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Understanding the financial reporting chain and the respond of the accountancy profession in improving quality of audited financial information.
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Assessing the Integrity of Current Accounting PracticesNik Mohd Hasyudeen Yusoff
Corporate Governance Summit 2009
29 September 2009
Competitiveness Through Innovation and Strategy
Competitiveness Through Innovation and Strategy
Agenda
• The financial reporting supply chain
• Stress points in financial reporting
• The response from the accounting profession
• Reform in the regulatory landscape
• Would reporting failure occur again?
• Moving Forward Thoughts
Competitiveness Through Innovation and Strategy
The financial reporting supply chain• The accounting and auditing
practices and the accounting profession itself have been under scrutiny since the collapse of Enron in 2001
• Since then the landscape has changed in line with the development in corporate governance globally
Competitiveness Through Innovation and Strategy
The financial reporting supply chain• A business:
▫ Need to serve customers
▫ Need to compete
▫ Business environment keeps on changing
▫ Affected by global developments
▫ Stakeholders beyond shareholders
▫ Profit is the result of risk taking
Competitiveness Through Innovation and Strategy
The financial reporting supply chain• The financial reporting supply
chain refers to the people and processes involved in the preparation, approval, audit, analysis and use of financial reports. All links in the chain need to be of high quality and closely connected to supply high quality financial reporting 11 Financial Reporting Supply Chain:
Current Perspectives and Direction
International Federation of Accountants 2008
Competitiveness Through Innovation and Strategy
The financial reporting supply chainPlayer Role in financial reporting supply chain
Management Prepares financial statements
Board Provides direction and approves
Auditors Provide independent opinion
Media Disseminates financial information
Investors/Stakeholders Make economic decisions
Professionals – Valuers, Lawyers Valuation, professional opinion
Bankers, Rating agencies Corporate proposals
Standards setters and Professional bodies Set standards – financial reporting, auditing, ethicsEnforce standards
Regulators Ensure market integrity, enforcement actions
Competitiveness Through Innovation and Strategy
The financial reporting supply chain
Financial
And Business
Reporting Supply
Chain
Source:
XBRL
International
Competitiveness Through Innovation and Strategy
The financial reporting supply chain
Competitiveness Through Innovation and Strategy
Stress points in financial reporting
• Complexity of business▫ Size
▫ Geographical coverage
▫ Industry
• Application of financial reporting standards▫ Complexity
▫ Mark-to-market issues
▫ Capacity to comply
▫ Lack of infrastructure
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Stress points in financial reporting
• Tone from the boardroom▫ Not given enough priority
▫ Heavy reliance on management’s assurance without adequate oversight
• Audit committee ineffectiveness▫ Lack of expertise
▫ Blind reliance on external auditors
▫ Not enough support from internal audit
Competitiveness Through Innovation and Strategy
Stress points in financial reporting
• Failure of risk management▫ Financial reporting risks not
adequately address on timely manner
▫ Internal control break down
▫ Fraudulent behaviour not detected
• Meeting market expectation▫ Attempting to meet analysts’
expectation
▫ Avoiding consequences of enforcement actions or debt covenant
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Stress points in financial reporting
• Breakdown in auditors’ independence▫ Financial interests from cross-selling of
other services
▫ Major clients
▫ Close relationship between auditors and clients
• Quality control practices within auditing firms▫ Lack of leadership
▫ Inadequate understanding of business and risks
Competitiveness Through Innovation and Strategy
Stress points in financial reporting
•Greed!▫ Unmitigated excessive risk taking
▫ Independent directors turn dependent
▫ Executive incentives linked to performance
▫ Auditors putting business interests above professional values
Competitiveness Through Innovation and Strategy
Stress points in financial reporting
Business failure
Governance failure Audit failure
Oversight failure
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The response from the accounting profession
• “You never want a serious crisis to go to waste. And what I mean by that is an opportunity to do things you think you could not do before”
Rahm Emanuel
White House Chief of Staff
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The response from the accounting profession
• Improvement in audit standards setting process, International Auditing and Assurance Standards Board (IAASB) reconstituted in 2002
• IAASB came under the preview of the Public Interest Oversight Board in 2005
• Completed the auditing standards clarity project in 2008
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The response from the accounting profession
• Forum of Firms, which was established in 2002, is an association of international networks of accounting firms that perform audits of financial statements that are or may be used across national borders
• The obligations of members include:
▫ Maintain appropriate quality control
▫ Policies and methodologies based on ISAs
▫ Policies and methodologies conform with IFAC’s code of ethics for professional accountants
▫ Submit annual report on meeting obligations
Competitiveness Through Innovation and Strategy
The response from the accounting profession
• Improvements in ethical standards including:▫ Strengthening of the independence
requirements by using the threats-safeguards approach
▫ Auditors rotation
▫ Network firm rules
▫ Clarifying guidance on non-assurance services
▫ Relative fee size
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The response from the accounting profession
IdentifyThreats
EvaluateThreats
ApplySafeguards
Decide onEngagements
Self-Review
Self-Interest
Advocacy
Familiarity
Intimidation
Significant?Assuranceteam, firm,
network firm?
Profession orlegislation
Assuranceclient
Firm’sInternal
procedures
Eliminatethe threatsor withdrawfromengagement
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The response from the accounting profession
• Competency requirements for audit professional standard was issued in 2006▫ Knowledge content
▫ Professional skills
▫ Professional values, ethics and attitude
▫ Continuing professional education
▫ Assessment
▫ Competent requirement for engagement partner
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The response from the accounting profession
• International Standards on Quality Control▫ Leadership Responsibilities for Quality
within the Firm
▫ Ethical requirements
▫ Acceptance of Continuance of Clients Relationships and Specific Engagement
▫ Human Resources
▫ Engagement Performance
▫ Monitoring
▫ Documentation
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The response from the accounting profession
• The Malaysian Institute of Accountants has also been active in improving audit quality in Malaysia through:▫ Increased education activities on audit
quality and ethics
▫ Adopting international auditing standards
▫ Financial Reporting Standards Implementation Committee
▫ Establishment of Ethics Standards Board and Audit and Assurance Standards Board
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Reform in the regulatory landscape
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Reform in the regulatory landscape• The regulatory landscape has
changed and will continue to change such as:
▫ Incorporation of whistle blowing provisions in the securities law and company law
▫ Independent audit oversight such as the PCAOB, the Malaysian Audit Oversight Board will be established soon
▫ Making auditing standards law e.g. Australia
Competitiveness Through Innovation and Strategy
Would reporting failure occur again?• Unfortunately, the answer is
YES
• While the structure and form of governance, standards and regulation are there, it is the PEOPLE that would eventually determine whether future shocks could be avoided
• If the root cause is greed, how do we overcome this?
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Would reporting failure occur again?• Is there another way of guiding
people to perform?
• MIA published a monograph on human governance which focuses on the inside-out approach instead of parameter-driven rule-based governance
• Spiritual aspect is recognised
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Moving Forward Thoughts• Audit quality is the responsibility
of every player in the financial reporting supply chain
• If a component fails, the stress would be transferred to the next component until the chain breaks
• While regulatory reform and response from the accountancy profession has improved audit practices, the threat of future failures remain real
Competitiveness Through Innovation and Strategy
Moving Forward Thoughts
Competitiveness Through Innovation and Strategy
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