Date: July 11, 2011
|Mr Low Weng Keong, President and Chairman of the Board, CPA Australia
Mrs Deborah Ong, Divisional President, Singapore, CPA Australia
Distinguished Guests, Ladies and Gentlemen
Let me first congratulate CPA Australia, CGIO of NUS Business School, IMAS and The Business Times for establishing the benchmark for corporate governance in Singapore. This will no doubt, encourage companies who have not made the grade this time to lift their game to achieve higher standards in governance and transparency.
Much has been said about good corporate governance and transparency being a necessity to business success. I would like to go one step further today to say that corporate governance and transparency should be an integral part of every company’s business model, not something that is added on or retrofitted later. Retrofitting, as many of you may know, is an expensive way of doing things. A key element of good governance is internal controls which are a sound corporate strategy which will safeguard the interest of the company and shareholders.
The recent Singapore Fraud Survey Report 2011 released by KPMG, covering directors and senior executives across a broad range of companies incorporated in Singapore and all of the companies listed in the Singapore Exchange, is enough to make any investor nervous. Findings of the survey are indeed disturbing.
The survey results show that the average number of fraud cases in Singapore has more than doubled since the global financial crisis and the total estimated cost of these incidents has also risen sharply. The KPMG report says companies in Singapore are being hit harder and more frequently by cases of fraud.
With regard to companies’ approach to bribery and corruption, the report states that only 37 percent of the organisation surveyed had an anti-bribery and corruption programme. This, to say the least, is disappointing.
What is alarming is the fact that majority of the fraud cases were “inside jobs”. The fact that 17 percent of fraud is carried out by senior members of a company must surely be of great concern not only to investors but to boards of listed companies as well. Mr Bob Yap, Head of Forensic at KPMG in Singapore says “These individuals set the ethical tone for the organisation and are in the position to do the greatest harm.” I agree!
Weakness of management or board oversight was one of the three major factors contributing to fraud. Another significant finding of the survey is that internal sources remain the major fraud threat. Organisations seriously need to first look inward to determine where efforts to manage fraud need to start says, Mr Yap. According to hifm, “the fact that internal control continue to fail or are being overridden suggests that companies should pay great attention to greater threats.
Much effort has been taken in Singapore on improving the corporate governance standards to create an ethical culture in the boardroom. But according to renowned governance experts, Fredrick D. Lipman and L. Keith Lipman (reference: Corporate Governance Best Practices, Strategies for Public, Private, and Not-for-Profit Organizations), the second most important corporate governance action is to create effective internal audit function. The internal auditor, should act as the eyes and ears of the board of directors, particularly the audit committee and the other committees appointed by the board. The audit committee of the board of directors is an essential part of the internal control structure of a company. No matter how qualified or competent the members of an audit committee are, the basic problem is that they can only respond to the information they receive. It is clear from the corporate scandals so far recorded, audit committees cannot depend solely on either the external auditor or the management to perform that function. It cannot be denied that the most important source of independent information for the audit committee is the internal auditor. Singapore has had its fair share of corporate scandals, Barrings; China Aviation Oil; Citiraya; Sino-environment and many others.
The internal auditor by definition is responsible for accessing the adequacy of internal controls, risk management and governance in a company. So by this definition, an internal auditor should be as knowledgeable as the CEO in the company i.e looking at operations, financials, governance, IT and risks. It is to be noted that there are a lot of frauds that are committed through the use of technology. The responsibility of an internal auditor, therefore, is onerous and the internal auditor must be remunerated well to attract talent.
In forward looking organisations, the outstanding performers are required to have a stint in internal audit to have a first-hand knowledge of the key processes in the company. The internal auditor’s job is to leave no stones unturned. He is the watchdog, the buddy to the CEO. He is the conscience to the board and the CEO. As the guardian angel to the CEO, he should tell him where the devils are. Ideally, we should have the likes of Cynthia Cooper (internal auditor in World Com) in Singapore if we are serious about fighting frauds and scams. So listed companies must not compromise on the engagement of internal auditor, whether in-house or out-sourced.
It is a recognized fact that many companies do not establish an internal audit function because of the cost of doing so. Whilst that is true, scandals are even more expensive. It is unfortunate that many companies establish or beef up their internal audit function only after they encounter a scandal that has caused them millions of dollars, huge amount of executive time, fines, and considerable damage to the corporate reputation. An internal audit function should help to prevent this disaster costs.
The Lipmans suggest “perhaps management should look at internal auditor as a substitute for scandal insurance. If scandal insurance were available (which it is not), many companies would purchase it if the premium costs were reasonable. Internal audit cost should be viewed as a form of insurance. They further advocate: “operational internal auditing can itself save the company money in uncovering duplication, waste, and wrongdoing at lower levels of the company. Further, “structuring the internal audit function to include financial reporting to avoid the World Com problems could also be viewed as additional cost of having an informed board of directors, who are legally required to monitor top management of the company to prevent wrongdoing”.
Admittedly, Singapore still lacks a good pool of professional internal auditors to meet this ideal situation of all listed companies having an internal auditor. I am glad to note that Institute of Internal Auditors and Singapore Accountancy Council are currently developing a certification programme for internal auditors to train them to meet the challenges of internal audit.
In my suggestion this morning, I find support from a world renowned corporate governance expert from South Africa. In Principle 7.1 of King III Report by Professor Extraordinaire, Mervyn E King, it stipulates that the board should ensure that there is an effective risk-based internal audit. The Report further suggests that the internal audit function ‘should adhere to the Institute of Internal Auditors’ Standards for the Professional Practice of Internal Auditing and Code of Ethics at a minimum’. The implication is that all CSOs should introduce the standards of a professional practice as a minimum requirement into its internal audit function.
I am also pleased to announce that SIAS together with Institute of Internal Auditors and Sim Kee Boon Institute of SMU will launch the “Internal Audit Excellence Award”. The “Internal Audit Excellence Award” will seek to recognize how Internal Audit provides value to listed companies by identifying opportunities to achieve organizational objectives, identifying operational improvements and reducing risk exposures. This award will complement the recent proposed changes to the Corporate Governance Code, and enhance investors’ confidence in listed companies.
This being the first time such an award will be given, it will be presented by Professor Mervyn King, an internationally recognized expert on corporate governance and sustainability and an outspoken ardent advocate of the internal audit function.
If Singapore’s listed companies are to be attractive for investors, they must provide further assurance that their internal controls and risk management processes are second to none. I congratulate the winners of awards to be presented today.
I wish you all an enjoyable Forum.