The appointment of PricewaterhouseCoopers (PwC) to undertake the special audit of Singapore Post (SingPost) has further deepened the controversy surrounding the latter, with a number of commentators criticising the appointment of the incumbent external auditor to undertake the special audit.
The criticisms have highlighted the long-standing relationship between PwC and SingPost, with PwC having been the external auditor since SingPost's listing in 2003, the non-audit services already provided by PwC to SingPost, the possible conflict between PwC's role as external auditor and special auditor, and the failure of SingPost to go through a request for proposal in selecting the special auditor.
APPOINTMENT OF SPECIAL AUDITORS
Using filters such as "special audit", "investigation", "independent review" and "special review", we identified 31 cases of issuers undertaking a special audit or independent review from 2011 onwards.
Besides these 31 cases where a special audit was commissioned, there were two cases where issuers faced short-seller attacks but opted for an internal review, one case where a special audit was called off because of lack of funds, one case where a special audit will be called if necessary and one case where no special auditor has been appointed yet.
We look more closely at these 36 issuers, including their external auditors, internal auditors and special auditors (where appointed).
If an issuer has robust external and internal audit functions and good corporate governance, it should reduce the risk of an issuer facing internal control and corporate governance lapses.
Twenty of these 36 issuers (55.6 per cent) had a Big Four firm as an external auditor. Not surprisingly, smaller issuers are more likely to have internal control and corporate governance lapses.
However, since our statistics on external auditors show that about 56.7 per cent of all small-cap issuers (with a market cap below S$300 million) have a Big Four firm as external auditor, there is no evidence that having a Big Four external auditor reduces the issuer's exposure to internal control and corporate governance issues - and precipitating a special audit or further action by the issuer to address these issues.
In terms of internal audit, it is a real mixed bag. One issuer had no internal audit, one had no mention about internal audit and one said it had an internal audit but provided no details. Fourteen issuers said they had an in-house internal audit (in one case, with additional outsourcing), but in at least three cases, it appears that the internal audit function consisted of just one person.
In the other 19 cases, internal audit was outsourced. Four of these issuers did not disclose the identity of the firm they outsourced to. Of the remaining 15, three outsourced to a Big Four firm and the rest to a plethora of firms, ranging from well-known mid-tier and specialist internal audit or risk consulting firms such as Baker Tilly (one issuer), Grant Thornton (two) and Protiviti (one) to unheard-of firms.
Turning to the 31 issuers that commissioned a special audit during the period of our study, PwC was the most popular choice, accounting for eight out of 31 (25.8 per cent) special audit engagements, followed by KPMG with five, Stone Forest with four, EY with three, and Baker Tilly, Deloitte & Touche and nTan Corporate Advisory with two each.
SINGPOST AND THE EXTRA SPECIAL AUDIT
Of the 31 issuers that appointed a special auditor, we found only one issuer appointing either its external auditor or internal auditor to undertake the special audit - that one exception being of course SingPost.
It seems that other issuers better recognise the actual and potential conflict of interest in having the external or internal auditor undertake the special audit. As mentioned earlier, various commentators have already explained their objections to SingPost appointing PwC, their external auditor, as the special auditor. Note that PwC is also the external auditor of Famous Holdings, which is one of the acquisitions covered by the special audit. There are further concerns.
First, consider just the first two parts of the scope of the special audit, which will cover:
whether the relevant policies, processes and procedures of the company were followed in the evaluation and approval process relating to the Famous Acquisitions; and whether the requisite internal approvals of the company were obtained in respect of the Famous Acquisitions.
In the course of conducting the audit, one would expect PwC to have reviewed whether the proper policies, processes and procedures had been followed and the requisite approvals obtained for the acquisitions. Would there be a self-review threat when undertaking the special audit?
In addition to a long-standing relationship with SingPost, PwC has also provided significant non-audit services to SingPost over the last five years. In 2015, the percentage of non-audit fees to audit fees was 39.7 per cent. The percentages for the preceding years were 50.5 per cent for 2014, 126 per cent for 2013, 141 per cent for 2012 and 83.8 per cent for 2011. In fact, the total percentage of non-audit fees to audit fees cumulatively over the last five years is 80.8 per cent.
Note that we have only included the amounts disclosed as audit fees and non-audit fees paid to the "auditor of the Company", which means that they may exclude fees that are paid to PwC and its network firms for audit and non-audit work in subsidiaries. SingPost does not disclose the nature of the non-audit services provided by PwC, so we are unable to assess if there may be conflicts between these non-audit services, the external audit and special audit.
The percentage of non-audit fees to audit fees for four of the last five years exceeds the 50 per cent threshold which the Code of Professional Conduct and Ethics for public accountants, under the purview of the Accounting and Corporate Regulatory Authority, deems as high for public company clients. Under the Code, in such situations, the following safeguards must be considered and applied as necessary:
"1. Discussing the extent and nature of fees charged with the audit committee, or others charged with governance;
2. Taking steps to reduce dependency on the client;
3. External quality control reviews; and
4. Consulting a third party, such as a professional regulatory body or another professional accountant."
Presumably, PwC would have undertaken such steps. However, its involvement as the special auditor may once again raise issues of dependency on the client.
In the corporate governance report of SingPost in each of those years, there is the standard statement that the audit committee has reviewed with management the non-audit services and is of the opinion that the independence of the external auditor would not be impaired and that they have received a confirmation of independence from the external auditors. We now have a situation of the audit committee affirming PwC's independence, notwithstanding the significant non-audit services, and PwC being put in a position to review the actions of the board and a former chairman and current member of the audit committee.
We believe it is untenable for PwC to continue to accept the appointment as special auditor of SingPost.
Mak Yuen Teen is an associate professor at the NUS Business School, where he specialises in corporate governance and ethics, and an investor in SingPost. Chew Yi Hong is an active investor and has participated in a number of corporate governance projects in Singapore and the region