Auditing for good governance

RECENTLY, there was a furore over the alleged shoddy work of an external auditor and the client has taken steps to sue. This is a first on the Malaysian corporate scene in recent memory.

The regulators concerned have come out to state that “auditors” should render their independent opinion without fear or favour, and discharge their duties free from any retaliation.

This is regurgitating the obvious, as auditors are covered under the Capital and Market Services Act 2007.

In a more puzzling development, additional independent non-executive directors were appointed by the corporate over and above its current complement, as it was opined that those currently on the board were not “action oriented” enough, not to mention their qualifications and know-how.

This brings the issue of independent non-executive directors to the forefront where their appointment to the board is at the discretion of the corporate/shareholders. The regulators are impotent on this front to ensure that the process of appointing them is transparent and at arm’s length.

Datuk Jagjit Singh, a High Court Judge, had ruled that “an independent non-executive director is not a decorative ornament and has a role to play.” This should not be compromised.

The current update to the Malaysian Code of Corporate Governance (updated April 2021) states that in the appointment of directors, “the board does not

solely rely on recommendations from existing directors, management or major shareholders. It should utilise independent sources to identify suitably qualified candidates.”

It also requires the nominating committee “to explain why these source(s) suffice and other sources were not used”. This tone is over-accommodating when taking into consideration the stipulation that 30% of directors should be women, which has invariably led to scraping the bottom of the barrel in terms of usable talent.

This rather weak statement also has no weight when it comes to appointing independent non-executive directors.

Logic would dictate that one would strive to bring “one’s own on board” to avoid possible conflict. It is not uncommon to hear of directors resigning due to “personal reasons” when conflicts occur, including over financials.

The regulators should explore this matter in depth. More specificity on this front is called for, including a requirement to tap directors’ registers.

Internal and external auditors have their respective stringent global standards of professionalism to adhere to. For good governance to be a reality, these auditors must report to the audit committee members, who, as independent non-executive directors, have gone through a robust vetting process, aided by the regulators if need be, to avoid conflicts.

Good governance is the healthy chemistry of the four cornerstones of organisations – board of directors, executive management, external auditors and internal auditors – in the process of making decisions and implementing them.

The regulators should go the extra mile to ensure that all players responsible for good governance meet certain minimum standards that can be benchmarked to global best practices.

There is work to be done, and it needs to be done with care and conviction


Past president, Institute of Internal Auditors Malaysia

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