Silver Bird's suit shocks accountants; may result in higher audit fees


PETALING JAYA: The legal suit taken by Silver Bird Group Bhd against its auditors has surprised the accounting fraternity although such suits have become common in countries like the United States, industry players said.

One key concern by accountants though is that audit fees may eventually rise, considering the risks of more suits going forward.

Said a big four accounting firm partner in Malaysia: “The sue the auditor cycle' has already happened in other countries. We (Malaysia) are not the first.”

The United States is possibly where such suites are most prevalent.

In the United States, he said, the result of the increased suits against auditors was that the Professional Indemnity Insurance (PFI) cost went up, which then led to an increase in auditing fees.

One of the more prominent cases in the United States were in 2011, when investors of Stanford International Bank sued the company's auditors BDO USA for US$10.7bil, claiming that BDO ignored signs of potential fraud.

Deloitte US was also sued US$7.6bil in the same year by the trust managing the bankruptcy of Taylor, Bean & Whitaker Mortgage Corp for failure to detect fraud during its audit work at the collapsed US mortgage firm.

As statutory auditors, he said, auditors were engaged based on a scope laid out under the International Standards of Auditing (ISA) and fraud detection.

“A statutory audit is more of a deterrence, as the longer you perpetuate a fraud, the more indicators or red flags appear and you are more likely to be caught.

“However, this timeline could span a few financial years, depending on how good and how senior the perpetrators are,” he said.

While auditors could have the ability to detect fraud earlier with the involvement of forensic techniques, it would be on increased costs.

He said it was the increase in audit procedures following an enlarged scope that would inflate cost, not only for the bad apples but also for every single company audited.

“The international professional and business community had tried over the years to balance the cost and practicality issues against the need to discover fraud issues.

“However, would it really be in the public's interest to increase costs tremendously across the board, as there are many more straight companies than there are of fraudsters?,” he questioned.

Another industry source said it was common knowledge that audit fees in Malaysia were low.

As a comparison, three out of four industry players contacted said local auditing fees were on the same level with the Philippines, which by far is a much less sophisticated market than Malaysia, and lower than peers like Thailand and Indonesia.

“Low fees could be a factor affecting the quality of audit work. It is high time clients appreciate the value of audit in helping their businesses and be prepared to pay more. But clients generally see an audit as a burden and thus always ask for lower fees,” the industry source said.

He said there could also be those who may be getting complacent.

“So, a case of an auditor being sued by a client could be a timely reminder for them to pull up their socks in performing their duties up to the expected standards,” he said.

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