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Regulatory framework for financial reporting&

Statutory Requirement

Statutory requirementsCorporate GovernanceAuditors and OversightIndependent Enforcement Bodies

Regulatory framework for financial reporting

Many parties play an active role within financial reporting environment› The activities of these parties will be influenced by:

legal setting economic setting political setting social setting

These specific environment is called the regulatory framework of financial reporting› The RF vary between countries, yet they have common

elements2

Regulatory framework for financial reporting

The elements of a regulatory framework are :› A) statutory requirements› B) corporate governance› C) auditors and oversight› D) independent enforcement bodies

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A) Statutory requirements The key participants in the production of financial report

are corporate director & independent auditors. The directors & auditors prepare audited report is to fulfill

statutory requirements, as contained in company law. On the other hand, company law will likely mandate basic

requirement on preparations of accounts and frequency of preparation.

E.g. Aust: must disclose information about their environmental performance.

Additional financial reporting requirement are derived from specific accounting standards & in many jurisdictions these standards have the force of law. E.g: Company law, Securities market law, Taxation law.

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B) Corporate governance ‘The structures, processes and institutions within and

around organisations that allocate power and resource control among participants.’ Davis

Some CG practices are derived from laws which require directors to carry out specific actions in relation to management of the company.

CG guidance may take the form of voluntary best practice recommendations which encourage directors to adopt appropriate governance mechanisms.

E.g. requirement to hold meetings, related party transactions – basic CG matters + covered by company law

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C) Auditors and oversight Auditors are important function in providing

assurance about the quality of information provided by companies› as such, auditing profession have to be regulated

The most basic form of regulation is limiting of membership to persons with particular qualifications and experience and requiring registration to practise.

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D) Independent enforcement bodies

The role of such body in the regulation of financial reporting is to promote compliance with the regulations governing the production of financial statements.

An independent enforcement bodies is an extension of lodgement supervision, a basic part of the regulatory framework.

Independent enforcement bodies may have extensive duties & powers in relation to monitoring financial reporting.

Diff country may have diff independent bodies. Hence, the need for consistent enforcement across countries is needed.

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Institutional structure for setting accounting and auditing standards

The IASB & FASB Convergence ProgramAccounting Standards for the Public SectorInternational Auditing Standards

Background Formation of IASC in London – 1973 The committee comprised representatives of professional

accounting bodies from 9 countries. Aimed to develop accounting standards for the private

sectors for use throughout the world IOSCO’s support for a set of core standards IASC not independent so restructured in 2001 into the IASB

› Coz IASC allowed a choice of accouting policy In 2002 the European Commission decided to adopt IASB

standards in 2005 in the European Union.› More transparent & comparable

Australia adopted IFRS on 1 January 2005

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The IASB and FASB convergence program

The work program of IASB become complicated by the announcement of the IASB/FASB convergence program in 2002 – Norwalk agreement

Convergence between IASB with US GAAP. This convergence program requires FASB & IASB to

identify differences between their respective standards, to review and adopt the better treatment.

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Accounting standards for the public sector

IASB set standards for private sector. Public sector may have diff standards coz diff goal, objectives & stakeholders.

Individual countries must decide the extent to which IASB standards will be followed by public sector entities

Australia has pursued one set of standards that can be used by both public and private sector entities – “sector neutral standards”.

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International auditing standards

Historically auditing was self-regulated 19th century – professional accounting societies

were found during a time when Companies Act were passed in UK that requiring audit. – generate revenue for accountants.

Best auditing practice has become enshrined in auditing standards

Governments have become involved due to market failure

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Standard Setting in MalaysiaBasic References : S.susiela et.al chapter 6,7

History Development of reporting practice in Malaysia

Explain current financial reporting regime in Malaysia

Describe the move towards convergence with International Accounting Standards

Indentify the challenges for standard setting

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Introduction A strong accounting profession is seen as a

crucial component of the capital market system. This role cannot be carried out satisfactorily in

isolation. The support of other key institutions is vital. Our main discussion is on providing an

understanding of how the accounting profession interacts with various institutions involved in the financial and reporting environment.

Accounting Profession and the Financial and Reporting Environment

Private Corporate Sector

Financial Reporting Foundation

Ministry of Finance

The Accounting Profession

Auditors General’s Department

Accountant General’s OfficeCompanies Commission of

MalaysiaSecurities Commission

Malaysian Institute of Accountants Central Bank

Public Sector EnterprisesMalaysian Accounting

Standard Board

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Key players in the Financial Reporting Process

Accountant General Office Malaysian Institute of Accountant Auditor General Department The Companies Commission of Malaysia Central Bank Securities Commission Malaysian Accounting Standard Board The Corporations Public Accounting Firms

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History Development of reporting practice in Malaysia

The Malaysian Accounting Standards Board (MASB) is established under the Financial Reporting Act 1997 (the Act) as an independent authority to develop and issue accounting and financial reporting standards in Malaysia.

The MASB, together with the Financial Reporting Foundation (FRF), make up the new framework for financial reporting in Malaysia. This new framework comprises an independent standard-setting structure with representation from all relevant parties in the standard-setting process, including preparers, users, regulators and the accountancy profession.

18Financial Reporting Foundation (FRF)

•Financial Reporting Act 1997 was gazetted on 6 March 1997.•The Financial Reporting Foundation (FRF) is established under Financial Reporting Act 1997. •The FRF comprises representation from all relevant parties in the standard setting process, including preparers, users, regulators, and accountancy profession.

19FRF

The FRF, as a trustee body, has responsibility for the oversight of the MASB's performance, financial and funding arrangements, and as an initial source of views for the MASB on proposed standards and pronouncements. It has no direct responsibility with regard to standard setting. This responsibility rests solely with the MASB.

20MEMBERS OF THE FINANCIAL REPORTING FOUNDATIONoThe Financial Reporting Foundation (FRF) comprises nineteen (19) members who are appointed by the Minister of Finance. oSeven (7) of the members are ex-officio representing the Minister of Finance, the Central Bank, the Securities Commission, the Companies Commission of Malaysia, the Kuala Lumpur Stock Exchange, the Malaysian Institute of Accountants and the Malaysian Accounting Standards Board. oThe other twelve (12) members represent a broad spectrum of interest groups - principal officers of public listed companies, senior partners of public accounting firms and persons with other relevant experience and background.

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The functions and powers of the FRF as provided under the Act are as follows:

1. to provide its views to the MASB on any matter which the MASB seeks to undertake or implement with respect to the development and issue of accounting standards and a conceptual framework;

2. to review the performance of the MASB; 3. to be responsible for the financing arrangements and operations of

the MASB; 4. to approve the MASB budget; 5. to engage or to employ persons and determine the conditions of

such appointments as are necessary to assist the FRF and MASB perform their functions under the Act;

6. to administer the fund established to finance the ongoing operations of FRF and MASB including management of funds not expended on operations during any period;

22Cont..

7. to maintain proper accounts and prepare an annual statement of accounts of the FRF;

8. to appoint an auditor for the purpose of auditing the annual statement of accounts;

9. to forward the annual statement of accounts and audit report to the Minister of Finance, and report on the activities of the FRF and MASB at the end of each financial year; and

10. to perform such other functions as the Minister of Finance may prescribe.

23Definition under FRF

Accounting Standard“ a statement of standard accounting practices for the presentations of financial statement”

Approved Accounting Standard“accounting standards which are issued or approved by MASB”

24Compliance to FRS

Mandatory to; Public listed companies under Exchange Companies registered with the Registrar Financial Institutions under Central Bank

Encourage for ;• government agencies• coorporations

25MASB

Malaysian Accounting Standard Board (MASB) is established under the Financial Reporting Act 1997 as an independent authority to develop and issue accounting and financial reporting standard in Malaysia.

26Mission of MASB

The MASB's mission is to develop and promote high quality

accounting and reporting standards that are consistent with

international best practices for the benefit of users,

preparers, auditors and the public in Malaysia. In a wider

context, the MASB seeks to contribute directly to the

international development of financial reporting for the

benefit of users, preparers and auditors of financial reports.

MASB’s objectives: • 1. to develop high quality, clear and enforceable national accounting

standards for financial reporting that benefit users; 2. to bring about harmonisation of national accounting standards with

international accounting standards; 3. to promote the use and application of those standards by way of

communication with and education of users, preparers, auditors and the public;

4. to actively contribute to the development of accounting standards internationally, including, Islamic-based accounting standards; and

5. to promote and support research in the area of financial reporting, in particular, for emerging markets and Islamic markets

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Functions of MASB1. issue new accounting standards as approved accounting standards and to

review, revise or adopt existing accounting standards as approved accounting standards;

2. issue statements of principles for financial reporting; 3. sponsor or undertake development of possible accounting standards; 4. conduct public consultation as necessary; 5. develop a conceptual framework for the purpose of evaluating proposed

accounting standards; 6. make such changes to proposed accounting standards as considered

necessary; 7. seek the view of the FRF in relation to new and existing standards,

statement of principles, and changes to proposed standards; 8. determine scope and application of accounting standards; and 9. to perform such other function as the Minister of Finance may prescribe.

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Key players in the Financial Reporting Process

Accountant General Office Malaysian Institute of Accountant Auditor General Department The Companies Commission of Malaysia Central Bank Securities Commission Malaysian Accounting Standard Board The Corporations Public Accounting Firms

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Accountant General Office

Strives to improve public sector accountability by providing excellent accounting services and management information to the satisfaction of various users thereby achieving national objectives.

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Accountant General’s Office Functions

Managing human resources and career development for the accounting services in the public sector.

Establishing accounting standards for the public sector.

Providing consultancy services on accounting and financial matters to all agencies in the public sector

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Cont..

Preparing monthly accounting financial information.

Providing support services (consultancy and training) on Micro Accounting System to all government agencies.

Enforcing the provisions of the Unclaimed Monies Act 1965 are processed in a timely manner.

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Cont..

Managing the Pension Trust Fund Accounting for Payments and Receipts on a daily

basis Preparing Annual Public Accounts according to

the provisions of the Financial Procedures Act 1957 to be tabled in Parliament

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Accountant General represents the Government in the Council of the Institute. Also represented in the Malaysian Accounting Standards Board. Plays a vital role as a linked between the private sector and public sector accounting.

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Malaysian Institute of Accountant

MIA exerts important influence on all accountants in Malaysia.

MIA gives the designation Chartered Accountant to its member.

The MIA membership is divided into 4 categories:› Chartered Accountants in Practice› Chartered Accountants Not in Practice› Associate Members› Licensed Accountants

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Cont..

MIA sets professional requirements for accountants, conduct research, and publishes materials on many different subjects related to accounting, auditing, attestation and assurance services, management consulting services and taxes.

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Auditor General Department Under the Audit Act 1957 the accounts of the

fedaration, states and such other public authorities and specified bodies are subject to audit by the Auditor General.

The Auditor General office ensures that the accounting and reporting standards prescribed by the Accountant General are complied with the Audit Act 1957.

It also offers audit services to the public sector enterprises.

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The Companies Commission of Malaysia

Section 169(4) of the Companies Act 1965 requires every company incorporated under the Act to have its profit and loss account and balance sheet duly audited before they are presented at the annual general meeting.

Amendments to the Companies Act 1998 further provide that companies should comply with approved accounting standards in the preparation of their accounts.

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Functions of Companies Commission Malaysia (CCM)

The main function is to ensure that the provisions of the Acts and laws specified below are administered, enforced, carried out and complied with:› Companies Act 1965› Trust Companies Act 1949› Kootu Fund (Prohobition) Act 1971› Registration of Business Act 1956› Any subsidiary legislation made under the acts

specified above

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Other functions of CCM

Enhancement and promotion of the supply of business and corporate information

Acting as agent of the government and providing services in collection and enforcing payment of prescribed fees

Regulating matters relating to corporations, companies and businesses

Encouraging and promoting proper conduct amongst directors, secretaries and other officers of a corporation

Central BankBank Negara Malaysia is the central bank of Malaysia. Established on 26 January 1959 under the Malay Ordinance, 1958.Objectives are;1. Issue currency and keep reserves safeguarding the value of

the currency2. Act as a banker and financial adviser to the government3. Promote monetary stability and a sound financial structure4. Influence the credit situation to the advantage of the

country

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Central Bank of Malaysia Act 1958 (revised 1994)

The act provides for the administration, objectives of the central bank.

Enumerates the power and the duties of the central bank in relation to issuance of currency, maintenance of external reserve, authorised business of the bank, specific powers to deal with ailing institutions, its relationship with the government and financial institutions,

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Other legislations to regulate and supervise the financial system

Banking and Financial Institutions Act 1989 (BAFIA)

Exchange Control Act 1953 Islamic Banking Act 1983 Insurance Act 1996 Takaful Act 1984 Emergency(Essential Powers) Act 1979 and

Essential (Protection of Depositors) Regulations 1986

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Cont..

Loan (local) Ordinance 1959 Treasury Bills (local) Act 1946 (revised 1977) Government Investment Act 1983

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Securities Commission

The securities commission was set up the Securities Commission Act 1993.

The function is to promote a strong and healthy securities market and to maintain the confidence of investors in line with the provisions of the Securities Commission Act and the Securities Industries Act 1983

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Role of Securities Commission (SC)

The SC is a self-funding statutory body with investigative and enforcement powers.

It reports to the Minister of Finance and its accounts are tabled in Parliament annually.

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Functions of SC

Supervising exchanges, clearing houses and central depositors

Registering authority for prospect uses of corporations other than unlisted recreational clubs

Approving authority for corporate bond issues Regulating all matters relating to securities and

future contracts, unit trust schemes, take-over and mergers of companies

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Cont..

Licensing and supervising all licensed persons Encouraging self-regulation Encouraging proper conduct of market

institutions and licensed persons.

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Malaysian Accounting Standard Board

The main functions of MASB of the FRF are to provide the financial arrangements for the operations of the MASB, and to review the MASB performance

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The Corporations

There are increasing awareness that directors and management in corporate sectors play a critical role in improving the level of financial and reporting systems.

The amendments to the Companies Act 1965 reflect this reality that includes;› Directors’ Responsibility

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Public Accounting Firms

The legal right for public accounting firms to perform audits on limited companies is granted by the Companies Act 1965.

3 categories of public accounting;› Big four › Medium sized› Small firms

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Role of the profession in accounting standard setting

The MIA and other professional accountancy bodies provide input to the MASB at every phase of the standard setting process.

Providing interpretations and guidance on the necessary and vital as the standard setting process now brings in together all key players in an open playing field to raise issues and problems

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Big Change

Reconstitution of the International Accounting Standards Board (IASB)

on 1st April 2001› New mission› New structure› New thinking

56Significant changes

New ideas - IAS -----IFRSNew concept – historical cost ----- fair valueNew deals- country specific ------global languageNew focus – harmonisation------ convergence

57Why convergence?

Need for common understanding –ease of communicationComparability enhanced-similar treatment for similar transaction, eliminate the incomparability factorCost savings-no need to reconcile accountsFacilitate cross-border listings- encourage capital flows

58What is the IFRS Convergence Plan all about?The convergence plan unveils a roadmap towards achieving convergence with IFRS by 1 January 2012.It maps out a series of broad steps over the next few years to ensure that Malaysia’s financial reporting standards will be in line with IFRS, both in content and timing of implementation

59What does convergence with IFRS mean?Convergence with IFRS means full compliance with IFRS as a basis for financial reporting system in Malaysia.

60Cont..

•Investors would have better understanding of financial statements prepared by companies in Malaysia and in making comparisons between companies worldwide.

61Cont..

Convergence will enhance national reputation of Malaysia as being in compliance with International Accounting Standards. The need to establish this profile is imperative to ensure Malaysia is not left out from the globalisation wave, especially since more than 100 countries are converging or have converged with IFRS.

62Which are the top capital markets that require or permit the use of IFRSUnited Kingdom; France;Germany;Hong Kong;Spain;Switzerland;Australia.

63Indentify the challenges for standard setting1. Lack of technical expert2. Working group mostly participate on a

voluntary basis3. Low response from the Malaysian public on

exposure draft and sometimes non-existent4. Lack of adequate research especially issues on

delevoping Islamic Accounting Standard5. Research evidence supported by empirical

studies is lacking to guide MASB deliberations.

64Future MASB

speed up with its research agenda in order to remain relevance. posses technically sound and competent representatives in order to stand up and be reckoned with its dealing in international arena.Play a proactive role in publishing its views on important accounting issues.Provide timely feedback to the resolution of accounting issues.

65Opportunities bound

Body of knowledge has changed Advisory Management upscale Knowledge building Education

66Conclusion

Accounting landscape worldwide has changed, and so does the body of knowledge in accounting. We need to understand changes, embrace them and plan forward and explore opportunities for a bright future.

67Tutorial

1. Discuss the roles and functions of FRS as being provided under the Financial Reporting Act1997.

2. Discuss the roles and functions of MASB as provided under the Financial Reporting Act 1997.

3. What are the challenges facing by MASB in this globalised environment?.

4. Explain the Due Process in the issuance of MASB standard in Malaysia.5. What do you think would be a desirable relationship between IASC and

national standard setters (MASB)?.

68Cont..

6. MASB standards are rename as Financial Reporting Standard (FRS). Discuss the possible advantages to financial reporting in Malaysia on renaming the MASB standards to Financial Reporting Standards (FRS).

7. Discuss the due process of development of Islamic Accounting standard.8. What factors need to be taken into consideration when setting a new

standards in regulated market environment like Malaysia?.