Name those PIEs

OPTIMISTICALLY CAUTIOUS BY ERROL OH

Published: Saturday August 31, 2013 MYT 12:00:00 AM 
Updated: Saturday August 31, 2013 MYT 6:53:11 AM

In this month’s rash of reprimands of auditors, it’s unhelpful that the listed companies involved aren’t identified.

SUPPOSE you read the news that a body regulating the conduct and ethics of engineers has censured and fined an engineer over the certification of completion of an office block. The article says this is because the engineer didn’t do what he’s professionally obliged to do.

The regulator is stingy with the specifics. The engineer is named and so is his firm. However, little else is revealed about the nature of the non-compliance.

Also, the building in question is not identified. All you know is that it’s in your city and was constructed within the last two years. You can’t help feeling a bit nervous. It so happens that you work in a commercial tower that was finished a year ago. When at work, you find yourself fretting over cracks in the walls and replaying evacuation scenarios in your mind.

The regulator does point out that the reprimand of the engineer doesn’t have to mean the building is structurally unsound. But that’s cold comfort, at best; nobody is stepping forward to affirm that the building is indeed safe.

The above situation is fictional, but this is real – the Audit Oversight Board (AOB) has announced this month the reprimand of six auditors for “failing to discharge their professional duties as set out in the International Standards on Auditing (ISA)”.

Just as real is the fact that we know almost nothing about those large companies whose audits of accounts were at the centre of these reprimands.

Last year, the first time the board wielded its powers to impose sanctions as provided under the Securities Commission Act 1993, two auditors were reprimanded.

So it appears that the AOB is stepping up its enforcement actions. Part of its job is to promote confidence in the quality and reliability of audited financial statements in Malaysia.

In his message in the AOB’s Annual Report 2012, executive chairman Nik Mohd Hasyudeen Yusoff said the reprimands last year of the two auditors “provided a clear message that the AOB would not hesitate to act when public confidence on the reliability of their audit reports could be compromised”.

But there is a dilemma here. How do you crack down on audit-related breaches without broadly casting doubt on the audited accounts of public interest entities (PIEs)?

(The board registers and supervises the auditors of 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.)

One way to avoid a crisis of confidence is to let people see that the breaches are exceptions rather than the norm.

The AOB’s strategy is to conduct annual inspections of the six largest audit firms, that is, those with more than 10 partners and 40 PIEs on their client lists. The other firms are covered within a pre-determined inspection cycle.

This way, the board’s regular inspections take care of the lion’s share of the audits of PIEs. It inspected 19 firms in 2012 and they audited 78% of the total number of PIEs. The listed companies among the clients of these 19 firms represented over 95% of Bursa Malaysia’s market capitalisation.

So far, none of the reprimanded auditors are from the top six firms. That tells us that there is no reason yet to be worried about these firms’ level of compliance with the auditing standards.

However, the six reprimand cases so far this year do lead to another concern. Does the amount of information provided strike a balance between protecting the investing public and fairness to those involved in the enforcement actions?

The details, including the names of the auditors and their firms, are in the AOB section of the Securities Commission’s website (www.sc.com.my).

All six have contravened the same section of the Securities Commission Act, which relates to a breach of the AOB’s registration condition. According to the board, each of the six has failed to comply with “certain requirements of the ISA in discharging his professional duties in the performance of an audit of the PIE”.

Two of them committed an additional wrong – failure to comply with certain requirements of the Malaysian Institute of Accountants (MIA) by-laws relating to independence of an auditor in discharging his professional duties. One of these two was slapped a penalty of RM10,000 and the other had to pay RM5,000.

We’re also told that each of the six were engagement partners in the audits of PIEs for certain financial years. These PIEs aren’t identified, but through Google, you can come up with a list of listed companies whose financial year-ends and auditors match the particulars supplied by the AOB.

Presumably, the regulator refrains from naming the PIEs for fear that people will automatically (and unfairly) reject these PIEs’ audited financial statements. The argument here is that the PIEs shouldn’t be at risk of suffering collateral damage because of the lapses of their auditors.

In a press release on Aug 19 to announce four reprimands, Nik Hasyudeen emphasises that the reprimands don’t necessarily suggest that the financial statements of the affected PIEs contain any material error or that their financial reporting controls are weak.

In addition, the SC website reminds people that an AOB enforcement action “may not necessary imply the audited financial statement does not give a true and fair view”.

These disclaimers are reasonable, but they fall short of assuring us that it’s fine to continue relying on the audit opinions on the accounts.

So where does that leave the investing public? Is it right that the shareholders and other users of the accounts are not told which PIEs have had audits that were not entirely in compliance with the ISA and by-laws of the MIA?

And what about the PIEs themselves? If they’re listed companies, are they correct to believe that they’re not required by the stock exchange rules to disclose an AOB sanction in relation to the audit of their accounts?

Shouldn’t their shareholders know about the reprimands? After all, they vote at AGMs to receive the audited financial statements and to re-appoint the auditors.

For that matter, are the auditors obliged to brief their clients about the AOB sanctions? Surely, this isn’t the occasion for a “don’t ask, don’t tell” policy.

The AOB is making a lot of effort to “foster high-quality independent auditing to promote confidence in the quality and reliability of the financial statements of PIEs in Malaysia”. Promoting full disclosure will only aid the process.

Executive editor Errol Oh wonders if the audit profession will respond publicly to the six AOB reprimands this month. It’s probably unprecedented that this many auditors have been subject to enforcement actions in such a short time.

Link to the original article http://www.thestar.com.my/Business/Business-News/2013/08/31/Name-those-PIEs.aspx

Audit Oversight Board takes four auditors to task

KUALA LUMPUR: The Audit Oversight Board (AOB) has reprimanded four auditors for failing to discharge their professional duties as set out in the International Standards on Auditing.

One of them was also fined RM5,000 for breaching the by-laws of the Malaysian Institute of Accountants (MIA) which relates to auditors’ independence.

The auditors had failed to perform audit procedures as required by the said auditing standards and had in some cases merely relied on representations from their clients without further verification for their audit opinion.

AOB executive chairman Nik Hasyudeen Yusof said that the inspection process was part of AOB’s strategic approach to enhance audit quality in Malaysia and that it was important that the industry worked together with the regulator to improve the audit profession.

“While the AOB engages the industry closely to improve audit quality, we are also mindful of the need to tackle critical root causes.

“We will not hesitate to take action on any breach that impairs or is perceived to impair the independence of auditor,” he said, adding that the reprimands did not necessarily suggest that the financial statements of the affected public interest entities contained any material error nor implied weakness in their financial reporting controls.

The AOB publishes its inspection findings annually, which include key root causes that could impact audit quality, auditor’s technical incompetence, not keeping abreast with the development in accounting and auditing standards, as well as failure to exercise professional scepticism in various occasions.

“Audit firms need to invest in the right resources and infrastructure to support high quality audit practices. The firms also should put in place effective monitoring control framework and a strong self-governance culture to ensure consistency of audit performance,” he said in a press release issued by the Securities Commission yesterday.

AOB was set up in April 2010 to promote confidence in the quality and reliability of audited financial statements of public-interest entities. It conducts yearly inspections to ensure that audit firms comply with requirements of the International Standards on Auditing and the relevant MIA By-laws.

The Star, 20 August, 2013.

Having a stand

Given the opportunities provided by various social media platforms, many people share their views on many matters, personal or public. Given that what we read on these platforms come to us based on who and how much we let others to share their thoughts on our defined space, we should not get upset if those views are not aligned with ours. Simply shut them off or just ignore those views.

However, I notice quite a number of us publicly expressed their dissatisfaction just because opposing views appear on their page. Please, grow up. Understand the concept of social media. You are reading those comments or remarks because you have allowed the people making those remarks to be your "friends" or the setting of our page allows them to appear on your page. Just remove the unfriendly "friends" or adjust your settings. On the other hand, please remember that many others are reading your comments and thoughts and not all may be agreeable with you. 

At this age and time, we should be able to ignore opposing views. If we want to engage and try to provide our side of perspectives, please do that in a very matured and dignified manner. If you cross the line and use insulting or vulgar languages, the one that will look like a fool will be you, not the other guys.

However, when it comes to make a stand as a group, things will be a bit more difficult. Given people in a group may have different interests and likings, to have a view with accommodates all these interests will be really challenging. Even on something which is quite obvious such as when people are murdered in front of TV cameras, many are thorn between whether those are actions with utmost restrained, friendly fire or simply, murder. There are countries which make it very clear such actions were simply democracy in actions, there are those which expressed their disgust over the lack of value given to human lives. Many remained quite, as if there were no leaders in office to take a stand in a situation where the value of humanity is at stake.

It is also interesting where the so called "liberals" liberally picking and choosing the truth they want to believe in. When they feel not to like a group of people, it does not matter what the facts are, the "liberals" will side the other side with all sorts of justifications.

While people are free to believe what they want to believe, Muslims cannot depart from the ultimate truth as prescribed in the Quran and the Sunnah. Yes, Islam is a revealed religion and it has its sets of predetermined principles which guide its followers in arriving at their stand when an event occur. This is where, sometimes, even the Muslims get themselves confused, what more those who do not understand this belief system. 

Many Muslims ignore the teachings of the Quran and the Sunnah and use their mind liberally. Islam does not prohibit people from thinking but it has set a framework to determine what is right or wrong. Since this is based on believe, one cannot want to be a believer and at the same time having a belief that is not based on the framework articulated by the Quran and Sunnah. In some society the belief of its people is defined by law. However, this does not work all the time as belief is in our hearts and not what the letter of the law wants us to believe in.

Aidil Fitri, an articulation of success?

Today is the third day of Shawal, the month awaited for by many Muslims as a sign of the completion of a month of devotion through fasting, prayers and other acts of submission to Allah during Ramadhan. The first day of Shawal is known as Aidil Fitri, the day where a devoted Muslim goes back to his or her original state of purity due to the deeds performed in Ramadhan. While Aidil Fitri is a day for celebration, it should remain within the parameters of submission to Allah in all aspects.

Here is where culture intersects with faith. In the era of commercialisation, many faith-based celebrations have been portrayed as the time for party, food and spending. While there could be commercials which try to remind the society about those who are unfortunate, the overall psychology during these festivities would be about enticing people to spend and spend.

Two weeks before Shawal appears, commercial about Hari Raya could be heard or watched over the media. Shops and shopping centres would be offering sales. This is on top of commercials Buka Puasa events. While Ramadhan is about controlling one's desire, especially towards the worldly stuffs, the environment was set for the opposite. That's why while the last 10 days of Ramadhan was supposed to be the final leg where Muslim should be striving for the Night of Light ( Lailatul Qadar), many would be at shopping centres instead to be enlightened by sales and discounts.

In Kuala Lumpur in particular, Aidil Fitri is celebrated for a month! Many individual and corporates will be hosting Open Houses, where plenty of food will be served. While I am not questioning the intention of this idea of offering food and hospitality to relatives and friends, in the overall of the whole scheme of things,mew could ponder the consequences of these activities. Does it really reflect the spirit of Ramadhan and Aidil Fitri.

I purposely differentiate Aidil Fitri as the day accorded by Allah for the faithful to celebrate their successful demonstration of faith and submission during Ramadhan with Hari Raya, which to be is the cultural dimension of Aidil Fitri. Aidil Fitri is only for a day whereas Hari Raya is celebrated for a month. Aidil Fitri is about an extension of the act of submission while Hari Raya is about enjoyment per se. In a multi cultural society, there is also pressure for the wider values of the society to be embedded in the celebration. Good or otherwise, I may not be there best person to judge this.

We had quite a number of children from the nearby neighbourhood who came to our house expecting to be given Duit Raya. It has been a custome for Malays to give our cash to children during Hari Raya. Borrowing from the Chinese, the cash is now given in green colour envelops. This was certainly not the case when I was small. Definitely, the ways Hari Raya is celebrated has evolved. What concerns me is the gradual shift of the meaning of the celebration, for a day of demonstration of how Muslims had been successful in fulfilling the demands of Ramadhan into a more cultural-based celebration which may not be based on the original intention of submission to Allah.

I suppose it is not to late for me to ask for forgiveness and pray that all our deeds in Ramadhan are accepted by Allah.