Review of Disclosure Requirements and Penalty Regimes for Breaches of Securities and Futures Act and Companies Act

Mr Chua Kheng Wee Louis asked the Prime Minister in view of the enforcement actions taken against Noble Group Limited for a civil penalty of $12.6 million relating to a breach of section 199(b)(ii) of the Securities and Futures Act and stern warnings to two former directors of Noble Resources International Pte Ltd relating to a breach of section 201(2) of the Companies Act, whether MAS intends to strengthen disclosure obligations and penalty regimes relating to false and misleading statements and breaches of disclosure requirements.

Regulatory framework for financial statements and disclosures is multi-layered and robust

Singapore’s regulatory framework governing the financial statements of and disclosures by Singapore listed companies places obligations on various stakeholders.

Companies listed on the Singapore Exchange (SGX) and their directors are subject to robust disclosure requirements under the Securities and Futures Act (SFA) and SGX’s Listing Rules.

Companies incorporated in Singapore and their directors must comply with the Companies Act, which requires them to present their financial statements in accordance with prescribed accounting standards.

Meanwhile, external auditors are responsible for conducting audits in accordance with prescribed auditing standards, to ascertain if the financial statements are a true and fair representation of the company’s performance.

The Noble case is a complex one involving multiple parties within and beyond Singapore. The parent company, Noble Group Limited (NGL), was incorporated in Bermuda, headquartered in Hong Kong and listed on SGX. As a company listed on SGX, NGL and its directors are subject to SFA. However, as it is a Bermuda-incorporated company, its financial statements and audit requirements are not subject to the Singapore Companies Act.

Noble Resources International Pte Ltd (NRI) is the Singapore-incorporated subsidiary of NGL. As a locally-incorporated company, NRI and its directors are subject to the Companies Act.

NGL, acting through NRI, entered into long-term marketing agreements and applied an incorrect accounting treatment to these marketing agreements. This had the effect of inflating NGL’s and NRI’s reported profits and net assets.

NGL’s financial statements were audited by Ernst & Young Hong Kong. NRI’s financial statements were audited by Ernst & Young Singapore. Clean audit opinions were issued in both cases. Ernst & Young Singapore had, in fact, concurred with the accounting treatment for the marketing agreements.

Notwithstanding the clean audit opinions, the Monetary Authority of Singapore (MAS), Accounting and Corporate Regulatory Authority (ACRA) and Commercial Affairs Department (CAD) continued to gather and review information to establish a basis to probe deeper into the case after allegations of accounting irregularities in NGL’s financial reports surfaced. In 2018, MAS, ACRA and CAD commenced formal investigations into NGL and NRI.

Upon the conclusion of the investigations, the regulatory authorities took action against the relevant parties in accordance with the respective requirements of their Acts, based on the facts and circumstances of the case and the culpability of the involved parties.

First, in respect of NGL, a civil penalty of $12.6 million was imposed under SFA for publishing false or misleading financial statements. Under SFA, a civil penalty sum not exceeding three times the amount of profit gained or loss avoided by the company, or $2 million for each breach, may be imposed on a company that fails to meet disclosure requirements. In this case, the incorrect recognition of future fees from the marketing agreements presented an artificial picture of NGL’s financial position but did not translate into actual monetary gains by the company. Hence, the applicable maximum civil penalty quantum of $2 million for each breach was applied. This quantum was arrived at after considering key factors, including the number of breaches and the cooperation rendered during investigation.

No penalties were imposed under the Companies Act as the Companies Act provisions only apply to Singapore-incorporated companies and NGL is not a Singapore-incorporated company.

With regard to the key former directors and managers of NGL, the information that could be obtained was insufficient to prove that NGL’s offences were attributable to the neglect of any particular individual.

Second, as to NRI, investigations revealed that the two directors were following the parent company NGL’s group accounting policy in approving the financial statements. Importantly, there was no suggestion from their auditors that the accounting treatment was incorrect and there was no intention to cheat or defraud on their part. As such, stern warnings were issued to them.

Third, with regard to NRI’s auditors, Ernst & Young Singapore, it was found that while their audit work did not reflect a competent application of accounting principles for the long-term marketing agreements, the audit issues they had to consider were not straightforward. They had abided by the firm’s processes to consult technical experts on the accounting treatment, which involved professional judgement, and the technical experts concurred with the accounting treatment. They were thus issued orders for their audit work to be subject to peer review and training to remediate the identified audit deficiencies.

Ernst & Young Hong Kong which audited the parent company NGL, does not fall within the regulatory jurisdiction of our authorities. MAS has shared information regarding the case with the Hong Kong regulator and will work closely with them as needed.

Measures to enhance regulatory oversight and enforcement. MAS and ACRA, together with the Singapore Exchange Regulation (SGX RegCo), continually review and enhance the relevant regulatory and penalty regimes. For example:

(a) MAS and ACRA set up a joint forum in 2019 to strengthen coordination for the review and enforcement of disclosure breaches, as these may be intertwined with accounting issues;

(b) SGX RegCo established a dedicated whistleblowing office in 2020 to address feedback regarding listed companies’ compliance with the listing rules. In 2021, it introduced requirements for all listed companies to have whistle-blowing policies; and

(c) Since 2021, SGX RegCo has also enhanced accountability for the audits of Singapore-listed companies’ financial statements, by requiring all primary-listed companies, including foreign-incorporated ones, to appoint a local auditor registered with ACRA.

MOF and ACRA are, currently, reviewing the fines that can be imposed on directors of companies due to the failure to prepare and table annual financial statements in compliance with the prescribed accounting standards in Singapore.

MAS, SGX Regco, ACRA and CAD will continue to thoroughly investigate acts of corporate malfeasance and take appropriate actions to ensure our regulatory system remains fair and robust.