Unusual treatment for UnUsUal Entertainment

multi million dollars from entertaining you

What is the law?
GST-registered businesses must charge GST output tax on the sale of their goods and services at the prevailing GST rate and account accurately to IRAS.

What happened?

IRAS found out that UnUsUal Entertainment (“UnUsUal”) had wrongly declared or “under declared” its output tax for 2005 and 2006. UnUsUal had not included the GST collected on tickets sales for both years as output tax in its GST returns.

How did IRAS find out?
This is the interesting part. IRAS found that sales figures submitted by UnUsUal for income tax purposes did not tally with the sales figures reported for output tax for 2005 and 2006. For example, the sales revenue declared for 2005 income tax was $9,136,361.00, against the $2,810,668.00 declared as total sales in their GST returns in the same year.

The conviction demonstrates the effectiveness of inter-departmental sharing of information.

What is the side issue?
The GST submission and income tax computation was done by its tax agent. The case also reminded us that it was clearly stated that the responsibility of accounting for GST on ticket sales lies with taxpayer. However, UnUsUal failed to check the GST returns prepared by its tax agent, which resulted in incorrect tax returns.

What is the penalty?

UnUsUal was found guilty of wrongly stating the output tax in its Goods and Services Tax (GST) returns, resulting in an underpayment of $502,922.27 in GST.  UEPL was ordered to pay a penalty of $601,632.72 and a fine of $10,000.

UEPL pleaded guilty to four charges of under-declaration of GST without reasonable excuse.  Four remaining charges were taken into consideration for sentencing.

Adapted from IRAS Media Release.

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Auditing – Crumbling Art Form?

Audit conundrum?

What is the event that triggers the doomsday scenario for auditing profession?

The US housing crisis before 2009. It sparked off a series of bank collapses or near collapses leading to forced government bailouts for some banks and loss of billions of dollars for many depositors, investors and homeless homeowners.

In October 2010, the European Commission issued “Green Paper Audit Policy – Lessons from the Crisis” to open a debate on two key matters:-

  • the expectation gap between auditors and the users of financial statements; and 
  • the issue of independence, size and governance of audit firms.

Singapore contributed to the debate through a series of panel discussions organised by ICPAS, ICAEW and SID.

Here are some key comments and observations of the debates and my humble responses to the respective comment:-

1. “Many of the speakers cast audit and auditors as a misunderstood lot – it is just unfortunate that investors and users of financial statements do not fully appreciate the value and the limitations of an audit.” – Willie Cheng.

Edgar – Audit profession is said to have responded by attempting to EDUCATE the “misinformed” public about what an audit is and what is not. So far in my “baseless” opinion, the “misinformed” public (who are both, your clients and users) has yet to be fully informed/convinced and consequently be fully appreciative of auditor’s work. Why?

I guess the “misinformed” public have read and some have been personally hurt when business entities that have been subjected to the vigorous regime of audit procedures, have actually gone bankrupt or going bankrupt, succumbed to frauds etc etc.

In most of these debacles, the auditors have been seen to have been able to walk away from the rubbles unscathed on defences that “an audit is FIRSTLY to just express an opinion on the true and fair view of the financial statement and SECONDLY, not to report on the financial health of the company”. Auditors want to be paid for their services but to the “misinformed” public, they do not seem to carry appropriate level of responsibilities and liabilities.

Let me cite a situation from Jonathan Weil’s article entitled “Why have auditors at all?”, which is unfolding before our very eyes. PwC said MF Global and its units “maintained, in ALL Material respects, effective internal control over financial reporting as of March 31, 2011”. MF Global filed for bankruptcy about 6 months later on Oct 31, 2011 with USD1.2 billion of customer’s money MISSING!!!. A lot of people who have relied on that audit opinion lost a lot of money.

2. Willie Cheng opined that the key root of auditor/”misinformed” public expectation gap lies in the issue of auditor independence.

What is the problem?
As the “person writing the cheque calls the shots” or “He who pays the piper calls the tune”, it is very difficult for the auditors to stand up against the Board of Directors/managements to preserve shareholders’ and stakeholders’ interests when your rice bowls are at stake.

Counter measures that have been encouraged over the last few years are:-

  • ensure auditor rotation
  • limits on fees from non-audit services and;
  • increasing the role and powers of the audit committees.

Edgar – Are these measures sufficient?
In my “baseless” humble opinion, no. Two further key areas are being addressed. Firstly, we need to tackle the bunch of people who are writing the cheques to the auditors. Secondly, the European Commission want to address the structure of providers of audit services.

What do I mean by the “bunch of people who are writing the cheques to the auditors”? I am referring to the individuals who are appointed directors/senior managers of business entities. Essentially all the current debates on corporate governance, term of directorship, number of directorships, independence/executive/non-executive status focus on strengthening the quality and ethical compass of our limited pool of directors in this small ecosystem of directors and auditors in Singapore.

European Commission is also encouraging an open debate on reforming the audit providers industry. Please consider the possibility of KPMG, Deloitte, Ernst & Young and PwC being required to put their audit and other consultancy services in separate legal entities with “unrelated” branding.

Or perhaps increase the number of “authorised” and “acceptable” audit providers for public-listed entities. The “misinformed” public, like me, seems to have the impression that the Big 4 are auditors of most public listed companies in Singapore. Take for example – When a PLC, currently being audited by Ernst &Young, got into some sort of trouble, one of the other 3 firms would be appointed to conduct the SPECIAL audit. There isn’t many alternatives.

Concluding remark – Questions like “Do we need auditors?”, “Why have auditors at all?”, “What are the roles and responsibilities of auditors?” will continue to be raised with answers leading to the destruction of existing structures and birth of a better structure (I hope) as part of a necessary evil of natural human thirst to do things better.

References
Willie Cheng, “Change is in the air for auditors”, Business Times, Sep 22, 2011.
Jonathan Weil, “Why have auditors at all”, Straits Times, Nov 28, 2011.


Acknowledge credit on graphic used
http://www.123rf.com/stock-photo/audit.html