Comparison of Stock Exchange Rules for Auditing in Japan, Malaysia, and London - Essay Example

Stock Exchanges London stock exchange rules for auditing firms To safeguard the interest of the public who have invested in listed companies, Audit Firm Governance code was published in January 2010. This code will be applicable to the audit firms who audit the accounts of companies listed on the Main Market of the London Stock Exchange. At present it applies to 8 major auditing firms of UK which audit 95% of the listed companies. Other firms may adopt its practices in full or part. This code has been developed and published by the independent working group which was established by the Financial Reporting Council in conjunction with ICAEW. It will be applied to financial year on or after 1 June 2010 as per working group recommendations (frc.org.uk). Following points have been listed from the published code and covers the following aspects (frc.org.uk): A. Leadership Under this point, the code says that there should be a governing body which should monitor the management’s activities so that no individual is all powerful and the management should be accountable to the owners. The structure of the governing body should be transparent and be subjected to performance evaluations. The management should have a clear understanding of its powers with respect to the whole firm and these should be made public. B. Values The firm should conduct all its businesses ethically. They should have a clear set of values that they will follow which should be published at their website. This philosophy should be permeated from top to bottom of the firm. They should also encourage an open and inclusive work culture and be committed to the governance code publicly. C. Independent non-executives The firm should have independent non-executives to instill confidence in the public. They should be involved in all public related decisions and their status with respect to continuation in the organization or resignation should be constantly made public through the website. These executives should be independent from the firm and its owners. Each non-executive should have a service contract with details of his right and duties. Any unresolved disagreements with the non-executives should be publicized and the firm should also these members in case they wish to take professional advice on a particular issue from outside the firm D. Operations The firm should comply with professional standards of auditing and quality besides ethics. They should have well laid out procedures for individuals who sign group audit reports and also about independence of auditors and reliance on them. They should have foolproof internal control systems. They should also have transparent people management policies and also involve non-executive member on taking people decisions. The individuals working in the firm should have misconduct reporting systems easily available to them so that they can report such incidents without any fear. E. Reporting The firm should have reporting mechanism to apprise the governing body or members of the status of the company – both financial and non-financial. They should also prepare financial statements as per International standards or UK GAAP. Financial and other non-financial indicators of the firm’s health should be published. F. Dialogue The firm should have communication with the shareholders of the listed companies regarding matters of the governance code. Japan Stock Exchange rules on Oversight and Independence of CPA auditing The Japanese CPA (Certified Public accountant) law was amended in May 2003 under the influence of bubble economy crash in the early 90’s and the strong influence of the U.S. Sarbanes-Oxley Act of 2002 (hp.jicpa.or.jp). According to this amended law following rules are applicable: The audit firm cannot provide non-audit services to its audit client. The law lists services like book keeping, financial advisory, accounting books, actuary etc. which come under the non-audit services ambit. They cannot provide tax services either. Engagement partners need to be rotated on a periodic basis within a 7 year period. This holds true even in the case of Securities and Exchange Law. An engagement partner who has audited a firm cannot hold any position in the firm for at least 1year from the end of the accounting period in which the firm was audited by the partner. Only the designated partners who actually perform the audit will be liable for negligence or inaccurate dealings. However, for third-party claims both Non-engagement partners and engagement partners are equally liable. Besides the above mentioned amendments, the individual CPA’s are also governed by the CPA law. They cover the following aspects. They cannot render audit services in organizations where either the CPA or the spouse of the CPA has is currently working or has worked in the past 1 year. They cannot also render audit services to those organizations where the CPA or the spouse of the CPA has any substantial interest. If the CPA has been a government official then he/she cannot take up audit activities for firms with which he had dealings during the work tenure. This quarantine period needs to be maintained for at least 2 years from the date of leaving the service. The CPA should also follow the JICPA’s code of ethics in true spirit of the words. All the provisions required by the CPA Law for individual CPAs and audit firms are also applicable to the Securities and Exchange Law in a more stricter fashion. This is because the definitions of various terms like substantial interest etc. cover a wider scope in this law. FSA is responsible for protecting the interest of various investors in Japan. To accomplish this task, FSA surveys rules concerning securities market and also supervises CPAs and Audit Corporations. All audit corporations need to register with the FSA after incorporation. They also need to file with the FSA their own business report and financial statements which are audited by them. For all audits required under the Securities and Exchange Law, the FSA reviews the summary of the individual audit engagements which the auditing firm needs to submit. With these summaries, the FSA is able to establish whether the audits have been conducted in the true spirit. The Securities and Exchange Law provides for civil and criminal actions against auditors and audit firms if they do not follow ethics or result in losses to the stakeholders of the firm they are auditing due to their negligence. The civil sanctions against such auditors would be that they will have to compensate the aggrieved party for damages. Even if they have cause damage to a third party by making false statements in their report, they are jointly liable to pay damages to the third party. The Japanese Audit Corporate partners are liable for unlimited liability in case of third party damages. For a person who prepares false annual securities report or registration prospectus the criminal sanctions can be as high as up to 5 years imprisonment and/or up to 5 million yen fine. Malaysian Stock exchange Looking at the various financial irregularities leading to collapse of big firms and loss to investors globally, the securities commission of Malaysia has decided to come up with an Audit Oversight Board (AOB) by mid-year (biz.thestar.com). At present the audit firms which audit the listed companies are required to be fully compliant with the Internal Standards on Quality Control (ISQC1) and MIA (Malaysian Institute of Accounts) by-laws.The by-laws cover the areas of professional ethics, conduct and practice. They are the laws to govern the integrity of the auditors. Comparison of Stock exchange rules of UK and Japan The laws in UK which govern the audit firm are still in the process of improvement. Though these have been published, at present they apply to only 8 of the audit firms in UK and other firms need not comply with them. Most of the points in the law cover the basic integrity and value aspects of auditor’s roles. There aren’t any specific penalties for non-compliance. However, the Japanese laws cover this aspect also. Most of the laws cover the aspect of how auditors can ensure that their reporting on financial statements of their client companies are not misleading to the stakeholders and the auditors are accountable for their actions. The Malaysian exchange is also preparing for introducing more stringent oversight laws and there definitely be more structure to their existing system by the end of year 2010. As of now the international laws and the local accountancy laws govern the auditors of Malaysia. References frc.org.uk. Audit Firm Governance Code. January 2010. March 19, 2010. http://www.frc.org.uk/documents/pagemanager/frc/The%20Audit%20Firm%20Governance%20Code.pdf.pdf hp.jicpa.or.jp. Oversight and Independence of CPA Auditing in Japan. 2004. March 19, 2010. http://www.hp.jicpa.or.jp/english/pdf/e-oversight.pdf Yap, Danny. New governance structure for auditors. March 4, 2010. March 20, 2010. http://biz.thestar.com.my/news/story.asp?file=/2010/3/4/business/5789808&sec=business Read More