Honoured guests, ladies and gentlemen

Good morning,

First of all, I would like to thank the MACPA for extending me their kind invitation to deliver the Commemorative Lecture at this auspicious event. The occasion has particular resonance for me, as a past President and a long-standing member of the Association, and I am greatly honoured to be here today.

Three years have elapsed since the Asian crisis assailed us in 1997. As our country recovers steadily from the economic turmoil and advances into the 21st century, it is timely for us to take stock of where we have been and critically assess our progress and achievements. Then, I would like to talk about the challenges that the Malaysian capital market will face and focus on what needs to be done. I will also share with you my views on the role that the accounting profession needs to play in facilitating capital market development.

The Asian Crisis

The Asian crisis came as a shock to many of us, including the established gurus and futurists. Seemingly robust economies crumbled virtually overnight as problems in one country sparked off a loss of confidence in neighbouring countries, exposing the vulnerability of our financial markets to the vagaries of herd behaviour. Stockmarkets plunged as investors fled the region in panicked droves and economic performance slid into negative territory in what was, for many countries, the first time in well over a decade.

As I stand here today, I can say that we have made remarkable progress indeed. Most countries have made up on lost ground, with stockmarkets posting a strong recovery amidst renewed interest by international investors, and GDP growth numbers recording a definite upturn. Malaysia is no different. The KLCI has rebounded substantially from a low of 262.7 on 1 September 1998 and currently trades around 780. With 5 consecutive quarters of positive GDP growth and estimated real GDP growth of 5.8% for the year 2000, there is solid evidence of a sustained economic recovery.

Ladies and gentlemen, while there is cause for cheer, I hasten to add however, that we should not take this as a signal for a return to the excesses of old. Even though some measure of stability has returned to the region, the crisis revealed significant weaknesses in our financial markets which must be addressed if we are to mitigate the effects of this crisis and fortify ourselves for future episodes of turbulence.

I have mentioned the damage caused by stampeding international investors. But let us not kid ourselves that the Asian crisis did not have its origins in institutional weaknesses and inefficiencies, which had been shrouded by a sustained boom in Asia throughout the late 80s and early 90s. An excessive reliance on bank-based financing, exacerbated by the lax credit practices of banks and inadequate risk management practices by corporates; and poor corporate governance practices, have frequently been cited as the main culprits. We must not miss this singular opportunity to learn from our mistakes and to put things right.

Post-Crisis Developments in the Malaysian Capital Market

The Securities Commission has, on its part, been an active crusader for capital market reform in the knowledge that a well-developed capital market benefits the overall economy by acting as an efficient and effective conduit for the mobilisation of resources for investment. Also, by providing alternative channels of financing, it helps to insulate the country from shocks linked to volatile international capital flows by decreasing the probability and quantity of sudden capital flow reversals.

Allow me to touch on several measures which have been put in place to strengthen and develop the Malaysian capital market over the last few years. Although the SC has done much work on a number of fronts, I have chosen today to highlight three areas which I believe would be of particular interest to the accounting community. In all fairness, I must also say that in most cases, these proposals were already on the drawing board even before the crisis struck.

Disclosure-based regulation

The SC first introduced disclosure-based regulation, or DBR as it is commonly known, in 1996. The objective of DBR, as most of you should be aware by now, is to promote greater efficiency and transparency. Under this regulatory regime, transparency is to be enhanced through comprehensive and timely disclosures and the onus of assessing the merits of any investment is restored to investors. The regulator no longer assays a primary role and slips into the background, rightfully so.

DBR is not merely aimed at increased disclosure of information by issuers, but at improving the quality, timeliness and relevance of information disclosed, and demands greater accountability by issuers and their advisors. Lest there be any doubt, let me remind you that these responsibilities extend to the CFOs and financial advisors among you.

Full implementation of DBR has been scheduled for 2001 onwards but the SC has already relaxed its hold and has gradually permitted issuers greater leeway with regards to the pricing of shares, the utilisation of IPO proceeds, shareholding spread requirements and so on.

As the regulator's involvement in the primary market diminishes, the issue of corporate responsibility becomes increasingly relevant, which brings me to the another area where a significant amount of work has been done in recent years, namely the enhancement of corporate governance standards.

Corporate governance

While efforts to raise the standard of corporate governance practices in Malaysia had already begun with the introduction of the SC's programme for disclosure-based regulation one year earlier, the crisis of confidence engendered by the downturn in 1997 led to a decision to "fast-track" the whole exercise. I still remember the many days and nights that Dato' Megat Najmuddin and Tan Sri Wan Azmi and I worked to produce our part of the report assisted by Cik Khatijah Abdullah (of FPLC).

Thus, a high-level Finance Committee on Corporate Governance was commissioned in March 1998 and given the Herculean task of producing a report on this issue. To its credit, this was duly accomplished and a 70-point report was subsequently published in March 1999.

Apart from the introduction of a Malaysian Code on Corporate Governance which sets out a set of principles and best practices for good governance, the recommendations of the Committee also concentrated on measures to strengthen disclosure and transparency, including calls for a rationalised regime for prospectus regulation, the introduction of civil actions for insufficient disclosures, additional reporting on the state of internal controls and the going concern status of the company, and the establishment of an internal audit function by all public listed companies.

Establishment of MASB and FRF

The third area which I believe has significant ramifications for the profession has been the establishment of a proper financial reporting framework in 1997, with the introduction of the Financial Reporting Act and the setting up of the Malaysian Accounting Standards Board and the Financial Reporting Foundation, of which I am a member. I am proud to report that Malaysia was the first and, in fact, remains the only country within South East Asia which has taken the step of setting up an independent, statutorily incorporated, accounting standard setting body. Hence, compliance with accounting standards is no longer mandated only by professional organisations such as MACPA or MIA, but has become a statutory requirement, with the attendant powers of enforcement. The Commission has also established its own compliance and enforcement programme to monitor compliance with approved accounting standards by listed companies. Combined with the introduction of quarterly reporting requirements for public listed companies by KLSE, these measures have gone a long way towards raising financial reporting standards in Malaysia.

Challenges and Perspectives for the Malaysian Capital Market

Ladies and Gentlemen, we face interesting and challenging times ahead. Not only must we grapple with the fallout from the crisis, Asia is awakening to an era of constant and rapid change and innovation, and mounting competition - an age ruled by the forces of globalisation, liberalisation and technology.

The dynamic nature of current trends will continue to redefine the future landscape of our capital market. Globalisation, facilitated by advancements in technology, will inevitably create a wave of expansion in terms of volume and variety of cross border transactions. There are undeniable benefits and opportunities for economic growth and development but on the flip side, it also poses considerable challenges, especially to small economy such as ours. From a capital market perspective, the bugbears of greater international competition for funds, an increasing stranglehold over capital market services by a handful of dominant international financial conglomerates, greater integration of markets leading to the increased vulnerability of our own market to the "contagion effect" and "hot flows", and the threat of marginalisation of uncompetitive markets, must be contended with. In this regard, the experiences of other jurisdictions have proven to be instructive - for example, numerous exchanges have sought to counter some of these challenges through internal restructuring as well as strategic partnerships. Already, we have seen many highly publicised demutualisation exercises, as well as alliances and mergers, sometimes both, announced over the last 12 months.

In the midst of all the hoop-la generated by these developments, we must not overlook the structural weaknesses in our capital market. These still need to be addressed, even though we have introduced and instituted various measures in efforts to strengthen and improve the capital market, including those discussed earlier. Let me now highlight some of the key problem areas where immediate action is required.

First is an under-utilisation of corporate bonds as a source of funding compared to bank borrowings and capital raising through the equity market. This is particularly pertinent since the lion's share of the blame for the crisis has been ascribed to underdeveloped bond markets, which frequently led Asian companies to rely on short-term bank financing to fund longer-term projects, thus exposing themselves to maturity mismatches. When bank lending dried up during the crisis, many companies were caught in a bind with few alternative avenues to raise capital. Currently, the outstanding value of bond issues amount to under 19% of GDP, compared to equity market capitalisation of 220% and outstanding bank assets of nearly 150%. Only a handful of companies account for the bulk of funds raised, the majority of them comprising government and government-related enterprises such as the utility companies. Private sector participation has, up to now, been limited.

Another area of concern has been the sluggish development of the Malaysian derivatives market. Exchanges such as KLOFFE and COMMEX have been plagued by a lack of tradable products and poor liquidity. This has been said to discourage active risk management by corporates, a situation which, as I have mentioned earlier, also aggravated the effects of the crisis.

Although Malaysia enjoys one of the highest rates of savings in the world, the investment management industry also remains relatively underdeveloped. Funds under management are still concentrated in the hands of a few major players despite previous attempts to open up and expand the industry. This provides retail investors with fewer investment opportunities catering to the different risk-return profiles which they may have. Moreover, direct retail participation in the stockmarket continues to be very high, constituting nearly 86% of total investors on the KLSE while accounting for only 12% of equity holdings. Although a high level of retail participation is no bad thing in itself, it is hoped that the increased institutionalisation of stockmarket participation through the professional management of funds will encourage a greater emphasis by investors on financial and economic fundamentals and long-term prospects, rather than on speculative, rumour-driven short-term investing.

Finally, as Malaysia plans its transition to a knowledge-based economy, it is recognised that the capital market plays a crucial role in the mobilisation of risk-capital to provide financing for higher-risk ventures, including start-up companies in the technology sector. To some extent, efforts have been made to address this issue through the establishment of the Second Board of the KLSE, which caters to small and medium-sized companies, as well as MESDAQ, which specially targets high-growth companies. However, further efforts are clearly required in order to support the nation's longer-term aspirations.

The development of e-commerce in the Capital Market was also being held back somewhat. To ensure an orderly development, the SC produced an exposure paper on "Framework for the Implementation of E-Commerce in the Capital Market" and after receiving the responses and due consultations with the industry groups, the paper was duly formalised.

Capital Market Masterplan

In moving towards a sustainable future, not only will we need to deal with these weaknesses and issues that have arisen as a consequence of the crisis, but equally, prepare ourselves for the challenges that lie ahead from globalisation, liberalisation and other emerging trends in the market place. It is my belief that a holistic, concerted approach is required to tackle these problems. With this in mind, very soon after my appointment to the SC, I initiated the formulation of the Capital Market Masterplan, which will provide a comprehensive strategic "road-map" for the longer term development Malaysian capital market. In addition to addressing the problems which I have just spoken about, it will aim to provide the answers to what sort of capital market we want, when and how. In drawing up the Masterplan, the SC has been working closely with industry participants, including members of the accounting profession, and expects to complete the project by next year.

Now, before I end my lecture for today, I would like to briefly talk about the part that the accounting fraternity must play in facilitating capital market development through the promotion of good quality financial reporting and information disclosure by corporates. Just last month, I spoke on this very same topic in addressing the members of CPA Australia at their regional conference, but I feel, as a long-time practitioner in this field, that it is of sufficient importance that I should repeat myself today.

The Malaysian Capital Market and the Accounting Profession

The role of the accounting profession has gradually evolved over the years. From being mere bookkeepers, accountants have transcended their humble beginnings and have become, in my own words, "gatekeepers of financial truth". Let me explain what I mean. The New Economy has and will continue to be the catalyst for the emergence of a whole range of new investment products and services, and complex trading arrangements. This environment needs to be supported by skilled, innovative service providers who can add value to the process. Accountants are among the pool of trained professionals which the nation can tap on in its quest to develop its capital market. In embracing the challenges before us, there is a major role to be played by accountants, auditors, financial advisors, standard setters and professional accounting organisations such as the MACPA.

In the wake of the crisis, there has been a heightened awareness of corporate governance issues and a discernible shift in investor preferences for companies which practise high standards of corporate governance and place priority on shareholder value maximisation.

Much has already been said about the importance and benefits of good corporate governance. As such, I will not belabor the point. However, I will say this much: as we have seen over the course of the crisis, investors are a skeptical lot by nature. The misdeeds of few corporates are sometimes attributed, fairly or unfairly, to the market as a whole. At a time when funds have begun to flow back into the market, I would like to urge all of you to redouble efforts to discharge your respective duties in a responsible, professional manner.

While the Commission will also continue to do its part in pushing through the necessary reforms to the law and its guidelines and policies, it is incumbent upon you to be vigilant in safeguarding the quality of financial information disseminated to investors, whether acting in the capacity of director, CFO, auditor or advisor. It is imperative that we work together to dispel the notion that Malaysian corporates suffer from poor corporate governance practices and restore our country's reputation as a prime investment destination by forging an environment in which comparable, transparent and reliable financial information is readily available to the investing public as a matter of course.

In particular, CFOs and financial executives must ensure that the financial statements of the company not only satisfy the requirements of regulatory authorities, but should be of a sufficient quality to meet the needs of investors. Auditors also play a vital role in this quest for high quality financial reporting. Independent auditors must continue to 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.

Additionally, those involved in the preparation of financial statements should consider incorporating disclosures on 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 in discharging their obligations. The SC has repeatedly emphasised the importance of shareholder value creation and would like to see a more explicit recognition of shareholder value considerations in decision-making as well as corporate governance reforms within the corporate sector in Malaysia.

Accountants must also learn to discard their paradigms. This is especially important due to the new developments in the market. The first is the development of the bond market which this year has been pretty active with RM10.9 billion worth being approved in the first six months and RM8.6 billion worth from 1 July to date. In the bond market, if you are an investor you have to learn that unlike the equity market, the bond market investor does not enjoy a good fortune, or otherwise, of the company in which he invested. He is only entitled to payment of the interest and repayment of capital - in other words, he gets a fixed return - that's why it's called a fixed income investment. His interest in the company therefore shifts to one of assessing risk, both current and future. He therefore needs to rely on information such as credit rating and financial reports. I suppose, as an analogy, one can say that it is very much like choosing a husband, or in these modern times, like choosing a spouse.

The development of the venture capital industry is another thing that will require accountants to discard their paradigms. This is because accountants are trained for success and they cannot tolerate failure. But if you are involved in the venture capital industry, you will have to tolerate and accommodate failure, for nine out of 10 dot.com companies or setup companies will fail. One must learn to be able to work with a portfolio of companies knowing that a significant number will fail and once they succeed must provide the necessary returns for the venture capitalists.

Last but certainly not least, professional bodies such as MACPA have an important role to play in leading efforts to encourage its members to uphold high standards of conduct in their endeavours.

Conclusion

Ladies and Gentlemen, we stand at a critical juncture in the development of our capital market. As an integral part of the financial system, the capital market must be fundamentally strong to support the long-term aspirations of the nation. Weaknesses arising from the crisis must to be addressed without delay through the recommendations contained in the forthcoming Capital Market Masterplan.

I cannot emphasise enough that the accounting profession plays a major role in facilitating good governance, accountability and transparency among corporate citizens, as we confront the issues which I have spoken about today. However, I am confident that we will be able to work together to surmount these challenges.

Ladies and gentlemen, I appreciate your attention during the lengthy speech. It is almost humanly impossible to make a speech on this topic interesting, and I am touched by the show of attentiveness from all those present especially the market players! My one and half year heading the Commission has been most interesting - not only is it an honour but it has given me a new experience - a life as a Regulator, after 30-odd years living as an accountant. I have initiated the reforms necessary, and the steps being taken to implement these in an orderly manner. The Capital Market Masterplan will encompass all the strategic initiatives in a phased and planned manner. But it cannot be denied that much work still needs to be done especially its implementation.

Let's work together to make all these happen. It is my hope that the accounting profession will also develop their own strategic masterplan for the next decade.

Thank you.