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

Burger King vs Sinar Mas/Golden Agri over green issues

In today’s Sunday Times, I read that Burger King cancelled its contract to buy palm oil from Sinar Mas Agro Resources and Technology (SMART). This is said to be a move to protest over Sinar Mas not adopting sustainable farming practices and destroying rainforests in generating the palm oil.

This is a timely reminder of the importance of “Green Reporting”/sustaintability reporting and SGX’s recent issuance of guidelines (ie. non manadatory) on disclosure of social and environmental aspects of business.

Boards and management of companies are slowly and surely being made accountable to all stakeholders. Many years ago, they were said to be only responsible to shareholders for financial results. Now given emphasis on sustainable reporting, management are now being queried on how they achieve those results and the impact they have on the communities within which they operate in.

While I personally hope for such information to be made available on a statutory basis, I am however happy that SGX has taken the first move to “encourage” such reporting.

Bursa Malaysia is ahead of SGX when it legislated (ie. by law) that such reports be made compulsory back in 2007!!! According to ACCA survey as reported by Darryl Wee, CEO of ACCA Singapore, 49 companies in Malaysia generated sustainability reports in eight years. In comparison, Singapore lagged behind with only 21 companies.

P/S – SMART operates all palm oil plantations for Golden Agri Resources, a company listed in Singapore Exchange.

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