INTRODUCTION

The integrity of financial reporting highly depends on financial reporting ecosystem comprising
external auditors, directors and management. External auditors play an important role in gaining the
investors confidence on the integrity of the financial information reported and disclosed in the audited
financial statements. It is the auditors primary responsibility to express independent opinion on the truth
and fairness of financial information presented in the financial statements. Auditors act as the agent for
the shareholders in determining the information presented by the management is true and reflective of the
real state of affairs of the business. Nevertheless, shareholders may at times loss their confidence on
auditors credibility. This is evident from the previous experiences of corporate failure and accounting
scandals such as Enron, WorldCom and Parmalat in 2000. The incidences implicate that auditors have not
met the public expectation which has given rise to the questioning of the quality of audit work performed
by the auditors. As a consequence, the shareholders in particular and the public in general are losing
confidence in auditors and putting the blame on auditors for not carrying the custodian responsibility to
protect the interests of the shareholders.
The establishment of Audit Oversight Board is in line with global trends. Many countries such as
United States, Singapore, Australia and United Kingdom has long established this oversight committee
mainly to control and oversee the professions and the auditing standards among firms providing auditing
services. In Malaysia, the establishment of the committee is to foster high quality independent auditing to
promote confidence in the quality and reliability of audited financial statements of public interest entities
in Malaysia.
International Federation of Accountants (IFAC) has issued International Standards on Quality
Control 1 (ISQC 1) quality control for firms that perform audits and reviews of historical financial
information, and other assurance and related services engagements. Although accounting body in
Malaysia have supplemented ISQC 1 with audit manual and guidelines, it is difficult to ascertain to what
extent the compliance with ISQC 1 has been achieved. The aim of ISQC 1 is to:

Consolidate smaller size firms to meet the numbers for rotation

Enhance expertise in highly specialized audit (i.e. banking industry)

The chronology of the establishments of the committee is from September to October 2007 in Budget
2008 announcement by YAB PM Government will establish a Public Companies Accounting Oversight
Board under the auspices of the SC. Many consultations held with industry groups and regulators to get

their feedbacks on this. From January to April 2008 SC (securities commission) establishes High Level
Task Force that met 6 times to deliberate on appropriate audit oversight framework for Malaysia and on
December 2009 Securities Commission (Amendment) Bill 2009 which contains the establishment and
functions of the AOB passed in both Houses of Parliament. Finally on 1 April 2010 the Part IIIA
Securities Commission (Amendment) Act 2010 came into force.
Among others the Functions of the Securities Commissions relating to audit oversight under Section
31B SCA is:

To promote and develop and effective and robust audit oversight framework in Malaysia
To promote confidence in the quality and reliability of audited financial statements in Malaysia
To regulate auditors of public interest entities

Overview of Audit Oversight Function in Malaysia

In the era of post-Enron, the auditing profession has been closely monitored by the regulators as
part of the external mechanisms of corporate governance of the firms. All over the world, auditors are
bounded with the movement from the International Federation of Accountants (IFAC) to improve the
quality of audit services provided to the clients. The assessment on audit quality has been extended to
cover both the audit firm level and audit engagement level. The International Standards on Quality
Control 1 (ISQC 1) deals with the firm wide quality control. It contains requirements in line with the
professional standards and regulatory and legal requirements that must be complied with by audit firms
and its personnel in order to provide a reasonable assurance that audit services performed by the firm or
engagement partners and the reports issued are appropriate in the circumstances. On the other hand,
International Standards on Quality Control for Audits of Historical Financial Information (ISA 220) sets
out the quality control standards that are applicable to the individual audit engagement level. Figure 1
summarizes the elements for both the ISQC 1 and ISA 220.
Despite having these standards in place, audit firms sometime failed to see the association
between the audit quality and the benefits to be derived from the application of the standards which may
come in the form of improved reputation and market share and reduction in audit liability. A study by
Esch, Negash, Firer, Oosthuizen, Abdool-Samad, Padia, Patron & Sanders (2005) in South Africa show
some concerns in the implementation of the standards. Some of the issues identified in the study include
the increase in compliance costs, lack of guidance, attitude of audit partners, evaluation of quality control

reviews, consultation and documentation, scope of the standards and diversity and structure of audit
market (Esch 2005). Similarly, in Malaysia, evidence showed that the implementation of ISQC 1 among
the small and medium audit firms is v very limited (Omar & Johari 2007). Small and medium audit firms
tend to operate based on non-standard operating procedures, which essentially do not reflect the total
compliance with ISQC 1.
Previous studies support the notion that the existence of standards (i.e., ISQC 1 and ISA 220)
alone are not sufficient to maintain and improve audit quality (Esch et al. 2005; Omar & Johari 2007).
The various accounting scandals that dragged auditors into the picture have given a signal on the need for
another mechanism that can provide the enforcement of the standards. Oversights by the external and
independent party in the structure shall be able to provide a more stringent enforcement that is being
perceived as more fair and justified.
The establishment of AOB marked a very important milestone in the development of audit
oversight framework in this country. AOB is expected to regain the public confidence on the auditors
work in providing opinion on a true and fair view of financial reporting as well as to monitor the auditors
work and their ethical behavior (Yin 2010). AOB is led by a powerful team comprising of one executive
chairman and six non-executive members representing a mix of different sectors including regulators,
accounting profession, legal fraternities and investment communities. Three main objectives of AOB are
promoting and developing effective and robust audit oversight framework, strengthening the investors
confidence on the reliability and quality of audited financial statements, and providing regulation of work
to the Public Interest Entities (PIE) auditors.
AOB has adopted a strategic framework which links the service areas and activities of AOB to the
desired outcome which manifest the attainment of its mission. As shown in Figure 3, the strategic
framework has four strategic themes that connect the outcomes and the service areas. The four strategic
themes are support adoption and implementation of standards, promotion of high quality audit practices,
influences on the financial reporting ecosystem and leverage on stakeholders support. These strategic
themes correlate with the main thrust of enhancing quality of the audited financial statements.

Audit Oversight Board strategic framework

In meeting the objectives, AOB undertakes various functions that cover registration, inspection,
inquiry, sanction and standard setting relating to audit. Individual auditors and audit firms that conduct the
audit of PIEs to register with AOB. The registration encompasses individual auditors and audit firms of
PIEs to ensure that every party involve in the audit of PIEs is fit and proper. Being new, AOB is
embracing the learning pathways progressively.
The AOB is responsible for the registration of auditors of public interest entities or schedule
funds under Part IIIA of the Securities Commission Malaysia Act 1993 (SCMA). The public interest
entities and schedule funds are defined in Schedule 1 of the SCMA. The registration of auditors of public
interest entities or schedule funds would ensure that only fit and proper auditors are involved in auditing
the financial statements of public interest entities or schedule funds. This is in line with one the AOB
strategic themes under the strategic framework which is to promote high quality audit practices. As such,
audit firms and individual auditors who are seeking registration with the AOB are required to make a
declaration in the Registration Form 1 and Form 2 of the Auditor Registration Application System
(ARAS) relating to their fit and proper status. Apart from that, the audit firms are required to submit
information on their compliance with the International Standard on Quality Control (ISQC) 1 and
Clarified ISAs. ARAS can be accessed at https://esubmissions.seccom.com.my/aras. An AOB registration
is valid until and unless it is revoked or suspended by the AOB, or withdrawn. As long as the registration
remains valid, the audit firm must ensure that the firm and the individual auditor(s) registered with AOB

remain fit and proper at all times as required by the SCMA. The audit firm is also responsible to ensure
timely update of information in ARAS, and is required to submit the Annual Declaration form via ARAS
to AOB within seven (7) working days after 30 June of each calendar year.
Section 31E (1)(d) of the Securities Commission Act, 1993 (SCA) provides that one of the key
responsibilities of the AOB is to conduct inspections and monitoring programs on auditors to assess the
degree of compliance with auditing and ethical standards. In discharging the above responsibilities, the
AOB may inspect an audit firm of PIEs under a regular inspection program or a special inspection
program. Under either program, an AOB inspection may be carried out at the firm level or engagement
level or both. A firm review focuses on the review of an audit firms quality control systems and practices
and the degree of compliance with the requirements of the International Standards of Quality Control 1
(ISQC 1). An engagement review aims to assess the degree of compliance with auditing and ethical
standards of an audit engagement conducted by an auditor. The AOB adopts a risk based approach and
conducts regular inspections annually on audit firms which have more than 10 partners and audit more
than 40 PIEs (collectively referred to as the Major Audit Firms). On the other hand, regular inspections
on mid-tier audit firms and sole proprietors (the Other Audit Firms) are completed within a predetermined inspection cycle.
The principle of proportionality, efficiency and achieving the desired outcome continue to be
essential to the strategic enforcement approach adopted by AOB. In determining the type of sanction that
is imposed on any contravention or breach, AOB takes into account the nature and seriousness of the
offences, previous regulatory record and other aggravating and mitigating factors. Among the matters
considered by AOB is the impact of the contravention on the integrity of the profession, the capital
market as a whole and the impact of the breach on the confidence and reliability of audited financial
statements of the PIE in question. The focus of AOB enforcement is whether the auditors comply with the
recognized auditing and ethical standards. Such action from the AOB may not necessary imply the
audited financial statement does not give a true and fair view.
The other functions of AOB is Inquiry. Audit inspections would be conducted at the firm level
and the engagement level. At the firm level, compliance with ISQC1 will be reviewed such as leadership
and responsibilities within firm, ethical requirements, acceptance and continuance of audit clients, human
resources and engagement performance monitoring. The inquiry conducted when there is reason to
believe that the provisions of the Act, written notice or guidelines are breached AOB inquiry officers will
be conducting AOB inquiries. Inquiry officers will be appointed and will have necessary powers to
conduct their duties.

In standard setting, the main objectives is to ensure that auditors comply with established auditing
standards in their statutory audits is a critical aspect in maintaining reliability of the companys audited
financial statement. Compliance with established auditing and ethical standards benchmark against
international best practices is an integral aspect in ensuring audit quality. The AOB expects the
accountancy profession to adopt all IFAC standards. The power to direct MIA to establish, amend, modify
or alter its prescribed standards will only be exercised if there is a gap in the scope and timing of the
adoption

CONCLUSIONS

The existence of audit oversight function is undeniably important in regulating the work of
external auditors, particularly concerning audit quality. Although auditors are bound to adhere to the
auditing standards in conducting audit works, evidence suggests that this may not be sufficient for the
auditors. External evaluation by independent body is seen as providing greater values in improving audit
quality, as such, the audit oversight function is seen a indispensable mechanism in auditing the auditors.
With regards to the Malaysia scenario, the establishment of AOB fits the financial reporting ecosystem,
but considering its two-year performance, its roles and functions in restoring public confidence over the
auditing profession is too early to tell. Nevertheless, based on this study, it is suggested that AOB
emulates several of the peers practices in making its roles more visible. These practices, however, shall
be reviewed and tailor-made to suit Malaysia environment due to limitation of this study to only based on
theoretical assumptions and is bound by content analysis.
The first suggestion is in terms of increasing the membership registration. As the membership
registration for 2011 has decreased as compared to 2010, AOB could have taken a stricter action on those
individual auditors and audit firms that have failed to register with AOB prior to accepting engagement
with PIE. Issuance of warning letter may be seen as just an administration act without any serious
implication. The second suggestion is to increase the transparency in reporting on those individual
auditors and audit firms that have been taken action against. PCAOB in the United State, for example, has
been very transparent in disclosing detailed report on the sanction taken against the auditors.

REFERENCES

http://www.sc.com.my/general_section/audit-oversight-board/
https://en.wikipedia.org/wiki/Public_Company_Accounting_Oversight_Board
http://pcaobus.org/Pages/default.aspx
http://www.mia.org.my/new/downloads/professional/audit/knowledge/2010/04/08/Presentation_slides_by
_the_AOB_Executive_Chairman.pdf
http://www.irssh.com/yahoo_site_admin/assets/docs/14_IRSSH-656-V6N1.329192438.pdf