The Securities Investors Association (Singapore), or SIAS, has called for an independent internal audit function to be part of SGX’s listing rules and for companies to include the internal audit report in the annual report.
This message was stressed by Mr David Gerald, President and CEO of SIAS, at a Memorandum of Understanding (MOU) signing ceremony in Singapore Management University (SMU) on Monday evening where he spoke to reporters.
The signing marked a three-year collaboration between SIAS, Institute of Internal Auditors Singapore (IIAS) and SMU to establish an Internal Audit Excellence Award as part of the SIAS annual Investors’ Choice Awards.
The new award seeks to recognise public-listed companies that have established an effective internal audit function to enhance corporate governance, risk management and internal controls.
Noting that having an internal auditor is currently seen as a best practice, Mr Gerald said: “We would like to see the internal audit process developing into an independent function where the internal auditor would be the eyes and ears of investors…and report directly to the board and audit chairman. We would like to see this as part of the (Singapore Exchange’s) listing rules and not just as part of the corporate governance code.”
Mr Gerald added that it is important to preserve the audit report’s independence because that is what investors want, and an independent internal auditor could provide “early warning signals” that would allow the board to make urgent decisions to prevent any scam.
“We don’t want a situation where the audit report is interfered with in any way or altered to suit certain people within the organisation,” he said. “We want investors to have the comfort of knowing that there is someone inside (the company) who is independent and will report immediately any lapses in integrity.”
A key finding of the KPMG Singapore Fraud Survey Report 2011 was that 46 per cent of fraud incidents was perpetrated by employees, while management, including board members and senior management officers, were responsible for a significant 17 per cent of such cases.
The KPMG report also noted that an average of nine incidents is reported per fraud-hit company in 2011, up sharply from 3.8 in 2008. Also, the total estimated cost of these incidents is S$6.5 million in 2011, an increase from S$5.3 million in 2008.
There should be mandatory corporate action when the chief auditor resigns possibly because he refused to leave out certain things in the audit report as requested by the CEO and this is a “very telling sign”, said Loh Uantchern, President of IIAS, who signed the MOU with Mr Gerald and Professor Arnoud De Meyer, President of SMU.
Internal audit has traditionally been seen as the third line of defence after internal controls and risk management.
However, Loh noted that the latter two functions have been increasingly challenged amid today’s economic turbulence and high-profile cases such as the recent UBS incident.
“We believe that the internal audit function has to go beyond the third line of defence…the role of internal audit has to be at the first, second and third lines of defence,” Loh said.
If the organisation allows the internal auditor to be present everywhere to know what is happening in various departments, the value of internal audit would not be questioned, he added.
Mr Gerald acknowledged that the effectiveness of the internal audit function is based on the assumption that top leaders and board members are people of integrity. However, he stressed that internal audit is still crucial as an additional layer of corporate governance to ensure accountability.
Regarding the short-listing of companies for the Internal Audit Excellence Award, Loh said the internal audit head, board chairman, the CEO and the external auditor will fill up and submit four questionnaires to a selection committee comprising members from SIAS, IIAS and SMU. Then, the questionnaires will be scored quantitatively and, together with qualitative considerations, will determine the award winners.
The Internal Audit Excellence Award will be given out at the SIAS 12th Investors’ Choice Awards ceremony on October 27.