ACCOUNTANTS (AMENDMENT) BILL

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ACCOUNTANTS (AMENDMENT) BILL: Order for Second Reading read.

3.53 pm

The Minister of State for Finance (Mrs Lim Hwee Hua): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time".

Background

This Bill amends the Accountants Act to enable accountants to form Limited Liability Partnerships (LLPs) for public accountancy services.

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The LLP business structure was introduced in April 2005 when the Limited Liability Partnerships Act was passed. This new business form is now available to most businesses and the take-up has been encouraging. From 11th April 2005 to 1st January 2006, a total of 947 LLPs were registered with the Accounting and Corporate Regulatory Authority (ACRA).

To enable the accounting profession to have the option of adopting the LLP structure as a vehicle for providing their services in Singapore, the Accountants Act has to be amended. Currently, public accountants can choose to operate as sole proprietors, ordinary partnerships or accounting corporations. The new LLP option will enable accountants to form structures that provide them with limited liability similar to companies, while preserving flexibility similar to "partners" in a partnership. As accounting firms expand globally, the LLP option will be particularly relevant as a partner operating in one region would no longer have to be held accountable on an unlimited basis for liabilities arising from the actions of another partner operating in another region, simply because they belong to the same accounting partnership.

On an individual basis, however, a public accountant will remain professionally accountable for each audit he performs. A public accountant in an accounting LLP will therefore be held to the same standards of professional conduct and competence as a public accountant in an ordinary accounting partnership, including unlimited personal liability, for his own wrongful acts or omissions.

LLPs for accountants have already been introduced in other countries like the UK, Jersey and US-Delaware where the response and feedback has been positive.

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Sir, I shall now highlight the main amendments proposed in the Bill.

Main amendments to the Accountants Act

First, the Accountants Act is amended to specify that Accounting LLPs shall abide by the requirements laid out in the LLP Act and all other legislation applicable to LLPs. For instance, an accounting LLP and all other LLPs will be required to have at least two partners and lodge an annual declaration of solvency with the Registrar of LLPs.

Second, this Bill proposes that Accounting LLPs shall be subject to the same standards of governance, professional conduct and administrative care as are required of Accounting Firms (namely sole proprietorships and partnerships) and Accounting Corporations under the Accountants Act. For example, similar to other business structures providing public accountancy services, an Accounting LLP must be managed by one or more partners who are public accountants ordinarily resident in Singapore. Accounting LLPs must also be overseen by the Public Accountants Oversight Committee (the PAOC) of ACRA in the provision of public accountancy services. The PAOC shall have the authority to investigate any complaint made against an Accounting LLP and institute disciplinary proceedings, if necessary. In addition, Accounting LLPs shall be subject to the same complaint and disciplinary processes, penalties and restrictions on employing disqualified persons as Accounting Firms and Accounting Corporations.

Finally, since partners of Accounting LLPs will enjoy limited liability similar to shareholders in Accounting Corporations, Accounting LLPs will also be subject to the investor and creditor safeguards applicable to Accounting Corporations. In particular, all Accounting LLPs will be

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required to maintain a minimum capital base of $50,000 and secure professional indemnity insurance of at least $1 million.

Conclusion

Mr Speaker, Sir, allowing the formation of Accounting LLPs will facilitate the expansion and internationalisation of accounting services from Singapore. This will complement and further our strategy to develop Singapore into a services hub and a leading jurisdiction for business.

Sir, I beg to move.

Question proposed.

3.55 pm

Dr Ahmad Mohd Magad (Pasir Ris-Punggol): Mr Speaker, Sir, speaking on this Bill, I would like to, first, declare my interest that I am a member of the Accounting and Corporate Regulatory Authority (ACRA).

I am delighted that one of the key provisions of this Bill is for public accountants to form LLPs. This was indicated at the ICPAS/ACRA seminar held in the calendar quarter of last year. And the Government, by provision of this Bill, is delivering on its promise.

Sir, in going over the provisions of this amendment Bill, I have a few comments and concerns which I would like the Minister of State, Mrs Lim Hwee Hua, to address. First is with respect to clause 9(c) of the Bill. I would like the Minister of State to clarify why the clause, inter alia , should prescribe that at least two-thirds of the partners in an accounting LLP should be public accountants. While this requirement may mirror that of some professional bodies of certain European countries, I feel that such a qualified

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majority provision may hamper the development of strong multi-disciplinary practices, such as the combination of accounting and legal practices which would be beneficial for Singapore. I would, therefore, advocate instead that a simple majority, ie, just above 50%, should be adequate to ensure that public accountants control the accounting LLPs.

My next point, Sir, pertains to clause 18 which sets out the amendment of section 28. It prescribes, among others, that one of the requirements of setting up or converting into a LLP is a minimum level of professional indemnity insurance or PII. It appears that the PII requirement is on the same scale as that for public accounting corporations, or PACs. It is my understanding that there are only a handful of PACs which

currently number less than 10. I have been told that a major reason for a lack of willingness for a CPA firm to convert to LLP is because of this specific requirement. Consequently, I imagine that many small to medium sized accounting firms may not want to convert to LLP because of this requirement.

I understand, from a legislative viewpoint, that professional indemnity insurance is required and important to safeguard the public interest as under a LLP, all partners would generally enjoy limited liability. A suggestion I would like to make is for the level of the professional indemnity insurance requirement to be lowered. A tiered insurance requirement could perhaps be stipulated. This would make it more appealing for smaller accounting firms to consider embracing LLP while at the same time ensure that the public interest is adequately protected.

The next several comments pertain to the changes provided in this amendment Bill relative to the umbrella statute for LLPs, ie, the LLP Act of 2005. This is

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made clear by the new section 30A addition as provided in this Amendment Bill which states that nothing in the Accountants Act shall affect the operation of the LLP Act of 2005 in relation to an accounting LLP.

Sir, it is stipulated under section 25(3) of the LLP Act that limited partners in a LLP are entitled to inspect the accounts of the LLP. This provision appears to be mandatory and not subject to the terms of a partnership agreement unlike certain other provisions. I understand that some accounting firms currently do have salaried partners and they may not be entitled to inspect the partnership accounts under the terms of "partnership". If a firm converts to LLP, it may no longer be possible to exclude such salaried partners from exercising their rights to inspect accounts under section 25(3) of the LLP Act 2005. The breach of this provision is an offence. I wonder whether this poses a serious issue for the accounting profession in terms of getting accounting firms to convert to LLPs, or to set up as LLPs.

Next, Sir, LLPs need to appoint a manager, as provided for by section 23 of the LLP Act. This manager has certain statutory duties, such as lodging an annual declaration of solvency or insolvency, lodging changes of particulars with the Registrar and several others. The manager has personal liability for these obligations. Unfortunately, the definition of "manager" under the LLP Act is very wide, and I quote, "The manager is any person (whether or not a partner of the LLP) who is concerned in or takes part in the management of the LLP (whether or not his particulars or consent to act are lodged with the Registrar)." I feel that the use of the term "manager" is too broad and unfortunate and could lead to a confusion as to whether other managers who are not appointed to perform the statutory functions of the manager of a

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LLP are or are not caught by this wide definition.

The accounting profession needs to consider their current application of the term "manager" and has to be clear that no one, whether intentionally or unintentionally, is caught by this wide definition. The professional managers who do fee-earning work rather than take part in management should not, in my view, be caught by this definition. What is less clear is the general manager and administrative manager, finance manager or other manager who may be concerned with or is taking part in the management of the LLP as well.

My final comment, Sir, is that while this Amendment Bill primarily provides for the accounting profession to form or convert to LLPs, what may be missing is the provision to address specific features of the LLP's structure under the LLP Act which may not be suitable for the accounting profession. In this regard, the accounting profession should make a study of the LLP Act of 2005, as was the case with the legal profession, and consider what changes perhaps could be made to their own Accountants Act to address some of these issues relating to LLPs which are unique to the accounting profession.

On that note, Sir, I support the Amendment Bill.

Mrs Lim Hwee Hua: Mr Speaker, Sir, I wish to thank Mr Ahmad Magad for his support of the Bill.

I would like now to address his questions in turn. He asked whether the two-thirds requirement is actually necessary. Sir, the requirement for at least two-thirds of the partners in an Accounting LLPs to be public accountants is the same as that for accounting partnerships and accounting corporations.

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A large majority, as opposed to a simple majority, will provide additional assurance and help to maintain public and business confidence in the professionalism and credibility of Accounting LLPs, just as the rule does for accounting partnerships and corporations. I should also add that this requirement is similar to that for other professions like the architects and the professional engineers. The Architects Act, for example, requires that two-thirds of the shareholding of the company must be owned by allied professionals. In fact, the rule for the legal profession is even more stringent where 100% of the partners of a legal partnership or LLP must be lawyers.

Sir, we would be cautious in making any changes to the requirement at the start so that Accounting LLPs do not inadvertently bring the integrity of the accounting profession into question. That said, the requirement could obviously, as in all regulations, be reviewed later in accordance with changing business conditions and public expectations.

As regards professional indemnity insurance, or PII, let me note that Accounting LLPs, like accounting corporations, enjoy limited liability. Hence, the PII is required for Accounting LLPs to safeguard clients and creditors' interest given the limited liability to be enjoyed by such accounting entities. This is also the case for the legal LLPs. The amount of the PII must necessarily be driven by the coverage required to safeguard public interest, and not the objective of encouraging the formation of Accounting LLPs per se . Again, the aim of this Bill is to provide an additional structure by which accountants can choose to provide their professional services. It seeks neither to encourage or discourage accountants from setting up Accounting LLPs. That said, again, a review will, however, not be ruled out in future.

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Mr Ahmad Magad noted that under the LLP Act, all partners are required to ensure that proper accounts are kept for the LLP. While a LLP is not required to file accounts with ACRA, this oversight by all partners helps to safeguard creditors and clients' interest. It is the responsibility of each and every partner of the LLP to ensure that proper accounts are kept. The criminal liability is imposed on the LLP and every partner if proper accounts are not kept. Therefore, it is fair and appropriate that every partner should have access to the accounts so that they may perform the necessary due diligence.

Finally, on his point about the definition of a "manager". Although the title "manager" is commonly used today, it has to be understood here within the specific context of the Act. There should not be any concern of ambiguity in this instance, as section 23(2) stipulates that "every LLP shall ensure that the particulars of every person who acts as manager of the LLP and his consent to act as such are lodged with the Registrar". So it would be clear to any LLP who the manager is for statutory purposes as the

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LLP will have to identify and lodge this information with the Registrar.

Sir, I believe I have answered his questions.

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. - [Mrs Lim Hwee Hua].

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