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Audit challenges in Malaysia today

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MANAGEMENT & ACCOUNTING

Audit Challenges
in Malaysia Today
Teck Heang Lee and Azham Md. Ali

Due to the outbreak of financial scandals involving Bursa Malaysia listed companies
Transmile and Megan Media, it may be argued that 2007 was a “challenging” year for
the auditing profession in Malaysia. The “ripple” effect of the scandals caused turbulence
in the auditing industry which spilled over to 2008 when the auditing profession was once
again in the limelight, in the case of Oilcorp Berhad.

T
he negative publicity connected
with these financial scandals
could very easily damage the
essence of the auditing profes-
sion i.e. “public trust.” Barker (2002)
claimed that society’s trust in a group of
professional persons is the “heartbeat of
that profession.” Hence, if such trust is
betrayed, the professional function, too, is
destroyed, since it would become useless.
Abdul Wahab Jaafar Sidek (The Star, 19
July 2008) of the Minority Shareholder
Watchdog Group (MSWG) opined that the
recent accounting scandals in Malaysia not
only adversely eroded trust of the sharehold-
ers and stakeholders in the affected compa-
nies but also affected the integrity of the capi-
tal market, the regulators and the auditing
profession. So, as far as the auditing profes-
sion is concerned, if that is indeed the case,
interested parties may need to be on the
highest alert for as mentioned by Railborn
and Schorg (2004), the presence of growing
distrust in the auditing profession may well
be “a cancer that is metastasising”.
All in all, there is little room for doubt
that the auditing profession in Malaysia is
currently experiencing a period of serious
turmoil. With fierce criticism against auditors,
it is only fair to hear the voices of the auditors
themselves. This may bring to light the prob-
lems faced by these professionals. Who
knows? Such enlightenment could one day
lead to amicable solutions sought by both au-
ditors and non-auditors.

24 ACCOUNTANTS TODAY • October 2008


Challenges Faced by Audit
Practitioners In Malaysia
10 interviews were conducted with au-
dit practitioners working in audit firms of
various sizes in Malaysia from June to Au-
gust 2008. Overall, it was found that there
are many problems faced by Malaysian au-
ditors. However, for the purpose of this pa-
per, the focus is on four issues. These are:
perceived value of audit function; hindsight
evaluation of auditors’ performance; com-
petition for human capital; and audit fees
versus audit quality.
Low perceived value of the audit
function
One of the challenges facing audit prac-
titioners in Malaysia is the low perceived
value of the audit function. In short, for
many of the small audit clients of the audi-
tors inter viewed, company auditing is
viewed as a waste of money and resources.
From the theoretical perspective, the
need of an audit function can be explained
by the agency theory, which denotes that
due to a separation of ownership and con-
trol, the principal (owner) will monitor the
activities of management through an audit
function. However, in Malaysia, an audit is
mandatory for all companies despite their
size and ownership structure (i.e. private
or public companies). That is, according
to Section 169(1), Section 174(1) and Sec-
tion 174(2) of the Companies Act 1965,
every single company in the country needs
to have its financial statements duly audited
by an independent auditor.
Notwithstanding the compulsory audit
requirement, many auditors have pointed
out that the actual contribution of auditing
towards its intended purposes is somehow
limited. This is because a vast majority of
the companies in Malaysia are private com-
panies as opposed to public companies.
Furthermore, a majority of these private
companies are owner-managed. Hence, an
audit appears to be meaningless to most
of the private companies because the di-
rectors and the shareholders are basically
the same people.
For this ver y reason, it explains why
most audit clients have found an audit func-
tion as a non-value adding activity and per-
ceive it to be a costly process. As pointed
out by a number of auditors, the most
October 2008 • ACCOUNTANTS TODAY
prominent value of auditing for the private
companies is merely adding credibility to
the financial statements for the purpose of
tax submission to the Inland Revenue
Board (IRB) and that of loan applications
to the financial institutions.
On the other hand, many auditors agree
that an audit function has a more significant
role for public companies since it serves the
purpose of reporting to their existing share-
holders and attracting future investment.
When it concerns listed companies in par-
ticular, apart from fulfilling the statutory
requirement of the Companies Act 1965, an
audit is required by Bursa Malaysia and the
Securities Commission. Interestingly, this
has led an auditor to claim that even when
it concerns the public companies listed in
Bursa Malaysia, an audit function has to a
large extent continued to play a “conform-
ance” role of satisfying the statutory and
regulatory requirements!
In the final analysis, some auditors are
of the opinion that the practical usefulness
of auditing may only be applicable to a lim-
ited group of users such as bankers, insti-
tutional investors and regulatory bodies
such as the IRB and Bank Negara. They
have also argued that a large section of the
Malaysian public do not actually rely on the
audited financial statements for decision-
making. As a result, over the years, it can
be witnessed that the practice of auditing
has gained little perceived recognition
from a large section of the Malaysian pub-
lic.
Hindsight evaluation of auditors’
performance
Another problem underlying the audit
practice in Malaysia is the inability of the
public to make a fair evaluation of auditors’
performance. On the whole, audit practitio-
ners claim that the present deluge of accusa-
tions against auditors is largely associated
with the recent financial scandals at
Transmile and Megan Media. They point out
that this is to be expected: it is the Malay-
sian habit to accuse the auditors of failing to
perform their work diligently whenever a
corporate financial scandal hits the news. In
their view, this is because the public do not
have the necessary knowledge and ability to
evaluate the quality of an audit leading to a
situation of failing to differentiate between
Audit Challenges in Malaysia Today
the quality of one audit versus another. These
auditors argue that the public judgement of
audit quality will only come out as a result of
subsequent events which more often than
not is demonstrated through negative report-
ing by the media that an audit has not quite
been performed at an acceptable level! The
hindsight evaluation of auditors is deemed
to be unfair as the perceived quality of the
auditors has been judged using the benefit
of knowledge after the event has taken place
to argue that auditors are not performing ad-
equately.
The hindsight manner of evaluation is
likely to bring about a high level of criticism
against the auditors given the significant
amount of negative publicity they receive. In
actual fact, the blame should not be placed
on the auditors’ shoulder alone whenever a
corporation is in trouble. This is simply be-
cause there are many other reasons which
may lead to the emergence of such a corpo-
rate quagmire including mismanagement,
bad strategic decisions, industry downturns,
competition, poor oversight by the board of
directors and last but certainly not least fraud
by senior management.
Since old habits die hard, notwithstanding
the presence of these and other debilitating
factors, the Malaysian public may continue
to apply the hindsight manner of evaluation
of auditors’ performance and accordingly
blame the auditors after just about every dis-
closure of corporate debacle. In doing so, as
argued by an auditor, the public is in need to
be reminded with one important fact: the
number of alleged audit failures as compared
to the number of audit cases conducted over
the years in the country is really quite small.
Hence, the terrible accusation thrown
against the audit profession in the country
as a result of a few bad apples does not seem
to be reasonable at all.
Global competition for human capital
Human capital is the most important and
essential asset and sourcing for real talent
is posing to be a great challenge for the
auditing industry. Unlike other industries
where technological advancement may
help to reduce human capital needed, the
auditing industry is similar to other ser-
vice-based industries, which tend to be
labour intensive. An auditor has pointed
this out by saying that the forming of an
25
Audit Challenges in Malaysia Today
independent opinion whether the financial
statements give a true and fair view is a
process that requires much subjective
judgement. Such a task needs to be per-
formed by professional audit personnel.
Therefore, “people” are always important
for the success of an audit firm.
In recent years, globalisation has gained
widespread impact on the financial sector
in Malaysia. As far as the audit profession
in Malaysia is concerned, it has now had
to face global competition for human capi-
tal. One of the auditors pointed out that
local audit firms are now facing a tough
time in recruiting qualified auditing per-
sonnel as they are paid much better in
countries like Singapore, China and the
Middle East. According to him a qualified
audit personnel is paid double in Singapore
and four to five times in China and the
Middle East. This in his view can only
mean more headache for audit proprietors
and partners who for many years now have
already had to confront the view held by
fresh accounting graduates that auditing
is a less attractive profession due to its long
working hours and less lucrative remu-
neration.
Another auditor claims that the shortage
of auditing staff has caused an unhealthy
competition among audit firms in Malay-
sia particularly for young graduates. He
explained, audit firms are supposed to be
training providers for novices to gain the
necessar y knowledge and experience;
however, the switching of jobs rapidly by
the so-called new accountants across a
number of audit firms will cer tainly
jeopardise their learning process.
Audit fees versus audit quality
Audit ser vices for public companies
in Malaysia have been dominated by
the four international audit firms (Big
4) i.e. KPMG, Deloitte KassimChan,
PricewaterhouseCoopers and Ernst &
Young. Generally, public companies pay a
“premium” for audit services obtained from
the Big 4. This is perhaps to be expected.
An auditor claims that the reason for public
companies to engage a Big 4 firm is to pro-
vide stronger assurance to their stakehold-
ers over the trustworthiness of their finan-
cial statements. However, another auditor
has argued that the view that the Big 4 pro-
26
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vides better services may not be the right
one considering the fact that companies in-
volved in the recent financial debacles have
auditors coming from among the Big 4. For
example, Transmile and Megan Media were
audited by Deloitte KassimChan and
KPMG, respectively.
Apart from the issue of Big 4 vs non-Big
4 in regard to audit quality, the issue of low
audit fees resulting from “lowballing” has
been a major concern of the auditing pro-
fession in Malaysia for many years. Even
though the Malaysian Institute of Accoun-
tants (MIA) has provided guidelines for
audit pricing in Malaysia, such guidelines
have not been adopted by most audit firms.
As a result, audit fees in Malaysia have
been considered by some auditors to be
quite low when comparison is made across
countries in the region. Some auditors
have the opinion that the price war among
audit firms will have negative implications
on audit quality. This is because to ensure
the necessary profit margin and to stay
competitive in the auditing industry, audi-
tors are likely to reduce audit procedures
in order to cut down the cost of perform-
ing the audit assignment. An auditor men-
tions that it is possible for auditors to do
so because: (i) the audit clients may not
be interested to demand for higher audit
quality; and, (ii) audit clients may not be
able to judge the audit quality. All in all,
audit quality is likely to be sacrificed as a
result of low audit fees while maintaining
a lucrative profit margin.
The evidence of low audit fees can be
found in the case of Transmile. A review
of the audit fees of Transmile for a two-
year period showed that the fees were low
when the audit assignment was per-
for med by Deloitte KassimChan:
RM150,000 in 2006 and RM73,000 in 2005
when revenue was RM655,831,000 and
RM356,379,000 respectively. However, in
2007 when the audit assignment was
taken over by KPMG, the audit fees shot
up to RM280,000 while the revenue
dropped to RM616,227,000 .
Generally, auditors agree that the prob-
lem of low audit fees is brought on by the
practice of “lowballing” among audit firms.
To overcome this problem, they believe
that audit firms should soon come to an
agreement for a standardised audit pricing.
Failure to make the necessary move would
only mean that audit quality in Malaysia
will continue to be the case of unfulfilled
expectations.
Conclusions and Outlook
In response to the recent financial scan-
dals in the last few years, the regulatory
and legislative authorities have imple-
mented a number of reforms as far as the
audit function in Malaysia is concerned.
These reforms include amending related
legislation and enforcing a higher degree
of regulation. In particular, with the imple-
mentation of the practice review and finan-
cial statement review by the MIA, the au-
dit profession may now be considered to
be highly regulated. The audit regulation
in Malaysia is likely to be more stringent
once the so-called Public Companies Ac-
counting Oversight Board (PCAOB) (an-
nounced over a year ago in the Prime
Minister’s 2008 Budget Speech) is finally
established in the near future.
Nevertheless, it should be noted that
stronger regulation may not be the only
solution in promoting better audit practice
in Malaysia. Perhaps, stressing on a higher
moral value in audit lessons and training
could be the accompanying path worthy of
involvement of various interested parties.
Finally, educating society on the nature and
purpose of an audit may actually help the
public recognise the value of auditing and
the contribution of auditors.
All in all, given the challenges faced by
auditors in Malaysia, one should have sec-
ond thoughts before pointing fingers at au-
ditors when another financial scandal hits
the news. AT
References
Barker, P. (2002). Audit committees: solution to
a crisis of trust? Accountancy Ireland. June. Vol-
ume 34. No. 3.
The Star (2008).The auditing profession – way
for ward. The Star. 19 July 2008. Available at
h t t p : / / b i z . t h e s t a r. c o m . m y / b i z w e e k /
s t o r y. a s p ? f i l e = / 2 0 0 8 / 7 / 1 9 / b i z w e e k /
1622049&sec=bizweek 19 July. Accessed on 1
August 2008.
Railborn, C & Schorg, C. (2004). The Sarbanes-
Oxley Act of 2002: An analysis of comments on
the accounting-related provisions. Journal of Busi-
ness and Management. Vol. 10. No.1. pp.1-13.
The writers can be contacted at
leeth@mail.utar.edu.my (Teck Heang Lee)
ACCOUNTANTS TODAY • October 2008