1. I would like to thank the Malaysian Institute of Accountants (MIA) for inviting me to officiate the launch of the Financial Reporting Standards Implementation Committee (FRSIC).

2. As many of you are aware, the Securities Commission was instrumental in working with the government to establish a strong financial reporting framework in Malaysia. The setting-up in 1997, of the Financial Reporting Foundation and the Malaysian Accounting Standards Board – which was the first independent accounting standards Board in Asia – paved the way for a more robust framework within which standards are developed, applied and enforced. There has been international recognition of these efforts by not only international standard setters but also other market commentators and players.

3. The recent World Bank report on the Observance of Standards and Codes (ROSC) for Corporate Governance accords full marks to Malaysia in the area of disclosure and transparency of accounting standards, further underscoring the significance of having a strong framework within which standards are developed and implemented.

4. The adoption of 18 new and revised Financial Reporting Standards (FRS) by the MASB which came into effect on 1 January 2006, has demonstrated further the commitment towards convergence with international financial reporting standards. It is significant to note the World Bank’s observation that “Malaysia has adopted a policy of full convergence….The standards are fully IFRS compliant…”

5. However, adoption of these new standards does result in further challenges to preparers, users and even regulators related to issues on interpretation and implementation.

6. Although accounting standards strive to set common ground rules for financial reporting by companies, there still exist grey areas which are subject to the interpretation of accounting practitioners based on their “best judgement”. Therefore, guidance on important and significant accounting issues, especially where there are conflicting interpretations, would be most useful to assist preparers and auditors alike to adjust to a more exacting financial reporting regime and to work together towards the common goal of providing internationally comparable financial statements.

7. It thus gives me great pleasure to witness the launch of MIA’s FRSIC which is established to provide the much needed guidance on accounting issues to its members and demonstrates the profession’s commitment towards greater self-regulation.

Apply highest standards of accounting to achieve sound financial reporting

Ladies and gentlemen

8. Comparable, reliable, complete and timely information is vital for the efficient functioning of markets and in building investor confidence. This is especially so in today’s business environment where the effects of intense competition and globalisation have removed financial and operational barriers, making the world borderless and interdependent. It is therefore essential that financial statements comply with the highest standards of accounting to inculcate confidence among the investing community both local and global. The ramification of failure in financial reporting can be extensive and at times fatal as evidenced by the spectacular corporate collapses early in the millennium.

9. Sound financial reporting is the cornerstone of good corporate governance, as it will instil investor confidence, contribute to capital formation and ensure efficient allocation of capital in securing long-term economic growth. It is important for investors to know that a set of financial statements produced by a Malaysian company is of a quality and level of reliability that is essentially no different than those available in a developed market jurisdiction.

Substance over form

10. However, compliance with FRS should be beyond form, and should report the substance of transactions. This is not to say that conformance is irrelevant but mere conformance is inadequate. Indeed companies need to achieve both conformance and performance, and not a trade off between the two. I would like to emphasise that the performance of companies should be the result of real growth.

11. Although opinions may differ, fundamentals should always prevail. In applying FRS, we should be guided by the spirit and reasoning behind them and accordingly, apply them based on substance over form.

Ethical conduct drives business growth

Ladies and gentlemen

12. Investor confidence and public trust empowers the accounting profession, for without it, the credibility of the information produced is put at risk. We cannot afford this. The accounting profession must uphold its core values namely integrity, objectivity, professional competence and independence, amongst others, as set out in MIA’s By-Laws on Professional Ethics, Conduct and Practice. Ethical conduct is the root of confidence in both individuals and entities, and is therefore a key driver of business growth.

13. I am confident the accounting profession will continuously strive to be at the forefront of efforts to raise the levels of integrity in the marketplace to ensure that capital market participants adhere to the highest possible standards of conduct.

14. The shift to a disclosure-based regulatory regime, where increased reliance is placed on the integrity of the accounting profession to ensure the reliability, quality and timely availability of information, provides another fundamental challenge for the profession. Minority shareholders need reliable information about the value of a company’s business and require the assurance that they will not be cheated out of that value by insiders. As a major gatekeeper of the capital market, the accounting profession plays a key role in further enhancing the levels of transparency, governance and accountability in the Malaysian capital market.

15. Therefore, in a disclosure-based regulatory regime, accounting firms must vouch for the quality of financial information. This is crucial especially when investors have no means of verifying directly the information which a company provides and rely solely on the financial reports published by companies, and duly audited by the accounting firms. The consequences of failure to live up to expected standards, can extend beyond the specific companies and affect overall market confidence.

Preserve true and fair view of audit opinions

16. In response to the recent history of corporate collapses, 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 that the shift to a more sophisticated approach should not, in any way, compromise or dilute the reliability or value of an audit opinion. As I have said, the true and fair view of an audit opinion must extend beyond form and cover the substance of financial transactions.

17. External auditors, aptly described as “watchdogs” of companies, represent the only independent party that is well positioned to review the transactions and books of a listed company. Any shortfall in the performance of these duties will have far-reaching implications in relation to the levels of investor protection. For example, the interests of shareholders of companies facing going concern issues could be severely compromised if the external auditors of such companies do not properly flag this in the audit opinion. It is therefore imperative that audit firms ensure that the integrity of the audit opinion is maintained.

18. Section 99E of the Securities Industry Act 1983 also imposes an obligation on auditors of listed companies to safeguard the quality of financial information disseminated to investors by requiring them to report on breaches of securities laws. To encourage requisite reporting, the whistle-blowing provisions provide for the protection of auditors from being sued in any court for any report made in good faith and in the intended performance of such obligations.

Conclusion

19. Underlining the Securities Commission’s regulatory approach of “no more regulation than necessary” is our commitment to move towards a more principles-based approach to supervision. A principles-based system which focuses on substance over form is not easily circumvented. This, however, can only be achieved when there is a sufficient degree of market and self discipline, and less reliance on regulators to catch offenders.

20. In conclusion, I am confident that the accounting profession will continuously endeavour to ensure the reliability and comparability of financial statements by consistent application of the FRS. Guidance on important and significant accounting issues to eradicate arbitrary application of the FRS in areas where there are unsatisfactory or conflicting interpretations will most certainly enhance investors’ confidence in Malaysia as a preferred investment destination. With the launch of MIA’s FRSIC, the accounting profession has achieved yet another milestone in its effort to cultivate sound financial reporting among preparers of financial information.

21. On that note, I wish the Financial Reporting Standards Implementation Committee every success. Thank you