Lack of professional scepticism = "boh chap"?

golfing or auditing?

At ACRA’s annual Public Accountants Conference on Aug 19, 2009, ACRA presented their findings on public accountants as follows:-

On the larger audit firms ie. auditors of public interest companies lack ‘professional scepticism’ while experienced audit partners often take a hands-off approach on actual audit (Edgar’s cheeky remark – Partners take a hands-on approach on golf?)

What do you mean by “lack of professional scepticism”? ACRA noted the following:-

  • the larger audit firms have generally failed to assess related-party transactions, management assumptions and forecasts, and the risk of fraud or misstatements.
  • junior audit staff doing most of the key audit work.

As to the smaller accounting outfits, they struggle to maintain audit quality with a very very competitive fees environment. Some faults noted are:-

  • some small outfits still do not search for unrecorded liabilities and do not perform work to test foreign currency translation.
  • increasing demands of the audit environment coupled with difficulty to attract quality audit staff and resources to provide adequate supervision.

Punishments done to date

  • Since 2004, seven public accountants have had their professional practice licences suspended or cancelled by ACRA as reported by Ow Fook Chuen, deputy CEO of ACRA.
  • Less severe cases have been dealt with by way of reprimand, mandatory peer review requirement and regulatory course.

I have the opportunity of meeting a few fellow members undergoing “remedial classes” in the last 2 weeks. One has told me of their uncertain fate even after attending their 3-day programme.

Any idea to resolve?
Ms Penelope Phoon, Singapore Country Head, ACCA provided some directions. She said the “anomaly in audit fee levels and the volume of work are therefore locked in a vicious cycle that increases the propensity of firms to overlook critical matters and lose their professional scepticism occasionally”.

One of the keys to breaking this vicious cycle is to understand in a clear way why companies in are paying much lower fees for, many would argue, comparatively higher quality audits.

Do you have any other ideas?

Tax spies and top income bracket

Mr Ooi Boon Jin, head of international executive services at KPMG, made this observation in today’s BT. He said, “Our study has recorded a general decline in top personal income rates over the past seven years, but for 2010 we are seeing indications that a reversal may be on the way.”

A reversal in falling tax rates in attempt to drive tax collections to pay for the trillions of stimulus packages implemented over the last 12 months.

In another development reported in today’s BT, Mr Mochamad Tjiptardjo, the new tax chief since last month, said, “(Indonesia) must boost tax revenues significantly to meet the government’s ambitious target in a country where tax evasion has been routine.”

How does he plan to do it? Among the many initiatives, he intends to send “tax spies” to places to gather evidences of Indonesians have stowed their ill-gotten gains and evading taxes.

So if you are a high income earner, it is time you seriously review your tax residency status if you have not.

KPMG illustrated that a Singapore tax resident would pay top personal tax rate of 20% if and if their next chargeable income exceeds SGD$320,000 or USD217,317/-. If you are a Malaysia tax resident, you would have the honour of paying the top personal income tax rate of 27% at a significantly modest annual income of USD28,470/-.

SGX proposing local auditor and governance adviser

Singapore Exchange CEO Hsieh Fu Hua in a speech at the annual Invest Fair on last Saturday proposed the following regulatory changes:-

  1. Companies with foreign operations audited by an overseas accounting firm may need a joint sign-off by a local auditor;
  2. New listings may need to hire governance advisers for two years after their initial public offering (IPOs).

The costs of listing and costs of maintaining a listing status in Singapore for an entity with foreign operations have just gone up.

The devil will be in executing the above changes.

Some issues of the top of my head would be:-

  • Local auditor signing off would also be in a position to decide which foreign auditor to appoint?
  • Will this eventually lead to local auditor taking over the audit of foreign operations as well?
  • What is the level of responsibility of local auditor signing off?
  • What are the responsibilities of governance advisers? Is he or she a board level personnel? Can a staff hired to do internal control duties be designated a governance adviser?
  • Actually who is a qualified governance adviser? Lawyers or accountants?

I would like to hear SGX proposing some control and maintenance measures to be done by them. I really hope SGX is not attempting to propose measures that would eventually “outsource” their control function to local auditors and governance advisers at the expense of the listed entities.

Will this happen to Accountants too?

What is the issue about?
The case involves lawyer Bachoo Mohan Singh, 61, who was convicted two years ago of helping to file a false claim – an offence which carried a mandatory jail term.

Having failed in his appeal to the High Court (which usually is the end of legal route), he took an unusual route of getting the Registrar to have his case heard by the Court of Appeal (Singapore’s highest court). On what ground, you may ask.

The hearing will allow the three-judge Court to consider this issue of concern to the legal community here, ie. the extent to which lawyers are responsible for verifying claims made by their clients which may turn to be false subsequently.

What is the current practice? Lawyers take most statements given to them by clients based on good faith, and assume them to be true.

The Court’s view on the case could put both lawyers and their clients on notice.

Edgar, what has this piece of news got to do with Accountants and Auditors? Try replacing “lawyer” with “accountant / auditor” in the above paragraphs, do we wish to be in the same position as Mr Singh? As a tax agent, we could be filing GST returns based on client’s information.

The ruling is due soon. I just hope the Court will not seek “refuge” under the “reasonable man rule”.

Enhanced Loss Carry Back – Priority issue

Rule – A company that has assessable income for a particular YA may be eligible to offset the income with losses carried forward from a prior YA as well as losses carried back from a subsequent YA.

Consider this scenario. There could be loss carried forward from YA2006 available to offset the
assessable income of $80,000 in YA 2007 in addition to the loss carried back from YA2009.

Question – What should the priority of offset be? Should it be carry forward first, then carry back, or vice versa?

Answer – Based on section 37E(1) and (17) of the Income Tax Act, the losses brought forward would be deducted first.

Airocean’s directors in Court

What is the case about?
The indepedent directors of Airocean have been charged for breach of duty when they are alleged to have given misleading announcements over the nature and details of investigation of Mr Thomas Tay, the former CEO of Airocean by Corrupt Practices Investigation Bureau (CPIB).

Ms Lorraine Tay, the Vice President of SGX’s issuer regulation unit and the team leader in charge of Airocean’s compliance issues, was queried by Mr Davinder Singh, Senior Counsel, acting for one of the independent directors in the early proceedings.

Lorraine said SGX was informed by MAS then that the announcements may not be accurate and that MAS was unable to disclose why. Mr Singh queried whether this was informed to the directors.

  • What information did SGX have at that point in time?
  • What were the precise circumstances leading to SGX to conclude that the announcements then at that point in time were misleading
  • And whether the same information was conveyed or made available to the directors?
  • And when the directors became aware of the information, did the directors, to the best of their abilities, attempt to rectify any “misannouncements” made earlier to the investing public?

SGX‘s position – Announcements must always be the responsibility of the directors.

MAS‘s role with CPIB and MAS’s role with SGX – Beyond my realm of understanding at the moment.

CPIB‘s role – To investigate any wrongdoing. But could they be expected to tell the whole world who and what they are investigating and may end up compromising their investigation?

Let us await for more news on this case.

Reference – BT, Aug. 15, 2009

Liquidator and her independence

Singapore-based Fustar Chemicals Pte Ltd owes FCL (Hong Kong) a debt of $614,560.71. Mr Ng Cheong Ling owns FCL (Hong Kong) while Mdm Wong Ser Wan owns the Singapore entity.

The Singapore firm came under voluntary liquidation in 2004, mired by a matrimonial dispute between them. Mdm Wong appointed Ms Ong Soo Hwa to be the liquidator.

Ms Ong rejected the existence the debt on the basis of absence of primary documents even though secondary documents such as audit confirmations and “qualified” audited accounts were submitted.

The dispute went to court.


The High Court agreed with Ms Ong’s decision not to admit the debt. The Court of Appeal, led by Justice VK Rajah, disagrees and overturns the earlier decision on the following grounds:-

  1. “weight should be given to the fact that the accounts in question have been audited’ and there was no evidence to conclude that the audited accounts may be inaccurate or incorrect.”
  2. “It must be obvious to anyone with accounting background that the doubtfulness about the collectibility of a debt by a creditor has no effect on a legal obligation to make payment by the debtor”

Justice VK Rajah expressed stern words on Ms. Ong‘s performance as a liquidator.

  • “A liquidator must not only act independently, but be seen to be independent.” She is seen to be biased in favour of her appointers.
  • Though the accounts were qualified by auditors, the debts are still part of the audited accounts of the company as the accounts were approved by the directors and shareholders at annual shareholders’ meetings.

As punishment, The Court of Appeal told Ms Ong that she can only get her fees after all the creditors have been paid.

FRS 16 – Property Plant Equipment v090604

a plant as defined by FRS16

FRS 16 prescribes the accounting treatment for property, plant and equipment.

Property, plant and equipment are tangible assets that are in use for more than one accounting period. Cost of property, plant and equipment comprise of:-

  1. Its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates.
  2. Any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.
  3. The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purpose other than to produce inventories during that period.

Property, plant and equipment are initially recorded at cost. Subsequently, they can be carried either:-

  • Cost less any accumulated depreciation and any accumulated impairment losses; or
  • Revalued amount (Fair value at the date of revaluation), less any accumulated depreciation and any accumulated impairment losses.

If option (b) is chosen, all assets within a class of property, plant and equipment must be revalued and the valuations must be updated regularly.

A revaluation increase shall be credited directly to equity as revaluation surplus, unless it reverses a revaluation decrease of the same asset previously recognized in profit or loss.

A revaluation decrease shall be recognized in the profit or loss. However, the decrease is debited directly to revaluation surplus in equity to the extent of the credit balance in revaluation surplus.

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. The residual value and the useful life of an asset should be reviewed at least at each financial year-end. If expectations differ from previous estimates, the change in accounting estimate (FRS 8 Accounting Policies, Changes in Accounting Estimates and Errors) is applied.

Impairment is recognised in accordance with FRS 36 Impairment of Assets.

The gain or loss on the derecognition of an item of property, plant and equipment shall be determined as the difference between the net disposal proceeds, if any, and the carrying amount of the item and is included in the profit or loss.

FRS 16 specifies disclosures about property, plant and equipment.

Source – ICPAS CPA Singapore Wire 9 June 2009