HEADLINES these days are fixated on the global credit crunch, which has since spilled over to infect the real economy resulting in a crisis touted as the next great depression.
Understandably, incensed stakeholders are apportioning blame to key players in the financial value chain.
Directors and management of banks and financial institutions were the first in the firing line since they took tremendous risks to generate profit, whereas regulators too were censured for being lax in their monitoring (witness the latest billion-dollar Madoff scandal).
Auditors, as the gatekeepers of financial information, too are culpable for failing to exercise adequate standards.
Like others in the blame chain, auditors will have to bear the brunt of increased regulation and monitoring thanks to pressure from stakeholders.
Towards Independent Oversight
Similarly, Malaysian auditors will not escape the burden of heavier oversight criteria and increased scrutiny. The independent Audit Oversight Board (AOB) under the auspices of the Securities Commission (SC) will reportedly begin operating in 2009, putting auditors on their toes. Comprising persons other than members from professional accounting bodies such as regulators, investor associations and industry associations, the AOB will be responsible for the inspection of auditors to ensure that they comply with international and domestic auditing and ethical standards.
The AOB will also be responsible for investigation and the imposition of proportionate sanctions on errant bodies.
Compliance with global standards is the key to achieving better audit quality.
Apart from complying with auditing standards based on the International Standards on Auditing, firms should also comply with the Standards on Quality Control, specifically the ISQC 1 ‘Quality Control for Firms that Perform Audits and Reviews of Financial Statements’, which has been effective since July 1, 2006.
But are our public practitioners equipped to meet the quality standards set or to be set by the AOB, when they have failed to comply with benchmarks such as ISQC 1, despite the window of implementation since July 1, 2006?
Sadly, many practitioners are still not aware of the requirements of the ISQC 1 and those who are aware are put off by the complexities and costs of implementation.
Firms which have already implemented ISQC 1 admit that it is an uphill task, which will be especially taxing on the resources of small and medium-sized firms.
But like it or not, Malaysian auditors and firms have to bite the bullet and aim for better audit quality in order to achieve global parity.
We cannot afford to slide off the radar screens of international investors and stakeholders, which will happen if we sideline global compliance standards, since these are part and parcel of global investment criteria set by institutional and pension funds as well as foreign direct investors.
Migrating to Fair Value Accounting
Another critical development that will impact audit quality is convergence.
The Malaysian Accounting Standards Board has announced that Malaysia will be in full convergence with International Financial Reporting Standards (IFRS) by Jan 1, 2012.
With convergence comes fair value accounting. FRS 139 Financial Instruments: Recognition and Measurement will be effective from Jan1, 2010, and FRS 132 Financial Instruments: Presentation and IFRS 7: Financial Instruments: Disclosures will also come into force.
Compliance to these standards will definitely be a tall order.
Reading and understanding these standards are difficult enough, whereas auditing reports based on these standards will be a herculean task especially in the teething years.
Are companies ready? Are accountants – especially auditors - ready?
Although FRS 139 is only effective from 1 January 2010, 2009 will be an important year to prepare for sea changes in the method of accounting because 2009 will be the comparative year for 2010 Financial Statements.
Hence, the appropriate structures must be in place and all those in the financial reporting supply chain must be equipped with the appropriate level of competency.
Accountants, auditors and the directors of companies as well as users of financial reports must be well versed in fair value accounting, and this can only be achieved through intense education and training.
Definitely, 2009 will be a watershed year for auditors. Not only do they need to enhance their grasp of fair value accounting, they will be scrutinised to see if they come up to par with the relevant accounting and auditing standards and other regulations.
A key recommendation would be to educate and train not only practitioners themselves, but importantly, their down-line or staff who go out there to carry out the work.
No longer can audit seniors or audit managers tell their staff to follow “last year’s working papers”, at least not without negative consequences.
·Jennifer Lopez is Head of Professional and Technical Development, ACCA Malaysia.
Readers’ feedback is welcome. Please email to email@example.com.
Did you find this article insightful?