Lack of professional scepticism = "boh chap"?

golfing or auditing?

At ACRA's annual Public Accountants Conference on Aug 19, 2009, ACRA presented their findings on public accountants as follows:-

On the larger audit firms ie. auditors of public interest companies lack 'professional scepticism' while experienced audit partners often take a hands-off approach on actual audit (Edgar's cheeky remark - Partners take a hands-on approach on golf?)

What do you mean by "lack of professional scepticism"? ACRA noted the following:-

• the larger audit firms have generally failed to assess related-party transactions, management assumptions and forecasts, and the risk of fraud or misstatements.
• junior audit staff doing most of the key audit work.

As to the smaller accounting outfits, they struggle to maintain audit quality with a very very competitive fees environment. Some faults noted are:-

• some small outfits still do not search for unrecorded liabilities and do not perform work to test foreign currency translation.
• increasing demands of the audit environment coupled with difficulty to attract quality audit staff and resources to provide adequate supervision.

Punishments done to date

• Since 2004, seven public accountants have had their professional practice licences suspended or cancelled by ACRA as reported by Ow Fook Chuen, deputy CEO of ACRA.

• Less severe cases have been dealt with by way of reprimand, mandatory peer review requirement and regulatory course.

I have the opportunity of meeting a few fellow members undergoing "remedial classes" in the last 2 weeks. One has told me of their uncertain fate even after attending their 3-day programme.

Any idea to resolve?
Ms Penelope Phoon, Singapore Country Head, ACCA provided some directions. She said the "anomaly in audit fee levels and the volume of work are therefore locked in a vicious cycle that increases the propensity of firms to overlook critical matters and lose their professional scepticism occasionally".

One of the keys to breaking this vicious cycle is to understand in a clear way why companies in are paying much lower fees for, many would argue, comparatively higher quality audits.

Do you have any other ideas?

SGX proposing local auditor and governance adviser

Singapore Exchange CEO Hsieh Fu Hua in a speech at the annual Invest Fair on last Saturday proposed the following regulatory changes:-

1. Companies with foreign operations audited by an overseas accounting firm may need a joint sign-off by a local auditor;
   
2. New listings may need to hire governance advisers for two years after their initial public offering (IPOs).

The costs of listing and costs of maintaining a listing status in Singapore for an entity with foreign operations have just gone up.

The devil will be in executing the above changes.

Some issues of the top of my head would be:-

• Local auditor signing off would also be in a position to decide which foreign auditor to appoint?
• Will this eventually lead to local auditor taking over the audit of foreign operations as well?
• What is the level of responsibility of local auditor signing off?
• What are the responsibilities of governance advisers? Is he or she a board level personnel? Can a staff hired to do internal control duties be designated a governance adviser?
• Actually who is a qualified governance adviser? Lawyers or accountants?
  

I would like to hear SGX proposing some control and maintenance measures to be done by them. I really hope SGX is not attempting to propose measures that would eventually "outsource" their control function to local auditors and governance advisers at the expense of the listed entities.

Will this happen to Accountants too?

What is the issue about?
The case involves lawyer Bachoo Mohan Singh, 61, who was convicted two years ago of helping to file a false claim - an offence which carried a mandatory jail term.

Having failed in his appeal to the High Court (which usually is the end of legal route), he took an unusual route of getting the Registrar to have his case heard by the Court of Appeal (Singapore's highest court). On what ground, you may ask.

The hearing will allow the three-judge Court to consider this issue of concern to the legal community here, ie. the extent to which lawyers are responsible for verifying claims made by their clients which may turn to be false subsequently.

What is the current practice? Lawyers take most statements given to them by clients based on good faith, and assume them to be true.

The Court's view on the case could put both lawyers and their clients on notice.

Edgar, what has this piece of news got to do with Accountants and Auditors? Try replacing "lawyer" with "accountant / auditor" in the above paragraphs, do we wish to be in the same position as Mr Singh? As a tax agent, we could be filing GST returns based on client's information.

The ruling is due soon. I just hope the Court will not seek "refuge" under the "reasonable man rule".

Airocean's directors in Court

What is the case about?
The indepedent directors of Airocean have been charged for breach of duty when they are alleged to have given misleading announcements over the nature and details of investigation of Mr Thomas Tay, the former CEO of Airocean by Corrupt Practices Investigation Bureau (CPIB).

Ms Lorraine Tay, the Vice President of SGX's issuer regulation unit and the team leader in charge of Airocean's compliance issues, was queried by Mr Davinder Singh, Senior Counsel, acting for one of the independent directors in the early proceedings.

Lorraine said SGX was informed by MAS then that the announcements may not be accurate and that MAS was unable to disclose why. Mr Singh queried whether this was informed to the directors.

• What information did SGX have at that point in time?

• What were the precise circumstances leading to SGX to conclude that the announcements then at that point in time were misleading

• And whether the same information was conveyed or made available to the directors?

• And when the directors became aware of the information, did the directors, to the best of their abilities, attempt to rectify any "misannouncements" made earlier to the investing public?

SGX's position - Announcements must always be the responsibility of the directors.

MAS's role with CPIB and MAS's role with SGX - Beyond my realm of understanding at the moment.

CPIB's role - To investigate any wrongdoing. But could they be expected to tell the whole world who and what they are investigating and may end up compromising their investigation?

Let us await for more news on this case.

Reference - BT, Aug. 15, 2009

Liquidator and her independence

Background
Singapore-based Fustar Chemicals Pte Ltd owes FCL (Hong Kong) a debt of $614,560.71. Mr Ng Cheong Ling owns FCL (Hong Kong) while Mdm Wong Ser Wan owns the Singapore entity.

The Singapore firm came under voluntary liquidation in 2004, mired by a matrimonial dispute between them. Mdm Wong appointed Ms Ong Soo Hwa to be the liquidator.

Ms Ong rejected the existence the debt on the basis of absence of primary documents even though secondary documents such as audit confirmations and "qualified" audited accounts were submitted.

The dispute went to court.

Decision

The High Court agreed with Ms Ong's decision not to admit the debt. The Court of Appeal, led by Justice VK Rajah, disagrees and overturns the earlier decision on the following grounds:-

1. "weight should be given to the fact that the accounts in question have been audited' and there was no evidence to conclude that the audited accounts may be inaccurate or incorrect."
2. "It must be obvious to anyone with accounting background that the doubtfulness about the collectibility of a debt by a creditor has no effect on a legal obligation to make payment by the debtor"
   

Justice VK Rajah expressed stern words on Ms. Ong's performance as a liquidator.

• "A liquidator must not only act independently, but be seen to be independent." She is seen to be biased in favour of her appointers.
  

• Though the accounts were qualified by auditors, the debts are still part of the audited accounts of the company as the accounts were approved by the directors and shareholders at annual shareholders' meetings.

As punishment, The Court of Appeal told Ms Ong that she can only get her fees after all the creditors have been paid.

FRS 16 - Property Plant Equipment v090604

a plant as defined by FRS16

FRS 16 prescribes the accounting treatment for property, plant and equipment.

Property, plant and equipment are tangible assets that are in use for more than one accounting period. Cost of property, plant and equipment comprise of:-

1. Its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates.
2. Any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.
3. The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purpose other than to produce inventories during that period.

Property, plant and equipment are initially recorded at cost. Subsequently, they can be carried either:-

• Cost less any accumulated depreciation and any accumulated impairment losses; or
• Revalued amount (Fair value at the date of revaluation), less any accumulated depreciation and any accumulated impairment losses.

If option (b) is chosen, all assets within a class of property, plant and equipment must be revalued and the valuations must be updated regularly.

A revaluation increase shall be credited directly to equity as revaluation surplus, unless it reverses a revaluation decrease of the same asset previously recognized in profit or loss.

A revaluation decrease shall be recognized in the profit or loss. However, the decrease is debited directly to revaluation surplus in equity to the extent of the credit balance in revaluation surplus.

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. The residual value and the useful life of an asset should be reviewed at least at each financial year-end. If expectations differ from previous estimates, the change in accounting estimate (FRS 8 Accounting Policies, Changes in Accounting Estimates and Errors) is applied.

Impairment is recognised in accordance with FRS 36 Impairment of Assets.

The gain or loss on the derecognition of an item of property, plant and equipment shall be determined as the difference between the net disposal proceeds, if any, and the carrying amount of the item and is included in the profit or loss.

FRS 16 specifies disclosures about property, plant and equipment.

Source - ICPAS CPA Singapore Wire 9 June 2009

ACRA, Van der Horst Energy and FRS102

a quiet pavillion

What happened?
The Accounting and Corporate Regulatory Authority (ACRA) has requested Catalist-listed Van der Horst Energy (VDHE) to restate its financial statements for fiscal 2008 on grounds that options granted to two executive directors should have been treated as an equity-settled share-based payment under a financial reporting standard (FRS).

ACRA confirmed that this is the first time it has directed a listed company to restate its financial statements under such circumstances.

What is the rule?
FRS102 ruled that every company that granted stock options have to account for them as a business expense in its income statement, instead of merely just having to mention them as a note in the annual report.

What is the implication?
After taking the fair value of the share options of $5.7 million as business expense, VDHE would now report a pre-tax loss of $2.83 million, instead of the pre-tax profit of $2.87 million that were earlier stated.

ACRA was not prepared to sit back and accept the auditor's qualification of the accounts on the basis of non-compliance with FRS102. ACRA has now ruled for restatement of the financial statements.

Audit opinion?

Based on Singapore’s accounting standards, auditors would put an 'emphasis of matter’ if an issue warrants deeper discussion but does not affect the auditors’ opinion.

Matters that affect their opinion would be highlighted by way of a qualified opinion, a disclaimer of opinion or an adverse opinion - in order of severity.

Is there a better way?

Perhaps we could follow the World Health Organisation's numerical approach on the level of seriousness on H1N1.

Alternatively, we could go on the colour-coding way.

Of course, I am not wholly serious about the above suggestions.

But the point here, let us not try to make our profession and our work complicated by using "chim" words/phrases that the ulitmate users of the auditor's report may not understand.

Can we do better?

FRS 14 - Segment Reporting v280509

FRS 14 prescribes the reporting of financial information by segment – information.

FRS 14 applies to enterprises whose equity or debt securities are publicly traded and enterprises in the process of issuing equity or debt securities in public securities market. Enterprises not in the above categories are also encouraged to disclose financial information by segment voluntarily.

A business segment is a component of an enterprise that is engaged in providing an individual or a group of product or service and is subject to risks and returns that are different from other business segments.

A geographical segment is a component of an enterprise that is engaged in providing products or services within a particular economic environment and is subject to risks and returns that are different from those in other economic environments.

The source and nature of an enterprise’s risks and returns determine whether the primary segment reporting will be business segments or geographical segments. Enterprises risks and returns mainly affected by differences in products and services should have its primary segment reporting as business segments and secondary segment reporting as geographical segments.

Likewise, enterprises risks and returns mainly affected by its operations in different countries should have its primary segment reporting as geographical segments and secondary segments as business segments. This is identified by the enterprise’s internal organizational and management structure and its system of internal financial reporting to senior management.

A business or geographical segment is a reportable segment if a majority of its revenue is earned from sales to external customers; and

a) these revenue from sales to external customers is 10% or more of the total revenue of all segments; or

b) its profit or loss results is 10% or more of the combined result of all segments in profit or loss, whichever is the greater in absolute amount; or

c) its assets are 10% or more of the total assets of all segments.

If total external revenue due to reportable segments is less than 75% of the total consolidated revenue, additional segments are identified as reportable segments until at least 75% of total revenue is included in reportable segments.

The disclosure for each primary reportable segment is as follows:-

a) separate revenue disclosure of sales to external customers, inter-segment revenue;

b) separate results from both the continuing and discontinuing operations;

c) carrying amount of segment assets;

d) segment liabilities; and

e) cost incurred in the period to acquire property, plant and equipment and intangibles.

The disclosure for each secondary reportable segment is as follows:-
a) separate revenue disclosure of sales to external customers and inter-segment;
b) carrying amount of segment assets; and
c) cost incurred in the period to acquire property, plant and equipment and intangibles.

Source - ICPAS CPA Singapore Wire 28 May 2009

ACCA Graduation - May 23, 2009

Linda, great to see you..

top guns for the various subjects

Welcome to the World!

Another 195 affiliates have completed the rigorous ACCA curriculum. Congratulations.

Women in Accounting & Finance Survey 2009

On Thursday last, I was invited to attend, in my humble capacity as a Local ACCA Executive Council member, the presentation of the survey results of women in accounting and finance roles. The survey was commissioned jointly by ACCA and Robert Half Singapore.

Based on the responses of 721 women, the following are some key findings:-

1. Are women ambitious? Yes, particularly for the younger women but the more matured ones are more likely to stay with their current employers.

2. 64% of respondents said they did not attend any leadership course at all in 2008.

3. What women see themselves doing better than men? The respondents highlighted 3 areas - attention to details, dealing with people issues, communication skills.

4. Women's top three desired work benefits:- flexi hours, better maternity benefits and thirdly, more annual leaves. 53% said they are willing to take pay cut for more flexi hours.

5. What are the priority areas for women?
Work/life balance came out as top priority for 59%. Surprisingly for me, the younger women are the ones that value this more than the matured counterpart.

FRS 12 - Income Taxes

casino in process

FRS 12 prescribes the accounting treatment for income taxes.

Current tax refers to the amount of income taxes payable/recoverable in respect of taxable profit/tax loss for the period. Income taxes payable for current and prior periods are recognized as a liability. Income tax recoverable or overpaid is recognized as an asset.

Deferred tax is the differences between the carrying value of the assets and liabilities in the balance sheet and the tax base of assets and liabilities. A deferred tax asset or liability arises if recovery/settlement of asset/liabilities affect the amount of future tax payments.

FRS 12 states that entities should recognize a deferred tax liability in full except in the following situations:-
a) where the initial recognition of an asset/liability in a transaction
i) is not a business combination; and
ii) at the time of the transaction, affects neither accounting profit nor taxable profit

b) deferred tax liability arising from the initial recognition of goodwill, or from goodwill for which amortization is not deductible for tax purposes.

c) deferred taxes on temporary differences arising on investments in subsidiaries, branches, associates and joint ventures if the entity is able to control the timing of the reversal of the difference, and it is probable that the temporary difference will not reverse in the future.

FRS 12 also states that a deferred tax asset is recognized to the extent that it is probable that a tax benefit will be realized in the future. This applies to the unused tax losses and unused tax credits.

Deferred tax is measured at tax rates expected to apply when the deferred tax asset/liability is realized/settled. The tax rates used must be enacted or substantially enacted by the balance sheet date. A deferred tax asset or liability is not discounted.

The tax consequences of transactions and events are recognized in the same financial statement as the transaction or event – that is, current and deferred taxes are:-

a) recognized in equity, if the items to which they relate are credited or charged directly to equity;

b) recognized as identifiable assets or liabilities at the acquisition date, if they arise as part of a business combination in accordance with FRS 103;

c) otherwise, recognized as tax income or expense.

Source - CPA Singapore Wire / ICPAS May 21, 2009

How to account for Jobs Credit?

prawns in soup

Surprisingly I received a circular from ICPAS on how to account for the grants received from Jobs Credit.

I thought we don't need guidance on something so simple. But then again, perhaps we should synchronise.

Anyway the specific directions that we should follow are:-

1. For grant received on 31 March 2009, we should recognise it for value 31 March 2009. For grant received on 30 Jun 2009, we should recognise it for value 30 Jun 2009 etc etc.
   
2. An entity should start accounting as per circular No. A7/2009 prospectively from 20 May 2009.
3. If you have chosen to apply this circular early, you are permitted to do so.
4. But if you have not applied as per Circular for the first cheque in March, you have to disclose that.

Questions

• What if we receive the cheque only after 31 March 2009? Should we then accrue for it?
• Which account should we credit the amount to?

What have you been doing for your company? Can share with me?

Summary of FRS 10: Events After the Balance Sheet Date

charlton hotel is changing

The objective of FRS 10 is to prescribe the accounting and disclosure requirements of events after the balance sheet date. Events after the balance sheet date refer to those events that occur between the balance sheet date and the date when the financial statements are authorised for issue.

Adjusting events provide evidence of conditions that existed at the balance sheet date. Examples of adjusting events include:-

• the settlement after the balance sheet date of a court case that confirms that the entity had a present obligation at balance sheet date;
• the awareness of information after the balance sheet date pertaining to the impairment of an asset impaired at the balance sheet date (eg. knowledge of customer’s bankruptcy after balance sheet date warrants an adjustments to be made to the receivable from customer at balance sheet date and sale of inventories below cost after the balance sheet date)
  

Non-adjusting events reflect conditions that arise only after the balance sheet date.

Examples of non-adjusting events include:-

• a decline in market value of investments subsequent to balance sheet date and before date financial statements are authorized for issue;
• dividends declared after the balance sheet date.
  

Refer to FRS 10 for more examples of non-adjusting events.

For non-adjusting events, the entity discloses the nature of the event and an estimate of its financial effect.

Financial statements should not be prepared on a going concern basis if management determines after the balance sheet date that it intends to liquidate the entity or to cease trading.

Financial statements should disclose the date when the financial statements were authorized for issue and who gave that authorisation.

Source - eICPAS newsletter May 2009

FRS 8 - Accounting Policies, Changes in Accounting Estimates and Errors

The objective of FRS 8 is to prescribe the criteria for selecting and changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and correction of prior period errors.

An entity should change its accounting policies only if the change is required by the Standards or the change results in a more relevant and reliable information about the entity’s financial position, financial performance or cash flows. Any changes in accounting policies shall be accounted for in accordance with the specific transitional provisions of the Standards. If there are no specific transitional provisions, the change in accounting policies shall be done retrospectively as though the new accounting policy had always been applied.

Changes in accounting estimates should be recognized prospectively in the profit and loss account either in the period of the change only or the period of change and future periods, if the changes affect both. Any corresponding changes in assets, liabilities or equity are recognized by making adjustments to the carrying amount of the assets, liabilities or equity in the period of change.

Material errors in financial statements that are discovered in subsequent periods must be adjusted retrospectively in the first set of financial statements authorized for issue after their discovery. The comparative amounts for prior period are either restated or if the error occurred before the earliest prior period presented, the opening balances of the assets, liabilities and equity for the earliest prior period are restated.

FRS 8 specifies that in instances where it is impracticable to do a retrospective adjustment for change in accounting policy, the entity should restate the comparative information prospectively from the earliest date practicable.

FRS also specifies the disclosures required of changes in accounting policies, accounting estimates and errors.

Source - eICPAS Apr 20, 2009

Unequal rights of shareholders

Shareholders only have rights but no liabilities.

What rights do shareholders have?

• right to vote
• right to attend AGM and EGM
• right to receive the Annual Accounts
• right to receive dividends when declared

Issue - Do some shareholders have more rights than stated above? Do the above always hold true for every single shareholder?

The simple answer - Some shareholders do have more rights, whether rightfully or otherwise, than the others.

The following are real examples where my simple answer holds true:-

• The issue of consolidating the accounts of 2 companies which are publicly listed. The holding company requires a lot more than statutory info to prepare its consolidated accounts and satisfy its auditors. So we have possible situation of a majority shareholder being given access to non-publicly available info.
  

• How about the situation of a major shareholder getting sensitive info through its nominee directors in the subsidiary company? A nominee director is appointed by a major shareholder. Who do that director owe a duty and responsibility to? The major shareholder or to the company?
  

How to resolve this?

FRS 7 - Cash Flow Statements Apr 2009

Summary of FRS 7: Cash Flow Statements

FRS 7 requires all enterprises to present cash flow statement. The standard requires the provision of information about historical changes in cash and cash equivalents of a company by means of a cash flow statement that classifies cash flows during the period by operating, investing and financing activities.

Operating activities are the principal revenue-producing activities of the enterprise. Cash flows from operating activities are disclosed either using the:-

• direct method (disclosure of major categories of gross cash receipts and payments; or
• indirect method (profit or loss for the period is adjusted for non cash items (such as depreciation, foreign exchange losses etc.) and income or expense related items related to investing and financing activities to determine the operating cash flows.

Investing activities are those expenditures incurred with an intention to generate future income and cash flows.

Financing activities are those expenditures incurred that result in changes in the size and composition of the contributed equity and borrowings of the entity.

Source - ICPAS ePublication April 2009

MOM's position on Company Stamp Part II

lingzhi

To be fair, I am presenting MOM's response received today on Company Stamp for your consideration.

MOM said,
"Our requirement to have company stamp endorsing our documents reduces the likelihood of unauthorised transactions or applications by a third party. Such cases do happen and companies become invariably implicated or inconvenienced due to fraudulent transactions.

While there is no legal requirement for companies to have a company stamp, such a requirement will safeguard the interests of our customers such as yourself. We will also accept alternative means of authorisation such as an official company letter in lieu of a company stamp endorsement." Unquote.

Questions for your consideration.

1. What is a Company Stamp?
2. Can anyone make a Company Stamp?
3. How much to make a Company Stamp?
4. How does a Company Stamp protect your company if it is not legally binding to use a Company Stamp in official documents and contracts?
5. Is it different from Company Seal?

1. What is a Company Letterhead?
2. What are the statutory information that must be found on a letterhead?
3. How to make Company Letterheads? Must I ask the printer to print or can I print them using my printer?
4. When is a letterhead a letterhead and when is it not a letterhead?

If the primary objective is to prevent false or fraudulent applications and transactions, you verify the person that is making the application / transaction by checking the identity card/passport.

I don't think a Company Stamp or Company Letterhead can prevent a fraudulent application/transaction.

Company Stamp? Do we need it?

Recently my company went into a tangle with Ministry of Manpower (MOM) over the requirement to place the company stamp on a work permit form.

I told the MOM officer that my company does not use any company stamp. The officer then requested my company to issue a letter on my company letterhead saying my company does not use company stamp.

I seek an explanation for the need of such a piece of paper with the company letterhead generated by MS Word. What is the legal importance of that piece of paper?

I seek feedback from MOM and EnterpriseOne on whether there is a legal requirement for companies to use company stamp. MOM's email response that I seek is still pending after more 3 business days as per their explicitly stated service standard. EnterpriseOne responded the very same day. Fantastic service! EnterpriseOne simply state that company stamp is not a legal requirement.

If that is the case, why are some banks and government bodies insist on use of company stamp?

Don't ask for things if they are not necessary in the first place. It is time to stop creating unnecessary work.

Anyone with legal knowledge, please correct me if I have mistaken. Cheers.

Proposed changes to Revenue Recognition

my last Sat's lunch - ICPAS AGM

Which FRSs could be affected? FRS 18 Revenue and FRS 11 Construction Contracts are proposed to be merged into a single revenue recognition model in a discussion paper published in Dec 2008.

What is the proposed underlying principle?
The underlying principle in the proposed model is that revenue is recognised when a company satisfies a performance obligation in a contract; in other words, when the company fulfils one of its promises in the contract.

Who will be affected?
The abolition of FRS 11 would affect industries involved in ship building and property development. Particularly those industries delivering products and services with long gestation period.

What would be the difference in treatment?
Currently, revenue is recognised on a percentage of completion basis.
In proposed model, revenue can only be recognised if and only if the work-in-progress is transferred to the Customer as it is created. Since the Customer will not be accepting the handover of partially completed products/services, the business entities involved could experience fluctuations in reported earnings.

For those in the software business - For eg. a software developer is paid $1 million to develop a software with a warranty period of 3 months after delivery date. The developer cannot recognise the full $1 million upon delivery of the software. To satisfy the proposed change, the $1 million must be apportioned as separately identifiable revenue to software development and warranty respectively. Over the delivered portion can be recognised as revenue.

Reference - Accounting and Business 04/2009