Noble - too much faith in a ‘clean’ audit?

Singapore authorities finally took action on Tuesday to probe locally listed Noble Group, more than three years after the first reports of accounting irregularities surfaced at the Hong Kong-based commodities trader.

Explaining why it took three years before they commenced investigations, Singapore’s white-collar crime buster Commercial Affairs Department (CAD), the Monetary Authority of Singapore (MAS) and the Accounting and Corporate Regulatory Authority (Acra) said there had been no reasonable grounds to move in, until recently.

This does not mean they have not been doing anything. The three bodies had been working together since 2015, when Iceberg Research first flagged potential irregularities and questionable accounting practices at Noble, and when US short-seller Muddy Waters weighed in, questioning Noble’s finances and unsustainable debt levels. All allegations and claims were denied by Noble, which boasted of clean audit opinions issued by auditors from 2014 to 2016. While regulators maintained they still reviewed allegations raised by various parties against Noble, and followed up on information and leads provided, the group’s clean audits appeared to have been a factor that gave pause to any decision to undertake a more overt probe in the absence until recently of more information.

The basis to start an overt probe eventually emerged after Noble’s substantial write-down and record net loss of nearly US$5 billion for 2017. That led to queries from Singapore Exchange Regulation (SGX RegCo), which unearthed more information that helped authorities to connect more dots, leading to the latest move.

Understandably, the lateness of this action led investors to question if too much store was placed on a clean audit, in cases when there are intense allegations to the contrary.

This is especially when auditors themselves take the position that detecting fraud is not the looked-for outcome in the normal course of a regular audit.

Even so, some observers, like corporate governance advocate Mak Yuen Teen of NUS Business School, have argued that there were various red flags in Noble’s accounts that should have been picked up.

There have been other cases of companies given clean opinions, but later shown to have problems. Take for example, Midas Holdings, a Chinese railway parts maker, currently being investigated here and in China for fraud.

This year, its auditors Mazars said their reports issued for 2012 to 2016 could no longer be relied upon. Mazars said their audits were based on required audit procedures, but as it turned out, that did not detect the issues that later came to light.

Investors are also awaiting the outcome of investigations on several other companies, including Trek 2000 International, which is being probed for various suspicious transactions, and YuuZoo Corporation, to name a few.

In Noble’s case, while listed in Singapore, the initial set of auditors for the period in question were based in Hong Kong, and not subject to Acra oversight. When another audit firm was engaged by the group to carry out a special review, that was severely limited in scope, and probably succeeded only to give false comfort to investors.

Such audit limitations do suggest that regulators should be more prepared to look past clean audits when the need arises. Indeed, a few months ago, the Financial Reporting Council (FRC) in London reported that audit quality appeared to be declining “across the Big Four” audit firms. It said the fall in quality was due to a number of factors, including a failure to challenge management and show appropriate scepticism in their audits.

The Noble saga, along with similar cases, should start a serious debate on holding auditors more accountable for their work.

It should also remind regulators that their duty to intervene should not be compromised by overreliance on auditors doing their jobs. And with audit firms increasingly becoming multi-business, potential conflicts of interest will invariably increase. All this needs to be addressed to deepen public trust in the market oversight framework.

Angela Tan

22 November 2018