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SGX RegCo proposals raise profile of ACRA, SISV
SEVERAL months ago, a major accounting firm refused my request to have one of its key people speak about the auditing field and the trouble that had engulfed Noble Group. I wasn't surprised. A number of other accounting firms had turned me down too. But the reason for their refusal left me scratching my head.
According to its communications staff, expressing a view on a particular listed company, and commenting on the work of a fellow auditing firm, might adversely affect its perceived independence. This made no sense to me. If anything, speaking candidly about a matter of great interest to the market would have enhanced the accounting firm's reputation among public investors, which is the constituency they are supposed to serve when they act as auditors for listed companies.
Moreover, Singapore Exchange Regulation (SGX RegCo) was at the time already talking about the need to address what it called a "trust deficit" in the market towards the financial statements of listed companies, and calling on directors, audit committees, auditors and regulators to work towards this goal. SGX RegCo had also let it be known that it was going to play a more active role in determining the scope of the annual audits of listed companies, ensuring that issues it is concerned about are properly covered in the audit exercise and reflected under the Key Audit Matters segment of the auditor's report.
Amid this shifting expectation of the scope of their work, it was surprising to me that the major auditing firms were not more eager to engage the market and demonstrate some leadership of their own. To be sure, there is also widespread apathy among investors about the role that auditors play in the market. Many investors do not ever read the auditor's report in the annual reports of companies. Many also assume that auditors are conflicted because they are paid by the very companies they audit.
Yet, the auditing firms have done themselves no favours with their reticence and seeming inaction in the face of corporate debacles that have contributed to the "trust deficit" in the local market - not least among them, the implosion of Noble Group amid allegations that it had been inflating the value of its assets and understating its liabilities.
The vacuum of leadership from the auditing field in addressing the "trust deficit" and restoring confidence in the market isn't going to be filled by anyone else though.
SGX RegCo has flexed the power it directly has over listed companies to improve their behaviour and practices; for instance, by dictating the scope of their annual audits. SGX RegCo has also sometimes reached beyond its domain in an effort to establish clear standards to which listed companies can be held.
For instance, in August 2017, together with the Singapore Institute of Surveyors and Valuers (SISV), it announced the formation of a joint committee to review the valuation and reporting practices of property valuers engaged by listed companies. In June 2018, following the deliberations, the SISV Practice Guide for Valuation Reporting for Reits, IPOs and Listed Companies was released.
Yet, SGX RegCo's initiatives haven't diminished the role of auditors and valuers in the local market. On the contrary, it has marked out space for these professionals and their regulators to share the burden of addressing the "trust deficit".
Earlier this month, SGX RegCo kicked off a consultation exercise on four proposals to improve auditing and property valuation standards in the local market. Firstly, SGX RegCo wants all locally listed companies to appoint an auditor registered with Accounting and Corporate Regulatory Authority (ACRA). Secondly, it wants to have the power to require companies under certain circumstances to appoint an additional auditor to provide a second independent opinion on their financial statements.
Thirdly, to ensure that real estate valuers appointed by listed companies are properly qualified, SGX RegCo is proposing that they should have at least five years of relevant experience; be members of SISV or a similar professional body that has the power to discipline and revoke their membership; be independent of the companies that engage them; and not be a sole practitioner or have an adverse compliance track record.
Lastly, SGX RegCo wants listed companies to comply with SISV standards for the valuation of properties in Singapore, while the valuation of its overseas properties may be in accordance with SISV or International Valuation Standards.
If these proposals are adopted, it is likely to be SISV rather than SGX RegCo that finds itself under the spotlight the next time a listed company or Reit attempts a transaction supported by independent valuations that investors find questionable. And, if ever there is another Noble case, investors may well direct their ire at ACRA, rather than at SGX RegCo. So, the time might have come for ACRA as well as SISV to prepare themselves for higher profile regulatory roles.
Maintain market relevance
How can ACRA and SISV improve the investor perception of the role that auditors and valuers play? The obvious starting point is to ensure that auditors and valuers are appropriately qualified and produce high quality work. Auditors and valuers should also be constantly reminded that their role is ultimately about protecting the interests of investors.
Just as importantly, ACRA and SISV should monitor market sentiment and be prepared to promptly and publicly address "trust deficits" involving the financial statements or asset valuations of any listed company. If the work of auditors and valuers is to be taken seriously by investors, these professionals cannot be allowed to ignore what is being said about their clients in the market.
With any luck, if a new spirit of reform and openness takes root, audit firms will no longer be reluctant to publicly discuss issues that matter to investors. And, they won't fear that their perceived independence will be affected in any way.