New measures to enhance financial reporting passed

THE recent parliamentary session saw the passing of a number of laws with the intention of enhancing financial reporting of public-listed companies in Malaysia. Given that sound and reliable financial information is critical for a healthy capital market, the changes in the laws would provide additional measures in regulating financial reporting and auditing of companies listed on the Malaysian stock exchange.

One of the amendments to the Capital Market and Services Act (CMSA) is the introduction of a new legal provision which prohibits any person from influencing, coercing, misleading or authorising other persons who are involved in the preparation of or the performance of audit of the financial statements of listed corporations which would cause the financial statement to be false or misleading.

The penalty for breaching the above provision is imprisonment for a term not exceeding 10 years and a fine not exceeding RM10 million.

Given the severity of the punishment, those who are involved in the financial reporting chain of listed corporations such as directors, senior management and the members of the financial reporting team should evaluate their present reporting process and ensure adequate controls and safeguards are put in place to avoid the risks of producing financial statements which are false and misleading.

At the same time, the Securities Commission Act has also been amended to establish the long-awaited Audit Oversight Board (AOB) which is expected to develop and promote an effective audit oversight framework as well as enhancing the confidence and reliability of audited financial statements in Malaysia. The AOB would be dealing with auditors who audit the financial statements of public interest entities such as listed corporations and financial institutions.

Among the roles of the AOB is to register auditors of the public-listed entities and conduct inspections and monitoring programmes on auditors to assess the degree of compliance of auditing and ethical standards. What is interesting is that the law now requires auditors to be registered with the AOB on an annual basis.

The AOB is also empowered to reject registration, revoke or suspend registration if the auditors had breached certain laws or failed to comply with the relevant standards expected of a professional accountant.

Inspections conducted by the AOB would allow the board to assess how far auditing firms comply with the quality control, auditing and ethical standards which are the key ingredients of quality auditing. The AOB is also empowered to conduct inquiry on the auditing firm if the inspections result in adverse findings or upon receiving notice issued by the Securities Commission.

A wide range of sanctions could be used by the AOB in its enforcement actions. Auditors who are found to be in breach of the newly introduced law could be directed to comply with certain requirements, reprimanded, assigned a reviewer to oversee the audit undertaken by them, prohibited from accepting public interest entities audit or imposed a penalty not exceeding RM500,000.

The AOB would be working together with our oversight bodies such as Bank Negara Malaysia, Companies Commission and the Malaysian Institute of Accountants (MIA) to avoid the duplication of roles and efforts. Auditors auditing private companies would continue to be regulated by the Companies Commission and the MIA.

It is hoped that these new measures would position our financial reporting quality to be at par with or ahead of other markets. While these measures provide the regulators with more options in overseeing the conduct of the market players, the desired result in enhancing the reliability of financial information is ultimately driven by the leaderships of corporations themselves. The board has the responsibility to set the tone and this would then be cascaded through a robust reporting process with the support of highly qualified people who uphold the highest level of integrity and professional standards.

The fact that Malaysia is converging into the full adoption of the International Financial Reporting Standards by 2012 would make the journey more challenging, especially for companies who have not been investing in high-quality personnel to steer their financial reporting process. The first step that audit committees should take in the New Year is to have an end-to-end review of the financial reporting process, identify possible risks and start mapping measures in mitigating the risks, including fraud, that may be identified.

We would certainly see a different financial reporting landscape in 2010. Some may see this change as an additional burden; some would be welcoming the changes as new injection of life in enhancing governance in Malaysia.

Ultimately, we Malaysians would benefit most if these new measures result in us being associated with integrity, honesty and good governance more than ever.

This article is also published at the Edge Malaysia website here:

http://www.theedgemalaysia.com/commentary/156392-new-measures-to-enhance-financial-reporting-passed.html