Saturday, 2 April 2011

Reliable audit opinions don’t come cheap

OPTIMISTICALLY CAUTIOUS By ERROL OH

A lot is riding on the sturdiness of the Audit Oversight Board framework




WHOSE fault is it if the quality and reliability of audited financial statements in Malaysia suffer because the audit fees don't correspond to the amount and nature of work required to do a good job? This mismatch is a common complaint among the auditors. We often hear them lamenting that the fees in Malaysia are on the low side. For an example of this, read our Up Close & Personal interview with KPMG Malaysia managing partner Mohamed Raslan Abdul Rahman.

The maiden annual report of the Audit Oversight Board (AOB), issued on Thursday, has amplified the issue. When highlighting the key findings from its inspections of the six largest audit firms in the country, the board points out that auditors need to price their services at levels that will ensure that they can comply with the requirements of auditing and ethical standards. The worry here is that firms may decide on the resources to be deployed for audit engagements based on the fees they will earn rather than on the risks that need to be addressed when auditing the accounts.

In its annual report, the AOB relays the grouse of audit firms that “due to the relatively low audit fees in Malaysia, it is a big challenge for them to secure adequate resources”. Considering that the AOB was set up to assist the Securities Commission in regulating auditors of public interest entities (PIEs), it's telling that the board saw this matter as worthy of a mention. But does this mean that the authorities agree that the auditors are not being paid enough for their services?

If you're bent on getting an unambiguous answer to that, good luck to you. The board will only go as far as to emphasise that the fees should be properly tied to the audit work that ought to be done. It says in the annual report: “The AOB is mindful that the global economy is still in a recovery stage. This will continue to place pressure on PIEs to contain their operating costs, including audit fees. Nevertheless, the AOB expects auditors to price their fees to commensurate with the risks undertaken so as not to compromise on audit quality.”

PIEs include listed companies, banking and financial institutions (including Islamic banks and development financial institutions), insurance companies and takaful operators, and holders of Capital Market Services Licences (such as securities and futures trading firms, and fund management companies).

When fielding questions from reporters after releasing the report, AOB executive chairman Mohamed Nik Hasyudeen Yusoff stopped short of endorsing the view that companies in Malaysia should get used to the idea of paying higher audit fees. He said the board would not tell the firms what to charge clients and would leave this to the market forces to decide. Instead, he urged companies to look at audit fees as an investment rather than as a cost, because the work of auditors supports the enhancement of a company's value.

To help audit firms in determining fees, the Malaysian Institute of Accountants have something called A Guide To Charging For Professional Assurance Services. It says: “Fee arrangement is a matter for commercial negotiation by practitioners. The Institute does not prescribe the mandatory basis for calculating fees, nor does it ordinarily investigate complaints relating solely to the quantum of fees charged.

“The level of fee is to be mutually agreed between the auditor and his client, which largely depends upon the skill and knowledge required, level of training and experience of the staff involved, the time necessarily occupied and the degree of responsibility and urgency of work involved.

“However, this RPG (recommended practice guide) is useful as a benchmark to establish the reasonable level of remuneration, commensurate with the provision of professional services of an acceptable and recognised standard in the absence of other more sophisticated billing methodology.”

The problem is, not many firms make full use of the RPG. Hence, we continue to hear the auditors' grumbling about the fees. Perhaps their best hope is that the AOB framework will bring about desirable changes.

The strategy here is that the AOB inspections will compel the firms to improve their compliance with the standards, and consequently, the firms will turn to their clients and say: “Look, we'll get into trouble with the regulators if our audit work falls short of the requirements of the standards. We won't cut corners and we won't reduce the scope of the work. Our fees have to be right-sized. If you don't want to pay that much, find auditors who are willing to risk being slapped with sanctions by the AOB.”

Of course, such a transition in mindset will take time. Meanwhile, let's see how the AOB handles the errant firms that has no qualms about bending the rules to fit the fees. The annual report has this to say: “It has been a known area of concern that the provision of non-audit services by audit firms to their listed audit clients may result in auditors low-balling their audit fees to gain more consulting jobs at clients and this may compromise independence. The AOB will be reviewing the safeguards in place to understand how the threats are mitigated.” Again, who should we blame for low-quality audits?

Deputy executive editor Errol Oh believes that many people don't understand what is it that auditors really do.