Friday 29 Mar 2024
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This article first appeared in Corporate, The Edge Malaysia Weekly, on May 30 - June 5, 2016.

THE Enron, WorldCom, Parmalat and Tyco accounting scandals that broke in the early 2000s spawned a new wave of whistleblowers and unearthed deficiencies in the audits of public companies. Since then, many countries have established audit oversight mechanisms, including audit oversight boards to oversee auditors of public companies, periodic inspections and setting auditing standards.

On its part, Malaysia came up with the Audit Oversight Board (AOB) on April 1, 2010, in the wake of local accounting scandals at companies such as Transmile Group Bhd, which was labelled the “Malaysian mini Enron”, and Megan Media Holdings Bhd in 2007, and loss of public confidence in the quality of audit reporting.

However, questions have been raised about whether it was necessary to set up the board in what seems to be an already highly regulated area. 

While it is undeniable that regulations are necessary for a group of professionals that authenticates financial reports often used in decision-making, over-regulation can stifle its growth.

Unsurprisingly, views on the regulatory body are divided. Some lament that the AOB has been too punitive on audit firms, while others praise it for keeping them on their toes.

The Edge spoke with audit partners who believe that the AOB has been effective in meeting its objectives, bringing positive changes to the industry. 

Datuk Rauf Rashid, managing partner and Asean Assurance leader of Ernst & Young Malaysia, shares that the AOB’s existence has sent a clear message to auditors and also preparers of financial statements on the importance of professionalism.

“Auditors are now regularly reminded of the need to align their function with the AOB’s mission, which is to foster high-quality independent auditing. It is important to understand that the AOB is not just an enforcement agency.

“It also helps provide support and guidance to audit firms in improving their quality-control policies, procedures and systems. As a result, we have seen a significant improvement in audit practices and compliance since the AOB was established,” explains Rauf. 

PwC Malaysia Assurance leader Pauline Ho concurs. She says this can be seen in the changes in audit opinions, audit team composition and audit procedures as well as restatement of financial statements, which was directly or indirectly caused by the AOB’s inspection of 12 audit firms and 35 individual auditors in 2015.

“Through the PwC global network’s interactions with regulators, we have found that the AOB appears to be one of the more progressive regulators globally, one which listens closely to the concerns of the profession,” adds Ho.

Besides that, she says, the AOB has kept audit firms vigilant. In 2015, for the first time, the AOB took action, deregistering an audit firm and its managing partner. 

However, some auditors think that some companies that intentionally understated or overstated their accounts have got off scot-free, while the auditors are the ones who suffer for not following certain audit procedures. 

“Does reprimanding the audit firms really help? I think the AOB may be sending the wrong message to the public. Whenever something goes wrong with a company, the auditor gets the blame first. With AOB publicly reprimanding audit firms, it kind of confirms the public perception that fraud is caused by the auditors, which is definitely not the case,” says a visibly upset audit partner who declines to be named.

PwC’s Ho thinks that reprimands and punitive actions do play a role. However, internal culture shaped by a strong tone at the top that focuses on audit quality is more important. “I believe that there should be recognition for audit quality where demonstrated, so that there is a more balanced view of the profession. It is important to note that audit quality is not the sole responsibility of AOB and the auditors. All parties in the financial reporting ecosystem and regulators need to play their roles effectively to ensure that the quality of financial reporting and auditing is enhanced,” she says.

Rauf opines that the AOB has been proactive in reaching out to various parties in the financial reporting ecosystem for feedback and hopes to see continuous engagement with all stakeholders in order to better understand the challenges faced by the industry.

“The AOB is in a privileged position to have an overview of the various issues and challenges faced by the industry and profession, from the large international auditing firms to the smaller and medium-sized ones. Perhaps it could extend its role further by providing benchmarking or guidance on addressing common issues faced by the auditing firms; and by creating a forum for the sharing of best practices,” he suggests.

He adds that the AOB could also consider issuing periodic alerts to the auditing profession and highlighting emerging or notable circumstances that may affect how auditors conduct their audit under the existing requirements and relevant laws.

 

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