firm.

I also note that SingPost has now confirmed that Stirling Coleman was the arranger appointed by the seller for the Famous Holdings acquisition. Previously, it had only disclosed that Stirling Coleman was the "arranger". This again raises the issue of conflict of interest similar to the acquisitions involving FS MacKenzie and Famous Pacific Shipping (NZ), for which Stirling Coleman acted as a financial adviser to the seller. There is currently a S$100,000 threshold for disclosure of interested-person transactions under the Singapore Exchange's listing rules and a S$200,000 threshold for determining independence under the Code of Corporate Governance for services rendered by a firm connected to a director. Under the strict letter of the listing rules and Code guidelines, payments made by the third parties for the three acquisitions in question are not technically discloseable, even though the conflict is arguably worse. There may be a need to review the rules in light of this episode, even though rules can never cover all possible situations.

It is hoped that the special audit will also establish the circumstances under which Stirling Coleman came to be acting for the seller for the three acquisitions in question. Since Mr Keith Tay had earlier committed to rendering all assistance and cooperation to the special auditor, he and Stirling Coleman may be able to provide the necessary information to the special auditor to shed light on this. Hopefully, the special audit will also confirm that Mr Tay was not personally involved in discussions with the sellers for the three acquisitions before they were brought before the SingPost board, especially now that it has been disclosed that Stirling Coleman was also acting for the seller in the sizeable Famous Holdings acquisition.

Finally, SingPost has said that only a summary of the findings will be announced. When the special audit was first announced, I had hoped that the full report would be disclosed. I urge the regulators who are privy to the full report to ensure that there are compelling reasons for excluding any information in the summary report. What we do not want is a summary report that raises more questions than it answers.

Mak Yuen Teen

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