Singapore: Disclosure And Accounting Standards Committee Report Adopted

The Disclosure and Accounting Standards Committee recommendations have been adopted on 18 October 2001 by Minister for Finance, Dr Richard Hu. The Committee has made a broad range of recommendations on company disclosure rules, financial reporting standards and ensuring the independence of auditors. This Update provides an overview of the Committee’s recommendations, which will effectively kick into operation in 2003.

The Disclosure and Accounting Standards Committee (the ‘Committee’) was one of three committees set up in December 1999 by the Ministry of Finance, Monetary Authority of Singapore, and Attorney-General’s Chambers. The Committee’s task was to review and make recommendations on each of the following:

• the approach, development and promotion of best practices in disclosure requirements among publicly listed companies in Singapore;
• accounting standards used and applied in Singapore, with a view to aligning them with international standards; and
• the process by which accounting standards are set, maintained and regulated in Singapore.

After the issue of an initial Public Consultation Paper on 6 December

2000, the Committee issued a second draft report on May 2001 for public feedback and consultation. The Committee completed this second public consultation and submitted its report with 22 recommendation to the Government in September 2001(‘Report’)

The recommendations made by the Committee may be broadly categorised into three broad sections that relate respectively to improving each of the following:

• disclosure of information by companies;
• the accounting processes of companies; and
• the independence of auditors.

This Update reviews and summarises the conclusions of the Committee as set out in its Report.

The Committee has recommended that an obligation on listed companies to make continuing disclosure be mandated legislatively. Although such an obligation is contained the Listing Manual of the Singapore Exchange (the ‘SGX Listing Manual’), the Committee was of the view that it was important that such an obligation be mandated statutorily to ensure that listed companies took such an obligation seriously.

The recommendation is for a three-tier method of laying down disclosure obligations:

• the first tier would be a general obligation as set out in primary legislation;
• the second tier would be contained in subsidiary legislation, and would consist of a non-exhaustive list of matters that have to be disclosed; and
• the third tier would consist of guidelines on additional disclosure issued by bodies such as the Singapore Exchange (‘SGX’).

It should be noted that the Securities and Futures Act (‘SFA’) which has been passed by Parliament on 5 October 2001 adopts this suggestion of the Committee. Section 189 of the SFA provides that where a listed corporation is under an obligation to make disclosure under the listing rules of the exchange on which it is listed, the corporation must not intentionally, recklessly or negligently fail to inform the exchange of information:

• that is not generally available; and
• that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of securities of the corporation quoted on the stock market of the exchange.

Failure to inform the exchange is an offence for which the offender may be subject to a civil penalty, or for which criminal sanctions may be imposed.

The Committee has recommended doing away with the preparation and presentation of directors’ reports in the annual reports, as prescribed under section 201 of the Companies Act (the ‘Act’), save for the Statement by Directors required under section 201(15) of the Act confirming the truth and fairness of the company’s financial statements. It has also been recommended that provisions relating to financial reporting and disclosure requirements be removed from corporate legislation; and be left instead to the private sector market inter-mediaries to develop.

For listed companies, the recommendation is that directors and management be required to present a detailed discussion and analysis of the company’s financial performance, state of affairs and business operations to the shareholders.

In addition to these matters, the Committee has recommended that for listed companies, their annual reports also include the following additional information:

• cash flow statement;
• management discussion and analysis of the company’s financial performance, state of affair’s and business operations;
• an analysis of the business outlook;
• prospectus-type information relating to the backgrounds of directors and key management staff, risk management policies and process; and
• corporate governance practices and processes.

The first three items listed are also to be included in the interim and final results announcements of listed companies.

Currently, clause 1205(3) of the SGX Listing Manual provides that selective disclosure of material information by listed companies is prohibited. The clause provides that when material information is inadvertently disclosed on the occasion of any meetings with analysts or others, it must be publicly disseminated as promptly as possible. The Committee recommended that clause 1205(3) be reviewed by the SGX to take into account recent global trends on fair disclosure.

The Committee has recommended that all companies be required to comply with a statutorily mandated accounting standard when preparing their audited financial statements. Currently, under the Act, the only requirement as regards a company’s accounts is that they be ‘true and fair’; there is no prescribed accounting standard (although most companies currently prepare their accounts in accordance with the Singapore Statements of Accounting Standards (‘SASs’)). Accordingly, the Committee was of the view that a single accounting standard should be statutorily prescribed.

While the Committee was of the view that compliance with a prescribed accounting standard would usually produce a ‘true and fair’ picture of a company’s financial position, it was also of the view that deviations from the standard should be allowed. However, such deviations would generally only be permitted if a ‘true and fair’ set of financial statements cannot otherwise be obtained. In addition, the company must seek the agreement of its auditors to such deviations, and any deviation must be fully disclosed. Any such disclosure should explain the nature, financial effect and justification for the deviation. Listed companies are to make such disclosures in all their announcements of financial results and position.

Consequential to the recommendation of a legislatively mandated accounting standard, the Committee has recommended that the specific accounting standard to be adopted in Singapore be the standards prescribed by the International Accounting Standards Board, and these standards be termed Financial Reporting Standards (Singapore)(‘FRS(S)’).

In recognition of the fact that the International Accounting Standards are not the only globally accepted standard, and that the exchanges of the United States and Canada do not accept the International Accounting Standards for listings on their exchanges, the Committee has further recommended that where a company is listed both on a Singapore exchange and on the exchange of another country which does not accept International Accounting Standards, such companies will be permitted to use the standard mandated by the exchange of the other country instead (for example, in the case of the United States, the Generally Accepted Accounting Practice). This will ensure that our companies do not have to take on extra costs when raising funds in the global market.

All other Singapore-incorporated companies, however, must use FRS(S) unless otherwise approved by the Registry of Companies and Businesses. To allow companies to sufficiently prepare themselves for the adoption of the new standard, the recommendation is that the new standard only apply to financial statements in respect of financial periods commencing on or after 1 January 2003.

As a knock-on consequence of these recommendations, the Committee has also suggested the following be adopted:

• An independent panel comprising representatives from businesses and organisations such as Institute of Certified Public Accountants of Singapore, Investment Management Association of Singapore, Singapore Business Federation, the SGX, Securities Investors Association of Singapore, Singapore Institute of Directors, and the Law Society should be established by the Minister for Finance. This panel would undertake the prescription of accounting standards in Singapore. Where necessary, the panel could issue guidance in the application of specific standards. The panel will also assist the Government in the review and enhancement of corporate governance and disclosure practices on a continuing basis.
• The monitoring and enforcement of compliance with reporting and disclosure standards be undertaken by the relevant regulatory agencies such as the Registry of Companies and Businesses and the Monetary Authority of Singapore.

The Committee has also made a number of recommendations to provide more frequent and timely financial announcements, as follows:

• All listed companies with financial years commencing on or after 1 January 2003 are required to make interim financial announcements on a quarterly basis for financial periods commencing on or after 1 January 2003. Such quarterly announcements are not required to be audited. Initially, such announcements must be made within 60 days of the quarter end, but should be brought down to 45 days for financial years commencing on or after January 2004.
• The same timeframes of 60 days and 45 days will be applied to final financial announcements made at the end of the financial year by listed companies.
• Annual reports should be issued within 120 days of the financial year end, instead of the current 5 month requirement. This timeframe will apply to the financial years beginning on or after 1 January 2003.

In addition, to facilitate the dissemination of information, companies should be allowed to release their financial statements and annual reports through paperless media such as the Internet. Indeed, the Committee recommended that all listed companies should have their own websites to facilitate a more effective and timely dissemination of information. Listed companies will also be allowed to use web-casts and dial-ins to disclose information.

In the interests of both reducing costs for companies, and to ensure that the public has available financial information that is both meaningful and useful, the recommendation is that where consolidated financial statements are prepared and presented, the parent company should not be required to present un-consolidated statements of its financial performance (although its financial statements should still be audited).

However, the parent company must still prepare and present its balance sheet so that users can assess its financial position. This recommendation will also apply to the interim and final results announcements.

The Committee also made recommendations as to the form of the reporting template for interim and final results:

• the format for the release of interim financial information prescribed by SGX should be regularly reviewed and updated;
• a reporting template for the prescribed accounting standard and other allowed alternative standards should be made available; and
• there should be a single common template to be used for interim as well as final results.

The Committee also felt that ensuring auditor independence was an important part of enhancing the corporate disclosure process.

In this regard, all ‘Covered Persons’ are prohibited from having any economic interest (such as shareholding interests, loans, bonds and other financial instruments held directly and indirectly) in the company being audited and all its subsidiaries and associates.

All other public accountants and staff in the accounting firm should not have, in aggregate, such economic interests exceeding 5% of the equity share capital of the audit client and each of its subsidiary and associate. These rules should apply equally to auditors of both public and private companies. The Committee also recommended that any economic interest or changes to such interest should be fully disclosed in the auditors’ report on an annual basis.

The following employment relationships between audit firms and their clients is also prohibited:

• an immediate family member of a public accountant and the staff directly involved in the audit is employed by the audit client in an accounting or financial reporting oversight role;
• a former partner or professional employee is employed by an audit client in an accounting or financial reporting oversight role unless the former partner or employee has severed his or her financial ties with the firm; and
• a former employee of an audit client becomes a partner of the auditing firm and participates in the audit of the audit client.

The Committee also recommended that the auditors of public companies should be prohibited form providing their audit clients with book-keeping or other services relating to the audit clients’ accounting records or financial statements.

A transition period of up to the end of calendar year 2002 will be given before total prohibition comes into effect to enable auditors of public companies to make the necessary arrangements with their audit clients. During the transition period, details of prohibited non-audit services provided during the financial year should be fully disclosed in the public company’s annual report.

The Committee recommended that audit committees of listed companies and the boards of directors of unlisted companies undertake a review of all non-audit services provided by their auditors with the view to determining whether the provision of such non-audit services would impair the independence of the auditors.

In undertaking the review, the boards of directors or the audit committees may wish to consider obtaining confirmation of independence from their auditors. The annual reports of listed companies should include a statement by the audit committee that it has undertaken the necessary review and that the provision of the non-audit services by the auditors would not, in its opinion, affect the independence of the auditors.

With the adoption of this Report, the recommendation is for the requirement under section 207(2)(b) of the Act for auditors to given an opinion on whether the statutory registers have been properly kept to be removed.

The Committee’s Report is a move towards greater transparency and disclosure for both companies and accounting firms. It certainly brings Singapore in line with global standards.