Category: My Insights

What Do Auditors Do When They Detect Fraud?

Posted on by Auditor Diary

Introduction: The Role of Auditors In Detecting Errors and Fraud

Auditors are responsible for forming an opinion on financial statements based on audit evidence, as defined by the SSA (Singapore Standard on Auditing) 700.

In other words, they obtain reasonable assurance that a business’s financial statements do not contain material misstatements. (2)

If you’re an accounting student like me or an industry professional, you should already know that audits are essential to businesses for legal compliance, stakeholder trust, and decision-making. 

These are the benefits of getting your business independently audited:

  1. Legal Compliance: The Singapore Companies Act mandates that all private limited companies in Singapore must undergo an annual statutory audit. Only small companies, small groups, and dormant companies are exempted. (3)
  2. Stakeholder Trust: Audits are objective assessments that enhance your financial credibility to lenders and consumers. (4) It’s generally easier for audited companies to attract investments, employees, consumers, and partners. (5)
  3. Business Decision-Making: Accurate financial information verified by an auditor provides reliable information for informed business decision-making. (6)

Are auditors responsible for fraud? This is a question that often arises when discussing business failure. To clarify, auditors are not responsible for preventing fraud. However, they are essential for fraud detection and reporting. Independent audits are part of anti-fraud measures to protect the interests of stakeholders and investors.

In today’s post, I’ll be elaborating on the key signs of fraud and providing a list of what auditors should do if they suspect fraud. I’ll also explain the limitations of audits and clarify what auditors are not responsible for. 

Signs of Fraud

Close-up image of a digital spreadsheet on a screen with columns of numbers indicating loan principal and interest rates.
Auditors look for signs of fraud when conducting audits.

Auditors are familiar with these signs of fraud when examining financial statements. (7) Let’s go through them:

  • Shrinking Inventory: Actual inventory (the physical number of items in stock) may not match recorded figures due to accidental losses during transit and handling. This is normal and happens due to human error. However, significant inventory shrinkage can indicate fraud. Auditors may notice the balance sheet reflecting an unusual level of inventory shrinkage by comparing the present number of products in stock with previous records. 
  • Missing Documents: Missing critical documents may indicate attempts to conceal fraud. These documents include vehicle registration, chequebooks, and inventory reports.
  • Duplicate Payments: Duplicate payments may be made to non-existent companies or vendors to defraud employers. 
  • Unrecorded Payments: Missing or understated payments may indicate ongoing fraud by internal employees. 
  • Excessively Adjusting Entries: Internal accounting teams may keep adjusting the account books to hide certain transactions.
  • Employee Lifestyle Changes: Employees involved in fraud may suddenly start purchasing big-ticket items beyond what their lifestyle and current income level would allow. 

Other fraud risk factors are caused by inadequate internal operations (8):

  • No Independent Oversight: Employees can alter and approve financial records and transactions without external verification.
  • No Mandatory Rotations or Vacations: The company does not regularly rotate or enforce mandatory vacations for employees in key financial roles.

As I’ll explain in the third section, internal operations also affect audit quality.

What Should An Auditor Do When Fraud Is Found?

Close-up image of a person pointing at several pinned-up documents displaying charts and statistics during a presentation.
Auditors must gather evidence and inform the relevant entities if they suspect fraud.

According to the Statement of Auditing Practice, auditors must provide feedback on the audit to the audit committee or those charged with governance. This applies to all audits, whether fraud is suspected or not. (9)

If misstatements are identified and fraud is suspected, the auditor must:

1. Gather Evidence

Auditors who suspect a misstatement indicates fraud must gather evidence and maintain documentation for their case. SSA 240 (p9) states that auditors should evaluate whether this insight affects other aspects of the audit, like management representation accuracy. (10)

Since fraud is usually not an isolated occurrence, the auditor must also assess the reliability of management representation. 

After gathering evidence, auditors must decide whether to escalate the matter to management, those charged with governance, or seek legal counsel.

2. Notify Management

According to the Statement of Auditing Practice, auditors who suspect fraud should notify the audit committee and management first. (9) 

However, if the auditor suspects that the fraud involves:

  • Management
  • Key employees involved in internal controls or financial oversight
  • Other employees, leading to material misstatements in financial statements

The auditor should report fraud to those charged with governance instead — the board and audit committee members. (9)

3. Inform Regulatory Authorities

The SSA 240 (Singapore Standards on Auditing) states that auditors should resolve matters concerning internal fraud suspicion through internal communications. This refers to management, the board and audit committee members. 

However, auditors should inform regulatory authorities if the fraud concerns public interest or has significant financial implications. (10)

According to Section 207(9A) of the Singapore Companies Act, auditors of public companies must report serious fraud offences to the Ministry of Finance. Serious fraud offences involve property or amounts of at least $20,000. (9)

4. Seek Legal Advice

If the auditor doubts the integrity and honesty of those in management or those charged with governance (the board, audit committee), they should seek legal counsel. (10)

5. Assess Impact on Financial Statements

Auditors must assess if the company’s financial statements need amendments due to the misstatement. They may issue audit opinions requesting corrective action from management if misstatements are not corrected. 

6. Withdraw From The Engagement If Necessary

This only happens under exceptional circumstances. SSA 240 (p10) states that the auditor may withdraw from the engagement if the misstatement affects the auditor’s ability to continue carrying out their duties effectively. (10)

What Auditors Are Not Responsible For

Auditors who suspect fraud should know what is within their scope of work. In this section, I’ll explain what auditors should not do when reporting fraud.

1. Identify Suspects

The auditor should not pass judgment on who is guilty, even if they suspect specific individuals. They are only responsible for identifying alleged fraud, not investigating who was responsible for it or what caused it. (11)

2. Identify Factors Causing Company Failure

Auditors may discover fraudulent activity that is significant enough to affect business sustainability. In some cases, fraud could contribute to business failure. However, auditors are not responsible for investigating what causes company failure.

3. Verifying Document Authenticity

Auditors carry out their work based on management representation, which includes financial statements and related documents. They are not responsible for verifying the authenticity of these documents, as management is accountable for ensuring that they are accurate. (12)

4. Rectifying Issues

Auditors aren’t responsible for refining or modifying their client’s financial management system, even if they know what needs to be changed. Instead, they should inform management and the audit committee of any issues and suggest improvements.

5. Analysing or Reconciling Accounts

Auditors are not responsible for analysing or reconciling a client’s accounts. This is the duty of the business’s accounting and finance departments. The management must make modifications and improvements based on the audit report’s observations. 

6. Preventing Fraud and Error

According to the Statement of Auditing Practice (approved by the Council of the Institute of Singapore Chartered Accountants), auditors are not responsible for preventing fraud and error. (9) The SSA 240 (p4) states that responsibility for fraud prevention lies with the management and those charged with governance. (10)

Why Auditors Fail To Detect Fraud

It is an auditor’s duty to report fraud under the Companies Act. (207(9)) However, several factors can prevent them from detecting fraud:

  • Collusion and Concealment: Complex fraudulent schemes are often deliberately concealed with layers of false supporting evidence. Several employees involved in fraud may collude to mislead auditors. Furthermore, management override makes management fraud harder to detect than employee fraud. (SSA 240, p5)(10)
  • Tight Deadlines: Auditors operate on strict deadlines and may not have time to investigate financial operations extensively. This means that some well-concealed fraudulent schemes may go uncovered. (13)
  • Reasonable, Not Absolute Assurance: The SSA 240 (p4) clarifies that auditors are only expected to provide reasonable, not absolute, assurance that a firm’s financial statements are free of material misstatements. Inevitably, some errors will not be flagged out. (10)(14)
  • Poor Internal Controls: Weak internal controls could create unreliable financial data, as employees can independently modify, add, and remove records. Auditors rely on this information to conduct audits. Financial information altered to conceal fraud will prevent the auditor from detecting anomalies. (15)

Final Thoughts

Auditors play a crucial role in maintaining financial reporting integrity. While they are legally required to report fraud, audit limitations may prevent them from detecting it. By understanding their duties and limitations, auditors can better focus their efforts during audits to ensure accurate financial information.

I write about topics and case studies relating to accounting, auditing, and the financial industry in Singapore. If you’re a fellow accounting student or enjoyed reading this article, follow my blog for more updates!

References

  1. https://isca.org.sg/docs/default-source/default-document-library/tech/ssa-700-revised-aug-2019.pdf?sfvrsn=52241b74_0 
  2. https://www.frc.org.uk/library/standards-codes-policy/audit-assurance-and-ethics/auditors-responsibilities-for-the-audit/#:~:text=The%20auditor’s%20objectives%20are%20to,basis%20of%20these%20financial%20statements. 
  3. https://www.pilotoasia.com/guide/audit-requirement-singapore 
  4. https://www.pricebailey.co.uk/blog/benefits-of-auditing-your-business/ 
  5. https://theauditordiary.com/safeguarding-investments-through-independent-financial-audit/ 
  6. https://atpaccountancy.co.uk/the-power-of-audit-and-assurance-in-building-trust/ 
  7. https://corporatefinanceinstitute.com/resources/esg/fraud-red-flags/ 
  8. https://download.ssrn.com/16/09/04/ssrn_id2834641_code2343564.pdf?response-content-disposition=inline&X-Amz-Security-Token=IQoJb3JpZ2luX2VjEAQaCXVzLWVhc3QtMSJHMEUCIQCC%2F60MGxDz5U3MQpRxfBwRXXLB9F34U3k%2Bd487OulkjAIgC4sBPKVELY39cyuhoDWoHoWRq6y4gcIJNbgl5BVF6c8qvQUIPRAEGgwzMDg0NzUzMDEyNTciDDoM4LkrdLafIHZPniqaBa2999K6magmNtAfUEseH57qudBJlCVmfbRlprXgbADbNA7XV1qAEXLqp3ikWDctl%2Fqp8V6dho8EWQdJHRKSrVuecmamy8ryI2IV2gEuFnh5f7My9%2BnHkxKDpSV47va59rCS1NCR7LHGKZOQc9AkY2ndXWB7I%2B0sB9O%2Fk6wcnu3oNU9gzkGj1HIiWKCgA%2B%2FShGvXtxljeLCDBg7GbX1yZnX4FEJte86ioIHLI7WJRrcmeg7vGY3xdTxZFCTGdvvYBCz72hKhneZuderSI%2Fh5sQooljipS%2BHJx69HRWM%2BSD5Y65Q2yHHbb%2BU7pEEhKhckv9Svkg0Fz1qcWjKoCh8FcvLHije4V192Dd9Q%2F4n3frHiWPBMITgcS4mXmXaLuJC%2FFBZJTUNz76i4IaIg5Jlf8LI8GXs1ZnRTemvKdtwpUBaQUSQWAEXgHOwwGO2Ym%2BokfnMxm2u%2B%2FhEgp%2FsGvO5rBQ%2BZI4yNG97M3MeUf2LIJYi5dMHveLIsoiyKcKG5h2bPGNRJJ1aWFhcfP6iij4PyK12B%2B%2FP89WOkTJ5lbJW8G9Dc9icVYy%2BIDnhveBT%2BQffgKAe8eivGgu38L7jzpvaoReY%2Bg%2BO5zDKxo8GJFelQl3obUfVfC%2FKCyJZOxXIkEoulPu2FFTCdNohYE98cCx664%2FD5jeSBHc9sJvRpZag%2FLMoeVDW0lRna7Ziu4f4DQUuVNF4DoQXcRPwykGMjxDAfV2SjaatrOLhFfbj%2BcLY8WUhukpdbpR0AjTs0T7M5ZB18N%2F7wDG41jT0pplP3nBZOUldcYHNGiWcHjlQiAsHizkjC2KXRj%2BRInhwuZcyrXdL%2FnXUgOQgK4cYjp2dGFA3Xg8%2FjdJhuG3RwZyeDSi85c2hp%2BXdv8GAM8PFm7zCo%2BfS9BjqxAcq2twCW73NIRD0SCTaRGFrpcdU0OPRMkDxkW17nUrdnepQvnBYvMchNJRQNfQ%2BCDeTJA9PuWK0nIUJCmBtqjsGMy1uVlrjcpYYQrRbLvXYHcf4O6DoOXo%2BqyqYdngfp5aA8s0xAIv9Syh5YxV%2Fen45os16NUUttKlxlA%2BM5uS6dA272ZajlK3d%2FWU%2FbnswRFjFwUWkg2HthNfheJUgGra76zOkYoMQARJB4xqs7dM3ApA%3D%3D&X-Amz-Algorithm=AWS4-HMAC-SHA256&X-Amz-Date=20250225T040448Z&X-Amz-SignedHeaders=host&X-Amz-Expires=300&X-Amz-Credential=ASIAUPUUPRWEYBRAZJP6%2F20250225%2Fus-east-1%2Fs3%2Faws4_request&X-Amz-Signature=84920b2a4894ec77dbfd0cf9098e3acc61ca10e0fbbaf9d456711d9fe7a40769&abstractId=2834641 
  9. https://isca.org.sg/docs/default-source/default-document-library/tech/sap-3-nov-2018.pdf?sfvrsn=fb2b00db_0 
  10. https://isca.org.sg/docs/default-source/audit-assurance/aa-standards/ssa-240-(dec-2021)161f150ed71248a494a062784c28b4a9.pdf?sfvrsn=a30d5d03_2 
  11. https://www.journalofaccountancy.com/issues/2022/aug/fraud-suspected-dos-donts-auditors.html 
  12. https://www.grfcpa.com/resource/auditor-responsibilities/ 
  13. https://www.isaca.org/resources/news-and-trends/newsletters/atisaca/2019/volume-24/why-auditors-rarely-find-fraud 
  14. https://linfordco.com/blog/reasonable-assurance-and-soc-report-opinions/#:~:text=Reasonable%20assurance%20is%20a%20high,is%20stated%20in%20the%20name.
  15. https://sprinto.com/blog/internal-controls-limitations/ 

Portfolio Diversification For Financial Stability

Posted on by Auditor Diary

In the competitive business environment, portfolio diversification is a cornerstone of sound risk management. When properly executed, it helps companies mitigate investment risks, increase stability, and protect against unexpected threats like hostile acquisitions. 

In this article, I’ll explain how strategic portfolio diversification—combined with a robust risk management and governance framework—can shield against hostile takeover attempts, helping companies maintain financial stability.

1. Introduction to Portfolio Diversification

Definition and Importance

Portfolio diversification is a kind of strategic planning. It involves intentionally distributing investments across multiple asset types, industries, and geographic regions to reduce exposure to any single investment’s risk. 

The rationale behind diversification is quite straightforward. By holding various assets, investors or companies are less vulnerable to volatility or adverse events in one market or sector. With a diversified portfolio, companies experience greater resilience and can better navigate the ups and downs of the market. (1)

3 Key Benefits of Diversification

The benefits of a well-diversified portfolio are vast (2):

  • Reduced volatility: Diversification minimises the impact of any single loss. This creates a smoother overall performance and reduces the likelihood of severe financial setbacks.
  • Improved financial stability: A balanced portfolio allows companies to achieve stable, consistent returns, even during economic uncertainty.
  • Protection against hostile takeovers: A diversified company with stable financial health is a less attractive target for hostile acquisitions. This is because its diverse assets and revenue streams make it harder for an acquirer to gain leverage.

2. Benefits of Portfolio Diversification

Reducing Risk and Volatility

One of the core reasons for adopting diversification strategies is to reduce risk and volatility. When assets are spread across different categories and sectors, negative performance in one area has a smaller impact on the portfolio as a whole. 

This financial management approach minimises exposure to economic, political, or market risks. It provides a protective buffer to ensure business continuity during economic downturns. (3)

Maximising Returns

Diversification also plays a crucial role in enhancing returns. By investing in various assets, companies increase their chances of capitalising on growth in multiple sectors. (4)

This balanced approach can lead to more consistent and often higher returns over time. This is because the gains from some investments counterbalance the losses from others.

Flexibility in Changing Markets

Diversification ensures companies are better prepared to adapt to a global economy where markets evolve rapidly. A well-diversified portfolio is more flexible and agile, allowing organisations to pivot strategies in response to market changes. This adaptability is crucial not only for achieving long-term growth but also for sustaining competitive advantage. (5)

3. Common Diversification Strategies

Companies can implement various diversification strategies to achieve a balanced and effective portfolio. These strategies include diversification across different types of assets, sectors, and even geographical locations.

Asset Allocation

Asset allocation is the distribution of investments across major asset categories, such as stocks, bonds, real estate, and cash. This type of diversification is based on the condition that different asset classes react differently to economic conditions. (6)

Companies can create a balanced portfolio that offers growth potential with reduced risk. They can do this by blending high-risk assets, like equities, with more stable options, such as bonds.

Sector and Geographic Diversification

Investing across various industries and geographical regions adds another layer of protection. (7)

  • Sector diversification: Spreading investments across technology, healthcare, and finance sectors. These sectors may perform differently under the same market conditions. 
  • Geographic diversification: Investing across different countries or regions. This reduces the impact of country-specific risks, such as political instability or economic downturns. 

Companies can benefit from a more balanced performance across market conditions by combining sector and geographic diversification.

Alternative Investments

Alternative investments, including private equity, hedge funds, and commodities, are valuable additions to a diversified portfolio. These assets often have a low correlation with traditional stock and bond markets, providing extra protection against volatility in mainstream markets. (8)

Adding alternatives to a portfolio helps smooth returns over time and further spreads investment risk.

4. Strategies for Effective Diversification

Companies must go beyond simply spreading their investments to achieve meaningful and sustainable diversification. Here are three fundamental strategies to build a strong and stable portfolio:

Implementing a Robust Risk Management Framework

A solid risk management framework is essential for sustaining a well-diversified portfolio. A comprehensive framework typically includes policies and processes for identifying, evaluating, and mitigating risks within the portfolio. 

Companies can prevent unanticipated losses by establishing clear parameters for acceptable risk exposure and investment concentration. For instance, a company may set a rule to limit exposure to any single sector to no more than 20% of the total portfolio.

A robust risk management framework enables companies to identify high-risk areas and develop contingency plans. These plans may involve setting aside emergency funds, hedging investments, or acquiring insurance. (9)

Effective risk management empowers companies to respond to challenges swiftly. It maintains financial stability and protects against hostile acquisitions.

Conducting Thorough Financial Due Diligence

Due diligence is a crucial step in investment strategies, especially in diversification. This process involves a detailed evaluation of each asset to understand its potential risks, returns, and market dynamics. 

Financial due diligence helps investors make informed decisions, preventing high-risk investments that could compromise the portfolio’s balance.

Key components of financial due diligence include (10):

  • Financial health analysis: Assessing each potential investment’s financial performance, profitability, and liquidity.
  • Market analysis: Evaluating current market conditions, trends, and competitors to gauge the future potential of each asset.
  • Investment risk assessment: Identifying specific risks associated with each investment, such as legal or regulatory challenges.

Conducting financial due diligence helps companies ensure that each new asset aligns with their overall risk profile and contributes to long-term financial stability.

Regularly Reviewing and Adjusting Investment Strategies

An effective diversification strategy is dynamic. Market conditions, economic cycles, and organisational goals are constantly changing. This requires companies to adapt their portfolios to stay aligned with current objectives. 

Regularly reviewing the portfolio enables companies to assess performance, adjust allocations, and mitigate emerging risks. This proactive approach aligns the portfolio with business goals and improves the company’s resilience to potential hostile acquisitions.

5. Corporate Governance and Risk Mitigation

Corporate governance is integral to building a diversified portfolio resilient to hostile takeovers. A company with strong governance practices is less likely to be targeted for a hostile acquisition. This is because its policies and oversight mechanisms make it more challenging for acquirers to gain control.

Role of Corporate Governance in Preventing Hostile Acquisitions

Good corporate governance promotes transparency, accountability, and adherence to best practices in risk management. 

Governance frameworks establish clear roles and responsibilities within the organisation. They ensure that decision-making processes are well-defined and ethically grounded. 

Effective governance also fosters a culture of compliance. This includes putting checks and balances in place, such as regular audits, to protect shareholder and investor interests. (11)

Corporate governance plays a vital role in reinforcing the company’s financial position. Strong corporate governance helps companies better monitor their diversification strategies, maintain accurate records, and build a reputation for financial integrity. (11)

A robust financial position helps deter potential acquirers who might otherwise exploit vulnerabilities to initiate a hostile takeover.

Board Oversight and Compliance

The board of directors is responsible for overseeing the implementation of diversification strategies and ensuring compliance with corporate policies. The board’s active involvement in managing the company’s portfolio and monitoring risk exposure is essential for maintaining financial stability. 

By regularly reviewing portfolio performance and enforcing compliance, the board safeguards the company’s assets and reduces the likelihood of hostile acquisition. (12)

In addition to board oversight, the board can play a proactive role in shaping the company’s diversification strategy. By encouraging strategic investments, the board helps the company strengthen its financial position and reduce dependency on any single revenue stream. This balanced approach enhances the company’s ability to withstand external threats, including hostile takeovers.

Prevention of Hostile Acquisitions

One of the most essential benefits of portfolio diversification is its role in defending against hostile acquisitions. A financially stable company with a well-diversified portfolio is more challenging to acquire, as its broad asset base complicates valuation and control. 

For instance, if a company invests across multiple sectors and regions, potential acquirers will find it harder to exploit vulnerabilities or gain a controlling interest.

In addition to financial stability, a diversified portfolio with strong corporate governance reduces the company’s attractiveness to hostile acquirers. By maintaining high standards of transparency and accountability, the company demonstrates its commitment to shareholder value, making it a less appealing target for opportunistic takeovers.

Case Example: The Importance of Diversification in Risk Management

To illustrate the importance of diversification, let’s consider a scenario where a company fails to diversify its portfolio and becomes vulnerable to a hostile acquisition. 

Suppose that a manufacturing company relies heavily on the technology sector for investments. During a tech market downturn, the company’s portfolio suffers significant losses, weakening its financial position. Recognising this vulnerability, a competitor initiates a hostile takeover to acquire the company at a low valuation.

If this company had diversified its investments across multiple sectors, such as healthcare, finance, and real estate, the losses in the tech sector would have had a smaller impact on its overall performance. This diversified approach would have enabled the company to maintain stability, making it a less attractive target for hostile acquisition.

Final Thoughts

In today’s dynamic business landscape, portfolio diversification is more than a prudent investment strategy. It’s an essential tool for risk management, corporate stability, and protection against hostile takeovers. 

Companies that diversify their portfolios by spreading assets across sectors, geographies, and asset types are better equipped to withstand market fluctuations, safeguard their financial health, and maintain competitive strength. 

I write about topics and case studies relating to accounting, auditing, and the financial industry in Singapore. If you’re a fellow accounting student or enjoyed reading this article, follow my blog for more updates!

References

  1. https://paytm.com/blog/stock-market/portfolio-diversification/ 
  2. https://blog.shorts.uk.com/genus/business-diversification-strategy-examples#:~:text=Diversification%20is%20important%20because%20it,and%20improved%20long%2Dterm%20sustainability. 
  3. https://smartasset.com/investing/how-diversification-reduces-risk 
  4. https://www.cfs.com.au/personal/news-and-updates/intelligent-investing-hub/invest-for-your-future/why-is-diversification-important.html 
  5. https://www.masterclass.com/articles/diversification-strategy 
  6. https://www.investor.gov/additional-resources/general-resources/publications-research/info-sheets/beginners-guide-asset 
  7. https://www.forbes.com/councils/forbesfinancecouncil/2023/05/09/benefits-of-a-properly-diversified-portfolio/ 
  8. https://www.wrise.com/the-role-of-alternative-investments-in-diversification/ 
  9. https://www.dataguard.co.uk/blog/the-benefits-of-using-a-risk-management-framework-for-risk-mitigation/ 
  10. https://dealroom.net/blog/how-to-conduct-financial-due-diligence#:~:text=Financial%20due%20diligence%20in%20M%26A%20transactions,-In%20M%26A%2C%20financial&text=It%20starts%20with%20reviewing%20financial,company%20can%20meet%20its%20obligations. 
  11. https://www.linkedin.com/pulse/role-risk-management-corporate-governance-brett-palmer-o2lwc 
  12. https://www.forbes.com/sites/alexanderpuutio/article/board-of-directors-responsibilities/ 

How To Choose An SME Accountant in Singapore

Posted on by Auditor Diary

How to find an accountant for small business in Singapore? Before trying to answer that, perhaps you’re considering accounting tools and online software that can make it easy for business owners to do their accounts. However, not all business owners have the time or expertise to use the full suite of services and functions offered by accounting software. Furthermore, some types of business models, like e-commerce shops, require complex accounting and bookkeeping systems to record cash flow and inventory. 

In this case, finding an accountant that’s a good fit for your small business is important. It can save you money and time in the long run. I’ll be sharing how to identify your accounting needs and choose an accountant.

The Importance of Having a Business Accountant

The first step is to decide whether you need an accountant in the first place. There isn’t a one-size-fits-all answer. But if you’re new to accounting and have questions about how accounting would help your business, it might be time to hire a professional accountant.

An accountant can provide essential guidance if you’re new to accounting and find financial statements and terminology confusing. They’ll help establish a financial strategy and prevent costly errors for your business. They can help you with essential questions like:

  • How to select a business structure
  • How to file tax returns 
  • How to plan for rapid business growth
  • How to prepare for an IRAS audit
  • How to apply for business loans
  • How to claim tax relief
  • How to buy a business or expand it

If these scenarios apply to you, it’s time to look for a suitable accountant. 

Identify Your Accounting Needs 

SMEs can choose in-house accountants or consider outsourcing accounting and bookkeeping functions. Outsourcing is a good idea if you run an SME with a lower yearly revenue turnout. 

According to Payscale, the average annual salary for an accountant in Singapore is around $52,000; in contrast, outsourcing to an accounting firm can offer a more economical option, with high-quality packages tailored for SMEs ranging from $500 to $900 per year. 

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You might also want to learn about The Role of Auditors in Corporate Governance for Investors
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How to Choose an Accountant

The Evaluation Process

  • Don’t rush it: A quick online search can help you understand what’s out there, but it’s best to go through referrals from trusted sources like business advisors, bankers, or industry contacts rather than doing online searches. Attending local business networking events can also help.
  • Choose a certified professional: Working with a chartered accountant offers assurance of qualifications and up-to-date knowledge. Ensure your accountant or accounting service is registered with the Institute of Singapore Chartered Accountants (ISCA).
  • Assess prospective accountants: Ask key questions to analyse how the accountant can benefit your small business. We’ve provided a list of questions in the later part of this article.

There are several additional certifications that chartered accountants can obtain in Singapore, such as:

  • Certificate in Payroll Administration (CPA)
  • Certified Information Systems Auditor (CISA)
  • Certified Internal Auditor (CIA)

Key Questions for a Small Business Accountant

Ask questions to understand their accounting experience and how they can improve the financial health of your small business:

  1. Ensure they have small business experience and understand your unique challenges.
  2. Beyond taxes and auditing, what additional accounting services do they offer, like bookkeeping, risk assessment, or financial reports? 
  3. How can they help your business grow? Look for someone who can be a long-term advisor for key business financial decisions.
  4. Understand which accountant or accounting team you will work with, your main point of contact, and how the communication will be handled.
  5. If you are hiring an in-house accountant, consider how they will fit in with your company’s work culture. Ask them the relevant questions to determine their working style and preferences.
  6. Discuss confidentiality, client testimonials and how they keep up with Singapore’s accounting system, tax regulations, audit requirements, and accounting best practices.
  7. Know their fees upfront—whether hourly or on a retainer—and salary expectations.

Streamline Your Business with Professional Accountants

After you’ve selected a suitable candidate, negotiate terms and draft an engagement letter outlining services, fees, and expectations. Clear communication is vital for a successful business relationship, so keep in touch regularly.

Spend less time doing your accounts and more time growing your business. By delegating your accounting tasks to a professional, your finances will be managed more effectively, and you’ll also avoid costly errors. A professional chartered accountant can handle the detailed accounting software, freeing up time to focus on growing and enhancing your business.

How Financial Disclosures Affect Auditors and Investors

Posted on by Auditor Diary

Content:

  1. Why are Financial Disclosures Important for Investors?
  2. How do Audits Promote Transparency?

How Financial Disclosures Affect Auditors and Investors — Audits are formal examinations of company financial records. They reasonably assure that a company’s financial statements accurately reflect its financial status and outlook. Auditors offer a professional third-party opinion about the credibility of the company’s financial reports. 

Companies often specify financial disclosures in their financial statements. These financial disclosures are both quantitative and qualitative. Quantitative financial disclosures include analyses of balances and transactions, revenue, profit, and major customer information. Qualitative financial disclosures contain information on accounting policies and procedures, discussion on risk areas, and going concern assumptions. Auditors review these financial disclosures, request evidence as proof and ensure the company is honest about its disclosures.

This blog explains the importance of transparency in financial disclosures. 

Why are Financial Disclosures Important for Investors? 

Financial disclosures contain all necessary information about an organisation that could affect investors’ decisions. As mentioned earlier, it includes quantitative and qualitative information to cater to the needs of all types of investors and stakeholders. 

Transparency in financial disclosures is based on concisely and truthfully disclosing relevant information to stakeholders. It means that all parties, including auditors, stakeholders, lenders, and investors, should have access to identical and comprehensive information about the company. Financial disclosures are deemed adequate and transparent when the financial information provides a clear outlook of the company’s financial situation. 

Transparent financial disclosures are essential for investors because they affect decision-making. Investors need reliable information to help them choose whether they want to invest in a company or what product they want to invest in. Incomplete or inaccurate information could affect investors’ ability to make a wise investment decision.

How do Audits Promote Transparency? 

Transparency is crucial in financial markets because it provides clarity for investors, stakeholders, and customers about the financial transaction they intend to make. For investors, transparency includes financial information about the company, like audit reports. For customers, transparency includes information about fees and rates. 

financial transparency | theauditordiary.com | Image by snowing on Freepik.com

Audits promote transparency in financial disclosures by ensuring that disclosures are accurate. Auditors need access to comprehensive financial records and sufficient evidence to make a fair judgement. The audit process encourages companies to provide proof to back up the disclosures made in their financial statements. Providing proof improves the transparency of their financial disclosures. 

A company with greater clarity in financial disclosures will build investor, stakeholder, and customer confidence. Audits increase a company’s trustworthiness because financial evidence that is reviewed and approved by certified auditors is perceived to be more credible. 

Audits reduce information asymmetry and ensure that management’s information does not differ from what they provided to other parties. Investors and stakeholders with fair access to clear and accurate information will feel more secure investing in the company. They are reassured that the company is not withholding any important information from them. 

Companies that are not transparent about their financial disclosures through audits risk losing investor trust. This can be seen in the Hyflux and KPMG audit episode. 

Following Hyflux’s liquidation in 2021, Hyflux alleged that KPMG was negligent in auditing its 2011-2017 records. 

KPMG denied the allegations and argued in its defence that the obligation to prepare the financial statements in compliance with the law and reporting standards lies with the plaintiffs’ management and board. 

KPMG maintained that Hyflux Group’s financial statements were audited in accordance with auditing standards, and there were no material misstatements. Auditors also conformed to professional standards when making judgement calls. Any incorrect judgements do not indicate auditor misconduct or negligence. 

Hyflux’s directors were charged with disclosure-related offences in 2022. 

Conclusion 

Financial audits are crucial in promoting transparency in financial disclosures, reducing information asymmetry, and protecting stakeholders’ interests. Companies must adopt transparent financial reporting practices to protect investors’ interests.

Crypto News: The FTX Collapse and Aftermath

Posted on by Rachel Lee

Introduction:

In the fast-paced world of cryptocurrency, FTX emerged as a major player in 2019.

Founded by Sam Bankman-Fried, it quickly gained traction as the third-largest crypto exchange, offering a platform for trading digital assets like bitcoin, dogecoin, and ether. 

This blog will discuss the significant event that rocked the cryptocurrency world: the FTX scandal.

From its meteoric rise to the sudden collapse and the FTX legal consequences, l shall unpack the key events and implications of what many call crypto’s “Lehman moment.”

The Rise of FTX: 

FTX rose to international prominence, making Bankman-Fried a household name in the crypto community with strategic acquisitions, aggressive marketing, and competitive trading fees.

FTX Red Flags:

While many crypto platforms struggled amidst the decline in cryptocurrency prices, FTX appeared resilient. However, cracks began to show when the balance sheet of Alameda Research, a crypto investment firm owned by Bankman-Fried, came under scrutiny. It was revealed that Alameda Research’s value was heavily reliant on speculative crypto tokens, raising concerns about FTX’s financial stability. 

FTX Bankruptcy:

In early November 2022, FTX collapsed. The revelation of Alameda Research’s precarious financial position triggered a wave of customer withdrawals, ultimately pushing both FTX and Alameda into bankruptcy. The once-thriving exchange came crashing down. To investors and traders, it wasn’t just a headline; it felt personal.

FTX Legal Consequences:

The fallout didn’t end with FTX’s collapse. In December 2022, the U.S. government brought civil and criminal charges against Sam Bankman-Fried and top executives for misappropriating over $8 billion in customer deposits. Bankman-Fried faced trial in October 2023 and was convicted in November 2023. 

FTX Lehman Moment Effect: 

The crypto news sent shockwaves throughout the cryptocurrency industry, spreading mistrust among the public. Many view the FTX effects as “Lehman moment,” drawing parallels to the collapse of Lehman Brothers during the 2008 financial crisis.

Market Volatility: The volatile crypto market lost billions and fell below a $1 trillion valuation.

Cryptocurrency Values: The value of FTT plummeted, taking other coins down with it, including Ethereum and Bitcoin.

Ripple Effect: The collapse of FTX led to customers withdrawing billions of dollars worth of assets from Binance, the world’s largest crypto exchange.

Regulatory Implications: The event underscored the need for greater transparency, accountability, and regulatory oversight within the crypto sector, prompting stakeholders to reassess their approach to crypto volatility and compliance.

Conclusion:

As we reflect on the FTX scandal and its aftermath, it is a stark reminder of the cryptocurrency industry’s inherent risks and challenges. While it shook confidence, it’s also a chance for change. By learning from past mistakes and embracing responsible practices, we, aspiring accountants, can pave the way for a more resilient and trustworthy crypto ecosystem.

Stay tuned for more insights on my blog, where I’ll keep you updated with the latest developments in the world of finance and accounting.

Until next time,

Rachel.