The introduction of the Public Companies Accounting Oversight Board next month willwarrant auditors to adhere to a new level of corporate governance. StarBiz interviewssome of the players on this move that will change the landscape of their profession.
THE setting up of the Public Companies Accounting Oversight Board (PCAOB), which comes into effect on Oct 1, is a positive move by the Government to ensure greater reliability of audited accounts, said PricewaterhouseCoopers executive chairman Datuk Johan Raslan.
“It will also boost investor confidence in the local stock market,” he told StarBiz.
Moreover, Johan said, the establishment and implementation of the PCAOB, under the auspices of the Securities Commission (SC), would help bring Malaysian-listed companies to be in line with global best practices in corporate governance (CG).
However, he noted that the impact would be less for the “upper crust” of companies, such as government-linked companies, as they were already operating at a high level of CG. “The greatest impact of CG improvement is likely to be seen in companies that are in the middle tier and below,” he said.
The measures to improve CG came on the heels of several high-profile corporate scandals like Transmile Group Bhd's that had rattled investors and raised concerns over weaknesses in the current system.
Johan said: “What happened in the last few months (collapse of several listed companies on Bursa Malaysia) showed inherent weaknesses in the existing financial system, especially in audit practice, but the Government was quick in coming up with innovative measures to address the issue.”
Players in the capital market also praised the Government for its speedy action to tighten financial controls, sending a strong signal to those planning to defraud stakeholders that their actions would not be tolerated. Others in the accounting fraternity also welcomed the setting up of the PCAOB and other measures to protect investors.
The Association of Chartered Certified Accountants (ACCA) Asean and Australasia director Tay Kay Luan concurred with Johan that amendments to the Code of Corporate Governance was welcomed.
“It would help realign our CG to international principles and best practices,” he said, adding that improvements of standards in CG would make Malaysian companies comparable to those in Britain and Australia.
Tay said while recent surveys showed local companies to have high levels of CG compliance to the existing code, Malaysian companies still needed to go further to include the adoption of international principles and best practices. “Studies have shown that better CG will have beneficial effects on the financial performance of companies such as higher share prices or lower cost of capital, resulting in an overall better capital market.”
Asked what the SC should include in the internal audit guidelines, Tay said whatever proposed should ensure the principles of integrity, relevance and skills be adhered to. “One important aspect which the SC might wish to consider is to support the Internal Audit Institute in their efforts to raise the standards,” he said.
With the setting up of the PCAOB, Tay said, companies could be assured of the quality and independence of auditors, as there would a committed board overseeing the function of auditors itself. He said accounting firms would now require higher standards of competencies and staff skills and would stick strictly to the rules.
“Accounting firms that do not meet the criteria may lose their business if they don't take efforts to meet these standards and requirements,” said Tay.
On who should be on the PCAOB, he said the majority should not be accountants, adding that this approach was consistent with the principles of transparency and accountability, and to demonstrate independence from the profession. “It should comprise representatives from different stakeholders, regulators, watchdogs, civil society, professional bodies,” said Tay.
He said the board should not only be responsible in monitoring auditors but also the quality of auditors.
“Moreover, there is a need to work closely with professional bodies to regulate and discipline accountants who are members of these bodies,” Tay said.
Asked what the Government could do to strengthen CG among companies, he said the authorities should stress that CG was not just about complying with a set of rules and principles. “CG is also about improving performance and a way to build trust and protect interest. Companies should also be more responsible to meet the needs of their stakeholders and not just shareholders,” he said.
Tay said there was need to encourage companies to report beyond compliance to enhance transparency and accountability. “The government should encourage companies not just on business performance but also on environmental and social performance. There is a need to educate and create awareness of the benefits of reporting beyond compliance or minimal reporting,” he said.
Tay also said more emphasis should be placed on ensuring leadership by example and to inculcate good governance within organizations. “Building trust takes time – cultural and change management involves winning hearts and minds – something regulation cannot do,” he noted.
On the composition in the audit committee, Tay said it should only comprise of independent non-executive directors with no financial or personal interest to ensure independent decision-making. In the proposed audit committee, structure executive directors are no longer allowed to become members of the audit committee to ensure its effectiveness. “The challenge is more pronounced in family-owned businesses,” he noted.
However, Tay said audit committee members must also have sufficient level of financial expertise and knowledge to understand the financial statements now that accounting standards and interpretation of rules and financial instruments become more complex. “Better understanding and interpretation of the financial statements for the purpose of managing company performance and how the auditing function works will hopefully ensure decision made are in the interest of the business itself,” he said.
Tay also said directors from non-finance background should be encouraged to attend courses on financial management for non-accountants. “We need to work towards a principle based system where there is high trust, integrity and clarity on governance responsibilities across the board from board room to shop floor,” he said.
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