Nik Mohd Hasyudeen Yusoff
Executive Chairman of the Audit Oversight Board
Securities Commission Malaysia
on Audit Quality – Thinking Ahead of the Game
at the forum organised by the
Malaysian Institute of Accountants
6 October 2011, Kuala Lumpur.
Ladies and Gentlemen,
I would like to welcome all of you to this forum organised by the Malaysian Institute of Accountants (MIA) and supported by the Audit Oversight Board (AOB), the Association of Certified Chartered Accountants (ACCA) and the Malaysian Accounting Standards Board (MASB). The combined effort by many stakeholders today demonstrates the united desire of all of us in enhancing the quality of financial reporting and auditing in Malaysia.
The theme of the forum, Audit Quality – Thinking Ahead of the Game, suggests that quality is an outcome of well thought and considered efforts. It sends a strong message to all stakeholders that high quality financial reporting and auditing could only be maintained if all stakeholders in the financial reporting ecosystem are able to effectively respond to the challenges in the ever changing business landscape, exert efforts in implementing international standards while continuing to uphold professional values and ethics.
The AOB would like to use this opportunity to share our thoughts and views on audit quality, in order to provide more clarity to the audit firms of its expectations and where challenges could come, moving forward. It is hoped that such clarification would assist the leadership of audit firms in planning ahead and ensuring continuous enhancement in audit quality.
Convergence with IFRS
2012 will be the year where our financial reporting standards would finally converge with the International Financial Reporting Standards (IFRS). While this milestone would certainly placed Malaysia at par with many other developed markets, a more critical measure would be the effective implementation of IFRS by relevant public interest entities (PIE). The MASB has been managing the transition by framing a clear roadmap towards convergence and had been engaging key stakeholders on possible implementation issues.
It would be very important for auditors of public interest entities to assess the potential impact of the IFRS convergence on their clients and their audit work. Such early preparation would enable possible issues to be anticipated and managed, thus ensuring the quality of the financial statements is not compromised. We expect audit firms to ensure their staff are appropriately exposed and trained in accounting and auditing issues which may arise as a result of the IFRS convergence. In fact, this has been one of the areas which we had assessed and will continue to assess during our audit inspections.
I am pleased that the Chairman of MASB will be discussing auditing issues relating to the IFRS convergence in this forum today.
Global economy and auditing challenges
The economic challenges faced by the United States and Europe would one way or another influence many other markets around the world. Given that many Malaysian companies are either exporting their products or operating in these markets, the impact on their financial performance could not be discounted.
This is where auditors should consider such risks when planning their audit and ensure they apply the appropriate level of professional scepticism when considering highly judgmental areas such as asset valuation and assessing risk of going concern. Unchallenged management judgments and assumptions are among the areas of concern which we noted during our audit inspections. Some of these companies may be adopting complex business structures and many are using sophisticated technologies, which could compound the challenges of auditors when performing their audits. Without adequate expertise and proper coordination of work between various experts in the audit team, there could be significant gaps in the audit work performed.
I would like to draw the attention of auditors towards their responsibilities in Group audit. The Clarified International Standards on Auditing (Clarified ISAs) No 600, among others, requires the group auditors to assess significant components and whether component auditor’s work could be relied upon. We expect performing such responsibilities would be more challenging under the circumstances described above.
The basic of audit quality
There are a number of initiatives pursued globally in enhancing auditor reporting and audit quality. I am sure we are familiar with the Green Paper issued by the European Commission on Audit Policy: Lessons from the Crisis which attempts to address concerns on the utility of auditor’s report, competition and audit concentration as well as independence of auditors.
In May this year, the International Auditing and Assurance Standards Board (IAASB) issued a consultation paper on the usefulness of auditor reporting. It describes issues with the current financial reporting, including a perceived “information gap”. The paper also sets out possible options for change including auditor commentary on matters significance to user’s understanding of the audited financial statements in enhancing auditor reporting and the communicative value of auditor’s report. The Public Company Accounting Oversight Board (PCAOB) of the United States had also issue a concept release on Auditor’s Reporting Model which is on similar track with the IAASB initiative. These initiatives are in addition to the thought piece released by the IAASB on audit quality earlier this year.
Notwithstanding the progress of the above efforts, the AOB considers the reliability of the audit opinion issued by auditors as the cornerstone of an audit. We expect auditors to arrive at their opinions based on sufficient appropriate audit evidence obtained through processes and procedures performed as required by ISAs. Such work should be properly documented to enable our inspectors to ascertain the thought processes of auditors and evidence considered in arriving at their audit opinions. Again, we would like to stress that application of professional scepticism and maintenance of professional values are pre-conditions for high quality audit.
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 very 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.
In respect of fees, we have reminded the firms to price their work appropriately in line with the risks that they assume as auditors as well as the requirements of ISAs. The AOB has also engaged the PIE, especially audit committees, on this subject and encouraged them to consider the importance of high quality audit within their overall governance framework and the risks to the company if the fees paid are not adequate for high quality audit to be performed.
We also noted that the demand for talents in the financial reporting ecosystem is as intense as well. This is compounded by the fact that many other economies within the region are having similar challenges and have been sourcing their talents from Malaysia. The AOB noted that audit firms tend to stretch the working hours of their audit personnel, which could also compromise their effectiveness, hence affecting the quality of their work. We view this as one of the drivers of staff turnover in audit firms.
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 implemented to ensure adequate supply of talents into the market. Firms should also offer more conducive working environment and better work-life balance as ways to retain talent.
Audit quality and firm’s business strategy
The tone set by leadership of audit firms in ensuring high quality audit is very critical. This aspect has been among the key focus areas in our audit inspections. It is the leadership which set the overall strategic direction of firms, the market they serve, how they compete and their appetite towards risks. All these elements have strong influence over their quality of services including their audit work.
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 new financial reporting 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.
Regionalisation is another trend that we observe where more firms are integrating themselves into a larger structure with more distance command and control. Practices which operate in lower margin countries could be under pressure to deliver business performances which are not that far from other markets. We would like to remind audit firms to ensure such regionalisation should not affect the quality of their audits. Last week, the AOB and its counterparts from Singapore and Thailand met with the leaders of the Big-4 accounting networks from the three countries. The objective of the meeting was to discuss strategic regional issues which could influence the quality of their audit. It is hoped such measure would result in the enhancement of audit quality across these network of firms which audit a huge proportions of PIE in the three markets.
I would like to thank the MIA, ACCA and MASB for this collective effort in exploring ways to enhance audit quality. I trust the topics to be discussed and the thought leaders invited would provide useful insights and ideas to participants in enhancing their audit work.
There is no short cut in this journey of enhancing the quality and reliability of audited financial statements of PIE in Malaysia. We are together in this effort and together we will make Malaysia as an attractive investment destination in this region. Thank you.