Auditors Face Greater Risk of Conflict under Companies Act 2016

Under the Companies Act 2016 (CA 2016), there has now been a change in the law which may cause auditors to be conflicted or disqualified from a wider range of audit jobs. In particular, this may affect the larger audit firms.

Where an audit firm is appointed as the auditor of the company, every audit partner and now, with change in the law, every audit partner’s spouse cannot be an officer of the company. The CA 2016 defines an officer as including any director, secretary or employee of the company. Hence, an audit firm would appear to be conflicted from acting for a company where the spouse of an audit partner is merely an employee of the company.

Analysis

Under the previous Companies Act 1965 (CA 1965), there was already a similar restriction. An auditor could not be appointed where the auditor was an officer of the company. The definition of officer under both the CA 1965 and the CA 2016 was identical: officer included any director, secretary or employee of the company.

The CA 2016 introduced an added disqualification factor whereby the auditor’s spouse being an officer of the company would similarly disqualify the auditor. This additional disqualification factor was not contained in the recommendations made during the Corporate Law Reform Committee process. Similarly, this wider disqualification was not contained in the Consultation Document on the Proposed Companies Bill issued in 2013 (see clause 260 of the proposed Companies Bill).

This disqualification factor in relation to the auditor’s spouse was first introduced in the Companies Bill 2015 and was enacted in section 264(1)(c)(iii)(A) of the CA 2016.

The effect of this disqualification factor would be very wide when read in the entire context of section 264 of the CA 2016.

First, the law remains the same in that section 264(4) of the CA 2016 requires every audit partner of the appointed audit firm to not be in breach of any of the disqualification factors set out in section 264(1) of the CA 2016. So now, every audit partner’s spouse cannot be an officer of the company.

Second, the law remains the same in that when construing an officer of the company, that would extend to being an officer of a related company (section 264(2) of the CA 2016). A related company would be a holding company, a subsidiary, or a fellow subsidiary with the same holding company.

Comments

I can see the justification in ensuring the complete independence of an auditor of the company, So, there is justification that the auditor’s spouse should not be a director or company secretary of the company (or related company) in question.

But I wonder if it was really intended to extend the disqualification to a situation where the audit partner’s spouse is only an employee of the company. This is the difficulty when adopting the broad definition of officer under the CA 2016. The spouse may be a mere employee but not in any C-Suite position or management-level position.

This may then affect the larger audit firms. Statistically, in 2015, the top 10 audit firms in Malaysia already audit 80% of the public listed companies. There will now have to be closer monitoring and conflict checks conducted on the employment status of audit partners’ spouses in all audit engagements.

 

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