Singapore Value of Audit roundtable:

transcript
25 September 2014Comments (0)

The third economia/KPMG Value of Audit roundtable in Singapore

Participants
Ong Pang Thye (OPT), head of audit, KPMG Singapore
Richard Cree (RC), editor-in-chief, economia
Mark Vaessen (MV), global head of IFRS, KPMG
Lee Wai Fai (LWF), Managing Director and Group CFO, United Overseas Bank
David A Smith (DAS), Head of Corporate Governance, Aberdeen Asset Management
Kenneth Yap (KY), Chief Executive, Accounting and Corporate Regulatory Authority
Gerard Ee (GE), President, Institute of Singapore Chartered Accountants
Mak Yuen Teen (MYT), Regional Research Director, National University of Singapore
Goh Ann Nee, (GAN), Chief Financial Officer, City Developments Limited
Willie Cheng (WC), Chairman, Singapore Institute of Directors
MV: The reason we started the value of audit programme was because we think it is important to have a debate with
our stakeholders. If you look in the aftermath of the global financial crisis, there have been valid questions raised, of
all participants in the marketplace, including the auditors. People were shocked that banks needed state help where
auditors had signed off their accounts, so there were valid questions asked. But its not only the audit profession. In
many places there was a general loss of trust in business and in institutions.
OPT: In Singapore there is a lot of discussion on audit quality, the ecosystem, the preparers, the auditors
themselves, and empowerment of audit committees all coming together. One of the outcomes has been to create
awareness about independence. Independence, in terms of non-audit services and also in terms of tenure of
appointment, is huge in Singapore. The question is whether it is the only measure of audit quality. I think in this part
of the world we struggle to look for the measures of audit quality. There are a lot of indicators out there, but how
appropriately do they measure the outcome, which is audit quality?
GE: Everyone is under extreme pressure. Boards are looking more and more to audit to give them that comfort and
assurance that the right things are happening. Previously, auditors did have a general overall responsibility to make
sure that things are okay, and I think weve debated long and hard and have taken this idea of true and fair. It gives a
lot of assurance to people. Today you will find the audit profession comment on accounting standards. They are
important, but to a lot of organisations that doesnt get to the heart of the challenge. A lot of us look at the value of
audit as making sure that our financial statements are correct and consistently prepared. Shareholders expect some
comfort from somebody outside the firm who says things are okay.
WC: I dont think independence is used as a proxy for quality so much as independence is an issue the marketplace
is trying to address. If you address the independence issue, you dont fully address audit quality. But I dont think
independence is a consequence only of quality, because other people (besides auditors) see independence as an
issue.
MYT: Quality is a function of several factors. Independence is one factor, but so is the competence of the auditors.
And I think the issue of today, with the way IFRS have moved and with so much subjective judgement called for,
that is a big factor affecting audit quality. Its a combination of factors. Independence is clearly important to provide
that assurance, but its a necessary but not sufficient condition for quality.
DS: From the perspective of an investor, independence is clearly an issue that the markets are looking at both in
terms of the tenure and in terms of the degree of non-audit fees that are paid. But I dont think anybody would say

that independence is a panacea for investors. As you invest in emerging markets, particularly, investors look to audit
as a stamp to say that the accounts are properly prepared. One of the things were also aware of is audit dependence.
Thats where audit firms only have one or two clients and, are therefore, dependent on them for a lot of their
income. That is as much of an issue as tenure has been and quality is now.
LWF: Id also like to raise the question of the independence even of the audit committee. We have the same
argument. Members are also paid by the firm and you saw what happened to the directors in the US. Its not who
pays, its a matter of mind. Same as the auditors, they are approved by shareholders, so whats the difference?
KY: The way the independence argument has proceeded has been a bit paradoxical. Were talking about maximum
tenure, where actually anywhere else in the world where youre talking about independence it would be about
minimum tenure. I think audit quality really must be qualitative. There must be other controls or issuers besides just
independence. Of course, this is an important basic point.
GE: The question of tenure is an attempt to correct the independence issue, but I dont think tenure in itself is going
to resolve it. The main issue is structural. Its an issue of how the relationships between the parties are set out.
MV: What is the role of audit committees then? I think that is very often seen as at least part of a solution. Should
audit committees step-up their responsibility?
GE: There is an attempt in the industry to raise the profile and the power of the audit committee to be able to more
independent and receive the reports of the auditors. But the reality is that the day-to-day interaction and in a lot of
situations the CFO and management have a lot of influence on both the selection of auditors and on what gets
reported. I think the experience of most audit committees is that a lot of things dont come to the audit committee.
MYT: Also have to consider the independence and competence of audit committees. That has improved in
Singapore. If you go back 10 years, it used to be common to have a lawyer chairing the audit committee who didnt
know anything about financials. Thats rare today. So it has improved but there are still questions over how
competent or independent those audit committees are.
GE: The bulk of audit work is in the areas of fraud and estimates. That means giving a true and fair view of the
financial statements, so there are no surprises. There is a tricky third area. If you look at the major financial failures
they were not illegal. I am talking about the packaging of derivatives, incorporating some junk. Is that within the
scope of the auditor? Not until it blows up. We are too focused on traditional areas and we pile on more regulation.
The typical audit today is very compliance-based, so much that auditors are kept so busy trying to comply they dont
notice whats happening around them. And if someone is going to use the proceeds and build an Olympic-sized
swimming pool, its not going to register in their minds that funds might have been used on expenditure that isnt
going to generate returns.
MV: What youre asking is who identifies systemic risk in an industry, because thats what happened with the
repackaging of derivatives.
GON: I agree. Who uses annual reports other than shareholders? Investors. And most of them just look to see that
theres an unqualified audit opinion and then close it and put it aside. But they want to know what the company
does. As preparers of accounts, youre often too busy trying to do the reporting and getting everything finished on
time. So the auditors are rushing, and you tend to forget the big picture. I would add that the notion of independence
is very judgemental. I can be classified as independent but I know Pang Tye very well. If I have coffee with him, I
may lose my independence.
GON: Weve got to ask ourselves what is the ultimate value in the auditors opinion. Is there a way to widen the
report, so that you highlight certain things? Like a review of controls, or a review of certain issues in a particular
segment of the business? Is there a way to benchmark the company to other global listed companies in the same
sector? Could there be a comment, from the auditor, on our comparative risk appetite? For investors, shareholders or
institutions when they read that it is an unqualified audit opinion well just a start. Whats next?
GE: Gut feel tells me it is this area of risk management that will address the issue. If auditors somehow have to

comment on the risk area, they will start looking at products being offered by the entities, and if they inherently
carry a risk. I would expect the integrated report to be of growing importance, especially if risk becomes a part of it.
When you speak of compliance among the Big Four, they all strive to achieve world standards and compliance in
international auditing. As a consumer of audit services, I dont have to worry which of the Big Four I appoint, as the
cheapest firm is the best. The Big Four are competing for market share and, therefore, as audit fees drop you reach
the point where you wonder how on earth they can do the full scope of work.
MV: That comes back to the point that it is very difficult to judge audit quality other than saying the Big Four are
approximately the same. But its interesting to take the experience from the UK with the new auditor reporting. The
auditor reports on materiality, because thats an important element. And they report on the scope of the audit. All of
a sudden in the dialogue with investors there is more awareness of materiality. So you get a better sense of value.
For me, it is a first attempt at trying to start comparing quality among firms, because firms have different materiality
thresholds, they different approaches to scope.
RC: Were just beginning to see the discussions between auditors and the audit committee released for sharing with
a wider community. Do we need more of these robust discussions be out in the open?
LWF: But once you touch the area of risk, then we have to ask whether this is beyond the auditors. Today, unlike
previously, firms are more stable. Risk is not what you create, rather it is the result of the market environment. That
is the dynamic. And that changes. And like you say, you can have all the rules, but private entities exist to take risk.
They make their money from risks. Without it there would be no jobs.
OPT: We have over-focused on independence and not enough on ethics. It boils down to the individual person on
the job. Its not so much the firm but the person in charge and his or her ethical standards.
WC: Its just how the profession has evolved. Because of scandals and lawsuits, the audit profession has done an
excellent job in protecting itself. So much so that it has reduced the audit opinion to something that is clinically safe.
If you ask the CFOs, they sign all sorts of statements to assure the auditors that everything, as far as theyre
concerned, is clean. Auditors have done a good job of managing liabilities and exposures to the point where if you
were to try and add value by commenting on the risk outlook, they would be exposing themselves. A fundamental
shift in how the profession wants to do this has to occur. It's all very nice to say that audits are too focused on
compliance, but that actually is the safest route from their own protection standard.
GE: I differ on the view that its not ethical standards that are critical. Just look at Arthur Anderson. It was the most
outstanding firm, the pride and joy of the profession and everybody wanted to join. All it took was one team that
didnt keep to the ethical standards to destroy the whole firm. You cant over-protect yourselves.
GAN: And it comes back to fundamental question of the raw materials going into the process of audit. I get the
perception not many young people joining the audit profession want to be auditors. And it is worrying. As a client, I
interact with auditors when they come in. And sometimes in the corridor you hear people saying maybe we should
go and join investment banking. Every year, as a client, we go to the audit committee to recommend the audit fees.
There is a lot of competition. I get a lot of calls from other firms. And any CFO wants to get good value. I want to
see the value not just in terms of fees, in terms of what this group of auditors can do for the group. I dont want
auditors just to come in tick boxes. If thats the case then maybe we hire a robot and just programme it and say,
look, you make sure that this is done for me. I want something more from an auditor.
DS: Its interesting when you talk about fee pressure. From a shareholder perspective I rarely see shareholders say
we think youre paying too much for your audit. Typically, the audit fee is lower than other incidental costs. As
shareholders we are prepared to pay for good quality, well-resourced audit, where that audit is of value to the
organisation and where shareholders get comfort. I would caveat that by saying that thus far for the market as a
whole, audit opinion in this region is binary and identical. Audit opinions from different firms and from different
auditors are virtually identical. For shareholders, its only the start of the journey into a company. Its a hygiene
factor. Investing is about individuals. We want to know about the risk management structure. Of course you have to
take risk. If theres no risk, theres no return. But what are internal controls like? Is the company ambitious in the
way accounting standards are applied? As investors, are we comfortable with the individuals and the estimates
theyre making? Those are the kind of values that we want from audit. Now, I struggle with how we derive that. Can

we then go and speak to the auditor and ask you audit one of our portfolio companies and I want to talk about
controls? Thats difficult for the auditor and for us in terms of information. But how do we have that dialogue
moving from the binary to quality in terms of analysing controls and financial reporting?
MV: There is an example I can use from the UK. As I said, the new auditors report requires the auditor to comment
on what they saw as the major risk carrier outside the key audit matters they focused on. But also what they have
done in terms of the audit process in order to address those. In the UK we ran a pilot with three clients, including
Rolls Royce. We went a step further, and in addition to identifying key audit matters and what they had looked at,
they also presented their findings on individual areas. The report says thinks like the provisioning in one area was a
big issue and was mildly cautious or we use words like mildly optimistic. Its a very judgemental opinion and
even within our network, not everyone was fully comfortable with it. It was a pilot, but we have now adopted it and
are encouraging all audit clients to adopt it. So far investor reaction has been positive.
GAN: I put it in the context of different cultures, with due respect in Asia theres a lot of companies with a single
dominant shareholder, like a family. Whether its Singapore, Korea or China, sometimes the audit committee can
also be under a lot of what I might carefully call dynamics. The audit committee is one way to stabilise the
dynamics. I was asking myself as I read that report will this be the evolution even to integrated reporting? The
point is can integrated reporting, if its carefully managed, be a way to come to a point where theres a paragraph or
half-page agreement that the auditors have reviewed the risk management profile, the context of understanding what
the shareholders or the investors would need? I want to know if I was to put $1m into this company, will I lose it
next year? Thats something that needs a tripartite from the regulators, the audit firms and the preparers, to give a bit
of input that we want it.
MYT: Id like to see more transparency around the auditor and client relationship and sometimes I dont feel theres
enough transparency. I feel the audit profession is too reactive and not sufficiently proactive in pushing for more
transparency around relationships. It tends to need a rule to be in place before you disclose audit fees, for example.
If tenure is a concern, why shouldnt how long the auditor has been working for a client be disclosed? What is there
to hide? Or shouldnt there be more transparency around the overall relationship, not only in terms of this one
company, but for the group as a whole? I would describe the audit profession as the transparency profession and I
think you ought to be transparent yourself. I would push a bit more and thats the way to build confidence and trust.
If people see youre open and transparent it allows them to disclose, it gives them opportunity to ask questions, to
raise issues and that will help.
WC: I agree to the extent that, as the financial statement becomes a statement of estimates, people who have to form
those judgemental conclusions on the estimates must be independent and not influenced by any factors whatsoever.
KY: Its not just about being open, its also about being seen to be open. I think whats very interesting is that the
conversation theyre having, theyre going to review some of it, and in a way that creates a lot of leverage for the
auditor, because its not just a binary nuclear outcome of a qualified or unqualified audit. You can now put in more
nuance and its still based on confirmatory work rather than speculative work. So youre still in reasonably safe
territory as far as liability is concerned. I would sound caution in terms of moving assurance into a speculative area,
because the next time someone fails to announce something theyre going to blame the auditor, because its all about
your speculation and your predictions, so youre on more shaky ground. The expanded audits going to be quite a
game changer and hopefully will move the focus of audit communities back onto quality rather than just price. But
the other thing I thought as a regulator we could do and probably will do next year is to try is to get audit
committees to ask the auditor the outcome of the last practice review. Were going to change the Act next year to try
and see how we can share the outcome of practice reviews with the audit committee. But as an interim move, were
probably going to just review when the last inspection was, to trigger a conversation. Among the big firms quality
isnt such a huge issue as qualitys quite high. But there is a spread of medium and small firms, and to refocus the
conversation I think it would be helpful. The quality issue is not just based on the auditor. Its about the audit
committee and the quality of management reports and management accounts.
OPT: What Kenneth says is interesting because we were talking about independence as not the only indicator of
quality, but as we went along we found that the Big Four find it difficult to differentiate and we keep coming back to
the measures we can evaluate, which are tenure of appointment and the level of non-audit fees. If the outcome of the
practice monitoring programme is checked with the audit committee thats a qualitative indicator that the audit

committee members will be able to use.

KY: The firm level controls that we review are just one set of indicators, but now theres a lot of talk about
developing a broader, more comprehensive set of audit quality indicators that could be developed by the firm to self
assess as a scorecard to show companies. That could be something useful going forward to shift the conversation
back to quality.
RC: Is there a danger that moving away from the binary report into this more complex more subjective area, means
measuring quality becomes harder?
KY: It does.
LWF: I think thats basically a challenge. I think I want to move away from concept that other sectors are not
willing to pay for value. If audit fees is the only value that you extract then the amount of fees we pay for
professional services to compliment the audit is significant. I think we all know in the audit profession thats the one
thats been done. Thats the irony when as the auditor you know the firm best but because of the independence rule
you cant provide other services and because of the limited liability you have to ring-fence yourself from the other
things that you are able to do. Were at the first stage where you can provide value to CFOs on this and you find you
cant do it because of the independence rule. At the same time the auditor is talking about having to provide basic
assurance, once you go beyond that youre going into areas of risk that go into a wide area and youre opening up
lots of subjectivity. At the end of the day everything can be done, its just a matter of cost for the auditors to sign.
GAN: If I put myself in the external auditors shoes, then fees are always a pressure. You cant raise your fees until
the client says I dont find any value. On the other hand, assuming that the client has a set of internal auditors, why
cant there be a closer working relationship there? Internal auditors and external auditors dont communicate enough
in some organisations. I want internal auditors doing a scope of work with external auditors so theres no
duplication. In terms of fees, putting on a business hat here, its the recovery of the fees that matters. An auditor can
put ten people on a job, but are those ten people doing what they can to cover the clients scope?
RC: Are you in favour of the recent European rules on mandatory rotation?
GAN: The debate goes on in Europe. Now every seven years we have to retender. The new auditors will have to
relearn every aspect of a business. Why cant I just change partners, or rotate the audit team? Does it maximise
independence? To me independence always goes back to integrity of the individual. You have to have the courage as
the audit partner to disagree with management.
WC: But would you be comfortable with an audit firm thats been there for the last 100 years?
GAN: Well, 100 years maybe a stretch to be honest.
WC: Thats my argument for rotation. At some point youve got to say right theres a systemic risk when you dont
have rotation. So its just a question of at which point you draw the line.
GAN: Yes, it can be 10 years I mean its very arbitrary the five years change, 10 years, 100 years, but the point is
that you see organisations are getting more and more complex.
WC: This is the usual continuity versus independence or renewal issue. But at some point in time there is a systemic
risk and the only advantage of having mandatory rotation is if you dont have it then the argument always remains
for continuing to just continue.
MYT: Rotation has become more and more difficult, because if you have a group the regulators quite often insist
they prefer group entities to have the same auditor. So once you rotate it makes it so much more difficult and
sometimes that can create problems for the perception of independence, too. Although I think at some point rotation
is needed, but maybe five years is hard to do with the banks. Its just too frequent, you know. But 100 years is
definitely too long. I think the question is where, at what point.

OPT: Weve come to an interesting part of the discussion. Our view is rotation of audit firms is not an issue. Over
time there could be good governance. The issue were seeing in the marketplace is this process called validation of
the audit firm, or retendering, either every five or every 10 years, where the incumbent is invited to participate in the
validation process. Retendering, if you exclude the incumbent, is fine. But when you allow the incumbent to join a
tender, the problem when you enshrine it within your guidelines, is that the incumbent may be compromised in
terms of independence. If they wish to be reappointed how will they behave? How would they react? I think its
better to exclude them altogether.
RC: So youre saying theres going to be a drop in challenge or scepticism if a firm is retendering?
OPT: Yes, there might be a friendlier audit if you like. So I think we need to be careful.
WC: Then dont have that intermediate retendering process. What youre saying is that instead of keeping them
honest, you actually make them dishonest.
KY: The minimum period, where it is shorter actually creates the effects of dependency, because what youre really
looking at is the next retendering and not the end of the road, which is the maximum. Its almost like an illusory
target youre going to have, its the morale, but its not going to make a big difference.
GE: The biggest argument in favour of rotation of firms is the principle that a new broom sweeps clean. No
incoming firm will want to inadvertently inherit somebody elses error. With the rotation of partners and managers
of the same firm is that if the new team discovers something not quite right theyre not about to expose it because
its still in the one family and theyll find ways to deal with it. Thats the reason some banks rotate the CEO and
every three years theres a cleanup and all the provisions are made because the new CEO has to be accountable for
all the bad debts. Thats the only thing that would strongly stand in favour of rotation of firms.
DS: The nub of the broad support that much of the investment committee has for rotation of audit firms is this clean
sweep. But we struggle with the same issue we do with independent directors. What is the ideal maximum tenure?
For audit firms I dont know if it should be 10 years or 15. Certainly 100 years is probably too long. On the flip side,
excessive rotation is also something that investors are alive to. If your audit firm changes every three years and
regardless of requirements for disclosure, the disclosure around changing firms tends to be anodyne, so we dont get
much colour on why thats happening. If you see a successive track of rotation, thats something to be alive to. Too
much on either end of the scale is an issue, but where you meet in the middle I dont know.
MV: In Europe it has been settled now on 10 years retendering and you can be reappointed, so a maximum 20 years.
But youre right in India where they have now have settled on five years and you wonder whether, you know, there
is a learning curve, if you go to a large and complex group then theres a learning curve, lets be honest. So youll
only actually get to grips with the organisation youre auditing to be honest, you know, after a while. So if you rotate
in a much too short duration I think youre actually not doing audit quality any service.
WC: Does it then make sense to have pure audit firms?
MYT: This is an important issue, because if you look at the growth of normal audit services outstripping the growth
of audit services, its a bit like with the banks. After a while you worry that an investment banking culture drives the
culture of the whole firm. Thats why regulators are so important in regulating the audit side, to make sure the
quality is there. But theres always that risk when your non-audit services become so big, will that drive the culture
of the firm?
KY: And I think where we are striking a balance now is probably quite fair, you still have about a 50:50 split or
60:40 split, so its not too bad. It hasnt gone below the 50% mark, which I think is a danger mark for audit firms.
MV: I think there is the discretion about can you do a proper audit without law specialists, while if you go into a
complex group you need to have valuation specialists, you have to have IT specialists and so on. Theres a whole
raft of specialists that you just need to have in an audit.
WC: And if you are large enough you can keep them pretty busy on audits, right?

MV: Well, thats a question whether that is sufficient to attract those people into an audit-only firm. At the moment
these people do both. They do audit assist, but they also actually have their own portfolio of work and non-audit
clients.
MYT: Which then raises the other issue, which is the argument from the audit firms has always been the non-audit
services are needed because of their ability to build competencies and other benefits to the audit. I think the audit
profession needs to communicate better to the people in terms of what it is. I dont think the audit profession has
done a good enough job of explaining the benefit of having full-service firms and how that benefits the quality of the
audit without compromising independence.
OPT: One reason for firms to end up with more non-audit services is talent retention. Many of our people do not
aspire to do audit all their lives. They want to have different kinds of exposure. I was in risk consulting for 10 years
and did a fair bit of other work. The other part of is when you start talking about value of audit youre looking for
auditors who have a broader appreciation of business issues. Not just someone who is trained from a very narrow
financial statements audit type of role for 30 years. It can be challenging trying to get our people to think beyond
financial statements audit, about due diligence and what sort of issues you find when your client acquires a new
company or when there is a merger.
RC: Can I just go back to something that was raised earlier which was around the structure of shareholding in,
particularly in Asian markets as compared to the West, theres perhaps more diversified shareholding in the West,
with lots of smaller shareholders. What impact does that have on that?
GAN: Perhaps Ill tell you the answer then because one of my shareholders is Aberdeen and they are actually the
second largest shareholder in our company. In my humble opinion that is a very good balance because we are
actually a family managed and owned business. We have a lot of internal checks and balances, because as
shareowners our view is that this company must last more than 200 years, compared to a professionally run
company. There is a perception that more dispersed shareholding means a more professionally run company, with
more corporate governance and all that. But ultimately it depends on the independent directors and the management.
Its very difficult to compare us to a purely professional company. I have great respect for my audit committee
members who are a mix of academia, accountants and lawyers.
DS: To pick up on the question around disbursed versus concentrated shareholdings, as investors Aberdeen invests
globally and we invest in companies that are family run in Asia, but also in many other emerging markets and in the
US and the UK in many mid-size companies that are family-owned. We look to audit firms to provide a level of
insurance against fraud or expropriation. In terms of atomised shareholding its expropriation by management,
where in terms of family shareholders and in emerging markets and Asia, its expropriation by controlling
shareholders at the expense of minority shareholders. But one of the issues we face with family companies is
succession planning. If you talk to most investors what worries them about family companies is not internal controls
or fraud, its succession. It presents one of the most material issues to the sustainability of the company. Ultimately,
we still look to auditors for assurance that internal controls or to the fact that audited accounts are prepared fairly.
One commonality between them to pick up something discussed earlier, there are fruitful dialogues between audit
firms, audit committees and CFOs. But outside that triumvirate are shareholders and we dont have that dialogue
with audit committee members. We dont have that dialogue with directors. Were the ones that elect them but we
dont get access to them. Were not looking for special information and were certainly not looking for inside
information. What we want is an open discussion among adults on their view of the strategy, on their view of
internal controls. Frequently were told that theyre not allowed because of shareholders. Thats something that
investors should look at improving, not to put everything on audit firms to say everythings okay.
WC: Does the governance structure mean that you should trust that the triangle works?
DS: Im trying to think of that Reagan quote. Was it, trust but verify? Theres a degree of trust. Theres the trust in
financial markets. Our clients trust us to manage money on their behalf, but that doesnt stop them talking to us three
times a year about that performance, the way that were managing money, internal controls, succession planning on
the desk.

WC: I would add that very often you dont know the quality of the board because you dont get to interact with
them. Like most of these boards on smaller companies especially, you have one or two people who speak to you and
the rest are just body counts. So is the company well run? Do they have an effective board or is it really just in the
hands of a two or three and the rest are just there?
DS: This is a topic weve faced in Singapore. We have a rule on independence and tenure. After nine years, you can
be deemed independent if the board believes you to be independent. As shareholders, we dont get to have those
discussions with directors. They can still be independent but, essentially, be a nonperforming asset. They can be not
independent but be really good directors. We dont get that information and in some ways were voting blindly on
the election of directors in an audit committee based on qualifications and independence, without knowing quality.
That communication between shareholders, directors and audit firms is hugely important.
RC: What stops you from making those contacts yourself? I remember, in the London discussion, there was a chap
who is a kind of serial audit committee chair basically and he was saying interestingly, audited by all four of the big
four, actually. So hes been a CFO and an auditor before that. In all that time, I think he was saying that it was only
last year, the first time that an investor had gotten in touch with him to talk about the report.
DS: I cant speak for the market but, certainly for us, we do frequently ask to speak to directors of the firms that we
invest in and, frequently, were denied by management. That could be executive management or investor relations.
Sometimes, on the ground, a fair disclosure of the information they want to be true.
WC: But here the main issue is the fair disclosure. There is a feeling there is already asymmetry of information.
DS: I think our counterpoint to that is that were quite happy to have small group discussions. So weve had them
with some boards with very large companies in Singapore, some of the larger companies, where theyve invited in a
number of larger minority shareholders with the board, excluding management, for lunch, and you have a very good,
open discussion. Were certainly not looking for information that...
WC: But youll never be able to include all shareholders.
MYT: Yes, but why cant you do it more at the general meeting and have less of an eating session? Even get the
auditors in. Since the first version of the code it says auditors should be present. The external auditors should be
present at the general meeting, in case shareholders have queries.
MV: But there is a precedent for that. In the Netherlands, just two years ago, they started also, at the request of
investors, to ask auditors to just give also some more colour to their audit opinion. So, actually, similarly, in the
same way as were now talking about extended auditor reporting, you just talk about what you see as the major risks
and what you have done about it. That might also lead to difficult questions like what do you think of the quality of
the management. That is maybe a bit more difficult to answer, but I think that opening up, actually, leads to a higher
perception of value of an auditor.
RC: Im conscious that weve only got about 15 minutes left. I wonder if its probably a good time to go around the
table, for everyone to give closing comments.
WC: This is about the value of audit. To me, the very fact of an audit is value itself, in my view. I think thats what
both the directors, the board and the investors look for is, as you said, an independent party that comes and looks at
the books and verifies that it passes the test. I think what were hearing is theres the broader issue of independence
but also, in terms of too much of a focus on compliance to standards. Part of it is how the accounting profession has
evolved, to become fairly complex and complicated and even, I guess, accountants themselves do not fully
understand the financial statement. I think thats a big value that auditors play at least, from my standpoint, on the
audit committees. At least they understand all the details/rules of the accounting standards, to verify that things are
properly done. I guess, if you want to add value to it, then you have to go broader into the other aspects of a
reasonable mans view of looking at a company without being involved by all the accounting rules. Actually, I think
thats going to be tough.
OPT: My takeaway is two things. One is, I think theres a lot more work that we need to do, in terms of defining

audit quality. I think thats still very much at the surface of it. So perhaps theres more discussion and more talk that
needs to go in there, working together with IoD and the investor committee. The second point is I do sense that there
are a lot of requests out there where theres a need for a broader assurance for the kind of work that we do. I think
the profession has itself to blame, I must admit, because we keep restricting ourselves to what the boilerplate is, the
binary report that we have or at least four types. Now that theres an expanded auditors report, I think thats
something thats going to come our way.
But I think, on the broader basis, the whole accounting community is such that we have prepared a set of reports,
both preparers and auditors, for multiuser. So were trying to meet the needs of the investors. Were trying to meet
the needs of investors, looking at whether it is still a going concern, what are the risk issues of the company. We are
trying to look at fair valuation and putting everything within the financial report. Thats the reason we have 300
pages, 400 pages, but it is a report to everyone. It becomes so complex that no one understands it, at the end of the
day, and I think everyone agrees that theres this basic financial report where it passes the smell test. Whether the
assets exist, I think thats primary, and thats the value of audit. If I were to ask anyone what if we dont have an
audit report, I think a lot of you will probably not agree with it, but I think that we need to deal with the
requirements of the other stakeholders, the fair value part, the estimates, as Gerard put it. So its a different type of
skill sets and do we need to provide a different assurance report, just to comment on estimates and, very specifically,
on that topic?
Thats another issue in terms of, perhaps, risk management framework. Should auditors be now commenting in a
separate report and all filed within the annual report. I think we have a chance to look at corporate reporting. We
already looked at corporate reporting today. Integrated reporting is not just another layer of what we are reporting
today but it probably needs [unclear] and, the way I see it, is it could be after our time when it comes our way where
financial reports should be so simple they are all integrated in terms of it tells a story within a 30-page document at
most, and thats what I think we are looking for. But, in the interim, I think the demand for more information, more
reporting, more assurance is out there. I think I must acknowledge, as a profession, we have not done our part to
satisfy that aspect and, therefore, the question on value of audit is being raised over and over again.
GAN: To take on what you just said, I always like to read something about Shakespeares. The world is a stage.
Everybody is actors and actresses. I wonder sometimes because, if its still within my lifetime, I just maybe one day
see theres no such... You used boilerplate just now. Maybe there will be a total revolution of the audit opinion and
heres the stakeholders, be it the shareholders, be it the investor, be it even NGOs nowadays, would even require an
independent... So, to me, independence has got to be given but, ultimately, you cannot manage independence
because it boils down to integrity of the individual and a group of people. I think, for us here, today theres so much
regulation, with due respect, that, as preparers, the backroom is sometimes so invisible but without the backroom
invisible glue that holds the complexity of organisation together, with that ramification, the auditor is just signing off
to say this is okay. But I think, sometimes I think theres an expectation gap that people out there think that you
auditors are just signing off and theres a set of accounts and its fine. Then the communication part, somehow or
other, the gap is what are we trying to communicate out to the market. The regulators will be happy if they see the
auditors have signed off, everything in compliance, but the investors are really looking for a different set of
expectations. They want to talk directly actually to the management, as I think David said. They want to know
whether, down the road, were not asking the auditors to sign a forecast, please, but to communicate down the road
that there is a robust management or robust structure, be it as corporate governance, compliance or what, that they
can still continue to invest, not after one year you sign the accounts and something blows up. Then there is
something fundamentally wrong there. I dont think, to be fair, the auditors can even pick it up because if the
auditors are not holistically trained, as you said... Theyve got to be valuers, theyve got to be good communicators,
walk into an organisation and maybe you can smell the red flags? I dont know. Or youre just going to have
compliance tick, tick, tick, tick, tick and thats it. I think the value about it really needs to be today. Look at it not
just simply from an independence view, in my humble opinion, or in the terms of changing the auditors. Then you
expect, okay, therell be independence. I think it is more than that because so fundamental as even to those
youngsters coming into the next generation, because they will be the ones to carry that baton, to continue whether
other funds still continue or whether IFRS still evolves into something else. So I think this discussion is great but I
think there are really fundamental building blocks, not just in the audit firm.
MYT: I think I should say the good news is I think audit does have value, but I think that needs to be... Obviously
trust is a big part of the reason why audit has value and, therefore, the point Im making is that the transparency,
greater transparency, is important. I think there is a tension at the moment. It seems to be that there is a big pressure

to move beyond our traditional audit, but I think there is a tension between sticking to what, fundamentally, the audit
profession has traditionally done sticking to your knitting or broadening. Because, as you broaden, there is also a
risk that you further widen the expectation gap. If you dont have the skill sets to deliver on that broader opinion, it
could be that people will say it will get worse. Lets look at the traditional areas. We have been reading a lot of
comments for many years about external auditors failure to detect financial statement fraud. Of course, the audit
profession has reacted to that and you have the ISA240 that has tried to look at that issue. I just looked at some
statistics, which is the report of the nations, the Association of Certified Examiners report, of the trend over the
years. Its ironic that, I think, before 2010, the percentage of fraud detected by auditors was around 10%. After the
new ISA Standard, it was about 5%. I dont think thats the cause but, although thats occupational fraud, its
beyond financial statement fraud. I think, in that area, Im not sure that this expectation is narrowing. When you
move into these areas of focus, there is that risk. I think I also want to just briefly say that I support Ann Nees point
about better interactions between the internal auditors and the external auditors. I think there needs to be better
communication between those two. Im glad to hear that for CDL you have that communication but...I think there
needs to be better communication. Audit committees should have more meetings, where both the internal auditors
and external auditors are sitting together and listening to the same. If you have an in-house internal audit probably
but, if you have an outsourced internal audit, then that may not be so common, in terms of that interaction.
GE : I think some corporations are finding value in the audits but, sadly enough, large numbers of corporations, to
them the audit is the price of that piece of paper - the auditors report. And their main concern is are you giving them
a clean report. The trouble with a standard auditors report, they are all designed to avoid litigation. So you dont say
more than you need to say and you use double negatives and things like that. Its designed specifically for that. So,
when we speak about quality of audit, I think it boils down to the individuals out there in the field, conducting the
audit, and it goes right down to the lowest denominator. The most junior of staff out there, with a personal standard
of ethics, to conduct the work professionally. I dare to bet with you even today, even the amount of big falls, if you
go to the most junior of staff who is examining ten machines out there against ten leasing agreements, they will
check the name, they will check the date but none of them would have gone up to the machine to look at the serial
number and check that the serial number in the leasing agreement matches it. For all they know, they could be
looking at ten leasing agreements relating to ten other machines. Again, its the personal ethical standards that make
you want to act professionally and do what is right. Unless that happens, and has Ann Nee has overheard
conversations of some of her junior audit staff, while they are doing the work ethic and moving onto more lucrative
sectors.
MV: Yes, I thought it was actually a very good debate today. A lot of things, I think, Pang Thye already summarised
a lot of what I also had picked up. I want to maybe highlight two that what really stood out for me today is the
demand for better dialogue with investors, as David has emphasised, which I think is a challenge for us, and I think
that will come with the expanded auditor report, and we are only in the early stages but I think thats an encouraging
development which will set in play, I think, a more dynamic, hopefully that that helps. Youre also asking about
more dialogue about systemic risk, and I think thats an interesting one for us to think on, on how you actually
facilitate that, because that is different from just a conversation on a one to one client, but how do you actually
identify build-up of risks, like we saw with repackaging in the financial. I dont have the answer, but I think it is one
that we look it and I think that all ties in very much with what Professor Mak was saying on more transparency also
being more open as auditors. I think thats one of the challenges that I take away and, I agree, its going to be
difficult for us to go beyond compliance. I would agree with that but I think we should actually take up that
challenge nevertheless. I see it in relation with the discussion around integrated reporting and the change of the
corporate reporting model. We havent actually spent a lot of time on integrated reporting. I dont think that
integrated reporting is a goal in itself. I think it is just a means to try to improve corporate reporting, to actually get
companies to be more meaningful in setting out how sustainable their business model is for the longer term. If we
can achieve that, not even if we get to integrated reporting on all but if we can actually make those improvements, I
think there will also be an automatic role for us, at some point, to say is there better reporting that the companies do,
can auditors give some views on that and maybe some assurance in certain places on whether thats on risk or on
some other areas. So, I see that as real, you know, challenges that we can take away and, well, it was a again a
very valuable discussion to me.
KY: On the value of audit, we commissioned a study recently with SMU that shows the level of the adjustments
the degree of the adjustments made by audit firms for one-third of the listed companies in Singapore and the results
are pretty astounding. The audit adjustments came up to 34 billion of some 200 of the companies listed

companies. Of course that doesn't mean its fraudulent, it doesnt mean its wrong, its audit adjustments, but I think
that quite clearly goes to show the value-add of the auditor. In fact, actually it was the [unclear] which I tried to
suggest [unclear] because it's really quite unheard of, you know, that [unclear] analyse the degree of difference that's
been made by the auditors to audited financial statements. But actually that's thrown in the spotlight the question of
what is [unclear] and, you know, some level of assurance needs to be provided for that because that is clearly relied
on by the market for investment issues. So, I think that there is scope to go beyond just the annual financial
statements, to provide more assurance for methods [?] that [unclear] of whatever financial data has been given by
the firm. And so I think thats one area where actually more value can be added, so to speak, and it's something that
the market really does desire. Quite apart from that, the modality of the report goes way beyond binary. That is
something that I think would really change the way audit is perceived and to be more helpful, to be more value-add
and to also add greater leverage to an auditor in terms of how he can position his findings vis-a-vis shareholder
interests and so on. In terms of quality, I agree what Ann Nee has said, that independence ethics is the starting point,
the building block. The individual is the first and foremost. Then the individual's competency as well is very, very
important. That's something, obviously, that we are very concerned about as a regulator, that we spend a lot of time
doing practice reviews to ensure there's basic competency. But beyond that I think, yes I mean, it is a very large
profession with many individuals, globalised networks. In a sense the anonymity is the enemy, actually, of
individual ethics and honourable conduct and so on. So, actually, systems need to be strengthened. Quality review
systems in firms is something that we want to put emphasis on, to make sure that while you do want the individual
to stand up, it's really about having some kind of system to regulate them both internally within the firm and
generally in the whole marketplace, which is quite important. So, a combination, I think, of firm level reviews and
individual reviews as well as the enforcement of ethical duties by membership professional bodies is going to be
quite necessary to maintain the level that we see now.
DS: Difficult for me to add anything new, I suppose, at this end of the table. It was a useful discussion, the value of
audit, and I think what we should take away is that there is tremendous value of audit in its current shape. The fact
that we have a discussion doesn't mean that there's no value in audit in its current shape. I think as investors around
the world, we take comfort in a clean audit report and the fact that audit exists and a clean audit report, even by a big
four firm, for example, is part of the covenants in many instrument issuances, which shows that the marketplace has
tremendous comfort in that. What was useful in the discussion is the way that we can move beyond where we are
now and I think that's really where we'll see true value of audit and the value of the audit profession to the market
really come through. Some of the work's been done already. The question is how we how the profession
communicates that with shareholders and it's going to be difficult. It's not easy to have those discussions. Some are
structural issues that are very But I do think the fact that we're having this discussion shows that we're hopefully
heading in the right direction as an ecosystem, as capital markets.
LWF: This debate on the value of audit is interesting. So far, nobody has debated whether we need audit. The
conclusion is that we do need it and I dont know why we ended up starting questioning ourselves as to what value
we add. As you start the limiting the areas you want to give an opinion on. I go back to this area of substance over
form. Do you just want to provide the form or are you saying the substance those companies have? I think thats
basically the challenge that we have.
I also want to caution regulators, because for regulators, no regulation is enough and the fact is that more disclosure
doesnt mean you add value. Adding pages to the annual report doesnt make the annual report more enlightening.
In fact, its more confusing. Thats basically the issue of what is the annual report prepared for? When you try and
satisfy so many different complex parties, then you have, again, the concern of risk. Theres so much risk
information in there, even for banks that is so consistent. If only I look at the risk, there is so much risk terminology,
how many people understand that?
And in banks they are even worse. I remember the first question one of the audit one of the directors that joined the
Board of UOB was actually a practising [unclear] before he retired. He asked me, how do banks measure capital
versus the financial [unclear]? So, now there is a reconciliation, saying that we should [unclear]. My point is that
theres just way too much disclosure but we still havent answered the basic question - are firms okay, are banks
okay? Thats basically the challenge and there is no easy answer because, again, Im fighting today
I always say firms themselves are not immune to whats happening in the world outside. So, the twin challenge
between globalisation and regulation are adding complexity to it, to where any of it, including audit goes. Because
the speed that firms can turn value up, because of the interconnectivity to the world is so fast. Previously you had
time to react, today you cant. Thats basically the challenge but, that being said, I think the audit profession is still
necessary. I think the real challenge is if regulators were to say you dont need an audit opinion, how many of us

would still go to see auditors? Thats the real test. That to me is the test whether you actually add value rather than
you are doing that because of that.
But that being said, there is too much complexity. Auditors do give that basic comfort today but Im only worried
the way that you are restricting the responsibility, one day they will make themselves irrelevant. Your very
existence, why you are there, because you give insight on at least certain basic qualities, basic conformity to certain
things and I think basic compliance is still necessary but to go beyond that, is what is needed.
Because the users of the financial statements are so diverse and you start going down asking everybody, I mean, I
talk to David often as well and if And, again, the same issue, right, that you want to be independent and
transparent.
By 2013 94% of the [unclear] shall be redundant and that's frightening. That's frightening, when you talk about that,
because some of this that you debate, one day can be automated. If a company's standards can be automated
[unclear], then where has the value gone? I think that's something that we have to think and I'm quite glad that we
are starting to debate that quite openly and that's probably useful.
RC: Brilliant. Thank you, all, very much indeed. Its been a fascinating discussion. Thank you all very much indeed
for coming along.
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