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Don’t put too much stock in clean audits

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Observers say there were red flags in Noble Group's accounts that should have been picked up

The authorities finally took action on Tuesday to probe locally listed Noble Group, more than three years after the first reports of accounting irregularities surfaced at the Hong Kong-based commodities trader.

Explaining why it took three years before they commenced investigations, Singapore's Commercial Affairs Department, the Monetary Authority of Singapore and the Accounting and Corporate Regulatory Authority (Acra) said there had been no reasonable grounds to move in, until recently.

This does not mean they have not been doing anything. The three have been working together since 2015, when Iceberg Research first flagged potential irregularities and questionable accounting practices at Noble, and when US short-seller Muddy Waters weighed in, questioning Noble's finances and unsustainable debt levels.

All allegations were denied by Noble, which boasted of clean audit opinions issued by auditors from 2014 to 2016.

While regulators maintained they still reviewed allegations against Noble and followed up on information provided, the group's clean audits appeared to have been a factor that gave pause to any decision to undertake a more overt probe.

The basis to start an overt probe emerged after Noble's substantial write-down and record net loss of nearly US$5 billion (S$6.8 billion) last year.

That led to queries from Singapore Exchange Regulation, which unearthed more information that helped the authorities to connect dots.

The lateness of this action led investors to question if too much stock was placed on a clean audit, in cases when there are allegations to the contrary.


This is especially when auditors themselves take the position that detecting fraud is not the looked-for outcome in the normal course of a regular audit.

Even so, some observers, like corporate governance advocate Mak Yuen Teen of NUS Business School, have argued there were red flags in Noble's accounts that should have been picked up.

There have been other cases of companies given clean opinions but were later shown to have problems.

Take Midas Holdings, a Chinese railway parts maker being investigated here and in China for fraud.

This year, its audit company Mazars said its reports issued for 2012 to 2016 could no longer be relied upon.

In Noble's case, while listed in Singapore, the initial set of auditors for the period in question were based in Hong Kong and not subject to Acra oversight.

When another audit company was engaged by the group to carry out a special review, that was severely limited in scope and probably succeeded only to give false comfort to investors.

Such audit limitations do suggest that regulators should be more prepared to look past clean audits when the need arises.

The Noble saga, along with similar cases, should start a serious debate on holding auditors more accountable for their work.

It should also remind regulators that their duty to intervene should not be compromised by over-reliance on auditors doing their jobs.

And with audit companies increasingly becoming multi-business, potential conflicts of interest will invariably increase.

All this needs to be addressed to deepen public trust in the market oversight framework.

This is an edited version of an article that appeared in The Business Times yesterday.