The proposed changes became moot in view of Singapore’s development into a maturing marketplace that entails greater scrutiny and higher expectations from investors.

On 12 January 2021, the Singapore Exchange Regulation (SGX) announced that the proposed changes to the SGX-ST Mainboard Rules and Catalist Rules (collectively, the ‘‘listing rules’’) would be effective on 12 February 2021. The changes were carefully made with feedback from a public consultation early last year and serve to enhance the existing rules for auditors and valuers in their dealings with listed companies.

Ostensibly, the impetus behind the implementation of more stringent compliance requirements can be traced to the high-profile accounting debacles in recent years concerning listed entities such as Hyflux and Noble Group. These two companies, mainstays in the Straits Times Index at different points in time, startled markets when news of their dire liquidity status surfaced shortly after their audit firms had given them a clean bill of health. Events such as these have led to a dampening of public sentiment regarding the veracity of financial reporting.

In this Alert, the key changes to the listing rules are highlighted, along with the rationale behind each change.

Key Amendments

Regulatory Regime for Conduct of Auditors

At present, issuers may hire auditors registered with and/or regulated by an independent audit oversight body acceptable to SGX. These auditors do not have to be registered with the Accounting and Corporate Regulatory Authority of Singapore (ACRA)[1].

However, following the amendments, SGX will now require all primary-listed issuers to appoint an auditor registered with ACRA to conduct their statutory audits[2] from the financial year commencing 1 January 2022. While this effectively subjects all audits performed by primary-listed issuers to ACRA’s purview, the impact is expected to be minimal as fewer than 20 primary-listed issuers do not have a Singapore auditor.

Importantly, secondary-listed issuers from the 23 recognized ‘‘developed markets’’ may continue to employ auditors from their own jurisdictions. However, for all other secondary listed issuers, SGX will assess on a case-by-case basis whether the appointment of a joint auditor registered with ACRA would be required.

The considerations when deciding whether a joint auditor should be appointed include the reputation of the auditing firm appointed and whether such auditing firm is subject to independent oversight by a member of the International Forum of Independent Audit Regulators[3]. Pertinently, even if the auditing firm meets the aforementioned criteria, SGX still retains the discretion to ask for a joint auditor if it has concerns regarding the risk profile and the business sector of the particular issuer.

Circumstances to Direct Appointment of Additional Auditor

SGX currently has the administrative power to require issuers to appoint independent professionals as well as auditors for specified purposes. Following the amendments, SGX may now require the appointment of a second auditor under exceptional circumstances where it believes that possible financial misstatements are pervasive and yet not evidenced by the incumbent auditor’s opinion. The purpose of the rule is to foster investor confidence in the issuer, not as a means to police the incumbent auditor’s work, which falls under the domain of the Public Accountants Oversight Committee[4].

While SGX has acknowledged that there are no clear bright lines as to when they would exercise such discretion, they have provided assurances that this power would only be invoked in occasions where a second opinion is needed in the interest of the market. The first port of call would still be to rely on other tools such as the issuance of public queries that may provide the market with the clarity needed. Alternatively, if the concern is specific to a certain area such as an issuer’s sales figures, the appointment of a special auditor may suffice. The issuer would only be compelled to appoint a second auditor as a last resort if the market has still not obtained assurance on the areas of concern after the use of these tools[5].

Qualifications of Property Valuers

Property valuers play an integral role in the preparation of financial reports as issuers tend to rely on their property valuations when preparing their financial accounts. As such, the decision to impose minimum qualifications[6] in relation to their appointment has seen overwhelming support from investors, auditors and issuers alike[7].

Experience requirement
Individual valuers will be required to have at least five years of relevant practical experience in valuing properties in similar industries in the same country they are conducting property valuations. The aim of this requirement is to ensure that the valuer has the necessary experience, including knowledge of the relevant local market conditions and requirements, to conduct quality and reliable valuations.

Membership in a Professional Body  
In relation to valuation of Singapore properties, the valuers must hold Singapore Institute of Surveyors and Valuers (SISV) membership and additionally hold an appraiser’s license issued by the Inland Revenue Authority of Singapore[8].

For valuation of foreign properties, issuers must appoint a valuer that is a member of or authorized by a relevant professional body or authority with powers to discipline and revoke memberships or licenses of valuation professionals[9]. Additionally, the valuer must also have license to practice in the particular jurisdiction if required under domestic law. If there are no such prerequisites, the valuer would only need to have membership in a valuation professional organization (VPO). All VPOs would already have in place a framework for disciplining members who breach their ethical and other conduct rules as required by the International Valuation Standards Council (IVSC).

Sole Practitioners  
Issuers are not permitted to appoint valuers that are sole practitioners as they do not have the benefit of peer review to support their valuations, and therefore may be less suited to conduct valuations for issuers. Notably, this rule is also espoused by the Securities Commission of Malaysia by virtue of the Asset Valuation Guidelines, which require valuation firms to have an established peer review process on top of a system of internal controls. 

Compliance Track Record
Valuers are required to have a clean compliance track record to provide assurance of their integrity and competence and uphold the standards of valuation conducted for issuers. For a breach to disqualify a valuer under the listing rules, it must relate to the valuation profession. Accordingly, disqualifying breaches would include a breach of rules prescribed by a valuation professional body or authority.

Importantly, there will not be a time bar for past breaches in the listing rules, but issuers can approach the SGX for waivers on a case-by-case basis.

For issuers, they would also need to have due diligence procedures in place when engaging valuers. The fact that the valuers are located overseas would not serve as a waiver of this duty. Under such circumstances, issuers could still request to view the valuers’ track records or obtain declarations from valuers that they fulfil the requirements.

Independence Requirement      
Issuers must appoint an independent external valuer to conduct a valuation of their properties. The valuer will not be considered independent if:

1. the individual valuer, his associates or any of his firm’s partners or directors is a substantial shareholder, director or employee of the issuer or any of the issuer’s subsidiaries; or
2. the valuation firm is a related corporation or a substantial shareholder of the issuer or any of the issuer’s subsidiaries.

To complement the independence tests in the listing rules, SGX also requires professional membership bodies to prescribe their own general requirements for valuers on dealing with conflicts of interest affecting their independence. If there exists any business relationships or financial arrangements with the issuer or the issuer’s counterparties in the financial transaction, valuers should decline the appointment.

Minimum Standards for Property Valuation Reporting

SGX has also provided that, at the bare minimum, standards of property valuation must comply with SISV standards[10]. SISV standards are generally in harmony with International Valuation Standards (IVS) and would be updated, if appropriate, to reflect any changes in IVS. Therefore, by requiring adherence to SISV standards, the SGX is essentially aligning the property valuation in Singapore to the prevailing international standards while accommodating peculiarities in the domestic market. 

Summary Property Valuation Reports

SGX will now require all summary property valuation reports to contain the information required for prospectuses and circulars prescribed under the SISV Practice Guide. This disclosure requirement would be equally applied to all issuers, regardless of whether their properties are located in Singapore or overseas. The objective of such disclosure requirements is to ensure investors have a minimum level of information to base their investment decisions on.

Notably, these reports would only be required for significant transactions identified in the listing rules, which include initial public offerings for property investment, development companies, business trusts or real estate investment trusts and interested person transactions involving the purchase or sale of property[11].

Conclusion

The proposed changes became moot in view of Singapore’s development into a maturing marketplace that entails greater scrutiny and higher expectations from investors.

The new measures follow the spate of regulatory tools introduced in recent years to achieve investor-centric outcomes. Such tools include the ‘‘Notices of Compliance’’ which can be used to direct companies to (a) make specific disclosures to the market, (b) appoint an independent reviewer to provide clarity on matters of concerns regarding the company and to advise minority shareholders, (c) object to the appointment of certain directors or (d) take specific steps to remove obstacles preventing independent directors from carrying out their duties to safeguard investors’ interest. A failure to comply with the requirements which SGX imposes under a notice of compliance is deemed a contravention of the listing rules.

While issuers may fret over the considerable latitude accorded to the SGX when it comes to the appointment of joint auditors and additional auditors, it is unlikely that the SGX would rely on such drastic measures in view of the myriad of other options at their disposal. Conversely, the presence of this discretion may serve as an incentive for auditors to be more thorough when reviewing the financial records of a company. This is because of the potential reputational damage that may follow should an additional auditor discover any material errors that had not been previously flagged by the incumbent auditor.

For issuers, it is important that when appointing a valuer, effort is taken to ensure that they are indeed independent. Notwithstanding that valuers may satisfy the statutory requirements of independence, they may be adjudged otherwise based on the factual matrix. To borrow the words of Tan Boon Gin, CEO of SGX RegCo, ultimately "behaviour will be assessed against the spirit, rather than the letter of the rules.’’

For More Information

If you have any questions about this Alert, please contact Leon Yee, Matthew Poh, any of the attorneys in our Singapore office or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.