More questions than answers from SingPost’s reply


Published January 31, 2016

First published in Business Times on February 1, 2016

Letter to the Editor

I REFER to the reply from Singapore Post (SingPost) to comments by me and other stakeholders about the special audit (“SingPost clarifies matters to public”, BT, Jan 30).

The board has clearly made up its mind about having PricewaterhouseCoopers (PwC) undertake the special audit, despite the reservations expressed by different stakeholders. I am naturally disappointed. I would like to respond to some of the main points made by SingPost in defence of its choice of PwC as the special auditor.

No conflict between external audit and special audit

I am surprised that the external audit did not review whether the relevant policies, processes and procedures of the company were followed in the evaluation and approval process relating to acquisitions, and whether the requisite internal approvals of the company were obtained – which are the first two items in the scope of the special audit.

This is particularly so as SingPost has made more than 20 acquisitions in the last five years, paid more than half a billion dollars for them, and its goodwill from acquisitions – excluding that arising from their latest and largest one, TradeGlobal – increased from S$78 million to almost S$300 million.

Given the potentially significant impact on the financial statements, I would have thought whether there was proper governance around acquisitions would have received a certain degree of attention in the external audit. Perhaps this is a question for the external auditors at the next annual general meeting.

SingPost’s special audit different from others

SingPost says that its special audit is different from other special audits usually undertaken by issuers which “involve investigations into alleged accounting irregularities, fraud and error on the accounts”. This is in response to my commentary written with Chew Yi Hong (“SingPost saga: Untenable for PwC to stay on as special auditor”, BT, Jan 28), that SingPost’s special audit is the only one we have found in the last five years to have used either the external auditor or internal auditor to conduct the special audit.

While there is no allegation of accounting irregularities, fraud and error, I had pointed out in an earlier letter (“Issues SingPost should tackle to improve corporate governance”, BT, Dec 31, 2015) that the “potential conflict of interest (in the three acquisitions) casts doubt in my mind as to whether SingPost paid a fair price for these acquisitions and led me to review the premia paid, and the accounting for goodwill and other intangible assets arising from these acquisitions in the financial statements”.

It is unclear if PwC as the external auditor was aware of the conflict of interest at the time of the external audit and whether this would have affected its audit of the acquisitions in question. Unfortunately, the scope of the special audit will not be addressing whether the financial statements will indeed be affected by the conflict of interest.

Preference for Big Four firms and choice of PwC

The board may not have a sufficient appreciation of the reputation and capabilities of some of the mid-tier accounting firms. A number of the mid-tier firms are well known internationally, and international investors will think no less of the quality of the special audit if it had been undertaken by them – especially if there was a proper request for proposal (RFP).

Even if the board thought it appropriate to limit the special audit engagement to the Big Four firms, it seems to have a rather one-sided view of the ability of the four firms to put in place the necessary “Chinese walls”. If it feels that PwC can manage possible conflicts by using different partners and team members, why did it not think that the other firms are also capable of the same?

Perceived and actual independence

The importance of perceived independence should not be underestimated, especially in the current circumstances. While I agree with the board that actual independence is also important, that is unfortunately more a matter between oneself and God. Who else can judge the actual independence of the special auditors? Should it be the board, whose actions are under review in the special audit?

I do not doubt the professionalism of PwC, but the fact remains that the amount of non-audit fees they have received from SingPost has consistently exceeded the thresholds considered as “high” under the Code of Professional Conduct and Ethics. The total audit and non-audit fees for the five years ranged from about S$1.1 million to S$1.8 million per year.

The relationship between PwC and SingPost is long and substantial – and difficult to walk away from. In an ideal world, we can just trust the professionalism of the accounting firms. We do not live in an ideal world, but in a world where accounting and other professional firms face commercial realities and client pressure.

The audit committee has continually cleared the non-audit services and fees of the external auditor, worked closely with the external auditor and endorsed their reappointment. Now, the external auditor will review the actions of a former chairman and a current member of the audit committee? There are clear perception issues here, in my view.

Acquisitions in question not interested-person deals

I have not asserted that the acquisitions are interested-person transactions; perhaps others may have. In fact, I had specifically said that the transactions are not covered by our interested-person transaction rules. However, regardless of whether they are interested-person transactions, the fact that a director – and not just any director, but a director who is the lead independent director, chairman of the nominating committee, and former chairman of the audit committee – is the chairman and a major shareholder of a firm acting for the seller undoubtedly raises conflict-of- interest issues.

Board’s knowledge of Keith Tay’s interest

The company said that the board was aware of Keith Tay’s association with Stirling Coleman from the time of the first acquisition. This is obvious as the association is disclosed in SingPost’s annual reports. SingPost has also confirmed that Mr Tay had disclosed his interest and abstained from voting on the three acquisitions, suggesting that the board was aware that Stirling Coleman was acting for the sellers. Was the board not concerned at all about the conflict of interest and perception issues, just as it is not concerned about such issues surrounding the appointment of PwC as special auditor?

I think it is also important to bear in mind that disclosing, abstaining or even recusing does not make a conflict magically disappear. Where a conflict is serious, avoidance of the conflict is necessary. I just cannot understand why, when there are so many firms that can act as adviser, the three sellers ended up with Stirling Coleman – including two sellers based in the UK and New Zealand. The circumstances under which Stirling Coleman was appointed for the three acquisitions need to be explained.

SingPost’s transformation journey

SingPost has reiterated that it is on an “accelerated transformation journey from a domestic postal company into an international end-to-end eCommerce logistics provider”. At SingPost’s AGM last year, I had pointed out that while revenues and “underlying profit” have been increasing, most of its financial indicators are moving in the opposite direction.

I also acknowledged that it may take time for SingPost’s transformation strategy to pay off and that I understand that, in the short term, financial performance may suffer. However, the jury is still out as to whether its transformation strategy will pay off.

There is plenty of literature suggesting that companies often overpay for acquisitions, and that long-term performance may suffer. For the transformation strategy to deliver on its promise, SingPost needs a strong and effective board unencumbered by conflict of interest, good corporate governance, and a strong management team.

Given that SingPost has now decided to persist with its choice of PwC as the special auditor, I would urge the Singapore Exchange (SGX) to ensure that the special audit is rigorous and its scope sufficiently comprehensive. I look forward to a published report that clearly answers all the questions that have been raised – but my expectations about the special audit have been diminished.

Mak Yuen Teen

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