Saturday, 25 November 2017

Reporting Excellence Means Effective Organisations?

I always believe that when you are new at something, you are entitled to ask the most basic questions. That was exactly what I did when I was the MIA President. I asked about the value of excellence awards such as the National Annual Corporate Report Awards (NACRA) and the National Awards for Management Accounting (NAFMA) where MIA was co-organisers for both.

As for NACRA, listed companies are not required to apply. All their annual reports would be screened by dedicated accountants until winners are determined. Not a bad deal for those companies, the accountancy profession takes all the trouble. Only when they are shortlisted, they have to pay for attending a dinner where the winners would be announced.

NAFMA, then, differed slightly where companies are required to apply and disclose their management accounting practices. The panel of judges would visit them to verify and understand more their practices. One organisation kept on winning for the first few years until they were gently encouraged to give way for others.

Of course I got strong responses from the other partners which were very clear of their positions in defending those awards. Among the arguments were the awards encourage companies to be more transparent in corporate reporting and would continue to enhance their management reporting practices because of the awards.

I am not denying that these kind of awards could generate benefits. There could be real progress where the winners become better companies. However, does this rule apply to all companies? How many award winners had troubles later and are no longer listed? Someone should look into this aspect.

So, does reporting excellence correlate to organisational effectiveness? I am not yet convinced. My scepticism applies to even organisations which managed to implement integrated reporting. 

If organisations have specific mandates and key information about the mandate are missing, what is the point of telling lengthy stories about "value creation" when certain fundamental information are not there? With the present printing capabilities, readers might be fascinated with beautiful graphics and could miss the "missing links or points".

Doing the same thing over and over again without challenging their meanings and ascertaining outcomes is not my cup of tea. Isn't this the cause of why many great companies failed? They got very nervous when their flagship products were criticised. Until the market really shifted and competitors have secured huge chunks of their markets with superior products or solutions, then only the reacted, albeit too late.

Well, I am still wondering about the nexus between excellence in reporting and organisational effectiveness. I could be alone. What the heck!

Thursday, 9 November 2017

How Boards Drive Innovation

I was invited by the Malaysian Directors Academy (MINDA) to be a panellist at the Bursa Malaysia's Power Breakfast session on innovation. While this was certainly an honour, the bonus was I would be sharing the stage with Ross Dawson, a technologist and futurist from Australia whom I respect very much.

Ross started by sharing his observations on the global state of play around innovation. It was made clear that for companies to remain sustainable and continue to create value for their customers and shareholders, they have to keep on innovating. Otherwise, products would be less competitive, cost will go up and the very business models which worked in the past may have been overtaken by time and competitors.

I shared my observation on how the Securities Commission (SC) decided to facilitate the adoption of financial technology (fintech) by introducing regulatory frameworks for Equity Crowdfunding and Peer-to-Peer lending platforms. At the moment, such funding platforms would only be useful for the small-medium enterprise sector which is small relative to the size of the Malaysian capital market which exceeds RM 1.3 trillion Ringgit. If the SC did not have the innovative mindset, such space would remained a mystery.

A day earlier, when opening the SCxSC 2017, the SC Chairman, Tan Sri Ranjit Singh announced that the platforms had succeeded in promoting 450 campaigns, raising RM 50 million in a space of more than a year. 70% of the businesses which benefitted were founded by women and youth while 40% of investors are below the age of 35.

At present, both the SC and Bank Negara Malaysia are at the forefront in transforming the financial services landscape by enabling financial institutions and market intermediaries to test their ideas through regulatory sandboxes which allow both sides to experiment. This sandbox approach is very revolutionary for regulators which are well known to be risk-adverse in their approaches towards formulating regulation.

So, how would the board influence innovation? I shared the following points:

Board could steer companies toward being more innovative especially at the strategic level. By challenging management to be clear of the market landscape, market positioning, differentiating from competitors and developing brands which actualise those strategic intents, management would have to develop and implement innovative business initiatives. This would over time, inculcate the mind and culture of innovation.

The other issue around innovation is the risks-tolerance towards failures. Would the board expects all initiatives to be successful or they could be sending signals that failures are part and parcel of business? By indicating the board's tolerance,  people would be encouraged to explore and test new ideas and would be less restraint to take some risks. However, this does not mean that governance processes are abandoned but managing risks out of innovation should be part of the framework.

I do not believe that there should be a specific board committee on innovation as such mindset should be applied across all aspects of business. What is more important is the tone and support provided by the board in enabling the companies under their care to test and explore new grounds, guided by boards which are aware of the changing business landscapes, understand where the opportunities are and what could possibly go wrong.

Coming back to Ross, he also explained about the scope of innovation. Innovation is not about applying new technology but it covers broad areas including business models, products and processes. Hence, companies have ample opportunities to be innovative but they need to be very strategic and focus so that positive results could be derived out of such investments.

Saturday, 4 November 2017

A New Accountant in the Family

I have been advocating professional accountancy as a career of choice for many years. Benefiting from the qualification myself, I thought it is appropriate for me to spread the virtues to other aspiring accountants.

While I never tell my children what should be their career paths, three of them decided to take up accountancy from our local universities. Two graduated from the Internal Islamic University and one from University ITM. Fortunately, all of them started their career in accounting firms, where the real actions are and where high-end accounting concepts and knowledge are applied on daily basis.

My eldest decided to pursue one of the professional accountancy qualifications from the UK. He did that while he was with one of the Big-4. However, his interest in Triathlon distracted his focus. He eventually started his own cake company with his wife and their business is growing steadily. What could I say?

It was my second daughter who managed to complete her Malaysian-Australian professional accountancy programme. I suppose the support she had from her firm, another Big-4, and the exposure she gained from her work helped her to succeed. So, last week, me and my wife attended the event where she was awarded her certificate of completion. She needs to work for another few months to clock the necessary hours before she could join the Malaysian Institute of Certified Public Accountants and possibly the Chartered Accountants in Australia and New Zealand. Finally, I am not the only qualified accountant in the house.

My second son joined the accounting firm that I established, Khairuddin Hasyudeen & Razi (KHR). Although it is not that large, the firm has a policy of encouraging and sponsoring its staff to become professional accountants. So far, more than 30 young Malaysians had passed or are in the process of qualifying. While many other firms fear that by having professional accountancy qualifications the market value of their staff would be enhanced and they might move on for better opportunities, KHR believes that if such event happens, those well trained accountants would be its ambassadors and would shape a good perception of the KHR brand. Many had actually left, including going overseas but KHR remained as a growing business. Hence, my son is sponsored to pursue CPA Australia, the same qualification with his father.

I am amazed with some Malaysians who are seeing professional accountancy as a mean colonisation especially when smart Malaysians obtained well-recognised accountancy qualifications from the UK or Australia. If they care to study the history of our nationhood, many overseas-qualified accountants contributed to the progress of Malaysia. Tan Sri Hanafiah Hussin, Tan Sri Azman Hashim and Tan Sri Abdul Samad Alias are amongst the living examples who we can still meet and ask them questions.

In fact, the Malaysian Association of Certified Public Accountants (MACPA) was established in 1958, a year after we achieved our independence. Unfortunately the nay sayers somehow do not recognise MICPA (its present name) as a Malaysian body!

In 2000, the Malaysian Institute of Accountants (MIA) changed the title of accountants registered with it from Registered Accountant or Public Accountant to Chartered Accountants. This has mislead many accountants! While many of MIA members had set for the many professional accountancy exam available like MICPA or ACCA, there is a group who had never taken any professional accountancy examination in their life. Hence, the registration title should be reviewed.

Employers in Malaysia are smart. They are able to differentiate the "Chartered Accountants" of MIA with others. So, while some MIA members could be smiling with their title, many employers ask these "Chartered Accountants", which examination did you pass? How to answer?

Again, I am stressing that I have benefited from being a professional accountant and I am mindful of the potentials brought by these qualifications. While I recognise that not all accountancy graduates would like to pursue this path, those who have the opportunities should not forego them simply because they are tough. Let me ask you this question, apart from being a Chartered Accountants of MIA, what else is easy in life?

I would like to thank my daughter's lectures, employer and friends for your contribution in her achievements. I wish every family in Malaysia to have an accountant in the house, a professionally qualified one.

Friday, 3 November 2017

Society and Faith in Fashion Business

What have society and faith got to do with business? Well, they are the major drivers in fashion business! That was the point discussed at a forum on Society, Faith and Fashion in Australia and Malaysia, organised by the Australian High Commission in Kuala Lumpur.

Insted of the usual corporate topics, I attended the event to understand more about fashion and society and was not disappointed at all. The panellists, Karen Teh, General Manager, Chopard; Glynis Jones, Curator, Museum of Applied Arts and Science; Aheda Zanetti, Founder & Designer, Ahiida and Calvin Thoo, Calvin Thoo were excellent in sharing their views on how societies influenced fashion and the emergence of "modest fashion" inspired after the Abrahamic faith shared by Muslims, Christians and Jews communities. In fact Calvin did very well in explaining why Muslim ladies need to cover themselves and how he blended those requirements with his designs.

Aheda shared her experience in designing the "Burqini", as a choice for ladies who want to remain modest while still enjoying the carefree lifestyle of Australians. In fact, 40% of her customers now are non-Muslims and her designs, which comply with her faith, have provided comfort to women who are inclined towards modest fashion, irrespective of their beliefs. She, again and again, emphasised that modest fashion is a choice, which works well in societies which are less judgmental like in Australia. Calvin, on the other hand, explained that in Malaysia people are more judgmental and one need not only pleases herself but her host and other guests. That makes modest fashion designs in Malaysia more complicated.

Me and Aheda
One interesting point which was discussed was on the influence of online and social media on fashion. According to Calvin, online sales in Malaysia exceed offline. One of the artiste who has done this well is Neelofa who has her lines of head cover and is promoting them via her Instagram account very well. Karen shared that even the high end brands do have online channels which are contributing to their overall sales quite well.

Glynis walked the audience through the evolution of fashion in Australia which according to her was still new. She also sees modest fashion as a segment of a larger choices which Australians have and that segment compliments the choices which Australians could make when deciding what they think suit them.

The Nasi Lemak design was raised by one of the audience and Calvin was very firm on his view about how much that design lacks taste and quality, even from the technical point of view. He is willing to sponsor a better design, something which will make Malaysians proud.

Looking forward to more life events, away but still connected with business.

Thursday, 2 November 2017

The Quest For Prosperity

The Chartered Accountants in Australia and New Zealand (CAANZ) recently released a report on the Quest For Prosperity: Shaping The Future Of Our Region. It is based on the Legatum Institute Foundation's Legatum Prosperity Index which measures prosperity of 149 countries in the world.

The index measures prosperity on a broad measured covering:

Economic quality
Business environment
Safety and Security
Personal Freedom
Social Capital
Natural Environment

The data-driven report analyses prosperity across Australia, Hong Kong, Malaysia, New Zealand, Singapore and the UK - key markets for the CAANZ and its members.

I was invited to share my views and thought on the topic at a forum organised by CAANZ with the same title.

During the discussion, I highlighted my concern on the direction of Malaysia's education performance as education was the tools used in helping many people to move out of poverty and enabled them to contribute towards nation building.

At the same time, given that the whole world is competing based on knowledge and innovation, excellence in education would provide any country or community competitive edge.

When asked about the role of accountants in enhancing prosperity in the markets they are in, I argued that being competent and performing their respective roles with the highest standards of professionalism and integrity would be critical. In Malaysia, many accountants are occupying C-suites with decision making power which would influence wealth creation and distribution. Hence, they carry heavy responsibilities on their shoulders to ensure the country progresses in the right direction.

Accountants should also be willing to walk away if required to do things which are against our professionals values and the best interest of our society. We need to stand tall and be counted.

Looking at prosperity beyond financial wealth would provide a more balance idea of the meaning of being citizen. I hope this report would provide Malaysians ideas of assessing the performance of their leaders and this report is an independent view of where Malaysia stands compared to markets which we are competing with.

The report could be downloaded here:

Monday, 23 October 2017

Board Expectations on Internal Auditors

I was invited to be a panellist at the 2017 Institute of Internal Auditors Malaysia National Conference recently. The subject given to me was the expectation of the board and the C-suite on internal auditors.

Points which I shared were:

Internal auditors have to demonstrate that they understand business issue beyond matters relating to the companies they serve. This means they must understand what is happening in the business landscape, their industries and key stakeholders such as customers, suppliers, competitors, regulators and NGOs. Only with these cumulative knowledge, internal auditors are able to discuss and flag issues from various perspectives and angles.

Given that board members consist of people from diverse backgrounds, having the ability to engage them in meaningful ways would be important to gain their trust and respect. Once trust and respect are given, they would be more open to listen to the issues raised and recommendations made by internal auditors. How issues are prioritised and discussed would be amongst the ways to improve engagements. 

Focus on matters which would make them stop and think and don't waste their time by raising a long list of issues where 90% of them could be resolved quickly by management. Always angels issue from the perspectives of director, especially they risks which they have to deal with if no action is taken on the matters discussed.

Another key point which was raised by another panelist was the depth of knowledge and expertise which internal auditors have. If they are expected to deal with more strategic issues, are they in the position to add more value than those people in the C-suites who are dealing with strategic issues as their day jobs? This is fairly high order but internal auditors have to address such needs if they want to earn the trust and respect of directors and management.

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

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.


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.


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

Can Auditors Withdraw Their Audit Opinions?

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.