Assessing The Integrity Of Current Accounting Practices

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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 Practices

  1. 1. Assessing the Integrity of Current Accounting Practices Nik Mohd Hasyudeen Yusoff Corporate Governance Summit 2009 29 September 2009 Competitiveness Through Innovation and Strategy
  2. 2. 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
  3. 3. 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
  4. 4. 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
  5. 5. 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 1 Financial Reporting Supply Chain: reporting 1 Current Perspectives and Direction International Federation of Accountants 2008
  6. 6. Competitiveness Through Innovation and Strategy The financial reporting supply chain Player 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, ethics Enforce standards Regulators Ensure market integrity, enforcement actions
  7. 7. Competitiveness Through Innovation and Strategy The financial reporting supply chain Financial And Business Reporting Supply Chain Source: XBRL International
  8. 8. Competitiveness Through Innovation and Strategy The financial reporting supply chain
  9. 9. 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
  10. 10. Competitiveness Through Innovation and Strategy 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
  11. 11. 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
  12. 12. Competitiveness Through Innovation and Strategy 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
  13. 13. 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
  14. 14. Competitiveness Through Innovation and Strategy Stress points in financial reporting Business Oversight failure failure Governance failure Audit failure
  15. 15. Competitiveness Through Innovation and Strategy 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
  16. 16. Competitiveness Through Innovation and Strategy 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
  17. 17. Competitiveness Through Innovation and Strategy 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
  18. 18. 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
  19. 19. Competitiveness Through Innovation and Strategy The response from the accounting profession Identify Evaluate Apply Decide on Threats Threats Safeguards Engagements Self-Review Self-Interest Profession or legislation Significant? Advocacy Assurance Assurance team, firm, client Eliminate network firm? Firm’s the threats Familiarity or withdraw Internal procedures from Intimidation engagement
  20. 20. Competitiveness Through Innovation and Strategy 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
  21. 21. Competitiveness Through Innovation and Strategy 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
  22. 22. Competitiveness Through Innovation and Strategy 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
  23. 23. Competitiveness Through Innovation and Strategy Reform in the regulatory landscape
  24. 24. Competitiveness Through Innovation and Strategy 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
  25. 25. 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?
  26. 26. Competitiveness Through Innovation and Strategy 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
  27. 27. Competitiveness Through Innovation and Strategy 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
  28. 28. Competitiveness Through Innovation and Strategy Moving Forward Thoughts
  29. 29. Competitiveness Through Innovation and Strategy

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