Malaysia: Financial irregularities – who is to blame?

Increasingly auditors are held accountable when corporate fraud is detected.

A couple of months ago, a listed company in Malaysia shocked local auditors by filing a legal suit against its former directors, external and internal auditors. The company involved was Silver Bird Group Bhd. and two of its subsidiaries, which were troubled by possible financial irregularities that involved a sum of over RM100 million. Crowe Horwath, Silver Bird’s long time external auditors, were named as one of the defendants. The legal action was taken on the assumption that there was alleged negligence and breach of duty of care and/or its duties and responsibilities on the part of Crowe Horwath as external auditors. In their immediate response Crowe Horwath diminished the allegation as “frivolous in nature and without basis”. They claimed they had discharged their duties professionally and had been in fact the ones who first discovered the financial irregularities and reported them to the audit committee and board of directors.

The move to name an auditor as a defendant was believed to be the first of its kind in Malaysia although such suits have become common in countries like the United States, Great Britain and elsewhere. Those cases spotlight the roles and responsibilities of auditors. They also indicate that the profession of auditing and accountancy has become more of a challenge. As statutory auditors, we are engaged based on a scope of activities laid out under the International Standards on Auditing and Fraud Detection. Auditors do not examine every transaction and event, so there is no guarantee that all material misstatements, whether caused by error or fraud, will be detected. Auditors could have the ability to detect fraud or financial irregularities at an earlier stage with the involvement of forensic techniques, but this would require increased cost and time. A statutory audit is more of a deterrent: the longer someone perpetuates a fraud, the more indicators or red flags appear and the more likely he is to be caught.

Apart from professional knowledge, in some cases, especially involving grey areas, the auditors need wisdom, judgement and skepticism to balance cost and practicality issues against special demands and expectations of their clients. While providing professional services, they also feel obliged to assist their clients in coming up with “clean accounts”. Problems may arise when the imbalances constantly occur.

The profession is now fully committed to better meeting the needs and expectations of investors and capital markets through improving the audit quality and methodology by leveraging new, innovative technology and processes. As the demands made of auditors have been increasing, accounting standard setters also issue new standards and guidelines to improve our professionalism. But the profession itself cannot solve the problems on its own. Success will require the involvement of a large range of stakeholders inside and outside the profession, such as the reporting community, the users of business reporting and the regulators.

Conclusion
Ultimately, a successful regulatory regime will not be sufficient to ensure good outcomes. Crucially, companies need to have an appropriate culture that is focused on the companies delivering the right longterm obligations to society. The right cultures are rooted in strong ethical frameworks and in the importance of individuals making decisions in relation to principles rather than short-term commercial considerations.

Author
Kris Chan
kris.chan@ecovis.com