Characteristics and effectiveness of Audit Committees (AC) in Malaysia

In the wake of corporate scandals in Malaysia in the middle of 1990s, AC has a vital role in discharging their oversight responsibilities particularly in improving companies’ accountabilities and governance. The integrity of the corporate reporting process requires AC members to understand the various developments affecting financial reporting, internal controls and assessment of the objectivity of external auditors. Collier (1992) concluded that AC should have the following characteristics: they are a sub-committee of the board, composed mainly of non-executive directors and have the responsibility for reviewing the financial statements and the external audit and control systems. Nevertheless, a report of the FCCG (1999) shows that AC was ineffective in most Malaysian PLCs. This statement was supported by the Malaysian Institute of Accountants (MIA), which felt that the AC in most PLCs have not lived up to initial expectations (Akauntan Nasional, 1994). This suggests that the formation of AC in PLCs was more inclined towards conforming to regulation but not in substance to the spirit of good governance.

The ineffectiveness of the AC could possibly be the reason on the occurrence of company scandals and failures in Malaysia in the 1990s. Some of the scandals that involved both GLCs and NGLCs were Perwaja Trengganu Sdn. Bhd (PTSB), Renong Bhd, Aokam Perdana Bhd, UEM and KFC Bhd. The failure of PTSB was caused by, among other things, poor management and irregularities in payments and award of contracts (Ibrahim, 1995). An internal audit report, which became public in December 1995, disclosed that PTSB was insolvent, and was unable to pay any interest and principal on its RM5.7 billion in domestic and foreign borrowings (Thomas, 2002). The Renong Group, the biggest government conglomerate in Malaysia also ran into difficulty and had to be rescued by the government. As a result, the awareness of corporate governance heightened during this period.

To address the problems, the Companies Commission of Malaysia (CCM) issued Voluntary Codes of Conduct for company directors and secretaries in 1996. The issuance of the new Code was to check on the behaviours of directors and to curb corporate scandals and failures. Apparently, the issues of corporate governance continued to be highlighted through the Asian Financial Crisis period. 

Now, the issue of audit committees' ineffectiveness is seldom heard. This is due to the various planning and actions embarked  by the Security Commission and Bursa Malaysia to improve the competency of AC. Fifteen years ago, most audit committees of PLCs would meet on an average of 3 times per annum. But now, due to the regulation  imposed  on AC, they have to meet at least 4 times a year. Some bigger PLCs would  meet more than eight times per annum.  Reason being, they have to review and check the quarterly reporting of  their financial statements, internal control and governance before all those matters are considered and  endorsed by the board of directors.