FINALLY, the Audit Oversight Board (AOB) has imposed its first sanction. On July 12, more than two years after it had been set up, the board reprimanded Alvin Tee Guan Pian, the senior partner of accounting firm UHY Malaysia.
The AOB only provided a brief description of the breach: “Failure to comply with the relevant requirements of the recognised auditing standards in Malaysia i.e. the International Standards on Auditing.”
Tee was penalised because he was the engagement partner in the audit of a public interest entity (PIE) for the financial year ended July 31, 2010. It appears that the breach had to do with the way the audit was conducted.
Apart from listed companies, PIEs include 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).
The AOB's refusal to reveal more about why Tee deserved a reprimand invites us to play the guessing game. Which of the many International Standards on Auditing applies in this case? And in what way exactly did Tee fail to comply with the auditing standard or standards? Why did this merit a sanction?
It was UHY that threw some light on this matter through a press release it issued on July 16 in response to a StarBiz report on the reprimand.
The firm's explanation is that there is a clash of opinions on whether it was right to believe that the PIE was a going concern back when its 2010 accounts were audited.
Said the press release: “UHY elaborated that the particular PIE was merely undergoing a recapitalisation exercise, where the focus on UHY's decision to concur with its client's going concern assumption' has been an area that the AOB differs in terms of its technical view of the matter. UHY believes it has strong grounds to appeal the AOB decision as the differing views are judgemental in nature.”
A fundamental principle in the preparation of financial statements, the going concern assumption simply means that the management of an organisation has no reason to believe that the organisation's operations will come to a halt in the foreseeable future.
When doing an audit, the auditor has to decide whether the use of the going concern assumption is appropriate.
The AOB has not responded to the UHY statement, although when speaking to StarBiz earlier, AOB executive chairman Nik Mohamed Hasyudeen Yusoff took pains to point out that the reprimand didn't mean that the PIE's 2010 accounts didn't give a true and fair view of the PIE's financial position and performance.
Instead, he added, the reprimand was because the auditor failed to do what was necessary in performing the audit.
But what was it that wasn't done? We won't know until the AOB and UHY decide to say more.
Meanwhile, it's useful to look at the AOB's annual reports for 2010 and 2011, which talk about issues concerning the going concern assumption that were uncovered when the board reviewed the audit work of some firms.
In 2010, the AOB highlighted several weaknesses in this area, such as auditors not doing enough to assess the appropriateness of the going concern assumption although there were signs of going concern issues; lack of evidence that the auditors had challenged key assumptions used by management to support the basis for going concern; and a majority of auditors failing to perform an independent stress test or sensitivity analysis.
The board then became specific: “In three instances, there were disclosures in the financial statements or management's representation letter which point to significant doubt or dependence of a future event to support their ability to continue operating as going concern entities. However, the audit opinion did not reflect the substance of such disclosures.
“In another instance, while an Emphasis of Matter' opinion relating to going concern was issued, the description of the facts supporting the opinion gave a different connotation as though there was no default in debt obligations.
Some of these issues observed in the 2010 inspections persisted the following year, judging from the comments in the AOB's annual report 2011.
“The AOB reiterates the need for assessing the fundamental assumptions of going concern made by management in the preparation of financial statements. Audit firms need to improve in this area as our inspection revealed that the performance of audit procedures is generally lacking,” said the board in the latest annual report.
“It is important to acknowledge that going concern considerations involve risks of key judgment area especially when the management's assessment may not be realistic.”
Clearly, this is an area that calls for professional scepticism, something that auditors are expected to exercise in spades in the course of their work.
There is no easy way to determine how sceptical an auditor should be in assessing the appropriateness of the use of the going concern assumption, but the AOB reprimand last week suggests that an intimate knowledge of the International Standards on Auditing is always desirable.
> Executive editor Errol Oh was told that professional scepticism is in short supply, but he doesn't believe it.