Saturday, 24 December 2016

2016 Solo Photos To Recap The Year

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I left the Audit Oversight Board and the Securities Commission into the next phase of my life which some people told be to be portfolio career. While I managed to take things easy for a while, the appointment to a number of boards got me to be busy again.

The photos in this video are the solo photos of mine, arranged in sequence of the relevant events. They do not cover my whole activities for the year but provide a fair recap of the year when my career path changed again.

One Morning At Mount Bromo

This was my second time in Surabaya, a city located at the east of Jawa Island in Indonesia. The first time I was in this city was many years ago on an official duty for the Malaysian accountancy profession, hence I did not have much time to spend to explore Surabaya. This time around I was on holiday.

Surabaya got its name from the combination of two animals' names, Suro, which appears more like a shark to me and Boyo, simply crocodile. The two creatures are also embodied as the monument of the city.


The highlight of this trip for my visit to Mount Bromo, an active volcano which is located around 80 kilometres from the city. In order to catch sunrise, we left out hotel at midnight. Although the distance was not that far, it took as nearly four hours to reach our destination by car. 

There were many heavy vehicles which were travelling at slow paces but remained on the right lane which was meant for faster vehicles. Later I figured out that the left lane was not consistent in terms of width and sometimes there were branches of trees hanging above. Hence, it was more convenient for the heavy vehicles to stick to the right hand side and vehicles which were overtaking them had to do it from the left lane. Something different from many other places which adopt the right hand drive system.

We had to take a four-wheel drive vehicle, known locally as high-top, to go up to the peak. It was cold in the early hours of the day and thick clothing was the appropriate attire although the locals were portraying the temperature was much cooler so that we would buy stuffs like gloves and scarfs from them.


The view from the sunrise lookout was magnificent. We had a 360 degrees views of the surrounding mountains and valleys. The mists and clouds intermittently shielded our view but as the sun was raising we could see sights with different colours and tones.

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Given the number of visitors to the mountain, we could only spend around half and hour before going down to the valley, made of larva and dusts from the last eruption. This was to make way for other visitors who came later in the morning.


The peak of Mount Bromo was a far distance from where the vehicles carrying visitors were allowed to park. Visitors have two choice to reach the peak, walking or riding horses which were managed by the locals. We took the second option and that was my first horse ride in my life. The horse can only go towards the bottom of the peak and we had to climb stairs with few hundred step and was fairly steep.


It was amazing to watch smokes coming out from the peak of Mount Bromo and one has to stand the smell of sulphur to be up there. It was worse when the wind changed it direction towards you. I saw some elderly visitors who had some breathing difficulties. Although I had visited other live volcanos before, this was the first time where I could watch smoke coming out from the crater with my own eyes. As far as I am concern, visiting Mount Bromo was the best experience that I had when it comes to such tourist attractions.

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On our way back down the mountains, we could appreciate the beauty of the mountainous scenery including the spots where the locals grew their vegetables and other plants for living. Of course we cannot resist from stopping as a famous Nasi Rawon shop which was used to be patronised by the President of Indonesia himself.



Sunday, 18 December 2016

Principles of Regulation - My Journey So Far

When I made the promise to write about the principles of regulation, I thought of going straight into the topic and share my views about them. However, on second thought, I feel it is worth sharing about my journey is dealing with rules and regulation from a number of roles and positions which I had in the past. That would provide readers with the context of where I am coming from and hopefully would lead towards better understanding of my views and perspectives.

While I was regulated as a public accounting practitioner, my exposure about regulation expanded when I joined the Council of the Malaysian Institute of Accountants (MIA). I was given the responsibility to chair the Public Practice Committee which deals with issues facing public accountants in Malaysia. That lead me to be involved in negotiations in trade in services at the World Trade Organisation, ASEAN and some bilateral trade agreements.

Due to my involvement in this area, I represented MIA on the board of the Professional Services Development Corporation, a company setup by the government to promote the services of our professional overseas. I was also appointed to the National Professional Services Export Council, a body which advises Matrade in the same area.

During this period I was also appointed to the Public Practice Committee of CPA Australia. This was an international committee with members from Australia and key countries where CPA Australia had significant presence such as Malaysia and Hong Kong. This exposure was interesting as I was able to observe the issues of practising accountants in other countries as well including how regulation influence their strategies and operations.

When I was the Vice-President and later, President of MIA, I was involved in dealings at global and regional platforms on issues around the accounting profession. In ASEAN for example, I was involved in the negotiations at the Coordinating Committee on Services which was part of the process in negotiating services liberalisation under the ASEAN Framework Agreement on Services.

During my tenure at MIA, I was also involved in dealing with disciplinary lapses of MIA members through the Investigation Committee and later the Disciplinary Committee. These functions are very important for MIA as it was set up via an act of Parliament meaning MIA  has to protect the rakyat from MIA members who failed in performing their professional work and not the other way around of protecting members when they fail to behave professionally.

When I was invited to set up the Audit Oversight Board (AOB) as it's founding Executive Chairman, my life changed from being regulated into a regulator. As the AOB is a body under an act of Parliament (Securities Commission Act), the ways we achieved our mission and vision had to be in line with the expectations of Parliament, which represent all the rakyat of Malaysia.


The AOB had to interact with other stakeholders including the International Forum of Independent Audit Regulators (IFIAR) and the ASEAN Audit Regulators Group (AARG). The issues involved were not limited to audit inspections matters only but also covered areas such as investigations and enforcement.

Towards the end of my career as a capital market regulator I was given additional responsibilities as the Executive Director in-charge of Markets and Corporate Supervision. I was responsible over the regulation of our capital, bond and derivative markets including market institutions such as Bursa Malaysia. My work also required me to ensure market transgressions were detected, dealt with and when necessary recommending for enforcement actions.

I was also the pioneer member of the Operation Review Panel of the Malaysian Anti-Corruption Commission (MACC). The role of the panel was to ensure MACC performed their investigations professionally and not to let off suspects due to reasons other than based on the facts obtained through investigations. We certainly challenged some of the findings which in some cases resulted in prosecution. At the same time, the panel acted as the representative of the rakyat in guiding and encouraging MACC to operate without fear or favour.

Now I am on board of a number of financial institutions which are regulated and also on a self-regulatory organisation which regulates the distribution of collective investment schemes. Somehow I could not run away from regulation, as a regulator or being a regulatee.

I suppose the above should provide you with my background on my understanding and enforcing regulation.

My next posting would be on the Discipline of Regulation as adopted at the World Trade Organisation.

Saturday, 17 December 2016

Will New Auditor KAM Deliver Promises?

With effect from Dec 15, 2016, reports issued by auditors on financial statements would not be the same again.
Not only the arrangements of the contents are changed, but auditors are also expected to share more about their audit, including Key Audit Matters (KAM), which would provide more insights regarding critical issues in their audit.
Matters relating to going concern would also be dealt differently as this subject is one of the fundamental assumptions in the preparation of financial statements.
The journey towards the operationalisation of the new standards had been long and challenging.

It started immediately after the global financial crisis, where again people were questioning, why companies collapsed after unqualified audit reports on their financial statements were issued. This resulted in the accounting profession and the International Auditing and Assurance Standards Board (IAASB) exploring the possibilities of audit reports to have more information regarding the audit instead of the simplified approach of the present pass or fail model.
The Financial Reporting Council (FRC) went ahead and issued its own version of auditing standards in the UK, perhaps as a quick measure in protecting London as the capital centre of the world.
Immediately, the form and shape of audit reports in the UK changed and more information, analysis and observation were shared although the pass or fail model is retained.
Perhaps, one of the more outstanding auditor report was issued by KPMG LLP on its audit of Rolls-Royce Holdings plc, which provided readers of the key risks around the business and how the auditors responded to those risks in their audit.
However, given that was the first set of audit reports under the new standards, the language used was very cautionary and sometimes require readers to refer to a dictionary for meanings. Nevertheless, this report was considered as the one which represents the breath of fresh air brought by the new auditor reporting standards.
On the other hand, across the Atlantic, the Public Companies Account ing Oversight Board (PCAOB), which has mandate to issue auditing standards for auditors auditing public companies in the US is still at the consultation stages. Given the nature of litigation there, sharing more about audit means both clients and auditors could face higher chances of court actions, something which is not intended when the auditor report is changed. With the changes in the US administration, this project could also be affected.
There are subtle differences between the FRC and the IAASB standards which may influence the effectiveness of the IAASB standards. While auditors in the UK are required to discuss how they have dealt with materiality, a threshold which is very important in any audit, there is no such requirement by IAASB.
Both standards require auditors to share about KAM, however, the FRC standards require auditors to report how they have responded to those issues whereas the IAASB standards require auditors to report on the procedures which they performed. It appears that FRC requires auditors to apply more judgement in deciding how much they need to share regarding their responses to KAM, while the IAASB has narrowed the scope to audit procedures only. Let’s see whether we would be able to have “Rolls-Royce” report when the new standards are implemented in Malaysia.
Auditors need to plan well ahead on how the requirements of these standards would be met, especially in drafting auditor reports. Since each firm would have to develop their own house-style, more partners and senior auditors are expected to be involved in this process. Many firms, by now, had shared with their clients how the new standards be applied to KAM of last year’s audit.
If you are on a board of a public-listed company and your auditors have not done so, you better get them to do so, the soonest to avoid any last minute surprises.
It is expected that KAM would be around judgements which the companies made in applying financial reporting standards such as those involving valuation and impairment of assets. However, if KAM reported by auditors start to cover issues around risks and effectiveness of controls, that could signal something which are more serious.
In anticipating the implementation of the new reporting standards, the listing requirements of Bursa Malaysia Securities Bhd had been amended requiring immediate announcement of KAM which relate to going concern issues.
Listed companies are also required to announce their responses to those KAM and the timelines during which those issues would be resolved. Quarterly reports would need to have updates of these matters. While not directly requiring KAM to be addressed in the report of audit committee, they are now required to address matters which would likely be raised as KAM.
Given the efforts and intention of getting audit reports to be more informative and help shareholders in making their investment decisions, auditors and the accountancy profession have the responsibilities to make this work. The tone set by regulators would also influence the effectiveness of implementation.
The first few reports issued under the new auditing standards would provide us some ideas of how much the landscape would change.
This article was also published in The Malaysian Reserve

Would Accountants Be More Relevant To SMEs?

The Companies Commission Malaysia (SSM) has finally issued a draft regulation in exempting small companies from mandatory audit requirement. Malaysia is among the last few countries in the world that still requires all limited liability companies, big or small, to be audited.
In many other jurisdictions, audit is only mandatory when companies have reached certain size and significance.
For those who are not familiar with audit, it is an independent opinion provided by an auditor that financial statements of the companies, which have been audited, provide a true and fair view of their results and financial positions, among others.
Auditors must be independent. If this is tainted, the value of audit is gone. Auditors only report to shareholders, not to any other parties although audited financial statements are filed with regulators.
This is a very important point as sometimes, some auditors argue that the benefits of audit transcend the shareholders and also benefit creditors and financiers.
There are a number of reasons why exempting small companies from audit makes sense.
First, most of these companies are at the early stages of their business lifespan. Resources are limited and the founders have to manage many critical issues in order to ensure their companies do not become another statistic as failed companies.
They need nurturing from professionals who understand the basics of business and able to assist entrepreneurs in navigating compliance requirements of various laws and regulations.
Accountants are among the professionals who can provide the helping hand. They can help these companies get their costing right, prepare annual budgets, ensure reliable accounts are prepared and provide tax and other advisory services.

The accountants are not allowed to offer most of these services if they act as auditors as due to the independent rules. Getting small companies to procure different services from many firms would further stress their limited financial resources.
Which services are more relevant to these small and medium enterprises (SMEs)? Those that help them to be a better entrepreneur or the one that focusses in ensuring their history is reported fairly, to themselves?
Second, the new Companies Act allows companies to have single shareholder and director. How would audit report be valuable if it is tabled to the same person who is responsible to prepare those financial statements in the first place?
Even for companies with more than one director, the value of an independent opinion on financial statements to owner-operated companies needs to be proven. This should not be confused with the need for companies to prepare financial statements that comply with accounting standards.
Small companies have to comply with the Private Entities Reporting Standards soon. Hence, the services of accountants would still be needed. The only difference is that they help to compile financial information in accordance with the applicable standards while at the same time are not prohibited from offering other value-added services, which could taint their independence if they act as auditors.
The third reason is more concerning. Can the accountancy profession assures the public that the audit services offered by their members meet the professional standards expected by the profession itself? The Malaysian Institute of Accountants (MIA) had been conducting reviews on the work of auditors who audited non-public interest entities for many years. Since the first round of review until last year, at least half of the audit work being reviewed were found to have failed to comply with auditing standards imposed by the MIA.
If this percentage of compliance failures by auditors is extrapolated across hundreds of thousands of audit performed every year, would the picture make the accountancy profession proud? For a profession that has adopted integrity as one of its core values, this issue has to be addressed if it wants to make audit mandatory.
While the threshold of the exemption is being finalised, the best interest of the small companies should be the basis of any decision. This is where public benefits should override any sectoral lobby.
After all, the small companies of today would be the giants of tomorrow. Efforts should be focussed on getting them to grow before they are expected to adhere to higher governance standards as the number of stakeholders around them grow.
Other government agencies such as the Inland Revenue Board of Malaysia (IRBM) should not be the deal breaker of this good initiative set by SSM. The IRBM has its own regulatory tools such as field audit and investigation. If under the present mandatory audit regime those tools are still being heavily used, it shows that audit and tax compliance may not necessarily have strong correlation.
There are certainly opportunities for accountants to be more relevant to SMEs. This audit exemption would challenge accountants to enhance their value propositions to their clients, like what other service providers need to prove in this competitive world.
This article was also published under the column The Boardroom View in The Malaysian Reserve

Implications On Wrongful Loss By Directors

Within the last two months, the Securities Commission Malaysia (SC) had taken three different actions against directors or former directors of three listed companies in relation to causing wrongful losses to those companies.
In the first case, a former ED and CEO was reprimanded and fined RM200,000 for remitting more than US$1 million (RM4.19 million) to foreign parties without the authorisation of the board. The monies were later used to purchase assets in the name of the director. Another former ED and CFO was reprimanded and fined RM150,000 for approving the vouchers for the remittances. The amount remitted was eventually refunded to the company.
A former MD and three former EDs were charged for causing wrongful loss in the second case. The charges are related to payments totalling RM5.1 million purportedly for the development of various software for the company which were allegedly used for other purposes.
The third case involves a suit filed by the SC against a deputy MD of a listed company. A sum of more than RM11 million non-refundable deposits were paid to several local representatives of 23 foreign companies for the exclusive rights to market and promote their products in Malaysia and Singapore. The amount was then allegedly paid by the local representatives into the deputy MD’s personal account. The SC had managed to obtain an injunction to restrain the deputy MD from dealing with the monies in the person’s bank accounts and is also seeking various orders, including for the amount to be restituted, the director concerned be barred from being a director of a listed company for five years and a civil penalty of RM1 million.

Directors are entrusted by shareholders with power and authority to make decisions in running and managing the company. Hence, they are required to act in the best interest of the company, act in good faith and discharge their duties by exercising reasonable care and skill. What happens when a director, or a group of directors together, conspire to breach these duties?
In addition to the provisions of the Companies Act, section 317A was introduced into the Capital Market and Services Act, to deal with the conducts of directors and officers of public-listed companies with the intention of causing wrongful loss to the companies irrespective of whether the conducts cause actual wrongful loss.
The meaning of “director” under this section is wide and includes CEO, COO, chief financial controller or any other person primarily responsible for the operations and financial management of a company. Wrongful loss is defined as loss of property by unlawful means to which the person is legally entitled.
Given the fact that a breach could occur even when there is no actual loss occurring, directors and senior management of companies should ensure their internal control systems are functioning effectively and all transactions must be approved based on merits and solely for the interests of their companies.
Perhaps, the following measures could be considered:
The rationale of the proposed transactions and how would they benefit the company commercially. Any other non-commercial benefit, if considered, should only benefit the company, not any other party.
The credibility of the counter-party and its track records. A simple step such as googling the party may provide useful information about their products and conducts. The proof that they are the real counter-party should be obtained.
The structure of the transaction. It should not defy how other ordinary commercial deals are structured. Proposals where huge sums of money to be paid in advance when the delivery of the goods and services would be made very much later should be a redflag and warrant further scrutiny and justification.
The value of the transaction and whether the company would be paying for a fair price or otherwise. If the price is inflated, it would be difficult for directors and management to defend their decision should problems are discovered in the future.
Independent board members should demand that the executives produce evidence and explanations if they are not clear with the proposed deal or transaction. There is no wrong questions and they should not refrain themselves from asking basic and simple question for the concern of being considered petty. Simple questions may not be simply answered in many cases.
The regulators have a wide range of options in dealing with wrongful loss cases. As demonstrated above, all the three cases were dealt differently, perhaps due to their facts, circumstances and the impact the regulator want out of their actions. Not prosecuting someone with criminal charge does not mean regulators are not doing their work. Sometimes, better impact could be achieved using other regulatory tools.
This article was also published in my column The Boardroom View in The Malaysian Reserve

Directors Beware, Some Of Your Firm’s Liabilities Can Be Yours

A friend of mine shared his unfortunate experience of being a an independent director of an insolvent public company. He was dragged to court when the company failed to remit the salary deductions of its employees and the employer’s contribution to the Employees Provident Fund (EPF).
During the court proceedings he was asked by the judge whether he enquired on the status of the EPF contributions and whether he asked to cite the EPF statements during board meetings. Of course he didn’t. He was found to have failed to perform his duties as a director in ensuring EPF contributions are remitted on time and a portion of the unremitted EPF contributions was judged to be his personal liability!
Generally, in practice, there is this division of roles and responsibilities between boards and management with regard to the administration of a limited company.
Boards are expected to be responsible for governance and high-level strategic matters whereas management would be dealing with the implementation of strategies and the day-to-day operations of companies. Due to this, the level of reliance by boards on management for administrative matters such as EPF contributions is high.
However, the letter of a number of laws in Malaysia place the responsibilities of ensuring certain actions are performed directly on the board of directors.

Apart from EPF, the Income Tax Act 1967 also specifies that directors shall be jointly and severally liable for the income tax of a company during the period in which tax is liable to be paid. A similar provision is also available for the unremitted Goods and Services Tax Act 2014 to be recovered from directors if the company they are directors of fails to do so.
There could be more laws which the onus on all directors to ensure proper conducts of companies with respect to the areas governed by those laws such as employment of foreign labour, quality of goods and matters pertaining to the safeguarding of the environment.
The company itself, has to comply with the requirements of the Companies Act 1965. Under this law the responsibilities of directors to ensure compliance such as tabling of audited financial statements which comply with approved accounting standards would expose directors to penalties and fines if the company fails to do so. If this is careful ly analysed, there are numerous steps that must be right for the expectations of the law to be met, and most of them are within the purview of management. They are:
• Transactions must be properly recorded.
• F inancial statements must be prepared.
• The financial statements must comply with approved accounting standards.
• The financial statements must be audited.
• An AGM is convened
• The audited financial statements must be tabled and approved by shareholders at the AGM.
• The approved financial statements lodged with the Registrar of Companies.
So, if one is an independent and non-ED, how much control does one has even over this requirement to have audited financial statements lodged before the registrar?
At the same time, our laws generally do not differentiate between executive and non-EDs although our enforcement agencies could consider the differences in roles in mitigation, not in determining culpability. Independent directors have to pray hard for that distinction to be made!
How could these risks be mitigated? After all, the fees and remuneration of independent non-EDs are not that superb in the first place. The imbalances between risks and rewards are deterring qualified people from accepting offers for such roles. This phenomenon is also not good in enhancing the level and quality of corporate governance in Malaysia.
Boards may consider few measures to ensure all directors are not necessarily exposed to liabilities when they have performed their job to the best of their abilities.
First, is to have a register of all the possible non-compliances and misconducts which may cause directors to be put in trouble. This could be around laws and regulations with respect to the establishment of the company, laws with respect to the conduct and behaviours of the companies and specific laws and regulations of the industry in which the company is operating in.
Second, is having regular updates from management with regard to the status compliance to those laws and regulations. This would require management to establish processes where the line executives, who are responsible to ensure compliance, are accountable. It would be fair for the CEO to ultimately signs off the updates to provide additional comfort to the board.
The third step is to all the deliberations on these updates to be properly minuted to reflect the level of scrutiny and assessments. Such minutes would be the bases for regulators and enforcement agencies to assess whether the board has discharged their duties adequately.
Given the complexity of business operations and the numerous laws and regulations which companies are subjected to, board members, especially the independent non-EDs, have to ensure their interests are protected. Compliance has become a norm in many industries and boards should not be apologetic to demand assurances from management. Otherwise, the liabilities of the companies could become theirs.
This article was also published in my column The Boardroom View in The Malaysia Reserve