HOW much do you know about the auditors of the listed companies whose shares you own? If these companies are relatively small, such as those on the ACE Market, there’s a chance you’d probably be hard-pressed to even remember the names of the accounting firms that carry out the audit jobs.
This is because some of these auditors are neither in the Big Four – PricewaterhouseCoopers, KPMG, Ernst & Young and Deloitte – nor are they second-tier firms. In other words, unless you’re part of the accounting fraternity, you’re not likely to have heard of them.
For that matter, very few investors bother to familiarise themselves with relevant details of the listed companies’ auditors. For example, do we have any idea about the size and capabilities of the firms? What do we know about those people whose names we see on the auditors’ reports?
Yes, this is essentially trivia to us. And yes, such information has no bearing on the performance of the stocks. But isn’t it at least a little scary that we rely on the integrity and competence of those about whom we know next to nothing, if not nothing at all?
And yet, when cases of accounting fraud involving listed companies are uncovered in recent years, we are quick to question whether the auditors are doing what they are paid to do and whether the authorities are properly supervising the auditors.
Of course, there are clearly regulatory gaps that needed to eliminated, and that’s why the Securities Commission (SC) had pushed for changes in the law that have paved the way for the formation of the Audit Oversight Board (AOB).
On March 19, SC chairman Tan Sri Zarinah Anwar said the board would “provide independent audit oversight over public-interest entities and to ensure our regulatory framework for auditors is on par with international standards”. The AOB is expected to commence operations on April Fool’s Day.
Considering that we don’t know much about the auditors, we should be ready for some surprises when the AOB is up and running.
It won’t take long. The registration process alone will reveal something troubling – that some of the listed companies are audited by sole practitioners.
Bursa Malaysia’s listing requirements are not specific about who qualifies to audit listed companies.
On this subject, the stock exchange says only this: “A listed issuer must appoint a suitable accounting firm to act as its external auditors, and among others, the factors to be considered for the appointment are the adequacy of the experience and resources of the firm and the persons assigned to the audit.”
That doesn’t explicitly forbid a listed company from engaging a firm owned by one person to act as the auditors.
Sole practitioners are not automatically bad auditors, and some listed companies that have been caught cooking their books had Big Four firms as auditors. So, size is not a sure-fire indicator that the auditors’ work is impeccable.
However, we have to recognise the risks when a sole practitioner audits a listed company. For one thing, there’s the worry that a small audit firm may not have the resources to do a thorough job in auditing a listed company, given the strict reporting deadlines and the scale of the business.
More importantly, there’s the question of auditor independence. If the sole practitioner relies significantly on revenue from work done for the listed company (including non-audit services), he may not always be willing to act against the interests of the management of the listed company when performing the audit.
With the AOB up and running, we may no longer have sole practitioners as auditors of listed companies, or at least, there will be greater scrutiny of these practitioners’ work.
But it’s a mistake to think that the AOB’s presence is a form of assurance and that it means investors can afford to be ignorant about the role and responsibility of auditors. Shareholders of listed companies should take the trouble to get to know a thing or two about the auditors.
If you’re unfamiliar with the auditors of a listed company, you can, as a shareholder, ask the company management for basic information about the firm, such as contact and registration details.
These will not tell you anything about the quality of the audit work, but this way, you can find out more about the firm. If it’s a sole practitioner, it’s worthwhile asking the company management to explain why it has opted to use the services of a small firm to do a job that hinges upon independence, technical knowledge and integrity.
This sounds like too much fuss over so little, but often, when things go wrong and the damage is done, we’ll look back and realise that a little vigilance could have gone a long way.
● Deputy business editor Errol Oh has realised that names can be misleading. An accounting firm may be called ABC & Co, but it’s actually ABC running it as a sole practitioner.