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.

Thursday, 18 May 2017

Our Accountancy Profession Has A Bright Future

Tan Sri Samad Alias is a 74 year old accountant. What has he got to do with a  symposium for young accountants? Well, when he was asked about the impact of blockchain technology, his answer was very convincing. His role in the conference was to share with the audience what does it take to be a great accountant. He did that very well. His life story was a compelling example of how far trust and integrity would help professionals in building their career.

Tan Sri Samad sharing his views and experience
The Young Accountants Symposium was organised by the Malaysian Institute of Accountants (MIA) for the first time. Most of the participants were below 40 years old and came from many economic sectors. The idea of having this symposium is to provide them with the exposure of what's coming and how they could seek opportunities while managing any risk to their career paths. Dato Yusli Mohamed Yusof, the President of the Malaysian Institute of Corporate Governance gave his keynote address while Dato Zaiton, the MIA Vice-President, welcomed the participants. Both of them also touched on integrity and upholding professional values in their speeches.

The opening gambit
I was on the first panel where we discussed digital economy. Well, I was the oldest. However, I shared with the audience my experience which required regulators to leverage on technology and why accountants, me included, had to step up and be comfortable in dealing with changes and complexities. At the same time, my message for young accountants was for them to uphold professional values at all cost, while acquiring knowledge and skills which are required by their work places and industries to ensure they remain relevant.

Sharing my ideas. Look how old I was compared with the rest of the panellist.
The questions that were asked by the young accountants showed how mature they were. While some were concerned in dealing with change, especially with the advancement in technology, all questions were relevant and required the panellists to dive into their knowledge banks and experience for answers. They were active participants in discussing present and future challenges of the accountancy profession.

I was seated with Tan Sri Samad during lunch and we were accompanied by many young accountants. We discussed many interesting topics including fundraising in the future, regulatory frameworks, industry disruption and its impact on society as well as corporate social responsibility and sustainability. Tan Sri Samad told me that the issues covered were very different from those discussed over lunch in other MIA events where senior accountants would be raising old issue such as audit exemption, as if there were no other pressing challenges to the profession. 

The depth of our discussion and the familiarity of those around the table with what were discussed really convinced both of us about how much potentials are there in those young accountants. We suggested more informal activities to be organised so that more knowledge and experience could be transferred and shared, with one caveat. Please do not invite senior accountants who are not keen to re-invent themselves in the ever changing environment.

I suppose if these young accountants are able to decide for themselves how the profession should evolve with time, they would be able to drive the accountancy profession to greater heights, beyond the imagination of their senior counterparts who are happy burying their heads in their imaginary sand. This is where any regulatory reform around MIA should consider having more young accountants to be in the driving seat, with minimum oversight from the seniors. Possible? Nothing is impossible, as what they were told in the symposium.

Saturday, 13 May 2017

Board Effectiveness Assessment, Why Have It?

Board effectiveness assessments have been practised for a while in Malaysia. There are any ways of approaching this difficult subject but somehow corporate Malaysia has been able to apply some versions of assessment to meet stakeholders' expectations.

The new Code on Corporate Governance (the Code) has brought this topic to a notch higher by requiring Large Companies, those which are listed in the top 100 companies on Bursa Malaysia or those with market capitalisation exceeding RM 2 billion, to engage independent experts periodically to facilitate objective and candid board evaluations. The Code explains that independence in this context means no connection with the company, directors and major shareholders.

The Code states that the annual assessment on individual directors should the evaluation of their:

  • Will and ability to critically and ask the right questions;
  • Character and integrity in dealing with potential conflict of interests situations;
  • Commitment to serve the company, due diligence and integrity; and 
  • Confidence to stand up for a point of view.
It would certain be beneficial for the individual director and the board as a whole in understanding how the above expectations were discharged. However, the assessment would not be easy for a number of reasons.

  • The minutes may not be detailed enough to indicate the performance of each board member as some companies prefer to record the key issues and decisions without attributing specific remarks or points to any specific member of the board;
  • Self-assessments by board members and individual board members assessing their peers may not be objective enough;
  • The definition of the keywords such as "critically", "integrity", "commitment" and "confidence" may have various meanings and understood differently by different people; and
  • Assigning a particular scoring with respect to each of the expectations would be highly subjective.
However, the subjectivity and difficulty in performing the assessment should not be a factor discouraging boards to take this issue seriously. Not only such assessment fulfils the expectation of the Code but it should also allow actions to mitigate whatever gaps discovered in the process to be pursued. Like any other regulatory intervention, this exercise would lead to a long term or even a continuous journey to keep on improving performance in the boardrooms.

Like examination, board effectiveness assessments is not about looking at things at the point of assessment but should encompass a proper plan for the performance to be demonstrated at every meetings of the board or its committees, before any assessment could be made. Hence, it would helpful for boards to plan ahead in terms of improvement steps and be mindful about seeing expected outcomes to be achieved as they progress through the year.

These assessments are not for show but for the own good of individual board members in discharging their fiduciary duty. If the substance are there and positive outcomes could be demonstrated, reporting the value of the process would be just a natural step.

Let's observe how board effectiveness assessments evolve, moving forward.

Sunday, 30 April 2017

The Refreshed Malaysian Code on Corporate Governance 1/1

Last week saw the launch of the revised Malaysian Code on Corporate Governance (MCCG) by the Securities Commission. As usual, the MCCG would be incorporated in the Listing Requirements of Bursa Malaysia and must be complied with by public listed companies in Malaysia. For financial institutions, the Policy Document on Corporate Governance is another layer of expectations which must also be observed.

The MCCG focuses on three key principles, Board leadership and effectiveness, Effective Audit and Risk Management and Integrity in Corporate Reporting and Meaningful Relationship With Stakeholders.

To ensure effective implementation, the MCCG is expected to be implemented with CARE - Comprehend, Apply and REport. Comprehend means the board is expected to understand and internalise the spirit and intention behind the prescribed principles and recommended practices including their intended outcomes. Apply is where the substance of the recommended practices are implemented to achieve the intended outcomes. Report requires a fair and meaningful disclosure on the company's corporate governance practices is made. It is hoped that a strong culture of governance would be practised across the company.

Where companies are not able to apply the practices, they are expected to identify and implement alternatives practices which would result in the same outcomes. 

The MCCG also has Step-Up practices which are expected to be applied by Large Companies. These are exemplary practices which support companies in moving towards excellence in corporate governance. Large companies are the top 100 companies listed on Bursa Malaysia and those where their market value exceed RM 2 billion at the beginning of the financial year.

Thursday, 27 April 2017

The New Code on Corporate Governance for Malaysia launched

This is a video explaining about corporate governance which was released by the Securities Commission yesterday

Thursday, 9 February 2017

Principles of Regulation - Staying True to the Cause

Most regulators were established via laws passed by the Parliament. Through such laws, their purposes, functions and enabling powers were defined. Let's take a pause here and reflect the essence of being established through an act of Parliament.

Parliament is where the representatives of the people meet to debate and enact laws. Once passed, these laws would be binding on all Malaysians. In theory, all laws must be created on the premise that they would bring greater good to our society. Not everyone would win, some might lose if their conducts are against public interests. For example, a person who committed an act of corruption, if convicted based on the provisions of the anti-corruption laws, could be sent to prison.

Hence, all regulators should not lose sight of the reasons why they were established, to bring benefits to the people and to prevent those who conduct themselves in ways which are detrimental to the interests of the society from causing further harm. Some regulators have another dimension to their purpose of establishment, to develop and grow certain economic sectors which in turn would provide opportunities to Malaysians to participate and enjoy the prosperity of this nation.

This is the reason in formulating new laws and regulations, the regulatory objectives must be determined clearly and should be within the regulatory mandates of regulators. As discussed in previous postings, once these objectives are set, they ways to get the outcomes should be as such that it does not be more burdensome than necessary. 

In practice, there could be challenges which regulators have to face in pursuing their regulatory mandates. 

As laws are passed by politicians, they are open to lobbying by interest groups which have their selfish interests to pursue. While this could be a fair game in a democratic process, we do not want situations where decisions are made not on fair regulatory principles where the centre is the people but based on who could shout the loudest. This will turn our regulatory processes to something which are practised in primary schools.

One other challenges is when regulators forgot their own raison d'ĂȘtre. As a regulator matures into an institution, sometimes institutional interests could also be the cause of conflict. While institutionalising regulatory authorities is important so that they could be pillars which our society could rely on, they should never be allowed to override public interests. I am sure we do not want the tail to whack the dog.

In staying the cause, regulators need to bring people with competencies and conscience who are technically competent in areas which they are responsible for and would never waive from protecting public interests notwithstanding pressures exerted upon them from within and without. Do we have such people nowadays?

To compliment the human component, regulators should also establish regulatory principles, processes and organisational structures which would preserve their regulatory mandates. These processes and checks and balances would allow them to deal with pressures and lobbies. This does not mean that they are closing their ears from the views of their stakeholders but would provide counterbalance for any unfair pressures, especially from politicians who may not place public interests as the basis of their views.

Transparency would also help regulators to do their work. If the society is aware of what are the intention of regulators, opposing views and the principles on which decisions would be made, it would be rather challenging for those who are not bothered about public interests to pursue their agenda. The public has their role to play is they want Malaysia to be a country which provides fair opportunities to those who want to work hard. They cannot just be demanding fair treatment but do not want to be involved in issues which are handled by regulators.

This article concludes a series of postings on regulatory principles, issues and challenges which are faced by regulators. I trust the views shared here would provide some insights on regulatory business and why we, the Joe public, should be concern with how our regulatory agencies are playing their roles in making Malaysia a great country for every citizen to benefit from its prosperity. 

Tuesday, 7 February 2017

Principles of Regulation - A Juggling Act

A regulator would have to juggle between a number of stakeholders in formulating regulations which, on the overall basis, should serve the interests of the public which not stifling business. While the concept is straight forward enough, the implementation could be challenging for few reasons.

First challenge would be for regulators to understand how the market operates. As regulation is required due to market failures, where market forces are not able to set equilibrium levels which are fair to suppliers and consumers, regulators must have a good understanding of market mechanisms, building blocks and key issues. Any regulation which is designed without due consideration on these factors would carry the risk of being inefficient.

Coincidently, there was a conversation this morning of whether the Price Control and Anti-Profiteering Regulation which introduced recently would benefit the public at large or would have the unintended consequences of raising cost of doing business in Malaysia. The conversation could be downloaded here.

Second is about having clear objectives of the regulatory outcomes which are supposed to address the identified market failure. Without the clear objectives, regulators would lose the sense of direction and could end up creating solutions looking for problems. This is particularly true for regulations which are adopted from other jurisdictions to align our legal frameworks and business practices with certain international standards. 

If regulators do not understand the contexts surrounding the failures which are intended to be addressed by the adopted regulation, its application in markets where the surrounding practices are different or the pattern of outcomes are not the same would carry the risks of introducing regulations which are not effective but creating unnecessary burdens to business entities.

Third is about ensuring the measures introduced are no more burdensome than necessary. This is to ensure regulators try to find ways which are simple and easy for businesses to comply with the regulation, not requiring high compliance cost and able to mitigate the identified market failures.

Sometimes, due to pressure from various lobby groups or sue to political interests, regulations are stretch to go beyond just addressing market failures. For example, under the pretext of ensuring consistent quality, certification of a process could only be done by one business entity. An example of this is the motor vehicle inspection services in Malaysia. Instead to defining the technical requirements which could be achieved by certified workshops, the concession to inspect commercial vehicles is given to one company only. So, in addition to ensuring quality of inspection, a monopoly is also created by the regulation.

As mentioned above, regulators would have to balance between conflicting interests of various stakeholders in addition to lobby groups which want to benefit economically or politically from the regulation being considered. This requires regulators to have high level of integrity, independence and professionalism to ensure they do not go beyond what is necessary where on group of stakeholders lose more then others because of factors which are not related to market failures. Would this be possible?

There is one kind of regulators which are exposed to inherent conflicts of being regulators and having self-interests at the same time, professional bodies. While  naturally they are supposed to regulate their members to ensure public benefits are not compromised, the fact that some of the professionals who set standards are themselves practitioners could be scary. This is the reason why the self-regulatory model is challenged and for some services such as audit of public interest entities, an independent regulatory body is set up to ensure the conflict is managed.

As a conclusion, a good regulation is the one which market failures are addressed in ways which is no more burdensome than necessary. In achieving this objective, regulators must be professional and independent and have deep understanding of the market which it regulates. They must also be able to withstand pressures from lobbyists and politicians who want to stretch regulations beyond their original intended purposes.

Monday, 30 January 2017

True and Fair: A View From the Boardroom #2

Accountability and Reporting

When a company is incorporated, there are at least three parties involved. The shareholders who invest their monies and assets into the company, directors who are elected as stewards of the company and management who are appointed by the directors to run the company's day to day business in achieving the objectives set by directors.

Shareholders can only exercise their power at the general meeting of the company. While the article of association may reserve some power to them especially in approving transactions involving substantial assets, most of the power of the company are vested with the directors. While  directors could delegate some of these power further to management, in most cases they are ultimately responsible for the conduct and affairs of the company. 

Public companies raise funds from the public to finance their business and growth. They issue prospectuses to convince future investors about their prospects. Most of the investors who are investing in public companies are pure investors and have no ability to influence and know its activities unless information is provided by the companies. Hence, it is a fair expectation that they provides their investors with true and fair financial statements to enable their performance to be judged and financial positions assessed.

The principle is crystallised in the Companies Act, the Capital Market Services Act and the Financial Services Act, amongst others. Not only these laws require the tabling of financial statements but it must also be audited by independent auditors. Directors, who are responsible over the affairs of companies and the utilisations of their assets, are required to prepare financial statements which comply with financial reporting standards and provide a true and fair views of performance and financial affairs.

For companies which are listed on stock exchanges, their share are traded on a daily basis. In most cases their share prices reflect their future prospects. This is the reason why for some companies the value of their shares are above the values of their net assets and some for some others, the values of their net assets exceed their share prices.

As investors who are not directors or management do not have first hand information of the plans and activities of listed companies which could affect their prospects, it is very important for companies to share those information with the market on a timely basis. This is to enable existing and prospective shareholders to make decisions in buying and selling the shares of listed companies on equal footing. Otherwise, those who are privy to such information would have an edge over others. This is the principle behind the requirement of stock exchanges requiring listed companies to announce material information on a timely basis.

Hence, directors are accountable on at least two fronts when it involves reporting, performance reporting and making material announcements. As companies could be large and having complex operations, it would be incumbent on the directors to ensure management have put in place systems and processes which would enable those two responsibilities to be met effectively.

This will be discussed in the next posting.