Opening remarks by
Nik Mohd Hasyudeen Yusoff
Executive Chairman of the Audit Oversight Board
Securities Commission Malaysia
on The Regulator’s Perspective on Audit Regulation – The Malaysian Experience
Public Accountants Conference 2011
26 July 2011, Singapore.
Ladies and Gentlemen,
I would like to record my appreciation to the Accounting and Corporate Regulatory Authority (ACRA) for providing me with this opportunity to address the participants of this forum on the topic “The Regulator’s Perspective on Audit Regulation – The Malaysian Experience”. The fact that this issue is discussed at this conference reflects the more visible role played by audit regulators around the world in promoting audit quality and enhancing market confidence in audited financial statements.
Developments in independent audit regulation
Since the establishment of the International Forum of Independent Audit Regulators (IFIAR) in 2006, its membership now stands at 38 and growing. Through IFIAR, audit regulators from around the world engage global accounting firms, standard setters and investors. It is also a platform for audit regulators to share information and experience which would be used in driving audit quality in their respective jurisdictions. Given such wide activities, the influence of independent audit regulators will continue to shape the auditing industry globally going forward.
Given the globalised nature of the present business, the financial results that are consolidated and reported in a particular country could consist of financial results of the business operations in many other parts of the world. From this perspective, it would be natural for audit regulators to cooperate and eventually rely on their peers in different jurisdictions. This trend could be observed in Europe and I am happy to share that independent audit regulators in Asean are also moving in similar direction.
Short overview of the Audit Oversight Board, Malaysia
The Audit Oversight Board, Malaysia, (AOB) commenced its operation on 1 April 2010. Our mission is to foster high quality independent auditing to promote confidence in the quality and reliability of audited financial statement of public interest entities in Malaysia. We were accepted to be a member of IFIAR in September 2010.
Last year, the AOB inspected 6 major audit firms which audited 73% of the public interest entities (PIE). The public listed companies audited by these firms constituted 93% of the market capitalisation of Bursa Malaysia as at 31 December 2010. While the auditing framework in Malaysia is in line with global best practices where all international standards have been adopted; and firms generally have put in place quality control frameworks which are in line with the standards, the challenge remains at the performance of the audit work where we noted a number of areas for improvements.
While I acknowledge that there are a number of global initiatives presently being pursued on matters relating to audit quality and auditor’s reporting, let me share with you four key issues which I consider critical. They are:
- The role of the leadership of audit firms in driving audit quality
- Professional scepticism and professional judgment
- Competition in the audit market and its influence over audit quality
- The continued importance of the accounting profession in shaping the tone for quality
The role of the leadership of audit firms in driving audit quality
Leadership, in any form of organisations, shapes its strategic direction, decides on the allocation of resources, nurtures values and ethics and appraises performance. Given such roles, the quality of the audit work performed by engagement partners and staff is influenced and driven by the tone set at the top of audit firms.
If the strategy adopted is to increase market share through securing more audit engagements, the firm should ensure that it has enough experience and competent people to handle the increase in workload. Otherwise, audit quality may suffer as partners and staffs have to juggle their limited time to attend to additional number of audit engagements. Coupled with more complex accounting standards as well as auditing standards which demand more thinking audit, business expansion without proper plan to mitigate additional risks that come together with it may not be the best interest of the firm on the long term.
Professional values and ethics form the core essence of the accountancy profession. How leadership of firms position values and ethics in their practices would also influence and shape audit quality. For example, independence is the core values which could be compromised by audit firms. In pursuing business growth, firms may be pressured to provide additional services, including to existing audit clients, in the ways that are permissible by the code of ethics. How this is managed will subtly convey the message to partners and team members on how much values and ethics are respected and appreciated by the firm. This signal would then influence the behaviour of the partners and staff when performing their audit work.
The AOB takes the view that quality should be a significant consideration in performance evaluation. Preaching about quality will only go so far, linking quality to bonuses and rewards is a clear signal that firms take quality of their work seriously. We noted that firms in Malaysia use a number of approaches in this area and we trust that further enhancement would be made in the near future to reinforce their seriousness about audit quality.
Professional scepticism and professional judgment
The issue of whether auditors had exercise sufficient professional scepticism in arriving at their professional judgments are highlighted in many inspection reports of independent audit regulators. We noted in the following instances which suggest the need for auditors to enhance professional scepticism in arriving at their conclusions:
- Management representations (both verbal and written) were not sufficiently verified or challenged;
- Insufficient audit procedures to analyse, understand and evaluate inconsistencies arising from audit evidence obtained;
- Insufficient audit procedures performed to assess the appropriateness of going concern assumption despite the existence of indicators of going concern issues; and
- Inadequate evidence of challenge on assumptions and key estimates used by management, for example usage of growth rates which are higher than historical record.
The importance of professional scepticism is aptly explained in the discussion paper on professional scepticism issued by the Audit Practices Board of the Financial Reporting Council in the United Kingdom where the board argues “auditing standards define professional scepticism as an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence’. This definition suggests that scepticism influences the scope of the work, helps the auditor evaluate audit findings and ultimately conclude whether sufficient appropriate audit evidence has been obtained to enable a ‘true and fair view’ opinion to be expressed on an entity’s financial statements.
Having better understanding of complex business models would certainly enable auditors to identify and focus on key risk areas which could be susceptible to fraud and error. The reliance on technology by enterprises enables trade to be offer on a 24/7 supported by operational teams across borders as well. Unless audit firms review and update their audit methodology on a continuous basis, the risk of having gaps in their audit work would also increase. As financial reporting presently involves information outside of the traditional general ledger system such as assumptions, basis of judgment, risk related information and other disclosures; firms should consider developing new competencies and approaches to address these emerging challenges.
It would also be helpful if firms have enough experience team members and work on a reasonable audit timelines to match with the workload, especially during peak periods. This could be in addition to having robust education and training programmes and effective mentoring by partners and senior team members in nurturing professional scepticism among the audit team members.
Competition in the audit market and its influence over audit quality
The auditing industry in Malaysia is a fairly matured industry featured with a small number of large firms dominating the PIE market and a large number of smaller firms auditing having a smaller share of the market. This is not much different from most markets around the world.
Notwithstanding the concentration at the top end of the market, the level of competition in the industry is fairly intense which resulted in fee pressure being experienced across the board. We have concern that firms would scope their audit work relative to the fees paid, which may not allow high quality audit to be performed.
On the other hand, the demand for talents is as intense as well. This is compounded by the fact that many other economies within the region are having similar challenge and have been sourcing their talents from Malaysia.
In respect of fees, we have reminded the firms to price their work appropriately in line with the risks that they assume as auditors. We have also engaged the PIE, especially audit committees, on this subject and encouraged them to consider the risks to the company if the fees paid are not adequate for high quality audit to be performed.
While there may be no short term solutions to address the issue of talents, the AOB have been engaging professional accountancy bodies and institutions of higher learning to identify measures that could be put in place to ensure adequate supply of talents into the market. Firms should also offer conducive working environment and better work-life balance as ways to retain talent.
The continued importance of the accounting profession in shaping the tone for quality
The establishment of independent audit oversight structure does not, in any way, dilute the role of the accountancy profession in promoting audit quality. In fact, from the AOB’s perspective, professional accountancy bodies should continue to set the tone for quality through the development, adoption and enforcement of high quality professional standards. The higher the respect accorded by the society towards the accountancy profession, the perception on the value of work performed would be higher as well. A respected accountancy profession would certain benefit its membership in many ways including the ability to shape market practices and influence strategic decisions.
However, such respect is only attainable through the demonstration of efforts such as undertaking actions in addressing concerns which may exist in the market and disciplining members who failed to maintain appropriate professional behaviours. Additional initiatives in ensuring the continued supply of competent and ethical accountants will further strengthen such respect. In the Malaysian context, this is also in line with the Capital Market Masterplan 2 which envisages further strengthening of gatekeepers’ accountability, accountants and auditors included, to further strengthen corporate governance in Malaysia.
The AOB adopts an open approach in working with the accountancy profession as we believe the financial reporting ecosystem would be better served if all the components of the ecosystem are supportive of each other towards the common goals of enhancing market confidence and providing investors protection.
In conclusion, I would like to suggest that the enhancement of confidence in the quality and reliability of audited financial statement of public interest entities could only be achieved if all elements in the financial reporting ecosystem operate effectively in harmony with each other.
Independent audit regulators would continue to play their roles, not only to oversee auditors but also engage other stakeholders in addressing emerging challengers which could influence financial reporting and audit quality.
Thank you for your attention.