Speech for The ICPAS Annual Dinner 2002 by Minister For Health and Second Minister for Finance, Mr Lim Hng Kiang, at Mandarin Singapore, 20 September 200221 Sep 2002
Mr Tan Boen Eng, President of the Institute of Certified Public Accountants of Singapore,
Distinguished guests, Ladies and Gentlemen,
I am happy to join you here today at the Institute's Annual Dinner.
2. Singapore aims to be a world-class business and financial centre, with a well-developed capital market to attract companies and investors from around the world. A strong capital market is an important asset to our economy. It gives our companies access to funding at competitive rates to grow their business operations. It presents opportunities for investors to invest in different assets and financial instruments, depending on their preferences and risk appetites. It provides jobs in the financial sector and other supporting industries.
3. A well-functioning capital market depends on three things: accuracy in drawing up financial information, consistency in the disclosure of corporate information and the willingness of investors to believe in the truth of the first two matters. In a disclosure-based regime, investors and analysts will need to rely on the financial statements and disclosures made by companies to make investment decisions. The recent accounting scandals and corporate shenanigans in the US and other jurisdictions have re-emphasised the importance for companies to provide timely, accurate and reliable information.
4. Singapore has not experienced any major corporate collapses in recent years. Our corporate governance and regulatory framework is highly regarded by global investors and analysts, who applaud our efforts to continuously improve our rules and benchmark them against the best practices in the leading jurisdictions. However, we should not rest on our laurels and think that corporate fraud and scandals are simple history for Singapore. If we are not careful, the credibility that we have painstakingly built over the years may be destroyed very quickly.
5. The recent US scandals have shown that a prescriptive rule-based approach does not necessarily prevent dishonesty and fraud. However, the effectiveness of a principle-based approach is dependent on the commitment of market players to comply with the spirit of the law. Singapore adopts a balanced approach that is largely principle-based. Our regulatory regime emphasises compliance in substance and not just in form. We believe that we can be light on rules if people comply with the spirit of the law. However, if the law is brazenly flouted by irresponsible individuals, stricter rules may have to be imposed to protect stakeholders and the public.
6. This evening, I would like to touch on some recent developments concerning the accounting profession.
Framework for regulating public accountants
7. As preparers of financial information, accountants perform the important function of providing accurate and reliable disclosures about the company's financial performance. Public accountants, in particular, play a key role to uphold the integrity of our corporate environment, by ensuring that their audit clients comply with prescribed accounting standards and other disclosure requirements. Public accountants must conduct their audits independently and objectively to determine whether companies have prepared "true and fair" financial statements.
8. Investors and companies will benefit from a good regulatory framework. Public accountants must be held to high standards of technical competence and ethical conduct. The recent demise of Arthur Andersen shows how the actions of a few rogue individuals can almost overnight bring down a historic institution, damage the reputation of the profession and affect the public's trust in the role of auditors as corporate watchdogs. The public outcry in the US has prompted accounting reforms in leading jurisdictions. The passing of the Sarbanes-Oxley Act in July 2002 would see the establishment of the Public Company Accounting Oversight Board as an independent body to regulate public accountants in the US. In the UK, the Accountancy Foundation was set up in 2002 as an independent regulator of the accounting profession.
9. Singapore has long recognised the value of having a strong and independent framework for regulating public accountants. We used to operate under a self-regulatory framework, with the Singapore Society of Accountants being both a regulatory body and a professional organisation. In 1989, the government decided to set up the Public Accountants Board, or PAB, as the statutory regulator for public accountants in Singapore. Your Institute was formed as a professional body for accountants, responsible for the development and advancement of the accounting profession.
10. The arrangement with PAB as the regulatory body and the Institute as a professional organisation has served us well over the years. With support from the Institute, PAB has taken action to suspend or de-register public accountants who bring disrepute to the profession. We have established a strong regulatory framework, with a good practice monitoring programme to "audit the auditors", and an effective disciplinary mechanism to deal with errant cases, before they do further damage to Singapore and our accounting profession.
11. I wish to emphasise that the effectiveness of our regulatory regime is not a matter of elaborate rules, but the commitment of our public accountants to abide by their professional ethics and code of conduct. While a prescriptive regime is not necessarily better, the government would have to impose stricter rules if the market players do not behave themselves.
12. Let me now move on to the subject of auditor independence. A distinguishing feature of the accounting profession is its responsibility to the investing public. An auditor is not only accountable to his client, he is also accountable to the public when he certifies a company's financial statements. The auditor's professional independence is a critical factor in determining the level of trust that investors can place on the audited financial statements. Auditors must conduct their audits independently, but just as importantly, they must also be perceived to be independent. An auditor must not be affected by threats of self-interest, self-review, advocacy, familiarity and intimidation in carrying out his audit work. These are well-established auditor independence principles that most public accountants are familiar with.
13. The accounting scandals in the US, UK and Australia have highlighted the perils when such principles are not adhered to. In the case of Enron, Arthur Andersen earned US$27 million in non-audit fees compared to US$25 million in audit fees from the company. Some people have commented that the large amount of non-audit fees had clouded Arthur Andersen's independence when they audited Enron's financial statements. As Arthur Andersen provided internal audit services to Enron, there was also a self-review threat where the auditor ended up auditing his own work. The Enron debacle is not the only example. Other examples include Maxwell in the UK and HIH in Australia. The lack of auditor independence had exacerbated the situation in these cases, which eventually led to the collapse of the companies.
14. In Singapore, our efforts to improve auditor independence started well before the Enron saga. The private-sector-led Disclosure and Accounting Standards Committee, or DASC, made several important recommendations to improve our rules on auditor independence, specifically in the areas of economic interest, employment relationships and the provision of non-audit services to audit clients. The DASC submitted its final report to the government in September 2001. In October 2001, the Minister for Finance announced the government's acceptance of all the DASC recommendations.
15. Follow ing from the DASC's report, the PAB set up a committee, chaired by Dr Ernest Kan, to undertake a review of its existing rules and regulations governing auditor independence. The committee did a comprehensive study of the rules and practices adopted by the US, UK and Australia. It also referred to the Code of Ethics issued by the International Federation of Accountants or IFAC. The committee issued its draft rules for public consultation in April 2002, before submitting its final report to the PAB. The committee's final report has incorporated the feedback from the public consultation exercise. The auditor independence rules will be gazetted later this month. They will form part of the PAB Rules. The new rules will take effect from 1 October 2002. Public accountants and theircurrent audit clients will be given a transition period of 12 months to make the necessary adjustments to their current arrangements.
16. The committee's approach is a balanced one. The focus of the rules is on the principles of auditor independence, and emphasis is placed on compliance with these principles. The committee proposed a more prescriptive and stringent set of rules for auditors of public companies. This is a sensible recommendation, as more attention should be placed on public companies, where there is greater public interest at stake. It is also consistent with the IFAC's approach. For example, the committee has recommended that auditors of public companies should be prohibited from providing certain non-audit services to their audit clients. These include book-keeping services, specialist valuation services, management recruiting services, corporate finance services, IT services and internal audit. To ensure that the rules are not overly onerous, appropriate exceptions have been provided for these non-audit services.
17. The committee has also recommended that auditors and members of the audit team should not receive gifts and hospitality from their audit clients, unless the value of the gifts and hospitality are clearly insignificant. I believe this is already the industry practice. The establishment of this rule will nevertheless send a clear signal to the public that the auditor's independence will not be affected by such self-interest threats.
18. Last but not least, the committee recommended that an auditor should conduct a review to ascertain that his independence is not compromised, if the fees from a particular audit client exceed a certain percentage of the auditor's total fees. This is to prevent undue reliance on a single client, which could potentially affect the auditor's willingness to confront such clients. The committee also proposed that the auditor and client should each do a review on the auditor's independence when the amount of non-audit fees is 50% or more of the audit fees. The outcome of the reviews would be disclosed in the client's annual report. The purpose of this recommendation is to prevent undue reliance on non-audit fees, which could also affect the auditor's independence and objectivity.
19. During the consultation exercise, PAB also surfaced the matter of mandatory rotation of audit firms for public feedback. This attracted comments from many accountants, who were against the proposal. Several countries already have mandatory rotation of audit firms, although the idea is still being considered in some leading jurisdictions like the UK and the US. There is merit to companies rotating their audit firm every few years. New audit firms improve audit quality by introducing a fresh perspective. This is a preventive measure to ensure that the auditor and his clients do not become overly familiar with time.
20. However, as mandatory rotation of audit firms for all public companies is still being actively discussed elsewhere, it would beprudent for Singapore not to push ahead at this point. Far wiser for MOF and PAB to monitor the developments in the leading jurisdictions, see what new principles and perspectives they come out with in the light of recent failures in audit and financial reporting, and then only make a ruling on whether to subject Singapore's public companies to mandatory rotation of audit firms.
21. I would like to take this opportunity to thank Dr Ernest Kan and his committee members for their efforts over the past months in coming up with the set of auditor independence rules which will enhance Singapore's standing as a world-class business and financial centre. The formulation of these rules, combined with regular reviews and effective enforcement, would help to assure investors and protect the integrity of Singapore's corporate financial reporting framework.
22. Good corporate governance can be a competitive advantage for Singapore companies in attracting global capital and investors. While compliance with corporate governance rules does not guarantee good business performance, the recent corporate scandals in the US have shown how bad corporate governance can affect investors' confidence in the economy. To be a competitive first-world economy, we must continue to simplify our business regulations and enhance our corporate governance and accounting practices. This is a colossal task, its accomplishment would require the collaboration of the private sector and the government. Moving forward, I would like to urge the Institute to continue to play an active role in contributing towards this effort.
23. Thank you.