Directory UMM :Data Elmu:jurnal:T:The International Journal Of Accounting:Vol35.Issue1.2000:
The International
Journal of
Accounting
Audit Quality in ASEAN
Michael Favere-Marchesi
Simon Fraser University, Burnaby, B.C., Canada
Key Words: ASEAN; Audit quality; International auditing standards; Statutory auditors
Abstract: This study explores audit quality in ASEAN from an analysis of the legal environment
faced by statutory auditors. First, it provides an overview of the national laws, regulations,
professional codes and standards defining the legal environment. Second, it provides an economic
analysis of the main differences among countries and relates those differences to the functioning of
the audit markets, with a potential for uneven audit quality in the region.
Data were collected with questionnaires from national representatives of four ``Big Five''
firms, and accuracy of the information was reviewed by 15 governmental and professional bodies
responsible for regulating the auditing profession in ASEAN.
Analysis of the data revealed a diverse legal environment among the ASEAN countries
possibly creating a climate of differential audit quality. Many differences were observed in the
competence requirements of auditors, the requirements regarding the conduct of statutory audits,
and the reporting obligations. Further, audit quality in some countries is seriously compromised
due to a lack of rules ensuring auditors' independence. Finally, some of the liability regimes in
ASEAN do not provide an incentive for statutory auditors to provide quality audit services. Several
recommendations are made to improve the legal environment by bringing the national laws and
regulations in line with international standards of auditing which would result in a more uniform
audit quality throughout ASEAN.
This article reports the result of a study on audit quality in the member states of the
Association of Southeast Asian Nations (ASEAN). Laws, regulations, professional codes
and standards1 regarding statutory audits define the role and position of auditors, and
affect the functioning of audit markets in the region. Currently, the legal environment in
which auditors operate differs between the ASEAN countries. Thus, the role and position
of statutory auditors are not uniform in the region and this heterogeneity could result in
dissimilar audit quality within the ASEAN community.
The objective of this study is to provide an overview of the legal environment
affecting the role and position of statutory auditors in the ASEAN region. More
Direct all correspondence to: Michael Favere-Marchesi, Associate Professor of Accounting, Faculty of Business
Administration, Simon Fraser University, 8888 University Drive, Burnaby, B.C., Canada, V5A 156; E-mail:
[email protected]
The International Journal of Accounting, Vol. 35, No. 1, pp. 121±149
ISSN: 0020-7063.
All rights of reproduction in any form reserved.
Copyright # 2000 University of Illinois
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THE INTERNATIONAL JOURNAL OF ACCOUNTING
Vol. 35, No. 1, 2000
specifically, it examines the national laws and regulations affecting (1) the appointment and termination of statutory auditors, (2) the independence and incompatibilities
issues faced by auditors, (3) audit reporting, and (4) the liability of statutory auditors.
This overview thus provides a basis to analyze the main differences between the
national laws and regulations and their impact on the functioning of the audit market
in ASEAN.
This study offers several benefits. First, it gives a better understanding of the nature of
the audit function within the ASEAN community and of the reliability that can be placed
on audited financial information. As the ASEAN securities markets play an increasing role
in global investment strategy, this assessment should help to evaluate the risk factors of
investing in the region. Further, as ASEAN becomes more involved in global trading,
companies wishing to invest or conduct business in the region should benefit from
understanding the present state of audit services. Second, by providing a comparative
analysis among the member states, this study should help the ASEAN community in
assessing the adequacy of the current laws and regulations governing the auditing
profession. The study makes several public policy recommendations, using international
audit standards as a benchmark, for the adoption of measures expected to improve audit
quality in ASEAN. In view of the present crisis faced by some of the ASEAN countries,
increasing the quality of audit services should heighten investors' confidence in the fair
play of ASEAN markets.
FRAMEWORK AND SCOPE
There are two parts to this study. The first part concerns an overview of the relevant legal
environment in ASEAN. This overview is based on data provided by the local offices of
``Big Five'' firms. The national representatives of the audit firms were asked to respond to
questionnaires covering the relevant laws and regulations. Table 1 indicates the firms that
participated in the collection of the data in each ASEAN country.
The second part is the analysis of the main differences among ASEAN laws and
regulations, and their impact on the functioning of the audit markets. The analysis uses
insights from economics-based research in auditing to make public policy recommendations using international audit standards as a benchmark. The political feasibility of those
recommendations is beyond the scope of this study. While the overview is concerned with
nearly all regulatory aspects of audit markets, the analysis focuses on the specific issue of
Table 1. Participating ``Big Five'' Firms
Country
Brunei
Indonesia
Malaysia
Philippines
Singapore
Thailand
Vietnam
Firm
Ernst & Young
HTM, member firm of Deloitte Touche Tohmatsu International
Price Waterhouse
SGV & Co., member firm of Arthur Andersen & Co.
Deloitte & Touche
SGV-Na Thalang, member firm of Arthur Andersen & Co.
Arthur Andersen & Co.
Auditing Quality in ASEAN
123
audit quality in ASEAN. Not all laws and regulations are equally relevant to this topic.
Hence, the recommendations emphasize a subset of the national laws and regulations
included in the study.
While the overview deals with laws and regulations concerning audit markets, the
analysis concentrates on the functioning of the audit markets. In this context, the
questionnaires used in the study provide in principle only data on the relevant laws and
regulations. They provided no information on the actual functioning of the markets. While
the respondents provided background information on their national audit market as much
as possible, no direct evidence was collected.
This study did not explicitly examine the role of markets in the supply of audit services
for lack of available empirical data. However, it is obvious that the seven countries
included in the study are at different stages of economic development. For example, while
Singapore has a rather sophisticated financial market and engages in significant global
trading, Vietnam by comparison is still in the transition stage from a government-directed
economy to a freer market environment. Hence, the demand for audit quality will
invariably be different among the ASEAN countries.
Nevertheless, the recent economic crisis in Southeast Asia has proven that lax
accounting practices may result in devastating financial consequences for foreign
investors. Since the reliability of financial information is an essential condition to sound
foreign investments, one step in the economic recovery of the ASEAN countries should be
to promote auditing standards that will lend credibility to the audit process and improve
the quality of financial information.
This study also did not measure the audit concentration of the ``Big Five'' firms in the
seven ASEAN countries and there are no empirical data to that effect. If international firms
dominate the audit markets in the region, one could argue that the mechanisms by which
these firms maintain and enhance their reputation for audit quality might be more relevant
than ``minimum'' standards via regulation. However, some anecdotal evidence seems to
counter this claim. Because most international public accounting firms are mixtures of
different national auditing firms, the quality of work performed may vary. For example,
SGV in the Philippines (a member firm of Arthur Andersen Worldwide) is subject to the
internal peer review program prescribed by Arthur Andersen for all its member firms but
not to an external peer review. In fact, the World Bank recently encouraged the ``Big Five''
accounting firms to ensure that ``their developing-world affiliates meet international
auditing and accounting standards'' (Wall Street Journal, 1998).
Four dimensions define the scope of this study. First, the countries covered in this study
correspond to the member states of the ASEAN as of December 31, 1996.2 At that date,
the member states were Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore,
Thailand, and Vietnam. Laos and Myanmar were admitted into ASEAN on July 23, 1997
and thus were not included in this study. Second, this study defines ``entities subject to a
statutory audit'' as private enterprises that are audited as a requirement of national law.
Audits of public sector organizations are not included, though they may be performed
under national laws and regulations similar to those applying to audits of private entities.
Third, auditors included in this study are those who have the right to conduct statutory
audits for the entities defined above. Finally, the questionnaires asked the respondents to
describe the status of laws and regulations as of June 1997, and any recent or upcoming
major changes in the legal environment.
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METHODOLOGY
This section presents the development of the questionnaires and the procedures to ensure
the quality of the data collected. The major activity for the first part of the study was to
obtain data on all the institutional details relevant to the role and position of statutory
auditors. Data on the laws and regulations were collected with questionnaires completed
by national representatives of the four participating audit firms. The first questionnaire was
developed by adapting to the region a research instrument previously used in a European
study (Buijink et al., 1996). The questionnaire used an open question format to allow
respondents more flexibility and give them the opportunity to add background information
to their answers. Additionally, many questions explicitly asked for background data on the
function of the statutory audit and the nature of the financial information in the country of
the respondents. The questionnaire asked information about the following topics: appointment and termination of statutory auditors, independence and incompatible activities,
relationships of statutory auditors with the company, liability of statutory auditors towards
the company and third parties, and contents of the audit reports.
Upon examining the answers, some of the completed questionnaires did not address a
number of specific issues and some of the responses required further clarification. Thus, a
second questionnaire was mailed to the national representatives with a list of questions
specific to each country. The information provided by both questionnaires was then
summarized and the overview sent to the national representatives to ensure that the data
compilation was correct. Finally, to enhance the accuracy of the information, the final
overview was mailed to the relevant professional and governmental bodies regulating the
auditing profession in each ASEAN country for their review. In total, 15 professional and
governmental bodies, including the ASEAN Federation of Accountants (AFA), were
involved in this review. This process was considered likely to result in the best quality of
Table 2. ASEAN Professional and Governmental Bodies
Country
Organizations
ASEAN
Bruneia
ASEAN Federation of Accountants
Ministry of Finance, Brunei Darussalam Institute of Certified
Public Accountants
Ministry of Finance, Indonesian Institute of Accountants
Ministry of Finance, Malaysian Institute of Accountants,
Malaysian Association of Certified Public Accountants
Professional Regulation Commission, Philippines Institute of
Certified Public Accountants
Public Accountants Board, Institute of Certified Public
Accountants in Singapore
Board of Supervision of Auditing Practice, Institute of Certified
Accountants, and Auditors of Thailand
Ministry of Finance, Vietnamese Accounting Association
Indonesia
Malaysia
Philippines
Singapore
Thailand
Vietnam
Note:
a
The Brunei Darussalam Institute of Certified Public Accountants was the only ASEAN professional body that could not
perform the quality review of the data within the 60-day period. However, the Brunei Ministry of Finance reviewed the
data within the same period and concluded that the information properly reflected the current rules and procedures
affecting statutory auditors in Brunei.
Auditing Quality in ASEAN
125
information possible, given the time constraints. Table 2 shows the names of the ASEAN
professional and governmental bodies involved in the quality review of the data.
DESCRIPTIVE RESULTS
This section provides an overview of the laws, regulations, professional codes, and auditing
standards affecting statutory auditors. The first part of this section summarizes the audit
environment in each of the ASEAN countries. The second and third parts detail the
appointment and termination procedures, respectively. The fourth part discusses the
independence requirements imposed on statutory auditors as well as incompatible activities.
The fifth part focuses on audit reporting. Finally, the last part reviews statutory auditors'
liability towards the company and third parties. The seven member countries of ASEAN as
of December 31, 1996 are included in this study. In the remainder of the article, the names of
the countries are abbreviated, using the first four letters of the full name (Table 3).
The Audit Environment in ASEAN
Brunei
Currently, no rules, guidelines or policies have been issued by either a professional
body or the government to regulate the auditing profession. The Brunei Institute of
Certified Public Accountants (BICPA) is not officially recognized by the government as a
regulating body for the auditing profession. Hence, the BICPA does not issue any rules,
guidelines or policies regulating the auditing profession. The Ministry of Finance can be
considered as the de facto regulatory body by virtue of its authority to grant audit licenses.
The Companies' Act gives the Ministry of Finance the responsibility and authority to
process applications for audit license, and thus empowers it to reject a new application,
refuse the renewal of an existing license, and cancel an existing license. In the absence of
established local auditing standards, the International Standards on Auditing (ISA) are
generally applied in practice.
Indonesia
The Indonesian Institute of Accountants or Ikatan Akuntan Indonesia (IAI) is the
government-sanctioned organization which has the responsibility to establish and review
Table 3. ASEAN Countries Abbreviations
Country
Brunei
Indonesia
Malaysia
Philippines
Singapore
Thailand
Vietnam
Abbreviation
BRUN
INDO
MALA
PHIL
SING
THAI
VIET
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accounting and auditing standards, and the Accountants' Code of Ethics. The auditing
profession is regulated and monitored by the Ministry of Finance under Decree No. 43
dated January 1997 regarding Public Accountants' Services. The Ministry grants licenses
to practice as a public accountant and only registered public accountants can be appointed
as statutory auditors. To be registered as a statutory auditor, one must reside in Indonesia,
pass the examination administered by IAI, be a member of IAI, have 3 years of work
experience as an auditor, and, for the audit of listed companies, be accredited by the
Capital Market Supervisory Board.
Malaysia
The 1967 Accountants' Act regulates the auditing profession. The Malaysian Institute
of Accountants (MIA) is the statutory national accountancy body, whereas the Malaysian
Association of Certified Public Accountants (MACPA) is a professional body. In addition,
various sections of the Companies' Act relate to approved company auditors and most of
the laws relating to government agencies contain several provisions covering the
qualifications, roles, and duties of auditors.
Both bodies issue local auditing standards and adopt the auditing guidelines, modified to
suit the local business environment, issued by the International Auditing Practices
Committee of the International Federation of Accountants (IFAC). These two bodies have
their own Code of Professional Ethics and Conduct, and are empowered to conduct
investigations and take disciplinary actions on any complaint filed by the public against
its members.
To qualify for appointment as a statutory auditor, one must be a public accountant
registered with the MIA and licensed by the Ministry of Finance. Membership to the MIA
requires either a degree in accountancy from a local university or membership in the
MACPA, and 3 to 5 years of practical experience in the field of auditing. To become a
member of MACPA, one must either pass the examinations conducted by MACPA or hold
an accountancy qualification recognized by MACPA, and have no less than 3 years of
relevant practical experience.
Philippines
The 1975 Revised Accountancy Law regulates the auditing profession. Only
certified public accountants are allowed to conduct statutory audits. The Professional
Regulation Commission (PRC) was created in 1973 by Presidential Decree to supervise
and regulate the various professions in the Philippines, including the accounting
profession. The PRC is under the administrative supervision of the Civil Service
Commission, an independent agency reporting to the Office of the President. A Board
of Accountancy, operating under the supervision of the PRC controls the licensing of
certified public accountants. Its members are appointed by the President of the
Philippines. Specifically, the Board determines and prescribes the minimum requirements for the admission of candidates to the CPA examination. It administers the CPA
examination and issues certificates to those who have satisfactorily passed the
examination. The Board also investigates violations of the Revised Accountancy Law
and, after due process, may suspend, revoke, or reissue certificates of registration.
Auditing Quality in ASEAN
127
Subject to the PRC's approval, the Board promulgates rules and regulations, and sets
professional and ethical standards.
In 1975, the PRC issued a certificate of accreditation to the Philippine Institute of
Certified Public Accountants (PICPA) as the national profession-wide organization of
CPAs. There are four other organizations composed exclusively of CPAs engaged in the
major areas of accountancy. They are the Association of CPAs in Public Practice
(ACPAPP), the Association of CPAs in Commerce and Industry (ACPACI), the Association of CPAs in Education (ACPAE), and the Government Association of CPAs (GACPA).
Under the integration concept defined by the PRC, these organizations co-exist with
PICPA and pursue activities and objectives compatible with those of PICPA. The Auditing
Standards and Practices Council (ASPC), established by PICPA in coordination with
ACPAPP, promulgates auditing standards, practices and procedures. The pronouncements
issued by ASPC and approved by the PRC (through the Board of Accountancy) become
generally accepted by the auditing profession. US auditing standards and the pronouncements of the International Auditing Practices Committee significantly influence the
development of auditing standards in the Philippines.
Singapore
The 1987 Accountants' Act regulates the auditing profession. The Public Accountants'
Board (PAB) is the regulatory body and the Institute of Certified Public Accountants of
Singapore (ICPAS) is the professional body. In addition, various sections of the 1967
Companies' Act (revised in 1994) relate to approved company auditors. The functions of
the PAB are to (1) register public accountants, (2) maintain a register of public
accountants, and (3) determine the qualifications of persons seeking registration as public
accountants under the Accountants' Act. In addition, it controls and regulates the practice
of the accountancy profession by public accountants. Finally, it regulates the conduct and
ethics of public accountants, and hold inquiries when rules of conduct or ethical behavior
have allegedly been violated.
In addition to registering with the PAB, public accountants also need to be members of
the ICPAS in order to call themselves ``Certified Public Accountants.'' The ICPAS was
established in 1963 as the Singapore Society of Accountants and renamed the ICPAS in
1989 (pursuant to the 1987 Accountants' Act). The ICPAS is responsible for the technical
development and advancement of the profession. The Singapore Standards on Auditing
issued by ICPAS are practically the same standards issued by the International Auditing
Practices Committee. In practice, all statutory auditors in Singapore are members of both
the PAB and the ICPAS.
Thailand
The 1962 (Buddhist Era Year 2505) Auditing Act established the Board of Supervision
of Auditing Practice (BSAP) which has the power to regulate the auditing profession. The
BSAP is a government agency under the Ministry of Commerce. The Act prescribes that
only certified public accountants are eligible to conduct statutory audits in Thailand. The
BSAP determines the qualifications of persons seeking registration as public accountants
by holding the necessary examinations that enable persons to qualify for registration.
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Additionally, it sanctions the accounting and auditing standards promulgated by the Institute
of Certified Accountants and Auditors of Thailand (ICAAT). Statutory auditors are appointed
by the shareholders at their annual general meeting and must be approved by the Securities
and Exchange Commission (SEC) for publicly listed companies and by the Bank of Thailand
for banks and finance companies. The ICAAT promulgates auditing standards, practices, and
procedures. The pronouncements must be approved by the BSAP to become generally
accepted by the auditing profession. Most auditing standards follow the ISA.
Vietnam
The Ministry of Finance of the Socialist Republic of Vietnam regulates the auditing
profession. The auditing rules and regulations in Vietnam are contained in two documents:
Decree 07 of the Vietnamese Government dated January 29, 1994, and Circular 22/TCDK
dated March 19, 1994, which details the provisions of Decree 07. Though Circular 22
provides detailed guidance on the auditing profession, various auditing matters are not
included therein, including Vietnamese auditing standards. The Ministry of Finance is
currently developing such standards. The Ministry of Finance is responsible for issuing
and guiding the implementation of the principles, criteria, and professional methods of
audit applied in the national economy. Additionally, the Ministry coordinates the
implementation of programs to train and educate professionals who wish to perform
audits. It also regulates the professional examinations and the granting of the auditing
certificates. A Selection Council at the State level set up by the Ministry administers the
professional examinations.
Furthermore, the Ministry of Finance processes applications for the establishment of
auditing firms, and manages the registration of individual auditors. Currently, statutory
audits are conducted by local firms (100% Vietnamese owned) and by the ``Big Five,''
organized either as joint venture auditing firms (partially foreign-owned) or 100 percent
foreign-owned auditing firms. While local auditing firms apply the Vietnamese auditing
methods, the ``Big Five'' firms follow the International Auditing Standards. The Ministry
of Finance also regulates the operations of auditing firms, and settles differences and
disputes arising from the result of the audit.
The Vietnamese Accounting Association (VAA), recognized by the Ministry of
Finance, is a professional body with a limited consultative role. Its aim is to unite those
engaged in the accounting and auditing profession in order to maintain and develop the
profession, improve expertise and professionalism, and preserve professional morality.
The Ministry of Finance issues legal documents about accounting and auditing operations
with the assistance and advice of the VAA.
Appointment of Statutory Auditors
Eligibility
Except in Thailand and Vietnam, both natural persons and auditing firms may be
appointed as statutory auditors. In Thailand, only natural persons and, in Vietnam, only
auditing firms may be appointed as statutory auditors.
Auditing Quality in ASEAN
129
In most countries, no specific restrictions exist on the delegation of audit work and the
qualifications of the individuals to whom audit work is delegated. Except for Indonesia
and the Philippines, no restrictions exist on the delegation of audit work and no specific
guidelines are given on the extent of work carried out by assistants. Further, except for
Indonesia and Vietnam, no educational or professional requirements are specified for the
assistants to whom the audit work is delegated. Generally, the only restriction is that a
licensed auditor sign the audit report.
In Indonesia, assistants need to have completed an accounting degree, be informed of
their responsibilities, and know the objectives of the procedures they are to perform. In the
Philippines, most audit work may be delegated as long as assistants are properly
supervised. Aspects of the audit work that cannot be delegated include the final assessment
and evaluation of the audit results, the conclusion on the overall financial statement
presentation, and the signing of the audit report. Vietnam has no guidelines on the
delegation of audit work but assistants must possess an accounting or finance degree from
a recognized university or vocational school.
Qualifications
Several requirements typically exist to qualify a statutory auditor. For example, there
may be proficiency (e.g., CPA examination) and/or educational (e.g., accounting degree)
requirements. Practical experience in the field of auditing may also be necessary to register
or be licensed as a statutory auditor. Significant differences exist among ASEAN countries
in the requirements to qualify as statutory auditor. Some countries have no educational
and/or proficiency requirements (Malaysia, Singapore) while others have either no
practical experience requirement (Philippines) or an unusually low requirement (Thailand).
Table 4 summarizes the requirements to qualify as a statutory auditor.
In order to retain their qualification, statutory auditors are often required to maintain
sufficient up-to-date knowledge through programs of continuing professional education
(CPE). Again, significant differences among countries can be observed. Brunei and
Vietnam have no CPE requirements, and Thailand has an unusually low requirement
Table 4. Qualification Requirements for Statutory Auditors
Country
Educational
requirement
Proficiency
requirement
Minimum period of
practical experience
required
BRUN
INDO
MALA
PHIL
SING
THAI
VIET
Yes
Yes
Yes
Yes
Noa
Yes
Yes
Yes
Yes
Noa
Yes
Noa
Yes
Yes
5 years
3 years
3 years
None
3 years
1,000 hours within 1 year
5 ±10 yearsb
Notes:
a
Required of public accountants who wish to become members of the MACPA (Malaysia) or ICPAS (Singapore) and be
recognized as ``Certified Public Accountants.''
b
University graduates in f inance are required to have at least 5 years of experience in accounting and f inance; graduates
from a vocational school of finance and accountancy are required to have at least 10 years of similar experience.
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Table 5. Continuing Professional Education Requirements
Country
Continuing professional education required and minimum CPE credit hours
BRUN
INDO
MALA
No
Yes
Yes
PHIL
SING
THAI
VIET
Yes
Yesb
Yesc
No
Notes:
±
120 hours over 3 years with a minimum of 30 hours per year
50±60 points from unstructured learning activities and 20±40 points from
structured learning activities per yeara
60 hours over 3 years
40 hours per year
24 hours over 5 years
±
a
Some activities such as CPE courses and conferences organized by the MIA are awarded three points per hour while
those conducted by accredited institutions are awarded one point per hour.
b
Mandatory for all members of the ICPAS, but not required by the PAB to be registered as a public accountant and
licensed to conduct statutory audits.
c
Can be substituted by continuing professional experience.
substitutable by professional experience if the auditor has signed at least one set of
statutory audited financial statements within five years (Table 5).
Nominations and Appointments
The parties responsible for the nomination and appointment of statutory auditors vary
among countries. In some countries (e.g., Philippines), management retains a lot of
control over the selection of auditors, while in others (e.g., Brunei), shareholders are
empowered with this prerogative. Table 6 specifies the parties responsible for nominating
and appointing statutory auditors, and whether approval of the appointment is required.
Restrictions
The Philippines and Vietnam have no procedures for or restrictions on communication
between the incoming and outgoing auditors. In Brunei, such communication is the
practice, though not required by law. In all other countries, the incoming auditor must
communicate with the outgoing auditor before accepting the engagement.
Advertising and unsolicited offering of services are prohibited in all countries, except
Vietnam. Companies may use tenders (i.e., offers to bid for an audit engagement) in the
appointment process. In Thailand, tenders are frequent and the Board of Directors will
nominate one firm from among those who have submitted bids. Brunei, Indonesia, the
Philippines, and Vietnam have no statutory requirements for tenders. However, in Brunei,
Indonesia, and the Philippines, some companies use tenders in the appointment process. In
Vietnam, government-owned projects or projects sponsored by the World Bank use
tenders in the appointment of statutory auditors. Malaysia and Singapore do not allow
auditors to respond to tenders.
Termination Procedures
Audit appointments terminate when the statutory auditor voluntarily withdraws from
the appointment (resignation) or is asked to withdraw from the appointment (dismissal).
Auditing Quality in ASEAN
131
Table 6. Nomination, Appointment, and Approval of Auditors
Party approving
the appointment
Country
Nominating party
BRUN
INDO
Shareholders
Shareholders
None
None
MALA
Shareholders
Directors and/or
shareholders
Shareholders
Shareholders
PHIL
Management
Management
SING
Shareholdersa
Shareholdersa
THAI
Directors
Shareholders
VIET
General Director
Directors
Shareholders and the
Central Bank of
Malaysia for financial
institutions
Board of Directors,
shareholders, or both
depending on company's
by laws
Shareholders and the
Monetary Authority of
Singapore for financial
institutions
SEC for publicly listed
companies and the Bank of
Thailand for financial
institutions
State Bank of Vietnam
for financial institutions
Note:
a
Appointing party
Often delegated to the Board of Directors.
Auditors usually resign because of loss of independence, material fraud, or conflict of
interest. Table 7 summarizes the resignation particulars for each ASEAN country.
Companies often dismiss auditors because of disagreements on fees, matters of
accounting principles or practices, financial statement disclosures, or auditing scope or
procedures. Table 8 summarizes the dismissal particulars for each ASEAN country.
The notification procedures relating to the termination of statutory auditors also vary
among countries. Brunei, Indonesia, and Vietnam have no public filing or required
notification procedures. In Thailand, only the shareholders are notified of the termination
of statutory auditors. In the Philippines, public companies are required to notify the SEC of
a change in auditors but there are no requirements of public notification for private
companies. In Malaysia, the company must send a copy of the resolution to remove an
auditor to the shareholders, the auditor concerned and the Registrar of Companies. In
addition, for publicly listed companies, the Kuala Lumpur Stock Exchange must be
Table 7. Auditor's Resignation
Resignation possible
Serious motives required
Approval by third party
required
BRUN
INDO
MALA
PHIL
SING
THAI
VIET
Yes
No
No
Yes
Yes
No
Yes
No
No
Yes
No
No
Yes
No
No
Yes
Yes
No
Yes
No
No
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Table 8. Auditor's Dismissal
Dismissal by appointing body
Dismissal by body other than
appointing body
Serious motives required
Approval by third party
required
BRUN
INDO
MALA
PHIL
SING
THAI
VIET
No
Yes
Yes
Yesa
Yes
No
Yes
No
Yes
No
Yes
Yesb
Yes
No
No
No
No
No
No
No
No
No
No
No
Yes
No
No
No
a
Statutory auditors appointed by the Board of Directors could be dismissed by the shareholders.
Bank of Thailand for financial institutions and SEC for public companies.
Notes:
b
notified of the change in auditors. In Singapore, the change of auditors must be filed with
the Registrar of Companies.
The defensive rights of auditors vary between countries. Brunei and Thailand do not
grant auditors the right to defend their position. Further, in Brunei, the Philippines,
Thailand, and Vietnam, auditors are not legally entitled to compensation fees upon
termination. Table 9 summarizes the defensive rights of statutory auditors.
Table 9. Auditor's Rights
Country
Rights to defend position
Entitled to compensation fees
BRUN
No
±
No
INDO
No
±
Yes
MALA
Yes
Representation to the
shareholders in writing
or personally
Yes
PHIL
Yesa
No
SING
Yes
THAI
No
Letter filed with SEC
stating nature of
disagreements
Representation to the
shareholders in
writing or personally,
and filed with the
Registrar of Companies
±
VIET
Yes
Note:
a
Complaint filed with
the Court of Economy
For public companies only.
Yes
No
No
In practice, auditors are
compensated for a
portion of the work
performed
Any outstanding fees for
professional services
before termination
Fees owed to outgoing
auditor must be paid
before incoming
auditor can accept the
engagement
±
Fees owed to outgoing
auditor must be paid
before incoming
auditor can accept the
engagement
In practice, auditors
are compensated for
a portion of the work
performed
±
Auditing Quality in ASEAN
133
Table 10. Auditor's Restrictions
BRUN
Personal relationship
Commercial relationship
Financial interest or relationship
Influential position
Notes:
a
Yes
Yesa
Yesa
No
INDO
MALA
PHIL
SING
THAI
VIET
No
No
No
No
No
No
Nob
No
No
No
No
No
No
No
Noc
No
No
No
No
No
No
No
No
No
a
Not prohibited by local laws and regulations.
Allowed if the amount of the auditor's indebtedness to the company or related party is less than RM 2,500.
c
Allowed if holding less than 5 percent of a public company's or less than 20 percent of a private company's equity share
capital, and/or loan to/from auditee or related parties is S$2,500 or less.
b
Independence and Incompatible Activities
Restrictions
Table 10 summarizes the restrictions aimed at preserving the independence of statutory
auditors. The relationships allowed (Yes) or prohibited (No) are between the statutory auditors
(or related persons) and the entity being audited (or related parties).
To preserve their objectivity, auditors may not be allowed to provide other services to a
statutory audit client within the same legal entity. However, these restrictions may be
ineffective if the same accounting firm has the ability to provide services through multiple
legal entities. Table 11 details the services that auditors can provide to an audit client
within the same legal entity.
Several other mechanisms are aimed at reducing threats to auditor's objectivity. Some
examples are rules concerning audit fees, regulations mandating the rotation of audit
partners or firms, restrictions on personnel movement, and sanctions attached to breach of
independence. Table 12 summarizes those provisions.
Safeguards
Safeguards such as internal or external quality reviews, or the involvement of an audit
committee are often used to minimize the potential of threats to objectivity faced by
auditors. Table 13 summarizes the available safeguards.
Table 11. Services Provided by Auditor
BRUN
Bookkeeping/Accounting
Tax
Legal services
Consulting
Investment/Financial advising
Corporate recovery
Notes:
a
Yes
Yes
Yes
Yes
Yes
Yes
INDO
Yes
Yes
No
Yes
Yes
Yes
MALA
No
Yes
No
Yes
Yes
No
PHILa
Yes
Yes
Yes
Yes
Yes
Yes
SING
Yes
Yes
No
Yes
Yes
Yes
THAI a
Yes
Yes
Yes
Yes
Yes
Yes
b
VIET
Noc
Yes
No
Yes
Yes
Yes
Allowed as long as the auditor does not have a relationship with the client in any capacity equivalent to that of a
member of management or employee.
b
If the owners of the bookkeeping firm are not the same as the owners of the audit firm.
c
Bookkeeping and compilation work may be provided with specific approval of the Ministry of Finance.
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Table 12. Provisions to Reduce Threats in Auditor's Objectivity
Audit fees fixed in advance
Rules to calculate audit fees
Rules to avoid low balling
Overdependence on single
client with respect to audit fees
Rotation of auditing firms
required
Rotation of audit partners
required
Restrictions on auditors
moving to clients
Restrictions on clients'
personnel moving to
auditing firms
Sanctions for breach of
independence
Notes:
BRUN
INDO
MALA
PHIL
SING
THAI
VIET
Yes
No
No
No
Yes
No
No
No
Yes
Yesa
Yes
Yes
Yes
No
No
No
No
No
Yes
Yes
Yes
No
No
No
Yes
No
No
Yes
No
No
No
No
No
No
No
No
No
No
No
Yesb
No
No
No
No
No
No
No
No
No
No
No
Noc
Noc
Noc
No
No
No
Yes
Yes
Yes
Yes
Yes
Yes
a
MIA's recommended basis for determining audit fees serves as a guide only. In practice, audit fees are negotiated
between the company and the auditors.
b
Audit partners are rotated every 5 years for publicly listed companies.
c
Restrictions are limited to situations in which the independence rule may be violated.
Audit Reporting
Statutory auditors can be required to report on matters other than the ``truth and
fairness'' of the annual financial statements. Such a reporting obligation implies that the
statutory auditors need to report on specified matters in the auditor's report or to other
parties. Three tables present the role of the statutory auditors. Table 14 shows the
reporting obligations of statutory auditors in the auditor's report. Table 15 lists the
reporting requirements to external bodies. Table 16 reports the disclosure and audit
requirements of interim financial information and environmental matters.
Except in Vietnam, the auditor's opinion is published in full with the annual financial
statements. In Vietnam, the opinion is published in condensed form, which does not
Table 13. Safeguards to Minimize Threats to Auditor's Objectivity
BRUN
Challenges to objectivity disclosed
Quality reviews by regulators
Quality reviews by peer audit firms
Internal quality reviews
Potential threats to objectivity
monitored by independent party
Audit committees required
Notes:
a
INDO
MALA
PHIL
SING
THAI
a
VIET
No
No
No
No
No
No
Yes
No
Yes
No
Yes
No
No
Yes
Yesa
No
No
No
No
No
Yes
No
Yes
No
Yesb
Yes
No
No
No
No
No
No
No
No
No
No
No
Yesa
No
Yesb
No
No
For financial institutions and publicly listed companies.
b
For publicly listed companies only.
Auditing Quality in ASEAN
135
Table 14. Reporting Obligations in Auditor's Report
Fraud or irregularities
Illegal acts
Internal controls and systems
Maintenance of proper
accounting records
Going concern
Corporate governance
Note:
BRUN
INDO
MALA
PHIL
SING
THAI
VIET a
No
No
No
No
No
No
No
No
No
No
No
Yes
No
No
No
No
Yes
Yes
Yes
Yes
No
No
No
No
No
No
No
No
Yes
No
Yes
No
Yes
No
Yes
No
Yes
No
Yes
No
No
No
a
Circular 22 only recommends but does not require disclosure of these items in the auditor's report.
Table 15. Reporting Obligations to Other Parties
Fraud or irregularities
Illegal acts
Internal controls and systems
Maintenance of proper
accounting records
Going concern
Corporate governance
Notes:
BRUN
INDO
MALA
PHIL
SING
THAI
VIET
No
No
No
No
Yesa
Yesa
Yesa
Yesa
Yesa
Yesc
Yesa
No
Yesb
No
Yesb
No
Yes
Yes
Nod
Yes
Yesa
No
Yesa
Yesa
No
No
No
No
No
No
Yesa
No
No
No
No
No
Nod
No
Yesa
No
No
No
SING
THAI
VIET
a
Report to the Board of Directors.
Report to management under local auditing standards.
c
Report in writing to the Registrar of Companies under the 1965 Companies' Act.
d
Except to the Monetary Authority of Singapore for financial institutions.
b
Table 16. Interim Financial Information and Environmental Matters
BRUN
Disclosure of interim financial
information
Audit of interim financial
information
Disclosure of environmental
matters
Audit of environmental matters
Notes:
INDO
a
MALA
b
PHIL
c
b
a
No
Yes
Yes
Yes
Yes
Yes
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
a
Quarterly financial results required for listed companies.
b
Mid-year financial results required for listed companies.
c
Quarterly condensed financial statements (unaudited) required for public companies.
include a description of the audit work performed and its results. The nature of the audit
opinion is different among countries (Table 17).
The scope of the work performed is not mentioned in Malaysia and Vietnam, and
reference to auditing standards is not required in Brunei and Vietnam. As shown in
Table 18, the requirements to use standard forms of published audit reports vary among
the countries.
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Table 17. Audit Opinions
Country
Nature of auditor's opinion
Report on compliance with
accounting laws and regulations
BRUN
INDO
MALA
PHIL
SING
THAI
VIET
``true and correct''a
``present fairly''
``true and fair''
``present fairly''
``true and fair''
``present fairly''
``faithful and reasonable''
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Note:
a
Limited to an opinion on the balance sheet.
In the countries where standard forms of audit reports are established by professional
bodies, the following reports are available: unqualified opinion, unqualified opinion
with explanatory paragraph, qualified opinion, adverse opinion, and disclaimer of
opinion. More variation is observed in the statement of responsibilities as evidenced
in Table 19.
The situations under which the auditors will issue a qualified report also differ
among countries. Table 20 indicates whether the auditor's opinion can be qualified in
case of limitations placed on the scope of work performed, existence of uncertainties, or
other matters.
The use of a ``subject to'' qualified opinion is still used in some countries. In Malaysia,
a ``subject to'' qualification is used for uncertainties either inherent or arising from a scope
limitation and the issue is regarded as material but not fundamental. In Brunei and
Singapore, an audit report could be qualified on the basis of a ``subject to.'' Auditors are
not required to take a definite position on issues where they cannot form an opinion. In
Thailand and Vietnam, a ``subject to'' opinion is used when the financial statements are
affected by uncertainties concerning future events.
Finally, in some countries, auditors are allowed to emphasize in the audit report
matters which they regard as relevant to a proper understanding of their opinion. For
example, auditors may wish to emphasize that the audited entity is a unit of a larger
business enterprise or that it had significant transactions with related parties.
Table 18. Standard Audit Reports
Country
Standard forms of
published audit reports
required by law
Matters to be included
in reports specified
by law
Standard forms of
published audit reports
established by
professional bodies
BRUN
INDO
MALA
PHIL
SING
THAI
VIET
No
No
No
No
Yes
Yes
No
Yes
No
Yes
No
Yes
Yes
Yes
No
Yes
Yes
Yes
Yes
Yes
No
Auditing Quality in ASEAN
137
Table 19. Statement of Responsibilities
Country
Audit report indicates party responsible for the preparation of audited
information and describes statutory auditors' responsibilities
BRUN
INDO
No
Yes
MALA
PHIL
No
Yes
SING
Yes
THAI
VIET
No
No
±
Management is responsible for the
preparation of financial statements
and the auditor is responsible for
the opinion on those statements.
±
Management is responsible for the
preparation of financial statements
and the auditor is responsible for
the opinion on those statements.
Management is responsible for the
preparation of financial statements
and the auditor is responsible for
the opinion on those statements.
±
±
Furthermore, auditors may draw attention to unusually important subsequent events or
to accounting matters affecting the comparability of financial statements. Such
supplementary information is presented in a separate paragraph of the auditors' report
(before the opinion paragraph). Certain circumstances, while not affecting the auditors'
unqualified opinion, may require the auditors to add an explanatory paragraph or
other explanatory language to the standard report. Table 21 presents examples of
such matters.
Liability of Statutory Auditors
Liability in General
In general, a liability regime consists of civil liability, criminal liability, and
professional sanctions. Whether auditors are exposed to civil or criminal liability usually
depends on the nature of the offense committed by the statutory auditor. Generally,
auditors are subject to civil liability when they breach contractual and/or civil obligations. Usually, criminal liability is not defined with respect to audit matters, but arises
from general definitions of criminal acts (e.g., intentionally providing misleading
information). Statutory auditors can also be sanctioned (e.g., warning, exclusion) by
professional or regulatory bodies. Table 22 lists the range of professional sanctions
against statutory auditors.
Civil Liability
The engagement contract between the auditor and the auditee is a civil law contract.
The main issue in civil liability relates to privity, which refers to whether a party not
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Table 20. Qualification of Audit Opinion
Auditor's opinion qualified in the event of scope limitations, uncertainties,
or other matters
Country
Scope limitations
Uncertainties
Other matters
Departure from generally accepted accounting
principles, financial statements not in
accordance with laws and regulations,
inadequate disclosures, disagreement with facts,
or amounts disclosed in the financial statements.
Departure from generally accepted accounting
principles, inadequate disclosures, disagreement
with facts, or amounts disclosed in the
financial statements.
Departure from generally accepted accounting
principles, financial statements not in accordance
with laws and regulations, inadequate
disclosures, disagreement with facts, or
amounts disclosed in the financial statements.
Departure from generally accepted accounting
principles, inadequate disclosures, or lack
of sufficient competent evidential matter.
Departure from generally accepted accounting
principles, or inadequate disclosures.
Departure from generally accepted accounting
principles or financial statements not in
accordance with laws and regulations,
substantial doubt about going concern,
material changes in accounting principles,
or inadequate disclosures.
Departure from generally accepted accounting
principles, financial statements not in accordance
with laws and regulations, inadequate
disclosures, disagreement with facts or
amounts disclosed in the financial statements.
BRUN
Yes
Yes
INDO
Yes
No
MALA
Yesa
Yesa
PHIL
Yes
No
SING
Yes
Yes
THAI
Yesa
Yesa
VIET
Yes
Yes
Note:
a
Qualified ``subject to'' opinion if material.
involved in the original contract (i.e., third party) can initiate litigation in the context of the
contract. Thus, the liability position of auditors is two-fold. Auditors may be exposed to
litigation initiated by the other contract party (i.e., the auditee). They can also be subject
(together with the auditee) to litigation initiated by a third party (e.g., shareholders). Table
23 summarizes the parties to whom auditors are exposed in civil liability.
Limitations of Liability
Some procedures aim at limiting the risk of civil liability faced by auditors. First,
liability may be capped. A legal liability cap is applicable when auditors are exposed to
civil liability initiated by the other contract party (i.e., the auditee) or by a third party (e.g.,
shareholders). A contractual liability cap is applicable when auditors are exposed to civil
liability by the other contract party. It is not available when auditors together with the
Auditing Quality in ASEAN
139
Table 21. Modification of Unqualified Audit Opinion
Country
Opinion based
partly on other
auditor's report
Uncertainties
about future
events
Substantial doubt
about going
concern
Material changes
in accounting
principles
BRUN
INDO
MALA
PHIL
SING
THAI
VIET
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Nob
Yes
Yes
Nob
Yes
Yes
Yes
Nob
Yes
Yes
Journal of
Accounting
Audit Quality in ASEAN
Michael Favere-Marchesi
Simon Fraser University, Burnaby, B.C., Canada
Key Words: ASEAN; Audit quality; International auditing standards; Statutory auditors
Abstract: This study explores audit quality in ASEAN from an analysis of the legal environment
faced by statutory auditors. First, it provides an overview of the national laws, regulations,
professional codes and standards defining the legal environment. Second, it provides an economic
analysis of the main differences among countries and relates those differences to the functioning of
the audit markets, with a potential for uneven audit quality in the region.
Data were collected with questionnaires from national representatives of four ``Big Five''
firms, and accuracy of the information was reviewed by 15 governmental and professional bodies
responsible for regulating the auditing profession in ASEAN.
Analysis of the data revealed a diverse legal environment among the ASEAN countries
possibly creating a climate of differential audit quality. Many differences were observed in the
competence requirements of auditors, the requirements regarding the conduct of statutory audits,
and the reporting obligations. Further, audit quality in some countries is seriously compromised
due to a lack of rules ensuring auditors' independence. Finally, some of the liability regimes in
ASEAN do not provide an incentive for statutory auditors to provide quality audit services. Several
recommendations are made to improve the legal environment by bringing the national laws and
regulations in line with international standards of auditing which would result in a more uniform
audit quality throughout ASEAN.
This article reports the result of a study on audit quality in the member states of the
Association of Southeast Asian Nations (ASEAN). Laws, regulations, professional codes
and standards1 regarding statutory audits define the role and position of auditors, and
affect the functioning of audit markets in the region. Currently, the legal environment in
which auditors operate differs between the ASEAN countries. Thus, the role and position
of statutory auditors are not uniform in the region and this heterogeneity could result in
dissimilar audit quality within the ASEAN community.
The objective of this study is to provide an overview of the legal environment
affecting the role and position of statutory auditors in the ASEAN region. More
Direct all correspondence to: Michael Favere-Marchesi, Associate Professor of Accounting, Faculty of Business
Administration, Simon Fraser University, 8888 University Drive, Burnaby, B.C., Canada, V5A 156; E-mail:
[email protected]
The International Journal of Accounting, Vol. 35, No. 1, pp. 121±149
ISSN: 0020-7063.
All rights of reproduction in any form reserved.
Copyright # 2000 University of Illinois
122
THE INTERNATIONAL JOURNAL OF ACCOUNTING
Vol. 35, No. 1, 2000
specifically, it examines the national laws and regulations affecting (1) the appointment and termination of statutory auditors, (2) the independence and incompatibilities
issues faced by auditors, (3) audit reporting, and (4) the liability of statutory auditors.
This overview thus provides a basis to analyze the main differences between the
national laws and regulations and their impact on the functioning of the audit market
in ASEAN.
This study offers several benefits. First, it gives a better understanding of the nature of
the audit function within the ASEAN community and of the reliability that can be placed
on audited financial information. As the ASEAN securities markets play an increasing role
in global investment strategy, this assessment should help to evaluate the risk factors of
investing in the region. Further, as ASEAN becomes more involved in global trading,
companies wishing to invest or conduct business in the region should benefit from
understanding the present state of audit services. Second, by providing a comparative
analysis among the member states, this study should help the ASEAN community in
assessing the adequacy of the current laws and regulations governing the auditing
profession. The study makes several public policy recommendations, using international
audit standards as a benchmark, for the adoption of measures expected to improve audit
quality in ASEAN. In view of the present crisis faced by some of the ASEAN countries,
increasing the quality of audit services should heighten investors' confidence in the fair
play of ASEAN markets.
FRAMEWORK AND SCOPE
There are two parts to this study. The first part concerns an overview of the relevant legal
environment in ASEAN. This overview is based on data provided by the local offices of
``Big Five'' firms. The national representatives of the audit firms were asked to respond to
questionnaires covering the relevant laws and regulations. Table 1 indicates the firms that
participated in the collection of the data in each ASEAN country.
The second part is the analysis of the main differences among ASEAN laws and
regulations, and their impact on the functioning of the audit markets. The analysis uses
insights from economics-based research in auditing to make public policy recommendations using international audit standards as a benchmark. The political feasibility of those
recommendations is beyond the scope of this study. While the overview is concerned with
nearly all regulatory aspects of audit markets, the analysis focuses on the specific issue of
Table 1. Participating ``Big Five'' Firms
Country
Brunei
Indonesia
Malaysia
Philippines
Singapore
Thailand
Vietnam
Firm
Ernst & Young
HTM, member firm of Deloitte Touche Tohmatsu International
Price Waterhouse
SGV & Co., member firm of Arthur Andersen & Co.
Deloitte & Touche
SGV-Na Thalang, member firm of Arthur Andersen & Co.
Arthur Andersen & Co.
Auditing Quality in ASEAN
123
audit quality in ASEAN. Not all laws and regulations are equally relevant to this topic.
Hence, the recommendations emphasize a subset of the national laws and regulations
included in the study.
While the overview deals with laws and regulations concerning audit markets, the
analysis concentrates on the functioning of the audit markets. In this context, the
questionnaires used in the study provide in principle only data on the relevant laws and
regulations. They provided no information on the actual functioning of the markets. While
the respondents provided background information on their national audit market as much
as possible, no direct evidence was collected.
This study did not explicitly examine the role of markets in the supply of audit services
for lack of available empirical data. However, it is obvious that the seven countries
included in the study are at different stages of economic development. For example, while
Singapore has a rather sophisticated financial market and engages in significant global
trading, Vietnam by comparison is still in the transition stage from a government-directed
economy to a freer market environment. Hence, the demand for audit quality will
invariably be different among the ASEAN countries.
Nevertheless, the recent economic crisis in Southeast Asia has proven that lax
accounting practices may result in devastating financial consequences for foreign
investors. Since the reliability of financial information is an essential condition to sound
foreign investments, one step in the economic recovery of the ASEAN countries should be
to promote auditing standards that will lend credibility to the audit process and improve
the quality of financial information.
This study also did not measure the audit concentration of the ``Big Five'' firms in the
seven ASEAN countries and there are no empirical data to that effect. If international firms
dominate the audit markets in the region, one could argue that the mechanisms by which
these firms maintain and enhance their reputation for audit quality might be more relevant
than ``minimum'' standards via regulation. However, some anecdotal evidence seems to
counter this claim. Because most international public accounting firms are mixtures of
different national auditing firms, the quality of work performed may vary. For example,
SGV in the Philippines (a member firm of Arthur Andersen Worldwide) is subject to the
internal peer review program prescribed by Arthur Andersen for all its member firms but
not to an external peer review. In fact, the World Bank recently encouraged the ``Big Five''
accounting firms to ensure that ``their developing-world affiliates meet international
auditing and accounting standards'' (Wall Street Journal, 1998).
Four dimensions define the scope of this study. First, the countries covered in this study
correspond to the member states of the ASEAN as of December 31, 1996.2 At that date,
the member states were Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore,
Thailand, and Vietnam. Laos and Myanmar were admitted into ASEAN on July 23, 1997
and thus were not included in this study. Second, this study defines ``entities subject to a
statutory audit'' as private enterprises that are audited as a requirement of national law.
Audits of public sector organizations are not included, though they may be performed
under national laws and regulations similar to those applying to audits of private entities.
Third, auditors included in this study are those who have the right to conduct statutory
audits for the entities defined above. Finally, the questionnaires asked the respondents to
describe the status of laws and regulations as of June 1997, and any recent or upcoming
major changes in the legal environment.
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METHODOLOGY
This section presents the development of the questionnaires and the procedures to ensure
the quality of the data collected. The major activity for the first part of the study was to
obtain data on all the institutional details relevant to the role and position of statutory
auditors. Data on the laws and regulations were collected with questionnaires completed
by national representatives of the four participating audit firms. The first questionnaire was
developed by adapting to the region a research instrument previously used in a European
study (Buijink et al., 1996). The questionnaire used an open question format to allow
respondents more flexibility and give them the opportunity to add background information
to their answers. Additionally, many questions explicitly asked for background data on the
function of the statutory audit and the nature of the financial information in the country of
the respondents. The questionnaire asked information about the following topics: appointment and termination of statutory auditors, independence and incompatible activities,
relationships of statutory auditors with the company, liability of statutory auditors towards
the company and third parties, and contents of the audit reports.
Upon examining the answers, some of the completed questionnaires did not address a
number of specific issues and some of the responses required further clarification. Thus, a
second questionnaire was mailed to the national representatives with a list of questions
specific to each country. The information provided by both questionnaires was then
summarized and the overview sent to the national representatives to ensure that the data
compilation was correct. Finally, to enhance the accuracy of the information, the final
overview was mailed to the relevant professional and governmental bodies regulating the
auditing profession in each ASEAN country for their review. In total, 15 professional and
governmental bodies, including the ASEAN Federation of Accountants (AFA), were
involved in this review. This process was considered likely to result in the best quality of
Table 2. ASEAN Professional and Governmental Bodies
Country
Organizations
ASEAN
Bruneia
ASEAN Federation of Accountants
Ministry of Finance, Brunei Darussalam Institute of Certified
Public Accountants
Ministry of Finance, Indonesian Institute of Accountants
Ministry of Finance, Malaysian Institute of Accountants,
Malaysian Association of Certified Public Accountants
Professional Regulation Commission, Philippines Institute of
Certified Public Accountants
Public Accountants Board, Institute of Certified Public
Accountants in Singapore
Board of Supervision of Auditing Practice, Institute of Certified
Accountants, and Auditors of Thailand
Ministry of Finance, Vietnamese Accounting Association
Indonesia
Malaysia
Philippines
Singapore
Thailand
Vietnam
Note:
a
The Brunei Darussalam Institute of Certified Public Accountants was the only ASEAN professional body that could not
perform the quality review of the data within the 60-day period. However, the Brunei Ministry of Finance reviewed the
data within the same period and concluded that the information properly reflected the current rules and procedures
affecting statutory auditors in Brunei.
Auditing Quality in ASEAN
125
information possible, given the time constraints. Table 2 shows the names of the ASEAN
professional and governmental bodies involved in the quality review of the data.
DESCRIPTIVE RESULTS
This section provides an overview of the laws, regulations, professional codes, and auditing
standards affecting statutory auditors. The first part of this section summarizes the audit
environment in each of the ASEAN countries. The second and third parts detail the
appointment and termination procedures, respectively. The fourth part discusses the
independence requirements imposed on statutory auditors as well as incompatible activities.
The fifth part focuses on audit reporting. Finally, the last part reviews statutory auditors'
liability towards the company and third parties. The seven member countries of ASEAN as
of December 31, 1996 are included in this study. In the remainder of the article, the names of
the countries are abbreviated, using the first four letters of the full name (Table 3).
The Audit Environment in ASEAN
Brunei
Currently, no rules, guidelines or policies have been issued by either a professional
body or the government to regulate the auditing profession. The Brunei Institute of
Certified Public Accountants (BICPA) is not officially recognized by the government as a
regulating body for the auditing profession. Hence, the BICPA does not issue any rules,
guidelines or policies regulating the auditing profession. The Ministry of Finance can be
considered as the de facto regulatory body by virtue of its authority to grant audit licenses.
The Companies' Act gives the Ministry of Finance the responsibility and authority to
process applications for audit license, and thus empowers it to reject a new application,
refuse the renewal of an existing license, and cancel an existing license. In the absence of
established local auditing standards, the International Standards on Auditing (ISA) are
generally applied in practice.
Indonesia
The Indonesian Institute of Accountants or Ikatan Akuntan Indonesia (IAI) is the
government-sanctioned organization which has the responsibility to establish and review
Table 3. ASEAN Countries Abbreviations
Country
Brunei
Indonesia
Malaysia
Philippines
Singapore
Thailand
Vietnam
Abbreviation
BRUN
INDO
MALA
PHIL
SING
THAI
VIET
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accounting and auditing standards, and the Accountants' Code of Ethics. The auditing
profession is regulated and monitored by the Ministry of Finance under Decree No. 43
dated January 1997 regarding Public Accountants' Services. The Ministry grants licenses
to practice as a public accountant and only registered public accountants can be appointed
as statutory auditors. To be registered as a statutory auditor, one must reside in Indonesia,
pass the examination administered by IAI, be a member of IAI, have 3 years of work
experience as an auditor, and, for the audit of listed companies, be accredited by the
Capital Market Supervisory Board.
Malaysia
The 1967 Accountants' Act regulates the auditing profession. The Malaysian Institute
of Accountants (MIA) is the statutory national accountancy body, whereas the Malaysian
Association of Certified Public Accountants (MACPA) is a professional body. In addition,
various sections of the Companies' Act relate to approved company auditors and most of
the laws relating to government agencies contain several provisions covering the
qualifications, roles, and duties of auditors.
Both bodies issue local auditing standards and adopt the auditing guidelines, modified to
suit the local business environment, issued by the International Auditing Practices
Committee of the International Federation of Accountants (IFAC). These two bodies have
their own Code of Professional Ethics and Conduct, and are empowered to conduct
investigations and take disciplinary actions on any complaint filed by the public against
its members.
To qualify for appointment as a statutory auditor, one must be a public accountant
registered with the MIA and licensed by the Ministry of Finance. Membership to the MIA
requires either a degree in accountancy from a local university or membership in the
MACPA, and 3 to 5 years of practical experience in the field of auditing. To become a
member of MACPA, one must either pass the examinations conducted by MACPA or hold
an accountancy qualification recognized by MACPA, and have no less than 3 years of
relevant practical experience.
Philippines
The 1975 Revised Accountancy Law regulates the auditing profession. Only
certified public accountants are allowed to conduct statutory audits. The Professional
Regulation Commission (PRC) was created in 1973 by Presidential Decree to supervise
and regulate the various professions in the Philippines, including the accounting
profession. The PRC is under the administrative supervision of the Civil Service
Commission, an independent agency reporting to the Office of the President. A Board
of Accountancy, operating under the supervision of the PRC controls the licensing of
certified public accountants. Its members are appointed by the President of the
Philippines. Specifically, the Board determines and prescribes the minimum requirements for the admission of candidates to the CPA examination. It administers the CPA
examination and issues certificates to those who have satisfactorily passed the
examination. The Board also investigates violations of the Revised Accountancy Law
and, after due process, may suspend, revoke, or reissue certificates of registration.
Auditing Quality in ASEAN
127
Subject to the PRC's approval, the Board promulgates rules and regulations, and sets
professional and ethical standards.
In 1975, the PRC issued a certificate of accreditation to the Philippine Institute of
Certified Public Accountants (PICPA) as the national profession-wide organization of
CPAs. There are four other organizations composed exclusively of CPAs engaged in the
major areas of accountancy. They are the Association of CPAs in Public Practice
(ACPAPP), the Association of CPAs in Commerce and Industry (ACPACI), the Association of CPAs in Education (ACPAE), and the Government Association of CPAs (GACPA).
Under the integration concept defined by the PRC, these organizations co-exist with
PICPA and pursue activities and objectives compatible with those of PICPA. The Auditing
Standards and Practices Council (ASPC), established by PICPA in coordination with
ACPAPP, promulgates auditing standards, practices and procedures. The pronouncements
issued by ASPC and approved by the PRC (through the Board of Accountancy) become
generally accepted by the auditing profession. US auditing standards and the pronouncements of the International Auditing Practices Committee significantly influence the
development of auditing standards in the Philippines.
Singapore
The 1987 Accountants' Act regulates the auditing profession. The Public Accountants'
Board (PAB) is the regulatory body and the Institute of Certified Public Accountants of
Singapore (ICPAS) is the professional body. In addition, various sections of the 1967
Companies' Act (revised in 1994) relate to approved company auditors. The functions of
the PAB are to (1) register public accountants, (2) maintain a register of public
accountants, and (3) determine the qualifications of persons seeking registration as public
accountants under the Accountants' Act. In addition, it controls and regulates the practice
of the accountancy profession by public accountants. Finally, it regulates the conduct and
ethics of public accountants, and hold inquiries when rules of conduct or ethical behavior
have allegedly been violated.
In addition to registering with the PAB, public accountants also need to be members of
the ICPAS in order to call themselves ``Certified Public Accountants.'' The ICPAS was
established in 1963 as the Singapore Society of Accountants and renamed the ICPAS in
1989 (pursuant to the 1987 Accountants' Act). The ICPAS is responsible for the technical
development and advancement of the profession. The Singapore Standards on Auditing
issued by ICPAS are practically the same standards issued by the International Auditing
Practices Committee. In practice, all statutory auditors in Singapore are members of both
the PAB and the ICPAS.
Thailand
The 1962 (Buddhist Era Year 2505) Auditing Act established the Board of Supervision
of Auditing Practice (BSAP) which has the power to regulate the auditing profession. The
BSAP is a government agency under the Ministry of Commerce. The Act prescribes that
only certified public accountants are eligible to conduct statutory audits in Thailand. The
BSAP determines the qualifications of persons seeking registration as public accountants
by holding the necessary examinations that enable persons to qualify for registration.
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Additionally, it sanctions the accounting and auditing standards promulgated by the Institute
of Certified Accountants and Auditors of Thailand (ICAAT). Statutory auditors are appointed
by the shareholders at their annual general meeting and must be approved by the Securities
and Exchange Commission (SEC) for publicly listed companies and by the Bank of Thailand
for banks and finance companies. The ICAAT promulgates auditing standards, practices, and
procedures. The pronouncements must be approved by the BSAP to become generally
accepted by the auditing profession. Most auditing standards follow the ISA.
Vietnam
The Ministry of Finance of the Socialist Republic of Vietnam regulates the auditing
profession. The auditing rules and regulations in Vietnam are contained in two documents:
Decree 07 of the Vietnamese Government dated January 29, 1994, and Circular 22/TCDK
dated March 19, 1994, which details the provisions of Decree 07. Though Circular 22
provides detailed guidance on the auditing profession, various auditing matters are not
included therein, including Vietnamese auditing standards. The Ministry of Finance is
currently developing such standards. The Ministry of Finance is responsible for issuing
and guiding the implementation of the principles, criteria, and professional methods of
audit applied in the national economy. Additionally, the Ministry coordinates the
implementation of programs to train and educate professionals who wish to perform
audits. It also regulates the professional examinations and the granting of the auditing
certificates. A Selection Council at the State level set up by the Ministry administers the
professional examinations.
Furthermore, the Ministry of Finance processes applications for the establishment of
auditing firms, and manages the registration of individual auditors. Currently, statutory
audits are conducted by local firms (100% Vietnamese owned) and by the ``Big Five,''
organized either as joint venture auditing firms (partially foreign-owned) or 100 percent
foreign-owned auditing firms. While local auditing firms apply the Vietnamese auditing
methods, the ``Big Five'' firms follow the International Auditing Standards. The Ministry
of Finance also regulates the operations of auditing firms, and settles differences and
disputes arising from the result of the audit.
The Vietnamese Accounting Association (VAA), recognized by the Ministry of
Finance, is a professional body with a limited consultative role. Its aim is to unite those
engaged in the accounting and auditing profession in order to maintain and develop the
profession, improve expertise and professionalism, and preserve professional morality.
The Ministry of Finance issues legal documents about accounting and auditing operations
with the assistance and advice of the VAA.
Appointment of Statutory Auditors
Eligibility
Except in Thailand and Vietnam, both natural persons and auditing firms may be
appointed as statutory auditors. In Thailand, only natural persons and, in Vietnam, only
auditing firms may be appointed as statutory auditors.
Auditing Quality in ASEAN
129
In most countries, no specific restrictions exist on the delegation of audit work and the
qualifications of the individuals to whom audit work is delegated. Except for Indonesia
and the Philippines, no restrictions exist on the delegation of audit work and no specific
guidelines are given on the extent of work carried out by assistants. Further, except for
Indonesia and Vietnam, no educational or professional requirements are specified for the
assistants to whom the audit work is delegated. Generally, the only restriction is that a
licensed auditor sign the audit report.
In Indonesia, assistants need to have completed an accounting degree, be informed of
their responsibilities, and know the objectives of the procedures they are to perform. In the
Philippines, most audit work may be delegated as long as assistants are properly
supervised. Aspects of the audit work that cannot be delegated include the final assessment
and evaluation of the audit results, the conclusion on the overall financial statement
presentation, and the signing of the audit report. Vietnam has no guidelines on the
delegation of audit work but assistants must possess an accounting or finance degree from
a recognized university or vocational school.
Qualifications
Several requirements typically exist to qualify a statutory auditor. For example, there
may be proficiency (e.g., CPA examination) and/or educational (e.g., accounting degree)
requirements. Practical experience in the field of auditing may also be necessary to register
or be licensed as a statutory auditor. Significant differences exist among ASEAN countries
in the requirements to qualify as statutory auditor. Some countries have no educational
and/or proficiency requirements (Malaysia, Singapore) while others have either no
practical experience requirement (Philippines) or an unusually low requirement (Thailand).
Table 4 summarizes the requirements to qualify as a statutory auditor.
In order to retain their qualification, statutory auditors are often required to maintain
sufficient up-to-date knowledge through programs of continuing professional education
(CPE). Again, significant differences among countries can be observed. Brunei and
Vietnam have no CPE requirements, and Thailand has an unusually low requirement
Table 4. Qualification Requirements for Statutory Auditors
Country
Educational
requirement
Proficiency
requirement
Minimum period of
practical experience
required
BRUN
INDO
MALA
PHIL
SING
THAI
VIET
Yes
Yes
Yes
Yes
Noa
Yes
Yes
Yes
Yes
Noa
Yes
Noa
Yes
Yes
5 years
3 years
3 years
None
3 years
1,000 hours within 1 year
5 ±10 yearsb
Notes:
a
Required of public accountants who wish to become members of the MACPA (Malaysia) or ICPAS (Singapore) and be
recognized as ``Certified Public Accountants.''
b
University graduates in f inance are required to have at least 5 years of experience in accounting and f inance; graduates
from a vocational school of finance and accountancy are required to have at least 10 years of similar experience.
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Table 5. Continuing Professional Education Requirements
Country
Continuing professional education required and minimum CPE credit hours
BRUN
INDO
MALA
No
Yes
Yes
PHIL
SING
THAI
VIET
Yes
Yesb
Yesc
No
Notes:
±
120 hours over 3 years with a minimum of 30 hours per year
50±60 points from unstructured learning activities and 20±40 points from
structured learning activities per yeara
60 hours over 3 years
40 hours per year
24 hours over 5 years
±
a
Some activities such as CPE courses and conferences organized by the MIA are awarded three points per hour while
those conducted by accredited institutions are awarded one point per hour.
b
Mandatory for all members of the ICPAS, but not required by the PAB to be registered as a public accountant and
licensed to conduct statutory audits.
c
Can be substituted by continuing professional experience.
substitutable by professional experience if the auditor has signed at least one set of
statutory audited financial statements within five years (Table 5).
Nominations and Appointments
The parties responsible for the nomination and appointment of statutory auditors vary
among countries. In some countries (e.g., Philippines), management retains a lot of
control over the selection of auditors, while in others (e.g., Brunei), shareholders are
empowered with this prerogative. Table 6 specifies the parties responsible for nominating
and appointing statutory auditors, and whether approval of the appointment is required.
Restrictions
The Philippines and Vietnam have no procedures for or restrictions on communication
between the incoming and outgoing auditors. In Brunei, such communication is the
practice, though not required by law. In all other countries, the incoming auditor must
communicate with the outgoing auditor before accepting the engagement.
Advertising and unsolicited offering of services are prohibited in all countries, except
Vietnam. Companies may use tenders (i.e., offers to bid for an audit engagement) in the
appointment process. In Thailand, tenders are frequent and the Board of Directors will
nominate one firm from among those who have submitted bids. Brunei, Indonesia, the
Philippines, and Vietnam have no statutory requirements for tenders. However, in Brunei,
Indonesia, and the Philippines, some companies use tenders in the appointment process. In
Vietnam, government-owned projects or projects sponsored by the World Bank use
tenders in the appointment of statutory auditors. Malaysia and Singapore do not allow
auditors to respond to tenders.
Termination Procedures
Audit appointments terminate when the statutory auditor voluntarily withdraws from
the appointment (resignation) or is asked to withdraw from the appointment (dismissal).
Auditing Quality in ASEAN
131
Table 6. Nomination, Appointment, and Approval of Auditors
Party approving
the appointment
Country
Nominating party
BRUN
INDO
Shareholders
Shareholders
None
None
MALA
Shareholders
Directors and/or
shareholders
Shareholders
Shareholders
PHIL
Management
Management
SING
Shareholdersa
Shareholdersa
THAI
Directors
Shareholders
VIET
General Director
Directors
Shareholders and the
Central Bank of
Malaysia for financial
institutions
Board of Directors,
shareholders, or both
depending on company's
by laws
Shareholders and the
Monetary Authority of
Singapore for financial
institutions
SEC for publicly listed
companies and the Bank of
Thailand for financial
institutions
State Bank of Vietnam
for financial institutions
Note:
a
Appointing party
Often delegated to the Board of Directors.
Auditors usually resign because of loss of independence, material fraud, or conflict of
interest. Table 7 summarizes the resignation particulars for each ASEAN country.
Companies often dismiss auditors because of disagreements on fees, matters of
accounting principles or practices, financial statement disclosures, or auditing scope or
procedures. Table 8 summarizes the dismissal particulars for each ASEAN country.
The notification procedures relating to the termination of statutory auditors also vary
among countries. Brunei, Indonesia, and Vietnam have no public filing or required
notification procedures. In Thailand, only the shareholders are notified of the termination
of statutory auditors. In the Philippines, public companies are required to notify the SEC of
a change in auditors but there are no requirements of public notification for private
companies. In Malaysia, the company must send a copy of the resolution to remove an
auditor to the shareholders, the auditor concerned and the Registrar of Companies. In
addition, for publicly listed companies, the Kuala Lumpur Stock Exchange must be
Table 7. Auditor's Resignation
Resignation possible
Serious motives required
Approval by third party
required
BRUN
INDO
MALA
PHIL
SING
THAI
VIET
Yes
No
No
Yes
Yes
No
Yes
No
No
Yes
No
No
Yes
No
No
Yes
Yes
No
Yes
No
No
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Table 8. Auditor's Dismissal
Dismissal by appointing body
Dismissal by body other than
appointing body
Serious motives required
Approval by third party
required
BRUN
INDO
MALA
PHIL
SING
THAI
VIET
No
Yes
Yes
Yesa
Yes
No
Yes
No
Yes
No
Yes
Yesb
Yes
No
No
No
No
No
No
No
No
No
No
No
Yes
No
No
No
a
Statutory auditors appointed by the Board of Directors could be dismissed by the shareholders.
Bank of Thailand for financial institutions and SEC for public companies.
Notes:
b
notified of the change in auditors. In Singapore, the change of auditors must be filed with
the Registrar of Companies.
The defensive rights of auditors vary between countries. Brunei and Thailand do not
grant auditors the right to defend their position. Further, in Brunei, the Philippines,
Thailand, and Vietnam, auditors are not legally entitled to compensation fees upon
termination. Table 9 summarizes the defensive rights of statutory auditors.
Table 9. Auditor's Rights
Country
Rights to defend position
Entitled to compensation fees
BRUN
No
±
No
INDO
No
±
Yes
MALA
Yes
Representation to the
shareholders in writing
or personally
Yes
PHIL
Yesa
No
SING
Yes
THAI
No
Letter filed with SEC
stating nature of
disagreements
Representation to the
shareholders in
writing or personally,
and filed with the
Registrar of Companies
±
VIET
Yes
Note:
a
Complaint filed with
the Court of Economy
For public companies only.
Yes
No
No
In practice, auditors are
compensated for a
portion of the work
performed
Any outstanding fees for
professional services
before termination
Fees owed to outgoing
auditor must be paid
before incoming
auditor can accept the
engagement
±
Fees owed to outgoing
auditor must be paid
before incoming
auditor can accept the
engagement
In practice, auditors
are compensated for
a portion of the work
performed
±
Auditing Quality in ASEAN
133
Table 10. Auditor's Restrictions
BRUN
Personal relationship
Commercial relationship
Financial interest or relationship
Influential position
Notes:
a
Yes
Yesa
Yesa
No
INDO
MALA
PHIL
SING
THAI
VIET
No
No
No
No
No
No
Nob
No
No
No
No
No
No
No
Noc
No
No
No
No
No
No
No
No
No
a
Not prohibited by local laws and regulations.
Allowed if the amount of the auditor's indebtedness to the company or related party is less than RM 2,500.
c
Allowed if holding less than 5 percent of a public company's or less than 20 percent of a private company's equity share
capital, and/or loan to/from auditee or related parties is S$2,500 or less.
b
Independence and Incompatible Activities
Restrictions
Table 10 summarizes the restrictions aimed at preserving the independence of statutory
auditors. The relationships allowed (Yes) or prohibited (No) are between the statutory auditors
(or related persons) and the entity being audited (or related parties).
To preserve their objectivity, auditors may not be allowed to provide other services to a
statutory audit client within the same legal entity. However, these restrictions may be
ineffective if the same accounting firm has the ability to provide services through multiple
legal entities. Table 11 details the services that auditors can provide to an audit client
within the same legal entity.
Several other mechanisms are aimed at reducing threats to auditor's objectivity. Some
examples are rules concerning audit fees, regulations mandating the rotation of audit
partners or firms, restrictions on personnel movement, and sanctions attached to breach of
independence. Table 12 summarizes those provisions.
Safeguards
Safeguards such as internal or external quality reviews, or the involvement of an audit
committee are often used to minimize the potential of threats to objectivity faced by
auditors. Table 13 summarizes the available safeguards.
Table 11. Services Provided by Auditor
BRUN
Bookkeeping/Accounting
Tax
Legal services
Consulting
Investment/Financial advising
Corporate recovery
Notes:
a
Yes
Yes
Yes
Yes
Yes
Yes
INDO
Yes
Yes
No
Yes
Yes
Yes
MALA
No
Yes
No
Yes
Yes
No
PHILa
Yes
Yes
Yes
Yes
Yes
Yes
SING
Yes
Yes
No
Yes
Yes
Yes
THAI a
Yes
Yes
Yes
Yes
Yes
Yes
b
VIET
Noc
Yes
No
Yes
Yes
Yes
Allowed as long as the auditor does not have a relationship with the client in any capacity equivalent to that of a
member of management or employee.
b
If the owners of the bookkeeping firm are not the same as the owners of the audit firm.
c
Bookkeeping and compilation work may be provided with specific approval of the Ministry of Finance.
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Table 12. Provisions to Reduce Threats in Auditor's Objectivity
Audit fees fixed in advance
Rules to calculate audit fees
Rules to avoid low balling
Overdependence on single
client with respect to audit fees
Rotation of auditing firms
required
Rotation of audit partners
required
Restrictions on auditors
moving to clients
Restrictions on clients'
personnel moving to
auditing firms
Sanctions for breach of
independence
Notes:
BRUN
INDO
MALA
PHIL
SING
THAI
VIET
Yes
No
No
No
Yes
No
No
No
Yes
Yesa
Yes
Yes
Yes
No
No
No
No
No
Yes
Yes
Yes
No
No
No
Yes
No
No
Yes
No
No
No
No
No
No
No
No
No
No
No
Yesb
No
No
No
No
No
No
No
No
No
No
No
Noc
Noc
Noc
No
No
No
Yes
Yes
Yes
Yes
Yes
Yes
a
MIA's recommended basis for determining audit fees serves as a guide only. In practice, audit fees are negotiated
between the company and the auditors.
b
Audit partners are rotated every 5 years for publicly listed companies.
c
Restrictions are limited to situations in which the independence rule may be violated.
Audit Reporting
Statutory auditors can be required to report on matters other than the ``truth and
fairness'' of the annual financial statements. Such a reporting obligation implies that the
statutory auditors need to report on specified matters in the auditor's report or to other
parties. Three tables present the role of the statutory auditors. Table 14 shows the
reporting obligations of statutory auditors in the auditor's report. Table 15 lists the
reporting requirements to external bodies. Table 16 reports the disclosure and audit
requirements of interim financial information and environmental matters.
Except in Vietnam, the auditor's opinion is published in full with the annual financial
statements. In Vietnam, the opinion is published in condensed form, which does not
Table 13. Safeguards to Minimize Threats to Auditor's Objectivity
BRUN
Challenges to objectivity disclosed
Quality reviews by regulators
Quality reviews by peer audit firms
Internal quality reviews
Potential threats to objectivity
monitored by independent party
Audit committees required
Notes:
a
INDO
MALA
PHIL
SING
THAI
a
VIET
No
No
No
No
No
No
Yes
No
Yes
No
Yes
No
No
Yes
Yesa
No
No
No
No
No
Yes
No
Yes
No
Yesb
Yes
No
No
No
No
No
No
No
No
No
No
No
Yesa
No
Yesb
No
No
For financial institutions and publicly listed companies.
b
For publicly listed companies only.
Auditing Quality in ASEAN
135
Table 14. Reporting Obligations in Auditor's Report
Fraud or irregularities
Illegal acts
Internal controls and systems
Maintenance of proper
accounting records
Going concern
Corporate governance
Note:
BRUN
INDO
MALA
PHIL
SING
THAI
VIET a
No
No
No
No
No
No
No
No
No
No
No
Yes
No
No
No
No
Yes
Yes
Yes
Yes
No
No
No
No
No
No
No
No
Yes
No
Yes
No
Yes
No
Yes
No
Yes
No
Yes
No
No
No
a
Circular 22 only recommends but does not require disclosure of these items in the auditor's report.
Table 15. Reporting Obligations to Other Parties
Fraud or irregularities
Illegal acts
Internal controls and systems
Maintenance of proper
accounting records
Going concern
Corporate governance
Notes:
BRUN
INDO
MALA
PHIL
SING
THAI
VIET
No
No
No
No
Yesa
Yesa
Yesa
Yesa
Yesa
Yesc
Yesa
No
Yesb
No
Yesb
No
Yes
Yes
Nod
Yes
Yesa
No
Yesa
Yesa
No
No
No
No
No
No
Yesa
No
No
No
No
No
Nod
No
Yesa
No
No
No
SING
THAI
VIET
a
Report to the Board of Directors.
Report to management under local auditing standards.
c
Report in writing to the Registrar of Companies under the 1965 Companies' Act.
d
Except to the Monetary Authority of Singapore for financial institutions.
b
Table 16. Interim Financial Information and Environmental Matters
BRUN
Disclosure of interim financial
information
Audit of interim financial
information
Disclosure of environmental
matters
Audit of environmental matters
Notes:
INDO
a
MALA
b
PHIL
c
b
a
No
Yes
Yes
Yes
Yes
Yes
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
a
Quarterly financial results required for listed companies.
b
Mid-year financial results required for listed companies.
c
Quarterly condensed financial statements (unaudited) required for public companies.
include a description of the audit work performed and its results. The nature of the audit
opinion is different among countries (Table 17).
The scope of the work performed is not mentioned in Malaysia and Vietnam, and
reference to auditing standards is not required in Brunei and Vietnam. As shown in
Table 18, the requirements to use standard forms of published audit reports vary among
the countries.
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Table 17. Audit Opinions
Country
Nature of auditor's opinion
Report on compliance with
accounting laws and regulations
BRUN
INDO
MALA
PHIL
SING
THAI
VIET
``true and correct''a
``present fairly''
``true and fair''
``present fairly''
``true and fair''
``present fairly''
``faithful and reasonable''
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Note:
a
Limited to an opinion on the balance sheet.
In the countries where standard forms of audit reports are established by professional
bodies, the following reports are available: unqualified opinion, unqualified opinion
with explanatory paragraph, qualified opinion, adverse opinion, and disclaimer of
opinion. More variation is observed in the statement of responsibilities as evidenced
in Table 19.
The situations under which the auditors will issue a qualified report also differ
among countries. Table 20 indicates whether the auditor's opinion can be qualified in
case of limitations placed on the scope of work performed, existence of uncertainties, or
other matters.
The use of a ``subject to'' qualified opinion is still used in some countries. In Malaysia,
a ``subject to'' qualification is used for uncertainties either inherent or arising from a scope
limitation and the issue is regarded as material but not fundamental. In Brunei and
Singapore, an audit report could be qualified on the basis of a ``subject to.'' Auditors are
not required to take a definite position on issues where they cannot form an opinion. In
Thailand and Vietnam, a ``subject to'' opinion is used when the financial statements are
affected by uncertainties concerning future events.
Finally, in some countries, auditors are allowed to emphasize in the audit report
matters which they regard as relevant to a proper understanding of their opinion. For
example, auditors may wish to emphasize that the audited entity is a unit of a larger
business enterprise or that it had significant transactions with related parties.
Table 18. Standard Audit Reports
Country
Standard forms of
published audit reports
required by law
Matters to be included
in reports specified
by law
Standard forms of
published audit reports
established by
professional bodies
BRUN
INDO
MALA
PHIL
SING
THAI
VIET
No
No
No
No
Yes
Yes
No
Yes
No
Yes
No
Yes
Yes
Yes
No
Yes
Yes
Yes
Yes
Yes
No
Auditing Quality in ASEAN
137
Table 19. Statement of Responsibilities
Country
Audit report indicates party responsible for the preparation of audited
information and describes statutory auditors' responsibilities
BRUN
INDO
No
Yes
MALA
PHIL
No
Yes
SING
Yes
THAI
VIET
No
No
±
Management is responsible for the
preparation of financial statements
and the auditor is responsible for
the opinion on those statements.
±
Management is responsible for the
preparation of financial statements
and the auditor is responsible for
the opinion on those statements.
Management is responsible for the
preparation of financial statements
and the auditor is responsible for
the opinion on those statements.
±
±
Furthermore, auditors may draw attention to unusually important subsequent events or
to accounting matters affecting the comparability of financial statements. Such
supplementary information is presented in a separate paragraph of the auditors' report
(before the opinion paragraph). Certain circumstances, while not affecting the auditors'
unqualified opinion, may require the auditors to add an explanatory paragraph or
other explanatory language to the standard report. Table 21 presents examples of
such matters.
Liability of Statutory Auditors
Liability in General
In general, a liability regime consists of civil liability, criminal liability, and
professional sanctions. Whether auditors are exposed to civil or criminal liability usually
depends on the nature of the offense committed by the statutory auditor. Generally,
auditors are subject to civil liability when they breach contractual and/or civil obligations. Usually, criminal liability is not defined with respect to audit matters, but arises
from general definitions of criminal acts (e.g., intentionally providing misleading
information). Statutory auditors can also be sanctioned (e.g., warning, exclusion) by
professional or regulatory bodies. Table 22 lists the range of professional sanctions
against statutory auditors.
Civil Liability
The engagement contract between the auditor and the auditee is a civil law contract.
The main issue in civil liability relates to privity, which refers to whether a party not
138
THE INTERNATIONAL JOURNAL OF ACCOUNTING
Vol. 35, No. 1, 2000
Table 20. Qualification of Audit Opinion
Auditor's opinion qualified in the event of scope limitations, uncertainties,
or other matters
Country
Scope limitations
Uncertainties
Other matters
Departure from generally accepted accounting
principles, financial statements not in
accordance with laws and regulations,
inadequate disclosures, disagreement with facts,
or amounts disclosed in the financial statements.
Departure from generally accepted accounting
principles, inadequate disclosures, disagreement
with facts, or amounts disclosed in the
financial statements.
Departure from generally accepted accounting
principles, financial statements not in accordance
with laws and regulations, inadequate
disclosures, disagreement with facts, or
amounts disclosed in the financial statements.
Departure from generally accepted accounting
principles, inadequate disclosures, or lack
of sufficient competent evidential matter.
Departure from generally accepted accounting
principles, or inadequate disclosures.
Departure from generally accepted accounting
principles or financial statements not in
accordance with laws and regulations,
substantial doubt about going concern,
material changes in accounting principles,
or inadequate disclosures.
Departure from generally accepted accounting
principles, financial statements not in accordance
with laws and regulations, inadequate
disclosures, disagreement with facts or
amounts disclosed in the financial statements.
BRUN
Yes
Yes
INDO
Yes
No
MALA
Yesa
Yesa
PHIL
Yes
No
SING
Yes
Yes
THAI
Yesa
Yesa
VIET
Yes
Yes
Note:
a
Qualified ``subject to'' opinion if material.
involved in the original contract (i.e., third party) can initiate litigation in the context of the
contract. Thus, the liability position of auditors is two-fold. Auditors may be exposed to
litigation initiated by the other contract party (i.e., the auditee). They can also be subject
(together with the auditee) to litigation initiated by a third party (e.g., shareholders). Table
23 summarizes the parties to whom auditors are exposed in civil liability.
Limitations of Liability
Some procedures aim at limiting the risk of civil liability faced by auditors. First,
liability may be capped. A legal liability cap is applicable when auditors are exposed to
civil liability initiated by the other contract party (i.e., the auditee) or by a third party (e.g.,
shareholders). A contractual liability cap is applicable when auditors are exposed to civil
liability by the other contract party. It is not available when auditors together with the
Auditing Quality in ASEAN
139
Table 21. Modification of Unqualified Audit Opinion
Country
Opinion based
partly on other
auditor's report
Uncertainties
about future
events
Substantial doubt
about going
concern
Material changes
in accounting
principles
BRUN
INDO
MALA
PHIL
SING
THAI
VIET
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Nob
Yes
Yes
Nob
Yes
Yes
Yes
Nob
Yes
Yes