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A recently published report into audit practice in Malaysia highlights some points of concern that practitioners need to address

Esther An

This article was first published in the June 2014 Malaysia edition of Accounting and Business magazine.

The Malaysian audit fraternity are under pressure following the publication of the Malaysian Institute of Accountants’ (MIA) Practice Review Report 2009-2013, which found at least four in 10 firms to be wanting.

The report exposed Malaysian audit practitioners’ failure to properly document procedures and maintain paperwork. The 639 firms reviewed for the first time as at mid-2013 represent 47% of the 1,363 audit firms registered with MIA. Of those reviewed, just 8% were rated ‘satisfactory’, 48% were rated ‘assurance to be provided’ and 44% required a follow-up review.

So when it comes to complying with regulatory requirements, have auditors fallen too far behind the curve? MIA president Johan Idris, who also chairs the review committee, is concerned. ‘They need to look at themselves,’ he says. ‘They need to consolidate. Things are getting tougher; the audit requirements are getting tougher.’

Dr Chua Hock Hoo, managing partner at fast-growing local firm Cheng & Ho, believes that most of the firms who received a poor review are older ones which have been in practice for the last 20 to 30 years.

‘Many of the partners may already be hitting retirement age,’ he says.

‘Merger is the answer.’

As expected, some auditors are unhappy with the report’s findings. One bone of contention is its public nature, igniting an earlier debate on the institute’s dual role as a regulator and a members’ body.

‘The report could be a fair and true reflection of the smaller players, but I would not publish it,’ says one auditor who declined to be named. ‘Rather, assist them by training.’

Review process

Through the review of ‘current engagement files’, the report is intended to identify areas where practising members may require improvement in order to comply with professional standards, according to information on MIA’s website. The Practice Review Committee (PRC) works together with member firms to determine whether professional standards have been maintained, observed and applied, it adds.

‘In promoting quality assurance and raising standards, the PRC emphasises awareness and provides guidance on application and compliance issues as well as recommendations for the cultivation of best auditing practices. The PRC in broad terms aims to fulfil the expectations of the business community, the public and the government by diligently building confidence and elevating trust in the accountancy profession in Malaysia,’ it says.

The review process seems fine, according to a number of auditors who spoke to Accounting and Business but declined to be named.

‘The reviewers give you advance notice before and they discuss with you point by point their findings,’ says one auditor. ‘You get an opportunity to view their findings and give your feedback.’

The MIA team undertaking the review presents their findings to the PRC members at their regular meetings throughout the year. When presented, each file appears with a number, with no mention of the firm’s name. This is to protect its identity, and to ensure that the committee members give their feedback without any bias. ‘The process is transparent and fair,’ said one committee member, who also declined to be named.

Common findings

Auditors who diligently take steps to comply with international auditing standards in their work will find that they are suitably cocooned in a safe environment, according to the report’s general observation on what it calls the ‘common findings’ of the review. ‘They will find that these auditing standards when applied in unison will act as firewalls against risk that may arise through the perpetration of fraud, negligence, incompetence, ignorance and inadequacy,’ it says.

On the flip side, the report notes that, when audit procedures are not performed in accordance with approved auditing standards, the risk of exposure to mis-statements in financial statements will increase.

The report notes that some practitioners do not take seriously documentation of working papers. It found that ‘inadequate attention’ was given to ‘writing down audit procedures performed, the findings made by the auditors with respect to the sufficiency and appropriateness of the audit evidence gathered, and the conclusions reached by the auditor.

‘The audit deficiencies that were identified in the common findings had invariably led to a compromise of the audit quality of the firm and in turn had contributed to an unsatisfactory rating for the audit firm at the end of practice review,’ it adds.

On auditors’ engagement performance, the report states: ‘Customised audit programme is not used in the execution of audit engagements.’

It recommends that such programmes be used ‘to assist in ensuring the completeness of basic audit procedures for each significant caption of financial statements and to guide audit team on audit procedures to be performed’.

On appointment of auditors, the report highlights the non-observance by some of the need for a professional clearance letter from the outgoing auditors prior to the acceptance of the appointment.

On audit documentation and audit evidence, the report found ‘no evidence’ of practitioners following procedures in 16 instances of their audit work. On bank balances, it notes no follow-up action to obtain confirmations from banks – in particular, those that provide secured credit facilities.

In addition, there were 35 common findings of omissions of required disclosure in the financial statements. Among them are concerns with reclassification of comparative figures, without disclosure of its nature and amount of the reclassifications made.

So, how does one make sense of these findings? Johan looks at the process as a ‘journey’ in the industry’s quest for higher delivery standards.

‘It’s difficult, especially for sole practitioners, more so when they are older,’ he says. ‘Audit has evolved. It’s difficult to do the job, handle marketing, collect debt, all in unison.’

What surprised Johan most, though, was the knowledge gap as some practitioners had not updated themselves with the new audit standards.

Going forward

Another major challenge coming the way of smaller firms is if the country chooses to exempt smaller companies from the audit requirement. In Australia, for example, small companies are already exempted from audit requirements, unless compelled by the Australian Securities and Investments Commission. This, at the moment, is the bread and butter of the auditors at SMPs in Malaysia.

Take it away and you deprive the one-man-show auditors of a big chunk of their income.

‘If that happens, there may not be much future for small firms. They should bite the bullet and seek compliance,’ says Chua.

One way out is for smaller firms to look beyond audit work for small companies. As an immediate step, they are urged to look for potential jobs coming with the advent of the Goods and Services Tax (GST) which will be implemented from April 2015. ‘They can undergo the 10-day course by Customs and provide GST consultations to smaller companies,’ suggests Chua. ‘Now is a crucial period; they shouldn’t miss the boat on this, or they’ll regret it.’

But in the long run, the firms will need to beef up their internal strength and external capabilities. For the 280-odd firms that received the lowest rating in the practice review report, MIA will require them to undergo another review exercise in a year’s time.

The firms will be made to submit their reports within certain intervals. If they still do not pull through the exercise, the committee will consider further investigations and possible disciplinary actions. At the extreme end, Johan says there is a possibility of their licences being affected.

CM Cheong, journalist

Last updated: 5 Jun 2014