Non-Audit Services in Malaysia

Summary:

This project focuses on how Malaysian laws (Companies Act 2016, the Capital Market and Services Act 2007 and the Financial Services Act 2013) deal with non-audit services.

Researcher:

Project Background and Aims:

Non-audit services are any services provided by auditors to a company other than audit namely, management consultancy, tax advice and human resources consultancy.

Enron, a Texas-based energy trading company is the first scandal which shook up the audit profession. Its auditors Arthur Andersen were receiving fees for audit and non-audit services. In the banking sector, 70% of the fees banks paid to auditors were for non-audit services. A study conducted in Australia showed, 27 out 58 of the top 100 companies, auditors are also offering non-audit services. Observably, auditors’ independence is questionable since the decision to engage auditors for non-audit services rests with the Board of Directors (BOD). If the auditors detected the BOD committed a wrongdoing and report the matter to the shareholders, they may not be re-engaged in future. Under common law, no duty is imposed on auditors to avoid non-audit services. Thus, this study focuses on how the Malaysian laws i.e. the Companies Act 2016, the Capital Market and Services Act 2007 and the Financial Services Act 2013 deal with non-audit services. Interviews will be conducted on audit practitioners, regulators i.e. Companies Commission of Malaysia, Securities Commission, Central Bank of Malaysia, professional bodies, academics and Minority Shareholder Watchdog Group (MSWG) to obtain their views on this issue.Finally, this project will draw conclusions as to the approach the Malaysian laws should take in addressing this issue.

Methodology:

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.

Findings:

It can be observed that there is no prohibition in the Companies Act 2016 which has replaced the Companies Act 1965, the Central Bank Guidelines on External Auditors 2015, Financial Services Act 2013, the Code of Corporate Governance 2017 and the By-Laws on non-audit services. Thus, auditors are free to provide non-audit services in addition to audit. Be that as it may, based on all the financial scandals, it is clear that non-audit services have the potential to affect the objectivity, independence and professionalism of the auditors. Ultimately, the ones affected are the stakeholders of the company as they relied on the auditors’ report to make key decisions. Thus, it is proposed that the Companies Act 2016 be amended to prohibit auditors from providing non-audit services. This is one of the ways to raise the standards of the auditors’ role, duties and integrity.

Output:

Journal Article

Krishnan, L. (2019). “Examining the Threat to Auditors’ Independence: Malaysian And Australian Legal Perspective”, ICCLR, 30(2).

Conference Proceedings

Krishnan, L. (2018). "The Impact of the Companies Act 2016 on Auditors’ Independence", Corporate Law Teachers’ Association Conference, 11th – 13th February 2018, La Trobe University, Melbourne, Australia