Enforcement on Audit Firms and Individual Auditors

The AOB utilises a diverse range of enforcement tools and powers to achieve its desired outcome. The AOB may impose administrative actions on auditors for various misconducts as follows:

Types of Actions Imposed

Directive to comply

Public reprimand

Remedy the breach according to directive of AOB

Undertake relevant professional education

Assign reviewer to oversee audit

Prohibitions from auditing and accepting PIEs and schedule funds as audit clients

Monetary penalties

Section 31Z of the SCMA

Revoke, withdraw or suspend the registration or recognition of auditors

Section 31Q of the SCMA

In imposing the above actions, the AOB applies the principle of proportionality in determining the appropriate enforcement sanction(s). To ensure that the sanctions imposed serve as an effective deterrence, the AOB takes into account the following considerations:

The AOB's Enforcement Actions Considerations

Nature and seriousness of the breach

Conduct of the auditors

Potential and actual impact to the capital market

Mitigating factors including any action taken by the auditors to remedy the breaches identified

In 2021, the AOB took five enforcement actions, as shown in Figure 5. The AOB revoked the registration of an audit partner and imposed a monetary penalty of RM400,000 on an audit firm for failing to comply with the relevant ethical standards relating to the auditors’ independence. The audit firm is also prohibited from accepting and auditing any PIE or schedule fund for a period of 12 months.

Both the audit partner and audit firm were found to have breached Section R601.6 of the Malaysian Institute of Accountants (MIA) By-Laws for providing prohibited services to its audit clients. The AOB views this non-compliance of ethical standards as a serious offence as it undermines the auditor’s independence and poses a self-review threat. Both the audit partner and audit firm were found to have breached Section R601.6 of the Malaysian Institute of Accountants (MIA) By-Laws for providing prohibited services to its audit clients. The AOB views this non-compliance of ethical standards as a serious offence as it undermines the auditor’s independence and poses a self-review threat.

FIGURE 5: ENFORCEMENT ACTIONS TAKEN IN 2021

Revocation of Registration

Prohibitions +
Monetary Penalties

Monetary Penalty

Reprimand

In addition, the AOB also imposed a monetary penalty of RM150,000 and RM50,000 on the same audit firm and its audit partner respectively for breaching the relevant requirements of the International Standards on Auditing (ISA). A prohibition for a period of 12 months was also imposed on the audit firm. The severity of the enforcement action reflected the gravity of the offence, and serves as a strong reminder to auditors to ensure compliance with the ISA and other regulatory requirements at all times.

The AOB is mindful that, to have the necessary impact and deterrent effect, the enforcement proceedings must be completed in a timely manner. The number of outstanding cases as at 31 December 2021 is shown in Table 3. Details on the movement of enforcement cases since 2017 are shown in Table 4.

TABLE 3: NUMBER OF OUTSTANDING CASES AS AT 31 DECEMBER 2021

Cases brought forward from 2020

Add: New cases referred to Enforcement in 2021

Less: Cases completed in 2021

(3)

Outstanding cases @ 31/12/2021

TABLE 4: NUMBER OF CASES COMPLETED SINCE 2017

Year

No. of referrals for enforcement proceedings

No. of cases completed prior to 2021

No. of cases completed in 2021

No. of outstanding cases as at 31 December 2021

2017

2018

2019

2020

2021

TOTAL

AOB’s Enforcement Observations
Auditing standards stress the importance of audit evidence, where the auditor is required to prepare, on a timely basis, work papers that support the audit work performed and the conclusions reached.

However, in many instances, the AOB observed that the audit procedures and the audit evidence in the audit file are either non-existent, incomplete, or inadequate. Figure 6 depicts the observations with respect to enforcement in 2021.
FIGURE 6: THE AOB’S OBSERVATIONS OF 2021 ENFORCEMENT ACTIONS
Auditor’s independence
Lack of will to say ‘No’ or inability to reject client’s request for non-audit work which are prohibitive in nature based on By-Laws (On Professional Ethics, Conduct and Practice) of the MIA.
Audit evidence
Non-existent, incomplete, or inadequate documentation in the audit file to support the audit procedures performed, assumptions made, and conclusions reached.
Going Concern
Failure to assess the reasonableness and appropriateness of the assumptions made.
Failure to challenge the viability of the proposed funding / projects and its likelihood of success.
Failure to perform quantitative assessment on the company’s financial position (liquidity test or ratios assessment) based on the assumptions made.
Asset Impairment
Lack of understanding and knowledge on the relevant accounting and auditing standards.
Failure to challenge the assumptions and assessment made by management.
Insufficient audit procedures performed to ensure the reliability of the underlying data and the reasonableness of the assumptions made in cash flow projections.
Securing Judicial Precedents
In 2021, the SC was involved in three ongoing judicial reviews against the enforcement actions imposed by the AOB. These judicial reviews involved challenges to the AOB’s powers in enforcing its rules and regulations and the manner in which the AOB conducted its enforcement proceedings. In all the judicial review applications, the SC obtained favourable results, which further reinforced the robustness of the AOB’s enforcement framework and its processes.
JUDICIAL REVIEW APPLICATIONS AGAINST THE AOB’S ENFORCEMENT DECISIONS AS AT 31 DECEMBER 2021
Judicial Review
Brief description
Outcomes
Between Afrizan Tarmili Khairul Azhar (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.
The Court of Appeal (COA) had on 10 December 2021, ruled in favour of the SC and set aside the High Court’s decision on 10 August 2020 to quash the sanctions imposed against AFTAAS and its partners.
On 31 December 2021, AFTAAS and its partners applied to the COA for a stay of execution of the sanctions imposed until the disposal of their leave application to appeal against the COA’s decision dated 10 December 2021 to the Federal Court.
Between RSL PLT and two of its partners and the SC
Challenges against the AOB’s powers and the manner in which the AOB conducts its enforcement proceedings.
The High Court had on 26 October 2021, dismissed RSL’s judicial review application against the SC.
Between Andrew Heng and the SC
Challenges against the AOB’s powers and the manner in which the AOB conducts its enforcement proceedings.
On 28 October 2021, the COA had ruled in favour of the SC and dismissed Andrew Heng’s appeal against the High Court’s decision on 25 August 2020, dismissing his judicial review application to inter alia set aside/quash the AOB’s decision and the SC’s appeal decision.
Read more on the update of the judicial reviews