Auditors are audited

These are just some of the findings that the Accounting and Corporate Regulatory Authority of Singapore notes in the 2018 public edition of its Practice Monitoring Programme (PMP). In these annual reports, ACRA, which oversees public accountants, highlights areas for improvement after inspecting auditors, their practices and processes, and compliance with Ethics Pronouncement 200 requirements, which governs anti-money laundering and terrorism financing.

Still, ACRA notes that the industry is on track to achieve its audit quality target of cutting by 25% the proportion of inspected audits of listed entity engagements with at least one finding. The target was set in 2016, to be achieved by 2019, for the six audit firms that were part of the Global Public Policy Committee networks that perform listed company audits. They were the so-called Big Four — Deloitte, EY, KPMG and PwC — as well as BDO and Grant Thornton. As at March 31, 2018, Grant Thornton had not performed listed company audits. The 2019 report is expected to be released in a couple of months.

According to the 2018 report, the audit deficiencies noted during engagement inspections were mainly in relation to insufficient audit procedures in areas such as revenue and cut-off; valuation of trade receivables; assessment of impairment of property, plant and equipment; risk assessment; and basis of modification in audit opinion.

The report does not provide details of errant firms — such as their names or the companies they had audited, and whose audits might be problematic given the lapses — and whether those errant firms are still in business. But the ACRA website lists public accountants whose licences have been suspended or cancelled. It also lists public accountants whose audit work is under review, as ordered by the Public Accountants Oversight Committee. The committee comprises seven ACRA board members, of which five including the chairperson are non-public accountants.

Currently, the audit inspections only cover public accountants. However, an ACRA spokesperson tells The Edge Singapore that the agency is in the process of amending the Accountants Act to expand audit inspections to audit firms and apply sanctions for lapses in audit firms’ quality controls. “The proposed amendments will hold audit firms to higher accountability,” the spokesperson says. The move was first announced nearly two years ago, in October 2017, by Indranee Rajah, who was then senior minister of state for law and finance.

The audit industry is under increasing scrutiny and pressure from the market following a slew of problems at a number of companies listed on the Singapore Exchange. Financial statements were reviewed and the companies given a clean bill of health by auditors, but it later emerged that the accounts were inflated or there was outright fraud. One such case involved commodities supplier Noble Group, whose auditor of record was EY (Singapore). The accounts done by the audit firm on the group’s coal trading unit, Noble Resources International, are now being reviewed by the authorities, even as Noble has appointed PwC to review EY’s work.

In fact, the scrutiny, particularly of the Big Four’s practices and business, appears to be global. In June, India’s corporate affairs ministry sought to ban Deloitte and KPMG’s affiliate, BSR & Associates, for five years after alleged lapses in their audits of a unit of Infrastructure Leasing and Financial Services, which the Indian government took control of last year. In July, the Indian government reportedly wanted its antitrust agency, the Competition Commission, to look into whether the firms were abusing their market dominance.

In the UK, officials have also been calling for the break-up of the Big Four, citing the conflict of interest between the firms’ audit and advisory businesses. The country’s Financial Reporting Council, which oversees audit firms, found that only three-quarters of the audits of companies on the FTSE 350 conducted in 2018 met the required standards. The FRC’s audit quality target was 90%; none of the Big Four firms in the UK met that standard. There were also corporate fiascos involving the major audit firms, over which the FRC had imposed fines worth millions of pounds and is still investigating.

Minding the gaps

Observers point out that cases such as Noble’s have affected investor sentiment, as trust in the local market is dented. However, as The Edge Singapore reported in its story “Auditing the auditors” (Issue 885, June 10), auditors are adamant that investor protection, or sniffing out fraud, is not part of their job. Among the other issues that this paper raised, and which have also been highlighted in ACRA’s report, is the high turnover rate among senior auditors at firms, which results in the loss of knowledge and experience.

Another issue is the apparently declining time that audit firm partners, who are tasked with overseeing or reviewing the audits, spend on client accounts. ACRA notes that staff-to-partner ratios at audit firms continue to be notably high, raising concern that audit partners are unable to spend enough time to effectively supervise audit engagements. This could also result in a higher workload and dissatisfaction among engagement team members, leading to a higher staff turnover rate.

Audit partners have also been criticised for not being involved enough in overseeing their audit engagements with financial institutions and having a high concentration of such engagements with the same deadlines held by the same partners. The low number of hours spent by both the partners overseeing the job and the partners reviewing the job indicates inadequate time spent on the engagement, although ACRA does acknowledge that due to the size and nature of such audits, consideration should be given to absolute time spent by partners overseeing the job. “A high staff-per-partner ratio may be indicative that partners are unable to devote sufficient time to supervise audit staff, which may result in poor-quality audits,” an ACRA spokesperson says.

ACRA has also called attention to the independence requirements of partners, with partner’s spouses having racked up a high proportion of independence violations. This is despite internal monitoring and sanction systems put in place by firms to ensure compliance of independence requirements of partners.

Most of these violations concerned untimely and inaccurate updates of investment portfolios maintained by the partners’ spouses. While this does not breach the Accountants Code, they were in breach of audit firms’ policies.

“Firms should re-emphasise to the partners the importance of communicating the independence requirements to their immediate family members to curb such cases of non-compliance. Further, ACRA also noted increasing trend of non-compliances pertaining to a firm’s independence policy by direct-admit partners, particularly on the reporting of financial interests,” says ACRA in the report.

Filling the cracks

Last November, ACRA, the Monetary Authority of Singapore and the Commercial Affairs Department, announced that they were jointly investigating suspected false and misleading statements, and breaches of disclosure requirements by Noble, as well as potential non-compliance with accounting standards by its subsidiary Noble Resources International. Problems at the company were flagged four years ago, but by this time the market value of Noble had shrunk 99%, causing investors to lose millions of dollars.

Early this year, SGX Regulation CEO Tan Boon Gin announced that the market regulator was proposing that SGX be given new powers to require listed companies to appoint a second auditor in exception cases. Currently, SGX can require listed companies to appoint a special auditor, but that will only look into a specific area. If appointed, a second auditor would have to sign off on a company’s statements as well. SGX also wants to require companies listed here to appoint a Singapore-based auditor, or in the case of companies with significant overseas businesses, a local auditor that will co-sign off with the foreign auditor on the companies’ statements.

On the part of ACRA, it has imposed a range of orders on public accountants who have not complied with auditing standards. The Public Accountants Oversight Committee can require the work of the public accountant under scrutiny to be reviewed by another public accountant or restrict the type of services that the public accountant can provide. The public accountant’s licence can also be suspended, or cancelled. In the last three years, 10 public accountants have had their licences suspended as a result of breaches identified during PMP inspections.

Ultimately, the key challenge the audit industry faces is finding, and retaining, the right people for the job. As The Edge Singapore has also pointed out in its earlier reports, the role of the auditor has to go beyond fulfilling the standard requirements or simply checking off boxes. The industry needs to work in concert with the rest of the market to ensure its function and integrity.

“People are the biggest asset for the audit profession,” ACRA said in its report. “No system or process can substitute for the proper exercise of an auditor’s professional judgement and scepticism when performing audit engagements.”

Some key findings of ACRA’s report

• The staff-to-partner ratio at some audit firms remains notably high, an indication that partners may be spending inadequate time in supervising audit staff
• Audit partners are spending less time at engagements, while engagement quality control and review (EQCR) partners are spending more time at engagements
• Both audit and EQCR partners may be spending inadequate time at financial institution engagements
• Staff turnover ratios are high, with an increased attrition of senior auditors in 2018, and firms are urged to improve retention rates
• Auditors have been relying on experts’ work without taking time to understand the method behind it
• Audit firms have failed to identify the beneficial owners of a client and used Google as a screening tool to perform background checks