Accurate and reliable financial statements are essential to the effective functioning of the capital markets.
To that end, auditors play an important role by executing independent and objective audits of the financial statements that are prepared by management.
The Global Financial Crisis (GFC) however has triggered a fundamental review of the role of audit.
Changes to reporting requirements have been one of the ways audit responded to the GFC, and we’ve seen the audit function grow more complex, with increased regulatory and reporting compliance requirements.
These changes will shape how auditors deal with investors, companies, regulators, Audit Committees (ACs), as well as their role in capital markets.
We aim to play a constructive role in the debates that will shape the future of auditing, financial reporting, regulation and corporate governance.
Trust should be a key component of boards' and shareholders' agendas as we move into a more volatile and challenging era because while it is hard to measure, trust is a critical asset in ensuring an organisation's long-term survival and success.
The aftermath of the recent financial crisis has shown both the vital importance of trust and the severe consequences to economic prosperity when it is undermined by perceived untrustworthy behaviour.
In tackling the issue of trust, there is no single one-size-fits-all solution. Each organisation will face its own set of challenges that affect its strategy and vision. These are some key points to note:
- Trust has to be understood and embedded in the organisation's culture in a natural way.
- Organisations need to see themselves in the context of a broader network of which they are a part, with society, government, regulators and individual stakeholders all involved, dependent and impacted by their actions.
- Building trust requires patience and discipline and must be continously earned and reinforced through the right behaviours. So, creating a new type of corporation that reflects the ethic of care more fully in its behaviours, thinking and decisions, may be necessary.
- Creating and embedding the right culture within organisations will require the right leadership. People will only do the right thing consistently and reliably if they are in a wider culture that celebrates and rewards it, and this needs to be set from the top, by the leaders.
- Cultural and behavioural change must extend beyond compliance with a code of conduct. Organisations need to rethink their entire approach to risk and compliance, and seek to cultivate behaviours that are based on not following rules, but living by principles.
- Organisations also need to rethink their communication and reporting strategies because trust and transparency are becoming increasingly important to corporate reputation. What customers, suppliers, investors and society at large think, matters when it comes to building trust.
- Finally, organisations cannot regulate their way to trust. It has to be earned through voluntary behaviour based on sound principles of honesty and integrity.
We can help organisations build and maintain trust with different stakeholders by providing audits on which markets can build trust in organisations’ finances and processes. We can also provide assurance for information on non-financial assets.
Timeline for releasing audited financial statements
- Bursa Malaysia has now proposed a shortened timeline for releasing audited financial statements by listed companies from 4 months to 3 months. We are fully supportive of this proposal.
- This is in response to investor concerns on differences between unaudited results (released at 2 months after financial year-end), and audited results (4 months after financial year-end) and to improve governance.
- We believe releasing annual audited financial statements 3 months after year-end is in-line with regional markets. It is a good balance of timeliness and reliability.
- The shortage of talent the Malaysian accounting industry faces will make it a challenge if all listed companies had to meet the deadline.
- For overall improvement in financial information reliability and governance, reviews should be performed on the half yearly financial results. This coupled with the continuous disclosure requirements in the current Listing Rules, will be a positive step towards investor protection.
- Get the full version of what we said around this matter, in the 2012 July/August issue of The Malaysian Institute of Certified Public Accountants (MICPA) magazine featuring PwC Malaysia's Assurance Leader, Pauline Ho and Senior Executive Director, Regina Fikkers.
Role of audit
Audit plays an important role in establishing and increasing market confidence in quality of companies’ financial reporting.
There is a need for collaboration and cooperation among the various stakeholders to arrive at solutions that are optimal to the capital market as a whole.
There have been demands for auditor reporting to provide more insight for stakeholders:
- Investors want more information, more insight and are asking auditors to provide that in more customised reports
- Key risk disclosures can be improved. Audit has a role to play in developing enhanced disclosures and providing additional assurance
- Auditors must build in a healthy amount of professional scepticism to ensure effective audits
- The auditor should not be an original source of factual data or information about the entity. In fact, auditors should not be providing anything new, rather providing views and directing readers to the most important aspects of reports
- The IASB is looking into enhanced audit report (likely to be in effect end 2014). This will include enhanced audit commentary, and an explicit statement on going concern
We strongly support reforms which:
- maintain or improve audit quality
- enhance the value of the audit to users
- increase the reliability of information the entity provides in public reports
- promotes timeliness of financial information
- protects the interests of investors
We also believe that the benefits of these reforms must outweigh the corresponding increase in costs or red tape.
Reforms or changes should maintain or enhance the effectiveness of the relationships and interactions of auditors with those charged with governance (e.g. audit committees) and management.
The roles of Boards and the finance function
Now, more than ever, Boards and the finance function need to take a more proactive role and make some changes to business practices in order to comply with regulatory, tax and legislation changes e.g. Basel 3, FATCA and anti-competition laws.
This is even more crucial for us, because Malaysia is an adopter of IFRS, therefore our content and implementation dates follow international norms.
It is important that businesses see accounting as part and parcel of the business risks they need to manage. Like all risks, it needs to be identified, monitored and managed.
Although the role of identification and monitoring clearly rests with the CFO and finance function, the management of such risk however, extends to all parts of the business.
For Boards, they play a role in making sure:
- they are kept appraised of changes and treatments
- they understand how management are incorporating these changes into their SOPs and business plans
- they understand the implications to past transactions, and
- that the organisation engages and advocates their position with the Malaysian Accounting Standards Board (MASB) on future changes, before these changes become embedded in standards.
Audit Committees should also be given a bigger role in promoting and ensuring consistency and transparency, which includes:
- overseeing the appointment of auditors
- the conduct of the audit, and
- better reporting to shareholders
It is important to build the right talent pool because the finance function also plays the role of:
- Being a watchdog
- As accountants, having a duty of care to the capital market
- Keeping up to speed with IFRS requirements to ensure compliance