This year, Singapore celebrates its golden jubilee. Fifty years ago, the lack of a hinterland, a weak economy, and an unskilled labor force made the nation’s survival tenuous. Since then, the transformation of Singapore from a third world country to a first world metropolis in a span of five decades has been a source of quiet pride for many Singaporeans.
Crucial to Singapore’s economic success was, and still is, the reputation it has earned as a trusted business hub. From the outset, our founding fathers recognized that Singapore could gain a clear competitive advantage if there was a transparent and stable business environment, supported by high standards of corporate governance and strong regulatory frameworks.
Fundamental to this is giving investors and other market stakeholders continued assurance about the reliability and integrity of business and financial information they receive. In the late 1990s, we made the strategic move from merit-based regulation, where regulators sought to pre-judge the risks of investments, to a disclosure-based regime, where the public had access to complete and timely information. Globally, following the collapse of Enron in the early 2000s, calls for audit reforms and more transparency and disclosure grew. For Singapore, companies and auditors were subject to new requirements and higher standards of business conduct.
It also led to the formation of the Accounting and Corporate Regulatory Authority (ACRA) in April 2004. Formed from a merger of the Public Accountants Board and the Registry of Companies, ACRA has dual oversight over the corporate sector and auditors. We are therefore uniquely placed to take a holistic regulatory approach that encompasses the entire financial reporting eco-system—including preparers, audit committees, auditors, and even corporate secretaries and filing agents. We are able to identify the stress points and take a proactive effort to share the burden equitably and effectively.
A robust regulatory framework was set up. Directors are legally required to ensure financial statements comply with the prescribed accounting standards. Auditors are subject to more stringent registration criteria and are legally required to perform audits according to auditing standards. Companies are required to file financial statements within certain timeframes and format.
With our regulatory framework in place, we then progressed to enforcement. First, we strengthened the quality of audits through inspections under the Practice Monitoring Programme, which was established in 2005. To raise awareness of common audit deficiencies, key inspection findings were shared through annual public reports and conferences. Constant outreach to gather industry feedback on audit quality issues on the ground also enabled ACRA to refine our regulatory approach and application methods. Last year, we revised our audit inspection methodologies to take on a more targeted and risk-based approach. We also further tightened registration criteria to require audit management practical experience and updated the Code of Professional Conduct and Ethics for auditors to be aligned with international standards.
Fully cognizant that high-quality audits alone cannot uphold good quality financial reporting, ACRA piloted the Financial Reporting Surveillance Programme (FRSP) in 2011, so as to strengthen the financial reporting value chain right at the source of preparation of the financial statements. This program was greatly stepped up in 2014 to cover public interest entities with clean audits while previously only partial reviews were carried out for financial statements of listed companies with modified audit reports. A significant number of warnings and advisories were issued to directors, with the direction to remediate or face further regulatory action.
The upstream shift to focus on the preparation of financial statements is timely for Singapore, given the local corporate culture and structural make-up. In particular, many companies in Singapore, in their pursuit of growth and expansion overseas, have not invested sufficiently in internal accounting systems, processes, and resources[1]. They then find themselves unable to cope with the increased complexity and volume in accounting.
The move in regulatory focus was also a timely reminder as some company directors seemed to be unaware of their legal duties and had the wrong perception that the primary responsibility to prepare high-quality financial statements lay with the auditors, rather than the board[2]. As such, there has been a tendency by directors to leave the task of upholding quality in financial statements to auditors, which was clearly evident by a high level of audit adjustments1. With the introduction and step-up of the FRSP, ACRA has started to see some positive behavioral changes, with company directors taking charge and making proactive changes to improve their companies’ financial statements.
While we believe in firm and robust regulation of both directors and auditors, our guiding philosophy is to work hand in hand with the parties we regulate for the best results. This includes the Institute of Singapore Chartered Accountants (ISCA), the national accountancy body, other professional accounting bodies, academics, and audit firms, as well as key stakeholders such as the Singapore Institute of Directors (SID) and the Securities Investors Association (Singapore) (SIAS), a lobby group for retail investors. We have forged public-private collaborations with ISCA to assist in carrying out the inspection of auditors and review financial statements under the FRSP. The combined resources and shared expertise has enabled ACRA to broaden the breadth and depth of our surveillance programs.
Aside from enforcement initiatives, ACRA also collaborated with other stakeholders to bring new tools, guidance, and training to help various stakeholders discharge their financial reporting duties. For example, ACRA collaborated with SID and a professional body (CPA Australia) to develop an Audit Quality Indicators (AQI) disclosure framework that helps audit committees evaluate and choose auditors based on quality measures. To fill the competency gap for directors, ACRA developed and sponsored a Financial Reporting Essentials Course in collaboration with SID and ISCA to train directors with no accounting background to review financial statements with rigor, and critically evaluate and challenge management’s assumptions.
Looking ahead, we will move downstream to deepen our engagements with investors. The value of audits and financial reports must be demand-driven so that companies and auditors will be spurred to produce high-quality audits and financial statements. Our future plans include collaborating with key investor bodies such as SIAS to raise retail investors’ awareness and understanding of the expanded auditors’ report, which will become effective in Singapore from 2017.
The reliability and integrity of corporate and financial information is key to a friendly and transparent business environment. This holds all the more true amidst the current uncertain economic climate. ACRA will continue to adopt a collaborative and progressive regulatory approach that remains responsive to business needs and boosts market confidence.
[1] A 2014 ACRA-Singapore Management University Audit Adjustment Study found that auditors proposed 3,222 sets of adjusting entries with gross values adding up to S$33.9 billion in 257 listed companies, supporting the observation that there is room for improvement in the quality of pre-audited financial statements. The study also found that growing companies (companies with market capitalization between S$100 million and S$500 million (32% of population)) accounted for S$22 billion (65%) of total proposed adjustments, suggesting the need for growing companies to expand their internal accounting capacity and capabilities.
[2] A 2013 ACRA-ACCA Survey on Preparers of Financial Statements showed that about 50% of the survey respondents appeared to believe that the primary responsibility over financial preparation lie with auditors.
