Saturday, 19 August 2017

Is MIA a regulator or a country club?

This had been the perennial question even when I was involved in the leadership of the Malaysian Institute of Accountants (MIA).

There are two schools within MIA when it comes to this issue. One who feels MIA should be protecting public interests and exerts its powers on accountants across the board to ensure they maintain professionalism and create value for their employers, clients and other stakeholders.

The other group, mainly practitioners, wants MIA to be more like a country club where the interests of members should be paramount over others.

I don't have any problem for MIA to be a country club if it is just like any other professional bodies where people join them to be recognised and enjoy benefits they offer. MIA on the other hand is a body created by a statute where its membership is compulsory. Why? So that only competent individuals are recognised as accountants and they are regulated to serve public interests.

However, the unique feature of MIA as a regulator is that a third of the Council members are elected by the members at large instead of being appointed by the government unlike the Board of Engineers or the Malaysian Medical Council. This is akin to have the cab drivers electing who should be on the board of SPAD to regulate them! This feature creates confusion, even to some of the MIA Council members themselves. 

Whenever there is election to elect Council members, there would be campaigns, although not as low as those in politics, by aspiring candidates. Guess what would be their core promises? Members interests!

This conflict of role was best demonstrated when the Companies Commission solicited views on audit exemption for small companies, MIA fought tooth and nail to retain mandatory audit across the board even when it knew that audit exemption is practically implemented in most countries in the world to make life simpler for budding businesses until they reach the stage where the risks they pose to the society is significant.

At the same time, MIA appears reluctant to be more assertive on auditors who keep on failing their practice review. Even the whole framework can be questioned. Why have practitioners making decisions on practice review outcomes when their conflict of interests in that subject is very clear? In the era of modern audit regulation, having practitioners on decision making structure of audit regulators is a big no, no. 

As at 30 June 2016, 681 out of 1,487 audit audit firms registered with MIA had been reviewed. The results certainly are not giving confidence to the public. Only 7% of those firms obtained the Satisfactory level, 45% had "assurance of compliance" while 48% needed "follow up". Needed follow up means the work of these firms had not been up to the professional standards set by MIA. Just imagine close to 50% of the cars in showrooms may have major defects!

MIA also shared on its website that it did 29 follow-up reviews on firms which were reviewed earlier. Based on my understanding of the report, 16 firms or 55% of them still were not been able to achieve the quality of work expected out of audit firms.

MIA cannot avail itself from responsibilities regarding audit quality amongst audit firms which are registered with it. I am aware that for auditors to get their approvals renewed by the Minister of Finance, they need the support from MIA. I wonder whether those firms which failed their second review are still supported by MIA? Such support, if given, is a clear breach of public trust given to MIA. MIA also has an obligation to IFAC to ensure its audit supervision work is effective. That is a tall order.

The MIA Council must remember MIA is not a country club. They have the responsibilities to make MIA a respected regulator. Why should MIA’s membership be made compulsory if there are no serious efforts to weed out members who failed to uphold MIA’s own standards? The auditors only deserve their rice bowls if their behaviours are consistent with public interests.

I feel MIA's structure has to be clarified once and for all. As a regulator, MIA has to be focused on ensuring accountants perform their duties as promised and uphold professional values as all time and all cost. If this is not the primary duty of MIA, then it should become a real country club so that those joining it is clear that the main purpose of joining it to have fun.

This article was published by Astro Awani in its Business section which could be read here http://english.astroawani.com/business-news/mia-regulator-or-country-club-152804

Monday, 14 August 2017

Companies Commission should explain its stand

Although the criteria for audit exemptions have been finalised, the debate may go on

The STAR by Errol Oh

WHAT will change when potentially tens of thousands of small companies in Malaysia are no longer required by law to appoint auditors? Will these companies benefit from not having to bother with annual audits of their financial statements? Will others find it riskier if they have to rely on the companies’ unaudited accounts? And how will audit firms deal with the drop in revenue?

We are likely to start seeing the impact of the audit exemption in 2019. That is if the Companies Commission of Malaysia (CCM) sticks to the criteria set out in its Aug 4 practice directive for determining which private companies aren’t obliged to issue audited financial statements.

The matter may not be settled yet despite the robust four-month-long public consultation on the proposed practice directive.

A number of heavy hitters were among those who wrote in to oppose the exemption for small companies. The CCM has subsequently tweaked the criteria and explained further the rules – the practice directive expanded from a five-page draft to a final version that has eight pages – but there’s no indication that the critics have changed their minds.

The Malaysian Institute of Accountants (MIA), whose lobbying against the exemption was the most vigorous, says its council will meet later this month to discuss the CCM’s latest move. Meanwhile, the institute has solicited views from members. 

Based on the MIA’s survey of audit firms and the feedback gathered by the CCM during the consultation period, it is clear that most practitioners don’t support audit exemption for small companies.

The chief arguments are that the financial statements of many SMEs won’t be reliable if not audited; the companies will have trouble with their tax filings and loan applications if they don’t have audited accounts; and the loss of audit jobs will hurt small and medium accounting firms and reduce training opportunities for accounting graduates and students.
By the time the consultation ended on Feb 28 this year, about 100 individuals, firms and organisations had given comments, with an overwhelming majority saying they didn’t agree with the move to exempt small companies.

(The draft practice directive also talked about audit exemption for dormant companies, which was widely accepted and is included in the Aug 4 directive.)

According to the MIA, the other membership-based organisations that offered their opinions were the Malaysian Institute of Certified Public Accountants, Malaysian Institute of Chartered Secretaries and Administrators, Malaysia Accounting Firms Association, Association of Banks in Malaysia, and Malaysian Association of Company Secretaries.


The banks and other financiers say they have an issue with the audit exemption because they depend on audited financial statements when assessing applications for loans, and monitoring the performance of corporate customers.

Surprisingly, government agency SME Corp Malaysia is less than enthusiastic about the audit exemption. A newspaper report last month quoted the agency’s CEO as saying the exemption must be treated cautiously as there are a few possible drawbacks to SMEs. 

One of the more strident pro-exemption voices is that of Nik Mohd Hasyudeen Yusoff, a former MIA president and the founding executive chairman of the Audit Oversight Board.
When responding to the draft practice directive, he said the audit exemption would enable small companies to manage their costs. He added that instead of paying audit fees, the SMEs could use the money to hire accountants to help prepare financial statements in compliance with the accounting standards.

He argued that auditors should not have a part in the preparation of the clients’ accounts because it compromised the auditors’ independence.

“An audit performed without compliance with independence standards are of no value,” said Nik Hasyudeen, who gave comments in his capacity as founder of Inovastra Capital Sdn Bhd, which advises on leadership, governance and strategy.

Incidentally, in their comments to the CCM during the consultation, some of the other respondents suggested that many SMEs couldn’t issue financial statements without the auditors’ intervention. 

Nik Hasyudeen even recommended that the criteria for audit exemption be changed so that more companies would qualify.

In the draft practice directive, the CCM said that for a company to be exempted from appointing an auditor, its must fulfil two of these three conditions: annual revenue of not more than RM300,000; total assets below RM500,000; and not more than five employees.
Nik Hasyudeen said the revenue cap should be increased to RM500,000, in line with threshold for exemption from the goods and services tax system.

The CCM did the opposite; it narrowed the scope for exemption. In the Aug 4 practice directive, the revenue and assets criteria for exemption have been lowered to RM100,000 and RM300,000.

In a Facebook post, a disappointed Nik Hasyudeen said the new criteria “practically require most active companies to be audited”. Is he right about that?

According to the Statistics Department’s Economic Census 2016, Malaysia had about 694,000 microenterprises, which are defined as having sales turnover of less than RM300,000 or fewer than five employees.

Going by CCM figures, perhaps 15% of these business are companies, which gives us 104,100 companies with annual revenue of less than RM300,000. If we assume that half of these have sales that don’t exceed RM100,000, it appears that about 50,000 companies will qualify for audit exemption.

That’s a small figure when compared with the 1,226,273 companies registered with the CCM as of July. However, the naysayers point out that it will be easy for the commission to later push up the thresholds. That’s presumably why the MIA is not exactly jumping with joy despite the lower thresholds.

But what’s particularly striking about this conversation over audit exemption is the CCM’s silence on the basis for the criteria and the importance of the exemption.
The change in legislation that brought about the exemption came from the Corporate Law Reform Committee. But the committee’s final report was issued way back in 2008. Much has changed since then.

On its website, the CCM bills itself as the “leading authority for the improvement of corporate governance” and says it ensures compliance with business registration and corporate legislation through “comprehensive enforcement and monitoring activities”.
Surely that should include supplying an authoritative and convincing rationale for audit exemption.

Executive editor Errol Oh is glad to see the strong response during the public consultation on the draft practice directive.

Read more at http://www.thestar.com.my/business/business-news/2017/08/12/companies-commission-should-explain-its-stand/#mOiUXE1A1hZEZlwe.99

Monday, 17 July 2017

Bringing Conscience into Boardrooms

I was involved in three events last week relating to governance, leadership and boardrooms. Considering that I had left the regulatory space for more than a year, I am happy that my thoughts and views on those subjects still matter to some.

Jamie Allen, the Secretary General of the Asian Corporate Governance Association (ACGA) bought me breakfast at the side of the International Corporate Governance Network (ICGN) conference in Kuala Lumpur last week. Allen was accompanied by Benjamin McCarron, the Managing Director of  Asia Research & Engagement.

The main topic of our discussion was on the development of corporate governance in Malaysia and what should be the key areas which need to be focused on to enhance our governance standards. We did touch on having strong culture in boardrooms and at the C-suites as one possible focus area. Inevitably, for such to happen, we need more directors who are not only competent by mush have strong conscience to move the agenda forward.


Later in the day I spoke at a forum on The Future of Work. The session was sponsored by EY, as part of the ICGN conference programme. It was chaired Bin Wolfe who is responsible for EY's talent decelopment in Asia-Pacific. Also on the panel was Jeffery Williams from China Universal Asset Management and Shareen Ghani, the CEO of Talentcorp.

From the boardroom perspectives, corporations need to align their talents with the continuously changing business landscape which require strategies and business models to be reviewed more frequently. A great strategy is only as good as its implementation, hence, matching talents must be available. One of the pushback when new talents are brought in would be culture, again. Culture, it not shaped properly, would mitigate whatever new ideas and thinking of new talents. Board must pay attention to this and follow up with strong discipline.

It was great that EY decided to bring the talent issue to the forefront in front of the global audience. Talent development and retention are major topics discussed in Asian boardrooms, especially as part of succession planning of the board as well as the C-suites.


The next day, I was invited by the Federation of Public Listed companies to share my views on how independent directors could manage expectations of their performance given the changing landscape and regulatory developments.

One of the issue which I raised was the ability of directors to keep up with new developments in many fronts, society, technology, economy, environment and regulation - the drivers of change.



While it would be great is a director is able to cover most of the issues, the total skills of the people in boardrooms matter. Hence, proper succession planning and having access to good advice would be helpful. However, ultimately, members of the board have to make the right calls, irrespective of the consequences on themselves. That is really challenging is board members are relying on board fees to finance their lifestyles.

One common theme from the three engagements above is about the need to have senior people with competent and conscience in boardrooms and C-suites. While competency is certainly a prerequisite for most organisations, conscience could be something which had not been focused on enough all this while.

It is time to bring conscience as a must-have criteria for those responsible to govern, lead and manage organisations.

Thursday, 22 June 2017

Does Leadership Define The Accountancy Profession?

How do you assess the values of a group of people? Especially those professing that they would be protecting public interests?

It is not an easy question to answer unless there are some sort of observable behaviours and standards which we can compare with.

One natural occurrence when people with some common interests gather as a group is for them to select or elect leaders to represent them. In formal arrangements such as clubs or associations, it would be customary, and in many cases legally required, for the leadership of the groups to be elected.


I would certainly view that whoever that is voted in as Presidents or any other similar positions to reflect the hearts and minds of the people who supported those leaders. In a situation where there are a number of groups with different world views and interests, the majority of them would prevail. So, the leadership would reflect the majority of people in such groups.

Like it or not, the standards expected from professionals such as the accountancy profession would be higher than for others, the man on the street. The accountancy profession professes to protect public interests through ensuring their members are competent and uphold the values of the profession. Integrity stands as the key ideals of the profession, above other principles such as objectivity, confidentiality and due care.

In fact, just recently, the accountancy profession adopted a new code of conduct which relates to actions to take in public interest when accountants are aware of potential illegal acts, non-compliance with laws and regulations committed by clients or employers.

Among other matters, the new standard, which becomes effective on 15 July 2017, provides a clear pathway for auditors and other professional accountants to disclose potential non-compliance situations to appropriate public authorities in certain situations without being constrained by the ethical duty of confidentiality. It also places renewed emphasis on the role of senior-level accountants in business in promoting a culture of compliance with laws and regulations and prevention of non-compliance within their organisations.

So, if that is the standard which they agree to live by, anyone elected to the leadership of the profession should also live and breath compliance culture and detest any breach of the law or regulation. It would much more better if the person had demonstrated such qualities in his or professional career.

In situations where any appointed leader does not carry the values promoted by the profession, doubt would be casted on the profession as a whole. Didn't the professionals exercised their membership rights without due consideration to their own professional values?

I suppose it if fair to judge a profession based on the standards which they impose on themselves. In the case of the accountancy profession, the approach has always been from the perspective of a third party who has reasonable information and understanding of the situation. Unfortunately, this high bar has been set as the "smell test" for accountants. They have to keep on training to jump higher that the bar. Otherwise, the whole profession could be tainted and perceived as abandoning their own professional standards, smelly.

Sunday, 28 May 2017

Go Beyond the Rainbow, Forget Small Company Audit

In conjunction with its 50th anniversary, the Malaysian Institute of Accountants (MIA) held its 2nd commemorative lecture last week. It was given by Tan Sri Azman Mokhtar, the Managing Director of Khazanah Nasional Berhad, a social wealth fund set up by the Malaysian government (Khazanah does not like to be referred to as a sovereign wealth fund as it does not manage the reserve of the country).

True to his form, Tan Sri Azman challenged accountants in Malaysia to ride the various waves of change which the country as a whole has to face. Using football as an analogy, accountants have various roles to play, from its traditional roles as custodians, standard bearers and measurers to more strategic roles as cheerleaders and thought leaders.


He urged accountants to join his journey in valuing companies based on their true values, beyond the fair value model which is predicated on the potential cash flow streams over the live of those companies. This would require more philosophical and conceptual understanding of value which would not be easy to figure out. In this respect, Khazanah has embarked on Project Chronos with PricewaterhouseCoopers and has started to field test its valuation model. Views from accountants would be sought to validate and improvise the model when it goes into the Beta stage.


In reinforcing his message about true value, Azman used the metaphor of a rainbow. True value is like the golden chest, believed to be there, beyond the rainbow. Hence, accountants have to do the necessary to be able to go beyond the rainbow and secure the golden chest.

Possible?

Let's go down to earth and consider the reality of the day. If asked, what is the main issue before MIA today? Without doubt, I would say, "Small company audit!".

Why such a small matter is hindering Malaysian accountants to go beyond the rainbow? I have a number of reasons as listed below:
  • MIA is a statutory body set up to regulate the accountancy profession in Malaysia. Its present mission is to be a "partner in nation building". While it is not expected to agree will all the initiatives of the government, it should consider all issues from the perspective of the benefits to the nation, not with the view of protecting a particular segment of the accountancy profession.
  • The issue of exempting small companies from audit had been on the table even when I was involved with MIA, easily for the past 15 years. It is not a pioneering piece by the Companies Commission. This is a standard practice in many countries, developed or developing. What matters to the economy is for small companies to be successful in their businesses until they reach certain scale where their financial statements start to be significant. The audit requirement is to protect investors, not to provide business for accountants. If you do not believe me, just read the limited clauses on the audit report, something introduced by MIA. It sounds like this "this report is made solely to the members of the Company, as a body, in accordance with the Companies Act in Malaysia and for no other purpose. We do not assume responsibility to any other person for the content of this report".

  • The world keeps on changing and by not letting this issue go, it is starting to hinder MIA from becoming current with the more pressing challenges. Even the law itself has changed and the Companies Act now even allows for a single shareholder, single director company. I would certainly laugh if audit is made mandatory for such companies. Do I have to get may financial statements audited so that they would be tabled to myself? The argument that audit is also for other purposes such as taxation would not hold water due to the limitation described above. At the same time Inland Revenue has its own audit unit and many companies have been subjected to such audit.
  • This does not mean that small companies need not be audited at all but it should be a choice, either because entrepreneurs love audit or they need to submit audited financial statements for their business dealings. That would make small company audit market-driven, rather than regulatory driven. What is wrong with that?
While the issue of small company audit looks "small", it reflects the constraint imposed on MIA by its own membership. That makes MIA unique. The law forces accountants in Malaysia to join MIA as a member but MIA itself cannot force its regulatory responsibilities on those members. Just look at the practice review structure of MIA. Is it as independent as the Audit Oversight Board? Who do the reviewers reporting to? 

The country really need a strong accountancy profession with members who are keeping themselves abreast with new developments and provide their services, as firms or individuals, professionally by adhering to the professional values of the profession. This requires MIA to be clear of its role, structure themselves appropriately to avoid conflicts, set performance standards with the interests of the nation in mind and enforce those standards without fear or favour. 

We need MIA members to be able to reach beyond the rainbow. However, for that to happen, they need to free themselves from the baggages of self-interests. They need to place the interest of the nation above all other interests and do whatever it takes to make Malaysia great!