It is the responsibility of the board of directors to ensure that a company’s annual financial statements are properly audited before the accounts are presented to shareholders at the annual general meeting. The external audit team must have the requisite experience to conduct the necessary review of financial transactions, and the expertise to spot irregularities and detect unusual accounting entries. Auditors are expected to have the knowledge and the ability to exercise independent judgement — to highlight misstatements, and to qualify a set of accounts that cannot pass the “true and fair view” test. To select or appoint a new audit firm merely because its fees are lower than what the incumbent is charging would be a fallacious decision.
Singapore audit firms are regulated by the Accounting and Corporate Regulatory Authority (“ACRA”), and are also expected to comply with the principles and ethics set by the Institute of Singapore Chartered Accountants (“ISCA”), the professional body for the accounting profession here. In addition, the audit firm is required to affirm annually to the board of directors that the firm is independent and does not have any conflict of interests that would affect its independence, or that would compromise its professional integrity in performing its review and annual audit of the company’s financial accounts.
There is an industry perception that the Big 4 accounting firms are better staffed with the talent and resources to conduct the annual audit, and they are also perceived to carry better insurance coverage in the event of any alleged negligence. As a safeguard, auditors invariably require the board of directors to certify that the company’s accounts are properly prepared, and that the board is not aware of any fraudulent conduct or misstatement in the accounts to the best of its knowledge and belief, before the auditors sign off on the audited accounts. A number of non-STI Mainboard listed companies and Catalist listed companies appoint second-tier accounting firms to conduct their annual audit. From the corporate governance perspective, I do not see any risk in appointing a second-tier audit firm, so long as the audit work is able to withstand professional scrutiny and satisfy the accounting regulator’s requirements.
Mr Renald Yeo of The Business Times has published a story on the Big Four’s iron grip on the audits of companies listed on the Straits Times Index, “No room for a fifth? The Big Four’s iron grip on STI audits“, to which I was glad to contribute my views. Whether that concentration is a question of capability or of perception is a useful one for boards to put to themselves as they weigh their audit appointments. The original announcement is available on LinkedIn here.