Eligibility of auditors
Examining the laws governing auditors’ eligibility, particularly the requirement of good character, in ensuring auditors’ effectiveness in Malaysia.
- Dr Loganathan Krishnan (Department of Business Law & Taxation, Monash Malaysia)
Project background and aims
This project examines key issues on the office of auditors, concerning the requirement for auditors to be of good character. Therefore, how the requirement of good character is being applied is also assessed. This is important because it will strengthen the role and duties of auditors so that they will be effective watchdogs and gatekeepers for corporate governance. This project also explores the necessary reforms that should be made to the issues concerning the requirement of good character of the auditors.
The Malaysian Companies Act 2016 (CA 2016) provides that a person may be appointed as an auditor if he is capable of carrying out an audit function and he is of good character. In cases where he is found not to be of good character, the approval can be revoked by the Minister of Finance (MOF). The concern is whether the current requirement and procedure to determine the eligibility of an auditor is comprehensive. The concern is also whether approval has been revoked in cases where auditors are involved in financial scandals. This is because involvement in scandals shows that they are not of good character. Thus, this study attempts to answer some of these grey areas pertaining to this issue.
The methodology used are literary research which involves legislation, case law, books, journals and media news; analogical reasoning, jurisprudential analysis, historical review and comparative study of the laws in other jurisdictions. The project is based on traditional doctrinal legal analysis and empirical legal research. Media news published from 2004 until 2017 will be referred to. Additionally, interviews will be conducted on audit practitioners, officials from Companies Commission of Malaysia, Securities Commission and Central Bank of Malaysia, academics, representatives of Minority Shareholder Watchdog Group and professional bodies. The interviews will be semi-structured. It will be carried out in Federal Territory, Penang, Johor Bahru and Kuantan as these places are the main business hub of Peninsular Malaysia and to cover large and medium sized firms. This is to obtain a holistic picture of the subject matter.
Interviews were conducted by auditors and regulators in order to obtain a holistic picture of the issue of the good character of auditors. It can be observed that there were mixed views among the auditors on the issues raised during the interviews. As far as the regulator is concerned, it can be seen that initiatives have been taken to address the issues concerned. The provisions of the Companies Act 2016 in relation to the office of auditors must be re-examined to ensure that the auditors perform a meaningful role in the current corporate atmosphere. The auditors’ role must be reinforced so that it meets the expectations of the stakeholders. Similarly, key reforms must be made to the Companies Act 2016 to achieve the desired objectives. The current practice of conducting interviews and requiring candidates to produce references is unsatisfactory. There is a need to raise the threshold of good character. The statutory provisions must define the parameter of good character and this must be further explained in the by-laws. In cases where the auditors were involved in financial scandals, the Minister should revoke the approval by virtue of s. 263(3) of the CA 2016 to convey a strong message about the importance of having a good character. The MIA should prepare a module of ethics and good character which is based on assignments to ensure that good character is not merely a theoretical result but a practical result. This will consequently ensure the fundamental issue of auditors being effective watchdogs to counter financial scandals. Additionally, auditors would play a more effective role in carrying out their duties so that there would be value added to the auditors’ report. Thus, the issue of good character which determines credibility and eligibility should not be taken lightly.
- Krishnan, L. (2018). “Examining the Laws Governing Auditors’ Eligibility in Ensuring Auditors’ Effectiveness”, Company Lawyer, 39(9), 288.
- Krishnan, L. (2016), “A Litmus Check of Auditors Credibility to Enhance Effectiveness in Countering Financial Scandals: A Case of Malaysia”, The 11th Kuala Lumpur International Business, Economics and Law Conference, 17th - 18th December 2016, Hotel Bangi - Putrajaya, Selangor, Malaysia.