FOLLOWING the much publicised accounting-related irregularities notably in Transmile and Megan Media, there have been calls for tighter regulatory control of auditors. This has particularly put pressure on the role of the accountancy profession.
Can public and investor confidence in the audit process be restored without increasing the degree of statutory regulation?
More statutes and guidelines will not assure that the like of what has happened will not happen again. The accounting scandals have not only adversely eroded the trust of the shareholders and stakeholders in the affected companies but also affected the integrity of the capital market, the regulators and the profession.
No wonder some fierce criticism of the profession had been voiced.
This criticism is not entirely ill-informed or unfounded, albeit the profession’s slow response to closely monitor auditors for compliance with audit regulations and prescribed standards for professional ethics and business practices.
Regulating auditors will certainly involve more costs for audit practices. Yet, the public feel it is the profession’s role and responsibilities not only to address their concerns but to ensure that auditors do not allow such incidences of accounting scandals to arise again in future.
The public perception of the auditors to be blamed for corporate debacles is rife. Three main issues have then developed.
First, what is the best means of ensuring the auditor independence and the audit quality?
Second, how should the duties of auditors blend with the corresponding duties of directors to exercise the oversight process over the management of their company? Are directors not accountable for drawing up the accounts to be examined by auditors? Auditors are not expected to conduct an audit like forensic review for a complete audit of each and every transaction.
Third, why can’t the audit committees perform as they should? Why are directors not alert and watchful at the helm putting in place prudent management and control over the credibility of the financial statements? Why can’t the external and internal auditors effectively address such matters of concern out of their own initiative?
The profession’s guidelines are that the auditors’ duties are statutorily limited.
However, the guidelines not only help auditors understand their responsibility better but also to properly plan, perform and evaluate their audit work.
Besides reporting matters of public interest, the company’s books and records must be properly kept and the accounts, which the directors have drawn up, should show a true and fair view.
Auditors need not have to prevent or detect misstatements in the financial statements but their audit procedures need to be designed such that fraud risks can be identified.
Recent amendments to the Companies Act 1965 requires auditors of public companies to make a written report to the Registrar if, in the course of their duty, are of the opinion that a serious offence involving fraud or dishonesty is being or has been committed against the company.
Failure to report such an offence attracts criminal liability against such auditors. However, ultimately the reporting and detection of fraud still remain the responsibilities of directors.
The profession also accepts that auditors’ adherence to its guidelines will not assure each and every material fraud to be uncovered.
Not only for the cost-effective audit, auditors are not in a position to delve into all details about what is going on inside the company.
The old saying about auditors as a watchdog, not a bloodhound, may to a certain extent still applies. Nonetheless, the profession still owes a responsibility to the public and investors for the quality of auditing and financial reporting. They should not shirk their responsibility to provide an early warning if there is a need to do so.
In its efforts to ensure a more resilient capital market, the profession has also set up the Financial reporting standards implementation committee (FRSIC) to provide implementation guidance for enhancing better financial reporting standards (FRSs).
The Profession has urged directors of companies, audit committees as well as auditors and preparers of financial statements to refer critical issues of doubt to FRSIC for clarification.
It is here that a special body, the Public companies accounting oversight board (PCAOB), has a critical role, that is to help monitor auditors of public companies and improve investor confidence.
It is a body set to emphasise the significance of the role of auditors and audit quality in attesting and providing credibility to the financial statements prepared by the companies.
The PCAOB would also ensure the auditor independence and the quality of audit.
Currently, errant auditors are referred to the Malaysian Institute of Accountants (or in short, MIA) which would then investigate and discipline their members.
Has this been effective? Would it now be left to the PCAOB to take appropriate action against errant auditors?
The PCAOB should be granted broad investigative and disciplinary authority over registered public accounting firms and persons associated with such firms.
If the auditors are found to be negligent or worst still fraudulent, the PCAOB must have the power to take appropriate actions.
It is most important that the public and investors can perceive the investigation process to be fast, not long winded or ineffective.
The PCAOB must be able to act promptly and punishment meted out quickly. For an independent PCAOB, its Board must be appropriately composed of people with repute and integrity.
The legislation has also to be put in place for the PCAOB to function legally so that errant auditors cannot justify themselves by saying they act under undue influence or duress in cases where they are put under inquiry.
The auditor’s report is entirely his own responsibility.
If the auditor has concluded that, because of doubts about whether the company is a going concern, he will have to qualify or disclaim his opinion.
His responsibility is to ensure that the company is warned and that the directors take appropriate action to resolve the auditor’s doubts.
The directors have no right to advise or instruct an auditor that he should not qualify his report to enable him to shift the burden of his judgment onto either the company or any other party.
For investors’ interests to be best protected, auditors need to express their opinions honestly and forthrightly under the law.
Which auditors are to be appointed, how much auditors should be paid including non-audit services and for how long in office even with the rotation system should now be the responsibility of both directors and shareholders.
The profession should be now happy to see rising standards in compliance of FRSs.
It is also hoped that the PCAOB will create a more effective enforcement mechanism for auditor independence that will restore not only investor confidence but also the integrity of the profession at large.
Unscrupulous, inefficient and incompetent directors or auditors are to be found in all parts of the capital market.
Fortunately, they are very few in numbers, but they are there. What they do and do not do appropriately, hopefully the PCAOB will not take too long to catch up with them.
· Abdul Wahab Jaafar Sidek is CEO of the Minority Shareholder Watchdog Group (MSWG)
