Innovative Society: Sustaining Business Success

The Malaysian Institute of Accountants (MIA) will be organising its second MIA International Accountants Conference 2012 from today and tomorrow. The theme adopted this year is Innovative Society: Sustaining Business Success. The fact that accountants in Malaysia will be debating about innovation is refreshing as they are known more for their conservativeness.

More than 2,300 accountants from 26 countries will meet at the Kuala Lumpur Convention Centre for this annual event. A part from picking up technical points discussed at the conference, this is an excellent platform for networking, not just among accountants but from other sectors of our business community.

Interestingly the theme goes beyond the profession, it is from the perspective of the society. This is something that could be timely as the subject is about accepting the fact that we need to face change, doing the same thing over and over again will not work and there is no full stop when it comes to the demand for change. Those who believe change will stop at some point definitely had their time in our society and should consider fading away gracefully. If the accountants speak loud enough about innovation and change, they may be heard by others who are also congregating in Kuala Lumpur this week.

I hope the accountants, as much as being perceived as conservative, would participate in nation building through inspiring innovation. Given their numbers in running corporates, accountants are it the pole position to continue to drive value creation and governance.

  

Can They Deliver What They Promise?

Sayan Chatterjee in his book Failsafe Strategies describes three basic risks that can derail any strategy: demand risk, competitive risk and capability risk.

Simply, demand risk is about offering something that others don't like, competitive risk is when others would be able to outperform the organisation  and finally, capability risk the inability to deliver what is offered.

While Chatterjee is saying something that appears obvious, many organisations fail to address these basic elements in their strategic formulation and hence suffer the consequences of failure. This issue is not only applicable to for profit organisations but is equally applicable to others such as governments, political parties and regulators. However, the dimensions of these strategic risks could differ given the differences in value creation processes of these not for profit organisations.

While offering something that people would not buy sounds crazy, this could happen if the organisation has no real feel of the sentiments on the ground. Having no access to real information or information received has been filtered could be among the reasons. Making decision without the necessary facts is dangerous but getting those facts may not be easy if not properly planned and with the necessary investment.

Some organisations underestimate the capabilities of their competitors or overestimating theirs. Some may not even have a clue as to who their competitors are? In this present world where business models appear to be among the important competitive elements, many organisations are not even clear is to their own business model and how value is created. Others could disrupt the supply chain or change value propositions offered to seize market share. In the context of a country, changes made may not be sufficient as other countries are moving forward faster.

Capability to deliver is always an issue to any organisation as all organisations are operating with limited resources. Resources are not limited to money but could include smart and honest people with the right know how and skills. Competition for talent appears to be one of the difficult battles faced by organisations. Given the portability of talents, many countries which devalue their currencies to maintain competitiveness in export will be losing talents as smart people are selling their talents elsewhere for better value.

So, whenever we assess any offer in any circumstances, we have to consider whether those making the offer know what we want, can do better then others and are really capable to deliver what they promise. Or, could they be promising something which are beyond their capabilities to deliver so that they do not have to do so when they get what they want from you. Collectively, we are the boss!

IFAC Has New Leadership

The International Federation of Accountants (IFAC) last Friday announced the election of Warren Allen as the new President of the global accounting body. Olivia Kirtley has also been elected as Deputy President.

Both Warren and Olivia had served the accounting profession in various capacities. Both were in Malaysia during the World Congress of Accountants in 2010 and in many other occasions. 

The sole representative on the IFAC Board from ASEAN is Ahmadi Hadibroto from Indonesia. Malaysia used to be represented by Tan Sri Abdul Samad Alias a number of years ago.

The full announcement from IFAC could be accessed here.

Why Not Prove Yourselves?

Many of the accountants who played critical role in moving Malaysia to where it is now were the alumni of the Colombo Plan. Many were sent to universities such as in Australia to pursue the Chartered Accountancy programme. Many returned and then got involved with many institutions which became the foundation of our modern economy.

Fathers of the Colombo Plan

Since then, pursuing professional accountancy qualifications became a second nature for Malaysians who wish to build their career in accountancy. Malaysians went abroad to countries such as UK, Canada and New Zealand because of the limited opportunities available in Malaysia. Many were financed by the sweat and tears of their parents who sacrificed for the future of their young flesh and blood. Notwithstanding the perceived difficulties of the professional programmes, many saw these programmes as the key to better lives.

Later, many of the Commonwealth-based professional accountancy qualifications were introduced and offered in Malaysia. This opened opportunities for many more Malaysians to be professionally qualified and provided them with more choices in their career progression. Accountancy had certainly contributed significantly to the talents that were required to modernise Malaysia.

Given the demand for more accountants, many Malaysian universities started to offer accounting programmes. This was pioneered by Universiti Malaysia (UM), the oldest university in Malaysia. To ensure we get the context right, the best students those days went to UM, the rest went abroad to pursue their education. Given this background, it was not a surprise that when the first batch of the UM accounting programme graduated around 1973, there was a dilemma. Should they be treated as professionals or should they be required to pursue professional qualifications? The wisdom then was to recognise the qualification to enable the holder to register themselves as accountants with the Malaysian Institute of Accountants. Since then, more degree programmes were recognised by MIA. There were two types of registration then, Registered Accountants and Public Accountants.

When the Accountants Act, 1967 was amended in 2000, MIA combined its designation into a single designation, Chartered Accountants. While the philosophy of this status remained unchanged, to signify that the person is registered with MIA, many perceived this as a prestigious qualification, similar to those obtained in England, Australia and other institutes of Chartered Accountants, notwithstanding that the local Malaysian graduates obtained the designation without any competency assessment, unlike to with similar designation elsewhere.

Is the designation Chartered Accountant accorded by MIA really carries a person far in his or her accountancy career? I have no answer to that question but as an indicator we could analyse how many of them (those without professional accountancy qualification in addition to their accounting degree) are holding positions at the top 100 companies listed on Bursa Malaysia? They answer will certainly address the question on whether an accounting student need to prove their competency via a process recognised by the market. 

Somehow in Malaysia, we always rely on legal solution to solve our problems. In the case of accountancy, there is a different between a legal recognition and market recognition. A good and competent accounting graduate will be legally recognised at the point he or she registers himself or herself with MIA. However, if the person does not posses a qualification recognised by the market, the person may not be given the opportunity to progress beyond certain level if those making decisions are not confident enough of the person's competency. What more when there is no challenge process at the registration stage at MIA. This will certainly create the perception of "quality" based on the lowest common denominator among the untested crowd.

We need more qualified and competent accountants to move up the value chain. This requires many more accounting graduates to pursue professional accounting qualification, whichever they are, as long as they are recognised by the market. Market recognition comes from consistent baseline performance of the holders over time. No amount of law will be able to shape market recognition, full stop. If an accounting graduate shy away from this reality, he or she is risking his or her own future and the opportunity to be significantly involved in nation building.

It is the Flood Season

Flood is normally considered bad and I don't have problem with such view. Many innocent people lost their belongings because of flood, life included. However, for someone who was brought up in a flood prone area, Kota Bharu, flood could trigger a different sort of feeling.

The North-East Monsoon normally blows towards the East Coast of Peninsular Malaysia from November until March. The rain that comes with it could be very heavy. Normally if rains heavily in the highlands in the south of Kelantan (Hulu Kelantan) and the wind blows strongly in the north, the Kelantan River will be swollen and places like Kota Bharu will be flooded. And yes, the flood was so frequent that it happened closed to annually when I was a little boy living near the river bank in Kota Bharu.

Tangga Krai, the place where the state of flooding in Kelantan is measured

Boys being boys, we love the flood season. Many of us will chopped down banana trees and tied the trunk together into rafts. Normally, when the flood is at its peak the rain will stop and people will go out in numbers to see for themselves the situation around Kota Bharu town, sort of a festival then.

Somehow, forty years down the road, instead of hearing about flood in the East Coast, we hear places in the West Coast being hit by flood towards the end of the year. Has the weather pattern changed? Or the flood could be the result of indiscriminate logging in areas which normally act as buffer to towns and cities? 

In pursuing development, we may have forgotten the consequences of transforming our landscape into concrete jungles. Given the attractive returns from property development and the pressure to provide accommodation to our increasingly growing population, the risk of having an unsustainable ecosystem is increasing by the day.

Time to make money, a lorry is turned a public transport

Who should solve this problem? Our local authorities, state government, federal government? Many of us will never feel that flood is our common problem. Over time, our society is slowly turning into a society which is collectively irresponsible, our problems must be solved by people other than us! We are behaving like this due to our selfishness and our eagerness to accumulate wealth. 

A very simple example of our apathy is the cleanliness of our toilets. Most people don't bother to keep public toilets clean because we do not know who was the last person who used the toilet. This collective irresponsibility is affecting us in many ways including how we govern our society and the resources which we own in common as citizens of this country. I always use my "Toilet Index" as a measure of level of responsibility of a particular society. So far, the Japanese is ahead of the rest.

Unless the flood problems eventually turns bad, many of us won't bother. Worst, we will wait for somebody else to act and that somebody will never be us.

A Short Week Ahead

I had a Nasi Lemak session with a British friend of mine who is running one local organisation. He owed me the treat due to a little favour in the past. I noticed that there were few surprised faces at Tanglin Nasi Lemak as a Mat Salleh was enjoying his spicy Nasi Lemak. I told him that understanding the local cuisine will help him to understand our local culture. He did not complaint.

One issue that he raised though was the number of holidays that we celebrate in this multi-racial country. Maybe for those who came from Europe, Malaysia seems to be a more relax country if our holidays are considered. We are going to celebrate Deepavali tomorrow, Awal Muharram on Thursday and off course December is normally a casual month as many people will be on holidays until next year. Than as we start to build momentum in the new year, Chinese New Year will be celebrated. As a baseline, Malaysia is well ahead of many other countries in celebrating celebrations, something that many of us will not complaint especially we are not responsible for the salary of our staff.

Kelantan, 1971

If we have been doing this for the past 55 years, at least, why are we still struggling when it comes to respecting others who are from different races, religions and nationalities? While on TV it seems fine, I am sure we are aware of the reality on the ground. Personally, I feel that this is becoming a more complicated issue lately. I was fine with all my friends when I was small. May be, because I went to a Convent kindergarten, may exposure to the real world was early enough in my life to provide me with the openness in respecting diversity.

However, Malaysians are very united when it comes to food. We love our food and we don't have problems in mixing recipes as long as the fusion tastes great. If this were to be transported to other aspects of our lives, I am sure the fusion Malaysians will be as interesting as well. Maybe when we enjoy the food served during the festivities which we will celebrate this week, we could start this new paradigm in thinking, if we are not there already. This does not mean we will compromise the principles of our beliefs, which will remain with us as individuals. Respecting others rights does not necessarily mean that we agree with the beliefs of those with the rights. After all, these festivities which we will celebrate originate from these beliefs anyway.

Happy Deepavali and Happy New Hijrah Year!

Of Factory and Products

Some people view economics activities in the world could be divided into goods, services and agriculture. Between these classifications there could be a range of the in-betweens which consist of some elements of these categories mixed together.

To attain quality products, many manufacturing companies apply various approaches. ISO certification is one of them. This is an attempt to ensure the manufactured products are produced with the pre-determined quality in a consistent manner. However, this on its own does not guarantee the products will be accepted in the marketplace. If the products produced by an ISO-certified factory does not have the features and functions which serve the needs of customers, they won't be saleable despite the certification.

In a world that is complex, people tend to address the complexity through simplifying things. Whether or not the simplified ways really address the actual problems may be secondary especially when those making the decisions are insulated by the consequences of their decisions. For example, many education institutions are rushing to get their institutions ISO certified. First, which part of the process are certified? Second, does the certification result in graduates which are acceptable to the market? Does the transportation of management techniques for factories work for institutions of higher learning where the "machines and products" are people?

In the above situation, having certification would enable the management of the institutions to have some sort of bragging rights. It may even provide prospective students will some sense of comfort that some elements of the institution has processes which are consistently executed. However, students may not necessarily be responding to the process in the manner that was planned. They come form different backgrounds and carry different world views. They have different capacity to internalise and externalise knowledge. Given that people are themselves complex, having systems and processes which are consistent may not necessarily result in the desired outcomes.

Sometimes institutions of higher learnings are imposed with these sort of policies from "above". By people who sit somewhere with enough cloud and power to make such calls. Interestingly, they may not be called to be accountable if the policies decided by them do not work. The education institutions will face the full brant of public anger as they are the ones facing the customers directly. However, the Brahmins (please pardon me for using this expression) may be the first group to claim credit if something works! The insulation of the policymakers from the risks of their decisions has created a system where they need not necessarily be smart to occupy their chairs but need to be connected enough at the right level.

Given education is an important component of nation building, this issue should not be neglected or taken lightly. Not only huge sums of money are invested, particularly to build infrastructure as these sort of things are visible,  any unnecessary cost may cost the society a lot particularly when the investment and value generated do not correlate. We need to demand for more accountability from those who are calling the shorts, their faces should be made public and made accountable if the make blunders. How many of them are brave enough to admit their accountability? How many of us care about this issue?

When views about auditor’s report are made public, interesting things surface

OPTIMISTICALLY CAUTIOUS

By ERROL OH
errol@thestar.com.my

ONCE in a while, we get ringside seats at an industry debate. That happens when the moderator of the discussion has faith in the process and is willing to grant public access to feedback from the various stakeholders.

This was the case when the International Auditing and Assurance Standards Board (IAASB), an independent standard-setting body, initiated in June a dialogue on its proposals to improve the auditor's report on financial statements.

The board did so by issuing a document called an Invitation to Comment (ITC) with the aim of getting stakeholders to respond to the board's ideas and questions on changing the auditor's report.

(The auditor's report is a standard yet integral feature in audited accounts. Through it, the auditor communicates with the users of the financial statements by laying out the respective responsibilities of the organisation's management and auditor, and by expressing an opinion on whether the statements present a true and fair view of the organisation's financial position and performance.)

The IAASB held roundtables in September (in New York and Brussels) and October (in Kuala Lumpur) to solicit additional feedback on the ITC.

However, the main source of views on the ITC are the letters submitted electronically to the board. The deadline for submissions was Oct 8, but the IAASB are accepting late comments. To date, it has received 158 letters from around the world. All of these letters can be read on the website of the International Federation of Accountants, which set up the IAASB and supports its operations.

Of immediate interest to us are the comments from three Malaysian bodies: the Malaysian Institute of Accountants (MIA), Malaysian Institute of Certified Public Accountants (Micpa) and Audit Oversight Board (AOB).

This is an opportunity to compare how three main players in the local accounting scene look at a set of proposals that may have a deep impact on auditor reporting.

Among the improvements mooted in the ITC are:

● Having “Auditor Commentary” in the auditor's report. This refers to additional information to highlight matters that the auditor believes are likely to be most important to users' understanding of the financial statements or the audit. The plan is to make such information a requirement for public interest entities (PIEs). In Malaysia, PIEs are listed companies, banking and 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);

● Introducing auditor conclusion on the appropriateness of management's use of the going concern assumption in preparing the financial statements and an explicit statement as to whether material uncertainties in relation to going concern have been identified;

● Having prominent placement of the auditor's opinion and other entity-specific information in the auditor's report.

Where they differ

It's interesting that the MIA and Micpa don't see eye to eye on the proposal that auditors' reports of PIEs should include auditor commentary.

In an eight-page letter to the IAASB, MIA president Datuk Mohd Nasir Ahmad agrees that it's appropriate to provide auditor commentary for audits of PIEs.

“As demands for auditor commentary have come primarily from institutional investors and analysts evaluating financial statements of listed or other PIEs, we believe any requirement for auditor to provide an auditor commentary should be imposed for the audits of PIEs and not the other audits,” he says.

“The cost-benefit analysis of providing auditor commentary for other audits will likely not justify its inclusion in the auditor's report.”

On the other hand, Micpa points out that all audits are supposed to be conducted in accordance with the International Standards on Auditing.

“On this basis, the auditor's reporting requirements should not be different, and Micpa believes that there should only be a single standard auditor's report to be used for all entities globally, regardless of the type and size of the entity,” says the institute.

“Further, Micpa believes that auditor reporting for audits of large entities and small entities is equally affected by specific issues, and that information gap exists in smaller entities too.”

As the body that promotes the quality and reliability of audited financial statements of Malaysian PIEs, the AOB naturally has no objections to having audit commentary for audits of PIEs.

“The introduction of auditor commentary provides the opportunity for auditors to communicate more about the audit, especially areas where readers should give more attention,” wrote AOB executive chairman Nik Mohd Hasyudeen Yusoff.

At the same time, he cautions that boilerplate reporting should be avoided and that the auditor commentary should evolve “to capture the essence of events that are by nature significant to be communicated to the users of financial statement”.

“The (auditor's) report must be consistently relevant at each time of reporting,” he adds.

Mind the gap

However, the MIA and Micpa mostly have similar views on the IAASB proposals. A striking example is what they say about the information gap.

The IAASB defines the information gap as “the divide between what users believe is necessary to make informed investment and fiduciary decisions, and what is available to them through the entity's audited financial statements, the auditor's report or other publicly available information”.

Micpa believes that this weakness is caused by inadequate information provided by management of the company. It adds that some of the deficiencies in financial reporting are a result of preparers' behaviour.

“Under such circumstances, Micpa feels that a more effective way to remedy this behavioural deficiency is to impose additional reporting on the preparers via accounting standard requirements,” it adds.

It also urges the regulators to “exert pressure on companies to prepare and provide higher quality information via disclosures rather than simply satisfying the minimum reporting requirements”.

The MIA has almost identical thoughts on this matter. Says its president Mohd Nasir: “Accounting standard setters play an important role in ensuring users' needs are met through financial reporting requirements.

“Also, some deficiencies in financial reporting are the result of preparers' behaviour to comply with minimum reporting requirements, and as such, would be better addressed by means of additional management reporting requirements, given financial reporting is the primary responsibility of management and not the auditors.

“Regulators can also exert due influence on companies to prepare and provide higher quality information rather than simply complying with minimum reporting requirements.”

It's a good thing that the MIA, AOB and Micpa have responded to the IAASB's proposals. It's far better than remaining silent on a matter that potentially has broad implications. And it's a great way for us to appreciate the fact that it's okay it's important, in fact to offer opinions publicly, no matter how small the voice.

Executive editor Errol Oh will soon issue an ITC on what he should do to lose weight. He's not promising that he will heed the comments, though.