The AOB continued to focus its efforts in taking enforcement actions that instil good behaviour and achieve high level of compliance among the AOB’s registrants.
The desired outcomes that the AOB intends to achieve include:
Proportionality of enforcement action
In determining the type of actions to be imposed, the AOB ensures that enforcement actions are commensurate
with the nature and severity of the breach. The AOB would impose stricter actions in cases of multiple instances of
failures to perform audit procedures. Other considerations include the conduct of the auditors, previous regulatory
record and impact on the capital market.
Nature and severity of
breach
Conduct of the
auditors
Previous regulatory
record
Impact on the capital
market
Enforcement proceedings typically involved long gestation periods before the matter is concluded. The AOB is mindful that for its enforcement actions to be an effective deterrence and mitigate the risk to the capital market, enforcement proceedings need to be completed in a timely manner.
The AOB recognises and considers the auditors efforts in mitigating any non-compliances of the relevant standards which contribute to an early and more timely resolution of the matter. In this aspect, the AOB takes into account the level of co-operation provided by the auditors which include providing a prompt response to the AOB’s requests for information, voluntarily providing information to assist the inspection/enforcement team and self-reporting of any non-compliances. In addition, the AOB favourably views the proactiveness of the auditors in taking actions to remediate, limit and mitigate potential and actual cases of non-compliance.
ENFORCEMENT ACTIONS IN 2022
Sanctions imposed
In 2022, the AOB took six enforcement actions, as shown in Figure 1. The AOB prohibited five audit partners and one audit firm from auditing and accepting PIEs and schedule funds as audit clients for one year. In addition to the prohibition, the AOB also imposed monetary fines on the audit partners and audit firm totalling RM383,500.
Three of the audit partners were sanctioned for failure to comply with the relevant ISA when performing audit of a PIE as the engagement partner. Meanwhile, two other audit partners were sanctioned for failure to perform their role as the Engagement Quality Control Reviewer (EQCR). The AOB views this seriously and reiterates the crucial role of the EQCR in safeguarding the integrity of audit quality and control process.
The audit firm was sanctioned for failure to comply with the relevant requirements of International Standards on Quality Control 1 (ISQC 1). In particular, the firm had failed to ensure that its quality control monitoring system operated effectively, resulting in its failure to detect the audit deficiencies found in the audits of the PIE clients.
The AOB wants to stress the importance of the audit firm’s quality control systems and practices and its compliance with the requirements of ISQC 1. The AOB would not hesitate to take actions against the firm for any weaknesses in the quality control systems and non-compliances to the ISQC 1 and the International Standard on Quality Management 1 (ISQM 1) (from 15 December 2022 onwards).
The AOB’s actions against the auditors were taken after the due process accorded to them, including the opportunity for them to appeal to the SC against the AOB’s decisions.
Read more on the AOB’s enforcement actions https://www.sc.com.my/aob/aobs-sanctions
Cases under inquiry and concluded
The number of outstanding cases as at 31 December 2022 is shown in Table 3. Details on the movement of enforcement cases since 2018 are shown in Table 4.
TABLE 3
TABLE 4
Number of cases completed since 2018
Auditors aggrieved with the AOB’s decision can appeal to the SC, and if not satisfied, they may have legal recourse. In 2022, the SC was involved in three judicial reviews brought by audit firm, Afrizan Tarmili Khairul Azhar (AFTAAS) and its audit partners. These judicial reviews involved challenges to the AOB’s powers in enforcing its rules and regulations and the manner in which the AB conducted its enforcement proceedings.
In a landmark decision, the Federal Court, on 17 August 2022, unanimously ruled in favour of the SC and dismissed the application for leave to appeal by AFTAAS and three of its partners against the AOB’s decisions to impose enforcement sanctions against the audit firm and its partners. The Federal Court’s decision reflects the seriousness of the breaches and reinforces the robustness of the AOB’s enforcement framework.
The SC also obtained favourable decisions in the High Court in two other judicial review applications brought by AFTAAS and its partner. The High Court had struck out the judicial review application to challenge the effective date of the prohibition imposed on AFTAAS and its partners on 29 June 2022.
In another judicial review application brought by AFTAAS’s partner against the AOB’s imposition of addition criteria of registration, the High Court again ruled in favour of the SC and dismissed the judicial review application. AFTAAS’s partner has since appealed to the Court of Appeal against the High Court’s decision.
Judicial review applications against the AOB’s decisions as at 31 December 2022
Between AFTAAS and three of its partners and
the SC
Challenges against the AOB’s powers and the manner in which the AOB conducts its
enforcement proceedings.
Outcomes
Between AFTAAS and its partner and the SC
Challenges against the AOB’s notification to AFTAAS and its partners on the effective date
of prohibition.
Between Datuk Mohd Afrizan Husain and the SC
Challenges against the AOB’s Criteria for Registration.
