31 May, 2012
Legal News & Analysis – Asia Pacific – Singapore – Capital Markets
On 14 September 2011, the Singapore Exchange Securities Trading Limited (“SGX”) announced amendments to listing rules to strengthen corporate governance practices and foster greater corporate disclosure. The amendments are undertaken to keep abreast of challenges and developments in the industry and are part of SGX’s ongoing efforts to enhance the quality of the marketplace. These amendments are effective from 29 September 2011 and will apply to the Mainboard Listing Rules and the Catalist Rules where applicable.
Under the new Rule 719(1), an issuer is required to have a robust and effective system of internal controls, addressing financial, operational and compliance risks. The audit committee (or such other committee responsible) may commission an independent audit on internal controls for its assurance, or where it is not satisfied with the systems of internal control. In terms of reporting, the new Rule 1207(10) requires an issuer to disclose in its annual report, the opinion of the board, with the concurrence of the audit committee, on the adequacy of the internal controls, addressing financial, operational and compliance risks. For Catalist issuers, the relevant rules are Rule 719(1) and Rule 1204(10).
On 16 March 2012, SGX issued an advisory note providing guidance to issuers’ boards on compliance with the reporting requirement under Rule 1207(10) (or Rule 1204(10) in the case of Catalist issuers), which is applicable to annual reports issued for financial years ending on or after 31 December 2011. When providing this opinion, it is important that the board and the audit committee demonstrate that it has focused its attention in all 3 areas of risks, namely financial, operational and compliance when assessing the issuer’s internal controls. The issuer should maintain proper documentation of the deliberations of the board and the audit committee.
Where the board is satisfied that the issuer has a robust and effective system of internal controls, the disclosure would need to include the basis for such an opinion, which may include the scope of review by the board and the audit committee. Where the board and/or the audit committee is of the view that controls need to be strengthened or has concerns over any deficiency in controls, the board would have to disclose the areas of concerns and how it seeks to address and monitor the areas of concerns.
Issuers are currently providing disclosures in their annual reports on internal controls in line with the recommendation under the Code of Corporate Governance (the “Code”). For the purpose of the Code, disclosures need not be in any prescribed form and are normally provided in the Corporate Governance section of the annual report. Issuers should note that Rule 1207(10) imposes an obligation on them to provide the specific disclosures detailed in the preceding paragraph above. As the listing rule requires an opinion from the board, it is recommended that this opinion and basis be disclosed in the directors’ report instead of the corporate governance section of the annual report.
The illustrations below provide examples of compliance or non-compliance of the disclosure requirements:
Illustration 1 – Acceptable
Based on the internal controls established and maintained by the Group, work performed by the internal and external auditors, and reviews performed by management, various Board Committees and the Board, the Audit Committee and the Board are of the opinion that the Group’s internal controls, addressing financial, operational and compliance risks, were adequate as at [31 December 2011].
(Comments:
- a. The factors considered and deliberated by the Board and the Audit Committee in arriving at their opinion are stated.
- b. Specific consideration was given to all 3 areas of risks – financial, operational and compliance.)
Illustration 2 – Acceptable
The Board, with the concurrence of the Audit Committee, after carrying out a review, is of the opinion that the internal controls of the Group are adequate to address operational, financial and compliance risks. In arriving at the opinion, the Board is of the view that the internal controls of the Group have reasonable assurance about achieving the objectives set out below.
For the purpose of the Board expressing its opinion and in line with the Committee of Sponsoring Organizations of the Treadway Commission (COSO) Internal Controls Integrated Framework, “internal controls” is broadly defined as “a process effected by an entity’s board of directors and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories:
- a. effectiveness and efficiency of operations;
- b. reliability of financial reporting; and
- c. compliance with applicable laws and regulations.
The first category addresses an entity’s basic business objectives, including performance and profitability goals and safeguarding of assets. The second category relates to the preparation of reliable published financial statements, including interim and full year financial reports and financial information derived from such statements, reported publicly. The third category deals with complying with those laws and regulations to which the entity is subject.”
Illustration 3 – Unacceptable
The Board, with the concurrence of the Audit Committee, believes that there are adequate internal controls in the Company.(Comments:
- a. The rule requires an opinion from the Board with the concurrence of the Audit Committee. A statement that the Board, with the concurrence of the Audit Committee, believes that the internal controls are adequate is not acceptable.
- b. The statement must make specific reference to financial, operational and compliance controls.
- c. The disclosure must state the basis for the opinion or the scope of review by the Board and the Audit Committee.
- d. The opinion required is in respect of the Group’s and not the Company’s internal controls. )
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