Implications of the Audit Oversight Board

  • Business
  • Saturday, 09 Jan 2010

ACCOUNTING firms that wish to audit public-listed firms will have a mammoth task raising their standards of practice once the Audit Oversight Board (AOB) comes into force.

This is based on the fact that accounting firms have fared rather poorly in the last practice review by the Malaysian Institute of Accountants (MIA). Furthermore, the AOB is expected to require firms to be fully compliant with the international accounting best practice called the ISQC1 (Internal Standards on Quality Control).

A glimpse of the requirements of the ISQC indicates that accounting firms will have to carry out a multitude of new processes and document them.

For example, accounting firms will need to produce manuals, templates, checklists and model working papers related to the performance of their audits on public companies. They also need to have at least three auditors working on a single listed company’s audit.

On human resources, ISQC requires accounting firms to produce a calendar showing their yearly staff training plans and monthly HR reports including training needs analysis.

If accounting firms do manage to fulfil these requirements, it will be a huge improvement from the current state of affairs, if the MIA’s practice review is anything to go by.

The review – conducted randomly on around 280 out of the more than 1,500 accounting firms in the country between 2004 to 2008 – found that only 9% of firms were rated satisfactory. Among the findings by the MIA was that generally, accounting firms were “oblivious to the importance of risk management.”

MIA also highlighted the lack of audit documentation in the audit working papers as a major audit deficiency. “Insufficiency of documentation is a widespread audit failing. Without documentation, audit evidence could not be captured to indicate the audit procedures performed,” the MIA report stated.

It should be noted though that the bulk of audit work conducted on public-listed firms are done by the big 10 firms. Considering the huge number of accounting firms in the country, it is difficult to say if any of the big 10 fall within the bad rating by the MIA.

In any case, there is no denying that smaller firms will find it hard to come up to mark if the requirements of the ISQC1 are enforced, a view shared by Mohd Noh Jidin a Seremban-based accountant and partner at SKMN. “This is a right time for local accounting firms to merge as they are as capable as bigger firms of accountants,” he says.

Mohd Noh adds that it is likely that accounting firms that audit the work of subsidiary companies of listed companies will also come under the purview of the AOB.

While he welcomes the implementation of the AOB, he hopes that the registration process (of firms by the AOB) will be transparent and open even to the smaller firms that have the adequate requirements.

Another obvious repercussion of the AOB and its requirements, is that the cost of audit work on public-listed companies is set to rise.

Notes Mok Yeun Lok, regional executive director of Crowe Howarth International, “Stringent compliance requirements will create new layers of processes. The areas that will be impacted with cost implications include professional fees, documentation processes, professional training and infrastructure.”

Crowe Horwath, one of the big ten firms in the country, not surprisingly, welcomes the AOB and claims to already being ISQC1-compliant. “It will improve the quality of audit services in Malaysia and promote high professional standards of auditor,” says Mok.

A similar view is shared by other top firms including Ernst & Young and Grant Thornton.

“The importance of independent oversight boards in enhancing the quality of audits and promoting investor confidence is widely recognised, based on the experience of other economies,” says Rauf Rashid, head of Assurance Practice Ernst & Young Malaysia.

Desmond Tan, a partner at Grant Thornton, also welcomes the AOB but adds that with it, comes about an estimated 30% increase in the overall cost of auditing of public companies.

Interestingly, some small firms also lay claim to being ISQC-complaint, such as that of Mohd Noh’s. But his grouse is that the establishment of the AOB could lead to reinforcing the stranglehold that large accounting firms have over the market of auditing the books of public-listed companies.

“In Malaysia, over 80% of the total accounting fees lands in the hands of the 10 big firms. The balance 20% is shared among around 1,500 accounting firms. We hope that the Government will try to ensure that all firms of accountants be given equal opportunity.”

Mohd Noh’s contention is also that bigger does not necessarily mean better. “Just look at all the large corporate scandals to hit the corporate world. From the United States, to India, to Malaysia. The big boys were involved,” he points out.

Another accountant, Atarek Kamil Ibrahim, who is executive chairman of Atarek Kamil Ibrahim & Co, pointed out that merely changing of the rules is not enough. “There are sufficient provisions in place for the authorities to have taken to task all the directors and if necessary, their auditors, for all those cases where the books were cooked. But has that been done sufficiently?” he questions.

What is clear is challenges remain for the AOB to be tasked with the right people – qualified accountants with integrity and who are free from any interest in existing firms. That is not going to be easy, considering that if people of such calibre would tend to be hired as consultants to the big firms. The AOB will also have its work cut out in monitoring accounting firms, considering the complexity and massive amounts of documentation involved in the ISQC standards.

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