Opening Address By Mrs Josephine Teo, Minister Of State For Finance And Transport, At The Public Accountants Conference14 Aug 2013
Ms Lim Soo Hoon, Chairman ACRA
Mr Kenneth Yap, Chief Executive ACRA
Ladies and gentlemen
Thank you for inviting me to the Public Accountants Conference 2013.
2. On the previous two occasions that I joined you, I spoke about the need to improve audit quality, with the purpose of raising standards of professionalism and enhancing the value of audit to businesses. I also highlighted concerns such as the low level of partner-involvement in audit engagements and the need to step up quality controls.
3. Encouragingly, there have been noticeable improvements since then. In particular, firms that audit listed entities are establishing stronger quality controls. Some firms have made a clearer link between audit quality and partner performance evaluations and remuneration.
4. ACRA has also seen an increase in the time-involvement by engagement partners and quality control reviewers. Last year, half of the engagements reviewed had partners spending more than five per cent of total engagement time, compared to only one-third in the previous two years. I hope audit firms will build on these efforts to further strengthen audit quality.
5. Through ACRA’s engagement with public accountants, a new concern is emerging. Auditors have found themselves spending significant time and resources to get the management accounts in order before a proper audit can take place. For example, clients need guidance to prepare audit schedules, such as the analysis for overdue trade debts. Auditors should, rightfully, not be involved in drawing up the same financial reports that they audit. So we should address this issue before it becomes a norm.
Companies Must Take Greater Ownership of Financial Reporting
6. In a survey by ACRA and ACCA this year, about half of the respondents, who were preparers of financial statements, did not realise that preparation of financial statements are their primary responsibility rather than that of auditors. Not surprisingly, this lack of awareness is more prevalent among small and medium companies, but quite a number among larger companies seem to be unaware as well. These survey findings suggest that poor preparation stem from the lack of ownership of the quality of financial reporting by the companies involved.
7. Auditors are rightly concerned that the raising of the audit threshold may also give audit-exempt companies the impression that they no longer need to prepare proper accounts. In fact, the Companies Act requires them to. Those still subject to audit may also view financial reporting as just an annual compliance exercise.
8. Such attitudes are most likely in the minority. Nonetheless, it bears repeating that accounting and financial reporting ought to be taken seriously by all companies.
9. At the most basic level, the companies themselves rely on these reports when making operational decisions. Mistakes due to a misguided view of the business could be costly. When financial reports are poorly prepared, investors and other stakeholders will also not have an accurate picture of the business, whether it is generating value and the risks involved.
Collective Action to Strengthen Financial Reporting
10. All stakeholders – the directors and the audit committees, management, investors, the accounting profession and the regulator – have a role to play in strengthening the financial reporting value chain.
11. Directors, in fact, have legal responsibility for the company’s financial statements, and should ensure that financial statements provide an accurate picture of the financial health of the company. Management have to set the right tone and put in place properly qualified staff who can prepare high quality financial statements. Investors also have a role to play in making clear their expectations for companies to provide them with high quality financial reports.
12. Among the most effective measures identified in the survey to improve companies’ financial reporting was to bring on board qualified accountants, enhance training and implement suitable IT systems. These are low-hanging fruits and not terribly difficult. Furthermore, there are schemes offered by agencies like SPRING and IDA to reduce the cost of implementing these measures for improvements.
13. The professional bodies can also do their part to make available affordable and up-to-date training programmes. There are also platforms for knowledge-sharing such as the Singapore CFO Institute set up by the Singapore Accountancy Commission (SAC) and other professional bodies. Preparers should leverage these avenues to keep abreast of regulatory changes as well as good practices.
14. In addition, the accounting profession should enhance self-regulation. For example, the Institute of Singapore Chartered Accountants’ (ISCA) Financial Statements Review Committee examines financial statement disclosures, and provides feedback to its members who audit these disclosures. Such professional self-regulation helps to exert pressure on directors and preparers, through their auditors, to ensure that standards are maintained. This year, for the first time, the committee extended its reach through training seminars to help preparers avoid the pitfalls of common disclosure deficiencies and omissions in financial reporting.
ACRA will Study Ways to Strengthen Financial Reporting
15. As the regulator, ACRA established the Financial Reporting Surveillance Programme where selected financial statements are reviewed to determine if they comply with the Singapore Financial Reporting Standards (SFRS). ACRA adopts a risk-based approach and focused on listed companies with modified audit reports. It also followed-up on referrals from audit inspections and other regulatory agencies.
16. In 2011 and 2012, ACRA reviewed the financial statements of some 140 listed companies and took regulatory action where there was non-compliance, such as issuing warning letters to directors. Directors were made aware that they could be prosecuted and face penalties if their financial statements failed to comply in the next reporting cycle.
17. ACRA has found the programme to be an effective way to heighten directors’ awareness about their responsibilities and to ensure that their companies have good accounting systems and practices. Therefore, it intends to broaden the programme coverage to include financial statements that do not necessarily have modified audit opinions but are of public interest.
18. ACRA is also exploring various approaches taken by other jurisdictions to further strengthen the quality of financial reporting. Unlike in Singapore where the statutory responsibility for financial reporting only rests with directors, other jurisdictions have introduced legal responsibilities for other office holders beyond the directors. For example, in the US and Australia, the CEOs and CFOs of listed companies have to certify or declare that the financial statements are true and fair, and comply with the accounting standards. The implications of making false reports in such jurisdictions range from criminal penalties, to fines or disqualification from holding a management position.
19. I should emphasise that there is a broader aim to making CEOs and CFOs legally liable. The top management of a company has to set the tone right. They must also take ownership of putting in place the right systems and people to enable the preparation of accurate financial statements.
20. High quality financial reporting is part and parcel of good governance and is key to maintaining Singapore’s competitive advantage as a trusted business environment. We should therefore make a serious effort to raise the bar in a meaningful way.
21. ACRA will study the options available and consider relevant factors such as the skills and competencies of our preparers, and the readiness of our companies to meet more stringent requirements.
22. ACRA has initiated some discussions with key stakeholders and will take on board the full range of views before making a firm proposal. I look forward to all of you taking an active interest in this development and even greater robustness in Singapore’s financial reporting value chain.
23. On this note, I wish you a fruitful and engaging discussion at today’s conference.