Auditing the auditors: Is the MIA’s latest report a clear snapshot of audit quality in Malaysia?

Published: Saturday March 29, 2014 MYT 12:00:00 AM

Auditing the auditors

BY ERROL OH

Is the MIA’s latest report a clear snapshot of audit quality in Malaysia?

IT’S easy to be sceptical about self-assessment exercises. How many people can be wholly critical and objective when evaluating what they see in the mirror? And surely fewer still are secure and honest enough to share the full results with the rest of the world.

So how should we view the Practice Review Report released this week by theMalaysian Institute of Accountant (MIA)?

The tricky element here is that the institute is a regulator as well as a professional body. Is the report an authoritative, warts-and-all survey of the profession that the institute oversees, or is it something that promotes the interests of MIA members?

Then again, these objectives don’t have to be mutually exclusive. When steps are taken to elevate the standards of the profession – starting with identification of problems – the accountants have much to gain.

In his message in the report, MIA president Johan Idris (who also chairs the institute’s Practice Review Committee) wrote, “The findings of practice review have significant educational content and are beneficial to practitioners. They serve to guide our practitioners in training their staff and alerting them to many pitfalls that may derail them in the course of carrying out the policies and procedures of the firm.”

The institute’s media release expanded this point: “This quality assessment programme will drive consistency and raise the bar on audit quality, thereby underpinning public confidence in the accountancy profession.”

The MIA’s practice review applies to all member firms that conducts audits. Practice review refers to the evaluation of the work performed by the auditors and of these firms’ internal quality controls.

The institute’s practice review programme began in 2004. The first report came out in 2009 and it was for 2004 to 2008. The latest Practice Review Report covers the period 2009 to 2013. Of the 1,363 audit firms registered with the MIA, 639 (47%) had been reviewed as at June last year. Here are some noteworthy details from the new report:

l Rating the auditors

The review reports are assigned ratings. Type 1 and Type 2 are labelled ‘Satisfactory’ and ‘Assurance to be provided’ respectively.

Both ratings denote a pass in practice review.

But when a firm gets a Type 3 rating, that means a follow-up review is required.

The report hasn’t been glowing so far. Only 8% of the firms reviewed have been rated Type 1. That’s about 50 companies. Type 2 firms make up the largest group, with 48%.

The rest (44%) are, of course, in the Type 3 category. After follow-up reviews of the Type 3 cases, the MIA found that half of them had improved on their audit quality and thus passed practice review.

The others would be referred to the institute’s Investigation Committee.

l The survey says

In August 2012, a survey was conducted to get feedback that may be useful if there’s a revision of the practice review framework. This involved responses from 60 practitioners whose firms were reviewed and for which final reports were issued.

The results are rather confusing. For example, 90% of the respondents say the Practice Review Programme is effective in enhancing their firms’ audit quality subsequent to the review, and 80% consider the practice review report a useful reference material for staff training purposes.

Yet, almost half of the respondents agreed that the same practice review report is fault-finding.

In addition, only 43% say the practice review findings are useful in improving the audit quality of their firms. Another 52% says the findings are “somewhat useful”.

And you know for sure that accountants are the respondents when 62% deem the practice review fee as high.

l A new approach

In January this year, the Practice Review Programme adopted the risk-based approach in selecting firms for practice review. The MIA is sending out risk assessment questionnaires to the firms so that it can determine the level of risk associated with each firm.

Another new initiative is to hold dialogue sessions with practitioners to create awareness on issues relating to the implementation of the revised practice review framework. These sessions double up as an avenue to address the practitioners’ grouses about practice review.

l What they found

Chief among the report’s general observations is this: “The documentation of working papers is still a key factor which is not taken seriously by some practitioners.

“Our practice reviewers find that inadequate attention is given to writing down audit procedures performed, the findings made by the auditors with respect to the sufficiency and appropriateness of the audit evidence gathered and the conclusions reached by the auditor.”

Executive editor Errol Oh is waiting for the Audit Oversight Board’s annual report 2013. That should be more interesting when read together with the MIA’s Practice Review Report.