Concerns regarding Appointment of PwC and Special Audit by SingPost

Date: January 21, 2016

Published 20 January 2016

Commentary for Business Times on SingPost

First published in Business Times on 21 January 2016

The announcement by SingPost yesterday appointing PwC as the Special Auditor has raised serious concerns amongst stakeholders. To ordinary retail investors, the implication may not be so apparent. SingPost has given the reasons for their appointment to PwC in its media interview. The Board had advanced reasons for not selecting the other three big firms; KPMG because SingPost has already outsourced some internal – related audit work to it. As for the other two, Deloitte and EY, SingPost said one was already the auditor for Sterling Coleman and the other was directly involved in providing due diligence for two of the three acquisition the probe will focus on. It also said that it considered second tier firms but thought that the Big Four would carry a “better reputation”. So they appointed PwC.

In choosing PwC, did SingPost make the right decision in the interest of all parties?

Perhaps at this point, we should first revisit the reason and the need for the special audit. It was entirely prompted by the letter to the press by Associate Professor Mak Yuen Teen, dated 15th December 2015, “Corporate governance concerns at SingPost”, which rightly raised, inter alia, some pertinent corporate governance and disclosure issues. One of the serious concerns amongst stakeholders was the failure of the disclosure of the role of the Audit Chairman and Director, Keith Tay in two of the acquisitions by SingPost at the appropriate time in view of his interest in Sterling Coleman, which was appointed by the Board as an arranger and financial advisor to the seller of the two acquisitions. However, the failure of the Board in ensuring timely disclosure is another question which will have to be considered separately. The questions on how the “administrative oversight in disclosure” regarding the involvement of Keith Tay in relation to the acquisition of FS MacKenzie and Famous Pacific Shipping (NZ) occurred, whether there were any weaknesses in compliance controls and whether the Board reviewed the announcements have all been raised by SIAS to the Board and will require the necessary responses.

Was the appointment of the special audit a kneejerk reaction or did the Board feel that there were far more serious corporate governance lapses that warranted it? The calling for the special audit without first clarifying the terms of reference is somewhat misplaced. Such a move is expensive and usually called for compelling reasons. If indeed there were compelling reasons requiring a special audit, surely these could be material information that ought to have been disclosed upfront in connection with the proposed special audit. Calling for a special audit without information and trading halt, therefore, was not a responsible move because market was allowed to trade with inadequate information, which management and others may have otherwise possessed. It may even be appropriate to consider whether a false market was created with certain privileged persons having access to material information that required a special audit. To this date, it is still not clear why was there a rush to call for a special audit when only after nearly a month, the scope was sketched out in the announcement yesterday.

Assuming there is/are compelling reasons, which we will get to hear from the Board in due course, the nagging question that would still occupy the minds of everyone is whether PwC is the right party to be appointed as the special auditor. Without questioning the high reputation and integrity of PwC, in this case, the issue is whether PwC should even take the job? By accepting this appointment, PwC may be seriously compromised as the external auditor of SingPost. They should evaluate whether they can be engaged in a non-annual work for SingPost that will attract substantial fee. Notwithstanding the quantum of fee, there is a certain self-renewal and familiarity threats that require consideration by PwC. It cannot be denied that PwC is too close to the Board and Senior Management in this instant being its long time external auditors. The code of ethics on auditor independence which deals with a substantial non-audit fee and ethics on independence may require a revisit. PwC is best placed to consider its position vis-à-vis Fourth Schedule of the Code of Professional Conduct and Ethics for Public Accountants and Accounting Entities.

Considering the totality of facts and circumstances, it would be wise for PwC to step aside and allow another audit firm to undertake this task. SingPost should look for a completely independent audit firm, which is approved by ACRA and not worry about “better reputation” as all accounting firms meet the required accounting standards. Knowing that PwC has been their external auditor and that the appointment will raise concerns, the Board should have carefully considered the independence issue. Credibility of the report is very crucial, given the many governance issues already canvassed by the experts. To this end, neither the Chairman nor Director, Keith Tay should participate in the supervision of the special audit report. Senior managers would also have to refrain from this exercise.

The serious concern that the audit report will have to focus on will, without doubt, be the acquisitions involving Director, Keith Tay especially the governance process which raises the question: was it done the right way? In the case of the purchase of FS MacKenzie and Famous Pacific Shipping (NZ), SingPost must reveal why they paid 2.8 times and 9.8 times of NAV respectively. In addition, the acquisition of Trade Global at $236 million for a company with NTA at $17.5 million, 13.5 times of NTA will also be a matter for discussion. One can only assume at this stage that the SingPost Board has been mindful of its fiduciary duty in pursuing these acquisitions. If the Board is not forthcoming or is silent on the basis for these acquisitions and fails to justify to shareholders, then they will be pressed for proper accountability by shareholders. They need to canvass their business case for doing so. Perhaps, to safeguard the reputation of the board and in the interest of all stakeholders, it would be advisable that Keith Tay temporarily take leave of absence from the Board until the special audit is completed so that he can fully cooperate with the auditor without conflict of interest in relation to his position as Director on the Board.

David Gerald
President & CEO
Securities Investors Association (Singapore)