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Opening Address by Mrs Josephine Teo, Senior Minister of State for Finance and Transport, at the Public Accountants Conference

24 Aug 2014

Date: 27 August 2014
Venue: Raffles City Convention Centre
Speaker: Mrs Josephine Teo

Ms Lim Soo Hoon, Chairman ACRA

Mr Kenneth Yap, Chief Executive ACRA

Distinguished Guests

Ladies and Gentlemen

1. Good morning. At last year’s Public Accountants Conference, I highlighted the Government’s concern that companies were not taking sufficient ownership of their financial reporting. If you recall, a survey by ACRA and ACCA had showed that up to half of the respondents involved as financial preparers did not realise that they, rather than auditors, were primarily responsible for the preparation of financial statements.

2. And yet, it is the very same financial information put out by these preparers that investors, creditors and other market participants rely on to support decision-making. It bears repeating therefore, our belief that all stakeholders in the financial reporting eco-system should make a stronger effort to ensure the quality of financial reporting.

3. Moreover, when it comes to listed companies, retail investors have a particular interest. Unlike institutional investors and analysts who are likely to have greater access to companies’ management and other information sources, retail investors rely mainly on companies’ public disclosure through their quarterly announcements and annual financial statements.

Improving the Quality of Financial Statements

4. For this reason, ACRA commissioned the Singapore Management University (SMU) to focus on the financial statements of listed companies in Singapore. The idea was to zoom in on the frequency and scale of audit adjustments.

5. As many in the audience know, adjustments are proposed by auditors during an audit to correct accounting omissions and errors. The purpose of the adjustments is to ensure that the audited financial statements are accurate and compliant with accounting standards. Audit adjustments are thus good indicators of the gap between the accounts prepared by the company and how well they met accounting standards. If the accounts were properly prepared, one should not expect too many major adjustments.

6. As far as we know, the study is the first of its kind. It studied the audit adjustments of 257 listed companies with an aggregated market capitalisation of about $290 billion. This constituted close to one-third of SGX’s total market capitalisation1. Such adjustments are typically not known to shareholders and investors, who see the post-adjustment financial statements.

7. The results from the study have been insightful. Of the 257 companies studied, about half (126 companies) had 4 or fewer proposed adjustments each and the total value of the adjustments constituted just about 10% of all the adjustments. It is noteworthy that this group of companies is not limited to the large cap companies as some of us would expect. It was a relatively even spread between the large cap and smaller cap companies. In other words, about half of all companies studied had prepared their accounts well enough not to have more than a few adjustments, and these companies included both large and small caps.

8. At the other end of the spectrum, a small group of about 33 companies had 20 or more proposed adjustments each. Although these companies formed only 13 per cent of the companies studied, they accounted for about 70 per cent of the value of the proposed adjustments. The proposed adjustments among these companies were also typically of much higher values, compared to those with fewer proposed adjustments. In other words, the companies that had more adjustments typically had higher value adjustments as well.

9. I should add that some adjustments may not impact the bottom-line. This happens, for example, when the adjustment was to properly classify an item that was wrongly-classified. Nonetheless, such adjustments should also not be prevalent if the accounts are prepared correctly in the first place.

10. That said, the fact that 13% of the listed companies studied had significant proposed adjustments, both in number and value, should interest us to look more deeply for recurring patterns. As it turns out, most of the 33 companies share a common trait – they are “growth-stage” companies with market capitalisation of less than $500 million. The higher rate of proposed adjustments was likely attributable to accounting systems and capabilities that had not kept pace with the companies’ expansion.

11. As I have mentioned earlier, there is no known international study of a similar depth. There is therefore no established benchmark on what constitutes an acceptable level of adjustments or whether the study’s finding is a red-flag for Singapore-listed companies.

12. What we now know is that size itself is not an impediment to good quality financial reporting. However, when companies are at a growth stage, there is a greater risk that this capability does not get built in tandem with the needs of the growing enterprise. It is therefore timely to remind growing companies to take heed.

13. In particular, if audit adjustments become more frequent or if you are inadvertently depending on auditors to tidy up your accounts, there is urgency to review the adequacy of your accounting systems and finance resources. Remember that auditors should, rightfully, not be involved in drawing up the same financial reports that they would audit. Companies in the public markets have an especially important duty to investors to ensure that you are equipped to deal with the tight reporting timelines. While the study shows that the auditors have done their jobs in flagging out inaccuracies during the audit, we should not rely solely on them as the gatekeeper.

14. With this empirical evidence in hand, ACRA will engage key stakeholders such as the audit committees, directors and investors to address the root causes of audit adjustments, and to find ways to support the continued improvement in financial reporting in Singapore.

Audit Committees – taking on a bigger and more involved role

15. Let me suggest that one particular group of stakeholders who can play an especially important role and that is the audit committee, which is in a unique position of having oversight over management as well as the external auditor. The study underscores the need for audit committees to increase their scrutiny of companies’ preparation of financial statements, and to set clear expectations on improvement measures when preparation fall short of the quality expected.

16. The key objective is to ensure that the company gives investors a true and fair financial picture of its performance. Instead of focusing on whether to accept the proposed adjustments, I encourage audit committees to delve deeper to find out the root causes for these adjustments. The audit committee can assess the company’s financial reporting capabilities and capacities, and deliberate if the nature and frequency of audit adjustments suggest more serious underlying issues such as fraud.

17. Audit committees are also responsible for making recommendations to the Boards on the appointment and remuneration of the auditors. To do so, they need to be adequately equipped to evaluate their auditors. ACRA, MAS and SGX have recently issued an updated version of a Guidebook for Audit Committees. The Guidebook provides a rich source of practical tips and guidelines for audit committees. It outlines best practices; including suggested questions that audit committee should pose to the auditors and audit firms, as well as factors to consider when evaluating auditors.


18. To conclude, we should build on the foundations of good corporate governance in Singapore and further strengthen the quality of financial reporting. We can also learn from the experiences of other jurisdictions, and adopt good practices.

19. In the UK, after the routine inspection of the audit firm, the regulator sends a copy of the confidential inspection reports relating to an audit engagement direct to the audit committee of that specific company. In Canada, audit firms are also expected to share key inspection findings with the audit committees. These measures encourage open discussion of inspection findings between the auditors and audit committees and assist the audit committee in maintaining oversight over the auditor.

20. In 2012, ACRA conducted a public consultation on the review of our audit regulation regime. Among the key stakeholders including the leading accounting firms and SGX, there was some support for one of the proposals to allow discretionary communication of inspection findings by ACRA to the audit committees.

21. ACRA will explore this proposal further. The sharing of inspection findings will likely facilitate the audit committees in their oversight of the auditors to ensure that their auditors are according the right resources, expertise and processes to their audits. As part of the efforts to further uplift the quality of financial reporting, there is merit in implementing such a practice in Singapore, as it has been done in the UK and Canada.

22. I hope that you will have take advantage of the opportunity today, with so many stakeholders gathered, to have an active exchange of views on this matter. On this note, I wish you a fruitful conference.

Thank you.