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