You will be able to read an auditor's report and spot opinions, emphasis paragraphs and going-concern doubts.
Hyflux's shares and perpetual securities were held by thousands of Singapore retail investors when the company applied to court for protection from its creditors in 2018. For most of them, the collapse felt sudden. The annual reports, read closely, had shown years of rising debt and weak operating cash flow. The auditor's report is the one part of an annual report written by an outsider with a legal duty to the shareholders, and it's often the shortest. It takes five minutes to read, and most investors never do.
The auditor's report opens with an opinion on whether the financial statements give a true and fair view, or present fairly the company's position, under the accounting standards it uses. An unmodified opinion, often called a clean or unqualified opinion, means the auditor found the accounts fairly presented in all material respects.
It doesn't mean the business is sound, the strategy works or the share price is reasonable. A company can be losing money, carrying too much debt and heading for trouble, and still receive a clean opinion, because its accounts accurately describe a business in trouble. The auditor checks that the figures are honest. Whether they're good figures is your job.
Modified opinions are rare and serious. There are three kinds: a qualified opinion, which says the accounts are fair except for one specific matter; an adverse opinion, which says they aren't fair; and a disclaimer, where the auditor couldn't get enough evidence to form a view at all. Any of these is a reason to stop and find out why before you hold the shares another day. SGX requires listed companies to announce a modified opinion promptly, so you'll usually see it on SGXNet too.
Since auditing standards changed in the 2010s, auditors of listed companies in Singapore, as in many other places, include a section on key audit matters: the areas that, in the auditor's judgement, needed the most attention during the audit. US audit reports have a similar section called critical audit matters.
These are usually the parts of the accounts that depend most on estimates. Common ones are the valuation of goodwill and other assets tested for impairment, the valuation of investment properties, inventory valuation, revenue on long contracts, and provisions for legal claims. For each one, the auditor explains why it mattered and what they did to test it.
One of these matters on its own isn't a warning. It's a map of where the numbers are softest. If you later build a model, as you will in module 7, these are the figures most likely to move when management changes its assumptions.
Larkspur's made-up auditor's report, on page 88, listed two. The first was inventory valuation: S$70 million of parts and materials, some of them made for specific customers' machines, which would be hard to sell elsewhere if orders were cancelled. The second was the impairment test on S$30 million of goodwill from buying the coatings business, which depended on management's forecast that coatings profits would recover. Marcus had already noticed in lesson 6.2 that coatings earned a thin margin. Now he knew the auditor had looked hard at the same question.
Two other paragraphs can appear below the opinion without changing it, and both deserve attention.
An emphasis of matter paragraph draws attention to something already disclosed in the accounts that the auditor thinks readers must understand, such as a major lawsuit or an uncertain asset sale. The opinion stays clean, but the auditor is pointing at a page.
A section headed material uncertainty related to going concern is more serious. Going concern is the assumption that the company will keep operating for the foreseeable future. When the auditor writes this section, it means there are events or conditions, such as debts falling due without confirmed refinancing, that cast significant doubt on whether the company can continue. The accounts are still prepared as if it will, but readers are warned that it might not.
Some companies with going-concern doubts recover. Many don't, and shareholders rank last when they fail. If you hold a stock whose auditor writes this section, read the note it refers to the same day.
Two events outside the report itself are worth checking on SGXNet.
A change of auditor happens for ordinary reasons: a tender to cut fees, a rotation rule, or a company outgrowing a small firm. It can also follow a disagreement over accounting. The announcement should say why, and the outgoing auditor is usually asked to confirm whether there's anything shareholders should know. Read both.
A late annual report or a delayed results announcement is a quieter flag. Companies that can't close their books on time often have problems that the eventual report reveals. An extension request on SGXNet is worth noting in your log with the reason given.
When Marcus searched Larkspur's announcements, he found the same audit firm for the past eight years and every report filed on time. That's what you hope to find. It doesn't make the company a good investment, but it removes one class of problem from the list.
For the activity, open the auditor's report in your chosen company's latest annual report, note the opinion, and list each key audit matter with the figure in the accounts it relates to.
Read the auditor's report of your chosen company and list each key audit matter with the figure it relates to.
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