New measures to enhance financial reporting passed

THE recent parliamentary session saw the passing of a number of laws with the intention of enhancing financial reporting of public-listed companies in Malaysia. Given that sound and reliable financial information is critical for a healthy capital market, the changes in the laws would provide additional measures in regulating financial reporting and auditing of companies listed on the Malaysian stock exchange.

One of the amendments to the Capital Market and Services Act (CMSA) is the introduction of a new legal provision which prohibits any person from influencing, coercing, misleading or authorising other persons who are involved in the preparation of or the performance of audit of the financial statements of listed corporations which would cause the financial statement to be false or misleading.

The penalty for breaching the above provision is imprisonment for a term not exceeding 10 years and a fine not exceeding RM10 million.

Given the severity of the punishment, those who are involved in the financial reporting chain of listed corporations such as directors, senior management and the members of the financial reporting team should evaluate their present reporting process and ensure adequate controls and safeguards are put in place to avoid the risks of producing financial statements which are false and misleading.

At the same time, the Securities Commission Act has also been amended to establish the long-awaited Audit Oversight Board (AOB) which is expected to develop and promote an effective audit oversight framework as well as enhancing the confidence and reliability of audited financial statements in Malaysia. The AOB would be dealing with auditors who audit the financial statements of public interest entities such as listed corporations and financial institutions.

Among the roles of the AOB is to register auditors of the public-listed entities and conduct inspections and monitoring programmes on auditors to assess the degree of compliance of auditing and ethical standards. What is interesting is that the law now requires auditors to be registered with the AOB on an annual basis.

The AOB is also empowered to reject registration, revoke or suspend registration if the auditors had breached certain laws or failed to comply with the relevant standards expected of a professional accountant.

Inspections conducted by the AOB would allow the board to assess how far auditing firms comply with the quality control, auditing and ethical standards which are the key ingredients of quality auditing. The AOB is also empowered to conduct inquiry on the auditing firm if the inspections result in adverse findings or upon receiving notice issued by the Securities Commission.

A wide range of sanctions could be used by the AOB in its enforcement actions. Auditors who are found to be in breach of the newly introduced law could be directed to comply with certain requirements, reprimanded, assigned a reviewer to oversee the audit undertaken by them, prohibited from accepting public interest entities audit or imposed a penalty not exceeding RM500,000.

The AOB would be working together with our oversight bodies such as Bank Negara Malaysia, Companies Commission and the Malaysian Institute of Accountants (MIA) to avoid the duplication of roles and efforts. Auditors auditing private companies would continue to be regulated by the Companies Commission and the MIA.

It is hoped that these new measures would position our financial reporting quality to be at par with or ahead of other markets. While these measures provide the regulators with more options in overseeing the conduct of the market players, the desired result in enhancing the reliability of financial information is ultimately driven by the leaderships of corporations themselves. The board has the responsibility to set the tone and this would then be cascaded through a robust reporting process with the support of highly qualified people who uphold the highest level of integrity and professional standards.

The fact that Malaysia is converging into the full adoption of the International Financial Reporting Standards by 2012 would make the journey more challenging, especially for companies who have not been investing in high-quality personnel to steer their financial reporting process. The first step that audit committees should take in the New Year is to have an end-to-end review of the financial reporting process, identify possible risks and start mapping measures in mitigating the risks, including fraud, that may be identified.

We would certainly see a different financial reporting landscape in 2010. Some may see this change as an additional burden; some would be welcoming the changes as new injection of life in enhancing governance in Malaysia.

Ultimately, we Malaysians would benefit most if these new measures result in us being associated with integrity, honesty and good governance more than ever.

This article is also published at the Edge Malaysia website here:

http://www.theedgemalaysia.com/commentary/156392-new-measures-to-enhance-financial-reporting-passed.html

Many Many Malaysians

Malaysians enjoying Christmas holidays at the KLCC park. We have many holidays to enjoy, Rakyat-centric I suppose! Productivity? Worry another day.

Are You Aware of These Changes?

A number of new laws and changes to existing laws were passed by the Dewan Negara on the last day of its sitting this year. While me are attracted to follow the jokes and acts of our Parliamentarians, what they do could have huge impact on our lives.

Among the new laws that were approved are:

• Labuan Limited Partnership and Limited Liability Partnership Bill
• Labuan Foundation Act 2009
• Labuan Financial Services and Securities Bill
• Labuan Islamic Financial Services and Securities Bill

A number of existing laws were amended as well. Among the interesting ones are changes to the Securities Commission Act to introduce the Audit Oversight Board to enhance the quality of audit in Malaysia.

The changes to the Capital Market and Services Act include making it an offence for directors to cause wrongful loss to listed corporations or to influence the issuance of misleading financial statements.

I am sure more discussions on the new laws would happen in the new year, particularly among the people involved in the areas affected by the new laws such as directors and auditors.

In Our People We Hope

In his book Revolutionary Wealth, futurist Alvin Toffler describes how different institutions in the United States react to change in the following manner:

• Business — 100 miles per hour (mph)

• Civil society — 90mph

• The American family — 60mph

• Union — 30mph

• Government bureaucracies and agencies — 25mph

• American school system — 10mph

• Inter-governmental organisations — 5mph

• Political structure — 3mph

• The law — 1mph

The global financial crisis certainly confirms how far business could influence the well-being of people, not only in the US but across the world. The excessive risk taking through aggressive lending practices created the sense of prosperity across the world, only to be disappointed at the end when the property bubble burst, the subsequent failure of the financial market and, eventually, the slowing down of the real economy globally.

On the other hand, waiting for the law to be introduced or amended in responding to the changing situations and circumstances could also be a long process, as different political systems deploy different due processes that certainly involve significant time and resources.

The recent United Nations Climate Change Conference in Copenhagen is a classic example of the difficulty in balancing economic and business interests with the well-being of the community, especially when it involves a long-time horizon.

Given such a scenario, it appears that nurturing a healthy and strong civil society would be one of the ways in ensuring a fair distribution of wealth among members of the society as well as enhancing the quality of life of the citizens.

Why? Based on Toffler’s observation, civil society moves relatively fast as a balancing force to ensure that the interests of business and society coincide with each other.

While civil society means different things to different people, the working definition used by the London School of Economics describes civil society as uncoerced collective action around shared interests, purposes and values. This applies to a growing list of organisations in Malaysia, covering myriad interests of society.

In the Malaysian context, how could civil society be effective in contributing to nation-building and ensuring the attainment of the desired quality of life?

There are a number of issues that may contribute towards a meaningful role of civil society in our country:

1. Facts based

While people generally are driven by emotions, what cannot be denied are facts. This would help in getting others to understand the issues being championed and facilitate the formulation of solutions. However, as in life, there are a lot of grey areas in a particular issue, and a fair balance between facts and emotions need to be established.

2. About us

Shared interests and purposes alone do not ensure the outcome would benefit the society at large. The fundamental purpose of any movement should always be about the best interest of all members of the society. This will definitely be a challenge for our society as we have been brought up to be very cautious about our races and religions.

3. Integrity

This is the main ingredient for respect and acceptance. While objectives and activities could be designed to display altruism, the ultimate intent could not be camouflaged for long and would be eventually detected by the society. Once trust is lost, regaining it would be a long journey.

There are ample opportunities now for us to use this platform to participate in the debate about our future. For example, on the issue of the Goods and Services Tax, both sides of the political divide appear to have made their minds.

What is missing is the third force coming up with facts and validated information to argue what will be the best course of action for this country in the longer term.

This is an opportunity that we all should not miss as the implications would be far reaching. Perhaps the accountants and lawyers could start the ball rolling.

The open house on the National Key Result Areas is a good example how the public is given more space in developing public policy. We, the people, should coordinate among ourselves in providing views and inputs, and later monitor the progress of each key area so that the promise is kept and delivered.

Given Toffler’s observation, the development of a strong civil society is definitely important in our quest to be a high-income economy. As the need for change in the future would be faster and more frequent, the civil society would be the third force that would champion the interest of every one of us.

Looking forward to seeing the position of the civil society in our new economic model.

This article is also published on the Edge Malaysia website here:

http://www.theedgemalaysia.com/commentary/156079-in-our-people-we-hope.html

Re-inventing Education

Should our education system cater for our immediate needs or prepare our future generation for future challenges?

That was one of the issues raised by Tan Sri Dzulkifli Abdul Razak, the Vice-Chancellor of USM at a forum on sustainability at the 8th Asian Academy of Management International Conference in Kuantan yesterday. He argues that education is about preparing for the future so that we could continue to enjoy meaningful life. In doing so, leadership of universities should stand up and do the right thing rather than conceding to the demands from politicians and industrialists who may not have our long term interest in mind.

Tan Sri Dzulkifli also make a point about the need to address the sustainability issues and ensuring a mode balance distribution of wealth among the world's population. At the end of the day we need to re-learn to be human.

As a co-panellist, I discussed my perception about business and the need for business to add value and manage the changing environment. To me, the collapse of the global financial system was mainly driven by greed and the only way forward is to address this issue. However, developed countries do not want to accept the fact that we have ignored the fundamentals of being human.

I also touched about form over substance, that we are obsessed to demonstrate conformance and missing the meaning of our effort. My sharing how different institutions react to change, I strongly propose for a meaningful civil society to be nurtured in Malaysia to provide a check and balance against business which may not be concern about our long term sustainability.

Competition for the brain power

THREE international personalities took part in a forum on innovation and change for business sustainability organised by the Graduate School of Business of the Universiti Sains Malaysia last week.

There was this professor from a highly reputable university in Australia who was born in Fiji. He is also the editor of a number of international accounting journals.

Another panellist was a director at a research centre of an international company in California. He was born in India and now advises a number of business schools around the world.

Next was a professor who was born in Ukraine, educated in Sweden and now based in Japan but offers her services in other Asian countries outside Japan.

The US, Japan and Australia are ranked second, eighth and 15th in the 2009 Competitiveness Index by the World Economic Forum (WEF). The economies of these countries are also deemed to be at the third stage of development where competitiveness is driven by innovation.

Innovation, especially at the top end of the scale, can only be possible by having brain power that is highly educated and creative.

If the international personalities mentioned above are taken as examples, we can deduce that advanced economies give priority to the quality of the brain and care less about where they come from.

Furthermore, the low birth rates in developed countries require them to bring in more talents from abroad to ensure their innovation engines continue to churn out globally competitive solutions to be marketed worldwide.

So when it was reported in parliament that more than 300,000 Malaysians migrated to other countries between March 2008 and August this year, we Malaysians should be seriously concerned.

Ranked 24th in the Competitiveness Index and deemed a Stage 2 economy whereby competitiveness is still driven by higher degrees of efficiencies in producing quality products, we need all the talents and brain power to transition ourselves to the next stage.

Apart from following the spouses, all other reasons why these Malaysians migrated — education, brighter career and business prospects — point to the risk of the country being trapped in the middle-income economy.

Our income level would not allow us to offer competitive remuneration or rewards for talented people who are also demanded by many other countries.

If we look around, there have been many developing countries which eventually ended up as the producers of talents for more developed countries as they could not, on the basis of income levels alone, retain their best.

At the same time, most global companies have a worldwide recruitment policy in sourcing for the brightest and smartest individuals irrespective of the colour of the skin that wrap their brains. To them, the quality of the brain is the paramount consideration!

Perhaps it is time to pause and reflect on the ways we manage talents in this country. Are there policies which our competitors would like us to retain so that they could grab highly talented Malaysians who are denied opportunities due to the colour of their skin?

Some might argue that most Malaysians, especially the Malays, are non-migratory and will continue to serve the country. Well, post-Internet Malaysians may have a very different worldview altogether. The Internet has allowed these young people to have a borderless mindset.

They could seek whatever information from wherever that they want. They develop friendships with many people whom they never meet from around the globe and are able to express themselves freely through various platforms such as blogs or other social media.

A lot of them are playing games with God-knows-who from other parts of the world through the Internet. To them the world is borderless. What will happen when they start to look for jobs or building their careers?

An interesting example of how countries respond to opportunities in the talent competition would be the case of the accountancy profession in Singapore.

Last year, they announced the vision of positioning Singapore as the global accountancy hub in the next 10 years. They formed a high level committee and recently, a comprehensive blueprint on how this would be achieved was issued for public consultation.

A simple guess is that they will implement the plan by next year.

The Malaysian Institute of Accountants (MIA) has been proposing to position Malaysia as the hub of accountancy education and training even before the Singaporean initiative was announced.

In fact, given the infrastructure and the presence of global accountancy bodies in this country, this is a low-hanging fruit ready to be plucked.

What is required is only for foreign students to be allowed to work in selected organisations in pursuing their professional accountancy qualifications.

If we cannot do this in quick time, how are we going to attract and retain talents to compete? Hopefully, this is not the case of Malaysia Tak Boleh.

We look forward to the revelation of the roadmap to move ourselves into a high-income economy soon. It would be a surprise if the issues of retaining talents and fair distribution of opportunities for talented Malaysians are not the key part of this grand plan.

This article was also published at the Edge Malaysia website here:

http://www.theedgemalaysia.com/commentary/155642-competition-for-the-brain-power.html

Innovation and Change for Business Sustainability

Change is something that scare a lot of people. It also does not make sense when people are comfortable with the present status.

As a country, we are losing our competitive edge quickly and competing in knowledge-driven economy requires different sources of competitiveness and human resource. As the services sector becomes more prominent in driving economic growth, the competition in getting the right brain as source of competitiveness would be more intense.

These are some of the issues highlighted in my presentation as a key note speaker at the forum on Innovation and Change for Business Sustainability organised by the Graduate School of Business, Universiti Sains Malaysia at the university in Penang this week.

Other panellists are Professor Chris Patel from the Department of Accounting and Finance, Macquarie University, Australia; Krishna Singh, Director of Strategic Programs, Service Science, IBM Almaden Research Center, Tan Sri Tengku Mahaleel Tengku Ariff, Executive Chairman, Tien Wah Press Holdings Berhad and Dr Zinaida Fadeeva, Director of Strategy, United Nations University Institute of Advanced Studies, Japan.

Work on reporting process now

IT is that time of the year again. We are not talking about Christmas shopping or going for a long end-of-the-year break. It is about preparing for the financial reporting season that will be faced by many companies when the new year kicks in in about three weeks.

Some might be wondering why the issue of financial reporting is raised during this period where most people are thinking about the Christmas gift they are going to get or planning for a well deserved break. After all, most Malaysians will be working for three consecutive four-day weeks this month. For listed companies that close their accounts in December, the third-quarter financial results were just announced last month. Doesn't financial reporting also deserve a break?

High quality financial reporting is one of the key indicators of good corporate governance. For companies that raise money from the public, financial reports communicate to the stakeholders about their performance and financial positions and would be the basis on which dividends would be declared.

While audit committees are normally tasked to look into financial reporting matters in detail, the whole membership of the board of directors should accord high interest and be critical towards financial reporting matters.

Companies face financial reporting problems when they underestimate the effort required to generate high quality financial reports. The financial reporting chain involves many parties from the board, management, auditors and other experts such as lawyers, valuers and actuaries. Beyond the physical infrastructure such as comprehensive accounting and management reporting systems, the quality of financial reporting is determined by ethical practices deployed and the integrity of all individuals in the reporting chain.

How a member of the board or audit committee would know that the financial reporting plan of the company under their care for this year is on the right track? Here are some questions that would help in assessing where you are:

a. Has the financial reporting milestone been determined?

Listed companies that end the financial year in December would have to announce their fourth-quarter results by February and the audited financial statements by the end of April.

By now, the management should be able to explain to the board and audit committee what their efforts are between now and those critical dates considering the Chinese New Year break and other key events that might be stumbling blocks to the milestones. This should also cover subsidiaries and associated companies which are operating overseas. Coordination up to this level is very important.

b. Have all the potential financial reporting issues and measures to resolve them been identified?

A good starting point for this is the management letter issued by the auditors for the last audit. If management has not resolved all the issues raised by the auditors, the chances are they would recur this year. In fact, failure to address concerns raised in prior audits reflects possible weaknesses in the financial reporting practices of the company.

What about issues that were identified in the preparation of the last quarterly statement? The game plan to address those issues in detail needs to be provided by management by now.

c. What about the risks of fraud?

Directors should be prepared to challenge management on this matter. If we look back, a number of financial reporting irregularities around the world involved those holding senior management positions.

d. Was there any change in financial reporting requirements?

The management should identify all the changes in financial reporting standards and regulations, provide their assessment on the impact to the company and explain to the audit committee how those changes are addressed.

e. Does the company have enough competent people to prepare high quality financial reports?

Financial reporting nowadays is fairly complex and challenging. Therefore, continuing assessment on the quality of people available to do the job is very important. Boards and audit committees should not compromise on this as the risks of having financial reporting problems would be high. If there is a gap in the skill set, measures to mitigate them such as outsourcing the task to outside experts need to be considered seriously.

f. What are the views of the auditors?

The audit committee should have a discussion with the auditors without the presence of management. Let the auditors spill out thoughts on the financial reporting matters and consider those issues objectively.

The auditors should explain financial reporting risks and how they would address them in their audit. The roles of the management and the board in resolving those issues should be agreed upon with the auditors.

Get the auditors to frankly express whether their fees are adequate for a high quality audit to be performed. Boards should consider audit as part of its risk management process and due consideration on this should be given. After all, audit fees in Malaysia are the lowest in the region!

The questions above are not exhaustive but should provide directors, especially the independent non-executive directors, with a clear idea how the financial reporting for this financial year would be managed.

It is better to ask the question now rather than be subject to stress and risks if financial reporting shortcomings are identified at the very last minute.

This article was also published on the Edge Malaysia website here:

http://www.theedgemalaysia.com/commentary/155149-work-on-reporting-process-now.html

Could Cuti-Cuti 1Malaysia Unseat Poco-Poco?

Today The Ministry of Tourism organises a mass dancing event showcasing the so called "Tarian Cuti-Cuti 1Malaysia" or 1Malaysia holiday dance at Dataran Merdeka. This consists of a number of dances rooted from the diverse Malaysian ethnic groups, reflecting the cultural diversity and harmony of Malaysia.

While not officially stated, some may argue this is a response to the cultural competitiveness between Malaysia and Indonesia. In fact, Poco-Poco, a popular Indonesian dance is also very popular in Malaysia. So, could this 1Malaysia dance a direct response to the popularity of Poco-Poco?

Promoting 1Malaysia Holiday Dance is one effort in shaping the future culture among Malaysians, especially in promoting inter-ethnic understanding. Could similar effort be used to combat social ills such as corruption?

Maybe it is time for Saya Benci Rasuah or I Hate Corruption dance to be introduced in Malaysia? Part of Cuti-Cuti 1Malaysia dance series?