“Towards Better Corporate Governance and Transparency”
YBhg Datuk Ali Abdul Kadir
Chairman, Securities Commission, Malaysia
on the occasion of
Institute of Chartered Accountants in England and Wales (ICAEW) Malaysia’s 1ST General Meeting
3 October 2002
Menara MAA, Kuala Lumpur
YBhg. Dato’ Jasani, Chairman of the pro-tem committee, ICAEW Malaysia
Honoured guests, ladies and gentlemen,
I am greatly honoured to be here today, and would like to thank the ICAEW Malaysia for inviting me to address all of you at this auspicious function. On a personal note, this occasion-the inaugural General Meeting of ICAEW Malaysia-holds particular significance for me, as I myself have had a long history with the institute, having been a member for almost 30 years.
I would also like to congratulate the pro-tem committee in setting up ICAEW Malaysia, which I understand is only the second group to be formed outside the United Kingdom after Sydney. I am certain that members will profit greatly through the greater opportunities for domestic and international interaction provided by the group, while also helping in raising the profession’s standing.
The evolving global landscape: corporate transparency under focus
Ladies and gentlemen,
The topic of transparency and disclosure is one that is very close to my heart. I say this not only because of the Securities Commission’s (SC) active involvement in this area, but also because this particular issue has taken on an increasingly interesting turn both domestically as well as internationally over the past few years.
From the Asian crisis of 1997-98 to more recent corporate developments over at the other side of the world, the issue of transparency has now been under the spotlight for a considerable period of time. Clearly, the thinking has evolved quite radically over the years, to the current realisation that even the largest multinationals in the most advanced markets can suffer from poor governance.
This renewed focus on transparency is timely, because we cannot afford to be complacent on the issue of corporate accountability. Some would even go further to say that the long-term credibility of the free-market system may well depend on good corporate governance. In other words, disclosure & transparency are the prerequisites in building a good framework for good corporate governance. And from this, good corporate governance lays the foundation needed for a strong and robust capital market.
From the global perspective, we have seen how the fallout from Enron, WorldCom and other ongoing cases have led to a spate of regulatory responses from the major developed economies, such as the Sarbanes-Oxley Act in the US and the Higgs Review in the UK.
Malaysia already has a sound corporate governance and reporting framework in place
In Malaysia, however, measures and regulations introduced over the past few years already address many of the concerns or “loopholes” that are only now being plugged in other jurisdictions.
For instance, the Malaysian financial reporting framework already requires that reporting responsibilities cover directors and chief executive officers as well. A natural outcome of this is that directors and financial officers would be expected to be suitably diligent in ensuring the proper preparation of their financial statements. This is in line with the need for corporations to build in a culture of compliance with accounting standards for right and sustainable reasons: not because somebody is watching over them, but because they want to and it is in their own interests to do so.
The corporate governance framework
Of course, Malaysia has had her own share of challenges in relation to the issue of corporate transparency. These came to the fore, as I have mentioned previously, during the 1997-98 crisis. As such, it was recognised that-in order to achieve meaningful longer-term corporate reform and economic recovery-the approach to promoting effective corporate transparency needed to be:
Diligently implemented, enforced & reviewed
In line with the holistic approach, initial measures focused on reviewing and addressing gaps in the broad corporate governance framework.
These measures gathered momentum during the Asian crisis, where incidentally I-in my previous position in the accounting fraternity-became involved in the Finance Committee on Corporate Governance that was formed in 1998. We undertook the responsibility for the first-ever major review of corporate governance practices in Malaysia. The Committee’s report was released in 1999, setting out 70 broad-ranging recommendations for improving corporate governance.
This was followed by the landmark release of the Malaysian Code of Corporate Governance in March 2000, with which all listed companies are now required to disclose their level of compliance. The Code now sets the tone for companies to inculcate best practices for corporate governance in their organisations.
By that time, my new role as Chairman of the SC meant that my interest in corporate transparency also took on a new dimension: that of a regulator. During the initial years of my tenure, the Commission also led the Asia Pacific Economic Cooperation (APEC) Collaborative Initiative on Corporate Governance (a core group that included Australia, the US, World Bank and Asian Development Bank), which worked on strengthening corporate governance in the APEC region.
By then the Malaysian economy was on the track to economic recovery. Efforts were subsequently directed towards drawing up a comprehensive blueprint for the capital market’s development over the longer-term: with corporate governance, transparency and disclosure being one of the key themes of the Capital Market Masterplan. The Masterplan built on recommendations of Finance Committee Report by providing the holistic context for the longer-term development of the corporate governance framework.
Nevertheless, good corporate governance is a combination of many elements, including sound regulation and enforcement, shareholder activism, and professional and ethical management.
Not least is the issue of financial transparency, which to my mind is fundamental to good corporate governance. Financial transparency means timely, meaningful and reliable disclosures about a company’s financial performance. Companies need to provide transparent financials to raise capital. Investors need transparent financials to make informed investment decisions. Therefore, financial transparency is important not only because it is the bedrock of our financial markets, but also because it is absolutely essential to today’s investors. None of us can afford to treat cases of inadequate disclosure or accounting malpractice lightly if we are to instill confidence and integrity in our markets.
The financial reporting framework
So what has been done so far to foster greater financial transparency in Malaysia?
One aspect has been, of course, the introduction of a wide range of regulatory reforms to promote more transparent dealings in the securities markets. These have included, over the years, measures to enhance prospectus disclosures, audit quality, as well as a shortened timeframe for reporting changes in substantial shareholdings.
To give an indication of how forward-looking our measures have been, it should be noted that Malaysia’s requirement of quarterly reporting by listed corporations, for example, was introduced as far back as 1999 and has far preceded proposals for similar reporting frequency in most other regional markets such as Singapore and Hong Kong.
Notably as well, the past few years have been significant ones in the area of accounting standard-setting in Malaysia. Prior to 1997, the promulgation of accounting standards rested primarily with the accounting profession, which issued accounting standards for adoption by their respective members. While accounting standards have been based on the IAS since 1978, there were differing degrees of compliance, as well as a lack of a structured approach towards resolving differences.
This state of affairs, of course, led to the introduction of the Financial Reporting Act in 1997, which set out the first formal financial reporting framework for Malaysia. This was no mean feat as it was, at that time, the only such statutory framework for accounting standard setting and compliance within the region.
An important feature of our financial reporting framework is that it is internationally benchmarked to ensure that the financial statements produced by corporates in Malaysia can be relied upon to allow comparability and decision-making. As you undoubtedly know, the Act led to the creation of the Malaysian Accounting Standards Board (MASB), the first such independent standard-setting body in Asia. MASB standards are set with reference to international accounting standards issued by the IASB. The Financial Reporting Foundation (FRF), which was also established under the Act, plays an oversight role over MASB’s activities.
Another important aspect of the Malaysian framework is that compliance with MASB accounting standards is mandated by law and covers both public and non-listed companies. This makes Malaysia the first country in the region to accord legal status to accounting standards. The relevant regulators, namely the SC, the Companies Commission Malaysia and Bank Negara Malaysia are entrusted with the enforcement of MASB standards over their respective jurisdictions.
In the area of enforcement, the SC oversees listed companies through a structured approach: our financial reporting surveillance and compliance programme. The surveillance and compliance function is intended to ensure that public listed companies comply with approved accounting standards in the preparation and presentation of their financial statements.
To be sure, the gravity we attach to compliance with accounting standards is reflected in the law. When a public-listed company is found to have failed to comply with approved accounting standards, the SC has broad powers to direct the company, its director or chief executive to take the necessary rectifying actions, or make the necessary announcements with respect to the non-compliance or rectification required. Such offences also carry a general penalty of a fine not exceeding RM1 million, or imprisonment for a term not exceeding five years, or both.
However, compliance with predetermined standards and rules is not an end in itself. We are not interested in achieving form over function, leading to data overload for the users. Financial reporting must provide useful information about the financial position of the company to users of financial statements, to facilitate informed decision-making.
Therefore, when assessing companies’ compliance with approved accounting standards, the SC also examines the substance of the information disclosed in the financial statements.
Often, in the course of our examinations, we also come across other issues such as cases of corporate impropriety and mismanagement. While such cases may fall under the purview of other regulatory authorities, the information obtained is not discarded but is actually collated before it is referred to other relevant authorities for their further action. For this purpose, to further strengthen enforcement actions, the SC has a dedicated “flying squad” to carry out monitoring and financial surveillance on public listed companies.
Corporate transparency: the bigger picture
Ladies and gentlemen,
Let me now turn to the issue of corporate transparency within the bigger context. Given the comprehensive planning and measures taken in recent years, Malaysia’s financial reporting framework is-in many instances-already ahead of many other capital markets, both within the region and beyond.
However, while the public response to domestic initiatives has been categorically positive, we cannot afford to be complacent. Global competitive pressures and challenging market conditions mean that, all other things being equal, capital markets characterised by transparent and well-governed companies will have a competitive advantage in investors’ radar screens.
Let me illustrate my point. A McKinsey survey of global investors in 2000 found that the majority of investors would pay a premium for the shares of a well-governed company. Essentially, they found that investors said they would be willing to pay 25% more for a well-governed Malaysian company than for a poorly governed one with a comparable financial performance.
In addition, companies benefit from having a reputation for high disclosure standards, particularly during times of market uncertainty. A recent study on almost 400 firms within the region found that firms with higher disclosure quality exhibited significantly better stock price performance during the Asian financial crisis of 1997–1998.
The evidence points towards the conclusion that corporate governance is an invaluable tool in incentivising good management of business. It calibrates the balance of pressures on directors and management to provide sound overall direction, that accountability and control are exercised on executive functions, and that regulatory requirements are complied with.
However, while good corporate governance can be facilitated through regulators wielding both “carrots” and “sticks”, all relevant parties must work together to fulfil their respective obligations. Enforcement alone cannot guarantee good governance. No rules will work if the individuals charged with observing them are not committed to the principles that underlie them.
The SC is a watchdog, not a bloodhound. The front-line responsibility for corporate transparency must remain with the preparers of financial statements themselves.
It is worth noting here, too, that the availability high-quality financial reporting will take on greater significance as the capital market moves towards the final phase of the disclosure-based regulation (DBR) programme early next year. High standards of corporate governance, disclosure and due diligence will be among the central requisites for the move towards a full DBR environment. It is also imperative that users of financial statements play their part in exercising due diligence in analysing and interpreting corporate disclosures.
The role of the accounting profession
Ladies and gentlemen,
Having stressed the importance of corporate transparency this leads me to the crux of my message: your role as accounting practitioners in instilling and enhancing corporate transparency, and in facilitating the development of the capital market.
As the custodians and champions of corporate transparency, the accounting profession is now being “called to account”, a phrase now frequently used by the media. Against this backdrop, the accounting profession as a whole must recognise that it is one of the more important pillars in ensuring that corporations exercise sound disclosure and transparent practices.
Those who say the accounting profession is a dry one are sorely mistaken. These days, especially, the accounting profession is very much a dynamic one. Accountants cannot be identified as mere bookkeepers, merely responsible for putting numbers together. They have to assume a much bigger role, which I daresay may be described as “gate keepers” of financial truth and integrity.
As such, in moving forward and embracing the challenges before us there is a major role to be played by accountants, auditors, consultants, advisors, standard setters and professional accounting organisations such as the ICAEW:
It is incumbent on the accounting profession and regulators alike to be vigilant in safeguarding the quality of information disseminated to investors.
Independent auditors must earn the confidence of the investing public by adhering to high standards of professional conduct that provide an assurance as to the integrity and objectivity of services rendered.
Along with the auditors, CFOs and financial executives must ensure that the financial statements of the company not only satisfy the requirements of regulatory authorities, but also should be of a sufficient quality to meet the needs of investors. Indeed, they should always consider how they can provide useful information beyond the minimum requirements where such additional information can serve investors better.
Financial statement preparers should also think about incorporating disclosures on how they have enhanced shareholder value, as a means of improving the quality of annual reports. While earnings and other conventional measures of performance remain important, members of the profession, together with the companies they serve, must look towards providing greater long-term value and serving the needs of a better informed and demanding investor base.
Finally, professional accounting organisations play a major role in instilling high standards of practice among their members. This will also help ensure that the domestic accounting profession is kept abreast of international standards and advances.
Ladies and gentlemen,
We are fortunate to have a sound, internationally benchmarked financial reporting framework in place here in Malaysia. But it is still just a framework. Your efforts, skills and intellectual capital are the critical success factors to ensuring that the financial reporting framework delivers timely, accurate and material information to users. In this regard, the SC remains committed to working closely with the accounting profession to foster high-quality financial reporting, and ultimately to further develop the capital market.
In conclusion, I would like to extend my thanks for your kind attention over the course of my message. As the Institute embarks on a new chapter here in Malaysia, I wish you every success and hope that members will benefit greatly from your work and activities.