Auditors get into trouble over these issues

do the plumbers get complaints for  doing this?

Just read this article from ACRA on “Discussion of Past Disciplinary Cases against Public Accountants and Public Accounting Entities”. It is to raise awareness of important issues concerning appropriate and acceptable professional conduct; and to make known actions taken by ACRA to uphold professional conduct. I will focus on the former.

What are most of the complaints against the public accountants about?
Usually they relate to allegations of improper or dishonourable conduct. Of course, this would includes (among others) a failure to comply with the Code of Professional Conduct and Ethics for Public Accountants and Accounting Entities (the Code).

Examples of main areas of complaints are:-

1. Can the Auditor retain or exercise a lien over the documents till fees (or ransom?) are paid? Similarly, can the Auditor refuse the request from client to release audited financial statements before settlement of fees?

The sad thing is the law or code of conduct does not offer much direction as it takes the position that “Generally, it is a private matter between him and his client”.

Confusion would reign in the form of determining auditor’s responsibility to client who may suffer financial and/or reputational loss when the client fails to fulfill statutory filing or meeting commercial obligations without the documents or the audited financial statements.

2. Poaching  clients of another public accountant who referred work to the public accountant.

Public Accountant A outsourced part of his work from Client to Public Accountant B. Client fell in love with Public Accountant B and asked B to take the job from A all together. What should Public Accountant B do? To me this is pretty obvious. My own guiding principle in the conduct of my business when in B’s predicament would be for B to seek permission from A. If A says no, B should walk away. As I do intend to be in the business for long term, protecting my professionalism is of paramount importance on this little red dot of Singapore.

3. Fees disputes.
A pretty common issue that needs to be specifically addressed upfront in the appointment discussion and documentation.

4. Independent issues

I quote – “A public accountant should avoid situations which would give rise to the impression that his integrity and objectivity might be compromised or impaired when he was performing the role as the auditor.”
Example cited in the paper – Can a member of an audit team be performing an audit of a company in which a related party is working as a director or a senior position?

My own guiding principle is again simple – When you yourself can have a doubt over a matter that may challenge your independence, please declare to all parties concerned and let the parties concerned decide on your participation or walk away from the situation.

5.  Conduct during practice review
ACRA may on many occassions conduct practice review of its public accountants. It is the duty of the public accountants concerned to render the necessary assistance and provide the necessary documents to appointed reviewers. Instead the reviewers receives shouting, foul language, threats and harassment from similarly “harassed and distressed” public accountants, defending their livelihood.

Yes, we should maintain basic civility between fellow human beings, each trying to do their job.

Good day and smile.

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.

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

How to prevent auditors from assessing your financial records?

Dear Friends,

I was just catching up on my reading of some old newspapers after a hectic couple of months when I come across this interesting article.

Sino Techfibre firstly announced that there were some issues pending from its year-end audit. While the management was in the process of arranging with E&Y for an expanded audit review of its operations in China (as informed in newspaper), Sino Techfibre reported that there was an early morning fire at its office premises in Shandong office which destroyed books and financial records. While the office premises were said to be damaged, the remaining production facility in Shandong province remained intact. Of course, the fire is being investigated by local police but the records have been destroyed forever.

Another interesting way to prevent auditor from reviewing financial records was to get the lorry carrying those records STOLEN while the driver was having lunch. This actually happened in 2009 with PwC having issues with verfying cash balances of China Sun Bio-Chem.

Source – Straits Times, April 25, 2011 page B13

China Gaoxian has also appointed PwC to verify cash and bank balances, the underlying sales and purchases and capital expenditures for its two subsidiaries in Zhejiang and Fujian provinces for quarter ended March 31. Luckily, the factory operations in the two respective provinces are still operating for now.

Other S-chips with similar accounting irregularities are Hong Wei Technologies and China Hong-xing.

Source – Business Times, April 22, 2011 page 6

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?

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.

Audit opinion?

Based on Singapore’s accounting standards, auditors would put an ‘emphasis of matter’ if an issue warrants deeper discussion but does not affect the auditors’ opinion.

Matters that affect their opinion would be highlighted by way of a qualified opinion, a disclaimer of opinion or an adverse opinion – in order of severity.

Is there a better way?

Perhaps we could follow the World Health Organisation’s numerical approach on the level of seriousness on H1N1.

Alternatively, we could go on the colour-coding way.

Of course, I am not wholly serious about the above suggestions.

But the point here, let us not try to make our profession and our work complicated by using “chim” words/phrases that the ulitmate users of the auditor’s report may not understand.

Can we do better?

Is your business a Going Concern?

Are your bankers, suppliers, customers, employees… asking questions or passing remarks about your company’s health ie. going concern (GC) status?

Given the current economic situation, may businesses may display certain symptoms that they may have caught the GC disease.

There is one more key person whom you may have to contend with in due course.. the auditor!

Auditors will increasingly question the viability of business. Helen Brand, head of ACCA reinterated this point in yesterday’s BT article entitled “Going concern dilemma for auditors”.

A CFO of a public listed company that I “accidentally” had lunch with recently, made this remark about their auditor. The company has some investment in China. To check for impairment, auditor requested that his company to do a 5-year cashflow projection and to be followed by computing for its NPV using the higher Weighted Average Cost of Capital (WACC) as the discount rate. He said the end result of that exercise is obvious. There will definitely be a write down on the investment. The write down may wipe off whatever profit and resulting in a loss. A loss ==> any going concern problem?

While a loss may not lead to a going concern problem, nevertheless the loss would activate another series of tests to confirm whether a company has the ability to meet its obligations within 12 months from its balance sheet date.

A quick and simple test would be whether Current Assets > or < Current Liabilities.

A loss in the P&L and CA Qualified Audit Report => investors/bankers withdrawing their support. Unthinkable?

Business owners, you may wish to get ready the following for the GC test.

  • a realistic business plan
  • a realistic plan to liquidate non-current assets
  • a financial support package secured
  • capital injection from shareholders
  • or any other info that will help the auditor to appreciate that your business can go on for another 12 months

Both auditors and business owners do understand the gravity of GC.

s207 (9a) Companies Act and NEL Group

What is that about?
Under the Act, the external auditor of a public company has a legal duty to report (ie. whistle blow) to Minister of Finance if potential fraud may have been uncovered during the annual audit exercise.

What if it turned out to be misunderstanding? No breach of legal duty if it is done in good faith.

s207 (9a) was seldom invoked. The last time it was used was about 12 years ago on CAM International Holdings Ltd. Recently it was invoked for NEL Group. KPMG has submitted a report to the Minister.

So what do KPMG think has happened in NEL Group?
Apparently there is this new game in town called “round tripping”. It was played by NEL Group and Advance Module, another listed company back in 2005.

How to play? First I sell to you. Maybe after my financial year end, you sell back to me at about the same price. Of course, nothing was really purchased or sold except maybe some people just do and exchange some paperwork on the “transaction”.

The pressure to perform financially has encouraged creativity!

Mr Tham Sai Choy – ACCA Conference 2008

He said under the new regime, the auditor and consequently the management of business entities would have to present written submission on risks considered and any actions taken to mitigate that risks in the preparation of the financial statements.

In the past, putting “Non Applicable / NA” in checklist may suffice.

To carry that idea to the extreme (if it is not in the extreme now) would be that a management of a business entity now could be required by the auditor to provide a management representation letter certifying that

  • all risks, man made or otherwise, has been considered and deemed acceptable
  • and also attached supporting documents for that conclusion ie. weather reports from MET office, geography records for earthquake risks, CIA reports for terrorist risks etc etc etc.

Does it mean higher audit fees too? 🙂