Speech by Minister Khaw Boon Wan at the Motion on the Auditor-General's Report on the Audit of Aljunied-Hougang-Punggol East Town Council

Feb 12, 2015

For the video of Minister Khaw's speech in Parliament today, click here.  

Mdm Speaker, I beg to move “That this Parliament:

(i) notes with concern the Auditor-General's Report on the Audit of Aljunied-Hougang-Punggol East Town Council (AHPETC) (Paper Misc. 1 of 2015), specifically its findings on:

(a) the deficiencies in AHPETC's financial and accounting systems, record-keeping and safeguards;
(b) the uncertain accuracy and reliability of AHPETC's accounts;
(c) the lack of proper disclosure and oversight by AHPETC's Town Councillors, especially over related-party transactions and conflicts of interest; and
(d) the risk that AHPETC has not properly managed and spent public funds;

(ii) calls on all Town Councils to uphold high standards of accounting, reporting and corporate governance so as to safeguard residents' interests; and

(iii) supports strengthening the legislative framework for Town Councils, in order to hold those responsible for their good management to proper account.

A copy of the audit report has been circulated to members as Paper Misc. 1 of 2015. It was also released to the public on 9 Feb 2015.

This is the first time in the history of Town Councils (TCs) that the Auditor-General has undertaken a special audit on a TC to look into concerns about its financial circumstances, under Section 4(4) of the Audit Act. Let me explain how this came about.

Each year, TCs are required to submit their audited financial statements, auditor’s report, and annual reports to my Ministry by 31 August, within five months of their financial year closure. MND will then table the reports to Parliament. All TCs have been able to meet the submission deadline, except AHPETC. AHPETC have not submitted their reports on time ever since their formation in 2011. Their first set of reports for FY2011 was only submitted to MND on 11 January 2013, a delay of more than 4 months, after repeated reminders. Even then their Auditor’s report was a qualified one, with the Auditor making a Disclaimer of Opinion on the financial statements. The Auditor listed 4 areas as the basis for their disclaimer. In audit terms, a Disclaimer of Opinion is a serious matter. It means that the auditors are unable to state that the financial statements provide a true and fair account of the TC’s financial position.

In response, AHPETC assured the MND that they had rectified most of the observations raised by their Auditor, and were in the midst of rectifying the others. That was in August 2013. MND decided to give the TC time to resolve the issues.

Unfortunately, the following year saw no improvement. Their second set of reports for FY2012 was submitted to MND on 10 February 2014, after another long delay of 6 months. And once again, their independent Auditor, M/s Foo Kon Tan Grant Thornton LLP, submitted a Disclaimer of Opinion on AHPETC’s FY2012 financial statements.

Not only was this the second consecutive year that the TC’s independent Auditor had submitted a Disclaimer of Opinion on AHPETC’s Financial Statements, but they now raised 13 areas as the basis for their disclaimer. There were 9 new issues of pressing concern, in addition to 4 areas identified by the auditor in the previous year, which remained unresolved contrary to AHPETC’s assurance to MND. The Auditor also issued a qualified opinion on AHPETC’s other legal and regulatory requirements, stating that AHPETC had not complied with the provisions of the Town Councils Act and Financial Rules in various respects. The TC’s financial accounting had further deteriorated.

This is a cause for serious concern. TCs collect substantial monthly Service & Conservancy Charges (S&CC) from their residents and their commercial tenants. TCs also receive large S&CC grants from MND. These are all public monies. As stewards of public funds, all TCs must keep proper accounts and records, and maintain adequate control over their assets. Who has paid and who has not? How is the money spent? Is it properly used? Is anybody doing anything wrong? Is the TC solvent, being able to pay its bills on time? Does the TC have enough reserves in its Sinking Fund to replace major infrastructure when needed? For example, can the TC afford to replace the lifts when it is time to do so? These and many other questions directly affect the interests and safety of the residents. They are not trivial technical issues raised merely to satisfy the accountants or the auditors, or to meet financial regulations. Unfortunately, the observations in AHPETC Auditor’s Reports have raised serious questions about the reliability and accuracy of its financial and accounting systems.

That is why on 19 February 2014, at my request, the Minister for Finance exercised his power under the Audit Act to direct the Auditor-General (AG) to conduct a special audit of AHPETC’s accounts. This was not a routine audit. AG was to ascertain whether AHPETC had taken all reasonable steps to safeguard the collection and custody of AHPETC’s monies, ensure adequate controls over payments, and ensure that all legal provisions relating to AHPETC’s monies were fully complied with. AG was to investigate the causes of Foo Kon Tan’s Disclaimer of Opinion, and ascertain the reliability and accuracy of AHPETC’s financial management and accounting processes and systems.

AGO’s Report

The AGO report has set out clearly its approach and its findings. It is a sad commentary on the state of affairs at the AHPETC. In summary, the Auditor General’s investigation has uncovered major lapses. It found that AHPETC had failed to take all reasonable steps to safeguard the collection and custody of AHPETC’s monies, ensure adequate controls over payments, and fully comply with all legal provisions relating to AHPETC’s monies. It concluded that the AHPETC had no proper accounting system resulting in the Town Council’s financial statements failing to “accurately reflect the state of affairs and transactions of AHPETC”. It added that “there can be no assurance that AHPETC’s accounts are accurate and reliable, or that public funds are properly spent, accounted for and managed”. In other words, AHPETC’s financial and accounting processes and systems are unreliable and their accounts, inaccurate.

Members can read the details in the Auditor-General’s Report. Let me highlight four of AGO’s key findings.

The Auditor-General has found that:

(a) AHPETC did not transfer monies to its Sinking Fund as required by law;
(b) AHPETC had inadequate oversight of related party transactions involving ownership interests of key officers;
(c) AHPETC had weak internal controls and systems to monitor payments received and made; and
(d) AHPETC had no system to safeguard important documents or keep proper accounts as required under the law, and failed to provide key information required by its Auditor and the Auditor-General.

As a result of these major lapses, the Auditor-General concluded that there was no assurance that public funds are properly spent, accounted for and managed by AHPETC.

Let me quote relevant sections from the AGO report to elaborate on these findings.

First, the Auditor-General found that “AHPETC had not complied with the Town Councils Financial Rules. It failed to make the required transfers to sinking fund bank accounts”. All TCs are required by law to transfer 30%-35% of their S&CC collections and grants received to their own Sinking Funds. These monies are the TCs’ own savings, for the TCs to replace major infrastructures like lifts and to do major repairs and repainting. The transfers have to be made promptly, to ensure the monies are safeguarded.

The Auditor-General found that more than a year after the end of each financial year, AHPETC still had not transferred the full sums required for their sinking fund. It owed $7.9m for the FY11 sinking fund, and $3.9m for FY12.

In FY12, AHPETC had $86million in its sinking fund. $86million might seem like a lot of money. However, AHPETC has about 1,870 lifts which the TC needs to replace when their operating-life expires. In fact, over the next 10 years alone, it will need to replace 10% of the entire stock of lifts. This will cost $54million, or 60% of the current sinking fund. This leaves only 40% of the current sinking fund for other major repairs and repainting works that also need to be done. Things can only get worse beyond that, because the bulk of the lift replacements – about 90% of the 1,870 lifts – are due after 2025. AHPETC needs to build up its sinking fund. If it continues to miss contributions to its sinking fund, the residents will eventually be living in blocks where lifts are unsafe or unreliable, and other infrastructures often break down.

There is always the temptation, when a TC is financially strapped, to postpone saving, and say it will make up the shortfall later, or worse, to put its hand into the cookie jar, to draw from the savings to satisfy immediate needs. Just spend, use the savings first. Sounds appealing, but the TC will then be simply running down its reserves and mortgaging the future of its residents away. That is why the TCs Act and Financial Rules enforce saving to pay for replacements and major repairs which have to be carried out in future.

Second, the Auditor-General found that “AHPETC did not disclose fully the related party transactions in its financial statements. It also did not adequately manage the conflicts of interests of related parties arising from ownership interests of its key officers”.

The related parties were two companies, FMSS and FMSI, engaged by AHPETC to carry out managing agent services and essential maintenance and lift rescue services. FMSI was a sole proprietorship owned by the Secretary of AHPETC. The directors and shareholders of the other company, FMSS, were the Secretary, General Manager and Deputy General Manager of AHPETC. The Secretary and General Manager of AHPETC are, by the way, husband and wife. The Auditor-General found that “The key officers of AHPETC (i.e. Secretary, General Manager and Deputy General Manager) who had ownership interests in FMSS and at the same time performed a role (for AHPETC) in approving payments to FMSS were in clear conflicts of interests. Hence, it was important for AHPETC to have put in place adequate mitigating controls to manage the conflicts of interests”.

However, AHPETC did not properly oversee transactions with these companies owned by its key officers. The Auditor-General found that before AHPETC entered into contracts with these companies, “there was no documentary evidence that the AHPETC Town Councillors had specifically considered the ownership interests of AHPETC Secretary, General Manager and a Deputy General Manager. These contracts amounted to about $25.9 million in total”.

The Auditor-General also found that “There were control weaknesses, and lack of documentary evidence that payments to the related parties were independently verified so as to ensure that work has been satisfactorily performed and payments were fully justified and correctly computed”. The report cites “instances where the Secretary and General Manager issued payment claims as owner of FMSI and director of FMSS respectively, and subsequently, the same General Manager certified these payment claims and approved the payment vouchers in her capacity as an officer of AHPETC”. In other words, it is very convenient. The husband issued the payment voucher, the wife approved the payment and the wife also co-signed the cheque and it is all in the family.

The Auditor-General concluded that “Taken in totality, AHPETC did not adequately manage the conflicts of interest involved in related party transactions”. This means that AHPETC may not have obtained the best value for the moneys paid to these related parties. Or worse, there could be opportunities of wrong-doing or unethical practices which AHPETC may not be able to detect or prevent.

Compounding this risk, the Auditor-General found “lapses in internal controls, which exposed AHPETC to the risk of loss of monies, or valuables, commitment to expenditure without requisite approval as well as wrong payments for goods and services”. The AGO report contained many examples of such lapses, including instances of a lack of segregation of duties within the payment process for many invoices to third party vendors. For example, “the General Manager of AHPETC certified work done as well as approved the payment vouchers and cheques”, to external vendors. This was in addition to the lapses in payment to the related parties owned by the key officers that I mentioned earlier.

TCs award millions of dollars of contracts each year. Residents and taxpayers need to know that their monies are properly spent and they are getting best value for money. When these contracts are awarded to parties related to the TC, the TC needs to be upfront with its residents as well as with taxpayers at large, so that there is transparency and proper scrutiny. In total, AHPETC has close to $27million worth of contracts with its two related parties, FMSS and FMSI. Of these, close to $6million was given without tender.

Third, the Auditor-General observed that AHPETC did not have a system to monitor the scale of its S&CC arrears accurately. “The statistics on arrears that AHPETC submitted to MND as well as AHPETC’s Finance and Investment Committee were unreliable”. As a result, the Auditor-General concluded that “there is no assurance that AHPETC is able to monitor and manage its (S&CC) arrears properly or present an accurate picture of arrears in its financial statements”.

Each year, AHPETC collects about $37million in S&CC from residents and tenants, and receives another $7million in grants from government. The TC also manages a reserve of about $90million, accumulated from residents’ monies and government grants over the last 25 years. Without a proper accounting system, the TC cannot accurately ascertain how much of the arrears is recoverable. This means that the TC’s financial position, as reported in its annual financial statement, may in fact be overstated. If so, the TC may actually get into financial difficulties without realising it. There is also no assurance that government grants, which are taxpayers’ monies disbursed to the TC, are being safeguarded and channelled to the purpose for which they are given. And most fundamental of all, there is no safeguard against potential mischief and loss of public monies.

Fourth, the Auditor-General reported that AHPETC had no proper system to safeguard important documents, and had weak accounting procedures. It did not provide key information required by its Auditor and the Auditor-General. Without access to proper records, the Auditor-General, like the TC’s own auditors, was unable to make a proper assessment of the TC’s financial situation. As a result, the Auditor-General concluded that “there can be no assurance that AHPETC’s accounts are accurate and reliable”.

Now, a key plank of TCs’ accountability towards their residents is via their financial accounts, which have to be audited annually by an independent Auditor and tabled to Parliament. AHPETC’s failure to provide information to its Auditor and the Auditor-General has completely undermined the system of accountability. While the TC framework is designed to give TCs maximum autonomy in their operations, it demands in turn that TCs account for their actions through proper accounting, governance and disclosure. AHPETC’s repeated failure to do so shows a disregard for its obligation to account to its residents; and also disregard for this Parliament of which the AHPETC’s Chairman, Vice-Chairmen and their fellow MPs have solemnly sworn to serve in.

As the accounts are unreliable, we do not know the exact state of AHPETC’s financial position. Based on their published reports, AHPETC’s financial position has deteriorated sharply, since Aljunied TC was merged with Hougang TC in 2011. The audited FY10 financial accounts at Aljunied TC had reported an operating surplus of $3.3 million. By FY12, the merged TC had incurred a $734,000 operating deficit. A TC runs a surplus if its income exceeds expenditure for that year; conversely, it runs a deficit if its expenditure exceeds income. In FY10, the Aljunied TC’s expenditure was less than its income and hence the TC had a surplus. But in FY12, AHPETC’s expenditure had exceeded its income, resulting in a deficit. In two years, AHPETC’s income rose 14% as its population base had increased, but its expenditure had shot up disproportionately by 30%.

The deterioration of AHPETC’s financial position was in part due to Aljunied absorbing Hougang and its bad finances (in FY10, before merging with Aljunied, Hougang TC had an operating deficit of $92,000). It was also partly due to the abnormally large fees it paid to its Managing Agent, the FMSS, which was fully owned by the key officers of AHPETC.

Serious Findings of Auditor-General

The Auditor-General’s findings confirm that something is seriously wrong at the AHPETC. They paint a picture of financial mismanagement, incompetence and negligence in corporate governance.

If an auditor makes such a finding on a listed company, it will immediately cause consternation among the shareholders, and a call for the removal of the CEO and the Board of Directors. In Japan, the president or CEO will call a press conference and take a deep bow; in the good old days, they may even commit hara-kiri. Where there are breaches of the Companies Act, both the company as well as the individuals responsible could be charged, and if found guilty, punished with fines and/or jail terms for the individuals.

Even for charities, if their auditor makes such a damning finding, the Commissioner of Charities will haul up the Governing Board and key officers for a full inquiry. They will be suspended and eventually removed from their duties. If the findings are borne out, they can also be charged and punished for any breaches of the Charities Act.

TCs are not regulated under the Companies Act or the Charities Act. As I explained in this House in May 2013, Parliament decided in 1989, to give elected Members of Parliament (MPs) more authority and responsibility over the HDB estates in their constituencies, in order to strengthen the nexus between the residents and their elected MPs. The strategic intent was to bring home to the MPs that how they manage and run their TC will affect their electoral fortunes at the next election, and to voters that the MPs they elect will be responsible for looking after their housing estates. This would enhance accountability, push MPs to focus on what mattered to the residents, and in turn, encourage voters to scrutinise more closely the capabilities and track record of election candidates. That is why the TCs Act deliberately takes a light touch approach to regulation and enforcement.

Accountability and Responsibility

However, light touch does not mean that the MPs and the Councillors running the TC bear no responsibility and need not be held to account if the TC fails to perform. By law, the MPs and Councillors are ultimately responsible for everything in the TC. They cannot simply delegate their responsibility away to the Managing Agent or any others. 

Unfortunately, throughout this saga, we have found the MPs running the AHPETC to be evasive, unresponsive and misleading. In response to legitimate queries from auditors, my MND officials, and their own residents and the media, they stone-walled, deflected the queries, made false or dishonest claims, raised irrelevant excuses and sought to confuse the public with a flurry of red-herrings.

AHPETC’s Pattern of Behaviour

Let me give four illustrations.

First, their lack of transparency – they failed to disclose things on time; they failed to submit reports they should be submitting. Every time we reminded them, again and again, they came up with yet another excuse.

AHPETC’s FY2011 and FY2012 financial statements were late, and its FY2013 statements are still outstanding. AHPETC’s S&CC arrears reports have been outstanding for nearly 2 years.

Financial incompetence aside, failure to carry out critical cyclical maintenance work is an even graver safety concern. For instance, even AHPETC’s FY2013 cyclical maintenance works report which informs MND of any delays in replacing major infrastructure, was late for more than 6 months, incomplete and inaccurate. This is serious as it potentially impacts on public health and safety. For instance, we expect lifts to be replaced after 28 years. If the TC prolongs the replacement of a lift beyond its recommended operating-life, we require the TC to disclose it, and declare that it remains in serviceable condition and has been duly certified by qualified personnel. But AHPETC does not seem to be exercised over such reporting. Each time MND officers update me on their TCs’ submissions, it reads: “AHPETC still outstanding”. Why this lack of transparency? Why are reports from AHPETC always outstanding?

Second, the TC appointed a related party, FMSS, as its Managing Agent. As I said earlier, the owners of FMSS are Mr Danny Loh, who became the TC’s Secretary, and Ms How Weng Fan, Mr Loh’s wife, who became the TC’s General Manager. There were occasions where Ms How certified work done, approved the payment voucher and approved the cheque from the TC to her own company. The Auditor-General has found insufficient disclosure of the related party transactions in AHPETC’s financial statements, and lack of evidence of safeguards to manage the conflicts of interests of related parties arising from the ownership interests of its key officers. Why did AHPETC not disclose these related party transactions and take steps to prevent the risk of abuse when the companies it gave contracts to were owned by its key officers?

Third, FMSS was paid abnormally high fees. It was paid 20% more than the previous Managing Agent that ran Aljunied, 50% more than a comparable TC, and more than any other TC. Why? When asked, the TC explained publicly that the higher rates included services which used to be contracted out, such as IT administration and maintenance, resulting in savings for the TCs. Sounds like fair enough. But is it true? In December 2012, in response to MND, the TC said “it had moved on to upscale and develop the Financial System which was in use at the former Hougang SMC”. So it is not true. And what exactly is the capability of this “up-scaled and developed Financial System”? Apparently, it could not even track and make simple monthly arrears reports. To produce the reports, the TC told MND that they would require “manual counting and sorting”.

Fourth, their failure to deal expeditiously with problems – S&CC arrears being a prime example. Throughout this sad saga, what are the MPs of AHPETC doing? I do not expect them to take over the job of their Managing Agent, but I do expect them to exercise close supervision, and when problems arise or issues are highlighted, to step up, take responsibility, to look into them quickly and address them squarely. This is the accountability that we expect of all elected MPs, or for that matter, any company director, or any member of the governing board of a charity. Instead, what we have consistently gotten from the MPs of AHPETC is side-stepping and avoiding responsibility - first “no response”, then “in due course”, and then followed by a series of excuses, blaming everybody else for their failure to perform. Finally, last month, AHPETC declared that they had “embarked on a roadmap to enhance its aggregated arrears reporting module sometime in November 2014”. This is their response to a problem in June 2013, 17 months earlier! It is simply astounding.

MND’s Follow-Up

Clearly, this state of affairs is unacceptable. MND will follow up in three ways.

(a) AHPETC to remedy the problems

First, MND expects AHPETC to follow up and remedy the problems and weaknesses listed in the AGO Report. It is already too late for AHPETC to submit their FY2013 financial reports on time. But MND expects them to submit an unqualified set of their FY2013 financial statements to MND by 30 Jun this year, and FY2014 financial reports by 31 Aug this year. These must be tabled to Parliament, just like the financial reports from all the other TCs.

MND further expects AHPETC to deal decisively with the gross incompetence of its MA. Please do something for the sake of your residents. There has been overpayment and public funds have been affected. Will the TC be suing the FMSS for return of money lost? Meanwhile, MND is studying what other legal recourse any aggrieved parties may have.

(b) MND to suspend the S&CC Grants

Second, because of these serious problems, MND has withheld this year, FY2014 S&CC grant from the AHPETC. The money has been put aside in a separate deposit account, and will be paid out after the problems are fixed.

MND is mindful that the suspension does not unwittingly result in the TC not being able to pay its essential services, leading to hardship for the local residents. In fact, we are prepared to consider paying out the S&CC grants, in full, or at least in half, if AHPETC could assure MND that the grants will be properly channelled to the purpose for which they are given. MND has asked AHPETC what measures they could institute to ensure this. AHPETC has not yet taken up MND’s offer. On Nov 12, 2014, Ms Sylvia Lim replied MND to say that they are assessing the situation and they will reply should they wish to take the option of the half-grant. We are concerned but we have not heard from her since then. Anyway, the earlier the AHPETC cleans up the mess, the earlier we could resume payment of the S&CC grants. So the ball is in the TC’s court.

(c) MND to amend the TCs Act

Third, MND will address the weaknesses in the current TC regulatory framework. We can no longer take the light touch and assume that all MPs running TCs will be responsible. We will amend the TCs Act to ensure that the town councillors, including the elected MPs, carry out their duties and if they don’t, to institute a proper system of enforcement and penalties.

Regardless of which party is running the TC, there is a need to ensure proper systems, accountability and governance, to safeguard residents’ interests. The Companies Act regulates companies closely. Boards of Directors are held to a high standard of fiduciary duties. The TCs Act has not and may not need to follow the Companies Act in full. But the basic need for accountability and good corporate governance must be followed and the legislative provisions strengthened as in the Companies Act.

After the COS this year, MND will table a Bill to amend the TCs Act to tighten the current legislative framework, so as to better protect the public interest. SMS Lee Yi Shyan has been working on this and will take the Bill through Parliament. But let me set out briefly three key areas which the amended TCs Act will address: 

(a) At the fundamental level, we will make clear that TCs are subordinate to and must comply with the authority of public law and of Government agencies charged with enforcing the law. While TCs are statutorily vested with the function and duty to manage and maintain common property, they do not own the common property and their powers are not unfettered.

We have assumed that all TCs will follow this fundamental principle without needing to spell it out explicitly. But sadly, AHPETC has proven us wrong. For example, we require all TCs to focus on their primary mission which is to maintain the common areas under their care. TCs are not set up like for-profit companies to make money. TCs should break-even with revenue from the S&CC collections and Government grants. For example, it is not their business to organise and operate trade fairs which compete with existing HDB shops as that would be unfair to the shops. That is why there are clear rules against such a practice. However, AHPETC has refused to comply with such rules, despite repeated reminders from MND and other Government agencies.

(b) We will strengthen TCs’ corporate governance and financial accountability, to ensure that TCs plan and use their finances in a sustainable way. This will take reference from best practices in companies and other organisations, and include spelling out the duties and responsibilities of the town councillors and elected MPs, and the penalties if they fail to perform those duties.

(c) We will strengthen MND’s regulatory oversight with powers to collect information and conduct investigations, and a stronger penalty framework. Currently, the TCs Act does not provide MND with any levers to cause TCs to comply, except for offence provisions in three narrow areas. MND also lacks the powers to investigate irregularities or non-compliance with the TCs Act, as it does not have the expressed authority to require TCs to submit any information beyond the annual financial statements. So far MND has been relying on moral suasion and TCs’ self-declarations. For effective governance and regulatory oversight, MND requires powers to collect information and conduct investigations. This also has to be coupled with a stronger penalty framework, to enable the Government to take errant TCs to task for non-compliance.

Conclusion

Madam Speaker, how TCs perform matter. How our public housing estates are managed impacts public health, public safety, and the quality of life for millions of Singaporeans, and the value of their flats.

TCs need competent, honest people and proper systems to serve their residents well. Good intentions and bland assurances alone are not sufficient. Elected MPs need to supervise the work of their TCs and their Managing Agents. While they enjoy wide autonomy, they also have huge responsibility. And they are accountable to their residents. They have statutory duties but they are also subject to national laws.

Running a TC requires elected MPs to govern, not just politick. Compared to the sound and fury of politicking, governing is long, tedious and unglamorous work. But good government is what secures a good life for Singaporeans, on a long-term, sustainable basis. Conversely, neglect of government ultimately compromises residents’ well-being. It may not show up immediately, but it will eventually. Meanwhile, where serious problems have been identified, MND has to intervene to require the TC to remedy them.

Madam Speaker, beyond ensuring that our HDB estates are well run, the TCs Act has a wider strategic objective: to ensure that any party aspiring to form the national government of Singapore first shows that it can run a Town Council competently. This aim remains sound. That is why despite the problems that the AHPETC has run into, we do not propose taking back the TCs’ powers and having HDB run everything again, like before. Instead, we will strengthen the TC framework to remedy the weaknesses in it, so that elected MPs have to perform and be held more tightly to account in running their TCs and towns.

Madam, I do not relish making this statement. Parliament should be about accountability and responsibility. Sadly, the Auditor-General’s Report has found the lack of accountability and failure to take responsibility on the part of AHPETC Chairman and her Councillors. I hope they will act speedily to remedy the problems.

Madam Speaker, I beg to move.