Should auditors act as bloodhounds?

Dr Loganathan Krishnan, Lecturer at the School of Business explores whether auditors should act as bloodhounds or remain as watchdogs.

Never Ending Financial Scandals

Auditors are pivotal in every corporate entity. This is demonstrated by the relevant provisions in the Companies Act 2016, which requires the appointment of auditors. Nonetheless, auditors must discharge their duties effectively so that the requirement of auditors in every corporate entity is legally justified.

In this context, fundamentally, the concern is whether auditors are under a duty to detect and report fraud. Mostly, the scope of this duty must be in tandem with the current corporate landscape in light of financial scandals such as IMDB, SRC International, Felda, to name a few, which attracted global attention. Hence, it is vital to assess the duty to detect and report fraud in the context of the Malaysian legal framework.

Additionally, this duty has to be examined since the Companies Act 2016 has repealed the Companies Act 1965. Furthermore, the Companies Act 2016 has been enacted as comprehensive legislation taking into account the legal developments in the UK and Australia. The study will then explore whether the legal direction taken is appropriate and also investigate whether the provisions are comprehensive. It will include any legal reforms that must be introduced to enhance the duties of auditors in the interests of stockholders and stakeholders.

Getting to the Root of the Cause

This project focuses on how Malaysian laws, i.e. the Companies Act 2016, Capital Market and Services Act 2007, Financial Services Act 2013, Bursa Malaysia Listing Requirements 2018, Code of Corporate Governance 2017 and Central Bank of Malaysia Guidelines on External Auditors 2014 deal with auditors’ duty to detect fraud. Interviews will be conducted to obtain views from audit practitioners, regulators, professional bodies and academics on this issue. A comparative study with the approach taken in the UK and Australia will also be included. Finally, this project will draw conclusions as to the approach the Malaysian laws should take in addressing this issue.

Should Have Nipped it in the Bud

Fraud was first discovered in the case of Kiara Emas Asia Industries Bhd (1997). The most recent is 1MDB. SRC International and Felda, whereby the first two (2) cases also attracted the legal fraternity in the United States of America and Singapore. The proceedings of these cases are closely watched globally.

Thus, this project will unearth to what extent auditors are required to detect and report fraud to the regulators. This project will also show whether Malaysian laws contain any lacunae in not imposing a duty on auditors to detect and report fraud to the regulators, which consequently affect those who rely on auditors’ report.

The Legal Approach

The approach used in this research is literary research which involves legislation, case law, books, journals and media publications of various jurisdictions through the library and electronic database. Additionally, analogical reasoning and historical review will be used. A comparative study will also be carried out to analyse laws in other jurisdictions which may offer a viable solution to the matter at hand since the Companies Act 2016 was drafted based on the laws of the UK and Australia.

All media news concerning fraud published from 2004 to 2019 would be referred to. Additionally, there will be interviews conducted with academics, representatives of non-governmental organisations, practitioners and government officials to seek their views. The interviews are semi-structured. Interviews will be carried out with practitioners in Penang, Klang Valley and Johor Bahru as they represent the main business hubs in Malaysia. Interviews will be conducted with a wide range of persons and bodies to obtain a holistic picture of the subject matter.