What is the board’s role in a special audit or internal investigation?

By NG SIEW QUAN

The Business Times, 6 January 2023


It should help ensure that the work is carried out smoothly and all relevant parties should render their full cooperation with the investigators.

ECONOMIC crime in the South-east Asian region appears to be on a rising trend, according to the Global Economic Crime and Fraud Survey 2022 by PwC. When a board is aware of a potential or actual crime or irregularity, it should address the matter – or it may be asked by the regulator to do so.

There has been a greater frequency of “special audits” required by Singapore Exchange Regulation (SGX RegCo) for local listed entities. Such a special audit is different from the regular internal audit which has a scope of work that usually covers a broad spectrum of internal controls. It is essentially an investigation which could be a prelude to the authorities launching a criminal probe.

For the purpose of this article, we shall use the term “special audit” to mean that initiated by the authorities and “internal investigation” to refer to that initiated by the board. There are some differences in the role of the board between the two cases.

Special audit initiated by SGX RegCo

Under SGX Listing Rule 1405(f) (and the equivalent Catalist Rule), SGX RegCo may require an issuer to appoint “special auditors” or other independent professionals for specified purposes. In addition, SGX RegCo may provide active guidance in determining the scope of such audits and require the special auditors’ findings to be reported directly to the Exchange, the issuer’s audit committee (AC) and/or any party as the Exchange may deem fit.

Usually, a special audit is a consequence of the issuance of a Notice of Compliance (NOC) by SGX RegCo. In the NOC, SGX RegCo specifies the reason for mandating such an audit and indicates the areas that are likely to be considered. SGX RegCo involves the independent directors and the appointed special auditor in determining the detailed scope.

The role of the board in such an instance depends on the NOC. The board actively participates in the appointment of the special auditor and, based on the areas suggested in the NOC, assists in developing the draft scope for SGX RegCo’s comments.
 
The board has to consider whether and when to issue announcements relating to the matter, and what the announcements should state.

SGX RegCo may direct the company to require the appointed special auditor to report directly and solely to SGX RegCo when sharing the findings of special audits.

Internal investigation commissioned by the AC

Besides the Exchange, an internal investigation may be commissioned by the board in the event of a suspected fraud or irregularity. According to SGX Listing Rule 719(2), it is part of the AC’s continuing obligations to ensure that as soon as the issuer becomes aware of any suspected fraud or irregularity, or suspected infringement of any laws or regulations, it discusses such matters with the external auditor and reports the matter to the board on a timely basis.

The AC may call upon internal auditors, external auditors, or other relevant specialists to investigate and determine how the fraud was committed, the financial implications, who the perpetrators are, and how the fraud could have been prevented.

Impact on directors

Whether a special audit or internal investigation, there are good governance practices that should be followed.

Before commencing the investigation, the board (or the AC, if so delegated) should establish the objective, scope and expertise necessary to undertake the work. The board should also consider, given the nature of the irregularity, whether and the kind of independent specialists should be called in.

Where the investigation relates to any member of the board or senior leadership team in management, it is important that such members are informed of the impending investigation and duly instructed to recuse themselves from all matters relating to the investigation.

The board and AC also ensures that it obtains regular updates from the investigation team on its progress and findings formally at their meetings and regularly through scheduled update meetings as agreed. This could result in widening the scope of the investigation.

During the investigation, the board or AC should help to ensure that the work is carried out smoothly and all relevant parties should render their full cooperation with the investigators. This includes granting full access to relevant data, financial records and documents. Directors must also take reasonable steps to preserve relevant physical and electronic copies of historical records and documents – to prevent the destruction, deletion or overwriting of potentially relevant information.

What’s next

For special audits, instructions on the next course of action generally come in the form of additional NOCs or announcements by the companies on the outcome of the audit at the instruction of SGX RegCo. The directors who have been part of the special audit process are expected to remain connected throughout the investigation with the special auditors and SGX RegCo until the outcome of the special audit is announced on the SGX website.

For internal investigations, the board remains responsible for ensuring that learning points and any recommendations, including disciplinary action, from the investigation are appropriately implemented. If a crime or breach of regulations has been committed, the matter should be promptly reported to SGX RegCo or other authorities as appropriate for further action.

This is the final of a four-part series on criminal investigations and special audits.

The writer is a member of the Best Managed Board Awards committee, a part of the Singapore Corporate Awards managed by the Singapore Institute of Directors.