Recently, lots of attention is given to the functions and roles of auditors around the world. This fact is presumed to be the case for at least in Malaysia after the legal battle saga between one of the listed companies against its external auditor. In this case, the Serba Dinamik is suing KPMG, the auditor, for RM4 billion against the claimed loss and damages. The legal battle consequently led to the resignation of KPMG as the company’s external auditor.
Around the world, there are examples of so many cases involving the auditors – be it due to sanctions by the regulators or legal action taken by stakeholders. To quote a few, they are as follows:
- Legal action against EY by Wirecard’s German shareholders’ association.
- Legal action against PwC by Taylor Bean and Whitaker bankruptcy trustee.
- The case against Deloitte by Government of Malaysia on 1Malaysia Development Berhad (“1MDB”).
Let’s now understand who an auditor is and their roles in the financial reporting ecosystem.
Who is an Auditor?
In Malaysia, for a person to act as an auditor, they must be a chartered accountant as defined under the Accountants Act 1967 and approved as a licensed auditor. The approval as an approved or licensed auditor is vested with the Ministry of Finance (“MoF”). At the same time, the admission as a chartered accountant lies within the purview of the Malaysian Institute of Accountants (“MIA”). MIA is a statutory body established by the MoF with the primary function to register chartered accountants in Malaysia and regulating them.
To be an approved company auditor, a person must go through an interview with a panel of interviewers from the following organisations:
- Accountant General Department of Malaysia (“AGD”) – Chairman of the panel
- Malaysian Institute of Accountants (“MIA”)
- Central Bank of Malaysia (“Bank Negara Malaysia”)
- Securities Commission (“SC”)
- Companies Commission of Malaysia (“SSM”).
The scope of the interview questions covers both core and non-core areas. Core areas relate to the knowledge and skills generally applicable to all auditors across a broad set of functionalities. In contrast, non-core areas are the more in-depth coverage of knowledge and skills in a specific function or a particular role. AGD grants a person with an audit license to act as a company auditor once they pass the interview, and the licence is subject to renewal.
Is an Auditor responsible for the preparation of financial statements?
The answer is no – auditor does not have the responsibility regarding the preparation of financial statements. The directors of a company are responsible for the preparation of financial statements. The Companies Act 2016 (“CA 2016”) clearly states the obligation to prepare financial statements and keep the account and record of transactions in place.
For this, the CA 2016 clearly states that:
- The company directors are responsible for preparing financial statements and ensuring the company’s financial statements and/or consolidated financial statements are prepared based on the applicable approved accounting standards.
- The directors and managers of a company are responsible for ensuring they are keeping the accounting and other records that sufficiently explain the transactions and financial position of the company. It also includes the responsibility to make sure such accounting and other documents are kept and retained in a manner for them to be conveniently and properly audited.
- The directors of a public company or a subsidiary of a public company must ensure that they put in place a system of internal control to (i) safeguard the assets of the company, (ii) to give a proper account of the assets and (iii) all transactions are properly authorised and recorded to enable the preparation of true and fair view of the financial statements of the company.
In performing the above duties and functions, the Board of Directors establishes a group of management. However, the Board of Directors has the overall responsibility to approve the financial statements. They provide a statement whether, in their opinion, the financial statements prepared are following the applicable accounting standards and reflect a true and fair view of the company’s financial position and financial performance and/or the group. The Board of Directors consists of independent and non-independent directors which the majority are generally independent directors.
What are the roles, powers and duties of Auditors?
So, where does the role of auditor fit in then? One of the public’s perceptions is that companies pay the audit fee of the auditor. As such, it is an expectation for auditors to work for the company in preparing the financial statements. And because the company pays the audit fee (and has the liberty to change auditor), the auditor is expected to follow the company’s instructions.
Let’s now understand a little more about auditors’ roles, powers, and duties and whether this perception is accurate.
An auditor comes in as an independent third party to perform checks on the management functions in the financial ecosystem. Auditors report directly to the company members, and this report is known as an audit report.
What is Audit report and the type of Audit opinion?
The audit report explains the auditor’s opinion, including the basis of such opinion, whether the financial statements give a true and fair view of the company’s financial position, financial performance, and cash flows. There are four types of audit opinion provided by the auditor, depending on their findings:
|Type of Audit opinion
|Financial statements are prepared, in all material aspects, in accordance with the applicable financial reporting framework.
|Modified opinion (Qualified opinion)
|A qualified opinion is expressed when:
– The auditor concludes that, having obtained sufficient appropriate audit evidence, misstatements either individually or in the aggregate are material but not pervasive to the financial statements or
– The auditor is unable to obtain appropriate audit evidence on which to base the opinion, but the auditor concludes that the possible effects on the financial statements of undetected misstatements could be material but not pervasive.
|Modified opinion (Adverse opinion)
|An adverse opinion is expressed when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements.
|Modified opinion (Disclaimer of opinion)
|An auditor will disclaim their opinion when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effects on the financial statements of undetected misstatements, could be both material and pervasive.
An auditor will also disclaim an opinion when in an extremely rare circumstance involving multiple uncertainties, the auditor concludes that it is not possible to form an opinion on the financial statements due to the potential interaction of the uncertainties and their possible cumulative effect, notwithstanding having obtained sufficient appropriate audit evidence.
Although the audit report provided by the auditors are only a few pages, it is crucial to the users of the financial statements as to whether the financial information reported by management give a true and fair view of the company’s financial affairs.
What are the power and duties of Auditors?
As explained earlier, an auditor comes as an independent third-party from management to provide an opinion on the financial statements. As an independent third-party, the auditors have the power and responsibilities under the CA 2016, among others, to:
- Access at all reasonable times to the accounting and other records and is entitled to require from any officer of the company and any auditor of a related company such information and explanations as they desire for audit.
- To report any particular deficiency, failure, or shortcoming related to the company’s accounting and other records relating to the financial statements, including irregularity that affects a true and fair view of the financial statements. It includes if the auditor believed there had been a breach or non-observance of any provision of CA 2016.
- To report on a serious offence involving fraud or dishonesty committed by the company or its officers, if an auditor in the course of their duties as an auditor of a public company or a company controlled by a public company.
In addition, an auditor of public interest entities also has the statutory obligation to report to the Securities Commission immediately if the auditor believed that any matters might constitute a breach or non-performance of any requirement of securities laws, rules of the stock exchange.
The MIA By-Laws (On Professional Ethics, Conduct and Practice) governs the code of conduct of auditors. As required by the By-Laws, auditors should remain independent – both independence of mind and independence in appearance – from the client throughout the audit course or engagement until its conclusion.