Formation of A Limited Company Providing Accounting Services

Question (as per letter dated 15 August 2001):-

Technical Enquiries

Questions (as per letter dated 27 December 2001) :- We would appreciate the assistance of the Institute to address the following technical enquiries. These enquiries relate to matters concerning KLSE Listing Requirements (KLSE-LR) and the Malaysian Code of Corporate Governance (MCCG). 1. Composition of Board of Directors of Listed Company Under Paragraph 15.02, Part B, Chapter 15 - Corporate Governance of the KLSE-LR, "a listed company is required to have at least 2 directors or one-third of the board of directors whichever is higher to be independent directors." It is further stated, "If the number of directors of the listed company is not 3 or a multiple of 3, then the number nearest to one-third shall be used." However, under Paragraph III - Board Balance, Part 2 of the MCCG, it is stated, "to be effective, independent non-executive directors need to make up at least one-third of the membership of the board." The board of directors of our listed client comprises 7 board members, out of which 2 are independent non-executive directors. The board composition is in compliance with the KLSE-LR. However, the board composition is not in tandem with the Part 2 of the MCCG. We wish to seek your clarification on which ruling should prevail under the above circumstances. 2. Directors' Interest in Shares Under Section 169(6)(g), the Company is required to disclose in its Directors' Report, the directors' interest in shares. As a listed company, our client has a number of institutional shareholders, for example, Permodalan Nasional Berhad, Tabung Haji and other institutional shareholders. Normally, these institutional shareholders will appoint their nominees as directors of listed company to protect their interest. Under these circumstances, are these nominated directors deemed to be interested in the shares of the company and therefore warrant disclosure under Section 169(6)(g)? Answers (as per our letter dated 23 January 2002) :- 1. Composition of Board of Directors of Listed Company In the event of a conflict between the Kuala Lumpur Stock Exchange (KLSE) Listing Requirements and that of the Malaysian Code of Corporate Governance (MCCG), the KLSE Listing Requirements shall prevail as this is a rule imposed by the KLSE on all public listed entities. In as far as the MCCG is concerned, it is, at present, a statement of best practices aspired from our corporate citizen. Hence, a heavier weightage should be assigned to the Listing Requirements. Based on the scenario given in your circumstances, the appointment of the 2 independent non-executive directors are deemed in compliance with the KLSE Listing Requirements on the appointment of independent director. However, our Institute, in adopting an aggressive stance, is also of the opinion that Paragraph III - Board Balance, Part 2 of the MCCG has since been complied with, although the Code did spell out that independent non-executive directors need to make up at least one third of the membership of the board. This is, in our opinion, simply due to the effect of rounding the fraction to a meaningful number. However, should your client feel that there is an incongruence in the compliance with the MCCG, the option is to disclose this non-compliance within the Annual Report and elaborate the alternative to best practices adopted by your client inside the statement in relation to its compliance with the MCCG in their Annual Report. 2. Directors' Interest In Shares Section 169(6)(g) provides for the disclosure in the Directors' Report about an individual director's interest in shares or debentures of the reporting entity as well as other related corporations as defined under the Act. Section 6A (4) and (5) further elaborate on the interpretations of a person that can be deemed to be interested in the shares of that reporting entity either through direct or indirect shareholdings. A person who is elected to the Board of your clients as a nominee director will not usually be deemed to be interested in those shares held by the institutional investors that you mentioned such as Permodalan Nasional Berhad, Tabung Haji etc. (and hence, disclosure is not necessary), provided that the nominee director can demonstrate to be able to control the Board of Directors or management of the institutional investors either through shareholdings or other contractual arrangement, whether singly or acting with parties in concert at a level which can be considered as substantial in nature, and hence, able to influence the directions of the institutional investors' entities.

By-Laws on Advertising

Question (as per e-mail dated 18 January 2002) :- Circular No. 13/99 sets out guidelines on Advertising for Sale of Assets by Insolvency Practitioners. It also provided a sample. The sample suggests that the firm's logo should not be placed on the advertisement. Under the present MIA By-Laws (A-9 and B-3), are we now allowed to place the firm's logo on the advertisement? Answer (as per our e-mail dated 28 January 2002) :- We would respond to your query in the affirmative. With effect from 15 January 2002 and subject to the requirements in By-Law A-9 and By-Law B-3, the firm's logo may be placed on any advertisement undertaken by the firm.

Dormant Companies

Question (as per e-mail dated 1 March 2002) :- By-Law B-6.2 (1) states that "No member shall charge an unrealistically low professional fee." Furthermore, in its explanatory note, it is stated that a professional fee of less than Ringgit Malaysia Five Hundred (RM500.00) for audit services shall be considered as an unrealistically low professional fee. Please advise whether this applies to audit fees charged on a dormant company of RM300.00 in the past. Answer (as per e-mail dated 7 March 2002) :- If you look at the By-Law and the explanatory note together, it would appear that a dormant company is also covered under this By-Law since no exception is provided therein.

Audit Evidence

Question (as per letter dated 8 February 2002) :- We wish to seek your clarification and advice on the following : 1. A is our audit client since the date of incorporation. 2. B is also our audit client from the date of incorporation until 1999. 3. A is owing B RMxxx from 1998 until to-date. 4. When we did the audit for B in 1998, A confirmed the balance outstanding. The confirmation slip is filed in B's audit workpapers. 5. To-date, A is still our audit client. B has changed to another auditor. 6. Now, B is taking legal action to recover the debt. One director of B has made an oral request to obtain the original confirmation slip from us as proof of debt in court. Please clarify and advise us on the following : 1. Please clarify and advise us on the following : 2. Must we agree or refuse B's oral request? Answer (as per letter dated 11 March 2002) :- Our Institute's Public Practice Committee had deliberated on the issue raised in your letter during a recent meeting. The Committee is of the opinion that the piece of audit confirmation which you obtained in the course of your audit of B is your own property. As such, how you actually deal with it should be based on your professional judgment. The possible areas to be considered include your agreement clause in your previous letter of engagement with B (how long you are supposed to maintain your file etc.) as well as the degree of audit assurance that you have obtained from that piece of confirmation vis-a-vis the audit opinion eventually. In certain circumstances, legal advice should also be sought prior to your disclosing such information to B.

Member's Ethical Code And Duty Of Care For Their Ex-Staff

Question (as per e-mail dated 10 March 2002) :- I have just graduated from the ACCA exams and expect to apply as a member of MIA as a non-practising chartered accountant. However, I have found some problems regarding my practical experience. I worked for an accounting firm (which is registered with MIA) a few years ago for a period of 2 years. I have requested the firm to write a detailed testimonial for me since the date before I resigned, but till now, I have not received anything from the firm. I would like to ask whether the accounting firm has a duty of care to its ex-staff or is there any ethical code that the member/firm should follow in this matter? How can I solve this problem and obtain my detailed testimonial. Answer (as per e-mail dated 22 March 2002) :- There is no express provision in our By-laws on Professional Conduct and Ethics for a member/firm to issue a testimonial for an ex-employee. However, all our members have a general obligation and responsibility to respond to professional enquiries and correspondence expeditiously under By-Law A-7 of the Institute's By-Laws on Professional Conduct and Ethics [Revised January 2002]. Failure to do so is a breach of the By-Laws which can result in disciplinary action being taken against the member concerned if a complaint is lodged with the Institute. We would suggest that you write to your previous employer requesting for your testimonial, and quote the above By-Law A-7 as a basis for your request to expedite the issuance of your testimonial. If there is still no response from your previous employer, you are entitled to lodge a complaint in writing to the Registrar of the Institute together with a supporting statutory declaration, against the member/firm concerned. If found guilty of a breach of the By-laws, disciplinary action can be taken against the member/firm concerned. However, the Institute has no power to compel the issuance of the testimonial on your behalf.

Size Of Practice Signboard

Question (as per e-mail dated 20 April 2002) :-

Ownership Of Audit Working Papers

Question (as per e-mail dated 14 April 2002) :-

Internal Audit Services

We refer to your letter dated 28 April 2003.

Presently, our By-Law B-1.4 prohibits a member in public practice or his firm from accepting appointment as auditors or reporting accountant if he or his firm already provide other public practice services (in your case, internal audit services) to a company or any other entity where the provision of such non-audit services would create a significant threat to his or his firm's professional independence, integrity or objectivity. The explanatory notes following this By-Law further elaborates on circumstances where such situation is not acceptable and no proper safeguard will be able to mitigate this professional independence threat.

Professional Independence

Question (as per letter dated 29 April 2002) :-

By-Law B-1 On Professional Independence

Question (as per facsimile dated 26 June 2002) :-

With reference to the above, kindly confirm the following :-

Definition of "Partner".

If an approved auditor acts as a non-executive independent director in Company A, can he act as an auditor in Company B where the director/shareholder of Company B is also the majority director/shareholder of Company A.

Can a member become the auditor of a company where the member of his immediate family is a company secretary?
(Note : The company secretary is not a key management personnel of the company as defined under By-Law B-1.1 (2)).

Answer (as per facsimile dated 28 June 2002) :-

We refer to your facsimile forwarded to us on 26 June 2002 and to your queries therein.

We would like to respond as follows:

Professional Fees

Question (as per letter dated 29 June 2002) :-

Professional Indemnity Insurance Coverage

Question :-

Signing of Statutory Declaration in Relation to Accounts Under Paragraph 9.27 of the KLSE Listing Requirements

Question :-

Practice Review

Question (as per letter dated 24 January 2003):-

I wish to inform that I shall be retiring from public practice not later than June 2003. Accordingly, please confirm whether I will be exempted from practice review..

Appendix 2 of Circular 3/2003

Frequently Asked Questions - Standard Board Lot At 100 Units

Appointment Of Auditors

Question (as per fax from XYZ & Co. dated 18 January 2002) :-

Professional Conduct and Ethics

Question (as per e-mail dated 25 October 2003):-

'A' is a member firm in practice (non-audit) in town X.

'B' is a member firm in practice (audit) in town Y.

XYZ Sdn Bhd in town X appointed B as the auditor.

A carries out the audit work. B reviews the audit files and prepares the audit report.

B bills A for time cost.

A bills XYZ Sdn Bhd the audit fee.

Does the above arrangement contravene the By-Laws or the like?

Professional Independence

Question (as per  e-mail dated 4 February 2004)

Profit Sharing Agreement

Question (as per letter dated 25 March 2004)

There are two MIA members who joined us two years ago with the aim of becoming partners of our firm upon acquisition of audit licence. There two gentlemen are in the midst of applying for an audit licence under Section 8(1) of the Companies Act, 1965. As they have not possessed the audit licence, Form 5 (Return of Partners of Firm of Auditors) has not been filed in this respect. As such, they are not permitted to sign audited accounts. However, they are given a profit sharing in the firm and as such an agreement has been drawn to effect his arrangement. The aggrement contains the following characteristics:
The profit sharing ratio of each partner;
The terms and conditions;
The amount of goodwill that the two gentlemen are required to pay to the existing partners.
Please advise if the above arrangement has breached the Companies Act, 1965 and any of the MIA By-Laws.

Answer (as per our letter dated 18 May 2004)

We refer to your letter dated 25 March 2004.

Please take note that for the purposes of Section 9(4) of the Companies Act, 1965, it is stipulated that partners of the firm who are residents of Malaysia must be approved company auditors. Any arrangement which appears to override this provision may be viewed as a breach of the Companies Act. In addition, the Public Practice Committee of the Institute is of the opinion that such arrangements as mentioned in your letter may not be considered as acceptable by the Institute.

As a matter of practice, the firm can certainly work out certain incentive packages such as in the form of bonuses which would be able to fairly compensate the effort of your two (2) potential partners pending their successful application for their audit licences.

Kindly note that our views expressed herein are intended to assist you solely on an ad hoc basis in resolving your inquiry. The views expressed are not the official opinion of MIA, its Council or any of its Committees. Advice given is provided gratuitously and without liability. Neither MIA, its Council or any of its Committees nor its employees shall be responsible or liable for any claims, losses, damages, costs or expenses arising in any way out of or in connection with any persons relying upon the advice given.

Practicing Certificate And An Audit Licence

Question

Can a person holding a valid practicing certificate and an audit licence also work as a manager in a trading company dealing with herbal supplements?

Answer

No. Under Rule 9 (7) of the Institute's (Membership & Council - Rules) 2001, it is provided that:-

Outstanding Audit Fees

Question

Does the Institute's By-Law allow an audit firm to discontinue the current year's audit if there is an outstanding audit fees from previous year? This is of course on the assumption that we have not tendered in our resignation as the statutory auditors to date.

Answer

We would like to highlight here that By B-8.4(1) on Changes in Professional Appointments states that a member in public practice who is an existing auditor may decline re-appointment if that particular client has not paid the auditor or any previous auditor of that particular client, the fees due on the statutory audit of the financial statements of the client for two consecutive financial years.

Please be informed that there is no provision in the By-Law which allows the firm to discontinue the current year audit if there are outstanding fees. If there are outstanding fees, the firm should decline re-appointment as auditor in the annual general meeting of the company but if the firm decides to accept the re-appointment, the firm has a statutory duty to complete the statutory audit.

We also wish to highlight that the new By-Law B-1 on Professional Independence has a provision on Fees - Overdue, which states that a self-interest threat may be created if fees due from an assurance client for professional service remain unpaid for a long-time and safeguards should be applied to reduce the threat to an acceptable level.

Definition of full time practice

Question

Can a member who is holding a valid practicing certificate, venture into other business, e.g. set up a restaurant, in the capacity of both director & shareholder?

Answer

Exemption of requirement of auditors and company's secretary

Question

Is the new Companies Act which is going to be introduced next year (2006) going to exempt the requirement of private companies to appoint qualified auditors and secretary?

Submission of the Accountants Report for Solicitor's Clients Accounts

Question (as per letter dated 20 September 2002) :-

Fee Advances

Question

We have a client where its' audit has been suspended for a period as they failed to provide the necessary documents for our verification. In addition, we also noted the company is currently involved in certain legal cases and may not operate on a going concern basis. In order to safeguard our interests on fee recovery we intend to propose for an advance payment before we continue with the audit. Should the advance payment not be forthcoming we may not proceed with the audit.

In this circumstances, we should be obliged if you could advise us whether this is in line with MIA's By-Laws (on Professional Conduct and Ethics).

Ethics

Question (as per e-mail dated 29 June 2005)

I am based in Kuala Lumpur and all the accounting records are maintained in Kuala Krai, Kelantan. As the head of the accounts department, I cannot deny that I don't know what is happening in the Company. There are some "questionable" transactions, by which I don't agree. Anyway, I have been requested to present the financial statements during the Audit Committee and Board of Directors' meeting.

The argument given by the former and present chairman is that I am not required to sign the audited accounts / make statutory declaration on the financial statements, whereby it is done by a Non-independent Non-Executive Director.

Please advise via email on whether or not I can be charged for any wrongdoing as the head of accounts department even though I acted on instructions.

Answer (as per e-mail dated 18 July 2005)

The Institute's By-Laws (On Professional Conduct and Ethics) state that a member in accepting or continuing a professional assignment or occupation, shall always act with integrity, objectivity, independence and impartiality. These fundamental principles form the basic tenets of ethical and professional conduct of all the members.

The members of the Institute are also expected at all times to be straightforward, honest and sincere in their approach to their professional work and not allow any prejudice, bias or influences of others to override their objectivity.

In view of the above and in addressing your question as to whether you can be charged for any wrongdoings even if you acted on instructions, we would like to advise you that you may be in breach of the Institute's By-Laws, notwithstanding the fact that you were acting on instructions. Acting on instructions from the management and/or your superiors do not absolve your actions and the possible breach of the relevant provisions in the Institute's By-Laws. If a complaint is lodged against you, the Investigation Committee of the Institute will have to investigate the matter and determine whether there is a prima facie breach of the Institute's By-Laws.

We would like to suggest that when faced with a significant ethical conflict, you should raise your concerns with your immediate superior and if the immediate superior is involved, in which case the problem should be raised with the next higher managerial level. This would show that you tried to remedy the situation by raising your concerns to the relevant parties. It would also be helpful to have your concerns documented and supported with the relevant evidence.

As a matter of policy, the Institute disclaims responsibility for any comments or statement by any of its staff. The views expressed are based solely on the limited information given to MIA and are intended to assist members solely on an ad hoc basis in resolving members' enquiries. The views expressed are not the official opinion of MIA, its Council or any of its Committees. Advice given is provided gratuitously and without liability. Neither the MIA, its Council or any of its Committees not its staff shall be responsible or liable for any claims, losses, damages, costs or expenses arising in any way out of or in connection with any persons relying upon the advice given.

We trust that the above is of assistance to you.