SGX audit, property valuation changes positive, but implementation may be challenging

“Clarity and raising the bar on standards is always a good thing,” Yuen Thio tells The Edge Singapore. “These professional reports are only as good as the professionals signing off on them are qualified and credible.”

Indran Thana, head of real estate, lodging and leisure, SEA, of UBS, says the reforms on audit and property valuation requirements are “timely”. “In light of the rapidly evolving market environment, the changes will help ensure that market participants have adequate controls and oversight in place to safeguard shareholders,” he tells The Edge Singapore.

However, Mak Yuen Teen, associate professor of accounting at NUS Business School, shares a concern. Although he is generally “positive” on the changes, he notes that the new audit requirements may face challenges in implementation.

‘Additional information’

Under the new audit requirements, all primary-listed companies must appoint an auditor registered with the Accounting and Corporate Regulatory Authority (Acra) to conduct their statutory audits. The new ruling effectively places audits performed for all primarylisted companies under Acra’s regulatory oversight.

Secondary-listed companies from developed markets may continue to engage the services of auditors from their own jurisdictions. But for all other secondary-listed companies, SGX RegCo will assess, on a case-by-case basis, if the appointment of an auditor that is registered with Acra is required.

The new audit requirements will also grant SGX RegCo the power to direct companies to appoint a second auditor. This is in addition to the regulator’s administrative powers to require companies to appoint independent professionals as well as special auditors for specified purposes.

SGX RegCo says it will exercise such powers only in exceptional circumstances. For instance, if the regulator believes that possible misstatements in the financial statements are “pervasive” and “yet not evidenced” by the incumbent auditor’s opinion, a second auditor will be appointed. SGX RegCo will also direct the company to appoint a second auditor if it believes that such concerns cannot be addressed by a special auditor.

However, the appointment of a second auditor would mean that there will be another audit opinion expressed, in addition to the first. So, will the second audit opinion override the first?

Michael Tang, head of listing policy & product admission at SGX RegCo, says that is not the case. “In our view, it is additional information that investors should take into account when looking at the investment [merits] of a company. The second audit does not override the [first] audit,” he said at a Jan 11 media briefing.

Still, how should investors make a judgement based on the “additional information”? After all, investors have traditionally relied on the opinion of a single auditor to ensure that the financial statements have no material error and faithfully represent the financial performance and position of a company. Now, there are two audit opinions that may contradict each other, but are both legitimate?

Mak believes that most investors will rely on the second audit opinion. “After all, the second audit would be conducted with the benefit of more, and potentially new, information, and I would expect the second audit will take a more investigative or forensic approach. A sceptical mind that the first auditor is supposed to possess may be replaced by a suspicious mind on the part of the second auditor,” he says.

Nevertheless, Mak points out that the second auditor may be hesitant to issue a second opinion that is different from the first. This is because the second auditor can be perceived to have performed a better job than the first auditor, and thus, this may tarnish the reputation of the latter. Moreover, both auditors may find themselves in the same boat again, but in reversed positions, he says.

The way Mak sees it, two auditors or more will not overcome inherent limitations in auditing standards relating to auditors’ responsibility for material misstatements relating to fraud, error or going concern matters. He reckons that enhancements in auditing standards are also needed to address the current shortcomings in audits.

Yuen Thio shares a similar view, saying that the appointment of a second auditor itself is already a “huge red flag”. The second auditor will probably check everything twice, given the regulator’s concerns, she says. “If the findings of the second audit concur with the first, then that is a sign that the misgivings were unnecessary. More likely, there will be an inconsistency and then it would make sense to read the first set of accounts with a healthy dose of scepticism,” she adds.

No qualms on property valuation rules

As for the new property valuation requirements, market observers are positive. Among the changes, property valuers will be required to have at least five years of relevant practical experience in valuing properties in a similar industry and area as the property to be valued. The valuer of Singapore properties must also be a member of the Singapore Institute of Surveyors and Valuers (SISV).

But if the property is located overseas, the valuer must be a member of, or authorised by, a relevant professional body or authority. Overall, the valuer should be independent of the company and cannot be a sole practitioner or have an “adverse” compliance track record.

In addition, valuation for Singapore properties should be prepared in accordance with SISV Standards. Overseas properties must have valuations prepared in accordance with domestic standards or the International Valuation Standards.

Summary property valuation reports will be required for significant transactions. These include IPO for property investment firms or developers, business trusts or REITS, or an interested person transaction involving the purchase or sale of property. SGX RegCo says it will prescribe the minimum content to be disclosed in such summary property valuation reports.

Mak says the property valuation requirements are “non-contentious”. “They make perfect sense,” he adds.

Yuen Thio stresses that it is important to have consistency in standards applied to valuations of foreign properties. “More and more REITs and Singapore [listed companies] are investing abroad, especially because of eyewatering local property prices,” she says.

Hence, “it is reasonable for [SGX] RegCo to expect the most qualified and knowledgeable valuers to opine on transactions in Singapore”, adds UBS’ Indran.

SPACs, sustainability reporting, retail bonds

Audit and property valuation requirements aside, the market can expect more regulatory works in the pipeline. Tan Boon Gin, CEO of SGX RegCo, says the growing interest in special purpose acquisition company (SPAC) listings has caught the attention of the regulator. “We have received enquiries and expressions of interest to do so with such a structure,” he notes.

SPACs are entities formed to raise capital through an IPO for the purpose of acquiring an existing business or company. These specialised companies are generally formed by investors or sponsors with expertise in a particular business sector, with the intention of pursuing deals in that area. The founders generally have at least one acquisition target in mind, but they do not identify that target during the IPO to avoid extensive disclosures. However, the investment mandate needs to be detailed in the prospectus for the SPAC’s IPO.

Tan recalls that SGX had previously consulted the market on SPAC listings in 2010. But “we are now thinking given the current popularity of such a listing structure, whether to revive that consultation”, he says.

Meanwhile, SGX RegCo will also focus on developing a framework on sustainability reporting in 1H2021. Tan points out that reporting on environmental, social and governance (ESG) issues has become more than just about pushing out data. Calls for standardisation and ways to improve comparability have increased. “We must respond to these,” he says.

Tan notes that SGX RegCo is currently finalising a survey of institutional investors on their views of companies’ ESG reporting. Subsequently, the regulator will complete a second review of listed companies’ sustainability reports, likely in this quarter.

Tan says the findings will shape what the regulator needs to do to make disclosures more meaningful, useful and impactful, especially in relation to climate-related disclosures. “We are targeting to consult the market on proposed changes by the end of our current financial year,” he says.

In addition, Tan notes that SGX RegCo has not forgotten about enhancing the rules governing retail bonds. “We expect to consult on proposed changes in the next few months,” he says.