One-third of top STI firms don’t disclose audit fees
Trend is a concern as investors cannot assess materiality of non-audit fees, independence of auditors
By LYNETTE KHOO 12 October 2009
Close to one-third of the top 30 companies on Singapore Exchange (SGX) do not disclose audit fees paid to their auditors.
This finding by RiskMetrics Group is a cause for concern, as investors are unable to assess the impact of non-audit work on the independence of an audit firm, without knowing how material non-audit fees are compared to audit fees.
In its latest report released last month, RiskMetrics found that 21 of the 30 Straits Times Index (STI) companies disclose the level of audit fees paid to the company’s audit firm.
The nine companies that do not disclose audit fees are City Developments, Cosco Corp, Golden Agri-Resources, HongKong Land, Jardine Matheson Holdings, Jardine Strategic Holdings, Olam International, Sembcorp Marine and Wilmar International.
‘This level of non-disclosure among the largest and most widely held companies listed in Singapore suggests that disclosure of audit fees across the broader market may be even less common,’ said David Smith, RiskMetrics analyst and author of the report.
When audit fees are not disclosed, shareholders are also unable to assess whether companies are switching auditors for fee reasons, he added.
RiskMetrics’ analysis of the latest 2009 season of annual general meetings (AGMs) also found that ‘discussion of the nature and scope of non-audit services is - on the whole - lacking, with little mention of policies around the retention of an audit firm for non-audit work.’
Under SGX listing rules, non-audit fees are required to be disclosed in a company’s annual report, while there is no requirement to disclose audit fees. This is the reason cited by some companies for not disclosing audit fees when approached by BT.
But investors’ concerns over the materiality of non-audit work have heightened since the collapse of Enron and WorldCom, where auditors failed to exercise due diligence.
While the United States has moved into disclosure of audit fees since 2000 and is prohibiting certain non-audit work being undertaken by a company’s auditor under the Sarbanes-Oxley Act 2002, Singapore has moved away from disclosing audit fees.
Hong Kong also appears to be ahead in this aspect as companies are required to disclose analyses of audit and non-audit services provided by their auditors, including each significant non-audit assignment, details of the nature of the services and the fees paid.
Most auditors agree that it is good practice for companies to disclose how much they pay their auditors for statutory audit.
‘Without disclosure of audit fees, shareholders have no basis to know whether the fees that are being charged support the quality of audit they expect,’ said KPMG regional head of audit Tham Sai Choy. ‘It’s also one of the indications on whether auditors have put in the right amount of effort into the audit.’
Chaly Mah, regional managing partner of Deloitte Asia Pacific, felt that disclosing both audit and non-audit fees is ‘in the interest of transparency’.
Ernst & Young assurance partner Tan Chian Khong, however, noted that while there is good reason to disclose non-audit fees so that shareholders can ask pertinent questions if the fees are too high, audit fees tend to be immaterial to the company’s financial statements, where only material items should be reported.
These audit partners pointed out that there are sufficient safeguards to prevent a conflict of interest.
For instance, there are regulatory rules on the scope of non-audit work that auditors can do for their audit clients. SGX listing rules also require the audit committee to undertake a review of all non-audit services and assess its impact on the independence of the auditors.
Mr. Tham felt that the real issue hinges on whether the non-audit service rendered complements the audit work that the auditors do for their audit clients, rather than how much these non-audit fees are.
Some corporate actions such as fund raising and mergers and acquisitions would require the auditors’ expertise and familiarity with the company’s financials and investment bankers also want auditors to be involved to certify the numbers, he said.
In such instances, non-audit fees in a particular year could easily overshadow statutory audit fees.
Singapore Telecommunications, which discloses both audit and non-audit fees in its annual report, paid a total of $2.8 million in non-audit fees to its statutory auditors, exceeding audit fees of $1.6 million paid for fiscal 2009.
CapitaLand and SembCorp Industries saw non-audit fees make up 15.9 per cent and 7.7 per cent respectively of the total compensation for their statutory auditors for fiscal 2008.
RiskMetrics recommends that where non-audit fees have constituted more than half the total compensation for auditors during three of the five most recent financial years, investors should vote against a re-election of the audit firm.
One-third of top STI firms don’t disclose audit fees
ReplyDeleteTrend is a concern as investors cannot assess materiality of non-audit fees, independence of auditors
By LYNETTE KHOO
12 October 2009
Close to one-third of the top 30 companies on Singapore Exchange (SGX) do not disclose audit fees paid to their auditors.
This finding by RiskMetrics Group is a cause for concern, as investors are unable to assess the impact of non-audit work on the independence of an audit firm, without knowing how material non-audit fees are compared to audit fees.
In its latest report released last month, RiskMetrics found that 21 of the 30 Straits Times Index (STI) companies disclose the level of audit fees paid to the company’s audit firm.
The nine companies that do not disclose audit fees are City Developments, Cosco Corp, Golden Agri-Resources, HongKong Land, Jardine Matheson Holdings, Jardine Strategic Holdings, Olam International, Sembcorp Marine and Wilmar International.
‘This level of non-disclosure among the largest and most widely held companies listed in Singapore suggests that disclosure of audit fees across the broader market may be even less common,’ said David Smith, RiskMetrics analyst and author of the report.
When audit fees are not disclosed, shareholders are also unable to assess whether companies are switching auditors for fee reasons, he added.
RiskMetrics’ analysis of the latest 2009 season of annual general meetings (AGMs) also found that ‘discussion of the nature and scope of non-audit services is - on the whole - lacking, with little mention of policies around the retention of an audit firm for non-audit work.’
Under SGX listing rules, non-audit fees are required to be disclosed in a company’s annual report, while there is no requirement to disclose audit fees. This is the reason cited by some companies for not disclosing audit fees when approached by BT.
But investors’ concerns over the materiality of non-audit work have heightened since the collapse of Enron and WorldCom, where auditors failed to exercise due diligence.
While the United States has moved into disclosure of audit fees since 2000 and is prohibiting certain non-audit work being undertaken by a company’s auditor under the Sarbanes-Oxley Act 2002, Singapore has moved away from disclosing audit fees.
Hong Kong also appears to be ahead in this aspect as companies are required to disclose analyses of audit and non-audit services provided by their auditors, including each significant non-audit assignment, details of the nature of the services and the fees paid.
Most auditors agree that it is good practice for companies to disclose how much they pay their auditors for statutory audit.
‘Without disclosure of audit fees, shareholders have no basis to know whether the fees that are being charged support the quality of audit they expect,’ said KPMG regional head of audit Tham Sai Choy. ‘It’s also one of the indications on whether auditors have put in the right amount of effort into the audit.’
Chaly Mah, regional managing partner of Deloitte Asia Pacific, felt that disclosing both audit and non-audit fees is ‘in the interest of transparency’.
Ernst & Young assurance partner Tan Chian Khong, however, noted that while there is good reason to disclose non-audit fees so that shareholders can ask pertinent questions if the fees are too high, audit fees tend to be immaterial to the company’s financial statements, where only material items should be reported.
These audit partners pointed out that there are sufficient safeguards to prevent a conflict of interest.
For instance, there are regulatory rules on the scope of non-audit work that auditors can do for their audit clients. SGX listing rules also require the audit committee to undertake a review of all non-audit services and assess its impact on the independence of the auditors.
ReplyDeleteMr. Tham felt that the real issue hinges on whether the non-audit service rendered complements the audit work that the auditors do for their audit clients, rather than how much these non-audit fees are.
Some corporate actions such as fund raising and mergers and acquisitions would require the auditors’ expertise and familiarity with the company’s financials and investment bankers also want auditors to be involved to certify the numbers, he said.
In such instances, non-audit fees in a particular year could easily overshadow statutory audit fees.
Singapore Telecommunications, which discloses both audit and non-audit fees in its annual report, paid a total of $2.8 million in non-audit fees to its statutory auditors, exceeding audit fees of $1.6 million paid for fiscal 2009.
CapitaLand and SembCorp Industries saw non-audit fees make up 15.9 per cent and 7.7 per cent respectively of the total compensation for their statutory auditors for fiscal 2008.
RiskMetrics recommends that where non-audit fees have constituted more than half the total compensation for auditors during three of the five most recent financial years, investors should vote against a re-election of the audit firm.