Non-qualified accountants in Singapore

Gone are the days when directors would simply attend board meetings, sip their coffee and leave it to the chairman or the CEO to make decisions. In today’s world of corporate failures, when a board, individually or collectively, can be sued by shareholders, the duties of a director can be onerous.

In Singapore, a recent enhancement in the corporate governance framework has refocused attention on directors’ personal responsibilities and duties. As a result, many directors are now expected to seek further professional and independent advice to help them in their role, but also to limit their personal liability.

Since September, at least two directors on the boards of companies listed on the Singapore Exchange (SGX) have had to give a negative assurance confirmation on quarterly results stating that, to the best of their knowledge, nothing has come to the attention of the board of directors that may render the financial results to be false or misleading.

The effect of the changes should only be psychological, as directors are expected to conduct the necessary due diligence before discharging their duties anyway. But if the amendment to Listing Rule 705 specifically states directors are not expected to commission an audit of these quarterly financial statements, accounting firms believe it will encourage more directors, especially independent ones, to seek a limited review of financial statements by an internal or external auditor.

“Our experience is that, although the SGX is only asking for a negative confirmation, many independent directors do not feel comfortable with this new rule,” said Sim Hwee Cher, assurance partner at PricewaterhouseCoopers. “It doesn’t help when you read in the newspapers about the recent corporate failures where the directors are being brought to court, even if they’re not prosecuted. I believe more directors will ask for this limited review to ensure that they have discharged adequately their duties under the Companies Act.”

Bernard Tay, an accountant and independent director who sits on the board of five listed companies, agrees: “Personally, I would prefer an external auditor to do a review of the quarterly financials and issue a review report that would be issued together with the announcement. This provides directors additional assurance that the quarterly financial statements are in order.”

Tay said he was less concerned about bigger companies which have the necessary in-house expertise and experienced accountants that may already have procedures in place to review the financial reports more closely and more frequently.

“My concern is more for the smaller companies and the foreign companies listed here. The latter may have accountants not familiar with Singapore’s disclosure requirements. Therefore, it would be more appropriate if an external auditor reviews the quarterly financial statements before the announcement is released to the public. It adds comfort to users of the quarterly announcements more than anything else,” he said.

The new rule could have an additional ripple effect. Smaller companies are likely to think twice about having non-accountants as their chief financial officers, says Ernest Kan, Vice President of the Institute of Certified Public Accountants of Singapore (ICPAS).

“If you have to sign off, you will probably ask a lot more questions. This will encourage the CEO to be more diligent in providing prudent interim financial information, and this only reinforces the need for an accountant as CFO,” points out Kan.

In recent months, the issue of hiring non-qualified accountants as CFOs, especially among small companies, has caused some concern in Singapore. The trend has already been observed in other countries and mainly reflects the changing nature of the CFO’s role. CFOs are now increasingly making strategic decisions and playing an operational role, called upon by the CEO to spearhead the organisation’s financial and investment objectives.

Some large companies, like property developer CapitaLand and even the SGX, do not have accountants as CFOs. “At SGX, we see the role of the CFO as very much a strategic one in pursuit of shareholder value. Accounting expertise is only one aspect of the role of the CFO,” explains John Gollifer, head of corporate communications and investor relations.

The debate on a CFO’s necessary qualifications is all the more important in Singapore because the law and regulations do not specifically require a company (whether listed or not) to hire only qualified accounting professionals for their finance and accounting functions, or for them to be members of a professional body, although it does require companies to prepare financial statements which comply with Financial Reporting Standards. However, in Malaysia, CFOs are required to be accountants and members of the Malaysian Institute of Accountants, while in Hong Kong the exchange requires main board companies to have a qualified accountant among its senior management, preferably in the capacity of an executive director.

ACCA Singapore has been raising the flag on this issue, pointing out that the term “accountant” is not even regulated and can in fact be used by any person doing book-keeping and other transactions-based work. The issue of unqualified accountants doing what are, in essence, the jobs of professionally qualified accountants is at the top of ACCA’s Public Policy Unit’s Agenda.

Grasp

Kan believes that CFOs should be qualified accountants because the training will give them a better grasp of the increasingly sophisticated local accounting standards. For example, Kan pointed to the complexity in stock options standards: “If the company creates a stock option scheme, it will have to charge the stock options granted to the employee to the profit and loss account. That’s simple. But sitting inside the standard there is a very subtle rule. Para 3 of the standard says that transfer of an entity’s equity instruments by its shareholders to parties including employees that have supplied goods or services to the entity are share-based payment transactions. In other words, if that scheme was undertaken by the shareholder of the company and paid directly to the employee, it’s also caught. Many people may not realise this, and the consequence is that financial statements will be misstated as something you should account for is not there.”

Professionals also point out that organisations like ICPAS and ACCA provide continued professional development schemes to ensure their members maintain and develop the capabilities required in the workplace. This means that the gulf between qualified and unqualified accountants could widen further over time.

But some feel that, in the case of larger organisations, the CFO’s accounting qualification is not that important.

“At the end of the day, it boils down to what you want your CFO to achieve,” says Danny Teoh, managing partner at KPMG.

“If you’re a small company and you’re looking for someone to deal with compliance issues related to financing reporting, then yes, it makes sense to hire a qualified accountant, but if you’re a large company, then your requirement will be different. It’s about how you surround yourself with the right people, how you organise yourself, what type of controls you have in place,” Teoh said, adding, “if you ask me, you’re probably better off having a banker dealing with stock options than an accountant. When dealing with options you’re dealing with valuations, and the people who understand it better are the bankers.”

Because of the increasingly changing role of CFOs, especially in larger companies, ACCA Singapore has been arguing for some time that the operation and recording roles often undertaken by one person should be split, as the syncretisation of the two roles can result in confusion and softening of internal controls.

“As organisations grow and become larger, there is in fact some merit to splitting the role into two separate functions. It is part and parcel of good internal control that the recording function be separated from operations,” points out Penelope Phoon, head of ACCA Singapore. “No law, regulations or internal financial controls system can eliminate fraud. Nevertheless, a strong and effective internal control system can minimise irregularities.”

Pivotal role

While the finance function may cover expertise in areas such as capital-raising and mergers and acquisitions, the accounting function focuses on how financial information about the company is communicated to others. In the context of accounting standards, the accountant plays a pivotal role in communicating this information to those outside the organisation. Historically, the two roles have been assumed by the same individual and syncretised, particularly in smaller organisations. This has resulted in some confusion and a softening of internal controls.

“The CFO is increasingly playing an operational role. He is called upon by the CEO to spearhead the organisation’s financial and investment objectives. He is expected to take risks and ‘market’ the organisation to others to obtain capital and finance. When he is also involved in authorising the recording and communication of transactions generated from these operations, some measure of independence is sacrificed,” Phoon notes.

Such dual role in any position in a company can increase the risk of financial information manipulation, as was the case with Nick Leeson of Barings Bank, who was able to manipulate the records and reports to his head office to conceal his reckless deals because he had access to both the back and front offices.

Although Phoon acknowledged the additional cost to companies of splitting these functions, she also believes management had to pay for an effective internal control system. “Controls do have costs, and costs have to be seen in relation to their benefits, not in isolation,” she said. As an alternative to splitting the CFO role, compensating controls – for example, close oversight by an audit committee – could be introduced.

“The important thing is for companies to realise that they are exposing themselves to an internal control risk in every case where the recording and operational functions are syncretised; the CFO function is only one such case,” Phoon said.

Sonia Kolesnikov-Jessop is a freelance journalist regularly contributing to Newsweek and the International Herald Tribune.