MORE MEMBERS OF THE AUDIT COMMITTEES OF LISTED COMPANIES IN SINGAPORE SHOULD POSSESS FORMAL ACCOUNTING AND FINANCIAL QUALIFICATIONS AND EXPERIENCE

3 March 2009, Singapore  --  In the light of the increasing sophistication of financial transactions and the growing complexities of the globalised marketplace, more members of the Audit Committees (ACs) of listed companies in Singapore should possess formal accounting and financial qualifications and experience, according to a study on the Profile of Audit Committees of Listed Companies in Singapore 2009, commissioned by the Corporate Governance Committee of the Institute of Certified Public Accountants of Singapore (ICPAS).

Looking at the educational background of AC members, only fourteen per cent of the members of ACs are formally trained in accountancy and finance.  If an education in Business Administration is included, this percentage rises to 37 per cent.  From the experience perspective, 26 per cent of the members of ACs have accountancy and finance as their major full-time experiences.  If experience as senior management is included, this percentage goes up to 76 percent.  Further, only 46 per cent of the companies have two or more financially-trained members in the AC.

This immediately poses a challenge as to how companies can satisfy the guidelines in the Code of Corporate Governance that at least two members of the AC should have accounting or related financial management expertise or experience. In light of the increasing sophistication of financial transactions and the growing complexities of the globalised marketplace, the representation of individuals with formal professional financial and accounting qualifications on ACs should be kept under constant review by companies.  The Institute notes that in some neighbouring jurisdictions, such as Malaysia and Hong Kong, members of the AC are required to be financially literate. Specifically, the Malaysia Code of Corporate Governance states that all members of the AC should be financially literate and at least one should be a member of an accounting association or body. In Hong Kong, the Listing Rules state that "the AC must comprise a minimum of three members, at least one of whom is an independent non-executive director with appropriate professional qualifications or accounting or related financial management expertise". Specifically, the Hong Kong Exchange expects such “person to have, through experience as a public accountant or auditor or as a chief financial officer, controller or principal accounting officer of a public company” amongst others.  Given the depth of one's business and industry knowledge and experience, the Institute acknowledges that directors who are not formally accounting and  finance-trained might possibly be as qualified as those who are formally accounting and  finance-trained. However, as a strong advocate of best corporate governance practices, the Institute firmly believes that possessing a formal qualification in accounting and finance should be considered as a pre-requisite for at least one member of AC in a listed company.

The survey finds that the Companies Act and the Code of Corporate Governance (CG Code) have been effective in bringing forth structural changes to the composition of ACs of listed companies in Singapore.  Most companies complied with the corporate governance guidelines.  The regulators have also proactively taken steps to provide additional practical guidance for audit committees as demonstrated by the issuance of a Guidebook for Audit Committees in Singapore by the Audit Committee Guidance Committee (ACGC) in October 2008.  The Guidebook was developed with extensive industry input, sought through dialogue sessions, focus groups and a survey of audit committee members.  The ACGC had placed emphasis on addressing key areas of concern identified during its consultations so as to provide practical guidance. These areas of concern include risk management, fraud, internal controls and the composition of the audit committee. The best practices are also targeted at audit committee members from various types of companies and all levels of experience.

According to the findings, ACs met more than three times a year on average. The median number of members in the AC is three, which is the minimum suggested membership size by the CG Code. In fact, only five companies (one per cent of the sample) have ACs with less than three members. There are no significant differences between firms of different market capitalisation and those listed on the Catalist in terms of size of the AC.

The survey also finds that on average, nineteen per cent of the members of ACs have been with the company for one year or less.  In addition, more than fifty per cent of the members of ACs are associated with the companies for five years or less.  It is encouraging to note that most of the recent members of ACs are financially-trained. This suggests that the CG Code is having its impact on the companies’ choice of recent AC appointees.

"While the companies are making headway in fortifying their audit committees, there are still areas that need to be remedied especially in the ongoing training and orientation of audit committee members.  To stay in line with best practice and to keep up to date with developments particularly in the compliance, regulatory and accounting arenas, it is critically important that audit committee members have adequate training with respect to financial reporting standards and in general finance matters," commented Dr Ernest Kan, Vice-President of ICPAS and Chairman of its Corporate Governance Committee.

The Corporate Governance (CG) Committee of ICPAS initiated the survey with the objective to provide an understanding of the compliance of the Companies Act and Singapore CG Code with respect to ACs of listed companies in Singapore. The report also provided a general description of the state of the ACs of listed companies in Singapore.

The survey covered the period from June 2007 to June 2008 and involved a total of 675 companies listed on the Singapore Exchange (including 135 companies on Catalist).  The survey covered a total of 1,402 individuals who are members of the AC of these companies and 76 per cent of them sit on only one AC.  223 out of these 1,402 individual members of AC are members of ICPAS.  In addition, 293 of the 695 listed companies are chaired by members of ICPAS. The membership of ACs is male-dominated (95 per cent).

Through the Corporate Governance Committee, the Institute identifies projects that champion/promote the cause of good corporate governance including holding seminars, forums and dialogues.

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