2 INTERNATIONAL CONFERENCE ON BUSINESS AND ECONOMIC RESEARCH (2 ICBER 2011) PROCEEDING

nd

nd

LEGAL ISSUES ON THE SCANDALS INVOLVING AUDITORS

Loganathan Krishnan1

Abstract There is a need to clarify the duties and obligations of auditors due to the recent spate of financial scandals. All the scandals involve big auditing firms. This is so although there has been a study that big auditing firms provide higher quality audit. Financial scandals have always been one of the major reasons for change in the company law. Nevertheless, it should not be a case of learning the wrong lesson from those financial scandals. The financial scandals prove to show that the auditors have fallen below the expected standards. If a company were to fail within certain months after being audited, the auditors are blamed for conducting an inferior audit. Thus, the most common question asked whenever there has been a financial scandal is, whether the auditors carried out their duties and obligations properly and whether they were objective. Thus, this study examines the financial scandals involving auditors which occurred in Malaysia and in other countries. In reviewing the scandals, the study will investigate the reasons and cause for such scandals. The study will show whether the auditors duties and obligations as provided by the Companies Act 1965 (CA) are comprehensive in addressing the scandals. Auditors are under a duty to audit the company. Nevertheless, if the duties and obligations of auditors are minimal, eventually, the use of a company to do business will be misused and abused. The duties and obligations of auditors must be expanded for the sake of capital market, stability of financial and economic sector and the rights and interests of those persons and bodies mentioned earlier. A higher audit quality will provide better information to investors and thus generate a more efficient investment. There must be a modern approach to the auditors duties and obligations in addition to the common law and statutory duties and obligations. This is because the current auditing is in a serious turmoil. Keywords: Auditors, Scandals, Legislations

1. Introduction
This study examines the financial scandals involving auditors which occurred in Malaysia and in other countries. In reviewing the scandals, the study will investigate the reasons and cause for such scandals. The study will show whether the auditors duties and obligations as provided by the Companies Act 1965 (CA) are comprehensive in addressing the scandals.
1

Department of International Business, Faculty of Accountancy and Management, Universiti Tunku Abdul Rahman, loganathan@utar.edu.my

1315

2 INTERNATIONAL CONFERENCE ON BUSINESS AND ECONOMIC RESEARCH (2 ICBER 2011) PROCEEDING

nd

nd

2. Examining the Financial Scandals

A distinction should be made between audit failures and business failures. In the former case, the blame should be attached on the auditors. In the latter case, there are external factors attached. This is because not all business failures are due to audit failures. This is although business failures are always interpreted as audit failures (Almer & Brody, 2002). Thus, in General Motors Corps the auditors Deloitte & Touche have raised substantial doubts about the companys ability to continue operations (New Straits Times, 2009). Enron, a Texas-based energy trading company is the first scandal which shook up the auditing profession although there were many cases involving auditors since the 18th century. Enron has caused a crisis to the confidence in auditors (Worden, 2002) and the reliability of financial reporting (Holm, C, and Laursen, 2007). The audit quality and the independence of the auditors were questionable (Davis, 2002). This is because the auditors, who were Arthur Andersen, were not only receiving fees for auditing but for non-audit services too i.e. for consultancy services. In 2001, Arthur Andersen earned US$55 million for non-audit services (Brown, 2005). Furthermore, there were regular exchanges of employees within Enron from Arthur Andersen. As far as the banking sector is concerned, 70% of the fees that banks pay to their auditors are for non-audit services (Economist, 2002). In 1993, 31% of the auditing industrys fees came from non-audit services (Byrnes, Brady, Lavelle and Palmeri, 2002). By 1999, the amount increased to 51%. On average, for every dollar of audit fees, the companies paid $2.69 for non-audit services (Bailey, Bylinski and Shields, 1983). A study conducted in Australia showed that 27 out 58 companies of the top 100 Australian companies admit that the auditors they have engaged are also offering non-audit services (Watts, 2002). Observably, the independence of the auditors is questionable because the decision to engage auditors for non-audit services rests with the Board of Directors. If the auditors detect that the Board of Directors has committed a wrongdoing and report the matter to the shareholders of the company, they may not be engaged for non-audit services. Under the common law duties and obligations, there is no duty reposed on the auditors to avoid conflict of interests. Thus, the fact that Arthur Andersen was offering non-audit services is not a breach of law in the first place. Under the Companies Act, although independence of the auditors is essential as can be seen in S. 9 of the Companies Act which disqualifies certain persons from being eligible as auditors, the provision does not deal with issues concerning the offering of non-audit services to the company. This is because the provision only prohibits an employee, officer, partner or employee or employer of an officer from being appointed as an auditor. The offering of the non-audit services by the auditors to a company is in the capacity of an independent contractor. The law assumes that such persons are independent. This is because independence is the cornerstone for auditing (Mautz, and Sharaf, 1961). Nevertheless, there will be conflict of interest and therefore the independence of the auditor will be affected.
1316

2 INTERNATIONAL CONFERENCE ON BUSINESS AND ECONOMIC RESEARCH (2 ICBER 2011) PROCEEDING

nd

nd

Although Arthur Andersen was making a report on the companys accounts, they did not report fraud to the stakeholders. This is because the fraud was committed by the management. Kenneth Lay took home US$152 million although the company was facing a loss. If the auditors were to report they probably will not be appointed in subsequent years or be engaged for non-audit services. They made sure that they were in the managements good books. They maintained confidentiality but for the wrong reasons. The U.S. government assured the stakeholders that Enron was just a case of one bad apple. Nonetheless, in 2002, WorldCom which is one of the biggest telecommunications company in US collapsed. The issue regarding auditors reached a high level due to Enron and WorldCom (Porter and Gowthorpe, 2004). The company faced US$28 billion in loans and yet Bernie Ebbers who ran the company was given a loan of US$366 million (Banyard, 2002). The auditors were Arthur Andersen. It was found that the auditors did not take proper steps in detecting accounting irregularities (Wong, 2004). Although it is the duty of the auditors to detect accounting irregularities, they failed to do so. Since they failed to do so rightfully, they should be liable. As a result of Enron, the audit firm Arthur Andersen in Malaysia was dissolved. In fact over 150 employees of the firm were merged into Ernst & Young Malaysia as they left the firm (New Straits Times, 2002). On the other hand, it is difficult to determine the ambit of the auditors duties and obligations. This is because in at least four matters, the American International Group Incorporateds auditor i.e. PricewaterhouseCoopers are aware of problematic accounting but decided that they were not material (Francis, 2005). If the view is shared by the auditing profession, it can be considered that the auditors have performed their duties and obligations accordingly. Nonetheless, the view must also be agreed by the courts before establishing whether the auditors have performed their duties and obligations accordingly. In another situation, a class action was brought by a group of investors against the auditors of an investment company i.e. KPMG for being silent on alleged violations by the investment adviser (Wilson, 1998). The company was alleged to have lost money because it invested in financial instruments not allowed by prospectus guidelines. The case shows that the auditors should have been aware of the prospectus guidelines and not just the companys constitution i.e. Memorandum and Articles of Association. This shows that where a company is listed, the auditors are additionally required to be aware of the prospectus guidelines. In Australia, the collapse of HIH Insurance Ltd was seen as the beginning of the reflection into auditors role, duties and obligations. The auditors were Arthur Andersen. The auditors were providing audit and non-audit services. Furthermore, the auditors ignored a document dated July 1998 which showed that HIH had been substantially under-reserved for many years (Main, 2002). The company collapsed in March 2001, creating a loss of AUS$5.3 billion (Mackerras, 2003).

1317

2 INTERNATIONAL CONFERENCE ON BUSINESS AND ECONOMIC RESEARCH (2 ICBER 2011) PROCEEDING

nd

nd

Another scandal in Australia involved One-Tel which is a mobile telecommunications company. The company collapsed with AUS$2.4 billion in debts and losses (Robbins, 2006). One of the main reasons for the collapse is that the independence of the auditors was questionable and further the auditors made erroneous judgments on the companys financial affairs (Houghton and Jubb, 2003). In the UK, a claim for 2.6 billion was brought by Equitable Life Assurance Society, a company founded in 1762, against its auditors, i.e. Ernst & Young (Financial Times, 2003). The auditors had failed to warn the company of its financial liabilities the company faced from the sale of guaranteed annuity pension products during the 1990s (Veysey, 2005). However, a settlement was reached and as a result a solution is denied on the difficult issue concerning auditors duties (The Lawyer, 2005). In Italy, Parmalat founder Calisto Tanzi was sentenced to ten years in prison over a 14 billion fraud scandal in 2003 that caused Europes largest corporate bankruptcy (New Straits Times, 2008). He manipulated the companys share price, assisting in false accounting and hindering audits. The company employed 36,000 workers in 30 countries. It wiped out the savings of 135,000 people in Italy. The auditors of the company Italaudit was ordered to pay a fine of 240,000 and had a further 455,000 confiscated. In France, an audit has been ordered on all its banks since Caisse dEpargne is merging with Banque Populaire which suffered a trading loss of 600 million (New Straits Times, 2008). In the case of Societe Generale, Jerome Kerviel who is a trader acknowledged placing more than US$70 billion in secret, unauthorized derivatives trades. Thus, the bank suffered a loss of US$7.2 billion (New Straits Times, 2008). The chairman Daniel Bouton said that the rogue had used extremely sophisticated and varied techniques (New Straits Times, 2008). Thus, the concern is whether auditors will be able to detect such types of sophisticated fraud. In Hong Kong, the police raided the office of Ernst & Young as part of a fraud investigation (New Straits Times, 2009). This is because Ernst & Young was accused in court for falsifying documents to cover itself from a negligence claim brought by the liquidators of electronics company Akai Holdings. However, the lawsuit ended with an out-of-court settlement whereby Ernst & Young paid an undisclosed amount to the liquidators. Akai holdings were wound up in 2000 and left the creditors with debts of more than US$1 billion. The police have taken some documents in relation to the case. Ernst & Young admitted that certain documents produced for the audits for the year 1998 and 1999 could not be relied upon due to the action of its audit manager who then became one of the partners of the firm. The person has been arrested by the police. Observably, the out-of-court settlement shows that the firm admits liability. However, it is unwelcoming that the matter did not reach the court to clarify the law governing auditors liability. When Enron took place, it was thought it could not happen in Malaysia. In fact the SC believed that since Malaysia practices different set of accounting and auditing rules (New
1318

2 INTERNATIONAL CONFERENCE ON BUSINESS AND ECONOMIC RESEARCH (2 ICBER 2011) PROCEEDING

nd

nd

Straits Times, 2009). However, much before Enron, there have been cases which involved auditing scandals. In fact the scandals pose a constant threat to the regulatory structure, public trust and confidence in the market economy (Buang, 2010). Thus, it has raised concerns regarding the credibility of the audit profession. In Malaysia, Technology Resources Industries Bhd (TRI) has sparked of concern regarding auditors duties and obligations. The company has issued fictitious invoices totaling nearly RM260 million in 1998 and 1999. The auditors, Arthur Andersen & Co failed to detect the fraud and neither did they qualify their report. In Cold Storage (Malaysia) Bhd (CSMB) the company and its two subsidiary companies claimed that their auditor Arthur Andersen has failed to detect and report the irregularities which resulted to misappropriation of funds and assets. The result is that the companies suffered huge losses. CSMB brought an action for RM350 million against its auditors. In Transmile Group Bhd, a company which is controlled by billionaire Robert Kuok, there were accounting irregularities and fraud discovered in the company (New Straits Times, 2007). The company has overstated its accounts to show it has made profits of RM75 million and RM158 million for the two consecutive years of 2005 and 2006 respectively. In actual fact the company was at a net loss of RM370 million and RM126 million respectively (New Straits Times, 2007). The stock dropped to RM9.55, which is the lowest in two years (New Straits Times, 2007). The auditors Deloitte & Touche declined to approve the accounts when the company failed to furnish them proof to substantiate certain trade receivables. However, the loss was not detected by Deloitte & Touche. It was detected through a special audit by Moores Rowland (New Straits Times, 2006). The audit was then carried out on CEN Sdn Bhd which is an associate company. Deloitte & Touche dismissed the claim that they failed to detect the accounting irregularities. Furthermore, it claimed that it is not practicable to expect audit to represent a 100 per cent check of a companys financial well-being (New Straits Times, 2007). As a result of the scandal, the company wishes to replace Deloitte & Touche with KPMG after many years (New Straits Times, 2007). It should be noted that KPMG is already an auditor for some of the companies owned by Robert Kuok namely Hong Kong listed Keck Seng Investments and Shangri-La Hotels (Malaysia) Bhd. KPMG is also offering due diligence and corporate tax advisory services to PPB Bhd a company owned by Robert Kuok. Thus, the issue is whether there is conflict of interests and independence of auditors. However, until and unless the issue is addressed, auditors are free to offer nonaudit services. In Ocean Capital Bhd, a retailer company in the domestic market registered a RM3.85 million deficit in its shareholders funds for the first quarter financial results ended March 31 2003 (Business Times, 2003). The company has been facing a loss since 2000. Nonetheless, the loss was not brought to the attention of the shareholders by Deloitte & Touche who were the auditors.

1319

2 INTERNATIONAL CONFERENCE ON BUSINESS AND ECONOMIC RESEARCH (2 ICBER 2011) PROCEEDING

nd

nd

In Megan Media Holdings Bhd, it was found that there was fraudulent trading (New Straits Times, 2007). There has been a default of RM900 million of bank loan. It has incurred a net loss of RM1.27 billion in the financial year ended in April 2007 (New Straits Times, 2007). However, the auditors failed to report the matter. In a matter involving Bumiputra Commerce-Holdings Bhd (BCHB), BCHB is planning to bring a legal action against Deloitte Kassim Chan over audit work on the then Southern Bank Bhd (SBB) (New Straits Times, 2007). This is because there has been inappropriate accounting treatment on the 2005 accounts. This was found by PricewaterhouseCoopers (PWC). They were inappropriately valuing certain derivative financial instruments, not writing down in full the collateral value and wrongly writing back specific provisions made on certain foreclosed properties relating to non-performing loans aged seven years and above and non-expensing of certain costs incurred. Furthermore, the net assets were overstated by RM160 million. BCHB exercised a takeover of SBB. BCHB is not planning to bring an action against the Board of Directors as it could not find any evidence of fraud (New Straits Times, 2007). In Fountain View Development Bhd formerly known as Plantation & Development (Malaysia) Bhd, the independent auditors found that RM450.2 million worth of transactions made between 1997 to 2001 have left the company insolvent (New Straits Times, 2003). This is because for the year ending December 1997, P&D had booked an allowance for doubtful debts of RM95.4 million and a write-off of goodwill arising from consolidated of Invescor Ventures Sdn Bhd amounting to RM60.2 million; made a RM28.4 million provision for foreseeable losses on various development projects and construction contracts; RM 31 million provision for diminution in value of investments; provision for liabilities pertaining to corporate guarantees for RM99.3 million. The concern is the reason the companys auditor did not detect this. It was only detected by the independent auditors. Essentially, one of the ways to counter financial scandals is to improve the quality of auditing services (New Straits Times, 2007). Nonetheless, the current legal, regulatory and corporate governance framework is robust and sufficient to protect the market (Yusoff and Anwar, 2007). This cannot be so. This is because the number of financial scandals involving auditors is increasing. Furthermore, whilst corporate governance may have improved but the auditors duties and responsibilities are shrouded in mystery and mystique as ever (Leek, 1996). There is a lacunae in the current legal framework as the duties and obligations reposed on auditors under common law, the Companies Act, BAFIA and the CMSA are inadequate in countering the financial scandals.

1320

2 INTERNATIONAL CONFERENCE ON BUSINESS AND ECONOMIC RESEARCH (2 ICBER 2011) PROCEEDING

nd

nd

3. DUTIES AND OBLIGATIONS UNDER COMPANIES ACT

In order for auditors to carry out their statutory duties and obligations effectively, they must be familiar with the Companies Act. The Corporate Law Reform Committee (CLRC) recommended that the current regime that relies on statute to state the general duty of auditors to report whether the accounts give a true and fair view of the companys financial position in its Recommendation 2.57 (Companies Commission of Malaysia, 2007). It is a statutory attempt to outline what the auditors report should contain (Singh, 1976). Nevertheless, the concern is whether the scope of the Companies Act in providing for the duties and obligations of auditors is exhaustive per se.

3.1 Duty to Report

By virtue of S. 174(1) and (2) of the Companies Act, an auditor is required to prepare an auditors report and give his true and fair view of the matters required by S.169 of the Companies Act. If it is a holding company, the auditors are required to report on the consolidated accounts. The auditors report is a formal document. Furthermore, S. 174(3) of the Companies Act provides that auditors must form an opinion on the matters specified therein and state the particulars of any deficiency, failure or shortcoming in respect of any of those matters. The reason for such a requirement is to have an independent assurance that the financial information received from the companys management is reliable (Hanrahan, Ramsay and Stapledon, 2000). In fact the credibility of the financial information is enhanced due to the fact that it is being audited (Pound, Willingham and Carmicheall, 1997). Nevertheless, it is not provided as to when the auditors report should be submitted for the purposes of deliberation during the annual general meeting. S. 170(1) of the Companies Act only provides that the auditors report must be furnished to the directors of the company in time to enable them to attach it to the annual report. In Syarikat Takaful Bhd, the audit was done in September 2006. However, just before the annual general meeting held on November 29 2006, the auditors KPMG Desa Megat & Co modified the report (New Straits Times, 2006). This is the first time in the history of company law, auditors did such a thing. This occurred because the Companies Act and the CMSA are silent as to when the auditors report must be furnished. Thus, it enables auditors to modify the report at the eleventh hour. A provision should be included in the Companies Act and the CMSA that once the notice is sent to the members for an annual general meeting, the auditors should not be allowed to modify the report. Additionally, S. 174(2)(a)(ii) and (iii) of the Companies Act provides that the auditors shall report whether the accounts have been properly drawn up in accordance with the provisions of the Companies Act and applicable approved accounting standards
1321

2 INTERNATIONAL CONFERENCE ON BUSINESS AND ECONOMIC RESEARCH (2 ICBER 2011) PROCEEDING

nd

nd

respectively. This duty is equally applicable if it concerns consolidated accounts. Conversely, it is unclear whether it means that the auditors are obliged to report to the members on breaches of the Companies Act by the directors (Baxt, 1985). However, if the company is in breach of the Companies Act, auditors are obliged to report the matter. A restrictive interpretation will mean that the auditors are not under a duty to report to the members on breaches of the Companies Act by the directors. Nevertheless, that could not have been the intention of the legislature. This is because although a company is a legal person, it is not a natural person who has a mind of its own and responsible for its own actions. The breaches of the Companies Act may have been by the directors and therefore rightfully the auditors should be under a duty to report the matter to the members. S. 174(2)(aa)(i) of the Companies Act provides that if the auditor is of the opinion that the accounts were not drawn up in accordance with a particular applicable approved accounting standard, he shall report whether in his opinion the accounts would if drawn up in accordance with the approved accounting standards, have given a true and fair view of the matters required by S. 169 of the Companies Act. This duty shall also apply in relation to consolidated accounts. It should be noted that mere non-compliance with a single particular applicable approved accounting standard will trigger this provision. If the auditor is of the opinion that the accounts would not have given a true and fair view of those matters even if it was drawn up in accordance with the applicable approved accounting standard, he must give reasons for his opinions. The provision shows that there could be a situation where the non-compliance with the particular applicable approved accounting standard does not amount to breach of duty as long as the reasons are acceptable by the courts. Auditors are also under a duty to report whether the accounting records, other records and registers have been in his opinion properly kept in accordance with the provisions of the Companies Act. If it is a holding company, the auditors must also look into whether the subsidiary companies have done so. The term opinion requires the auditors to give their professional opinion and thus this duty should not be taken lightly merely because the term opinion has been used. Another issue is that although S. 174(1) requires an auditor to report to the members of the company, the provision does not require the auditor to be present at the general meeting at which the auditors report will be tabled. This will enable the members of the company to raise any questions or issues that may have arisen. This is because the AGM is the only platform whereby the members of the company are able to meet the auditors of the company. The auditors need not fear of any statements made by them at the meeting since they are protected by S. 174A of the Companies Act.

3.2 Duty in the Context of Group of Companies

1322

2 INTERNATIONAL CONFERENCE ON BUSINESS AND ECONOMIC RESEARCH (2 ICBER 2011) PROCEEDING

nd

nd

S. 174(2)(c)(i) of the Companies Act provides that in the case of consolidated accounts, the auditors must report which subsidiary companies they have not acted as auditors. S. 174(2)(c)(ii) of the Companies ct provides that the auditor must report whether he has considered the accounts and auditors reports of all subsidiaries of which he has not acted as auditor being accounts that are included in the consolidated accounts. Further, S. 174(2)(c)(iii) provides that he must report whether he is satisfied that the accounts of the subsidiaries are in form and content appropriate and proper for the purposes of preparing consolidated accounts. He must also state whether he has received satisfactory information and explanations for those purposes. Finally, under S. 174(2)(c)(iv), he must state whether the auditors report on the accounts of any subsidiary was made subject to any qualification. It can be seen that the auditor of a holding company must also be concerned with the accounts, registers and reports of the subsidiary companies. This is an extensive duty imposed on the auditors. This duty is pivotal since there are many companies which are within a group of companies.

3.3 Duty to Report Breach and Non-Observance

S. 174(8) of the Companies Act provides that in carrying out auditing duties, if the auditors discover that there has been a breach of the Companies Act and it has not or will not be adequately dealt with by the report or the directors of the company, they are bound to report to the Registrar. This is a watchdog function of the auditors (Hanrahan, Ramsay, Stapledon, Nariman and Bidin,.2002). Nonetheless, it is more than a watchdog function as the provision requires the auditors to review the steps taken by the Board of Directors in addressing the breach. Furthermore, this provision shows that auditing company accounts is not merely an internal matter as it involves the regulatory body i.e. the Registrar. However, the predicament is the standard expected of auditors on this matter. This is because it is unclear whether it is based on what the auditors believe or whether the auditors could have reasonably discovered it. The provision reads ...if an auditoris satisfied Thus, the provision suggests that it is based on what the auditor believes since it is worded subjectively. Notably, the duty to report to the Registrar does not arise if the auditor does not consider that there has been any breach or non-observance of the Companies Act. The provision does not impose any duty since the duty is determined by the auditors themselves. The provision should have incorporated a duty along objective standards. The provision should have read where an auditorought to have known that there has been a breach In that situation, an objective standard is imposed. The standard will be based on what reasonable and competent auditors would have known in the given circumstances. Furthermore, the provision concerns a breach or non-observance of the Companies Act. The provision is criminal in nature because the penalty on the auditors for failure to do so is an imprisonment of two years or a fine of RM 30,000 or both. Thus, the issue is
1323

2 INTERNATIONAL CONFERENCE ON BUSINESS AND ECONOMIC RESEARCH (2 ICBER 2011) PROCEEDING

nd

nd

whether the auditor should be satisfied on the balance of probabilities or beyond reasonable doubt. Essentially, the degree of satisfaction should increase with the gravity of the imputation the auditor is making (Pound, 1994). A further problem is that the provision does not stipulate who committed the breach i.e. whether it is the company, officer or agent of the company. Since a company is not a natural person, the breach must have been committed by the management or the directors of the company. Nonetheless, the provision should have clearly stipulated whether the breach was committed by the company, officers or the agent of the company. However, in the case of Ekran Bhd, it can be seen that the auditors Ernst & Young reported that advances amounting to RM98.9 million which was given to Wembley Industries Holdings Bhd is not in compliance with the Companies Act since it was made to a person connected with the company (New Straits Times, 2003).

3.4 Duty to Report Fraud and Dishonesty

S. 174(8A) of the Companies Act provides that auditors of a public company are under a duty to report to the Registrar if the auditor is of the opinion that a serious offence involving fraud or dishonesty is being or has been committed against the company or the Companies Act by officers of the company. This is inserted by Companies (Amendment) Act 2007 (Act A1299) in July 2007.

A concern is that the duty is only imposed on auditors of a public company or a company which is controlled by a public company. S. 174(8C)(a) of the Companies Act provides a company is considered as being controlled by a public company if the public company has not less than 15% of voting shares in that company. There is no legal rationale for requiring auditors to report on fraud or dishonesty only on companies where the public companies have 15% of voting shares. The public company may choose to hold 14% of voting shares to avoid this provision. Furthermore, it should not be restricted to public companies just because public have invested their money in the company. This is because there is a growing trend of public companies being converted to private companies in recent years. The trend is also seen among public listed companies which are going private (New Straits Times, 2010). In fact shareholders are concerned of such a trend. It should be noted that fraud and dishonesty is not defined in the Companies Act. Nevertheless, S. 174(8C)(b) provides that a serious offence involving fraud or dishonesty means an offence that is punishable by imprisonment for a term that is not less than two years or the value of the assets derived or any loss suffered by the company, member or debenture-holder exceeds RM 250,000 and includes offences under S. 364, S. 364A, S. 366 and S. 368 of the Companies Act.

1324

2 INTERNATIONAL CONFERENCE ON BUSINESS AND ECONOMIC RESEARCH (2 ICBER 2011) PROCEEDING

nd

nd

Essentially, the offence involving fraud or dishonesty must be an offence as provided for under the Companies Act. Furthermore the fact that the provision uses the term includes shows that S. 174(8A) of the Companies Act is not confined to S. 364, S. 364A, S. 366 and S. 368 of the Companies Act. Thus, it seems that the concept of true and fair view no longer acts as a yardstick for auditors to check the accounts of a company since there is a duty to report on fraud and dishonesty reposed on auditors. Observably, the duty to report on fraud and dishonesty is of a higher duty compared to the duty to report on the companys accounts. The former is result oriented i.e. to report on fraud and dishonesty whereas the latter is process oriented i.e. duty to report. Notably, the duty to detect fraud and dishonesty is only imposed on the auditors in 2007 by virtue of the amendment to the Companies Act, whereas the duty was imposed on auditors in the banking sector in 1989. It took 18 years to convince the legislature that the duty should also be imposed on auditors in other sectors. Such a duty is essential. This is because it was felt that corporate accounting does not do violence to the truth occasionally, and trivially, but comprehensively, systematically and universally, annually and perennially (Chambers, 1991). Fundamentally fraud can also distort a companys accounts. In the case involving Inix Technologies Holdings Bhd, three directors were charged with causing the issuance of the prospectus which contained false information pertaining to the revenue for six months financial period ended January 2005 (New Straits Times, 2010). It does raise concern as to the reason the auditors did not detect this fraud. Thus, if the auditors have been more careful, they could have detected the fraud. Furthermore when the directors were charged for such an offence, the auditors should also have been charged under S. 174(8A) of the Companies Act for failing in its duties. However, that is not the case in this situation as only the directors were charged.

4. Conclusion
Auditors are under a duty to audit the company. Nevertheless, if the duties and obligations of auditors are minimal, eventually, the use of a company to do business will be misused and abused. The duties and obligations of auditors must be expanded for the sake of capital market (Carmichael, 1974), stability of financial and economic sector and the rights and interests of those persons and bodies mentioned earlier. A higher audit quality will provide better information to investors and thus generate a more efficient investment (Balachandran and Nagarajan, 1987). REFERENCES Almer, R, and Brody, R. 2002. An empirical investigation of context-dependent communications between auditors and bankers. Managerial Auditing Journal. 17(8):47848.

1325

2 INTERNATIONAL CONFERENCE ON BUSINESS AND ECONOMIC RESEARCH (2 ICBER 2011) PROCEEDING

nd

nd

Bailey, K., Bylinski, J., and Shields, M. 1983. Effects of audit report wording changes on the perceived message. Journal of Accounting Research. 21(2):355-370. Balachandran, B.V., and Nagarajan, N.J. 1987. Imperfect information, insurance and auditors legal liability. Contemporary Accounting Research. 3:281-301. Banyard, P. 2002. Audit Trials. Credit Management. 22. Baxt, R. 1985. The naked auditor: liability for an indeterminate amount to an indeterminate class of people for an indeterminate period of time. Australian Business Law Review. 13:154. Brown, R.E. 2005. Enron/Andersen: crisis in u.s. accounting and lessons for government. Public Budgeting and Finance. 25(3):20. Buang, A. (2010, July 6). Corporate fraud, graft under control. New Straits Times. Business Times (Malaysia). (2003, May 5). Ocean capital reclassified as pn4. Byrnes, N., Brady, D., Lavelle, L., and Palmeri, C. (2002). Accounting crisis. Business Week. Carmichael, D.R. 1974. The assurance function auditing at the crossroads. The Journal of Accountancy. 64. Chambers, R.J. 1991. Accounting and corporate morality: the ethical cringe. Australian Journal of Corporate Law. 1:9&16. Companies Commission of Malaysia, Corporate Law Reform Committee, Review of the Companies Act 1965 Final Report, (Kuala Lumpur: Companies Commission of Malaysia 2007). Davis, M. 2002. Self-regulation called into question. Australian Financial Review. 19:13. Economist. (2002, June 7). A murky sort of pond life, p. 70. Financial Times. (2003, February 11). Flawed equitable claims heap more misery on chairman: andrew bolger and nikki tait on yet another piece of bad news that the troubled mutual has to report to policyholders, p. 4. Francis, T. (2005, June 3). Moving the market tracking the numbers/outside audit: aigs accounting errors raise questions about auditors. Wall Street Journal, p. C3. Hanrahan, P., Ramsay, I. and Stapledon, G. 2000. Commercial applications of company law, 2nd ed. Sydney: CCH.

1326

2 INTERNATIONAL CONFERENCE ON BUSINESS AND ECONOMIC RESEARCH (2 ICBER 2011) PROCEEDING

nd

nd

Hanrahan, P., Ramsay, I., Stapledon, G., Nariman, A., and Bidin, A. 2002. Commercial applications of company law in Malaysia. Singapore: CCH. Holm, C., and Laursen, P.B. 2007. Risk and control developments in corporate governance: changing the role of the external auditor. Corporate Governance. 15(2):322. Houghton, K.A. and Jubb, C.A. 2003. The market for financial report audits: regulations of and competition for auditor independence. Law and Policy. 25(3):299. Leek, J. (1996, August 28). Letter. The Times. Mackerras, M. 2003. Australia. European Journal of Political Research. 42(7-8):880. Main, A. 2002. APRA lacked insurance depth. Australian Financial Law Review 8. Mautz, R.K., and Sharaf, H. 1961. The philosophy of auditing. Monograph No 6 204. New Straits Times. (2002, February 19). Enron-type woes unlikely to occur here: regulators. New Straits Times. (2002, July 22). 150 leave andersen Malaysia. New Straits Times. (2003, November 6). Recoverability of some ekran assets cannot be fully verified. New Straits Times. (2003, December 26). Auditors identify rm400 million deals that made p&d insolvent. New Straits Times. (2006, November 30). Takaful shareholders get a shock. p.38. New Straits Times. (2007, June 7). BCHB mulls legal action over sbb audit. p.39. New Straits Times. (2007, June 8). Audit on southern bank properly conducted: deloitte. p.42. New Straits Times. (2007, June 19). Transmile audit shows losses in 2005, 2006. p.39. New Straits Times. (2007, June 21). Transmile shares extend fall, sc vow swift action. p.35. New Straits Times. (2007, June 25). Transmile: a bumpy ride. p.45. New Straits Times. (2007, July 3). Megan media posts rm1.27b loss. p.36. New Straits Times. (2007, July 4). Transmile rebounds strongly. p.39.

1327

2 INTERNATIONAL CONFERENCE ON BUSINESS AND ECONOMIC RESEARCH (2 ICBER 2011) PROCEEDING

nd

nd

New Straits Times. (2007, July 4). Megan media in more hot water. p.39. New Straits Times. (2007, July 21). Deloitte defends role in transmile. p.27. New Straits Times. (2007, July 27). Steps to improve accounting firms. p.43. New Straits Times. (2007, August 23). Transmile may pick kpmg to be auditor. p.39. New Straits Times. (2008, January 25). Biggest fraud in financial history. p.13. New Straits Times. (2008, January 29). French style of capitalism stained by scandal. p. 48. New Straits Times. (2008, October 18). Paris order audit of all banks after 600m trading loss. p.40. New Straits Times. (2008, December 20). Tanzi, founder of parmalat, gets 10 years for fraud. p.32. New Straits Times. (2009, March 6). Auditors raise substantial doubts about gms viability. p.B12. New Straits Times. (2009, October 1). Ernst & young offices in hk raided amid fraud probe. p.B12. New Straits Times. (2010, August 5). Concern on privatization. p.B1. New Straits Times. (2010, September 24). Three directors charged with falsifying accounts. p.24. Porter, B and Gowthorpe, C, Audit Expectation-Performance Gap in the United Kingdom in 1999 and Comparison with the Gap in New Zealand in 1989 and in 1999, The Institute of Chartered Accountants of Scotland, Edinburgh, (2004). Pound, G. 1994. Auditors obligations. Australian Accountant. 64(1):50. Pound, G., Willingham, J., and Carmicheall, W. 1997. Auditing concept and methods. Australia: The McGrawHill Companies Inc. Robbins, F. 2006. Corporate governance after sarbanes-oxley: an australian perspective. Corporate Governance. 6(1):34. Singh, A. 1976. Company law of singapore and Malaysia. Singapore: Quins Pte Ltd. The Lawyer. (2005, November 7). Man v freightliner ruling eases auditors duty of care responsibilities. p.13.
1328

2 INTERNATIONAL CONFERENCE ON BUSINESS AND ECONOMIC RESEARCH (2 ICBER 2011) PROCEEDING

nd

nd

Veysey, S. 2005. Equitable drops lawsuit against ernst & young. Business Insurance. 39(39):25. Watts, T. (2002, November). Non-audit fees survey: a review of the non-audit services performed by the auditors of the asx top 100 from 1992-2002. Institutional Analysis, Melbourne, p.19. Wilson, S. (1998, November 30). Proposed aicpa guide may weaken auditors role. Fund Action. 9(48):1. Wong, G.B. Lessons from enron: a corporate governance framework for new Zealand. New Zealand Petroleum Conference Proceedings. (2004, March 7th 10th) Auckland, New Zealand. Worden, E. 2002. Whats the auditors role after enrons collapse. New Business Review 27. Yusoff, Y.M., and Anwar, Z. (2007, June 21). Transmile shares extend fall, sc vows swift action. New Straits Times, p.35.

1329