Reliable audit opinions don’t come cheap


OPTIMISTICALLY CAUTIOUS By ERROL OH

A lot is riding on the sturdiness of the Audit Oversight Board framework

WHOSE fault is it if the quality and reliability of audited financial statements in Malaysia suffer because the audit fees don’t correspond to the amount and nature of work required to do a good job? This mismatch is a common complaint among the auditors. We often hear them lamenting that the fees in Malaysia are on the low side. For an example of this, read our Up Close & Personal interview with KPMG Malaysia managing partner Mohamed Raslan Abdul Rahman on page 6.

The maiden annual report of the Audit Oversight Board (AOB), issued on Thursday, has amplified the issue. When highlighting the key findings from its inspections of the six largest audit firms in the country, the board points out that auditors need to price their services at levels that will ensure that they can comply with the requirements of auditing and ethical standards. The worry here is that firms may decide on the resources to be deployed for audit engagements based on the fees they will earn rather than on the risks that need to be addressed when auditing the accounts.

In its annual report, the AOB relays the grouse of audit firms that “due to the relatively low audit fees in Malaysia, it is a big challenge for them to secure adequate resources”. Considering that the AOB was set up to assist the Securities Commission in regulating auditors of public interest entities (PIEs), it’s telling that the board saw this matter as worthy of a mention. But does this mean that the authorities agree that the auditors are not being paid enough for their services?

If you’re bent on getting an unambiguous answer to that, good luck to you. The board will only go as far as to emphasise that the fees should be properly tied to the audit work that ought to be done. It says in the annual report: “The AOB is mindful that the global economy is still in a recovery stage. This will continue to place pressure on PIEs to contain their operating costs, including audit fees. Nevertheless, the AOB expects auditors to price their fees to commensurate with the risks undertaken so as not to compromise on audit quality.”

PIEs include listed companies, banking and financial institutions (including Islamic banks and development financial institutions), insurance companies and takaful operators, and holders of Capital Market Services Licences (such as securities and futures trading firms, and fund management companies).

When fielding questions from reporters after releasing the report, AOB executive chairman Mohamed Nik Hasyudeen Yusoff stopped short of endorsing the view that companies in Malaysia should get used to the idea of paying higher audit fees. He said the board would not tell the firms what to charge clients and would leave this to the market forces to decide. Instead, he urged companies to look at audit fees as an investment rather than as a cost, because the work of auditors supports the enhancement of a company’s value.

To help audit firms in determining fees, the Malaysian Institute of Accountants have something called A Guide To Charging For Professional Assurance Services. It says: “Fee arrangement is a matter for commercial negotiation by practitioners. The Institute does not prescribe the mandatory basis for calculating fees, nor does it ordinarily investigate complaints relating solely to the quantum of fees charged.

“The level of fee is to be mutually agreed between the auditor and his client, which largely depends upon the skill and knowledge required, level of training and experience of the staff involved, the time necessarily occupied and the degree of responsibility and urgency of work involved.

“However, this RPG (recommended practice guide) is useful as a benchmark to establish the reasonable level of remuneration, commensurate with the provision of professional services of an acceptable and recognised standard in the absence of other more sophisticated billing methodology.”

The problem is, not many firms make full use of the RPG. Hence, we continue to hear the auditors’ grumbling about the fees. Perhaps their best hope is that the AOB framework will bring about desirable changes.

The strategy here is that the AOB inspections will compel the firms to improve their compliance with the standards, and consequently, the firms will turn to their clients and say: “Look, we’ll get into trouble with the regulators if our audit work falls short of the requirements of the standards. We won’t cut corners and we won’t reduce the scope of the work. Our fees have to be right-sized. If you don’t want to pay that much, find auditors who are willing to risk being slapped with sanctions by the AOB.”

Of course, such a transition in mindset will take time. Meanwhile, let’s see how the AOB handles the errant firms that has no qualms about bending the rules to fit the fees. The annual report has this to say: “It has been a known area of concern that the provision of non-audit services by audit firms to their listed audit clients may result in auditors low-balling their audit fees to gain more consulting jobs at clients and this may compromise independence. The AOB will be reviewing the safeguards in place to understand how the threats are mitigated.” Again, who should we blame for low-quality audits?

Deputy executive editor Errol Oh believes that many people don’t understand what is it that auditors really do.


How liveable is Kuala Lumpur?


By THEAN LEE CHENG leecheng@thestar.com.my

Cities are built for tomorrow. As Asia progresses and joins the ranks of advanced economies, green-related issues such as sustainability, liveability and smart cities have cropped up as this drawing by a child from India illustrates.

THERE is a 20-something person let’s call him T who has a I Wanna Be a Millionaire ringtone on his iPhone. Every now and then, he would touch base with his roots in Gemencheh, Negri Sembilan. There are many Ts in Kuala Lumpur, and other Ts from neighbouring countries who have made Kuala Lumpur their home and job market. The city and its promise of a better life draws many young people here.

They come, or their parents came decades ago, to eke out a living and over the years, this working class moved up to join the ranks of the middle-class who make up much of Kuala Lumpur today. But like any other city, the have and the have-nots create the diverse demographic landscape of Kuala Lumpur.

T lives in a nice middle-class Petaling Jaya, about 15km from the Kuala Lumpur City Centre. There are many others who are not so fortunate. Many live in slums, besides rivers and on the fringes of Kuala Lumpur.

It is not that the city draws the poor and succours the rich, but that the working class are attracted by job and economic opportunities in the city and the rich enjoy the urban pleasures like art and culture (or what we currently have) and consumption culture of the city. They may not live cheek by jowl as housing from low-cost government-subsidised flats and gated communities and shopping districts, separate them, but all of them are here because they want to be at the centre of activities, be it political, economic or cultural. As the country evolves, so does the city. In fact, because the city is the gateway to the nation, the rate of evolution begins and goes at a faster pace than the country.

The city we know today is the result of an evolution which began in 19th century Malaya. Kuala Lumpur started at the meeting point of the Gombak and Klang Rivers when early travel was by foot, boat and on bullock carts.

Today, the Federal Government is planning to have mass rapid transit (MRT) among other infrastructures. Much has taken place between the bullock days and today’s rail travel. There is the Petronas Twin Towers and, before that, the current railway station and Bangunan Sultan Abdul Samad.

Heritage buildings have today given way to iconic buildings. But it is not buildings that make up a city. It is the community of people who gave breath and life to the city.

According to the United Nations Population Division, the share of Asians living in urban areas has grown from 32% in 1990 to 42% last year. In 15 years, the UN forecasts that half of Asians will be city dwellers.

This can be seen in the population growth of Kuala Lumpur. In 2000, it had a population of 1.305 million (density of 53.7 persons/ha). Today, it stands at 1.627 million (density of 66.9 persons/ha).

Says Dewan Bandaraya Kuala Lumpur, or City Hall, the guardian of the city in a statement: “KL’s population is growing at the rate of 2.2% per annum in the last 10 years, exceeding the national population growth rate of 2.17% per annum.” This excludes the number of foreigners who have made Kuala Lumpur their home.

What will this mean for the city’s infrastructure? More people also means a greater demand on the infrastructure transport, water, amenities, healthcare, education and services. More people also means greater waste. How will the city manage this? These are the challenges confronting Kuala Lumpur today.

The Economist Intelligence Unit has ranked Kuala Lumpur 79 out of 130 listed liveable cities. The ranking has given Federal Territory and Urban Well Being Minister Datuk Raja Nong Chik a new vision to see it in the top 20 by the year 2020. That is just nine years away. Before getting to the 20th spot, he says there are several measures that need to be fulfulled, and one of the main criteria is an effective infrastructure.

In its Asian Green City Index, German power house Siemens independently commissioned the Economist Intelligence Unit to assess the performances of 22 Asian cities. Kuala Lumpur is one of them. It was given a rating of average. It was judged based on its performance in eight areas: energy and CO2 emission, transport, land use and buildings, waste management, water mangement, sanitation, air quality and environmental governance. Among the greatest concerns were waste and water management. It scored well in transport.

Says Siemens chief sustainability officer Barbara Kux: “The battle against climate change will be decided in cities. This applies to Asia, with its booming conurbations, more than anywhere else on earth. Only green cities will make life worth living over the long-term.”

US-based technology company IBM did a presentation on Smart Cities last month. It compared Kuala Lumpur with some of the best international practices in areas such as city services, people, business, communications, transport, water and energy. Kuala Lumpur was ranked below international best practices in all areas and lagged further behind in the people, business and city services systems. It was just close to average in its water and energy segments.

IBM’s general manager (government and healthcare) Nazerollnizam Kasim in his paper notes that “smarter cities are working to infuse intelligence into each of their core systems.”

Therein lies the crux of the issue human intelligence. A city thrives because of its creative, productive and talented workforce. Smart people go out in search of smart people to benefit from that interaction. Over this, there is the great need for governance and government. Which is why the Government is trying hard to pull talent and high-value human capital back to the country.

But people will only return, and new ones come, if Kuala Lumpur promises more than just tall skyscrappers. Security, amenities, liveability, education, financial rewards for hard work and talent among other urban pleasures are their measure.

Harvard economic professor Edward Glaeser in his book Triumph of the City writes: “London’s amenities have helped the city attract 32 billionaires, according to Forbes, an impressive share of the world’s wealthiest people. About half of those mega-rich Londoners are not English … Human capital, far more than physical infrastructure, explains which cities succeed.”

The fact that we are trying to bring back our own is very telling.

Last year, the Government through Minister in the Prime Minister’s Department Datuk Seri Idris Jala unveiled the Government’s plan to improve the city’s liveability. His tool urbanisation.

His rationale is that the city will provide the engine of growth for the entire country. That means, the next 10 years will be crucial. A decade is a short time, actually, to do all that he has laid down. His emphasis on liveability is based on improving the public transport system, stability, healthcare, edcuation, infrastructure, culture and environment.

At the moment, the city has big plans for infrastructure. By the middle of this year, the Government will begin work on the RM50bil MRT system to connect the entire city. Seven mega projects are currently being planned in and around the city. There is another type of infrastrasture which is not so physically visual, but of utmost importance water and waste management. Both the studies by Siemens and IBM have highlighted the fact that these two areas need attention.

The issue of water management was brought up by Energy, Green Technology and Water Minister Datuk Seri Peter Chin Fah Kui last week. He lamented that Malaysians use an average of 226 litres of water per person daily, which is way above Singapore’s 154 litres and Thailand’s 90 litres.

Unlike our neighbour Singapore, which has two-thirds of its land area as water catchment areas, Kuala Lumpur, together with the state of Selangor and Putrajaya, are expected to suffer water shortage by 2014.

Says Syarikat Bekalan Air Selangor Sdn Bhd corporate affairs department executive director Abdul Halem Mat Som: “We only have 6% reserve (of water supply). By right, we should have 20%. During the dry season, the demand goes up, so the reserve is gone. We cannot maintain a 20% reserve, which is why the Selangor government is buying water from Pahang.”

Says Economist Intelligence Unit head of research Jan Friederich: “The wastage comes from old pipes and high water consumption. Water leakages is running at an estimated 37%, compared with the Asian Green Index of 22%.” Today, there is an impasse as the water sector is being restructured.

Water and waste management is crucial because many diseases are water-borne. Before the days of air travel, some of the diseases that had ruined many a city were due to contaminated water. City Hall is also planning to plant more trees from 25,000 to 100,000 and clean up the Klang river. All these efforts are to add value to the city.

“Intensive cleaning of the river and flood mitigation works are the most crucial parts of the whole programme. These works will include rivers from upstream in Gombak and Selayang and scheduled progressively until 2020. The budget allocated for these works is RM3bil,” City Hall says.

Botanist and researcher Dr Francis Ng is all for beautification. But he stresses the need for diversity. “We have a total of 4,000 species compared to Britain’s 50. But our city does not reflect the biodivesity of our forest. There are about 50 species planted in and around Kuala Lumpur today, about half of which are imported.

“Diversification will help to address the problem of extinction, as more areas are opened up for development and other uses besides putting a bit more creativity in our planting, such as creating small clusters of three to five trees.”

Ng, who is the former deputy director-general of the Forest Research Institute of Malaysia, says the country works with five-year plans, “basically to keep contractors going and all they can think of is having concrete, but no maintenance. So the lack of maintenance is built into our culture. That’s why trees fall on rail lines and cars in the city. There has to be a tree maintenance programme which includes fertilising and pruning.”

But beautification programmes alone will not draw people into the city. Security, still an issue, is being progressively and successfully addressed. Cities are crime-prone because people bring their social problems such as poverty with them. It’s hard to make a living as a snatch thief in small towns, although some do as some of our newspaper headlines testify. The many pockets riding on the rail system promise better returns.

So as Kuala Lumpur restructures and weeds out crime, builds new rail linkages, addresses water and waste management issues, the issue of balancing competing needs comes into the picture. Opening up green fields versus reducing water catchment areas, congestion versus crime, carbon dioxide emissions versus selling more cars, there is no end to competing needs.

But if it is to be ranked as a city for the future, it must build for the future.

Related Stories:
The liveability index and complexities of urban living
Keeping track of our neighbour’s growth
The integrated approach in solving transport woes
Experts: Water issue needs thrashing out
Intensive cleaning of rivers is necessary in improving the quality of drinking water

What house are you building?


SCIENCE OF BUILDING LEADERS By ROSHAN THIRAN


Building a solid house can only be done through reflection.

“Keep doing what you’re doing, and you’ll get what you are getting. If that is good, great. If it’s not, you better change.” Ang Hui Ming

A FEW years ago, I heard about an elderly construction worker who wanted to quit. He told his boss of his plans to leave. His boss was sorry to see such an excellent worker go and asked him to build one last house as a personal favour.

The construction worker said yes, but his heart was not in his work. There was no passion left. He resorted to shoddy workmanship and used inferior materials, cutting corners to get the work done.

Finally, when the house was finished, his boss handed him the keys to the house saying, “This is your house. It’s my gift to you.” The construction worker was stunned and full of regret as he knew he was sloppy working on it. If he had only known he was building his own house, he would have done it all so differently.

Isn’t it the same with us? Often we work hard but after a point in time, we dish out less than stellar performances. Our attitudes differ but we console ourselves by saying it doesn’t matter. But in most cases, it does matter.

Each day, we build our lives, one transaction at a time. Each day counts as we build our life’s building. When I worked at General Electric (GE), people always spoke about the “house that Jack built.” Jack Welch, painstakingly, for more than 20 years, built the foundation of GE, then its rooms, its roof and finally completed a remarkable turnaround. This took patience, time and years.

When we don’t get the promotion we crave, or we fail to get what others get, we are surprised. Could it be because the house we built doesn’t have strong foundations or good materials? It’s not just last year’s performance or last week’s deal that counts it is your cumulative effectiveness on a daily basis.

So, how does one ensure that you are effective daily? Based on our research, it requires an equilibrium of action and reflection. While most leaders are biased towards action, the best leader balances contemplation and action, creating daily solitude for effective action.

Ineffective leaders

Most leaders say the resource they lack most is time. But if you really observe managers for a day, you will see them rushing to meetings, constantly checking their Blackberry, dodging fires, believing they are attending to important matters.

For 10 years, Bruch and Ghoshal observed behaviours of busy managers, and their conclusions: 90% of managers squander their time in all sorts of ineffective actions and activities. A mere 10% of managers spend their time in a committed, purposeful, and reflective manner. These 10% are usually classified as great leaders.

Worst still, psychiatrist John Diamond found that 90% of people “hate their work.” They come to work to punch their time clock and can’t wait to go home. The difference between leaders who love their jobs and those that don’t they take time daily to re-energise themselves and focus through reflection.

Reflection

The practice of reflection goes back centuries and is rooted in numerous institutions including the Japanese samurai. Ben Franklin, one of my leadership heroes, had a rather systematic approach to reflection, which was a fundamental part of his daily life. He developed a list of 13 virtues and each day he evaluated his leadership relative to these virtues.

A sincere examination of ourselves is never easy. It involves the willingness to face and acknowledge our mistakes, failure and shortcomings. Albert Schweitzer, Nobel Prize winner, believes reflection in life is critical to leadership as it allows you to take into “account what you have neglected in thoughtlessness.”

Interestingly, a key step in the Alcoholics Anonymous programme asks participants to make a probing and courageous moral inventory. Steve Jobs went to India to reflect prior to starting Apple.

In business, reflection provides an opportunity to consider the ramifications of the services they provide and how to keep raising the bar. Business grows when they look within.

So, what does one achieve by reflection and contemplation? Productive action relies on a combination of three traits:

1. Focus the ability to zero in on an objective and see the task to completion

2. Energy the vitality that comes from concentrated personal commitment.

3. Learning the ability to correct past mistakes and improve oneself

Focus without energy results in lethargic execution or burnout. Energy without focus leads to aimlessness or artificial busyness. And not learning from your mistakes ensures you repeat them.

All three pieces can only be obtained through reflection. Procrastinators are usually people with low levels of energy and focus. Leaders with high focus but low energy never inspire and generally end up ostracising the troops. Managers with high energy but low focus confuse their employees with chaotic activity.

Reflective managers are purpose-driven with high energy levels, learning from their mistakes. They start their day in reflection to ensure purposeful execution and action.

Focus

Confucius once said, “A man who chases two rabbits catches neither!” In Star Wars Episode 1, Qui-Gon says to the young Jedi Anakin, “Always remember, your focus determines your reality.” There is an ounce of truth in that Jedi wisdom. A focused person usually attains his/her goals.

At the end of a tiring day, if we focus on how tired we are, generally we will remain tired and end up vegetating in front of the TV set. If we re-focus the mind from being tired to needing to be healthy, there is a bigger likelihood we will exercise.

It is easy to stray with all the distractions, TV, Internet and mobile devices that we have today. These distractions can lead us off-tangent, stealing our focusing power. Reflection corrects that.

Energy and passion

Reflection generates passion and energy. Energy comes from passion. Passion is self-generated as you can motivate yourself to be excited about what you do.

Author Bill Strickland writes: “Passions are irresistible. They’re the ideas, hopes, and possibilities your mind naturally gravitates to, the things you would focus your time and attention on.”

Strickland believes that only by following your passion will you unlock your deepest potential. “I never saw a meaningful life that wasn’t based on passion. And I never saw a life full of passion that wasn’t, in some important way, extraordinary.”

Learning from mistakes

Reflection allows us to learn from mistakes. We all make mistakes I have done so spectacularly at times. We have all been in situations where things don’t go exactly to plan. But how often do we take the time to sit down to reflect on where it all went wrong?

Plato’s great words “know thyself” implies that a lifetime of self-investigation is the cornerstone for knowledge. John Dewey states, “We do not learn from experience, we learn from reflecting on experience.”

In fact, the Kolb Learning Cycle, is based on the belief that learning for real comprehension comes from a sequence of experience, reflection, abstraction, and action. All learning can come only through reflection.

Check your attitudes daily

Living an extraordinary life is done internally through the daily positive alignment of your attitude. Your attitudes and the choices you make today build the house you live in tomorrow. Build wisely! Build with commitment, pride, joy, love and passion.

Your attitude is contagious and sets the mood for those around you. Your employees get excited when you are excited. They are energised when you are.

Plato opened up The Academy in Athens at the age of 40, when life expectancy was 36. He ran this first university, training Aristotle and others, until he was 80. Pursuing focused positive dreams arms one with high energy and leads to an extended, rewarding life.

I don’t have time to think!

This is a pretty common reaction: I don’t have time to reflect.

Which begs the question: Do you have time to make the same mistakes over and over again? Or to remain unfocused, running around like a headless chicken? Or lack energy to fulfil your dreams?

I remember an old boss once told me that I was not paid to sit around and think. On hindsight, that was probably the worst advice I received. Leaders should spend at least a quarter of their time thinking about the future of their company and reflecting on the past. It may seem ludicrous to spend time reflecting but “real work” can only be done right when you know where you are going and have the energy to get there.

Final thoughts

If we could do things over, we probably would do many things differently. And better. But the problem is, we cannot go back. We are just like the construction worker. Each day we hammer a nail, place a board, or erect a wall in our career, family and lives. Are you doing it with focus and energy? Are we improving ourselves by learning from our mistakes?

If the fire in our eyes has diminished and we are going through life in auto-pilot, with the joy of life seemingly leaked out, it is time to take stock of life and reflect.

Socrates, Ben Franklin and most great leaders believed that reflection led to a productive and fulfilling life. And don’t say you don’t have time. After all, as Buddha aptly puts it, “All that we are is the result of what we have thought.”

Roshan Thiran is CEO of Leaderonomics, a social enterprise passionate about transforming the nation through leadership development. For more information on leadership programmes for your organisation or youth camps for your kids, call +60122006045 or login to www.leaderonomics.com

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