Malaysia Institute Of Accountants

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According the Malaysia Institute Of Accountants (MIA, 2009) indicated that the importance of the role of external auditors is to enhance reasonable assurance to the public, therefore the external auditor is carry out the duties to consider the company’s directors are well prepared the report to investigate and consider fraud of the company to see whether the financial statements are free from material misstatement. However Makkawi and Schick (2003, p. 591) had mentioned that “the issue of how independent auditors respond to an increased likelihood of financial statement fraud is important for two reasons”. Makkawi and Schick (2003, p. 591) indicated fraud by the current confidence crisis of investors over the credibility of financial reporting to minimize the material misstatements to given a good financial impact to public investor of confident and trusty. Second, “it reinforces the role of auditors in society to provide reasonable assurance about the reliability and dependability of financial information” to reduce the risk of information with financial statements (Makkawi and Schick 2003, p. 591). Due to the important of their role in society, they are surrounded by regulation such as corporate governance, code of ethics and auditing standards. However, what happened in the past after Enron and WorldCom cases were became public knowledge yet there still got corporation such as Transmile and Megan Media accountancy fraud case appeared in Malaysia.

The role of external auditors in society today

According to Liandu(2002) has indicated that the person who the external auditor have to enhance the profession to enable it to provide services of consistently high quality in the public interest. However he also has mentioned that the importance of the external auditor have to keep a “state of mind” to be a personal opinion without being influences that compromise professional judgment. One the other hand Yves Gendron, David J. Cooper, Barbara Townley(2001, p.279) has arguing that as a professional auditor has to responded to criticisms by trying to reduce the problem issue of the independence. They are also agreed that as an auditor should keep a “state of mind” of the professional auditor whereas independence is very important to give a secured to shareholder a good confident and trustfulness. Nevertheless El-Hussein E. El-Masry, Kathryn A. Hansen (2008, p. 27) has discussed that there are four factors influencing auditor independence such as “individual factors”, “environmental factors”, “task-related factors” and “factors related to the nature of the cues”. On the other hand Nur Barizah Abu Bakar, Abdul Rahim Abdul Rahman, Hafiz Majdi Abdul Rashid (2005, p.807) has argued that different point of “factors influencing auditor independence” such as “size of audit firm”, “level of competition in the audit services market”, “tenure of audit firms serving the needs of a given client”, “size of audit fees received by audit firms”, “provision of managerial advisory services by audit firms to the audit clients”, and “the existence of audit committee” factors affected by the profession external auditor independently. Therefore Dr. Abdul Samad Haji Alias (2004, p.8) has given a famous case like Enron he stated that “the auditors (Andersen) had extensive experience with the company (Enron), but may have been too close to management as a result of the large number of former audit firm employees at the client. The provision of non-audit services gave a perception of a lack of independence. The engagement team also appears to have overridden advice from the firm’s technical department” these will give lesson to the public of the external auditor challenge by independence profession.

Based on the Malaysia Institute of Accountants (MIA, 2009) indicated that the important of the role of external auditors is to enhance reasonable assurance to the public, therefore the external auditor is carry out the duties to consider the company’s directors are well prepared the report to investigate whether the financial statements are free from material misstatement. In addition Lee and Tong (2007, p.5) has emphasized that the external auditor cannot express in any way an opinion that the financial statements are correct and accurate because the auditor does not carry out a one hundred per cent check on all the transactions. Second the auditor is not responsible for the detection and prevention of fraud or course of the auditor’s work. Third, the auditor may not necessarily adjust or amend the financial statements for every error or omission noted, provided that the error or omission is not considered as material in the professional judgment of the auditor. One of the Malaysia Jaafar Sidek (2008) shareholder activism has commented that the auditor should responsibility to provide an early warning if there is a fraud or something wrong in corporate governance. He has also got argue that the Public companies accounting oversight board (PCAOB) has a critical role that to help monitor auditors of public companies and improve investor confidence to ensure the accountability would not going wrong so that this is a responsibility of the role of auditor part. However Teck and Md Ali, (2008, p.21) indicated that the role of auditors is poorly understood, whereas the public cannot be blamed totally as auditing is a complicated subject that is not easily comprehended by those have limited knowledge and exposure in auditing. Besides, the objective of auditing and the role of auditors have always been a dynamic rather than static one. Nonetheless what happen past of the lessons of Enron has became to the public knowledge but there was a Transmile case appear in Malaysia of high level of negative connected with the financial scandals overstated statement found by Moores Rowland Risk Management of special audit, and the statement was verified by previous the external auditor Deloitte & Touche(D&T). (Fong, 2007)

However Iain Gray et al. (2008, p.645-646) also has indicated that the external auditors’ just only can consider fraud in an audit of financial statements and not fully to detect all the fraud. In the discussion of the fraud they also was found out three of the big accounting firm has been done a survey by KPMG found that management was the most likely group to perpetrate a fraud, PricewaterhouseCoopers found that the major crime committed by senior management was financial misrepresentation and Ernst & Young found that most of the companies they surveyed 72 per cent did not provide their employees with training to understand and implement the organization’s anti-fraud policy. In addition the Malaysia Institute of Accountants (MIA) (Accountants Today, 2008) stated that “due to the inherent limitations of auditing, the auditor may not obtain absolute assurance that material misstatements in the financial statements will be detected.”

Meanwhile Teck Heng Lee, Azham Md. Ali and Dieter Gloeck (2009, p.19) research that the auditors has responded to “credibility crisis” by coining, reciting and hiding behind the phrase “audit expectation gap” which is the differences between the public’s and auditors’ perceptions of the role of an audit function. Whereby the stakeholder is the primary role in the company not the external auditor whereas the auditors’ just only consider fraud of the financial statement. Similarly there was a case like a Transmile Group of the two directors with chief financial officer charged in court for their roles in one of Malaysia’s biggest accounting fraud cases in appeared (, 2007)[online]. To consider possibility of fraud MIA (2009)[online] has indicated that as a professional auditor should maintain an attitude of “professional skepticism” in the audit work to recognize the possibility that fraud could exist. On the other hand Payne and Ramsay (2005, p.323) has indicated that the “professional skepticism” have to keep a questioning attitude and supporting conclusions opinions with appropriate relevant audit evidence to consider whether there are material misstatement. However when the case of Transmile Group was faced to financial scandal there was higher losses audited by Moores Rowland Risk Management in appeared the news in Malaysia (Fong, 2007) proven to public that the previous Transmile external auditors (D&T) there was played a bad role in the society due to lack of the “professional skepticism” attitude. In addition, to reduce the “audit expectation gap” Teck Heng Lee, Azham Md. Ali and Dieter Gloeck, (2009, p.18) has given a recommendations for possible solution to reduce the “audit expectation gap” stated that “shareholders’ awareness of auditing can be improved by having the auditors provide an explanation of what the aim of the audit attest function is and what can reasonably be expected of auditors.” This will publish in the annual report or attached to the agenda for the AGM.

Effectiveness of existing regulatory environment

Corporate Governance

According to (Hayes, R, et al, 2005) had emphasized that a good external auditors are always acting independently in corporate governance to ensure that the auditors should not influence by director. However (Humphrey et al., 2006) has argued that one of the fundamental issues at the heart of the debate on the independence of auditors is the fact that they are effectively appointed by the directors of a company, who also effectively determine the size of the audit fee. As a consequence Lee and Tong, (2007, p.24) had mentioned of the collapse company such as Enron with together the external auditor (Andersen) in 2001, WorldCom in 2002 and Parmalat in 2004. Nonetheless, the financial scandal of public-listed companies such as Transmile Group Berhad and Megan Media Holdings Berhad in 2007 have similary with the giant of the Enron was lack of the quality of transparency and self-interest to influence the external auditor to be an independently in the corporate governance. To enhance the corporate governance Baker (2009) has suggested that to balance of the board of the directors to representative in the company to prevent the fraud.

Professional Independence

Cosserat and Rodda (2009) had clarified that the auditors must not only be independent but must be look to be independent this may lead to the auditor’s integrity, objectivity and strength of character. To enhance the auditors’ independence Cosserat and Rodda (2009) also has emphasize that the Company Act

Code of ethic

According to (IFAC, 2009)[online] stated that integrity is a requirement for those acting in public interest and it is vital that auditors act and are seen to act with integrity. This requires not only honesty but a wide range of qualities such as fairness, candour, courage, intellectual honesty and confidentiality. However

To enhance the external auditors (ACCA, 2009, p.247) emphasize that the sheer variety if threats to compliance with the fundamental principles mean that no guidance can cover every situation where there is a potential threat. Therefore requiring use of a principle-based framework rather than a set of specific rules is in the public interest for the several reasons such as “codes can include examples to illustrate how the principles are applied”, second “a code prescribes minimum standards of behavior that are expected”, third “a framework can accommodate a rapidly changing environment, such as the one in which auditors are”, fourth “ a framework can contain prohibitions where these are necessary when principles are not enough”. However (ACCA, 2009, p.247) have also argue these may also have several disadvantage for external auditors, such as “ethical codes cannot include all circumstances and dilemmas, accountants need a very good understanding of the underlying principles”, and “international codes such as the IFAC code cannot fully capture regional variations in beliefs and practice”
Although there are a lot of regulatory given guidance for auditors yet there was also a very evident embracing of the arguments by (Christopher Humphrey, Peter Moizer, Stuart Turley, 2006) that auditors providing a range of services to audit clients were likely to be more effective than those solely providing a statutory financial audit. Such as the case of Transmile and Megan Media it may miss of the “professional independence” to meet the fundamental principle due to self-interest threat and familiarity threats. According to “MIA-By-Laws” (Accountants Today, 2006, pp. 21-23) has stated that to ensure the fundamental principle the auditors should always keep a “state of mind” of the professional auditor to be independence otherwise will be rise to the various threats to independence. In addition to enhance the quality of audit, the profession (ACCA, p. 48) had suggested that if the business relationship between the external auditor and stakeholder are very close, the auditor either terminate or change the other audit committee to ensure that the professional are independently. However Rittenberg and Schwieger (2005, p. 71) had suggested to improving the knowledge of auditing standard to ensure auditors are updating the latest the framework by attend the seminar or workshop.


Although the important of the role of external auditor is to verification and investigation the financial statement to enhance a reasonable assurance to public, by the way the external auditor should also consider the fraud and to maintenance the questioning attitude to close the expectation gap is the part of responsibility. Either way the external auditor should play a good effectiveness of the existing legislation or regulation to enhance the role of external auditor. Those the academic and journal articles has explained those of the role of external auditor in society today as a conclusion until today the external auditor still are challenging for their independently.



ACCA, 2008a, ‘Professional Accountant’, P1, ACCA, UK, p. 247

Accountants Today, 2006, ‘Professional Ethics’, Accountants Today March 2006, Vol.19 No.3, MIA, MY, pp. 21-23

Accountants Today, 2008, Surveillance on Financial Reporting, Accountants Today December 2008, [Accessed on 4th July 2009],, pp. 16-18.

Baker C.R. 2009, ‘From member of the company to registered auditor: the role of external auditor in corporate governance’, Wiley, [Accessed on 17th July 2009],, pp. 26-27

Dr. Abdul Samad Haji Alias, 2004, ‘The Lessons of Enron’, Accountants Today January & February 2004, Vol.17 No.1, MIA, MY, p. 8.

El-Hussein E. El-Masry, Kathryn A. Hansen, 2008, ‘Factors affecting auditors' utilization of evidential cues: Taxonomy and future research directions’, Emerald, Managerial Auditing Journal,, p. 27.

Fong, K., 2007, ‘Audit uncovers more irregularities in Transmile’, The Star [Online], [Accessed on 4th July 2009],

Fong, K., 2007, ‘Transmile audited losses higher’, The Star online, [Accessed on 4th July 2009],

Hayes, R, et al., 2005, ‘Principles of Auditing’, 2nd edition, Pearson Education, UK, pp. 617-620

Iain Gray et al., 2008, ‘The Audit process’, 4th edition, Thomson Learning, UK, pp. 645-646.

Jaafar Sidek, A.W., 2008, ‘The auditing profession – the way forward’, The Star Saturday July 19, 2008, [online],, 2007, ‘Former Transmile CEO among trio charged in accountancy fraud case’,, [online] [Accessed on 1st July 2009],

Lee, M and Tong, S.K., 2007, ‘Practical Auditing in Malaysia’, Prentice Hall, MY, p. 5.

Liandu, N., 2002, ‘The independence of accountants’, 10 Jun 2002, ACCA online, [Accessed on 13th July 2009],

Makkawi,B, and Schick,A, 2003, ‘Are auditors sensitive enough to fraud?’,[Online], [Accessed on 28 June 2009], p. 591

Malaysia Institute of Accountants, 2009, ‘Facing the global financial crisis’, Jan 2009, [Online], [Accessed on 28 June 2009],

MIA, 2009, ‘INTERNATIONAL STANDARDS ON AUDITING’, MIA, [online][Accessed on 4th July 2009],

Nur Barizah Abu Bakar, Abdul Rahim Abdul Rahman, Hafiz Majdi Abdul Rashid, 2005, ‘Factors influencing auditor independence: Malaysian loan officers' perceptions’, Emerald, Managerial Auditing Journal,, p. 807.

Payne, E.A and Ramsay, R.J., 2005, ‘Fraud risk assessments and auditors’ professional skepticism’, emerald,

Rittenberg, L.E., Schwieger, B.J, 2005, ‘Auditing, Concepts for Changing Environment’, 5th edition, Thomson, UK, p. 71.

Teck Heng Lee, Azham Md. Ali and Dieter Gloeck, 2009, ‘The Audit Expectation Gap in Malaysia (Part 1)’, Accountants Today March 2009, Vol.22 No.3, MIA, MY, p. 19.

Teck Heng Lee, Azham Md. Ali and Dieter Gloeck, 2009, ‘The Audit Expectation Gap in Malaysia (Part 2)’, Accountants Today April 2009, Vol.22 No.4, MIA, MY, p. 18.

Teck, H.L and Md Ali, A., 2008, ‘The Evolving Role of Auditors’, Accountants Today March 2008, [Accessed on 4th July 2009],, p.21.

Yves Gendron, David J. Cooper, Barbara Townley, 2001, ‘In the name of accountability -State auditing, independence and new public management’, Emarald, Accounting, Auditing & Accountability Journal, [Accessed on 14th July 2009],, p.279.

CHOI, J.H; WONG, T.J.. Contemporary Accounting Research, Spring2007, Vol. 24 Issue 1, p13-46, 34p; (AN 24470515), Auditors' Governance Functions and Legal Environments: An International Investigation,

Christopher Humphrey, Peter Moizer, Stuart Turley, 2006, Independence and Competence? A Critical Questioning of Auditing, Emerald, Advances in Public Interest Accounting,

Christopher Humphrey, Peter Moizer, Stuart Turley, 2006, Independence and Competence? A Critical Questioning of Auditing, Emerald, Advances in Public Interest Accounting,