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MANAGEMENT & ACCOUNTING

Audit Challenges
in Malaysia Today
Teck Heang Lee and Azham Md. Ali
Due to the outbreak of financial scandals involving Bursa Malaysia listed companies Transmile and Megan Media, it may be argued that 2007 was a “challenging” year for the auditing profession in Malaysia. The “ripple” effect of the scandals caused turbulence in the auditing industry which spilled over to 2008 when the auditing profession was once again in the limelight, in the case of Oilcorp Berhad. he negative publicity connected with these financial scandals could very easily damage the essence of the auditing profession i.e. “public trust.” Barker (2002) claimed that society’s trust in a group of professional persons is the “heartbeat of that profession.” Hence, if such trust is betrayed, the professional function, too, is destroyed, since it would become useless. Abdul Wahab Jaafar Sidek (The Star, 19 July 2008) of the Minority Shareholder Watchdog Group (MSWG) opined that the recent accounting scandals in Malaysia not only adversely eroded trust of the shareholders and stakeholders in the affected companies but also affected the integrity of the capital market, the regulators and the auditing profession. So, as far as the auditing profession is concerned, if that is indeed the case, interested parties may need to be on the highest alert for as mentioned by Railborn and Schorg (2004), the presence of growing distrust in the auditing profession may well be “a cancer that is metastasising”. All in all, there is little room for doubt that the auditing profession in Malaysia is currently experiencing a period of serious turmoil. With fierce criticism against auditors, it is only fair to hear the voices of the auditors themselves. This may bring to light the problems faced by these professionals. Who knows? Such enlightenment could one day lead to amicable solutions sought by both auditors and non-auditors.

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ACCOUNTANTS TODAY • October 2008

Audit Challenges in Malaysia Today

Challenges Faced by Audit Practitioners In Malaysia
10 interviews were conducted with audit practitioners working in audit firms of various sizes in Malaysia from June to August 2008. Overall, it was found that there are many problems faced by Malaysian auditors. However, for the purpose of this paper, the focus is on four issues. These are: perceived value of audit function; hindsight evaluation of auditors’ performance; competition for human capital; and audit fees versus audit quality.

Low perceived value of the audit function
One of the challenges facing audit practitioners in Malaysia is the low perceived value of the audit function. In short, for many of the small audit clients of the auditors inter viewed, company auditing is viewed as a waste of money and resources. From the theoretical perspective, the need of an audit function can be explained by the agency theory, which denotes that due to a separation of ownership and control, the principal (owner) will monitor the activities of management through an audit function. However, in Malaysia, an audit is mandatory for all companies despite their size and ownership structure (i.e. private or public companies). That is, according to Section 169(1), Section 174(1) and Section 174(2) of the Companies Act 1965, every single company in the country needs to have its financial statements duly audited by an independent auditor. Notwithstanding the compulsory audit requirement, many auditors have pointed out that the actual contribution of auditing towards its intended purposes is somehow limited. This is because a vast majority of the companies in Malaysia are private companies as opposed to public companies. Furthermore, a majority of these private companies are owner-managed. Hence, an audit appears to be meaningless to most of the private companies because the directors and the shareholders are basically the same people. For this ver y reason, it explains why most audit clients have...
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