Published April 3, 2009

Call for vigilance against 'creative accounting'

Accounting experts warn of more fraud cases creeping in during bad times

By LYNETTE KHOO

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ACCOUNTING experts have warned once again of the need for more vigilance against financial fraud, saying that if 2008 was bad, this year could be much worse.

Auditors and audit committees were told, at a forum yesterday, that the key challenge facing them now comes from the higher tendency of creative accounting - the manipulation of numbers - rearing its ugly head.

Amid the continuing economic and market turmoil, more companies may resort to manipulating their financial statements to meet certain targets or to avoid any breach of loan covenants.

'When the economy is coming down, it is difficult for companies to generate enough profitability and cashflow will be negatively affected. Then it is very difficult for them to convince banks to finance them continuously,' said Ernest Kan, vice-president of the Institute of Certified Public Accountants (ICPAS).

This would result in a 'motivation to manipulate the numbers'.

The forum was jointly organised by ICPAS and the Accounting and Corporate Regulatory Authority (Acra).

KPMG LLP audit partner Philip Lee noted that it is certainly not business as usual for auditors this year.

Key areas of audit considerations now include highly judgemental issues of going concern, fair value accounting in a volatile market, heightened risk of fraud and mis-statements, and qualifying of audit opinion.

He reminded the audience - comprising auditors, accountants and audit committee members - of the need to do further due diligence when in doubt.

This may involve visiting the client's major customer to ascertain the collectibility of receivables and cross-checking information with various sources. 'We work a lot harder in times of crisis,' he quipped.

Commenting on the recent cases of fraud, Acra's deputy chief executive of operations and policy Ow Fook Chuen told BT at the sidelines of the forum that Acra will not resort to knee-jerk reaction by finger-pointing of sorts.

'In most of the recent cases, we see that the auditors are the ones who are highlighting it,' Mr Ow said.

'Acra will not hesitate to take appropriate enforcement actions where necessary.

'However, we have to make sure that we do not react in a knee-jerk manner and start a 'witch' hunt.'

On the confidential submission by KPMG to the finance minister on NEL Group that flagged potential dishonesty and fraud in the group, Mr Ow said the regulators are monitoring the developments.

He noted that strong corporate governance requires the collective efforts of all parties charged with governance, not just auditors alone. At the panel discussion, Mr Ow urged auditors to communicate more with the board and audit committee.

While it is natural that some companies may go under in bad times, what the regulators are concerned is the 'systemic destruction of trust and the whole corporate governance regime' making it difficult for investors to differentiate a good company from a bad one as 'everyone is painted with the same concerns and scepticism'.

Mr Ow cited a company that resorted to brandishing its bank statement in recent analyst briefings given doubts over whether its cash is real. The company is not named but it is understood to be China Hongxing.

'Our practice going forward in the next few months is to extend our communication to the other stakeholders to facilitate the bridge between the auditors and the other parties that are charged with the responsibility in corporate governance,' Mr Ow said.