Development of Financial Reporting in Malaysia

Article 1 - The extent of compliance with FRS 101 standard: Malaysian evidence
Azhar Abdul Rahman and Mohd Diah Hamdan. 2017. The extent of compliance with FRS 101
standard: Malaysian evidence. Journal of Applied Accounting Research. 18(1), 87-115.

Historical development of financial reporting in Malaysia, pg. 90

The history of financial reporting in Malaysia is reasonably short. Although the securities
industry has existed since the 1870s with the presence of British companies in the tin and
rubber industries (Kuala Lumpur Stock Exchange, 1998), the first financial reporting
regulation in Malaysia can be traced back only as far as 1940 when the Companies Ordinance
(amendments) of 1940 was established (Tan, 2000). Further, Ordinances followed in 1946
and 1956. The Ordinances played a major role in regulating financial reporting during this
period, until the Malaysian Companies Act (based on the Victorian Act 1961) was enacted
in 1965. Prior to the establishment of the 1965 Act, there had been calls for greater
regulation in financial reporting. Babiak (1966), for instance, drew attention both to
weaknesses and the absence of uniform accounting standards , areas in which
improvements were needed.
The development of accounting standards only began in the late 1970s, where most of
the accounting standards involved the adoption of the IAS (Tan, 2000). A major turning
point in the history of financial reporting in Malaysia started in the mid-1990s when several
major events took place resulting in significant impact upon financial reporting
regulations. For example, the enforcement of the Financial Reporting Act 1997 took place on
6 March 1997, giving rise to the establishment of both the MASB and the Financial
Reporting Foundation (FRF). The outbreak of the 1997/1998 Asian financial crisis also
brought about significant development of financial reporting in Malaysia. Since then, a
number of regulations have been amended and introduced.
The structure of financial reporting regulation in Malaysia is composed of legislation
and requirements set by various regulatory agencies, those consisting of the government
and the private agencies. The agencies involved in formulating authoritative accounting
regulations and/or in enforcing these regulations include the CCM, which monitors
compliance with Companies Act 1965, and the MASB, which issues accounting standards.
The Companies Act, MASB standards, listing requirements of the KLSE and the guidelines
of the SC are currently the major sources of reference for corporate reporting in Malaysia.
Article 2 - Development of financial reporting environment in Malaysia
Balachandran Muniandy and Muhammad Jahangir Ali. 2012. Development of financial reporting
environment in Malaysia. Research in Accounting Regulation. 24, 115–125.

Abstract, pg. 115

The purpose of our paper is to examine the development of the financial reporting
environment in Malaysia. We explore the influence of environmental factors such as social,
political, economic, legal and cultural in the development of accounting and Malaysia’s
recent move towards the adoption of International Financial Reporting Standards (IFRS).
We find that Malaysia’s colonial past and the reformation of corporate governance have
significantly influenced the country’s financial reporting practices . Although there are a
number of reforms in place more needs to be done in order to improve the transparency of
corporate financial reporting practices in Malaysia. Our conclusion suggests the necessity to
improve the quality of financial reporting practices and to build the confidence of
stakeholders and potential investors. The findings of our study are particularly important to
the standard-setters, regulators and accounting professionals to improve the financial
reporting practices in Malaysia and other developing countries throughout the world.

Introduction, pg. 115

Since each country has its own unique environmental characteristics, recently, a number of
studies in many emerging nations (see Ashraf & Ghani, 2005 on Pakistan; Ali & Ahmed, 2007
on South Asia; Mashayekhi & Mashayekh, 2008 on Iran; Al-Akra, Ali, & Marashdeh, 2009 on
Jordan; Assenso, Ali, & Ahmed, 2011 on Ghana), have examined has been under-researched
despite the substantial growth in the economy and accounting regulatory change due to the
globalisation. Since there has been a significant growth in the Malaysian economy, potential
investors, market participants, financial institutions and regulators from developing
countries would like to better understand the financial reporting environment of Malaysia. Our
study fills the present research gap by examining the environmental factors which shape
development of accounting practices in Malaysia.
The strengths of Malaysia in the ranking can be seen in the obtaining of credit (ranked 3rd),
protecting investors (ranked 4th) and engaging in trade across borders (ranked 21st). Malaysia is
ranked 24th in the world for foreign direct investment (FDI). The growths in the market
capitalization and inflow of capital have generated a need for the country to have sound financial
reporting and disclosure of information. Additionally, Malaysia is of interest not only
because of its strong capital market but also because it possesses considerable cultural diversity
with regard to ethnicity, religion and language. This cultural diversity had also contributed to the
policies underlying financial reporting (Nasir & Zainol, 2007). Another unique characteristic of
Malaysia is the presence of a special form of political influence in the economy. This unique
business practice is referred to as cronyism2. This paper contributes significantly to the
accounting literature in that it will help accounting regulators and policy makers in the East
Asian region and other developing countries to formulate accounting regulations
in order to protect their stakeholders. It will also help to add value to many individuals,
institutional investors and foreign investors to gain a better understanding of the
transparency and quality of accounting disclosure in Malaysia.
Accounting regulations for financial reporting practices in Malaysia, pg. 116
The corporate financial reporting practices of Malaysia are primarily governed by the
Companies Act 1965, the Securities Commission Act 1993, the Kuala Lumpur Stock
Exchange (KLSE) Listing Requirements and the Companies Commission of Malaysia.
These laws and rules contribute significantly and influence corporate disclosure practices in
Malaysia.

Companies Act 1965, pg. 117

Malaysia is an Asian country once colonised by the British since 1976 and has benefited
immensely from the colonization process. The British colonisation had systematically infused
into Malaya (as it was known before 1965) well-developed and refined accounting regulations
(Ma, Lambert, & Hopkins, 1997). The Companies Act 1965 was based on the UK Companies
Act 1948 and modelled on the Australian Uniform Companies Act 1961. Since
independence in 1957, a number of amendments have taken place to suit the evolving
Malaysian legal and corporate environment.
The Companies Act 1965 requires that all the listed companies and those that wish to be
listed on the KLSE to prepare annual reports in accordance with the Ninth Schedule of the
Act. The Ninth Schedule prescribes only minimal disclosure requirements for the profit and
loss accounts, balance sheets and the director’s reports of companies in accordance with
Section 169 and 326 of the Companies Act 1965. Additionally, the Companies Act 1965 requires
that the published accounts present a true and fair view, although no statutory definition is
accorded to this term (Hossain, Tan, & Adams, 1994).

Securities Commission Act 1993, pg. 117

The Securities Commission was established under the authority of the Ministry of Finance
and started its operations in 1993 under the Securities Commission Act 1993. The Securities
Commission (SC) licenses capital market players and oversees the activities of the several
exchanges and institutions that comprise the KLSE. The establishment of the SC in 1993
was meant to streamline the regulatory framework of the Malaysian capital market that
helps the efficiency, professionalism and orderly development of both the securities and
futures industries to ensure protection of the interests of investors. The SC also attempts to
ensure the proper conduct of market institutions and licensed persons. The SC has a very
wide scope, encompassing all aspects of the securities industry, including advising the Minister
of Finance on all matters relating to the securities and futures industries . Additionally, it is
also the registering authority for the prospectuses of corporations (SC, 2009).

KLSE listing requirements, pg. 117

There are two trading boards in the KLSE: the Main Board and the Second Board. Public
listed companies can be listed on either one of the two boards. Companies that are not large
enough to satisfy the Main Board capital requirements are listed on the Second Board.
There are also disclosure requirements for both boards that are related to the companies’ annual
reports and the official Corporate Disclosure Policy of the KLSE. One of the reasons for the
1997–1998 Asian financial crisis is that publicly listed corporations in Malaysia and East Asia
typically had very low levels of transparency and corporate disclosure (Ball et al., 2003). After
the Asian financial crisis, the KLSE Listing Requirements were revised and helped set a more
sound financial reporting system. Chapter 9 of the KLSE Listing Requirements prescribes the
continuous disclosure requirements and refers to the timely and accurate disclosure by the listed
companies to enhance financial reporting quality. This disclosure requirement helps ensure that
there is less information asymmetry and that material information is disclosed on a timely basis
to investors. The following section discusses the role of corporate governance in financial
reporting and disclosure.

Corporate governance in Malaysia

The history of corporate governance in Malaysia can be traced back to as early as 1965 when the
first Companies Act was developed to serve as the legal framework for the business
environment. Since 1965, regulatory developments in corporate governance have gradually
taken pace and one of the resulting provisions related to, among other things, the establishment
of audit committees in 1993 by the KLSE. However, such initiatives did not prevent the 1997–
1998 Asian financial crisis from occurring which suggests that they were largely rhetorical,
superficial reforms, or that they were implemented too late (Liew, 2007).
It is argued that weak corporate governance and lack of transparency are seen as the main
reasons for the Asian financial crisis of 1997–98 and this has become a major issue
for investors (Mitton, 2002). This argument is consistent with Haniffa and Cooke (2002).
Ghazali and Weetman (2006) find that high managerial share ownership results in less voluntary
disclosure in the annual reports for year 2001. Additionally, Saleh, Mohd-Iskandar,
& Rahmat, 2007 show that the earnings management practice is higher with the presence of CEO
duality.
Corporate scandals involving Enron and WorldCom (USA), Nortel and Crocus (Canada),
Parmalat and Royal Ahold (EU), Renong (Malaysia) and HIH Insurance (Australia)
shook global capital markets and these corporate failures put the spotlight on weak corporate
governance (Breamer & Elias, 2007). As a result, the Malaysian government immediately
revamped the corporate governance structure after the 1997–1998 Asian financial crisis and
in 2001 issued a Malaysian Code of Corporate Governance (MCCG). This code has been
mandated as a part of the KLSE Listing Requirements. This strengthens the capital market,
boosts investors’ confidence and improves the credibility and accountability of financial
information produced by listed companies (Rahman & Ali, 2006).
Additional amendments to the code of corporate governance took place in 2007 improving
the effectiveness of audit committees. The KLSE Listing Requirement mandated that all audit
committee members be independent directors effective from 2007 (SC, 2009). It is expected that
the extent of compliance with accounting regulations will likely improve in Malaysia as a result
of the introduction of the revamped corporate governance code.

Companies Commission of Malaysia Act 2001, pg. 117 & 118

The Companies Commission of Malaysia (CCM), formerly known as the Registrar of
Companies (ROC), came into operation in 2002. The CCM is a statutory body that
regulates companies and businesses. The main activity of the CCM is to serve as an agency
to incorporate companies and register businesses as well as to provide company and
business information to the public (CCM, 2009). Additionally, the CCM is responsible for the
administration and enforcement of the Companies Act 1965 (Act 125), Registration of
Businesses Act 1956 (Act 197), Trust Companies Act 1949 (Act 100) and Kootu Funds 1971
(Prohibition) (Act 28).
Factors that influence financial reporting practices in Malaysia, pg. 118-120
Legal system
Tax laws
Business ownership and organization
The educational system
The accounting profession
Culture
The Islamic religion
Political favouritism
The Malaysian capital market
Privatisation
Foreign direct investment

The adoption and enforcement of International Financial Reporting Standards (IFRS) in

Malaysia, pg. 120 & 121
A two-tier framework was established for the development of accounting standards
comprising The Financial Reporting Foundation (FRF) and the Malaysian Accounting
Standard Board (MASB) under the Financial Reporting Act 1997. The FRF comprises 19
members who are appointed by the Ministry of Finance and who have no direct
responsibility for the standard setting process. The FRF, as a trustee body, has
responsibility for the oversight of the MASB’s performance, financial and funding
arrangements, and as an initial source of views for the MASB on proposed standards and
pronouncements (MASB, 2010). It has no direct responsibility with regard to standard
setting. The standard setting responsibility rests solely with the MASB (Saudagaran, 2004).
The accounting standards developed by the Malaysian Accounting Standards Board
(MASB) are mainly based on the International Accounting Standards (IAS) and aim to
enhance the comparability of financial reporting practices nationally and internationally.
The MASB supports the International Accounting Standards Board’s (IASB)
harmonization program, and initially adopted 24 of the extant IASs and gave them the
status of approved accounting standards (Saudagaran, 2004). This status would apply until
each IAS or MAS was amended, rescinded or replaced by a new MASB standard (Devi, Hooper,
& Davey, 2007). The MASB acknowledged that the extant accounting standards issued by the
MIA and the MACPA represented a valuable starting point in the establishment of the new
financial reporting regime in Malaysia. Additionally, the MASB embarked on an intensive
programme to review all the accounting standards for consistency and convergence during the
due process.
The MASB directed an immense effort during 2004–2005 towards the adoption of International
Financial Reporting Standards (IFRSs). The MASB initiated a series of discussions about its
future and the consequences of adopting the framework and standards set by IFRSs. Malaysian
companies faced another challenge with the issuance of 21 Financial Reporting Standards (FRS)
by the Malaysian Accounting Standards Board (MASB) before year-end 2005. These standards
became effective from 1 January, 2006. This initiation of FRSs comes as a result of the MASB
plan to move Malaysia closer to the global convergence of accounting standards .
Convergence with the IFRSs supposedly promotes investors’ confidence within and outside
Malaysia. The Financial Reporting Foundation (FRF) and the Malaysian Accounting
Standards Board (MASB) issued a joint statement about their plans to bring Malaysia to
full convergence with International Financial Re porting Standards (IFRS) by 1 January
2012.
The FRF and the MASB jointly renamed the existing MASB Standards as Financial
Reporting Standards (FRS) as of January 2006 in line with similar moves by other countries
globally. Additionally, the MASB changed the numbering of the standards to correspond
with those of the international standards but with a prefix of 1 (see Table 1). Thus for
example, the IAS 17 became in the Malaysian context, FRS 117. The following section will
focus on the challenges experienced by Malaysia in the adoption process of IFRS.

Accounting standards due process , pg. 121

Accounting standards are vital for efficient capital markets in that they help entities to provide
transparent, credible and understandable information to investors and stakeholders (FASB,
2010). The standard setting process involves several stages in Malaysia. The MASB is
responsible for issuing new accounting standards , and revising or adopting existing
accounting standards. The standards are developed according to the MASB’s framework for
the Preparation and Presentation of Financial Statements.
The MASB develops national accounting standards which are known as Malaysian
Accounting Standards (MAS). The MASB’s standards setting process is similar to that of
the developed countries, for example, Australia, Canada, New Zealand, United Kingdom,
United States, and the International Accounting Standards Board (IASB). Therefore, the
standards setting process is consistent with other international accounting standards
boards (MASB, 2010). The accounting standards setting processes for the adoption of
International Financial Reporting Standards are shown below.
Due process in the issuance of Financial Reporting Standards in Malaysia takes around
nine to fifteen months. The standards involve ten stages in the due process. The process
begins with the identification and review of the emerging issues by the MASB for the
standards. The MASB appoints a working group to debate the issues. Thereafter, the MASB
issues an Exposure Draft following extensive research and deliberation. This draft is presented
to the FRF for further comments by the MASB and then issued for public view. This provides
an opportunity for the MASB, through the working group, to gauge the appropriateness of, and
the level of acceptance for the Exposure Draft. The MASB then forwards the revised Exposure
Draft to the FRF for final review. Immediately after the FRF’s final review, the MASB issues
the accounting standards, with the pre-fix of FRS to the public.

Enforcement of accounting regulations , pg. 122

The enforcement of accounting standards is extremely important for improving the quality
of the country’s financial reporting practices . Hope (2003) argues that the enforcement of
accounting regulations encourages managers to follow prescribed accounting rules, thereby
reducing analysts’ uncertainty about future earnings.
The due process for adoption of IFRSs :
Stage 1 Identification and review of emerging issues by the working group
Stage 2 Review of the discussion papers by the MASB
Stage 3 Review of the discussion papers by the FRF
Stage 4 The MASB finalises the discussion papers into Exposure Drafts
Stage 5 The exposure drafts are issued to the public
Stage 6 Review by the working group based on public feedback
Stage 7 The MASB reviews the comments from the working group
Stage 8 The FRF does a final review
Stage 9 The MASB approves the accounting standards
Stage 10 The financial reporting standards are issued to the public
Nobes and Parker (2006) argue that there is no ideal model of enforcement of accounting
standards which fits all countries as it depends on the overall regulatory system of the
country. Two types of mechanisms, preventive and punitive , can be used to enforce
accounting regulations, helping to ensure quality in the financial reporting practices of a country
(Craig & Diga, 1996; Saudagaran & Diga, 2000). Table 2 outlines the types of measures for
enforcement taken by various regulatory bodies against non-compliance with required financial
reporting disclosure and auditing practices in Malaysia.
As the table shows, the regulatory bodies in Malaysia have introduced several preventive and
punitive enforcement measures. Financial statements are to be prepared and presented in
compliance with the Financial Reporting Standards issued by the Malaysian Accounting
Standards Board (MASB) and the Companies Act, 1965. The institutions that are entrusted with
enforcement are the KLSE, CCM and the SC for non-finance companies and Bank Negara
Malaysia (the Central Bank) for financial institutions. The KLSE conducts front-line monitoring
of compliance with periodic and continuous reporting obligations. The SC can impose a fine of
up to RM3 million and or the offender (executive directors) can be imprisoned for a term not
exceeding ten years for falsifying or providing misleading financial information under the
Securities Commission Act (ROSC, 2005). The CCM’S role is to ensure that all listed
companies have complied with Schedule Nine of the Companies Act 1965 and it may request
that companies rectify non-compliance with the Act and the financial reporting standards or it
may take other action commensurate with the offence. Ball et al. (2003) find little litigation in
Asian countries and no cases of judicial actions against auditors in Malaysia (Saudagaran &
Diga, 2000).
All the listed companies on the KLSE trading board are required to be audited by an external
auditor in accordance with the auditing standards in Malaysia. The practicing auditor must be a
member of the MIA. The Malaysian Ministry of Finance (MOF) is the issuing body for an audit
licence. The onus is on members of the MIA to use their best endeavours to ensure that the
required standards are also observed by those persons who assist them in their
work. The MIA strictly enforces compliance with the approved Standards on Auditing by its
members. The punitive measure for non-compliance could be the revocation of the licence by the
MOF. Additionally, the Investigation and Disciplinary Committee of MIA may inquire into
apparent failures by members and those persons under their supervision to observe the approved
Standards on Auditing and Generally Accepted Auditing Principles (GAAP). Failure to observe
the approved Standards on Auditing could be regarded as conduct discreditable to the profession
of an accountant and might lead to disciplinary action being taken against the delinquent
members.
The KLSE is another regulatory body, imposing Listing Requirements for all listed companies.
One of the Listing Requirements is with regard to compliance with the presence
of a minimum number of independent directors on the board and audit committee. Non-
compliance with other listing requirements with regard to financial reporting disclosure results in
suspension, or delisting of the company from the KLSE. The KLSE Listing Requirements
also require companies to have audited financial statements for every financial year-end and all
companies are required to comply with the Companies Act 1965 and financial reporting
standards. A 2005 report by the World Bank and IMF stated that Malaysia scored high marks for
financial reporting disclosure (ROSC, 2005).

Conclusion
The purpose of our study is to examine the environmental factors that influence the
development of financial reporting practices in Malaysia. We find that the accounting
regulatory system in Malaysia is strongly influenced by its colonial past. Consistent with
prior research we also find that the legal, political, cultural, economic, and the capital
market have influenced the development of accounting practices in Malaysia. The
reformation of the corporate governance code and the adoption of IFRS improve the quality
of their financial reporting practices and to build the confidence of stakeholders and
potential investors. We observe that the Malaysian Accounting Standards Board supports
the IASB’s harmonization programs , but and also face some challenges in the adoption of
IFRS.
Although there are number of reforms in place including corporate governance , more needs to
be done in order to improve the transparency of corporate financial reporting practices in
Malaysia. The extent of compliance with accounting regulation in Malaysia is low and the
enforcement of accounting regulation is weak. The regulatory bodies of the country need to
empower monitor compliance with and to enforce national accounting standards. This study
provides significant implications to accounting regulators, preparers and investors. It aids
and encourages regulatory bodies to adopt better strategies in formulating financial
reporting regulations in relation to developing countries and improve the quality of financial
reporting that could promote a country’s investment environment.