Speech by
YBhg Dato’ Zarinah Anwar
Deputy Chief Executive, Securities Commission
at the
Malaysian Institute of Certified Public Accountants (MICPA)
46 th Anniversary Commemorative Lecture
2 December 2004
Renaissance Hotel, Kuala Lumpur

The Future of Capital Markets – Evolving Challenges for the Malaysian Accounting Profession

YBhg Dato Abdul Halim Mohyiddin, President MICPA

YBhg Dato Nordin Baharuddin, Vice President MICPA

Distinguished Guests

Ladies and Gentlemen:

I am honoured to deliver this commemorative lecture in celebration of MICPA’s 46 th anniversary. Let me first I would like to compliment MICPA which started off with just 20 members in 1958 but has now grown in membership to more than 3,000. Throughout the years since its inception, MICPA has played an important role in growing the status of the accounting profession in Malaysia and in raising the standards of practice and professional conduct – through training and examinations. In fact, MICPA helped to jump-start the application of International Accounting Standards (IAS) in 1972 with the adoption of IAS 1 to IAS 4 in Malaysia – reflecting its foresight in recognizing the benefits of international compatibility.

I have been tasked today with the challenge of providing you my perspective on the future of capital markets and the implications it holds for the Malaysian accounting profession. I thought it might be useful to view future developments in the capital market from two perspectives. The first, how information technology is transforming the global capital market landscape and second, to briefly explain Malaysia’s development plans for its capital market within the context of these challenges.

Dramatic transformation of the capital market landscape

If one surveys the global capital market, it is evident that several structural changes are in motion. The main driver of this change has been the pervasive impact of innovation in information technology (IT) on the way economic and financial activity is carried out and organized.

At one end, investors are increasingly choosing to rely on the electronic medium to receive financial information and advice and as their preferred mode for financial transactions. At the other end, financial service providers are changing the way they produce and distribute information and services. This has far-reaching implications throughout the whole value chain for capital market services.

For example, new business models such as e-broking and the internet distribution of IPOs have emerged to challenge traditional models. Their presence is intensifying the level of competition and many capital market intermediaries are being forced to re-position themselves to find viable niches in an increasingly over-crowded landscape.

In the past, convergence referred to how different financial institutions such as banks and stockbrokers encroached into each other’s business. But convergence now also means that financial institutions are increasingly having to compete with media and internet service providers. Information providers such as Yahoo, Google, Reuters and Bloomberg are already acting as portals to a wide array of financial services, even directly offering financial products or even providing a market-place.

Similarly, the boundaries and forms of the marketplace itself are also undergoing dramatic change as organized exchanges sprout in cyberspace. Exchanges, in the past a member-owned self-regulatory entity, are busily undergoing transformation through a demutualization process. Exchanges are consolidating across borders and even de-coupling their business activities such as clearing and settlement services from their trading activities.

The range of products traded on organized exchange are no longer confined to financial products and exchanges now cater for many highly customized requirements as illustrated by the success of e-Bay (which conducts auctions over the internet) and the mushrooming of the B2B exchanges – which caters to suppliers and manufacturers.

Transparency and trust as critical imperatives

Ladies and Gentlemen:

While these organizational changes are easily observable, perhaps the most important aspect of change has been the manner in which the improved availability and dissemination of information has re-shaped the expectations of investors and society. Transparency and trust have become acutely critical to the operation of corporations and economies.

With unprecedented access to information on corporate behaviour, operations and performance, all stakeholders can now scrutinize corporations, as never before, to find information about matters that affect their interests. In a world of instant communication s , others can easily be informed and public opinion quickly mobilized against any company.

In this context regard , it i s important to realize that capital markets are places where “investors pay enormous amounts of money for intangible rights, whose value depends entirely on the quality of the information that investors receive and on the honesty of people about whom investors know almost nothing”1. But Trust is therefore a critical element in the relationship; and when that trust is squandered by misbehaviour, investors are likely to vote with their feet . and i I I nvestor trust that has been lost will not easily be re-captured.

In the twenty-first century, therefore the key ingredients in the value proposition of any capital market are investor confidence and trust in the reliability, quality and timely availability of information. Transparency is expected to be a the norm and business increasingly conducted in open forums rather than behind closed doors.

Malaysia’s capital market development plans

Ladies and gentlemen:

It was to address these global challenges that the Capital Market Masterplan (CMP) was developed. This 10-year blueprint, which was launched in February 2001, charted an orderly and managed transition with a vision that Malaysia would evolve into an internationally competitive capital market.

The CMP recognized that “the challenges facing the Malaysian capital market from the rapidly changing domestic and international environment have highlighted several key imperatives for ensuring that Malaysians continue to have access to a fair, efficient and robust national securities market under these dynamic conditions”.

The CMP recommendations were therefore aimed at enhancing the value proposition of the capital market while ensuring a strong and facilitative regulatory framework that provided a high degree of confidence.

In this context, the SC had focused considerable efforts on effecting legal reform alongside the introduction of voluntary codes, facilitating investor as well as director education and intensifying shareholder activism. In addition, the recommendations of the High Level Finance Committee on Corporate Governance were fully implemented as well.

This included the introduction of a Code of Corporate Governance, the requirement for mandatory accreditation programmes for directors of public-listed companies , to undergo mandatory accreditation, and continuous education, the introduction of Internal Audit Guidelines, tightening disclosure requirements and enhancing enforcement efforts.

Other CMP initiatives focused on raising prudential standards, diversifying the sources of financing to strengthen financial system stability and resilience and strengthening market infrastructure and processes to ensure high levels of efficiency and reliability.

Overall, the philosophy of the CMP is to manage a shift towards market-based regulation which emphasis e greater reliance on market disciplinary mechanisms and market participants – particularly advisors and professionals – to ensure that investors have confidence in the integrity and safety of the capital market. This has been reflected by the implementation of the disclosure-based reg ulation ime (DBR) across the entire spectrum of fund-raising activities.

Evolving challenges for the Malaysian accounting profession

Ladies and gentlemen

Within the context of the global challenges and the CMP, the accounting profession clearly has an important role to play in assisting efforts to build a credible, reputable and internationally competitive capital market. The accounting profession wields considerable influence in the capital market through their many roles – whether as auditors, advisors, consultants or as member s of the corporate sector.

To a large extent, the accounting profession has done reasonably well as reflected by the improvement in Malaysia’s corporate governance rankings over the past few years. One of the major contributory factors to the higher scores was the quality of Malaysia’s financial reporting standards. For example, CLSA has upgraded its scores for Malaysia’s accounting standards from 5.0 in 2001 to an outstanding score of 9.0 in its recent 2004 report.

Ladies and Gentlemen:

Let me now outline what I consider to be the three major evolving challenges for the Malaysian accounting profession.

The challenge of enhancing transparency, governance and accountability

The first and most fundamental challenge for the accounting profession is to continue to enhance the levels of transparency, governance and accountability in the Malaysian capital market. This almost goes almost without saying to an audience such as yourselves as the accounting profession are dominant providers in the governance and financial reporting chain.

Over the last four years, account ants ing ha ve s occupied the headlines , but for the wrong reasons. Most i I nexplicably, this took place in highly developed capital market centres demonstrating that sophistication and tradition do not offer sufficient safeguard s against commercial pressures and that strong regulatory oversight and constant vigilance are necessary to ensure that there are no lapses in professional duty.

In Malaysia, these developments should be considered within the context of the shift to DBR where there is increased reliance on the integrity of the accounting profession to ensure the reliability, quality and timely availability of information. Minority shareholders need reliable information about the value of a company’s business and want to have confidence that they will not be cheated out of that value by insiders.

In a DBR environment therefore, reputational intermediaries like accounting firms must vouch for the quality of financial information. This is cruciual when the investors have no means of verifying directly the information which a company provides. The consequences, when reputational agents do not live up to expected standards, can extend beyond the specific companies and affect overall market confidence.

Our experience with the investigative audits of PN4 companies shows an area where perhaps there has been weaknesses in the market disciplinary mechanism. Our concern over the lack of forensic analysis in the investigative audit submissions have not abated. For example, there is an astonishing number of cases where auditors have cited the destruction of records hampering their ability to gather evidence of improprieties. I therefore want to take this opportunity to remind those acting as special administrator s or liquidators to ensure that accounting records in their possession are preserved under their care. In addition, I would expect those undertaking investigative audits to use their skill and capabilities to reconstruct material events of misconduct through other approaches at their disposal.

More broadly, we note that accounting firms have been shifting to a risk-based approach to auditing in tandem with global practices. While I am glad to see consistent upgrading of audit methodologies, I would like to remind the profession that the shift to a more sophisticated approach should not, in any way, compromise or dilute the reliability or value of an audit opinion. The true and fair view of an audit opinion must extend beyond form and cover the substance of financial transactions.

For example, we notice an increasing tendency to offer opinions of “Emphasis of Matters” in relation to going concern issues rather than the qualification of accounts. External auditors represent the only independent party that is well positioned to review the transactions and books of a public-listed company. Any shortfalls in the performance of these duties will have far-reaching implications in relation to the levels of investor protection and it is important that audit firms should not allow the integrity of the audit opinion to be depreciated.

Overall, we expect the accounting profession to have the skill and experience to spot the obvious instances of false and misleading disclosure. And we would like the accounting profession to play a stronger role in educating their clients that concealing bad news is a recipe for trouble.

The role of the SC in strengthening professional accountability in a DBR environment

Ladies and Gentlemen:

The SC recognizes that the burden of ensuring good corporate governance practices cannot fall solely on the shoulders of the accounting profession itself and that regulatory reinforcement is required to assist the profession to withstand commercial pressures for laxity and latitude. Therefore, the SC has stepped up its surveillance and enforcement activities in relation to the conduct of professionals and advisors to ensure they fully understand appreciate their accountabilities in a disclosure-based environment.

First, as evident from my earlier comments, the Securities Commission has stepped up its real-time surveillance of financial reporting reflecting our preference for a pre-emptive approach to curtailing corporate misconduct.

Second, we will continue to make the necessary changes to the legal framework to strengthen investigative and enforcement capabilities and effectiveness. The most recent change was to amend Section 99E of the Securities Industry Act 1993 to impose obligations on auditors to report on breaches with respect to securities laws. These whistle-blowing provisions also provide for the requisite protection of auditors from being sued in any court for any report made in good faith and in the intended performance of such obligations.

It is a gratifying development We are glad to report that we have started to receive whistle-blowing reports from the accounting profession and we look to the industry to encourage its members to take advantage of the protection afforded by the Act to act as the “the conscience of the corporation”.

Third, efforts were made to strengthen supervision over auditors through strengthening of the Licensing Committee, which assists the Minister of Finance in the issuance and revocation of auditing licences, to include representatives from the SC and the Central Bank.

Additionally, licensing conditions are also being reviewed with a view to introducing continuous compliance obligations by auditors while efforts are also underway to enhance supervision of audit practices.

Fourth, the Securities Commission recently increased enforcement activities against professionals and criminal prosecution will and has been brought against those who that has have abetted others in providing false and misleading information to investors.

Harmonisation and coping with diverse information needs

Ladies and Gentlemen:

I would now like to talk about the second challenge for the Malaysian accounting profession. Globalization has increased the amount of cross-border capital flows and this has led to increasing demands for comparability of accounting standards across borders. As you are already well aware, Malaysia will further converge with IASB standards. MICPA and its members have been among the fore-runners in advocating convergence and I do not intend to preach to the converted.

Convergence is l not be an easy process and many countries are grappling with the challenge of harmonizing with international standards. Even Al though in Malaysia ‘s case , we have already adopted many of the IASB standards, however the new standards introduce much greater complexity and impose additional disclosure requirements as a means of capturing the impact arising from the proliferation of new and sophisticated financial instruments.

Rapid changes can impose a strain on both companies and auditors in that it will involve greater expenses to upgrade the accounting information systems and requires greater skill s either in terms of valuation and or auditing techniques.

For this reason, non-accountants in the corporate world may grapple to understand and appreciate the rationale for the changes. Members of MICPA and the industry association should step up their efforts to assist the rest of corporate Malaysia to adjust to a more exacting financial disclosure regime and to work jointly towards the common goal of providing internationally comparable financial statements. Global investors will take great comfort in knowing that a Malaysian financial statement is no different from that in another internationally advanced jurisdiction and this will boost their confidence in the reliability and integrity of the Malaysian capital market.

But this is not the sole challenge. The more daunting challenge for the accounting profession is its ability to meet the demand for more extensive and customized disclosure of both financial and non-financial information at the same time. There has been an explosion of information needs ranging from management information purposes to catering to the needs of the many and varied stakeholder groups.

Corporate management require analysis of detailed transactional data to understand evolving customer trends and preferences, scenarios for risk management purposes, data to produce balanced scorecards, shareholder value metrics to satisfy investors, valuation of human capital and to report on Syariah compliance to meet the needs of its Muslim shareholders.

Apart from this, disclosure requirements have also expanded beyond the traditional financial data reporting to include macroeconomic developments, providing a business outlook and demonstrating that companies understand their social responsibilities eg environmentally-friendly practices, and to report on their compliance with governance requirements.

The explosion of information needs is not a regulatory intent but is simply a reflection of public demand arising from the shift to a knowledge-based society. The insatiable demand for more financial and non-financial demand information from the public is their way of saying that they have a keen interest in the conduct and character of the companies that sells them products, that provides them jobs, that borrows their money or in which they invest.

While many complain about the burden of complying with these expanded information needs, the more astute recognize the changing needs of society and use this to their advantage by communicating such information in a manner that builds their brand and lowers their costs of capital.

In this regard, the second challenge for the accounting profession is to help the business community to cope with the explosion in information needs by distilling the diverse requirements in a succinct manner and, hopefully, to avoid producing “telephone directories”.

Moving up the value-added ladder

The third challenge for the accounting profession is to assist its clients to increase value-add in its operations as well as to transform itself into a provider of intellectual services. Given the expertise and broadening role of the accountant, it is logical then that they should be at the forefront of assimilating technological innovation, such as internet-related technologies and data mining, into business practice.

In addition, the accounting profession have a key role to play in assisting firms to not only strengthen but to embed risk management practices into their operational and strategic processes so as to be able to anticipate and manage risks arising from the increasing complexity of financial transactions which has raised the exposure and vulnerability of firms to market uncertainty and price volatility.

As the accounting profession expands its range of activities, it will find itself facing increasing ly c onflict ing pressures arising from convergence. It would need to build the necessary balancing mechanism to manage conflicts of interests and to rise above commercial interests to demonstrate the ability to act as a trusted and independent business advisor.

On the part of the SC, we would like to see Malaysian-based accounting firms lead the way in developing the country’s intellectual capital and to provide “thought leadership” in their areas of strength. Accounting firms should also explore opportunities offered by the growing cross-border opportunities to perhaps even export their services through leveraging on Malaysia’s strengths and to play a more substantial role particularly in helping us develop Malaysia’s Islamic capital market into an international centre.


Ladies and Gentlemen:

As I have mentioned earlier, the Malaysian accounting profession is held in reasonably high regard and has been generally been forward-looking in meeting the challenges posed by a changing capital market landscape. In this regard, I would like to note their efforts and contributions in working closely with the regulators to build a strong regulatory and corporate governance framework in Malaysia.

It is worthy of note that the much followed CLSA Corporate Governance Report 2004 noted that India, Malaysia and Korea, the three markets that have seen major improvements in their corporate governance environment have been the only countries in their sample of 10 to have outperformed the Asia MSCI Index ex Japan over the last three and five years.2

The accounting profession should therefore seek to enhance their role in promoting good corporate governance. It should be emphasized that the test of good corporate governance is not just in compliance with the law. It is beyond that; it is about doing what is right, it is about values and ethics and about the highest level of individual and collective responsibility all of which should be translated into impeccable conduct.

In this regard, the objective of enhancing public trust through commitment to the highest standards of quality and integrity is not only a capital market agenda, it is one that is close to the heart of the profession as well. And it requires real action as well as the ability to effectively communicate that action to all stakeholders to earn that trust every day.

We believe that we can count on the profession to be at the forefront of efforts to raise the levels of integrity in the marketplace to ensure that its members adhere to the highest possible standards of conduct and to take proactive efforts to convince others in the corporate world that “honesty is indeed the best policy”.

Thank you for your attention.

1Prof. Bernard Black, “Remarks on the Preconditions for Strong Securities Markets”
Except for Thailand which recorded a small positve gain of 2%. The three other countries recorded 11-24% gains.