Auditors see new challenges in ESG requirements, greater investor expectations

Audit roles are evolving as new requirements emerge for environment, social and governance (ESG) factors, said auditors polled by The Business Times. They are also expecting their duties to get more demanding as the investing public seeks greater accountability and transparency.

Choo Eng Beng, assurance leader at PricewaterhouseCoopers (PwC) Singapore, said business models today are changing in response to issues such as technology and climate change. In addition, factors such as demographic pressures and declining confidence mean auditors have to grapple with a "multitude of challenges and increasing complexity".

"The role of the auditor is evolving beyond financial matters to include areas such as digital trust and ESG as we continue to help businesses build trust with their stakeholders," said Mr Choo.

KPMG Singapore's head of audit Lee Sze Yeng said auditing listed companies today is no longer just a case of "black or white". Auditors have to exercise their judgement more, challenge some judgements of the company's management, and ensure there are effective controls in place.

In her view, there are three layers of defence in the auditing process for listed companies. The first line of defence is the company and how it engages in corporate reporting and disclosures. A good audit process starts here, said Ms Lee. But there are companies that falter at this point, taking shortcuts or not being as transparent as they should be.

The second line of defence is the internal auditors of companies. This function could be done inhouse, or it could be outsourced - either to a third-party accounting firm; or a major shareholder, holding company or controlling enterprise of the company with internal audit staff.

The third line of defence is the external auditors, who are generally better able to take a more objective view and can challenge significant issues they notice. Auditing processes have become more complex, she noted.

"There's a lot more judgment or estimates involved in the accounting. As a result, because it's not just black or white, auditors need to exercise their judgment," said Ms Lee.

With the Covid-19 pandemic, some issues have been exacerbated.

Henry Tan, chief executive of Nexia TS, said the impairment of assets, debt covenants, modifications to contracts or leases, and going concern issues are among the problems that have seen a spike due to the pandemic. This, he said, has resulted in the need for more professional scepticism.

For instance, the pandemic means companies are facing effects of lockdowns, supply chain interruptions and also reduced demand. This means certain assets in a company might have to be revalued based on lower cash flows and revenues, which would warrant an impairment.

Mr Tan said Nexia is also having to pay attention to long-term contracts and leases that are being re-negotiated, in particular if there is a need for a provision for early termination penalties.

"The expectations of businesses may not be realistic. For example, they may expect a quick recovery from the pandemic, but we may not necessarily agree," he said.

Travel restrictions are also hampering the ability of auditors to carry out their duties, as they are unable to visit overseas offices or interact with their clients.

"If it's a year or half, it's fine; but this cannot be for (the) long term. We need to be able to visit these locations soon," Mr Tan added.

Quite a few problems have also emerged among listed companies recently, which has thrust auditors in the spotlight. As a result, the Singapore Exchange (SGX) in January announced enhancements to rules on auditors and valuers in their dealings with listed companies.

Under the new rules, all primary-listed issuers would have to appoint an auditor registered with the Accounting and Corporate Regulatory Authority (ACRA) to conduct their statutory audits. Audits would, in this indirect way, be subject to ACRA's regulatory oversight.

This tightening of rules has resulted in greater pressure on auditors. "There is indeed a vast difference in the role that auditors are meant to play according to regulations versus the responsibility that they undertake, especially now with higher stakeholder expectations that frauds or fraud risks should have been uncovered by the auditors," said Christopher Wong, head of assurance at EY Singapore.

Such stakeholder expectations arise because auditors have access to a company's financial position, or management actions and transactions. This means they are able to call out observations of non-compliance with matters outside of accounting and finance, and alert the relevant stakeholders about risks associated with finances or reputation, added Mr Wong.

But he was quick to point out that such expectations do not always fall within the official role of an auditor.

PwC's Mr Choo said the role of auditors is set to get more challenging.

"The increasing complexity of doing business in a dynamic world would likely present more challenges for the entire business ecosystem, not just for auditors. Whether too much is being left to auditors really depends on how well the companies are managed," he said.

Similarly, Mr Wong of EY said the role of external auditors can be expected to expand further as stakeholders demand greater scrutiny and oversight of their investments.

They will be expected to broaden their scope of work beyond the technical audit, and will need to employ tools and procedures beyond what was traditionally used.

For instance, EY is already using forensic procedures on the audits of certain clients or sectors assessed to be of higher risk.

Nexia's Mr Tan, meanwhile, said advanced tools such as data analytics, artificial intelligence and robotic process automation will help auditors increase their coverage and productivity.

Source: The Business Times