Big Four among audit firms with faults

KUALA LUMPUR: The Audit Oversight Board (AOB) has pinpointed “a number of shortcomings” after inspecting the country's six largest audit firms last year. This raises the possibility of the board finding more areas of concern when it widens its inspection coverage to include smaller firms this year.

AOB executive chairman Nik Mohd Hasyudeen Yusoff said the board was targeting to inspect 18 audit firms this year, including mid-tier and small firms. “We will have a better picture of where everybody is in the (financial reporting) ecosystem,” he told reporters after the release of the AOB's maiden annual report yesterday.

He described the inspections and the resulting remediation as the most important part of the board's work. “This is where we try to influence the quality of audit, when we understand where the firms are lacking and where they can improve,” he said.

Last year, the AOB used a risk-based approach to select the six firms for inspection. These firms are the Big Four (PricewaterhouseCoopers, KPMG, Ernst & Young and Deloitte) and two others with more than 10 partners. The board did not name the latter, but according to its Register of Auditors, BDO and Crowe Horwath are the only firms apart from the Big Four that have more than 10 partners.

Nik Mohd Hasyudeen said these firms collectively audited 73% of the public interest entities (PIEs) in Malaysia, while their listed clients accounted for 93% of the total market capitalisation of the companies on Bursa Malaysia. PIEs include listed companies, banking and financial institutions (including Islamic banks and development financial institutions), insurance companies and takaful operators, and holders of Capital Market Services Licences (such as securities and futures trading firms, and fund management companies).

Said Nik Mohd Hasyudeen: “We have decided that the six firms will continue be inspected annually because of the impact of their work, whereas the others will each be inspected every three years. But that depends on what we find during the inspections, because we may have to conduct follow-up inspections.”

In his message in the annual report, he wrote: “While we determined that the audit firms inspected had put in place systems and processes in line with global best practices, some specific areas for improvements were identified. The AOB will follow up on the remediation efforts of the audit firms to ensure substantive changes are effected to enhance audit quality.”

The report said the inspections had identified a number of shortcomings that needed to be addressed by the firms, particularly in the area of audit documentation and evidence for significant judgement areas.

“If a firm doesn't document its work, there is no basis for us to confirm that the firm has performed its function. One of the principles that we have adopted in our inspections is that if you fail to document, we will consider that you have not done the audit procedure. This is a very strong position that we have taken,” added Nik Mohd Hasyudeen.

Said the AOB in the annual report: “Other than instances where there was insufficient documentation for the audit evidence obtained, there were instances where the necessary audit procedures and evidence were clearly not performed or obtained. It is pertinent to recognise that without sufficient evidence and analysis, the auditor may not have a basis to support their opinion.”

The board also called on the auditors to be more robust and to apply professional scepticism in challenging management assumptions and estimates, particularly in areas that require significant professional judgement such as in determining fair value, asset impairment and going concern.

He said these were highly subjective areas and pointed out that the value of the audit work came from the auditors exercising professional scepticism to objectively and independently arrive at audit opinions.

Another key observation by the AOB following last year's inspections was the need for audit firms to price their services at levels that commensurated with the risks undertaken so as not to compromise on audit quality.

The annual report also highlighted that human resource was an important factor in ensuring high quality audit, including ensuring appropriate workload of partners and other members of the audit team, as well as attracting new talent through a conducive work environment.

Nik Mohd Hasyudeen said the board had yet to determine if the issues uncovered in last year's inspection would lead to inquiries and possible sanctions. He explained: “Our main focus is to work with the firms on remediation. That is very critical. If we have identified areas for improvement, we need to get that resolved immediately rather than to prolong the situation. Given that we just completed the inspections in December, we are still looking at a number of issues. If we were to impose sanctions, we will be transparent.”

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