RESPONSE TO CONSULTATION PAPER ON ENHANCEMENTS TO REGULATORY REGIME FOR PROPERTY VALUATION AND AUDITORS

Do you agree that issuers and applicants applying to list on SGX should only engage a property valuer that:

(a)                has at least five years of relevant experience in the type of property to be valued;

(b)               is a member of SISV, or a similar professional body in his home jurisdiction of practice which must have the powers to discipline and revoke the membership of its members;

(c)                is not a sole practitioner;

(d)               has no adverse compliance track record; and

(e)                is independent of the issuer?

Please select one option:

☒ Yes

☐ No

Please give reasons for your view:

It is important that property valuers be truly independent and competent as property valuation is part science and part art. There will inevitably be some judgement involved in property valuation in areas such as approach and comparatives. Therefore, the valuer must be independent and perceived to be independent of the issuer, and have the necessary qualifications and experience to undertake a proper valuation. Membership of a professional body with self-regulatory powers also helps in ensuring that those undertaking the valuations are accountable for such valuations. However, this will very much depend on how robust are the disciplinary processes of the professional body.

Do you agree that the Listing Rules should require that:

(a)                valuations for properties located in Singapore must be prepared in accordance with SISV Standards; and

(b)               valuations for properties located outside Singapore must be prepared in accordance with SISV Standards or IVS,

in the circumstances stated in the proposed rules? 

Please select one option:

☒ Yes

☐ No

Please give reasons for your view:

It is important that valuation of properties is based on professional standards to improve their reliability. This goes hand in hand with the proposal that valuers must be members of a professional body, which would allow the body to take action for non-compliance with such standards.

However, I believe the proposals will only address a small part of the problem and are particularly relevant to REITs and business trusts.

Many valuation issues are not about valuation of properties, but about valuation of businesses, securities and other assets (such as intangible assets). Arguably, the valuation of properties is the least contentious valuation issue for many listed issuers here. SGX Regco should consider how to improve valuation in these other areas.

Do you agree that the Listing Rules should require that all summary property valuation reports must contain the information required for prospectus and circulars under the SISV Practice Guide?

Please select one option:

☒ Yes

☐ No

Please give reasons for your view:

This will ensure more transparency and provide users with better information about the properties concerned when reading the reports.

Do you agree that all issuers must appoint an auditor registered with ACRA, and if an issuer appoints an auditor that is regulated outside Singapore, it must also appoint an auditor registered with ACRA to jointly carry out the audit?

Please select one option:

☒ Yes

☐ No

Please give reasons for your view:

This will help ensure that ACRA is able to exercise regulatory oversight over all auditors of entities with a primary listing on SGX (I agree with exempting ETFs and the “calibrated” approach for secondary listings proposed in the consultation).

A main trigger for this proposal is probably the Noble case. Noble was incorporated in Bermuda and had a primary listing on SGX. The parent company audit was undertaken by EY (HK), and the HK audit profession was self-regulated by the professional body. ACRA therefore had no regulatory oversight over the auditors of the parent/listed entity and EY (HK) was not subject to oversight by a public regulator.

SGX could consider a calibrated approach for this proposal, and require an auditor to either be registered with ACRA or by an auditor in its principal place of business, provided there is an equivalent regulatory regime for auditors in that principal place of business. I do not believe SGX should accept an auditor that is not from the principal place of business as some issuers may end up appointing an auditor from jurisdictions where they are incorporated. In such cases, even if the jurisdiction of incorporation has an ACRA-equivalent regime, they may not be a priority for the regulator as the issuer neither has a principal place of business nor listing in that jurisdiction.

One possible consideration is whether the audit regulator in that country is a member of The International Forum of Independent Audit Regulators (IFIAR), and whether there is an agreement between ACRA and the audit regulator in that country on sharing of information about audits.

It is possible that the country of incorporation or other rules may require that the auditor is from the country of incorporation or principal place of business (just as our Companies Act requires companies incorporated here to appoint a Singapore auditor), which means that foreign issuers incorporated elsewhere may then have to appoint two auditors. SGX may wish to study the audit requirements in countries where foreign issuers are likely to be incorporated or have as their principal place of business, and consider if a more calibrated approach may be necessary to avoid imposing a joint auditor requirement in situations where the foreign auditor is subject to an equivalent regulatory regime as ACRA and where there is good cooperation with ACRA.

SGX may also wish to explore the possibility of requiring all foreign issuers with a primary listing here to incorporate in Singapore, which would then automatically require it to appoint a Singapore auditor for the listed entity. Based on research done a few years ago, I believe about 14% of all issuers (excluding REITs and business trusts) are not incorporated in Singapore – although some of these may nevertheless have a Singapore-based auditor. The advantage of incorporating in Singapore is that not only will foreign issuers be required to appoint a Singapore auditor, other provisions in the Companies Act would also apply to them.

Even if this proposal is implemented, there remains the issue that foreign issuers have their principal place of business overseas, and their overseas subsidiaries may be audited by foreign auditors. These foreign auditors may not be subject to a regulatory regime which is equivalent to ACRA’s and may or may not be network firms or affiliates of the Singapore auditor. If they are not network firms or affiliates of the Singapore auditor, requiring a Singapore auditor may not necessarily result in an improvement in audit quality. While some auditors take the view that the Singapore auditor is responsible and will not sign off if they have concerns about the audits of the subsidiaries, will ACRA be able to hold such auditors accountable if their defence is that the problems lie with the work of the foreign auditors?

There are no easy answers with foreign issuers, and while I broadly support the proposal, I believe that the best safeguard is ensuring robust due diligence before companies are admitted for listing, which means issuer managers, sponsors, intermediaries, and SGX itself doing a proper job screening listing applicants. On a continuing basis, SGX Regco, directors and where applicable, sponsors, must also do their jobs. Auditors are just one piece, albeit an important one, to the solution for problems relating to foreign issuers.

[Additional comments: Once you have a poor quality listing, other bad things follow. The bad company will scrap the bottom of the barrel for independent directors, and there are enough on offer in our market. Since all foreign issuers will require at least two Singapore-resident independent directors, even those at the bottom of the barrel will land directorships. As our regulators rarely take enforcement actions against independent directors, these directors will remain available for directorships. The same goes with sponsors and auditors, as I have never known a company here, no matter how bad, not being able to find a sponsor or an auditor (or a lawyer or valuer). Even a company with six or seven years of disclaimer of opinion is able to get a new auditor as long as the company can pay the audit fees.]

Do you agree with the proposed circumstances that SGX may require issuers to appoint an additional auditor, and are there other circumstances where this requirement may be appropriate?

Please select one option:

☒ Yes

☐ No

Please give reasons for your view:

Yes, I agree with the circumstances for appointment of a second auditor set out in the consultation paper, but have some additional suggestions and comments.

There have been more than a few instances, both here and overseas, where auditors have issued clean opinions and serious issues are then uncovered soon after the audit report was issued. And as the paper explains, there could be new developments after the audit opinion has been issued – although in this situation,  the second audit may no longer be an audit of the financial statements for the financial year for which the first audit opinion was issued. Of course, in some cases, the new developments or information may raise questions about the veracity of the financial statements for the past financial year(s).

Where concerns are raised by stakeholders about audited financial statements,the experience has been the auditor will either make no comment, issue some boilerplate statement about the truth and fairness of the financial statements and its “clean” opinion, or the client will say that the auditor has not withdrawn its opinion or believes that any changes are warranted. In cases where I or others have privately communicated concerns to auditors, the auditors have not acknowledged and it was unclear whether concerns have been looked into by them.

We also see that in situations where an auditor resigns, the departing auditor will issue a professional clearance letter saying that there are no professional reasons why the incoming auditor should not accept appointment (even though there may be strong professional reasons for the auditor to resign!). Even though auditors are appointed and can only be removed by shareholders and the auditors’ report is addressed to them, auditors almost invariably behave as if they are accountable to management and the board – and they are loath to offend them.

The requirement for a second auditor will not directly address these concerns. The fact that the second opinion will be published will likely make the second auditor hesitant to issue a different opinion. More likely, auditors will decline appointment as a second auditor if they believe that this is likely to require them to issue a different opinion.

That being said, I believe SGX having the power to require the appointment of a second auditor in the circumstances set out in the consultation paper can help. If anything, it keeps the auditor more on its toes.

There may also be other circumstances where  a second audit may be warranted, such as repeated cases of significant restatements, variances between audited and unaudited numbers, and extensive key audit matters accompanied by clean audit opinions – basically, where a clean audit opinion seems at odds with the issues surrounding the financial statements and the financial reporting quality of the company.

Beyond the measures proposed, regulators should consider incorporating into the Companies Act, similar provisions that were incorporated into the Corporations Act in Australia for listed companies. Under the latter,  the lead partner is legally required to be present at the AGM, or he has to be represented by another member of his firm who is in a position to answer questions about the audit.

Under the Australian Corporations Act, the chair of an AGM must:

Currently, the Singapore Code of Corporate Governance recommends that the external auditors be present at the AGM to answer questions about the conduct of the audit and the preparation of the auditors’ report.  More needs to be done to make auditors more accountable to shareholders.