ACCOUNTANTS (AMENDMENT) BILL

Order for Second Reading read. 3.00 pm

The Minister for Finance (Dr Richard Hu Tsu Tau): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time".

The Bill before the House seeks to amend the Accountants Act (Cap. 2A) to enable accounting firms to be formed as accounting corporations with limited liability; and to improve the registration and de-registration procedures; as well as the disciplinary and inquiry proceedings for public accountants.

Allowing incorporation as an additional business structure

Currently, accounting practices in Singapore can operate only as sole proprietorships or partnerships. Hence, all partners in an accounting firm can be sued if a single partner is errant. This may have been all right in the past when accounting firms were expected to be small set-ups. However, in today's globalised environment, this is no longer realistic. The Bill will allow for accounting corporations, in addition to existing business structures. The Government is not advocating that accountants adopt any particular business structure or model.

The main features of accounting corporations are:

First, it allows for a better framework for professional accountability, where the innocent public accountants practising in an accounting corporation will not be jointly liable with the errant ones. The errant public accountant will still be liable under the law of tort, without a statutory cap on his liability. This is to ensure that public accountants maintain high standards of professional duty and care.

Second, corporatisation allows accounting practices to raise external capital. Access to external financing increases the competitiveness and global reach of accounting corporations, and is in line with the Government's drive for regionalisation and globalisation.

Third, it allows non-public accountants to be directors and shareholders in an accounting corporation, subject to regulatory safeguards. In an accounting partnership, only public accountants can be partners.

Regulation of accounting corporations

Accounting corporations will be incorporated under the Companies Act and will be subject to the Companies Act. The corporation must also be approved by the Public Accountants Board. Some of the key safeguards to maintain the independence and professional standards of public accountants, who are key players in ensuring effective compliance with disclosure requirements and the integrity of our corporate environment, include:

First, the primary object of the accounting corporation must be to provide public accountancy services. These services include audit and reporting on financial statements and other acts that are required to be done by an approved company auditor under the Companies Act or under any other written law. They do not include services such as taxation and consultancy services.

Second, accounting corporations must have a minimum authorised share capital of $50,000. To ensure that ownership and control of accounting corporations remain in the hands of public accountants, at least two-thirds of the voting shares of an accounting corporation must be owned by corporate practitioners. A corporate practitioner refers to a director or an employee of the corporation who is a public accountant and is practising as such in that corporation.

Third, to ensure the independence of the accounting corporation, all shareholders must be natural persons. Shareholding by nominees and securitization of any share in an accounting corporation are prohibited. This is because accounting corporations will be auditing other companies, and we need to ensure that these audits are independent.

Fourth, to ensure that parties contracting with an accounting corporation are adequately protected in the event of a breach of contract or negligence on the part of the accounting corporation, it is mandatory for accounting corporations to take up professional indemnity insurance. The minimum amounts are as stated in the Bill.

Conclusion

Allowing for the incorporation of accountants will facilitate the creation of a more vibrant and competitive accounting services sector in Singapore, to better meet the challenges of the global economy in this new millennium.

Finally, I would like to express my appreciation to the Public Accountants Board's Sub-Committee, chaired by the then Accountant-General, Mr Goh Khee Kuan, and members from the Institute of Certified Public Accountants of Singapore, the Nanyang Technological University, the Singapore Exchange, the Attorney-General's Chambers, and the Registry of Companies and Businesses, for working on the issues which form the content of this Amendment Bill. Inputs were also obtained from the Association of Banks in the drafting of the Bill.

Sir, I beg to move.

Question proposed.

Mr Leong Horn Kee: Sir, I wish to speak in support of the Accountants (Amendment) Bill.

Sir, I am in total agreement with the proposal that accounting firms should be allowed to form Public Accounting Corporations (PACs). Essentially, this means that local accounting firms will be allowed to corporatise. The benefit is that after corporatisation, local firms can look towards mergers to form bigger companies or to form strategic alliances with overseas firms. Corporatisation will also enable local firms to adopt more professional practices which will facilitate recruiting and retaining of good staff. It also removes the onerous responsibility of unlimited and collective responsibility as in the case of partnerships.

Sir, I wish to take this opportunity to raise a point not covered in this Bill and that is on advertising by professional firms. I note that current rules which govern the conduct of professional firms such as accounting firms are that they are not allowed to openly advertise their services. I would like to suggest that this restriction be reviewed. Professional firms should be allowed to do some limited form of responsible advertising. I feel that permitting advertisement will be beneficial, especially for the smaller local firms. Large accounting firms, especially the foreign ones, are already very well-known and do not require advertising to publicise their services and expertise. Moreover, large foreign firms get ample press coverage of their activities or coverage of events which they can afford to sponsor. On the contrary, small firms have no means of publicising their expertise and services. Hence, there is a need to review and relax on the advertising rules so that small firms can advertise and let their prospective clients know more about the services that they can offer.

Sir, I also wish to point out that the Government should consider similar relaxation of rules on advertising for other professional firms such as the lawyers, architects, engineers and others, and also allowing them to corporatise their services.

Dr Lily Neo: Sir, I stand to support the Accountants (Amendment) Bill. However, I would like to seek clarifications on several parts of this Bill.

New section 18A - Approval for accounting corporation

Sir, new section 18A(3)(b), c(i) and c(ii) incorporates the phrase "as may be prescribed". I am of the view that the aforesaid phrase creates an area of ambiguity as to:

(i) who may make the prescription; and

(ii) the mechanism prior to making such a prescription. Should there not be an additional clause added at the end of this part to clarify the aforesaid ambiguity, for example, a clause titled "Rules on Accounting Corporations"? This clause can be worded in the same manner as section 81H and of the Legal Profession Act (Cap 161 of the 1997 Revised Edition), namely:

(i) the Minister may, after consulting the Board, make rules for the purposes of this Part;

(ii) without prejudice to the generality of sub-section (1), any rules made thereunder may provide for prescribing anything which may be prescribed under this Part.

Sir, may I ask the Minister whether there is a typographical error in new section 18A(3)(b) namely, "$50,000". Is it correct to have a comma at the end of "$50,000"?

New section 18(I) - Shares of accounting corporation

Sir, new section 18(I)(7) does not state the commencement date of the grace period, whereas new section 18(I)(9) sets out the commencement date. In this regard, I am of the opinion that new section 18(I)(7) creates an uncertainty as to the commencement date of the grace period. I am of the view that without the necessary clarification as to the commencement date, the same is capable of being interpreted as follows:

(a) the date of application to the Board;

(b) the date of the Board's order;

(c) the date of cessation as a public accountant; or

(d) the date of cessation as a director or an employee of the accounting corporation.

Would it not be better to have new section 18(I)(7) read like new sections 18(I)(8) and 18(I)(9) to clarify the commencement date for new section 18(I)(7)?

Sir, I also notice that the said clause does not state the consequence of a non-transfer of the voting shares. Will it not be more complete if another clause can be added to this part on "Additional grounds for winding up Accounting Corporation"?

New section 18(K) - Management of accounting corporation

Sir, I am of the view that this clause, in particular, the one-month period to source for another public accountant to fill the vacancy of directorship may be difficult for an accounting corporation with only two directors cum shareholders to comply with in the event of the directorship being vacated. May I ask the Minister whether the accounting corporation can be permitted to apply to the Board for an extension of time to comply with this clause before the expiry of the one-month period? May I also suggest that an accounting corporation be granted the right of appeal against the Board's decision to the Ministry in this regard.

Sir, I support the Bill.

Mr Noris Ong Chin Guan (Nominated Member): Sir, before I proceed to comment on the Bill, I wish to declare my interest as a partner in a Big 5 public accounting firm and as the Vice-President of the Institute of Certified Public Accountants. I was also a member of the sub-committee established by the Public Accountants Board to study the incorporation of the accounting profession which led to the introduction of this Bill.

Having heard this House engaged in a lively debate earlier this year to allow legal practitioners to set up law corporations, members of the accounting profession in Singapore generally expect that the option to incorporate will be extended to accountants. The introduction of this Bill to allow public accountants to establish Public Accounting Corporations (PACs) has therefore been widely anticipated.

Sir, I support the Government's adoption of the principle for professionals in Singapore to incorporate. Right now, the engineering, architectural, medical and legal professions can opt to adopt the incorporation route in Singapore. The passing of this Bill will enable public accountants to similarly elect to embrace a corporate model.

I applaud the Government for recognising the need to grant the professions in Singapore the option to incorporate. It is imperative that members of all professions in Singapore, including public accountants, are given the opportunity to incorporate. After all, accounting firms in jurisidictions, such as the United States of America, the United Kingdom, Australia, Canada, New Zealand and Hong Kong can opt to incorporate.

At the moment in Singapore, however, accounting firms can only operate as sole proprietors or partnerships based on unlimited joint and several liability. If the firm's asset is inadequate to meet a claim, the personal assets of all the partners in the firm are liable for the claim. Given today's incredulously massive amount of claims, all it takes is for just one partner's deficiency to annihilate the entire lifetime earnings of the other partners in the firm. This unlimited liability factor can act as a deterrent to the growth of the accounting firm and the profession as a whole.

In a PAC, an accountant's liability will no longer be unlimited in respect of his partner's shortcomings. This, it must be noted, does not mean that the clients of a PAC will not be protected. In this regard, ample safeguards have been provided for in the Bill. A minimum capital of $50,000 is required to form a PAC. A PAC is also required to have an adequate level of professional indemnity insurance cover, ranging from $1 million to $50 million, depending on the number of corporate practitioners and the gross income of the PAC. As with the legal profession, limited liability will not affect the professional standards of accountants in Singapore.

Sir, my other reason for supporting the Bill is because incorporation will allow professionals to reposition themselves in the New Economy business landscape. The digital transformation has attached a high premium to the application of human know-how. In our knowledge-based economy, intellectual asset has become critical and highly valued. Incorporation will lend a hand to accounting firms seeking to counter the fierce clamouring for limited knowledge resources. It will render it easier for PACs to recruit and retain valued staff against the ardent rivalry for talents from other corporations and institutions, both locally and internationally. By offering more flexible remuneration packages, including employee stock options, PACs will be better positioned to be the employer of choice in the marketplace.

Incorporation will also facilitate PACs to raise more capital to gain a wider reach for their services. The leeway to allow one-third of the PAC's shareholders to be non-practitioners will breed a more multi-disciplinary business orientation within the PAC, greatly enhancing its capacity and capability to provide clients with seamless service delivery, whilst still maintaining the PAC's audit independence. Hence, incorporation can provide our professionals with the critical structural support to elevate them to a platform to compete with the world's best. But I must qualify that incorporation is not a panacea for business woes. It is not a pill prescribed to resurrect failing sole proprietorships or partnerships. Instead, this Bill is meant to enable the accounting profession, as a whole, to move forward with the times, keep pace with world-wide development in the profession and meet the growing needs of the business community. It will create an environment that is more conducive for the development and better practice of the accounting profession in Singapore. The introduction of this Bill is therefore appropriate. I would like, however, to raise two points for the Minister's consideration.

Sir, my first point is on the capping of liability. We should make a clear distinction between the PACs and other companies under the Companies Act. This is because the claims against professionals in general and accountants in particular are grossly disproportionate to the fees that they earn. Such claims are neither fair nor equitable. They are not fair, as the claims made against accountants are many manifold times the amount of fees charged. They are not equitable, as the claims made against the auditors are usually more excessive than that pursued against the management at fault. Because, unlike the PACs, the management do not need to take up mandatory professional indemnity insurance cover under the Companies Act.

Sir, it is absurd to expect an auditor, who clearly did not connive to bring down a company, to be sued more excessively than the management directly responsible for the company's collapse. There is no question that if at fault, the auditor must be personally liable. But it is clearly unreasonable to penalise the PAC and auditor more severely than the management for a failure that the auditor did not directly bring to bear upon the company. If the accountant's exposure to claims remains unlimited under the law of tort, there is little incentive for a sole proprietor or a small accounting practice to convert to a PAC.

As I have mentioned to the House in January this year, the tendency for escalating claims made against professionals, including lawyers and accountants, is due to the "deep pocket" syndrome. Claimants are somehow erroneously led to believe that accountants and other professionals can afford grossly disproportionate claims due to their extensive insurance cover. In reality, the indemnity pockets of the professionals may not be deep enough. This is because, on the one hand, the capacity of the professional indemnity insurance market is shrinking. On the other hand, the quantum of claims has been escalating to such astonishing levels that it has become really impossible for individual accountants or accounting firms to recover from large claims. Instead, a single successful claim can easily and completely wipe out the life-time earnings of individual public accountants. If there is a threshold for reasonable claims, the current sky-high amount of claims against professionals has crossed the threshold many times over.

In reality, professionals are caught in a vicious indemnity cycle. For genuine fear of the impact of escalating claims, the professionals are usually left with little option, but to take up a high level of indemnity insurance coverage that renders them more prone to law suits and claims. Sir, there should be a capping on the amount of claims against professionals, so that the amount of claims bears a fairer resemblance to the fees charged. For example, the claims could be capped based on a fixed multiple of the amount of fees charged.

When I first proposed the capping of liability for professionals in the debate on law corporations earlier this year, the Minister of State was concerned that the capping may lead a lawyer to lower his guard, and hence lower professional standards. This should not be a concern, as the capping can be at a reasonably high but not astronomical level. In any case, the Bill has provided adequate safeguards in respect of the PAC. A PAC must provide adequate insurance cover of between $1 million and $50 million, depending on the size of the practice. Negligent practitioners can be struck off the Register of Public Accountants and lose their livelihood through the practice. More significantly, as an individual public accountant will be liable under the law of tort, whilst his partners are not jointly liable in their personal capacity for claims, we can expect individual accountants to be more circumspect in their statutory roles. Hence, I am of the view that the capping of liability will not affect professional standards and substance. On this basis, can the Minister please clarify whether a capping on the liability for professionals, particularly public accountants in the PAC, will be considered?

Sir, the second point concerns exempt private status. I wish to seek clarification on whether a wholly-owned subsidiary of the PAC can be deemed to be an exempt private company. According to the Bill, PACs will be granted exempt private status. A PAC may decide to give some of its departments more autonomy to manage their own finances and operations. The PAC directors may decide that in the interest of growing the business, these departments should be restructured as wholly owned subsidiaries of the PAC, so that they can be more autonomous in operations. Also, different HR policies and salary structures may give rise to a need for a line of business to be hived off under a separate legal entity. A PAC should be given the freedom to structure its business in this way, with its subsidiaries similarly enjoying exempt private status. But this should be on the basis that the subsidiaries must be wholly owned by the PAC. So long as the PAC is not disqualified and continues to be an exempt private company, can the Minister clarify whether wholly owned subsidiaries of a PAC will similarly be considered exempt private companies.

Sir, with these two points which I hope the Minister can consider, I support the Bill.

Mr Gerard Ee: Mr Speaker, Sir, I rise to support the Bill. Being the fifth speaker and speaking after the Vice President of the ICPAS, I find that much of what I have planned to say have been said. So, I shall zoom in to lend support to the two points that I share great concern.

One is on the capping of liability. The objective of the public accounting corporations is to afford limited liability to the members as opposed to a partnership. As the Minister has said, under tort, the individual would not enjoy such protection and can be sued for unlimited amounts. I can see that, in practice, no individual will be willing to accept the responsibility for signing off accounts unless he obtains cross indemnity from the rest of his members. If that happens, it would negate the benefit that a public accounting operation serves to provide. Therefore, I wonder, as Mr Ong wonders, whether it is possible to legislate a cap on the quantum of a claim from a piece of work to be based on a multiple of the fees charged for that piece of work. This will certainly achieve a more equitable relationship between practitioner and client.

Like Mr Leong, I would like to make reference also to a relaxation of advertising rules. The Bill hints on such a possible relaxation. New section 48(2A)(b) refers to advertising or holding itself out or describing itself in any way to be an accounting corporation or to be authorised to provide public accountancy services in Singapore. Currently, the rules on advertising prohibit a public accountant or his firm from seeking professional work by means of advertising. And "advertising" is defined as "a communication to the public of information as to the services or skills provided by a public accountant or firm of public accountants with a view to procuring professional business." I am hoping that in the spirit of new section 48(2A)(b), the rules of advertising will be amended. With a liberalisation of the advertising rules, I expect to see more articles on various business aspects to be made available which will provide nuggets of information of value to the public. As it stands, whilst in the rest of the developed world one could easily access interesting websites produced by accounting firms, we in the accounting profession here in Singapore agonise in having to tell people to log-on to our US or other overseas websites to learn more about doing business in Singapore.

Sir, I support the Bill.

Dr Richard Hu Tsu Tau: Mr Speaker, Sir, before I answer Members' questions, I would like to thank all of them for supporting the Bill itself.

I will now take their questions in the order in which they were raised. Mr Leong Horn Kee and later Mr Gerard Ee have suggested that accountants should be allowed to advertise their services in a controlled way, in particular, the smaller firms which are not well known and therefore are unable to compete with the larger firms. I would like to point out that the rules governing advertising by accountants are determined by the Institute of Certified Public Accountants of Singapore (ICPAS). I understand that ICPAS is reviewing the issue and I will refer the Members' suggestions to them.

I would like to thank Dr Lily Neo for the questions that she raised as it gives me the opportunity to clarify the ambiguities. Dr Neo is concerned that the use of the word "prescribed" in new section 18A(3)(b), (c)(i) and (c)(ii) may create ambiguity. The word means prescribed by the Act or subsidiary legislation made thereunder, as provided under Part I, section 2(i) of the Interpretation Act. In the case of the Accountants Act, it is the rules made by the Public Accountants Board with the approval of the Finance Minister under section 58.

On new section 18A(3)(b), the comma after "$50,000" is not a typographical error. It is common practice to insert a comma before the qualifying phrase "or such other sum as may be prescribed."

Dr Neo is also concerned that uncertainty could arise because section 18I(7) does not state the commencement period of the grace period. I do not believe that there should be ambiguity. Section 18A makes it clear that only corporate practitioners can own two-thirds of the protected fraction or more of the voting shares. If the protected fraction of shareholding is not affected as a result of the shareholder ceasing to be a public accountant or corporate practitioner, neither the accounting corporation nor the person will apply to PAB for a grace period. They will apply only if the protected shareholding fraction is affected. The grace period they will ask for will be from the date of the event of disqualification which took place. Otherwise, the accounting corporation cannot be said to be in compliance with section 18I at all times, thereby rendering it open to disciplinary action.

Dr Neo also notes that section 18I is silent on the issue of the non-transfer of voting shares. The consequence of non-transfer of voting shares is addressed in new section 21A(1)(f). In the event of a non-transfer, the accounting corporation will not be in compliance with section 18I and its status as an accounting corporation can be revoked. After revocation, the company can still provide professional services other than public accountancy services in its capacity as a company registered under the Companies Act and according to its articles of association. The company cannot then hold itself out as an accounting corporation and would have to operate under revocation under a revised name, subject to the approval of the Registrar of Companies and Businesses.

Dr Neo is also concerned that after the one-month period allowed for the filling of a vacant directorship, it might be insufficient in the case of an accounting corporation with only two directors. In this case of an accounting corporation with only two directors, only one of them needs to be a public accountant. If the vacancy created is for a director who is not a public accountant, filling the vacancy should not be a problem within the one-month period stipulated. If the vacancy created is for a public accountant and the accounting corporation has difficulty in filling it within the one-month deadline, it may apply to the Public Accountants Board for an extension of time.

Finally, I would point out that if an accounting corporation is dissatisfied with the Public Accountants Board's decision on this issue, it can appeal to the High Court, as provided under section 21A(1)(f) and under section 22.

Mr Noris Ong, and later Mr Gerard Ee, have both said that they would want a cap on the accountant's personal liability, otherwise there would be no incentives for sole proprietors to form accounting corporations. I would like to say that, as far as the Government is concerned, the intention of this Bill is neither to encourage nor to discourage accountants from setting up accounting corporations. It is to allow for an additional form of business structure for accountants over and above partnerships. A statutory cap on auditors' liability suggests that we can statutorily pre-determine the potential damage caused by an errant auditor. There are also two main disadvantages to statutory capping.

First, setting such a cap on the auditors' liability may be unfair to the plaintiff as he may suffer damages caused by the public accountant in excess of the cap. Second, high standards of public accounting are crucial to the development of Singapore as an international financial and investment centre. Statutory capping may indirectly compromise the standards as the incentives for public accountants to be thorough in their work may be lowered with the knowledge that they will not be hurt badly in the event of a law suit. Other professions have been allowed to incorporate in Singapore, namely, the lawyers, engineers, architects and doctors, and none of them have statutory capping on their liabilities.

Finally, Mr Ong has also suggested that the subsidiaries of accounting corporations should also be treated as private exempt companies. I believe it would depend on the activities of these subsidiaries. In most instances, I would assume that the subsidiaries of auditing firms are formed to do mostly non-auditing work. If this is the case and the subsidiaries are performing non-auditing work, there would be little ground for granting them private exempt status. However, this is an area which I will undertake to study further.

Mr Gerard Ee: Just a clarification, Sir. The advertising rules actually appear in the Public Accountants Board's Rules as well, verbatim from that which appears in ICPAS. I wonder whether the Public Accountants Board could lead the way in liberalising advertising.

Dr Richard Hu Tsu Tau: We can look at it. But if ICPAS makes the recommendations, I think the Public Accountants Board will consider them very seriously.

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill. - [Dr Richard Hu Tsu Tau].

Bill considered in Committee; reported without amendment; read a Third time and passed.