Auditing in hard times

OPTIMISTICALLY CAUTIOUS By ERROL OH

HOW bad will things be this year? Everybody has some thoughts on that, but nobody really knows, of course. But if you’re thinking of turning to the accountants and auditors for some reassurance and optimism amid the gloom, you’re definitely barking up the wrong tree.

The fact is, this fraternity is already bracing for the worst and is calling upon members to be on the lookout for signs of trouble as they carry out their work.

On Dec 28, the International Auditing and Assurance Standards Board (IAASB), the New York-based independent standard-setting body, issued a press release to draw attention to the challenges that accounts preparers and auditors currently face.

“The global economy continues to experience difficult conditions as the effects of the financial crisis for example, on corporate cash flows and access to credit persist. Volatility in capital markets, and issues including measurement and disclosure of exposures to sovereign debt of distressed countries, continue to create uncertainty,” says the board.

“The impact of these issues and uncertainty has wide-ranging financial reporting implications that often extend beyond national borders.”

The IAASB points out that such conditions make it challenging for management of entities, those charged with governance, and auditors to do their jobs.

According to the board, among the tough aspects of this groups’ responsibilities are assessing an entity’s ability to continue as a going concern and making relevant disclosures in the financial statements and auditor’s report.

(In accounting, the going-concern concept assumes that an entity will continue operating indefinitely. Therefore, its accounts are prepared accordingly and there’s no need to reflect the possibility that the entity will soon grind to a halt and its assets sold off.)

The board reminds auditors of the requirements of the International Standards on Auditing (ISAs). It adds that in every assignment, an auditor must weigh whether it’s appropriate for the management to use the going-concern assumption.

Said IAASB chairman Professor Arnold Schilder: “Difficult economic conditions give rise to many important audit considerations, but none more important or more difficult than evaluating management’s assessment of an entity’s ability to continue as a going concern and determining the appropriate auditor reporting in the circumstances.”

What’s interesting is that the board has asked auditors to refer to a three-year-old document titled Audit Considerations in Respect of Going Concern in the Current Economic Environment.

“While this Audit Practice Alert was released in context of the 2008-2009 credit crisis, many of the matters addressed in it are equally relevant today,” said Schilder.

“For example, an entity may be experiencing a decline in its financial health, or may have material uncertainties arising from direct or indirect exposures to sovereign debt of distressed countries. Auditors are therefore encouraged to review the Alert and, importantly, the relevant requirements in the ISAs.”

On Wednesday, the Malaysian Institute of Accountants (MIA) came out with a circular that’s largely based on the IAASB press release.

Says MIA executive director Ho Foong Moi in the circular: “Auditors in Malaysia similarly should take cognisance of the currently-challenging global economy and accordingly must remain alert throughout the audit to identify and critically examine evidence of events or conditions that may exist nationally or globally which may cast significant doubt on an entity’s ability to continue as a going concern.

“Auditors must continue to exercise professional scepticism and judgment in evaluating financial-statement disclosures and the implications for the auditor’s report when a material-uncertainty exists relating to events or conditions that, individually or collectively, may cast significant doubt on the entity’s ability to continue as a going concern.”

So, the message is clear these days, auditors have to be more questioning about the standard-management assumption that a business is in a position to go on and on. After all, which management will readily admit that the entity is reaching the end of the road?

The truth is, many businesses fail, even in the best of times. And when the economies and industries go through rough patches, it’s harder to hide flaws in business models and weaknesses in how businesses are run. And when this happens, many people depend on the accountants and auditors to raise the red flags.

Therefore, the huge economic uncertainties we’re experiencing now are as much a test of the profession’s alertness and integrity as they are a test of the businesses’ strength and resilience.

Executive editor Errol Oh didn’t like tests when he was in school and that hasn’t changed. But now he at least recognises that testing serves a purpose.

Big Four auditors under pressure

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Big Four auditors under legal, EU pressure ; Authorities considering rules to break them up!

By Dena Aubin and Huw Jones NEW YORK/LONDON | Wed Sep 28, 2011

(Reuters) – The “Big Four” auditors face possibly their biggest shakeup since the Enron scandal as European authorities consider rules that could force them to break up, while the firms also are confronting multibillion dollar suits emerging from the subprime crisis.

The European Commission, according to a draft law seen by Reuters on Tuesday, is proposing that auditors be banned from providing consulting services to companies they audit, or even be banned altogether from consulting, a fast-growing business.

EU Internal Market Commissioner Michel Barnier is due to publish the draft in November, targeting what he sees as a conflict of interest when auditors check the books of the same companies from which they reap lucrative consultancy fees.

Leading potentially to break-ups, a ban on consulting would be the most punitive measure yet taken by regulators against the world’s largest auditors — Deloitte DLTE.UL, PwC PWC.UL, Ernst & Young ERNY.UL and KPMG KPMG.UL.

On another front, Deloitte was sued on Monday by a trust overseeing the bankruptcy of Taylor, Bean & Whitaker Mortgage Corp and one of its units claiming a combined $7.6 billion in damages. It is one of the largest lawsuits stemming from the 2007-2009 credit crisis.

Though auditors have been successful at winning dismissals of several crisis-related lawsuits, legal experts said some legal defences used by auditors in the past may have some holes when applied to the Deloitte case.

Deloitte has said the legal claims are “utterly without merit.”

The Big Four review the financial books and records of most of the world’s large corporations. The firms dodged a bullet during the era of the Enron and WorldCom frauds when U.S. regulators stopped short of an outright ban on consulting.

The 2002 Sarbanes-Oxley audit industry reform laws limited the types of consulting services that auditors can provide to companies they audit, but the post-Enron laws left auditors free to pursue one another’s clients for consulting work.

STRICTER MEASURES

The EU has been considering stricter measures since auditors gave clean bills of health to many banks that suffered debilitating losses during the credit crunch.

Auditors, which are privately held, do not disclose their insurance coverage or reserves held for legal awards, though most have been able so far to absorb the legal penalties stemming from the financial crisis.

According to Audit Analytics, the Big Four auditors have been named as defendants in at least two dozen class action cases stemming from the credit crisis through July 2011.

“There is a point at which the reputational damage combined with large judgments can do significant damage to their operations,” said Andrea Kim, partner at Diamond McCarthy law firm in Houston.

It is unlikely, however, that any of the Big Four firms would be allowed to fail, given their role in auditing most of the largest companies in key markets, she said.

MONEY-MAKING ENTERPRISE

“You can safely assume that before we reach that level, what you’re more likely to see is some legislative action,” she said.

Sarbanes-Oxley was enacted after the disastrous meltdown of Enron auditor Arthur Andersen, which had been the fifth of the Big Five audit firms. Sarbanes-Oxley actually helped the remaining four firms by creating more rigid requirements and auditing work for them.

“The biggest beneficiary of Sarbanes-Oxley was the Big Four,” Kim said. “It’s just a giant money-making enterprise.”

The measure being considered in the European Union would be far more stringent. In addition to potentially forcing auditors to split off their consulting businesses, it might include a requirement that auditors be “rotated,” or changed, every nine years, forcing them to give up some of their best clients.

Another element of the draft includes the introduction of “joint audits,” so the Big Four would share auditing work with smaller rivals.

A ban on consulting would be especially damaging now, as the auditors have been furiously expanding their consulting business to offset slower growth in their core audit area.

“Breaking up the Big Four audit firms would make them more susceptible to be taken over by emerging Chinese firms,” a UK audit official said on Tuesday on condition of anonymity due to the sensitivities involved.

Barnier’s spokeswoman said he had made it clear that the audit sector displayed clear failings during the crisis, giving banks a clean bill of health just before they were rescued.

Talents on the move

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Local accountants attracted by foreign greener pastures

By LIZ LEE lizlee@thestar.com.my

KUALA LUMPUR: Despite unwavering interest in accountancy courses at universities and colleges, mid-tier accounting and auditing firms are finding it difficult to hire and retain their accountants.

The problem: the outflow of local talents to foreign “greener pastures”.

Baker Tilly International chief executive officer and president Geoff Barnes told StarBiz that something needs to be done about this, as “a strong audit profession underpins an economy with good corporate governance, a strong capital market and an economic environment that can cross borders.”

Barnes said the accounting profession has always demanded the brightest of people globally and that good firms have always had this “war for talent, because we are all looking for the best people”.

Barnes (left) and Heng stressing on the importance of retaining accounting talents.

Local member firm, Baker Tilly Monteiro Heng (BTMH) chief executive partner Heng Ji Keng said many Malaysian accounting graduates see better opportunities in Hong Kong, Shanghai, Shenzhen, Singapore and Australia.

Heng added that many graduates left mainly due to the salary disparity. To counter this, he said firms needed assistance from the Government as “a word from the Government is better than a thousand words from practitioners”.

“We need to slowly bridge the gap between the salary we pay here and that offered in the countries attracting our talents. We need assistance from the regulators to impress upon clients that low fees also affect the quality of an auditing job,” Heng said.

A fresh graduate can earn up to RM100,000 per annum in China, around RM85,000 per annum in Singapore while Australian firms pay about RM160,000 per annum. Locally, they would earn about RM30,000 only.

SJ Grant Thornton (SJGT) managing partner Datuk Narendra Jasani said an estimated 500 accounting graduates out of 1,500 from local universities leave the country every year.

Both firms, BTMH and SJGT, said the Government could further benefit the country’s accounting profession by liberalising immigration policies.

Heng said the many foreign students studying here could be a good source of accountants for local firms, provided the Government revises the related immigration restrictions.

“We must acknowledge their potential and train them to become qualified professional accountants,” he said.

Both Heng and Jasani suggested that the Government could look into giving foreign students a work permit of three to four years after their studies.

“To avoid disheartening our Malaysian accountants, a quota could be set for firms to employ no more than 20% foreign accountants,” Jasani further suggested.

Heng pointed out that another turn-off for young accountants to begin their career here is the difficulty in getting a licence to practise.

“The accountants have to go through about a decade of university education and training, topped off with a scrutinising interview that tests them on the technicalities of the industry before the Finance Ministry issues a licence,” Heng said.

Specifically, Malaysian accountants need three years for a university degree, three years of working experience, another three years of post-Malaysian Institute of Accountants membership and an interview to determine whether they would qualify for a licence. The tedious process and no guarantee of getting a licence to practise has become a deterrent to young accountants when embarking on their careers.

“We also have to change work procedures. One aspect is to change the audit methodolgy no more ticking and checking all the time but more thought-processing, overviews and comparative analysis which is more suited to the younger generation,” SGJT’s Jasani said.

Grant Thorton International chief executive officer Ed Nusbaum said the rapid economic growth and expansion in the entire Asia-Pacific region has caused the shortage of talent.

“The demand is greater than the number of students graduating from universities and qualified experienced talent within the region. Whether you are talking about Malaysia, China or India, we need to attract people to the accounting profession,” he said, adding that dynamic firms also contributed to attracting young accountants.

“Being part of a growing organisation makes (one’s career) interesting and employee retention is better because people see opportunities,” Nusbaum concluded.

Get to know the auditors

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OPTIMISTICALLY CAUTIOUS By ERROL OH

There’s a price to pay for taking audit quality for granted.

In a consultation paper released last October, the European Commission (EC) observes: “While the role played (in the financial crisis) by banks, hedge funds, rating agencies, supervisors or central banks has been questioned and analysed in depth in many instances, limited attention has been given so far to how the audit function could be enhanced in order to contribute to increased financial stability.”

This so-called Green Paper, titled Audit Policy: Lessons from the Crisis, solicited responses to questions that were designed to help the EC figure out how to improve the European audit market. However, many of the issues raised are applicable in most other parts of the world.

Then, in January this year, the New York-based International Auditing and Assurance Standards Board (IAASB) came out with a thought piece called Audit Quality: An IAASB Perspective. This publication too sees a connection between the financial crisis and the auditors.

“The turbulent events of the global financial crisis have highlighted the critical importance of credible, high-quality financial reporting. They have also demonstrated the importance of considering the role of audit quality in the broader context of quality financial reporting.

Achieving quality financial reporting depends on the integrity of each of the links in the financial reporting supply chain,” wrote IAASB chairman Professor Arnold Schilder.

“As one of those links, the external audit plays a major role in supporting the quality of financial reporting around the world, whether in the context of the capital markets, the public sector or the private or non-public sector. It is an important part of the regulatory and supervisory infrastructure, and thus an activity of significant public interest.”

Naturally, the enforcement agencies sometimes have a more severe view on how the auditors have contributed to the crisis. Last December, the New York attorney general sued Ernst & Young, the longtime auditors of Lehman Brothers, whose application for bankruptcy protection in September 2008 is considered one of the triggers of the crisis. The lawsuit alleged that the Ernst & Young helped Lehman Brothers engage in a “massive accounting fraud”.

Another Big Four firm, PricewaterhouseCoopers (PwC), also had to endure the harsh glare of publicity recently in the aftermath of a large corporation’s downfall. In this case, the company is India’s Satyam Computer Services, whose chairman confessed that the IT service provider’s accounts had been falsified.

Last month, the United States’ Public Company Accounting Oversight Board (PCAOB) announced a settled disciplinary order against five PricewaterhouseCoopers International firms based in India. Two of those firms were slapped with a US$1.5mil penalty.

This is in addition to a US$6mil penalty imposed by the Securities and Exchange Commission (SEC) against the five firms. The combined $7.5mil penalty imposed in this matter is the largest that the SEC and PCAOB have assessed against any registered foreign accounting firm.

On May 16, the IAASB issued a consultation paper titled Enhancing the Value of Auditor Reporting: Exploring Options for Change. “The purpose of this international consultation is to determine whether there are common views among key users of audited financial statements and other parties to the financial reporting process about the usefulness of auditor reporting, and to explore possible options to enhance the quality, relevance and value of auditor reporting,” the board explains.

Clearly, now is as good a time as any to have discussions on the importance of the work of auditors. The question is, are Malaysian investors participating in this dialogue? Going by how shareholders are generally passive about the appointment of auditors of listed companies, the answer can only be no.

For that matter, when was the last time we hear minority shareholders openly and vigorously questioning the management and board’s choice of auditors? It’s standard for an AGM agenda to include the re-appointment of the auditors and the authorisation of the directors to fix the auditors’ remuneration. Year in and year out, the shareholders at the AGM will dutifully pass such resolutions on the assumption that the directors and the auditors are doing what they’re supposed to be doing when it comes to ensuring audit quality.

The average minority shareholder of a listed company probably doesn’t even know which firm audits the company. There’s this dangerous perception that all auditors are more or less the same, and that it’s not up to the investors to demand for audit quality.

There are several questions that shareholders (and investors, in general) should be asking about the auditors and their selection by the management.

How were the auditors picked, and how did the board satisfy itself that it had found the best firm for the job? Who is the partner of the firm who will oversee the audit and how is he qualified to handle that role? Do the audit fees reflect the extent of work required? Bear in mind that in audit, a bargain is not always a good thing. If the same firm has been the auditors for a long time, is there a need to consider a change? How do the auditors ensure independence?

Yes, these are rather dull and procedural areas, but isn’t it better to tackle these questions now than after the breakdown of a company?

Executive editor Errol Oh has said this before and he’ll say it again many people don’t understand what is it that auditors really do.

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
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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.

Another Malaysians best in the world

Duo score highest in ICAEW exam

Duo score highest in ICAEW exam

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PETALING JAYA: Two Malaysians shared top honours in the internationally recognised Institute of Chartered Accountants in England and Wales (ICAEW) Financial Accounting paper in 2010.

Their wins brought the number of prizes awarded to Malaysians last year to three. In June, An Li Fong had scored the highest marks in the Audit and Assurance examination. Kwong Sze Hui and Teh Qian Yuen, both 20, scored the highest marks in the Financial Accounting paper, ahead of almost 900 students across the world and 64 in Malaysia.

Sponsored by the world’s fifth largest accountancy and advisory services network BDO, Kwong and Teh were two of the top accounting students studying for the leading Accredited Chartered Accountant (ACA) qualification in Malaysia with Sunway-TES.

A total of eight prizes have been won by Malaysians since 2004, ICAEW said in a statement yesterday.

Number crunchers: Gan (centre) posing with the ICAEW examination joint first place winners Teh (left) and Kwong.

Kwong and Teh garnered joint first place and the Spicer and Pegler prize with their BDO colleague Sam Moore of Huddersfield, Britain.

BDO Malaysia managing partner Datuk Gan Ah Tee lauded the duo’s achievements as a reflection of their drive to become global accounting professionals.

“They have demonstrated their commitment to excellence and this augurs well with BDO’s continued strategy to support human resources development.

“Our intention to provide opportunities for young, deserving Malaysian students to become global professionals through the BDO sponsorship programme continues to be well on its way,” Gan said.

ICAEW is an international accountancy body which provides training and support to over 134,000 members in 160 countries.

It is also a founding member of the Global Accounting Alliance with over 775,000 members worldwide.

Ernst & Young accused of hiding Lehman troubles

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A view of the Ernst & Young headquarters in New York December 20, 2010.

Credit: Reuters/Lucas Jackson

By Grant McCool

NEW YORK (Reuters) – Accounting firm Ernst & Young was sued by New York prosecutors over allegations it helped to hide Lehman Brothers’ financial problems, in the first major government legal action stemming from the Wall Street company’s 2008 downfall.

The civil fraud case contends that Ernst & Young stood by while Lehman used accounting gimmickry to mask its shaky finances. The lawsuit says Lehman ran “a massive accounting fraud,” but it did not name as defendants any former top executives at the investment bank whose September 2008 collapse helped spark the global financial crisis.

The lawsuit seeks more than $150 million in fees that Ernst & Young received from 2001 to 2008 as Lehman’s outside auditor — less than 1 percent of its global annual revenue — plus other unspecified damages.

The lawsuit was filed by New York Attorney General Andrew Cuomo. People close to Cuomo said one factor in bringing the case was that he knows that the U.S. Securities and Exchange Commission already is investigating former Lehman chief Richard Fuld and other former top Lehman executives.

Cuomo “wants to go after the one party he knows isn’t being sued,” said John Coffee, a professor of corporate law at Columbia University.

In a statement on Tuesday, Ernst & Young said it intended to “vigorously defend” the lawsuit.

Lehman’s bankruptcy occurred in the midst of a global financial crisis and was not caused by any accounting issues, the company said.

“Lehman’s audited financial statements clearly portrayed Lehman as a highly leveraged entity operating in a risky and volatile industry,” the accounting firm said.

Legal and accounting experts said earlier they expect that Ernst & Young will try to settle the case rather than engage in a long court fight.

“It tends to be lot less expensive for both parties to resolve it through settling and getting it behind them,” said Bruce Pounder, an expert on accounting ethics and president of Leveraged Logic, an Asheville, North Carolina, firm that provides continuing education to accountants.

He said he does not see significant fallout for Ernst & Young in terms of its viability as an audit firm.

Ernst is the third-largest by revenue of the “Big Four” U.S. accounting firms, behind Deloitte and PwC.

Cuomo filed the lawsuit days before he is to leave office and become governor of the state in January. A spokesman for incoming attorney general Eric Schneiderman declined to comment.

REPO 105

Cuomo said in the civil complaint that for more than seven years leading up to Lehman’s bankruptcy, the investment bank engaged in fraudulent accounting transactions that Ernst & Young explicitly approved. The case focuses on an accounting technique known as Repo 105, which temporarily removed as much as $50 billion in assets from the balance sheet in 2008.

“This practice was a house-of-cards business model designed to hide billions in liabilities in the years before Lehman collapsed,” Cuomo said in a statement.

The lawsuit comes nine months after a court-appointed examiner in the Lehman bankruptcy concluded that Ernst & Young was “professionally negligent” in its audit duties.

The report by examiner Anton Valukas also said that Lehman could also have claims against Fuld and former chief financial officers Chris O’Meara, Erin Callan and Ian Lowitt for negligence or breach of fiduciary duty related to the use of Repo 105 transactions.

PAST CASES

The case, filed in New York state Supreme Court, is one of the biggest legal cases involving an accounting firm since Arthur Andersen was criminally indicted in 2002 over the Enron scandal.

The Ernst & Young case is a civil lawsuit, while Andersen was charged criminally and later convicted of obstruction of justice for its role in Enron’s collapse.

The U.S. Supreme Court reversed the Arthur Andersen conviction in 2005, but the firm was virtually out of business by then — and its reputation was shattered.

Andersen’s demise reduced the number of big accounting firms that audit most large companies globally to just four, including Ernst & Young. Since then, prosecutors have been wary of charging entire firms with fraud because of worries that another audit firm collapse would harm the financial system.

In one major settlement, KPMG agreed in 2005 to pay $456 million to settle a federal investigation into questionable tax shelters, avoiding a potentially crippling criminal indictment. The firm agreed to make internal changes and to be overseen by an outside monitor temporarily as part of the pact.

In 1999, Ernst & Young agreed to pay $335 million to shareholders of Cendant Corp to settle a case stemming from an accounting scandal at the travel and real estate service company. Ernst & Young said at the time that it was misled by Cendant and had done nothing wrong.

London-based Ernst & Young employs about 140,000 people. It had revenue of $21.3 billion in the fiscal year ended June 30.

(Reporting by Grant McCool, Dena Aubin, Scot J. Paltrow and Dan Levine. Editing by John Wallace, Robert MacMillan and Matthew Lewis)

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Accountants have vital, more strategic role in value creation

Tuesday November 16, 2010

More strategic role for accountants

By ELAINE ANG
elaine@thestar.com.my

This is due to ethical integrity and accountability becoming increasingly vital

KUALA LUMPUR: Finance professionals are expected to take on a more strategic role in corporates in the future with ethical integrity and accountability becoming increasingly important, said Association of Chartered Certified Accountants (ACCA) chief executive Helen Brand.

“The core technical skills of accountants are recognised and valued but what really matters going forward is the ethical dimension of the profession and the rounded sustainability that professional accounting can bring to business and economies globally.

“In particular, we are looking at issues around risk management and internal control. Businesses are focusing more on this and see professional accountants providing value in that sphere,” she told StarBiz.

Brand said that according to ACCA’s recent report, The value creation model for business: 2010 and beyond, business leaders believed that accountants helped to improve the ethical standards across an organisation.

Helen Brand says business leaders believe that accountants help to improve the ethical standards across an organisation.

Some 58% of the respondents believe this guardianship role will become more important in the future.

The research also noted that the role of the finance professional was now more visible and more responsible since the global financial crisis and this visibility and responsibility would grow in the future.

In addition, business leaders expect accountants to bring greater oversight and supervision in an increasingly global regulatory environment and help organisations manage risk more effectively.

Two-thirds of the respondents placed risk management and internal control among the top skills required of accountants going forward.

The survey, which was launched at the World Congress of Accountants 2010 last week, sought the opinions of over 500 senior business people in nine countries.

Brand said one of the ways that accountants could add value was by looking at the investment and financial aspects that would provide a sustainable future to businesses.

“Another issue is governance. Many chief financial officers (CFOs) have a higher profile in the boardroom now and this adding of sound financial accounting advice and good governance framework will help businesses develop,” she said.

Brand said accountants had been taking on a strategic role for a long time and it was basically the recognition of that role and the integration of the financial and strategic aspects that would be emphasised going forward.

“CFOs are being brought more firmly into the centre of decision-making.

“We are seeing more CFOs becoming CEOs in many markets. This used to be a myth as CFOs do not have the appropriate profile to become the CEO,” she said.

Brand said accountants would play a critical role in ensuring that the world would not be hit by the same problems that resulted in the recent financial crisis again and that the right financial information and strategies were pursued.

“We see it as a golden age for accountants going forward, where their value will be truly understood,” she added.

On the roles of accountants in the next decade, Brand sees the profession becoming more dominated by women.

“The majority of new members in ACCA are female. Research has shown that if women entered the boardroom then there is diversity of approach that strengthens the business,” she said.

By ELAINE ANG
Elaine@thestar.com.my

Panellists: They are moving away from traditional accounting practices.

KUALA LUMPUR: Accountants have an important role in assisting their organisations create value and sustain long term growth, industry experts said.

Panellists at the World Congress of Accountants 2010 plenary session, entitled Accountants: Sustaining Value Creation in the Borderless Economy, said accountants were moving away from traditional accounting practices and playing a more active strategic role in their organisations and in turn help economic growth.

China’s Ministry of Finance vice minister Dr Wang Jun said the global accountancy profession should constantly play a more active role in driving economic recovery and growth.

Dr Wang Jun

“In doing so, the profession continuously creates value for society,” he said at the session yesterday.

He said accountants and accounting bodies globally should bring fuller into play the supervising and alerting role to promote economic recovery and assist the economy to meet challenges post crisis.

In addition, Wang said the International Federation of Accountants (IFAC) should actively participate in international economic affairs and help the accountancy profession to make greater contributions to the world economy.

“Accountants in all jusrisdictions must further strengthen cooperation in the accountancy profession and improve the competitiveness of the accounting industry,” he said.

Khazanah Nasional Bhd managing director Tan Sri Azman Mokhtar highlighted three key points – trust, relevance and leadership – to enable accountants to create value sustainably in their organisations and the economy.

“We need to go back to the basics and rebuild the trust in the profession. From the investor standpoint, we need information that is relevant, reliable and understandable.

“Once we regain the trust, then we can look at how to chart the way forward,” he said.

London School of Economics (Department of Accounting) Chartered Institute of Management Accountants (CIMA) professor of accounting and financial management Professor Wim A. Van der Stede said that according to a global survey by CIMA, momentum towards greater responsibility was likely to continue for accountants the world over although the degree might differ geographically.

“The results underscore that there remains significant pressure for financial professionals to move into roles that add more value to their organisations and broaden their responsibility beyond traditional accounting tasks.

“Keeping the numbers in order do not span the entire extent of an accountant’s reach as major corporations need financial professionals who understand risk, financial instruments and other complex functions and be able to offer strategic guidance to executives and enter boardrooms as peers,” he said.

AICPA certified public accountant Olivia Faulkner Kirtley said it was key to embed sustainability into the DNA of a company.

“The accounting profession has a role to play. They need to present the business case to senior management, to help develop a reporting system and processes and influence the mindset of the people in the organisation,” she said.

The session was chaired by IFAC president Robert Bunting.

Meanwhile, at a press conference later, Bunting said one of the key challenges for the accounting profession post financial crisis was a greater examination of the role of the accountants and its future.

On fair value accounting and its usefulness, Kirtley said it was the accountants’ role to help investors gain an understanding of it and help investors to make decisions.

Van der Stede said the important role for an accountant was to produce reliable information in a fair value environment.

Azman had questioned the relevance of fair value accounting in today’s reporting system.— ENDS-

The Malaysian Institute of Accountants is split – what’s next?

By ERROL OH
errol@thestar.com.my

PETALING JAYA: The outcome of the Malaysian Institute of Accoun-tants’s (MIA) AGM on Saturday indicates that the gap in the membership may be widening between small accounting firms on one side, and the rest of the fraternity on the other. The former are dissatisfied with the profession’s regulatory framework and, judging from the voting at the AGM, their call for change is gaining momentum.Those at the meeting rejected four resolutions, endorsed by the MIA council, to raise the annual membership subscriptions and the annual practising certificate fee. Similar resolutions failed to secure enough votes at last year’s AGM.

On the other hand, six motions that had been proposed and seconded by two members got the nod. These motions were essentially gestures of protest against certain rules that govern the supervision of accounting practitioners.

Christina Foo says it’s up to the council to recommend action.

Newly-elected MIA council member Subramaniam Sankar, a senior audit partner in the accounting firm of HALS & Associates, had proposed all six motions. The seconder was Chan Kah Kooi, also with HALS & Associates.

Subramaniam told StarBiz that the next step for the MIA membership and the Government was to determine whether the institute should be a regulator or a professional association.

“If it is decided that the MIA is to be a regulatory body, then we need another professional association to represent our interests and to provide technical expertise. We can’t leave it to the international accounting bodies. We should have a Malaysian organisation,” he added.

Set up under the Accountants Act 1967, the MIA’s chief tasks are to regulate and develop the accountancy profession in Malaysia. It is in fact a hybrid organisation, embracing the roles of both a regulator and a professional body.

MIA vice president Christina Foo acknowledged that by voting against the resolutions and for the motions, the members represented at the AGM had spoken.

“It’s now for the council to deliberate on these matters and to recommend the appropriate actions. If we need to follow up with the other authorities – and these issues do involve them – we will liaise with them,” she said.

According to Foo, the council meetings for the year had been pre-scheduled and it was up to MIA president Abdul Rahim Abdul Hamid to call for an emergency meeting if necessary.

At the start of the AGM in Kuala Lumpur, which lasted over four hours, a member questioned Abdul Rahim’s eligibility to chair the meeting, alleging that the president was not independent.

When members wanted to put this to a vote, Abdul Rahim instead stepped aside and Foo took over.

The dissenting mood continued when the resolutions and motions were tabled. The voting was via ballots, when it became clear that a show of hands would not go unquestioned.

One of the motions proposes that “necessary steps be taken so that all matters that affect only the rights of members in practice be voted upon only by members in practice.”

Another motion proposes that the MIA council takes steps to control the interview process for the issuing of audit licences, instead of a panel comprising various third parties and the MIA as the minority.

Subramaniam also proposed that there be a separate register for practitioners “so as to accord them with respective rights and obligations required to be in practice.”

The members at the AGM also agreed with the motion that the council should make efforts to abolish the need to renew audit licences every two years.

Subramaniam said if efforts to push for these changes through the MIA failed, it might be necessary for the practitioners to bypass the institute.

He is vice president of the Malaysian Association of Small and Medium Accounting Firms, which currently has about 50 members.

In contrast, the MIA has a total membership of almost 27,000. About two thirds of these are professional accountants in business, while a quarter of this population are in public practice.

According to the MIA’s latest annual report, as at June 30, it had 2,036 member firms, including 1,356 audit firms.

Industry insiders reckoned that at least 1,500 firms could be considered small.

Cosy auditors

GOVERNANCE MATTERS

By SHIREEN MUHIUDEEN

ONE of the big questions we faced in the recent spate of annual general meetings (AGMs) is that whether companies should renew the contract or replace the audit firms. And, how does a company decide when appointing an auditor?

An auditor is supposed to be the company’s best friend, the sort that tells it what it needs – not wants – to hear, especially when the chips are down. But when listed companies in South-East Asia recently held their AGMs, these meetings exposed the annoying reality that the auditors of some of these companies have been unreliable friends.

To be sure, an auditor is in an unenviable position from the start. He is the company’s disciplinarian and so is there not only to ensure that the company complies with financial reporting standards and other best practices, but also to forewarn it of anything risky that might suddenly blow up.

These responsibilities have become even more complex in recent years, as there are now so many different industries and companies with complex structures; an audit firm needs to have sector specialists to manage the audit function effectively. One would presume that gone are the days when auditors should be able to just rubber-stamp a company’s finances.

Even so, we wonder how many auditors tell their client companies hard truths as well as red-flag their transgressions? Will they lose their clients if they push them too hard on tough issues? How far can they push their clients? Should they resign if clients stop taking their advice? From our experience, one thing is very clear: “There are auditors, and then, there are auditors.”

Recently, we reviewed a company that was supposedly recovering. We noted in our review that this company and all its subsidiaries after 10 years were still in the red as at Dec 31, 2009, and the board and management didn’t seem to know how to reverse that. We dug further and found that its share premium rose significantly over the decade because its fixed assets – primarily land for development – had been revalued.

What was very clear is that each time the land was developed and the properties sold, there were writedowns on the value of the assets. This suggested that the existing assets on its balance sheet were overvalued.

These seedy activities raise obvious questions:

● Where were its auditor’s red flags?;

● What was the auditor’s advise before the writedowns?; and

● Did the auditor assess the risk sufficiently before the company revalued the land or did he just bow to its wishes?

This company also cut deals with related parties, and every year for the last seven years wrote these transactions off, which cost it millions of dollars. These losses were too large and too often to be dismissed as occasional business risks.

To get some answers, we reviewed the composition of the company’s board of directors and audit committee. We zoomed in on the audit committee as the obvious source of the oversight. It has three members, or so-called independent directors, two of whom are in their 70s, and have been on it since 2000. The third is an ex-politician who is well-connected.

While all three have had fairly successful careers, they seem to no longer be able to insist that the company desist its loss-making moves. That’s because these audit committee members must have been aware of all the company’s related-party transactions and write-offs for almost seven years.

We also compared the total audit fees paid. This company paid audit fees which were considerably lower than the average fees paid in the same sector. One wonders if the choice of the auditor was based primarily on fees and not on the best practices that the firm abides by.

We also wondered whether the audit committee discussed any of its real concerns with the external auditors. After all, the company’s annual report states that its board of directors and audit committee will meet every quarter “to acknowledge and monitor” its performance outcome, with “the counterbalance and revision” of the independent directors.

In the same report, this company also stated that it “believes in a good management system” and avowing that its directors and executives had “vision”, were responsible and had a “balance of power mechanism to ensure and monitor transparent management and equitable treatment for its shareholders.”

How can a company state all these when it is consistently losing money, does not have a single subsidiary that is profitable, indulges habitually in related-party transactions and then, consistently writes them off?

We can only wonder how its audit committee members and its other independent directors discharge their duties amid all of the above activities. For now, their profiles and records of attendance at meetings give us neither relief nor belief that they really are, as the annual report puts it, “adhering to the principles of the stock exchange for the optimal benefit of the Company”.

What is very clear to us is that the investment community should stand up and question companies that vote in auditors purely based on fees and cosy friendships.

● Shireen Muhiudeen is managing director of Corston-Smith Asset Management in Malaysia, a fund management company that makes investment decisions based on corporate governance.