In about 3 years, ASEAN’s AEC will come into being. Already, the globe’s business are noticing, are are already heading to the ASEAN region. Apart from that expected more business activity, the business environment under ASEAN AEC, is expected to be more complex, as it will involved multiple national level environment.
- With more business and more complex form of business, regulating the business for various compliance, is expected to become more complex. One such compliance, is in the accounting practices of businesses, which is namely the auditors responsibility.
However, in general, the quality of auditing in the ASEAN region is low. For example, the International Journal of Accounting in an article about “Audit Quality in ASEAN”, by Michael Favere-Marchesi, after collecting data from national representatives of four “Big Five” firms, and accuracy of the information was reviewed by 15 governmental and professional bodies responsible for regulating the auditing profession, says:
- Analysis of the data revealed a diverse legal environment among the ASEAN countries possibly creating a climate of differential audit quality. Many differences were observed in the competence requirements of auditors, the requirements regarding the conduct of statutory audits, and the reporting obligations. Further, audit quality in some countries is seriously compromised due to a lack of rules ensuring auditors’ independence. Finally, some of the liability regimes in ASEAN do not provide an incentive for statutory auditors to provide quality audit services.”
A financial audit, or more accurately, an audit of financial statements, is the verification of the financial statements of a legal entity, with a view to express an audit opinion. The audit opinion is intended to provide reasonable assurance that the financial statements are presented fairly, in all material respects, and/or give a true and fair view in accordance with the financial reporting framework. The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements.
Financial audits are typically performed by firms of practicing accountants who are experts in financial reporting. The financial audit is one of manyassurance functions provided by accounting firms. Many organizations separately employ or hire internal auditors, who do not attest to financial reports but focus mainly on the internal controls of the organization. External auditors may choose to place limited reliance on the work of internal auditors. Auditing promotes transparency and accuracy in the financial disclosures made by an organization, therefore would likely to reduce of such corporations to conceal unscrupulous dealings.
Internationally, the International Standards on Auditing (ISA) issued by the International Auditing and Assurance Standards Board (IAASB) is considered as the benchmark for audit process. Almost all jurisdictions require auditors to follow the ISA or a local variation of the ISA.
Financial audits exist to add credibility to the implied assertion by an organization’s management that its financial statements fairly represent the organization’s position and performance to the firm’s stakeholders. The principal stakeholders of a company are typically its shareholders, but other parties such as tax authorities, banks, regulators, suppliers, customers and employees may also have an interest in knowing that the financial statements are presented fairly, in all material aspects. An audit is not designed to provide assurance of 100% accuracy; rather it is designed to increase the possibility that a material misstatement is detected by audit procedures. A misstatement is defined as false or missing information, whether caused by fraud (including deliberate misstatement) or error. “Material” is very broadly defined as being large enough or important enough to cause stakeholders to alter their decisions. Audits exist because they add value through easing the cost of information asymmetry and reducing information risk, not because they are required by law (note: audits are obligatory in many EU-member states and in many jurisdictions are obligatory for companies listed on public stock exchanges).
- In responding to that audit challenge, a few ASEAN auditors just got together to discuss and coordinate their activity. During that discussion, a few problems and solution was highlighted. The problem, revolves around human resource problems, in developing talents, and the problem of critical thinking skill.
The following is from the Star:
Asean audit regulators need to work together prior to AEC
KUALA LUMPUR: Asean audit regulators are increasingly working together to create consistency and address industry challenges in the region.
According to Malaysia’s Audit Oversight Board (AOB) executive chairman Nik Hasyudeen Yusoff, collaboration among audit regulators is crucial to improve audit quality in the region.
Pointing to the imminent formation of the Asean Economic Community (AEC), when regional markets were supposed to be more liberalised, Nik Hasyudeen said it became even more important for regulators to work together to ensure information shared across countries is properly audited and adopts consistent standards.
In an exclusive interview in conjunction with the 2nd Asean Audit Regulators Group Forum held in Malaysia recently, Nik Hasyudeen, together with Singapore’s Accounting and Corporate Regulatory Authority chief executive Juthika Ramanathan and assistant chief executive Julia Tay, and the director of the Accounting Supervision Department of the Securities and Exchange Commission of Thailand Thawatchai Kiatkwankul, spoke to StarBiz on some of the critical issues faced by the industry.
Below are excerpts of the interview:
What are the priority issues for improving the work of audit firms in your respective countries?
Nik Hasyudeen: In Malaysia, one of the things we always emphasise is the tone set by the leadership of audit firms. We recognise that for a good, high-quality audit to be performed, the leadership must be committed.
They have to invest in the necessary resources such as human capital, and the leaders have to make sure they are independent of their clients.
Every year, we conduct inspections on audit firms and engage the larger ones to discuss critical issues facing the industry, including setting the right tone and implementing a monitoring system to ensure quality.
What we’re trying to do here is ensure that audit firms develop a very strong tone and culture on a quality that is supplemented by a sound framework of monitoring system.
All stakeholders (and not just the regulators) have a role to play in ensuring a healthy financial reporting ecosystem. Directors and preparers at company-level, for instance, have to ensure that their financial statements are prepared in compliance with the required standards.
Juthika: In Singapore, we are also looking at the tone set at the top and the emphasis on quality work.
The other area that we’re looking at is improving professional scepticism. We want to encourage greater engagement between auditors and their clients to ensure that there is better contribution to the work that is being audited.
We also put a lot of emphasis on compliance with financial statement standards, and we are looking at educating company directors on their responsibility to prepare good sets of financial statements.
Kiatkwankul: Our priorities are pretty much the same as what Juthika had just mentioned.
The audit oversight system is new for our country, but we concur with the fact that the tone at the top is very important. What do you expect to come out of the collaboration among Asean audit regulators, and what are the key issues to address?
Nik Hasyudeen: One of the main objectives is ensuring consistency among audit regulators. This is important to facilitate business, as many companies nowadays operate in more than one jurisdiction. For instance, we cannot have several different rules and definitions on the same subject.
It’s important for regulators in the region to work together, especially with the AEC coming into force in 2015.
When markets become more liberalised, and information has to be shared across countries, it becomes even more important to ensure that the financial statements are audited with the same rigour and adopt the same standards.
Juthika: We can share best practices and learn from each other the developments in each of our jurisdictions. There’s a lot of learning and sharing which we find very useful.
Sometimes, different issues surface in different countries at different points of time. By sharing with each other developing issues, it helps us to understand what is on the horizon and how to tackle it based on the experiences of other regulators.
We also play a role in trying to encourage our fellow Asean countries to set up similar oversight bodies. By getting them to participate in our workshops, they then shorten the learning curve, as they would learn what is to be expected and the issues to be overcome in the early days of setting up such a body.
Tay: In the longer term, we hope that with the larger number, we can have a bigger voice at Ifiar (International Forum of Independent Audit Regulators).
(Ifiar is a global body of regulators based in London. It currently has 44 member countries, including Malaysia, Singapore and Thailand.)
There may be certain issues that are unique to this region. We think that if we have a combined view, we can bring that to Ifiar and across the global leadership of the firms we regulate. In a way, we think that the issues we face can then be brought to a higher level of attention and the speed in which it can be addressed can be improved.
What are the most common challenges faced by the regional audit industry?
Nik: One common issue that we face in the industry, especially in Malaysia and Singapore, pertains to the availability of talent and the ability of firms to retain talent. As in many industries, having the right talent is critical because in order for a good job to be done, the firm must have good people.
Another issue that we are concerned about is the level of professional scepticism among auditors in the region. This is one thing that we’re currently discussing. We hope our auditors can exercise their professional judgement better when it comes to auditing clients’ financial statements to enhance reliability of the information given.
Tay: The point is for auditors not to take things at face value, but to probe with a questioning mind. Professional scepticism comes with experience, and therefore, we are concerned about talent. Accumulation of experience gets one to a higher level of scepticism.
Juthika: Many of the issues that the industry faces are inter-related. Professional scepticism, which is a key element of quality audit, is an important issue, but it could be linked to the talent issue.
We are concerned about whether firms here are able to retain people with the right level of expertise and experience, as the business environment here becomes more and more complex.
Talent is a critical foundation for good audit work. You must have people with the right experience and capability to support critical issues like professional scepticism to provide quality audit.
We hope that an independent survey that is being done in Singapore, Malaysia and Thailand (in collaboration with the Association of Chartered Certified Accountants or ACCA) will help firms understand why people remain or leave an audit firm, and what they should do to manage talent effectively.
What are some of the things firms can do to address the issue of talent?
Tay: From our experience, we can see how firms are trying to innovate and find new ways to improve the workflow.
For example, many firms have gone into electronic work papers to reduce manual work and save time. This is because one of the factors that drove talent away from the industry in the older days was the mundane nature of the work and the long working hours.
Another thing that we see firms trying to do is put into place a standardised methodology training so that everyone in the firm thinks consistently and people do not have to rework what another colleague has done.
Nik Hasyudeen: We need to know how to tap the female talent pool. We now have significantly more female accounting graduates than male. Firms have to be realistic in terms of the talent pool that we have.
At present, there are not many women at the higher levels of management in audit firms.
Maybe we should encourage firms to admit more women as partners to attract talent and retain experience.
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