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Speech by Mrs Lim Hwee Hua, Minister of State for Finance and Transport, at The CPA Forum 2005, 12 August 2005, 9.00 am at Swissotel Stamford Hotel

12 Aug 2005

Good morning Guests, Ladies and Gentlemen,

1. I am very happy to be here this morning to deliver the keynote address at this CPA Forum 2005.

2. I would like to applaud the Institute of Certified Public Accountants of Singapore (ICPAS) and CPA Australia for their joint efforts in organizing this event, and sponsoring the Channel NewsAsia series on "The Agenda - Corporate Culture" in the run-up to this forum. These efforts help emphasise the importance of sound corporate governance practices, and are extremely relevant for our times.

Corporate Landscape

3. The very public collapse of global companies such as industry leaders Enron, WorldCom and Parmalat, has highlighted that greater integrity, accountability and transparency in corporate governance is critical. Singapore is a country well-trusted for its rule of law, ethics and integrity. Nonetheless, we have also not been completely spared from these corporate shenanigans, as can be seen by the recent episodes involving China Aviation Oil, ACCS and Citiraya.

4. In adopting a disclosure-based regulatory regime, it is critical to assure the integrity of the securities market so as to sustain investors' confidence in Singapore and companies listed here. Everyone - the Government, companies, directors, management, employees and accountants - has an important part to play in ensuring full commitment to good corporate governance and high standards in disclosure practices.

Corporate Governance

Importance of Corporate Governance

5. Many studies and research have shown that investors are willing to pay significant premiums for companies with effective corporate governance, not just in form but also in substance. Some institutional investors in emerging market companies are willing to pay as much as 30 percent more for shares in companies with good governance, with companies enjoying higher price multiples. Increasingly, investors are paying more attention to the proper functioning of both boards and management, and beyond the hard financial numbers. Ultimately, they are assessing how much trust they should put into each investment candidate.

Revised Corporate Governance Code

6. In light of the increasing emphasis on qualitative factors, the Government decided to recognise the value of good corporate governance by issuing in 2001 the Code of Corporate Governance to lay out best practices that listed companies should strive to adopt so as to maximize value to their shareholders.

7. More recently, the Government accepted most of the recommendations from the Council on Corporate Disclosure and Governance in its review of the Code. Among other things, the revised Code expanded the role of the Audit Committee to include ensuring the integrity of the company's financial statements and adequacy of the company's internal controls. Recognising that employees are often in the best position to raise concerns about possible financial improprieties, the Revised Code also empowers the Audit Committee to ensure that adequate arrangements are in place to facilitate whistle-blowing, to allow staff to raise such concerns and for the independent investigation of such matters.

Rules vs Ethics

8. While the Code can put greater responsibility on the Board and its Committees, we also recognise that it is ultimately the values and integrity of the management which will be critical in ensuring that the substance, and not merely the form, behind good corporate governance practices is assured. Faced with an unethical CEO or CFO, even the best and tightest regulation will fall apart. `The fish rots from its head', the saying goes. No rules can ever completely contain a person's deceitful mind.

9. Where then does this lead us? Should companies discard corporate governance mechanisms and risk management systems, as they cannot, on their own, assure sound thinking and sound practices? Certainly not. Good corporate governance practices cannot guarantee no corporate failures. But the absence of such governance standards will almost certainly guarantee questionable practices, and corporate failures which surface suddenly and massively.

10. Yet the Government, as regulator, must strike a careful balance between paranoia over corporate misdeeds leading to the imposition of onerous rules and the proper functioning of companies. We should never delude ourselves into thinking that rules, and yet more rules, will help us prevent corporate misdeeds which are frequently perpetrated by greed, not a lack of rules.

Role of Auditors and Professional Accountants

Auditor: Bloodhound or Watchdog?

11. Auditors too have an important role to play in safeguarding the integrity of the financial reporting system. There have been long debates over whether the auditor should actively unearth wrong-doing or just watch out for and report frauds.

12. The public places great trust on the stamp of approval provided in the auditors' report. Although auditors are not expected to be bloodhounds able to detect all fraudulent behaviour by management, all auditors should strive to be vigilant watchdogs loyal to shareholders of the company, and not to the management who can influence their engagement.

Independent watchdog

13. To ensure that auditors remain independent from management, both in fact and in perception, the Government introduced a number of rules in 2002. This included amending the Accountants Rules to disallow auditors from providing certain non-audit services to audit clients.

Vigilant watchdog

14. Notwithstanding these rules, it is again the spirit with which independent auditors carry out their work that is most critical. A study published by the Harvard Business School has pointed out that most bad audits are the result of unconscious bias and inadequate vigilance, and not conscious corruption. Often an auditor's preparedness to accept small imperfections in a client's financial practices for reasons such as ambiguity over the interpretation of information, may unintentionally culminate in substantial errors over time. This is something that all auditors should be vigilant of and guard against.

15. Besides auditors, professional accountants such as the CFOs, group accountants and accounts executives also play an equally important role in preparing proper accounts, and in consistently applying internationally recognised accounting standards.

16. We have our share of good auditors and professional accountants. What we need are more accountants and auditors who see the critical need to be vigilant and bold, exhibit good common sense, and remain true to the values of their profession.


17. In conclusion, good corporate governance goes beyond rules and regulations that the Government can put in place. It is also about ethics and the values which drive companies in the conduct of their business. It is therefore all about the trust that is established over time between the companies and their different stakeholders.

18. Let me end by urging all companies to embody and internalise the virtues of honesty, accountability and transparency in governance. Directors, management, employees, accountants and auditors must all play their part in this. Together, I believe that we can all help sustain Singapore's reputation as a trusted reference and bring our companies to greater heights. The reputation for integrity, once lost, is very, very hard to restore. Do not tinker with it. Never risk it.

19. I wish all of you fruitful and stimulating discussions at today's Forum. Thank you.