Accountancy’s regulatory makeover has to be explained well
MALAYSIAN Institute of Accountants (MIA) president Datuk Mohammad Faiz Azmi revealed something surprising when interviewed by Bernama recently.
The news report that came out on Boxing Day quoted him as saying that chief financial officers (CFOs) of certain types of companies, including listed ones, may be required to register with a new regulator.
The aim here is to “help monitor the CFOs and recommend appropriate improvements as and when needed”.
Faiz added that the move was also in line with Malaysia’s convergence with the International Financial Reporting Standards, which requires the consistent application of complex global accounting standards.
“The proposal to register CFOs is to understand the degree of experience and training that person has to be able to do that job, and it is a fundamental requirement that the person signing (financial statements) must have the right knowledge of accounting standards.
“We realise that Malaysia is a bit late in making CFOs accountable, as they have in other countries in the region where they have already taken a much further step than us. It is time,” he told Bernama.
He was speaking in his capacity as chair of the committee that was set up to implement the recommendations in the Report on the Strengthening of the Accountancy Profession in Malaysia.
Prepared by a multi-agency panel called the Committee to Strengthen the Accountancy Profession (CSAP), the draft of the report was released in December 2014 to solicit public feedback. Eight months later, the document was presented to the Finance Minister, who accepted the report and its 15 recommendations. And this is where the implementation committee (IC) chaired by Faiz takes over.
This proposal for CFO registration was unexpected because the draft report doesn’t talk about such a move. Instead, its first recommendation was that the MIA’s regulatory functions should be carved out and placed with a new regulatory body (NRB).
“The objective of the NRB is to ensure that the accountancy profession is effectively regulated,” says the CSAP in its draft report.
“The NRB will also be tasked to develop the accountancy profession and ensure key issues pertaining to the profession are dealt with appropriately with no duplication of efforts. All accountants in Malaysia will need to be registered with the NRB.”
In this scenario, the MIA operates as a professional accountancy body that “has to develop its new value proposition in winning market recognition”.
It’s only natural that the MIA is less than enthusiastic about such a move.
In an interview in June, when he was already the IC chairman, Faiz had in mind an alternative structure in which the NRB is a small outfit that looks at macro and more strategic regulatory matters, while the MIA continues to perform more intensive regulatory duties such as registration and enforcement.
But that idea seems to have been taken off the table. In the Bernama interview, he said the NRB’s two main roles were to act as an enforcement body for professional conduct and to formulate policies for the accounting profession in Malaysia.
That sounds like the NRB will be a full-blown regulator, and part of its job, as envisaged by the IC, is to make sure that the CFOs of public-interest entities (PIEs) meet certain standards.
This is seen as a move to place the CFOs on a level with auditors when it comes to accountability for the PIE’s annual accounts.
Since 2010, the audit industry has been supervised by the Audit Oversight Board, which registers firms and individuals involved in the audit of PIE accounts, and inspects their work “to promote confidence in the quality and reliability of audited financial statements in Malaysia”.
The Securities Commission Malaysia Act originally classified PIEs as listed companies; banking and financial institutions; insurance companies and takaful operators; and those with Capital Market Services Licences, such as securities and futures trading firms, and fund management companies.
The list was expanded last year to cover other capital market institutions such as the Capital Market Compensation Fund Corp, exchanges, central depositories, clearing houses, self-regulatory organisations, private retirement scheme administrators, and trade repositories.
Currently, there is no rule that specifies who can be the CFO of a PIE. But most employers (and surely, other stakeholders) expect the CFO to at least be registered with the MIA as a chartered accountant. Under the Accountants Act, without MIA membership, a person can’t practise or hold himself out as an accountant.
But is it necessary to have another layer of registration for CFOs of PIEs? What does this say about the MIA’s chartered accountant status?
Because of the nature of the PIEs’ businesses, it’s in the public interest that their audited financial statements properly reflect the companies’ health and results. That’s why we have auditors, whose principal task is to express an opinion on whether the annual accounts give a true and fair view of the companies’ financial position and performance.
This doesn’t mean a CFO has no obligation to do his job well. Typically, he answers to the CEO and the board of directors, including the audit committee. They should be the ones holding him accountable for his work, including the preparation of accounts.
Furthermore, the MIA has a mechanism for responding to complaints against members, and if a CFO breaks the law in relation to a PIE’s financial reporting, there are provisions for prosecution by the Securities Commission and/or the police.
Bank Negara has a policy document that explains the fit and proper criteria applicable to a financial institution’s key responsible persons, including the CFO. It covers the persons’ probity, personal integrity and reputation; competency and capability; and financial integrity.
Maybe this has partly inspired the proposal to register CFOs of PIEs, but it should be noted that this particular policy of the central bank extends across the board. Other than the CFO, those who must meet the fit and proper criteria are directors, the CEO, the chief internal auditor, the chief risk officer, the chief compliance officer and the appointed actuary.
If the implementation committee pushes for a change in the law to make it mandatory for CFOs of PIEs to register with the new regulator, it should first convince stakeholders that this will indeed improve financial reporting and corporate governance in Malaysia.
We need to know that there will be no wasteful duplication of efforts and overlapping of authority.
And this may also be a good time to assess the adequacy of the PIE list. For example, why are GLCs not considered PIEs when they often receive government backing – financially or otherwise – and many of the businesses have significant impact on the nation?
Executive editor Errol Oh reckons it won’t be long before somebody suggests that CEOs and directors of listed companies be registered too.