Asia getting tougher on auditors after high-profile defaults

Hong Kong

REGULATORS in some Asian countries are getting tougher on auditors after landmark defaults, in an increasingly high-stakes game as investors call for earlier warning signs amid expectations for debt failures to mount.

High-profile collapses of commodities trader Noble Group Ltd and India's shadow lender Infrastructure Leasing & Financial Services Ltd have rocked investors over the past year. In China, a spate of defaults has raised concerns over the quality of financial reports.

Those incidents have prompted investors and regulators in Asia to look back on where they might have picked up more clues that trouble was brewing, adding to broader scrutiny of auditing firms elsewhere in the world.

In Malaysia, the Securities Commission fined Deloitte PLT earlier this year for breaches related to a bond issuance by 1MDB. The Singapore Exchange plans to increase the accounting oversight of listed companies, amid a probe into Noble Group and its longstanding auditor Ernst & Young LLP.

"Auditors in Asia have not been very good at warning debt investors of potential defaults," said Charles Macgregor, head of Asia at Lucror Analytics Pte in Singapore. "Most auditors are afraid of qualifying their audit report, as they could get sacked by the company."

The Singapore Exchange has in the past defended its oversight of Noble, citing a clean bill of health by the company's auditors Ernst & Young. PricewaterhouseCoopers LLP also produced a study in 2015 that stated the commodities trader complied with international rules in valuing long-term contracts, even as it qualified its assessment by saying Noble needed to improve governance and deal valuation methodology. In response to questions, the Singapore Exchange referred Bloomberg to a speech by Tan Boon Gin, chief executive officer of Singapore Exchange Regulation in January. The Singapore Exchange will play "a much more active role" in determining the scope of the year-end audit for selected companies, Mr Tan said at that time. It has already started doing so by meeting with auditors and audit committees of about 15 listed companies so far. SGX will also propose a new power to require the appointment of a second auditor in "exceptional circumstances" Mr Tan said. In addition, it proposes that all listed companies have to appoint either a Singapore-based auditor, or to have a Singapore-based auditor jointly sign off on a year-end audit conducted by a foreign auditor.

"We are fully cooperating with the enquiries and are unable to comment on the details at this time," EY said in response to questions from Bloomberg. A PwC spokesman said the firm is unable to comment on anything related to Noble as it is a past client.

Singapore's Accounting and Corporate Regulatory Authority conducts inspections on registered auditors to assess their compliance with auditing standards, according to a spokesman. The regulatory body may suspend or cancel a public accountant's registration for serious audit deficiencies. It is also "looking into amending the law to allow sanctions to be meted out on firms for lapses in quality controls", the spokesman said.

The increasing complexity of accounting standards makes it harder for auditing firms, and of course if a company is intent on committing fraud, that can be difficult for anyone to detect. "The job of the auditor is to make sure that the company's accounts conform with generally accepted accounting principles," said Todd Schubert, head of fixed-income research at Bank of Singapore Ltd. "They are not forensic accounts."

The so-called "big four" accounting firms - Deloitte, KPMG, EY and PwC - have faced scrutiny globally. A UK competition watchdog said late last year that audit work should be split from the much larger consulting business at an operational level. Still, Asia presents unique challenges. "It's very hard to rely on auditors for Chinese companies for credit analysis," said Ben Sy, head of fixed income, currencies and commodities at JPMorgan's private banking unit in Asia. "Sometimes the actual liabilities of a Chinese company can be significantly larger than those on the books." BLOOMBERG