Opening Speech


Mr Goh Ching Yin

Executive Director,
Securities Commission Malaysia

at the

Seminar on the Audit Oversight Board and Ethical Dimensions

Wednesday, 3 March 2010

Securities Commission Malaysia

YBhg. Tan Sri Arshad Ayub, Chancellor UiTM
Encik Abdul Rahim Abdul Hamid, President MIA
Prof. Dr. Ibrahim Kamal Abdul Rahman, Dean Faculty of Accounting UiTM



Ladies and gentlemen, good morning

Thank you for giving me this opportunity to be with you here today. This seminar is timely as the establishment of the Audit Oversight Board (AOB) provided for by the Securities Commission Amendment Act 2010 had just seen its passage in Parliament.


It is said that the efficient functioning of the capital market depends on investors having confidence in companies financial reporting. Investors rely on companies’ financial reports to assist them investing in the capital market. Statutory auditors, who review the companies financial statements, play an important role in ensuring that companies accounts are trustworthy and reliable. Audit plays a vital role in a market economy.


The collapse of large firms and news of fraud involving globally recognized firms over the years have raised concerns regarding the credibility of the audit profession, audit oversight and regulatory response. In light of this, the profession and the relevant regulators had come up with reforms to help address the causes of audit failures. The need to reform the current audit oversight framework is thus seen as a direct response to the discovery of serious irregularities present in financial reporting in Malaysia as well.


Emanating from the Budget Speech of 2008; the Securities Commission established a High Level Task Force to advise it on the establishment of an independent and effective audit oversight framework for Malaysia. This culminated in the drafting of the Audit Oversight Board provisions in the Securities Commission Amendment Act (the Act) 2010.


The Securities Commission Amendment Act among other things provides that the SC will promote and develop an effective audit oversight framework in Malaysia. Further, the Act also states that in discharging its functions relating to audit oversight, the SC shall establish an Audit Oversight Board or better known as the AOB.


The AOB’s mission is to oversee the auditors of public interest entities and to protect the interests of investors by promoting confidence in the quality and reliability of audited financial statements of public interest entities.


On this, the AOB will seek to do this through its registration, inspection, inquiry, enforcement and standards setting programs. I will not dwell too much on the detailed features of the Act here as we have the next session to address that in today’s programme.


Nonetheless, I would like to take this opportunity to acknowledge the time and commitment put in by members of a High Level Task Force who comprised representatives from the Malaysian Institute of Accountants, the Malaysian Institute of Certified Public Accountants, Bank Negara Malaysia, Bursa Malaysia and the business community.


Consistent with the recommendation of this High Level Task Force, the AOB is to provide independent oversight and regulation over external auditors of public interest entities. The High Level Task Force holds the view that independent oversight is a key factor to restore and strengthen investors’ confidence in the audit profession.

New Oversight Experience


Ladies and gentlemen

The concept of independent audit oversight is globally recognised. At the international level; a number of jurisdictions have established independent audit oversight authorities to regulate the audit profession. Some of the examples include the Public Company Accounting Oversight Board (PCAOB) in the United States and the Professional Oversight Board for Accountancy in the United Kingdom. Australia has an Auditing and Assurance Standards Board responsible for setting auditing standards, and the Financial Reporting Council which monitors auditor independence.


It is not a regulatory concept that is unique to developed markets. As it stands, even emerging and start up markets have adopted this concept evidenced by countries such as Egypt, Lithuania, Mauritius and Sri Lanka. All these countrieshave in place, some form of independent regulatory oversight over its auditing profession.


However, the scope of regulatory oversight may differ amongst these foreign audit oversight authorities. This can be seen with respect to their functions, powers, level of activities, independence and the degree of interaction with the audit profession and governmental agencies. Although the nature of audit oversight and the process through which its activities are carried out may differ from one jurisdiction to another, we believe that effective oversight must generally include several mechanisms.


An important and fundamental mechanism which should be common to all oversight processes would be the setting up of a body which is to be independent of the profession and acts in the interest of the public, to oversee the quality of auditing and ensure that audits are independent and in line with auditing and ethical standards.


Against this back drop, the setting up of the AOB will bring a new oversight experience as the regulatory landscape will transform a new governance structure created to underscore auditors’ responsibilities in financial statement reporting.


The establishment of the AOB in Malaysia is thus overdue and its coming into operation puts Malaysia in good stead as it will ensure that our regulatory framework for auditors is on par with international best practises. In this regard, reference can be made to the “Principles for Auditor Oversight”, by the International Organization of Securities Commissions (IOSCO), for which the SC of Malaysia is a member.


This principle states, back in October 2002, among other things, “A mechanism should exist to require auditors to be subject to the discipline of an auditor oversight body that is independent of the audit profession, or, if a professional body acts as the oversight body, is overseen by an independent body.”


Given that not all IOSCO members have audit oversight roles, the Audit Oversight Roundtable Group at the international level which consists of independent audit regulators is now working to bring about a more robust structure and greater clarity to audit oversight. This group includes organisations that are already looking into auditing issues such as the Financial Stability Forum, the World Bank, IOSCO, the Basel Committee, the Public Interest Oversight Board and the European Commission.


It should be emphasized here that the AOB established under the SC, will work with other regulatory agencies such as the Companies Commission of Malaysia, Bank Negara Malaysia and the Malaysian Institute of Accountants to bring to bear the full objectives of the new regulatory framework for auditors. This cooperative objective is already embedded in the establishment of the AOB, as it is empowered by the Act to share information with these other mentioned bodies; thus casting wider the regulatory and enforcement reach of each constituency.

Benefits of AOB


Ladies and gentlemen

While the AOB’s mission is to oversee auditors and protect the interests of investors, the independent oversight over public interest entity auditors will not be one dimensional to benefit investors. It would also benefit the auditing profession. The AOB will work together with the auditing profession to raise audit quality which in turn will promote confidence in the assurance work that is performed by the auditing profession.


The recent global financial crisis has reshaped thinking and questions long held policy tenets. It has posed far reaching changes to the regulatory landscape and tested capital market regulators; placing new demands and responsibilities, be it on aspects of independent or self regulation.


It is encouraging to note that some initiatives in this respect have been undertaken by the auditing profession itself as audit oversight becomes even more topical. Notable is the advent of the Audit Firm Governance Code (a project for the Financial Reporting Council of the UK) which will come in application on 1 June 2010. This Code is extended to promote continuing confidence in firms that command public trust in the market for the audit of public interest entities.


We need to work together to build this trust. Our commitment to working with the auditing profession will be reflected in the board composition of AOB, as it will maintain links with individuals who must understand the responsibilities for and the nature of financial disclosures as required by public interest entities. At all times, not more than two out of the six non-executive members of the AOB shall be members of the MIA.


Further, we are of the view that audit quality can usually best be improved by providing incentives, rather than sanctions. The vast majority of auditors are committed to professionalism and integrity. In this regard the advent of the AOB’s oversight should be seen as a catalyst in helping audit firms to identify weaknesses and strengthen their audit practices.


The Act bears out the example of this kind of incentive to improve. The Act provides that the AOB may publish its inspection report if the auditor concern fails to take remedial measures for any short coming that have been identified in the inspection report. Remediation is a vital part of the AOB process and this approach should encourage both integrity and vigor within the profession.


Maintaining confidence is about ensuring high-quality audits and adherence to standards. In the era of high cross border trade and globalisation it is imperative that our audit quality is at par with international standards. This will expand the horizons for our auditors, as they will be able to gain recognition for employing high standards. With this comes the possibility of them facing reduced regulatory burden should they come to audit companies which are subjected to other jurisdictions.


To underscore this point I would direct your attention to the EU Directive on Statutory Audits. This directive provides that firms auditing companies incorporated in a third country but listed on a regulated market in the European Union should come under the independent public oversight of the EU Member State concerned.


At present, audit firms from 30 jurisdictions (including Malaysia) outside the European Union benefit from a transitional period until 1 July 2010 from this directive. Once the transitional period expires, the European Commission will face a choice between two options.


The first option is to move quickly thereafter to a situation where the independent public oversight bodies in the EU Member States start regulating and inspecting audit firms in non-EU countries. The second option is to rely on equivalent public oversight systems in non-EU countries as more countries around the world set up such oversight systems. It should be noted that to date, no equivalent decisions have been taken by the European Commission.


Clearly in the interest of Malaysian audit firms we would prefer the second option and the AOB shall endeavor to procure EU member states to recognize its oversight over our auditors. This will pave the way to reduce the regulatory burden for Malaysian audit firms.


We must recognise that auditing has become a global activity. Auditing and its issues have long moved beyond national borders; and with it the domestic concerns. Multinational companies with cross-border activities and subsidiaries abroad need auditors present or represented in several jurisdictions in the world to be able to provide international audit service.


This in itself poses a unique challenge for audit regulators. Given that auditing is a global activity, there is a need to establish close co-operation between audit regulators that goes beyond joint inspections and comparability in standards, which is essential.


Towards this end, we see the AOB having to play a crucial role in spearheading and establishing mutual cooperation relationships with its other foreign counterparts. To enable this, the Act has provided for this by explicitly stating that the AOB may enter into arrangements to cooperate and share information with other foreign audit regulators.

Operationalisation of AOB


Ladies and gentlemen

The SC is committed to the successful implementation of the AOB and has taken the initiative to set up an Implementation Steering Committee (ISC) that will advise the SC on operationalising the AOB. The ISC which is already constituted; draws its members from BNM, CCM, Bursa, MIA and MICPA and its terms of reference include assisting in the formulation of AOB’s registration criteria for auditors of public interest entities. The ISC will also assist in the development of AOB’s inspection program and in the internationalization of the AOB.


From these developmental initiatives to launch the AOB, we should see the AOB evolve from a start up to a steady state oversight body. It will begin with a registration strategy which will provide the foundation for the AOB’s inspection and enforcement activities. This will move on quickly to develop a supervisory oversight program to assure the AOB fulfills its statutory mandate.


That should culminate in a multiyear strategic plan with the requisite program initiatives driven by its strategic objectives. Beginning with registration, inspection, inquiry, enforcement and standards setting; all these aspects will be integrated into a supervisory model to fulfill its mandate. This will extend and broaden into research and risk analysis to supervise the 100 plus audit firms and 340 or so auditors that should be registered with the AOB in time to come.


Casting our vision forward, the next phase will involve internationalization as Malaysian audit firms have begun to regionalize their partnership and thus import extra territorial implications. This would involve gaining international recognition within the ASEAN counterparts of the AOB and establishing effective arrangements with them.

Closing remarks


Ladies and gentlemen

It cannot be stressed enough that the efficient operation of our capital market is predicated upon the assumption that information reported to potential investors is accurate, timely, and that this information includes all information that would be important to a reasonable investor’s investment decision.


The average investor is not privy to the same information available to members of a company’s management and board of directors.  As a result, investors must rely, to some degree, on the work of auditors in order to obtain a level of confidence in the company’s reported results in making investment decisions.  


The SC through the AOB seeks to promote the integrity of financial information used in the capital market by ensuring compliance with relevant auditing standards. It is hoped that by doing this effectively this would reduce the risks of auditing failures and strengthen the soundness of our capital market. 


I firmly believe that the independent oversight to be performed by the AOB will promote higher audit quality work. The knowledge that the auditor’s work may be reviewed by an independent inspection program to be carried out by the AOB should increase the standard of care and thought that goes into that audit work.


Further, given that the AOB may be reviewing how difficult auditing issues were resolved, it should engender and empower auditors to exercise prudent judgment, and resist management pressures on questionable accounting concepts and not to ignore red flags that arise in the course of audits.


On this, there is a timely reminder of the new section 320A of the Capital Markets and Services Act for preparers of financial statements. This section makes it an offence for “any person to influence, coerce, mislead or authorize any person engaged in the performance of an audit of the financial statements of a listed corporation or any of its related corporation to do anything which may cause the audited financial statements to be false or misleading.” Conviction in this offence can result in that person being punished with a maximum jail sentence of 10 years and a fine of a maximum 10 million Ringgit.


With the AOB implementing what it has been empowered to do by Parliament, the AOB shall provide greater stability, accountability and confidence in financial reporting. This together with the SC’s other regulatory efforts will bring confidence in our capital market and ensure all facets of our capital market are internationally competitive.


Thank you for your attention and I hope you will find this seminar informative and that together we will work to ensure that AOB contributes positively to our nation’s well being and the audit profession.