True and Fair: A View From the Boardroom #2

Accountability and Reporting

When a company is incorporated, there are at least three parties involved. The shareholders who invest their monies and assets into the company, directors who are elected as stewards of the company and management who are appointed by the directors to run the company's day to day business in achieving the objectives set by directors.

Shareholders can only exercise their power at the general meeting of the company. While the article of association may reserve some power to them especially in approving transactions involving substantial assets, most of the power of the company are vested with the directors. While  directors could delegate some of these power further to management, in most cases they are ultimately responsible for the conduct and affairs of the company. 

Public companies raise funds from the public to finance their business and growth. They issue prospectuses to convince future investors about their prospects. Most of the investors who are investing in public companies are pure investors and have no ability to influence and know its activities unless information is provided by the companies. Hence, it is a fair expectation that they provides their investors with true and fair financial statements to enable their performance to be judged and financial positions assessed.

The principle is crystallised in the Companies Act, the Capital Market Services Act and the Financial Services Act, amongst others. Not only these laws require the tabling of financial statements but it must also be audited by independent auditors. Directors, who are responsible over the affairs of companies and the utilisations of their assets, are required to prepare financial statements which comply with financial reporting standards and provide a true and fair views of performance and financial affairs.

For companies which are listed on stock exchanges, their share are traded on a daily basis. In most cases their share prices reflect their future prospects. This is the reason why for some companies the value of their shares are above the values of their net assets and some for some others, the values of their net assets exceed their share prices.

As investors who are not directors or management do not have first hand information of the plans and activities of listed companies which could affect their prospects, it is very important for companies to share those information with the market on a timely basis. This is to enable existing and prospective shareholders to make decisions in buying and selling the shares of listed companies on equal footing. Otherwise, those who are privy to such information would have an edge over others. This is the principle behind the requirement of stock exchanges requiring listed companies to announce material information on a timely basis.

Hence, directors are accountable on at least two fronts when it involves reporting, performance reporting and making material announcements. As companies could be large and having complex operations, it would be incumbent on the directors to ensure management have put in place systems and processes which would enable those two responsibilities to be met effectively.

This will be discussed in the next posting.

True and Fair: A View From the Boardroom #1

When I ended my tenure as the Executive Chairman of the Audit Oversight Board and Executive Director of the Securities Commission last year, one of my ambitions was to write a book. I wanted to share my experiences in the areas of financial reporting and corporate disclosures, two important areas which contribute to the smooth functioning of our capital market. This idea remains an idea until today.

Hence, I have decided to take a different approach. Many of my Facebook friends write regularly on the topics of their choices with the intention to publish books based on these regular postings. Why not? If I post regular enough on the subjects here, I would have enough to publish as well.

I would be sharing my views and ideas on corporate reporting and disclosure from today onwards, a sort of a new initiative for 2017. This adds to another project of mine on Wattopers, my batchmates from MARA Junior Science College, Kota Bharu, where we would be celebrating our 40th anniversary of friendship next year.

Tentatively, I have chosen True and Fair: A View From The Boardroom as the title. It is about the board taking responsibility over the quality of financial reporting and disclosure, a delicate subject to directors due to the ways boards work. They have to rely on management who run the daily business and have depth understandings of corporate issues. How would boards balance their responsibilities with the amount of time they spend in boardrooms? Are there ways and means to ensure the fulfilment of their obligations under various laws?

At the same time reporting, particularly financial reporting, is becoming more complex. As companies carry more financial assets and liabilities on their balance sheets, their existence and valuations are amongst key issues which require attention. Many of these assets and liabilities are premised on projected cashflows which are based on assumptions and models which pose risks on their own. What adds to the challenge is the convergence of regulatory requirements with these complex standards.

The expectation on auditors to perform their statutory functions have led to the establishment of oversight structures within and outside of corporations. From this year, audit reports of public listed companies would have to comply with the new standards which require auditors to share more light regarding their audits. Would some of the new standards unearth issues beyond financial reporting and audit issues?

As share prices reflect forward looking prospects of companies, investors need high quality information on a timely basis. This has exert pressure on listed companies to come out with relevant information which could affect their prospects on a more forthcoming basis. We had situations in the past where companies have to provide additional information after their initial announcements, suggesting that they did not disclose enough beforehand.

In addition to discussing financial reporting and disclosure issues, I hope the book would provide directors with insights and ideas on what they could consider to enhance their performance. 

This would be a long journey but unless I make the first step, it would remained just an intention.

I am making that first step today.

Discipline in Regulation, Let's Learn from the Accountants

This is my second posting on the principles of regulation. The first article was about my exposure to regulation, especially in professional services and capital market.

When I was involved in negotiations to liberalise the accountancy sector at both, the World Trade Organisation and ASEAN, I had to be comfortable with the issues which were critical in enabling free flow of trade and ensuring the balance of benefits are shared fairly between countries. There were two principle agreements which Malaysia are parties to, the General Agreement on Trade in Services (GATS) and the ASEAN Framework Agreement on Trade in Services (AFAS). Naturally, understanding the modes of export in the services sector and trade barriers were critical for trade negotiators.

One of the issues in liberalisation of trade is domestic regulation. This is the trick applied by many countries. While many offered liberal access to their markets, foreign service suppliers are subjected to the same regulation like their domestic counterparts. Well and fine, until the domestic regulations are peeled and the substance revealed. One common example is the usage of national language. While it could be a reasonable condition generally, national language may not necessarily be relevant in international transactions. How would this be addressed? Hence, there was a recognition for some sort of discipline to be agreed upon when crafting domestic regulation.

To my surprise, the Council on Trade in Services in Geneva decided to use the accountancy profession as a showcase for discipline in domestic regulation. It was argued that the large accountancy firm exist in most jurisdictions in the world, hence accountancy sector is more homogenous. The document explaining about domestic regulation (Discipline on Domestic Regulation In The Accountancy Sector, adopted in 1988) can be downloaded here.

In essence, the discipline proposed was intended to ensure regulation around services are:

• based on objectives and transparent criteria, such as competence and the ability to supply the services
• no more burdensome than necessary to ensure the quality of the services
• in the case of licensing procedures, not in themselves a restriction of the supply of the services

There were also a set of "horizontal" disciplines in negotiating liberalisation of accountancy services. They are:

• Transparency 
• Impartiality and objectivity
• Relevance of foreign qualification and experience
• Legal certainty
• International standards
• Necessity

While many countries have various approaches in arriving at their domestic regulation, the approach taken at WTO and also ASEAN was to ensure they are developed transparently and do not go beyond regulating the services. This was a bit contentious for countries which are using domestic regulation for other purposes such as to redistribute opportunities based on certain national policies.

To me, the key principle in formulating regulation is to be clear of their regulatory objectives and applying measures which facilitate the achievement of the objectives in the least trade-restrictive ways. This is very important so that regulators do not go in the ways which create unnecessary burdens to business, where the cost would eventually passed to consumers. Hence, recognising that regulatory objectives could be achieved in more than one way (what the regulator believes as the only way) is very important and this discussion has to be provided for the in the rule-making process.

I really hope that the discipline is applied across all agencies in Malaysia as it would require relevant agencies to be clear of the market failures and risks which are being addressed using measures which do not go beyond what is necessary. For this to be actualised, transparency, impartiality and objectivity have to be observed, irrespective of the powers these agencies have. If we read the rationale of the discipline, nobody would argue they are bad unless the person has other interests.

By the way, I was invited to share my views about the regulation pertaining the accountancy sector in Malaysia at the Council on Trade in Services in Geneva. That was the first time when I spoke in a United Nations-like environment where I could not hear my own voice. Finally, when questions started to come, I was glad that the audience were giving attention to my points. My presentation could be downloaded here.

Fine To Be Honest

First of all I would like to wish everyone a happy new year and may 2017 be a year where we could regain our pride being citizens of this country.

While a new year would certainly brings hope and aspiration to most of us, we may not be able to change our surroundings if we do not remediate the root causes of the problems which we face as a country.

To me, it is all about the failure of us, as individuals, as families, as a society and as a country to demand and appreciate honesty. Given our natural tendency to be susceptible to our own selfishness and self-interests, we tend to overlook and compromise on abuse of powers and corruption as long as our lives are not badly affected. Worse, if we are also part of the those crimes and are benefitting from them!

So, my aim for 2017 is to convince as many hearts as possible to appreciate honesty and integrity. It would also be nice if we could re-shape our society to only accord positions and power to individuals who are capable, smart, honest and act with utmost integrity. This could be just a wish but if we do not try and promote these values how are we going to tell our grandchildren about our roles in making this country great again.

I trust all of us would be doing something to change the ways we look at success. I believe being a society which uphold values such as honesty and integrity would make this country a more resilient one in facing many challenges which are anticipated in 2017. So, please, demand honesty and integrity.

#fine2Bhonest