Monday, 14 August 2017
Monday, 17 July 2017
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
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
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.
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!
Saturday, 27 May 2017
The Star reported about auditors of a public listed company in Malaysia declaring that it audit opinion on the financial statement of that company is no longer reliable.
As far as I could recall, this is the second time in Malaysia where auditors publicly declared that reliance should not be given to their auditors reports as they were not provided with material information or facts by management when the audits were conducted.
This sort of situation is very dangerous as it would taint public confident on the reliability of auditors reports accompanying financial statements in Malaysia. As a result of such withdrawals, as termed by the news article, I have heard questions from the public as to whether such withdrawals are professionally proper and whether the auditors could just walk away from the issues without being held professionally responsible for their audit opinions.
Let us consider what the International Standards on Auditing (ISA) says about this. In my view, paragraphs 14 to 17 of ISA 560, Subsequent Events, are relevant to situations where material facts are made available to the auditors after the audited financial statements had been released. In summary, if the auditors are aware of the facts which, if known to them during the audit, would have caused them to modify their audit reports, the auditors are expected to discuss the matter with management of their clients, determine whether the financial statements require amendments and inquire how their clients would deal with the matters.
If the client's management and those charge of governance do no to anything, the auditors are expected to prevent future reliance on their audit opinions and reports and are expected to take appropriate actions. The standard does not spell out what are those appropriate actions.
Hence, making public to be aware that the auditors report are no longer reliable appears to be in line with the requirements of ISA 560, taking appropriate actions.
However, whether the auditors are absolved professionally would be a question of facts and circumstances. The Audit Oversight Board had been reporting about auditors failing to apply professional scepticism in many instances in the past. Such failure would also affect their professional judgments.
Before auditors could be allowed to walk away with audit opinions which did not consider material facts or information, there would be few questions which the auditors would have to explain to regulators, if such cases came under regulatory scrutiny:
- Whether the audit firm has expertise in auditing the business of their clients, including those with overseas operations?
- How did the audit firm assess their capabilities in auditing material transactions which occurred abroad? Do they have branch offices or affiliates who could assist them in their audit?
- How could risks were not discovered during their audit planning?
- If those facts were around very much earlier, were there any trigger which would have alerted the auditors?
- Why the auditors were able to sense those facts after the audit, not before?
With these kind of questions, which are not exhaustive, it would not be easy for auditors to claim that they have been cheated by clients. What more when such clients are known to the world to have cheated many times before. Under such circumstances, their professional scepticism would be heavily scrutinised, if regulators are keen to know the truth about the audit. They would have to be accountable to the audit opinions which they have issued.
We should also not forget about the companies which caused their auditors to "withdraw" their audit opinions. There could be issues of misconduct and breaches of laws. As for the company reported above, the Securities Commission had secured relevant documents. This may lead towards enforcement actions, if there were evidence of any breach of the Capital Markets Services Act. As for the earlier case, another regulator is involved. There is no information in the public domain as to whether any action is taken against the company involved.