Saturday, 29 October 2016

A Morning About Governance

I have been making a number of speaking appearances lately. That helped to maintain my visibility within the corporate community since I left my positions with the Securities Commission last March.

The Malaysian Institute of Corporate Governance (MICG) and Unitar invited me to be the keynote speaker at their governance conference yesterday. All aspects of governance, human, corporate and public were touched on by various speakers.

I shared my observations on the progress of corporate governance in Malaysia especially by providing the contexts of why certain positions were taken. Put in place as a response to the financial crisis in 1997, the Malaysian Code on Corporate Governance, which is spearheaded by the Securities Commission, has changed the corporate practices in Malaysia to a respectable position compared to where it was decades ago.

However, the 1MDB issue had dragged perception about our governance standards down and this was reflected in the recent Asian Corporate Governance Associations' assessment where Malaysia is now placed at fourth in Asia, behind Singapore, Hong Kong and Thailand. Many people may not realise the efforts made by regulators, corporate Malaysia and other institutions such as MICG all this while in shaping Malaysia as a competitive market with good governance environment.

One key point which I emphasised was the influence of public governance on the governance practises at the corporate side. Given that power is mainly concentrated in the public sector, any practise which results in corruption and abuse of power in the public sector would be transmitted into the ecosystem.

While the discussion about governance would be concentrated on the systems and processes, the human dimension is very critical in shaping the quality of governance. After all, those systems and processes are operated by humans. Hence the issue of minds and hearts should not be ignored.

While the Malaysian Code on Corporate Governance 2016 is being formulated, after considering public feedbacks which were provided in respond to its public disclosure, its focus on corporate culture is a manifestation of the importance of the human part in shaping governance practices. I pointed out that Prophet Muhammad was known as an honest person (Al Amin) before he was chosen to be the Messenger of God. This signals that conscience should take precedence over competence when choosing leaders. An honest leader could leverage on competent advisors but a dishonest but competent leader could abuse his or her  competency and create huge problems to all stakeholders.

In closing, I appealed to all Malaysians to do the right thing in whatever decisions which they are making. Do not wait for the world to change but make whatever little change that they can to make Malaysia a better country. This is more critical when they choose people to be given responsibilities which would affect our daily lives.

My presentation could be downloaded here.

Sunday, 23 October 2016

Should We Take Digital Economy Seriously?

I was invited by CPA Australia to share my views on how Small and Medium Practices (referring to accounting firms) could revamp themselves by leveraging on economic crisis. I was given the final slot at the ASEAN Regional Small & Medium Practices Conference 2016 held back to back with the ASEAN Federation of Accountants' Council meeting in Bangkok, Thailand.

The thrust of my presentation was for the accountants to reframe their mindsets. Instead of worrying about the sizes of the firm they should be planning to be Meaningful and Significant to their clients. So, moving forward, SMPs should be referring to accounting firms which are providing meaningful services to their clients and making the firms significant in the minds  of the clients with respect to business.

My slides can be downloaded from this site.

I was then told that the Federation of Accounting Professions (Thailand) would be organising an international conference on digital economy. I managed to get myself invited as I am really keen to understand how the Thais in particular and ASEAN generally are dealing with this ever-changing landscape. Coincidently, technology was one of the topics discussed at the SME Conference.

Two presenters from Thailand kick started the conference. The representative from the Ministry of Commerce recaptured the progress of digitising the economy, which was mainly driven by the government. This incorporates various online submissions replacing papers which were the norm in the past. The Director of Payment Systems from the Thai Central Bank shared the progress and future of the usage of digital technology in the Thai economy. 

Then, the elders of the accounting profession (read: presidents of accounting bodies from Malaysia, Thailand and Singapore) took the centre stage and shared the progress of the digitisation of their various economies. What surprised me was the depth of knowledge and technical jargons used. I was not expecting that given what is commonly perceived of accountants. Their collective messages to the accountants in the audience were simple, the world is changing rapidly and accountants mush have their agenda in the digital game. 

Trust was mentioned as the edge that accountants have and that should be leveraged over even when problems are solves in nano seconds digitally. I suppose many accountants would have to reflect on this point. Are they being trusted now and how could they maintain trust in the domain naturally not associated with them?

I am scheduled to discuss about discuss about changes in technology with directors of capital market institutions next week. So, technology and digitisations seem to be the common theme in three events which I attended and would be attending in a week. What does this mean?

So, the digital economy is here and we have to embrace the challenge ourselves. There is no point to pray for the world to stand still. We would be missing the boat is we try that path.

In any case, the fact that you are reading this posting means you are already connected to me either through this blog, Facebook or Twitter.

The digital economy is real and it influences you and me similarly.

Thursday, 22 September 2016

Whose Interests Should the Accountancy Profession Protect?

As usual the issue of maintaining audit as a mandatory requirement for all limited companies who get attraction at the Malaysian Institute of Accountants (MIA) annual general meeting.

It appears that instead of taking advantage of the requirements of the law, many auditors feel that mandatory audit is a sort of rights and any attempt to relieve small companies from such requirement should be opposed. The following motion would be debated at the forthcoming MIA annual general meeting this Saturday:


BE IT RESOLVED THAT the Malaysian Institute of Accountants (MIA) expresses its members’ intention to the relevant government authorities that audit exemption be limited to dormant companies only. And, to request the Companies Commission of Malaysia (CCM) to engage with MIA before confirming the guidelines on the companies to be exempted from audit. 

There are a number of public interest issues behind this discussion:
  1. Exempting from audit is practised in many countries recognising that audit is only valuable when companies have grown to a certain size. Why should Malaysia be different?
  1. Auditing standards, especially for private companies, generally are not up to the mark. As of 30 June 2015, out of 660 firms which were reviewed by MIA, 47% did not meet MIA own auditing standards (Type 3). This is a serious situation if considered from public interest perspectives. Were the clients of those firms which got Type 3 did not get their fair share of the bargain? Were there assurances, as expected by auditing standards, for those audit engagements? Interestingly, in the 2016 annual report, the statistics on the outcomes of practice review is not shared? The closest to this were the number of practice review failure cases which were referred to the Investigation Committee. 26 cases were referred!
  1. The MIA allows auditors in Malaysia to limit the usage of their audit reports to the shareholders of the companies only. While the legal position of this limitation has yet to be tested in Malaysia, the issue is whether such limitation is fair given that audit requirements is mandatory.
MIA is not a trade association. It is a body set up by an act of parliament to safeguard the accountancy profession and public interests. Section 6 of the Accountants Act requires MIA to regulate the practice of accountancy in Malaysia. Who are at risks when MIA members do not perform their work according to the standards set by MIA itself? It is obvious, the party which need protection is the public who are not in the position to assess the quality of work including those performed by auditors.

If the rate of sub-standard assessment is very high, what were the remedial measures done? All auditors would claim in their audit report that they have complied with the auditing standards, the MIA own practice review results indicate a high non-compliant rates. More information should be share, for the sake of the public who consumes the services of MIA members, especially auditors.

Sir David Tweedie, the former Chairman of the International Accounting Standards Board was in KL earlier this week. His advice to the accountancy profession was "You serve public interest first, then your profession, client, employer and your self". I trust this advise would be upheld by MIA.

Let's see what would transpire at the MIA AGM and see whether public interest becomes the overriding principle in the decision to be made by a profession which has legal backing for its existence.

Saturday, 6 August 2016

How Is Your Board Dealing With Brexit?

Even as the votes were being counted on June 23, not many people in Britain and the whole world were expecting that the ‘Leave’ side would prevail during the recent referendum to determine whether the UK should remain in the European Union (EU) or otherwise. However, as more votes were counted later that night, the concern about something not imaginable started to become stronger. The pound started to tumble against many currencies. By the morning the day after, the ‘Leave’ campaign had won.
Brexit or Britain exiting the EU appears to be a classical black swan event, something not foreseeable to happen which eventually happened. Not only did the event split British voters into two groups, ‘Remain’ and ‘Leave’, but it also brought with it uncertainties which would persist over a long period.
The first casualty was David Cameron, the British prime minister who had to quit his job after being defeated during the referendum. His successor, Theresa May, who was from the ‘Remain’ camp, has to take over and deal with something which she herself was not convinced is good for the UK and Europe as a whole. While she had clarified that the UK would only invoke Article 50, the trigger for exit, towards the end of the year, many people are still hoping that Brexit would never materialise. Some people are even bringing this issue to court.

The Europeans would also try to make Brexit as tough as possible to deter other countries within the union to venture into the same territory. Strong remarks from Brussels and Berlin in urging for the UK to invoke Article 50 as quickly as possible could also be aimed at other member states as well in sending the message that this is not a game.
While uncertainties could be good for speculators and some could have made money in the financial markets after the Brexit decision, uncertainties would also influence sentiments and confidence of investors. There are already talks about investment moving away from the UK to other parts of the world. In the stage where the global economy is not at its optimum as what we would have liked, a black swan event like Brexit is the last thing that we need.
While many Malaysian companies may not have direct exposure to the risks arising from Brexit, this issue should not be left unattended. The risks could also be possible from secondary events such as new rules which could be applicable once the UK is no longer part of the EU. Market access to Europe, for example, could be affected if the existing entry point is only from the UK. Effects on customers or particular market segments have to be considered and even the reliability and cost effectiveness of any supply chain from the UK or Europe has to be reviewed again.
On the other hand, would there be new opportunities as well? If there are really capital flights from the UK, would there be any chance that Malaysian companies could have some share of that? What needs to be done to capture those opportunities?
It is well known that some Malaysian companies were investing heavily in the UK property sector in the past few years. For them, their exposure to the risks of Brexit is different; some of the risks could have already crystallised. If the progress of their property development projects, for example, is already half-way through, the next course of action would be vital. Do they proceed as planned, defer further investment or speed things up, pack their bags and leave the market? All these options and their consequences require deep thinking to figure out some sense of direction and logic that correspond to the realities on the ground.
While many companies are aware about what is going on around them, not many are taking those events seriously. In the absence of a systematic process where events are detected and analysed and the understanding of their impacts are discussed in C-suites and boardrooms, many clear and present dangers and opportunities would be missed. This is where board members have to be comfortable that the companies under their care regularly scan the local, regional and global landscapes to detect and analyse emerging trends and update them accordingly.
For the case in hand, it would be also good to reflect on whether the processes had detected the possibility of Brexit and whether the views formed were close to the realities that prevailed. This would be a good opportunity to assess the effectiveness of such systems and processes, and whether they were helpful in providing boards with relevant data and information in discharging their duties towards their companies and shareholders.
As the saying goes, don’t let a crisis go to waste.
This article was published in The Malaysian Reserve under the column Boardroom View

What Companies Can Learn From the AOB Annual Report?

The Audit Oversight Board (AOB) recently issued its sixth annual report which covered its work and observations for 2015. While the report was predominantly aimed at the auditors of public interest entities (PIEs), it also contained observations and insights relevant to companies audited by the auditors concerned.
Hence, directors who are keen to enhance the quality of governance of their companies, particularly PIEs, should pay attention to the findings of the AOB.
In the context of the AOB, audit firms are divided into two groups: major audit firms and the rest. Why? The major audit firms consist of the larger firms that have more than 10 partners and audit close to 96% of public listed companies if measured by market capitalisation.
In addition to their reputation, their size and scale enables them to take larger and complex audit engagements. This is important for companies that have a significant presence in foreign markets. The other side of the coin is the 42 medium to small firms, which have only around 4% of the market share.
The skewed distribution of audit work creates different challenges for the firms. The larger firms have more work on their plate, thus stretching their resources in meeting deadlines. The type of clients they serve also requires them to deal with more complex accounting issues and make more challenging professional judgments.
As the smaller firms have a lesser amount of work, with a majority of them dealing with only one PIE client, their exposure to the complexities of auditing PIEs may be limited. If the enforcement actions taken by AOB are taken as an indicator, it appears that some firms in this category have issues in complying with auditing standards.
One of the key observations of the AOB for the major audit firms is the increase in the percentage of engagements requiring significant improvements, from around 10% in 2012 to around 18% in 2015. This means that close to one in five audit works of the major audit firms needed significant improvements.
Among the drivers of the findings are the inability of the firms to maintain consistent quality of work across all engagements, failure to consult their relevant experts in dealing with challenging matters and the need for further improvements in their systems to monitor work quality.
For other firms, while the percentage of engagements requiring significant improvements had improved from 80% in 2012 to 45% in 2015, the percentage of work in this category remained unsatisfactory. If the findings on this category of firms are analysed further, they would have more structural challenges compared to their larger cousins.
For example, the AOB highlighted gaps in the ways their partners’ performances are assessed, where quality is not being given adequate weightage, hence not providing enough incentive for them to ensure quality work is performed.
Other gaps identified include independence and ethical issues, failures to comply with the new client acceptance process properly and inadequate training, as well as the extent of involvement of partners in audit engagements.
Like prior years, there were common deficiencies in the audit work, which were noted across all the firms. They were in the areas of revenue recognition, asset impairment, group audit, sampling and reliability of information provided by management or experts.
Notwithstanding the remediation efforts made by the firms in response to the AOB’s findings in prior years, the effectiveness of those efforts seems to be questionable.
What do these findings mean to the board of companies audited by those auditors? There are a number of issues that the company boards need to give their attention to.
First, boards need to understand the strengths and weaknesses of the firms which they engage. What are the views of the leadership of those firms with regard to audit quality and what are their efforts to ensure the assurance provided to the board every year is reliable?
Given the findings of the AOB, boards are entitled to ask whether there are adverse findings against them and what they have done to rectify those shortcomings. While audit firms may play down the findings of the AOB, that view alone is already a red flag about the attitude of the firms regarding audit quality.
The second issue is about ensuring the firms have enough experienced staff, other than the partners, to deal with specific industry issues or complexities of the companies audited. While the partners are responsible for the whole audit, most of the work would be performed by more junior staff.
Questions around the efforts of partners in supervising the audit, and the experience and expertise of senior staff assigned to the audit engagement would provide ideas about whether the firms could handle the audit risks of the engagement.
Workload and tight deadlines are the third element which could influence the quality of an audit. Boards may also want to ask about resource allocations for their audit work and whether the firms are also committed to other large clients in the same period.
The AOB annual report provides good insights about the state of affairs of the auditing industry and possible shortcomings that could pose potential risks to the level of assurance provided to boards and shareholders. Those boards which are responsive to those findings would certainly be able to have better assurance and quality of work from their auditors.
This article was published in The Malaysian Reserve under the column Boardroom View