Why the silence, Audit Oversight Board?

THE statement issued yesterday by the Securities Commission (SC) and the body it oversees, Bursa Malaysia, on the recent events, is timely.

It appears that the primary purpose of the statements issued by both entities, albeit separately, was more on addressing and rebutting the assertion made by the chairman of Serba Dinamik in a press conference on June 22, whereby it was mentioned that the company had met with both on the events that are in the public eye now.

With the statements more issues and unanswered questions have been raised.

The SC in their statement reiterated that auditors have a statutory obligation to report directly to the SC.

Since 2010, auditors auditing public interest entities are required to register with the Audit Oversight Board (AOB) which was established under Part IIIA of the Securities Commission Act Malaysia 1993 (SCA). The AOB is responsible for the registration of auditors and to ensure that only fit and proper auditors are involved in auditing the financial statements of public interest entities. KPMG, together with almost 40 other audit firms, has been a registered entity of AOB since its establishment.

Section 31E (1)(d) of the SCA provides that one of the key responsibilities of the AOB is to conduct inspections and monitoring programmes on auditors to assess the degree of compliance with auditing and ethical standards. And each of the registered firms and individuals are required to make a yearly declaration with the AOB relating to their fit and proper status.

How useful and effective were these inspections and monitoring programmes in alerting investors to the risks faced? Or in the audit of the public interest entities by these auditors registered with the AOB?

From 2012 to 2019, the AOB has issued approximately:

  1. 50 sanctions against firms and individuals registered with it for various offences, including but not limited to compliance with auditing standards in Malaysia i.e. the International Standards on Auditing, compliance with the requirements of the Malaysian Institute of Accountants, etc.
  2. A total of five orders for the revocation and suspension of registration against individuals and firms, and
  3. Two orders for the suspension and withdrawal of recognition against individuals and firms.

Even though the 50 sanctions issued are more than the total number of firms and individuals registered with the AOB, the orders made were mainly to firms apart from the Big 4 audit firms, with some of the firms being issued sanctions more than once throughout the years. These results appeared to indicate the following:

  1. Since the introduction of the AOB, the standards and processes adopted by audit firms conducting audit on public interest entities has improved or gone up tremendously, instilling confidence in investors who want to know the subjective opinion of auditors to help them make investment decisions.
  2. That the Big 4 audit firms, which collectively audit more than 50% of the total public- listed entities on Bursa Malaysia, have consistently maintained high standards and uniformed processes in the audit of their clients. If they had failed in these undertakings, AOB would have, through their regular inspections and monitoring programmes on auditors to assess the degree of compliance with auditing and ethical standards, picked and flagged out such discrepancies and issued sanctions against them. The AOB is infamous for their integrity and adherence to strict inspection standards – traits clearly demonstrated in every case where AOB went for their regular inspection on audit firms registered with them, one could sense the tense mood in those offices during the entire period of the inspection.

Thus, when the newly installed Serba Dinamik chairman said – ad verbatim – that the company’s auditor, KPMG, had negligently red-flagged trivial issues, used sub-standard auditing standards, misled the SC, Bursa Malaysia and the board of directors of Serba Dinamik with trivial issues, shouldn’t it be appropriate for AOB to respond, too?

The assertion by the chairman appears to imply that the AOB had failed in their vaunted integrity and adherence to strict inspection standards when they inspected KPMG. Otherwise, how and why would the chairman say that the auditor used sub-standard auditing standards? Although KPMG had, today, tendered their resignation as auditor, it would not alter the fact that they would still be sued by the company. If the company succeeds in their suit against KPMG using the above as the basis for their suit, questions would then arise on the auditing standards of the remaining audit firms still registered with the AOB. Are they also using sub-standard auditing standards since AOB also inspect them? Existing clients of KPMG would also be interested and probably could be worrying right now whether their audited accounts were done in accordance with international standards or the sub-standard used by KPMG in their audit of Serba Dinamik.

With the resignation of KPMG, is the statement from Bursa Malaysia who reiterated that the company finalise its appointment of an independent audit firm to undertake the review still valid? Wouldn’t the appointment of a new auditor take precedence first? If a new auditor is appointed, is the new auditor required to undertake and review the issues that led to this situation? If so, how do the AOB and Bursa Malaysia assure the investing public the issues raised were reviewed independently and separately from a normal audit?

As the company had already filed a suit against the ex-auditors, do the AOB and the authorities expect the findings by the independent audit firm to be any different? Given the strict standards imposed by the AOB on the auditors registered with them, whichever firm, regardless of whether they are the Big 4 or otherwise, would have used the same standards and processes in the audit of their clients who are public-listed entities.

Yes, opinions could differ, but regardless, every opinion is based on things as how the data was available to them, whether they had an opportunity to follow all due procedures, the level of materiality and other issues along those lines. We cannot imagine what would happen if the findings concurred with the ex-auditor.

Given that the management has rationalised the appropriateness and their interpretation of the subject matters as defensible, how the independent auditor processes and reviews it would be interesting to see, given that the ex-auditor has expressed a differing view.

The investing public is watching this very keenly for if the company were to succeed in its suit, it could possibly open a floodgate for all other audits, past and present, against audit firms that are registered with the AOB.

As KPMG has today tendered its resignation, would Bursa Malaysia allow the company to delay the filing of its annual returns as any new incoming auditor would require the same amount of time that a normal audit would require, as they would not be able continue and pick up where the ex-auditors left off? If yes, would it be fair for the shareholders of the company, especially the individual and minority shareholders?

AOB, the public is waiting for your response. – June 24, 2021.

* FLK reads The Malaysian Insight.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.

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