SGX clears up S-chip audit issue
Beijing’s move to restrict auditors for China firms causing confusion here
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08 July 2011
The Singapore Exchange (SGX) has gone some way to clearing the air for China companies listed in the Republic, or S-chips, over a directive issued last month by the Chinese authorities concerning audits.
Beijing said that large and medium- sized firms in China, as well as some of those listed overseas, are restricted to one of 12 approved auditors for audits of their financial statements.
This has led to some confusion over whether the rule is a strict requirement. In response to a query from The Straits Times about whether this applies to S-chips in Singapore, the SGX did not specifically refer to Beijing’s new rules.
But an SGX spokesman said: ‘We note that the requirements of jurisdictions may differ and companies would have to comply accordingly with the applicable law and regulation.’
SGX also stressed some other points to consider when appointing an auditor.
‘Listed firms are required to give regard to the adequacy of the resources and experience of the accounting firm and the people assigned to the audit,’ it said.
They should also consider the accounting firm’s other audit engagements, the size and complexity of the listed group being audited, and the number and experience of supervisory and professional staff to be assigned to the particular audit.
‘All SGX-listed companies are required to prepare their accounts in accordance with the Singapore Financial Reporting Standards, the International Financial Reporting Standards or the US GAAP (Generally Accepted Accounting Principles),’ it added.
Observers welcomed SGX’s reminder to listed firms - given the confusion that arose from Beijing’s move.
Last month, China’s Finance Ministry had issued guidelines capping the number of auditors for large and medium-sized mainland firms, as well as overseas-listed firms in sectors such as finance, energy and defence, to just 12.
This is ostensibly part of a two-year reform effort to improve mainland audit standards and to build up the expertise of its own accounting firms.
But the move coincided with a spate of accounting scandals involving China- based firms listed in New York, Hong Kong and Singapore.
Audit firms approved by Beijing include the Big Four international audit firms - Ernst & Young, KPMG, PricewaterhouseCoopers and Deloitte - as well as large accounting practices with international exposure, such as Grant Thornton, BDO and RSM.
It is clear that H-shares listed in Hong Kong will be directly affected by Beijing’s guidelines as they are registered in China, but S-chips fall into a grey area.
This is because, while their operations are largely in China, most of them were incorporated in jurisdictions such as the Cayman Islands and Bermuda.
Some traders are worried that this may result in S-chips engaging one auditor to audit the listed company’s accounts while relying on another unrelated auditor to look into its China books to comply with Beijing’s new guidelines.
‘It will be difficult for investors to set great store by the numbers blessed by an auditor who had to rely on the opinion of another unrelated party who had done the bulk of the audit work in China,’ said dealer James Chen.
But a check shows that most of the 150-odd S-chips are already being audited by the Big Four audit firms and second-tier firms such as Grant Thornton Hong Kong and Foo Kon Tan Grant Thornton.
Some observers also noted that Beijing’s recent statement was crafted more like an opinion and not as a hard and fast rule which makes it mandatory for mainland companies to comply with.
Mr Keith Ang, a reader of The Straits Times, for one, believes that it is not the intention of Beijing to restrict the number of audit firms qualified to do the audit for big and medium-sized mainland firms to just 12.
‘Instead, it seems more like they are proposing companies such as S-chips use auditors that are of an appropriate size and reputation that would match those audit firms currently recommended for H-share listings in Hong Kong,’ he said.