This article was first published in the July/August 2016 China edition of Accounting and Business magazine.

The Audit Oversight Board’s (AOB) annual report belongs on the must-read list of every auditor and accountant working in corporate Malaysia.

The board’s mission is to boost confidence in the quality and reliability of the audited financial statements of many of the country’s largest companies and funds. And it does so by fostering high-quality independent auditing. This alone should oblige auditors and accountants to be familiar with its policies and views.

But there is more than that. To achieve the outcomes it desires, the AOB’s strategies are to promote high-quality audit practices, influence the financial reporting ecosystem, leverage stakeholders’ support, and support the adoption and implementation of auditing and ethical standards. Nik Mohd Hasyudeen Yusoff, the AOB’s executive chairman at the point when the report was finalised, calls this ‘bringing new dimensions in its oversight activities’.

How it goes about doing so makes up the majority of the board’s latest annual report, which was released in May. Hence, the report serves up plenty of food for thought. For example, there is much emphasis on how audit firms are led, particularly by their managing partners. The AOB wants firms to understand that leadership by example is key in promoting audit quality. This is because the tone at the top influences how partners and audit engagement teams do their jobs.

The board urges every firm’s number one to champion quality as part of the culture; this includes making it clear that any conduct that compromises audit quality will not be tolerated. It points out that it is necessary for firms to link quality of engagement performance with the remuneration of partners and staff, and to ensure that growth does not come at the expense of audit quality.

On the new and revised auditor reporting standards that come into effect next year, the AOB aims to smooth the introduction of the revamped auditor’s report. One such initiative was the setting up of a steering committee in June 2015 to identify issues and risks relating to implementation, and to develop strategies and provide guidance.

The committee is chaired by the Securities Commission, with the AOB as the secretariat. Its members represent regulators, the accounting profession and listed companies. The board is convinced that the new auditor’s report will help narrow the audit expectation gap, primarily by allowing users of financial statements to have a better grasp of the audit procedures that have been carried out and how these affect audit quality.

There was, of course, extra attention on key audit matters (KAMs), the section in the new report that discusses those matters that the auditor feels were of most significance. According to the AOB, it is thus more crucial than ever for auditors to understand their clients’ business models as KAMs disclosures should be guided by the entity’s business model. In addition, the board ‘strongly reminds’ readers that KAMs descriptions should focus on the matters themselves and not be a mere description of the audit procedures. 

And here is another reason to go through the AOB’s annual reports: to understand the regulator’s approach to enforcement. Last year for the first time the board revoked the registration of an audit firm and two of its partners for failure to remain fit and proper to audit public-interest entities.

‘We trust other firms will view this seriously and will respond appropriately in improving their work,’ Nik Hasyudeen wrote in May’s report. 

Errol Oh is executive editor of The Star