UKML3043 BUSINESS ETHICS AND

CORPORATE GOVERNANCE

Code on Corporate Governance –

Part 1
Auditors
Internal Control
Company Secretary and
Whistleblower

1
 Topics

A. External Audit (EA) C. Internal Control

 Appointment, • Definition

purpose, roles, power • Components

and duties
 EA’s independence D. Company Secretary
 Threats to EA’s • Roles of CS in CG

independence
E. Whistle-blower (WB)
• The importance of WB
B. Internal Audit
 Roles • Laws to protect WB

2
 Learning Outcomes

 Explain the purpose, roles, powers and duties of external

auditors

 Explain the importance of auditor’s independence

 Describe the threats to auditor independence and the

measures that could be taken to reduce these threats

 Explain the roles and functions of internal auditor in

promoting sound CG

 Explain the roles of company secretary in promoting sound CG

 Describe the importance of whistleblower in CG

3
 Reading List

 Solomon, J. (2013) Corporate Governance and

Accountability. West Sussex: John Wiley and Sons
Limited. – Chapter 6.

 Khas, M. N. (2000) Important role of auditors in

corporate sector. Business Times, p.15.

 Lee, F. H. (2002). Corporate Governance & the

Company Secretary’s Role, The Chartered
Secretary Malaysia., pp. 4 – 8.

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Relationship between EA, BOD and
Top Management

BOARD OF Makes final decisions about the

DIRECTORS accuracy of the reports and
the financial state of the co.

Provides opinion of the

EXTERNAL AUDITOR
truth,
fairness and compliance of
the reports

TOP Prepares financial info. in

MANAGEMENT compliance with laws and
accounting standards

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 Types of Audit

 External Audit
performed by an independent auditor e.g.
KPMG, PWC, Horwath etc.

 Internal Audit
performed by an internal unit within an
organisation e.g. Internal Audit
department, Audit Committee

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 External Audit
 External audit: statutory annual audit of
a company by independent external
auditors.
 The Companies Act 2016, S248 requires

the Directors to prepare financial

statements and shall be duly audited, sent
to every member under S257 or in the case
of a public company, laid at the AGM
(S340).
(Old reference : S169 CA 1965)
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 Purpose of External Audit

 To conduct an independent audit of the

company financial statements in order to
ensure that the information in the
statements is accurate and believable.
Thus reflecting the company’s current
financial situation
 Believable means honest information
without fraud (intentional) and error
(unintentional)
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Purpose of External Audit
If there is fraud or error, it will lead to:
1. Incorrect use of accounting policies;
2. Omissions of fact; or
3. Misinterpretation of fact

An audit CANNOT guarantee that the

financial report is free from material
misstatement BUT, it provides a HIGH
level of assurance on reliability and
accountability

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 Roles of External Audit

1. To prepare the annual independent audit

report.

2. To provide independent assurance that the

financial statements give a true and fair
view of the company’s financial
performance and position.

3. To report to the CCM on any breaches of

the Companies Act.

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 Who may be an auditor?

Accountants Act 1967 prescribed:

1. An auditor must ordinarily be registered as a
public accountant with the Malaysian Institute
of Accountants (MIA) and holds a valid license
issued by the Ministry of Finance.
2. The person must be at least 21 years of age
AND fit and proper person to be admitted.
3. He must have passed the FINAL examination
in accounting of one of the institutions
specified in the Act OR he must be a member
of one of the specified Professional Bodies;
e.g. ACCA, CIMA.MIA.

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Appointment of External Audit

 Every company is required by the CA to

appoint EA at each AGM and approved EA
to hold office for the following financial
year.

 The requirement for annual renewals

empowers the shareholders to remove EA
whom it is felt have not fulfilled their
duties prudently.
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 Powers of External Auditor
 Right to access to the accounting and other
records of the company i.e. entitled to obtain
them from ANY officers of the company

 Right to access to the records of any subsidiary

and may obtain information and explanation for
the purpose of reporting on consolidated accounts

 Entitled to attend any AGM of the company and

to receive all notices relating to the AGM and to
be heard on any matter concerning them
(capacity as auditors)

Week 11 - Topic 5 13
 Powers of External Auditor
 An officer who refuses OR fails without lawful
excuse to allow an auditor access to any
accounting and other records and registers of the
company OR hinders, obstructs OR delays an
auditor in the performance of his duties, the
officer shall be guilty of an offence under the Act.

 Auditors are NOT liable for any action for

defamation in respect of statements they may
make in the course of their duties as auditors
UNLESS there is malice on the part of the
auditors.

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 Remuneration of External Auditor

 Fees & expenses of an EA is fixed by the

company at an AGM OR by the BOD – this would
depend which party had made the appointment

 The AGM may delegate its duty to decide on

remuneration of EA to the BOD

 BOD may seek advice from Audit Committee in

selecting the External Audit

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 The Audit Report
 Under the Companies Act,2016 – S. 266 :
Auditor report to be laid at AGM (public co) or
circulated to members or laid before a members
meeting for private company;
 External Auditor should include their opinion
pertaining to the following issues in the report
 Whether he has obtained all the information
and explanations that he required
 Whether proper accounting and other records
(registers) have been kept by the company as
required by the Act
 Whether the procedures and methods used by
holding or subsidiary in arriving at the amount
taken into any consolidation account were
appropriate to the circumstances of
consolidation
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 External Auditor’s Independence

 Shareholders rely on external auditor to protect

their interest by ensuring the company provides
true and fair view of the financial position

 External auditor’s independence enhances the

integrity of the financial reporting

 External auditor must not get involve in any

activities that may threaten its independence

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Threats to external auditor’s
independence

 Provision of non-audit services – dual roles

 Might compromise thoroughness and quality

of audit

 Non audit services – HR consulting, internal

audit, management consultancy, legal advice
etc. give higher fees than external audit

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 Threats to external auditor’s
independence
 Low-balling
• Alleged practice of pricing the cost of audit

work at a loss making amount in order to win

consultancy business at much higher and
lucrative rates

 Familiarity
• A close personal relationship between a senior

person in the audit firm and someone in the

client company

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THE END

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 UKML3043 BUSINESS ETHICS AND
CORPORATE GOVERNANCE

Code on Corporate Governance –

Part 1b
Auditors
Internal Control
Company Secretary and
Whistleblower

21
 Topics

A. External Audit (EA) C. Internal Control

 Appointment, • Definition

purpose, roles, power • Components

and duties
 EA’s independence D. Company Secretary
 Threats to EA’s • Roles of CS in CG

independence
E. Whistle-blower (WB)
• The importance of WB
B. Internal Audit
 Roles • Laws to protect WB

22
 Learning Outcomes

 Explain the purpose, roles, powers and duties of external

auditors

 Explain the importance of auditor’s independence

 Describe the threats to auditor independence and the

measures that could be taken to reduce these threats

 Explain the roles and functions of internal auditor in

promoting sound CG

 Explain the roles of company secretary in promoting sound CG

 Describe the importance of whistleblower in CG

23
 Internal Audit/Auditor (IA)
 Internal Audit: an independent appraisal activity
established within an organisation as a service to
it

 Purpose: To evaluating the adequacy and effectiveness

of those internal control systems and recommending
improvements.

 IA can be outsourced nowadays, one of the

reason is to ensure its independence.

 MCCG 2017 – Practice 10.1 (The Audit Committee should

ensure that the internal audit function is effective and able to
function independently.)

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 Cont…Internal Audit (IA)
 According to MMLR 15.27:
 A listed issuer must establish an internal audit function
which is independent of the activities it audits
 A listed issuer must ensure its internal audit function
reports directly to the audit committee

 A strong relationship with the audit committee is

needed => major source of information to the
audit committee on the performance of the
company and its control environment.

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 Internal Control (IC)
 Definition: IC is a process effected by the BOD,
management and other personnel, which is designed to
provide reasonable assurance regarding the
achievement of objectives in the following categories:

1. Effectiveness and efficiency of operations

2. Reliability of financial reporting
3. Compliance with applicable laws and regulations
4. Safeguarding of the organisation's assets

 CA 2016 S246 requires PLC and its subsidiaries to have

a system of internal control

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 Components of internal control
 Control environment: this sets the tone and
culture of the company. It is the foundation of all
aspects of internal control, providing discipline
and structure. It includes the integrity, ethical
values, and competency of the personnel.

 Risk assessment: identifies and analyses relevant

risks that prevent the company from achieving its
objectives and forms the basis for determining
how those risks should be managed.

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 Cont...Components of internal
control
 Control activities: these are the policies and
procedures that help ensure the necessary actions
are taken to address risks impeding the
achievement of the company’s objectives, and
maintaining these risks within an acceptable risk
appetite.
 Information: must be identified, captured and
communicated in a form and timeframe that
enables personnel to carry out their
responsibilities.
 Monitoring: assesses the performance of the
control system on a continuing basis.
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 Company Secretary: An overview
 CS – the chief administrative officer of the
company if employed in-house
 CS can also be outsourced to a professional firm
to provide secretarial services
 Section 235(1) – every company is required to
have at least one secretary and qualified to act
under Section 235(2)(a) & (b) i.e. Member of a
Prescribed Professional Body by the Minister of
Domestic Trade, Cooperative & Consumerism
and licensed by the CCM
 Stated in MCCG 2017 – Practice 1.4
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 Functions of CS in CG

 Manage all board and committee meeting logistics,

attend and record minutes of all board and committee
meetings and facilitate board communications.
 Advise the board on its roles and responsibilities.
 Facilitate the orientation of new directors and assist in
director training and development.
 Advise the board on corporate disclosures and
compliance with company and securities regulations
and listing requirements.
 Manage processes pertaining to the annual
shareholder meeting.

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 Functions of CS in CG (Con’t)

 Monitor corporate governance developments and

assist the board in applying governance practices
to meet the board’s needs and stakeholders’
expectations.
 Serve as a focal point for stakeholders’
communication and engagement on corporate
governance issues.

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 Company Secretary Training

 CCM required all company secretaries to

attend Company Secretaries Training
Programme (CSTP) Essential 1.0

 Company Secretaries Training

Programme (CSTP) Significant 1.0 is
optional.

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 Whistleblower (WB)
 MCCG 2017 Practice 3.2
 The board should encourage employees
to report genuine concerns in relation
to;
 breach of a legal obligation (including
negligence, criminal activity, breach of
contract and breach of law).
 miscarriage of justice.
 danger to health and safety or to the
environment.
 the cover-up of any of as above in the
workplace.

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34
 Example of Protection to WB
Capital Markets and Services Act

1. CMSA Section 321:

- protection for chief executive, any officer
responsible for preparing or approving
financial statements or financial information,
an internal auditor or a secretary of a listed
corporation
2. CA 2016 Section 266(10) :
- protects the auditor from any legal
action for making the report provided it
was made in good faith
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Cont…Example of Protection to
WB
3. Whistleblower Protection Act 2010
Such as S10(1) - No person shall take
detrimental action against a whistleblower or any
person related to or associated with the
whistleblower in reprisal for a disclosure of
improper conduct.
4. Whistleblowing Policy in PLC
The BoD should ensure appropriate
whistleblowing policies are in place by which
employees may, in confidence, raise concerns
about possible misdemeanours.
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THE END

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