By ISHUN P AHMAD
Total audit fees and salary cost have increased at a slower pace last year compared to previous years, according to the regulatory report on the sector.
The lower rates of about 4% for both audit fees and salary cost were mainly due to uncertain economic conditions, as well as continued movement of public interest entity clients away from the top 10 audit firms.
The growth in audit fees was now more closely aligned to the increase in salary cost, according to the Securities Commission Malaysia’s (SC) Audit Oversight Board’s (AOB) latest annual report.
“Further analysis revealed a drop in the average recovery rate, a measure of the extent to which time spent by the audit firms is being translated to audit fees.
“The decrease in the average recovery rate despite the growth in audit fees denoted that more time was spent on audit engagements in 2016, but was not reflected in the amount of audit fees subsequently charged to clients. Such practices may not be sustainable over a longer period,” it said.
The report, released on July 4, said while it was commendable that more time was spent to ensure audit quality was upheld, audit firms needed to also ensure that audit fees were commensurate with the time committed and work effort undertaken.
In a statement, SC said AOB will perform a deeper analysis of the data gathered over the last few years to establish key trends for audit quality in 2017, adding that the analysis aim to identify the areas of improvement and drive efforts for capacity building.
The initiative, it said, is consistent with the SC’s goal of achieving effective regulation through active monitoring and engagements with audit firms.
In the SC’s 2016 annual report, the securities regulator urged audit firms to strengthen their capacity building and improve their quality controls in order to demonstrate the importance of the value of audits and its relevance to ensuring good corporate governance.
SC highlighted that promoting reliability of audited financial statements and high quality audit practices, and addressing inspection findings of audit firms in Malaysia remain a key focus for the regulator.
“The AOB is committed to maintaining its focus and positive momentum on key areas and game changers such as the new and revised Auditor Reporting Standards as a means to drive greater transparency in auditors’ reports as well as financial reporting,” said AOB executive chairman Datuk Gumuri Hussain.
The standards will require auditors to disclose key audit matters in their reports, leading to a more informative and tailored reporting; specific to the clients’ circumstances instead of the present reporting approach consisting of standard templates or boilerplate reports.
SC said AOB has organised engagements with auditors and stakeholders prior to the adoption of these standards.
These include briefings by the UK Financial Reporting Council and International Auditing and Assurance Standards Board experts on insights and practical experience in implementation challenges in the adoption of these standards in Malaysia.
SC said it will closely monitor the auditors’ compliance in implementing the new standards through AOB’s inspection programme to identify instances of non-compliance and trends. Since 2015, the AOB has been gathering data encompassing revenue mix, human resources, training, client portfolio allocation and internal monitoring activities from the top 10 audit firms to benchmark their performance.
The annual data gathering exercise has enabled the AOB to gain significant insights into the current state of the larger firms.
SC said the inspection and enforcement will continue to remain as AOB’s core function.
“This is of utmost priority in order to protect investors and other stakeholders and to
set the tone for high quality audits. In 2016, the AOB inspected five major audit firms and seven other audit firms which collectively audited public-listed companies making up 96% of the market capitalisation of Bursa Malaysia,” it said.
SC noted that incremental improvements with the number of recurring findings reduced from previous inspections. Out of nine firms re-inspected in 2016, two firms recorded no recurring findings, while improvements were noted for the other six firms.
However, certain deficiencies in the work of auditors in relation to revenue recognition, inventory, group audits and related-party transactions remain a concern and AOB will continue to engage with the audit firms to understand the root causes of such deficiencies and monitor the remediation efforts taken by the firms on a timely basis, added SC.
AOB, established under the Securities Commission Act 1993, came into force on April 1, 2010, to promote and develop an effective audit oversight framework and to promote confidence in the quality and reliability of audited financial statements in Malaysia.