KUALA LUMPUR: The formation of the Audit Oversight Board (AOB) has ended up creating a cartel of big accounting firms that have become "too big to fail" as there is not enough others to serve the needs of the Malaysian capital market, industry observers said.
They said in the United Kingdom, its audit regulator the Financial Reporting Council (FRC), the equivalent to Malaysia' AOB, was seeking to break up the oligopoly of the business.
The Financial Times reported that the FRC planned to break up the dominance of the largest four accounting firms namely Deloitte, EY, KPMG and PwC.
"The AOB should rightly be questioned about its right to determine the firms to accredit when there is a statutory body, the Malaysian Institute of Accountants (MIA), whose very function is to do that.
"We can see that having many regulators does stifle growth," an industry observer told the New Straits Times.
The observer claimed that the AOB dictated that smaller firms who wanted to work together to audit larger, listed companies could not do so as only individual firms can do it.
The observer said upon formation of the AOB, the number of audit firms that could theoretically audit a public listed company had fallen to 39 firms from well over 200 firms.
"This in itself is causing a strain on auditors and audit firms. Such an environment favours the larger firms which are mostly not home-bred firms, as the requirements from the AOB are rigorous," the observer added.
Another observer claimed that the fines imposed by AOB were hefty, making the audit sector not attractive for new local firms to challenge the foreign big names in Malaysia.
"It is okay for big firms with bigger clients who have competent staff to prepare accounts," he added.
The smaller firms, he said, had huge pressures arising from lesser quality client and staff, which hampered or sometimes delayed the documentation process.
The AOB, which is under the Securities Commission (SC), was formed in April 2010, hence placing audit firms under the dual jurisdiction of the MIA and the former.
This is unlike in the UK where audit firms are placed solely in the care of the FRC, which regulate auditors, accountants and actuaries.
As at July last year, there were 932 listed companies on Bursa Malaysia, which work out to some 23 listed entities per audit firm.
The SC, in its response, said the AOB did not dictate how firms should work together.
"Our main concern and priority has always been the interest of investors. On that note, we do encourage mergers of smaller firms to strengthen their capacity, if they wish to serve bigger clients.
"However, we would like to remind firms not to merge merely for the purpose of auditing PLCs without having established formalised and uniform policies and procedures to ensure consistent engagement performance and audit quality."
The SC said based on the AOB data, 45 per cent of PLCs were audited by audit firms other than the major audit firms.
"This indicates that almost half of the PLC market is still being serviced by audit firms of different sizes."
It added that over the years, the number of individual partners had increased, standing at 339 now compared to 325 in 2016.
This was despite the decrease in the number of audit firms from 51 in 2016 to 38 as at December 31 2020.
"This shows that audit firms have continued to strengthen their capacity as well as ensuring adequate resources are in place to promote high audit quality in Malaysia.
"PLCs represent a pool of shareholders/investors, hence to ensure public interests are safeguarded, it is imperative for any audit firm, regardless of its size, to have sufficient resources and capabilities to take on PLC clients, in order to service and audit any public listed companies in a sustainable manner," the SC added.
When contacted, an MIA spokesperson declined to comment on the matter.
"As you may be aware that AOB is established under the Securities Commission Act Malaysia and it is also part of the entire Capital Market Regulatory Framework.
"As a fellow statutory body under MoF (Ministry of Finance), it is our policy not to unnecessarily comment on a regulator such as the SC," the spokesperson said.