Published October 24, 2008

Expand the auditor's responsibilities

By SIOW LI SEN

	Email this article
	Print article
	Feedback

AMID the raging financial markets crisis, there was a curious announcement this week from the Monetary Authority of Singapore (MAS). On Tuesday, the regulator said that, given the current turmoil, the three local banks can reappoint the same audit firm beyond five years to have some degree of audit continuity.

Currently, DBS Group Holdings, United Overseas Bank (UOB) and OCBC Bank are not allowed to appoint the same audit firm for more than five consecutive years, except with the approval of MAS. 'Banks are devoting a substantial amount of time and resources towards heightened vigilance during this period of unprecedented stress in the global financial markets,' MAS said.

Temporarily suspending the requirement for the three local banks to change their audit firms after five years will minimise the disruption that could arise when appointing a new audit firm. 'MAS believes the banks would benefit from some degree of audit continuity during these challenging times,' it said.

UOB will benefit immediately from the suspension as current auditor Ernst & Young is in its fifth year. DBS's auditor PricewaterhouseCoopers (PwC) took over only a year ago while KPMG has been auditing OCBC since 2006.

Singapore is the only major financial centre where auditor rotation is mandatory for banks. In other countries, only the audit partner is required to change.

Auditors earn big bucks auditing the local banks. For 2007, DBS's audit fees came to $6 million while UOB's was $4.32 million. OCBC's audit fees were $4.32 million.

Auditors say mandatory rotation is a good idea from a governance perspective but given the complexity of the financial services industry, it does require heavy investment. So rotating works against the existing firm.

When the idea was mooted back in 2002 following the collapse of Enron - which was blamed on its cosy relationship with Andersen - auditors lobbied fiercely against it. 'It undermines the auditors' ability to develop cumulative knowledge of the business, risks and effects of changes in business, and corresponding impact on risks. In turn, this may affect the auditors' ability to offer meaningful and useful perspectives on business issues,' wrote Yeoh Oon Jin of PricewaterhouseCoopers (PwC) then.

In the West, where auditor rotation did not take root, it has not stopped banks from failing. Executives at American International Group Inc (AIG) hid the full range of its risky financial products from auditors as losses mounted, according to documents released earlier this month by the US congressional panel examining the chain of events that forced Washington to bail out the conglomerate.

At the same time, outside auditor PwC confidentially warned the company that the 'root cause' of its mounting problems was denying internal overseers in charge of limiting AIG's exposure access to what was going on in its highly leveraged financial products branch.

It would seem that the auditors were aware of the increasingly risky nature of AIG's business; after all, they are well placed to understand these very arcane complex derivatives such as collaterised debt obligations (CDO) and their worth, or their lack thereof.

From where they stand, they could have offered useful perspectives and raise alarm bells on the risks the banks were undertaking. One auditor said one can't assume red flags were not raised; they just weren't raised publicly.

Singapore often gets pilloried for acting differently and makes no apologies for it. Perhaps MAS in offering this concession to banks and their auditors can go out on a limb and make it part of the auditor's duty to highlight business risks and let shareholders judge - and not just give an opinion on the accounts.