From Siva Nathan
Going concern or gone concern?
Part 1 discussed the impact and consequences of the pandemic on businesses, and depending on whether a company was still a going concern or not, the Audit Report ought to be modified accordingly to suit the present predicament of its financial affairs.
Section 17A of the MACC Act 2009 (Amended 2018)
Part 2 continues with Section 17A of the MACC Act 2009 (Amended 2018).
This section deals with the need to contain bribery and corruption, in line with similar legislation adopted globally by most developed and advanced nations.
The Anti-Bribery & Anti-Corruption (ABAC) section was introduced within three months into the country’s first coronavirus pandemic lockdown and came into effect on June 1, 2020.
It augurs well for auditors to be thoroughly acquainted with the implications of this Act.
The section introduces new stringent responsibilities and classifies as offences where measures to prevent bribery and corruption are not procured, installed and implemented.
A commercial organisation may be prosecuted if its employees and/or persons associated with it carry out corrupt practices for the benefit or advantage of the organisation.
Commercial organisation includes partnerships and companies incorporated under the Companies Act 2016 or wherever incorporated and carries on a business or part of a business in Malaysia.
Persons associated include directors, partners, employees or persons who perform services for, or on behalf, of the entity
What is preposterous is that more than a year has passed and commercial organisations, including government bodies, do not seem to be conversant or even aware of this very important piece of ‘landscape changing way of doing and conducting business’ legislation.
For what seems now ancient, the watchwords of Justice Lopes in the seminal case of Re Kingston Cotton Mills calling for auditors to be watchdogs rather than bloodhounds…the law and the scope of the auditor’s duties, standards and techniques have since progressed calling for more rigorous verification work for the auditors to discharge.
Under current laws and related duties, auditors must consider the risk of fraud or error (corruption and bribes now classified as fraud) in order to obtain reasonable assurance that there is no risk of material misstatement that might affect financial statements.
Hence, if there is found no semblance or mention of such compliance, the auditors may likely be held liable in negligence if not reported. Such is the state of this contemporary law.
Thus, it now becomes crucial for auditors to categorically report Section 17A compliance of the MACC Act 2009 under the separate heading ‘Report on Other Legal and Regulatory Requirements’.
This obligation to report is STATUTORY, meaning MANDATORY. Regulatory bodies, in this case MACC, would not be hesitant to allege non-compliance where there is no reference by the auditors regarding this assurance in their reports.
Consequently, this could become a potential platform for disagreement or possible litigation if the companies ‘state of compliance’ is not referred to in the Audit Report.
This is bound to raise questions as to whether the auditors have conducted sufficient work to satisfy that the Company has complied.
The situation further exacerbates when an incident of corruption or bribery is discovered by MACC in the course of their random checks.
Clients connote unqualified audit reports as meaning satisfaction with compliance. Auditors inevitably become defensive when hints of corruption by their clientele are exposed.
Despite the lapse of an entire year since the law became effective, there is yet to be seen an audit report making reference to this piece of legislation.
If directors of defaulting (non-compliant) companies opine that the government is not serious about enforcing Section 17A, they need to rethink seriously.
The prolonged pandemic has depleted national reserves and the government is desperately looking to refill its coffers.
What better way than to penalise defaulters who haven’t complied with the newly enacted provision. MACC made its first arrest and charged a former director RM321,350 for bribing a national oil company to procure a subcontract.
MACC stipulates that cCompanies which prove compliance with the Guidelines termed Adequate Procedures are deemed to have complied with the Act.
Hence, it is imperative that the auditors check that these procedures are effectively in place and are functioning.
Instituting and implementing Adequate Procedures is a complex exercise and adds to a company’s existing cost structure. There are companies that have adopted external platforms that assure compliance within the meaning of the provisions of this Act.
Planally is one such platform that is inexpensive but yet complies with the Act. The advantage of this system is that Auditors have real time access to the entire compliance process.
Implementation of such systems provide auditors with sufficient compliance assurance measures that conform with the provisions of Section 17A of the Act. This can resolve and alleviate the pains of potential litigation that can confront auditors and their clients.
So, the Audit Report is clean when Adequate Procedures are in place. What then when there is non-compliance?
The following abstracts show how the reporting should be in order to avoid ambiguity.
Qualified ‘except for’ opinion issued, but no key audit matters
We have conducted the audit of Faaiza Sdn Bhd. The company has not complied with the provisions of Section 17A of MACC Act 2009, which became mandatory for businesses to comply with effect from June 1, 2020.
Substantial amounts paid and classified as marketing and promotion expenses cast doubt as to whether these could be in contravention with the provisions of this Act.
The Finance Director is reluctant to seek confirmation and/or clearance from the Authorities that these payments are not in contravention of the Act.
We have issued a qualified ‘except for’ opinion on the basis of disagreement with the entity’s failure to seek clearance as well as not having Adequate Policies as required by the Act.
The auditor has concluded that there are no Key Audit Matters (KAM) which require to be communicated in the audit report. The KAM section of the report will read as follows:
Key audit matters
Except for the matter described in the Basis for Qualified Opinion section, we have determined that there are no Key Audit Matters to communicate in our report.
Report on other legal and regulatory requirements
In accordance with the requirements of the Companies Act 2016, we report that in our opinion, whilst the accounting records were kept in accordance with the provisions of the Act, the other records for the matter as described in the Basis for ‘Except for’ Opinion have not been properly maintained or complied with by the Company.
Click here to read Part 1
Siva Nathan is a Chartered Accountant and Auditor and is currently an Adjunct Professor at Taylors University, Malaysia. He is the author of “Auditing, Assurance Services and Ethics”. He is also Professor of Accounting, Business and Economics and adviser to the Chancellor and Examinations Board at PUET in Europe.
The views expressed are those of the writer and do not necessarily reflect those of FMT.