Will Malaysian audit have its day in court?

Silver Bird may well be the first local listed company to sue its internal and external auditors.

IF ever there were Malaysian parents who had hoped that their kids would go into audit, there's probably quite a bit of serious rethinking going on right now. It looks like the audit profession is in for some harsh scrutiny and painful soul-searching.

On Aug 1, Silver Bird Group Bhd and two wholly-owned subsidiaries filed an action in the Kuala Lumpur High Court in relation to financial irregularities at the three companies. One of the 10 defendants named in the suit was Crowe Horwath, Silver Bird's longtime external auditors.

According to Silver Bird's announcement through Bursa Malaysia, the suit against the accounting firm is premised on alleged negligence and breach of duty of care and/or its duties and responsibilities to the plaintiffs as external auditors.

The bread and confectionery maker links this to Crowe Horwath's “failure to discover and/or detect the financial irregularities”.

It is believed to be the first such legal action by a listed company in Malaysia against its external auditors.

In recent years, it's increasingly common to hear of auditors in the United States, Britain and elsewhere (Japan, India and Hong Kong, for example) being sued for professional negligence because they had failed to spot fraud and warning signs of business collapses.

It's perhaps an indication of the current thinking that when companies go under, certain parties should be held accountable for the huge losses and suffering, and these include the auditors, whose opinion on the companies' financial statements are widely relied upon.

The day after Silver Bird initiated the civil suit, Crowe Horwath issued a press release to deny the allegations in the suit, as laid out in the Silver Bird announcement. The auditors pointed out that they had, in fact, discovered the irregularities and immediately reported these to Silver Bird's audit committee and board of directors.

“We believe that the suit by Silver Bird is frivolous in nature and without basis. We strongly believe that we have fully discharged our duties professionally and will vigorously defend our position in court,” added the firm.

Indeed, as that last line in the press release indicates, right or wrong will be decided before the judge, unless the case doesn't go to trial.

However, there were no such statements from Audex Governance Sdn Bhd and Focus Internal Audit Solutions (FIAS), who are also among the defendants. Both are on the list because they have done internal audit work for Silver Bird, which had outsourced its internal audit function to Audex Governance before switching to FIAS.

Suits against internal auditors appear to be rare overseas and it's almost certain that Silver Bird's civil action against Audex Governance and FIAS is a first for Malaysia.

The Silver Bird case has thrown the spotlight on the roles and responsibilities of internal auditors.

Internal audit became a more visible component of corporate governance in Malaysia when it was made mandatory beginning Jan 31, 2009, for a listed company to have an internal audit function.

Bursa Malaysia's listing rules require that the internal audit function be independent of the activities it audits and that it reports directly to the audit committee.

In addition, the listed company's annual report have to include a statement relating to the internal audit function, informing whether the function is performed in-house or is outsourced, and the costs incurred for the function in respect of the financial year.

Despite these rules, most people tend to underestimate the importance of internal auditors, probably because few people really appreciate what internal auditors do.

In a brochure, The International Institute of Internal Auditors (IIA) reports this lament: “There is a universal lack of understanding of the internal audit profession, how it makes a difference in regard to organisational governance, risk, and internal control; and its value to stakeholders.”

In addition, there's more emphasis on the audit opinion of the external auditors as it's a tangible product of their work.

Also, the external auditors are seen as independent of the management, whereas an in-house internal audit function is undertaken by those on the company's payroll.

The IIA defines internal audit activity as a “department, division, team of consultants, or other practitioner(s) that provides independent, objective assurance and consulting services designed to add value and improve an organisation's operations”.

It adds: “The internal audit activity helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of governance, risk management and control processes.”

On the other hand, as Crowe Horwath puts it in Silver Bird's financial statements for the year ended October 2011, the external auditors are called in primarily to express an opinion on the financial statements “based on our audit in accordance with approved standards on auditing in Malaysia”.

Silver Bird's move to sue the internal auditors tells us that it's time to take a closer look at the internal audit function, whether in-house or outsourced. The regulators and the internal audit profession should be asking some tough questions.

Would it be possible for companies to sue internal auditors for professional negligence if they are employees? Who watches over the outsourcing of the internal audit function and the firms that take on such jobs? What more can be done to ensure the independence and quality of the internal audit function?

When financial irregularities are not picked up by the internal and external auditors, is it possible for one of the auditors to be exonerated while the other is found to be at fault?

The Silver Bird case may or may not lead to answers to these questions, but if the audit profession is truly proactive and dynamic, it wouldn't wait for the case to be resolved before responding to the reality that in Malaysia, resistance to the idea of suing auditors is waning.

> Executive editor Errol Oh hopes he will have the stamina and patience to follow closely the developments in the Silver Bird lawsuit.

Gu Kailai: High flying lawyer turned murder accused

As a high-flying international lawyer married to one of China's most promising and charismatic politicians and with a son at Harvard, Gu Kailai appeared to have it all. Now she is on trial for murder.

China Official's Wife Doesn't Deny Killing Briton

This frame grab taken from CCTV video shows Gu Kailai, the wife of Chinese politician Bo Xilai, facing the court during her murder trial in Hefei, Aug. 9, 2012. (CCTV/AFP/Getty Images/Newscom)

As a high-flying international lawyer married to one of China's most promising and charismatic politicians and with a son at Harvard, Gu Kailai appeared to have it all. Now she is on trial for murder.
  
Since her detention earlier this year on suspicion of poisoning a British businessman a new picture has emerged of an at times volatile woman with a troubled childhood and a reported history of depression.
  
The daughter of a renowned general, Gu, like her husband Bo Xilai, is a so-called princeling -- an elite group in Communist China whose family background has given them influence and privilege not enjoyed by most.
  
Like Bo, she studied at the prestigious Peking University, although the pair did not meet until 1984, while she was on a research trip near the eastern city of Dalian, where he had taken a post as a local party secretary.
  
"He was very much like my father, that sort of extremely idealistic person," Gu, 53, told the Southern Weekend, a local weekly, in an interview published in 2009, recalling her first encounter with Bo.
  
"He lived in a small dirty room. He offered me an apple before telling me about his ideas."
  
They married two years later and in 1987 had a son, Bo Guagua, who attended one of Britain's most prestigious private schools, Harrow, followed by Oxford University and a postgraduate degree at Harvard.
  
She began work as a lawyer the same year the boy was born, later setting up her own firm and winning plaudits as the first Chinese attorney to successfully challenge a legal decision in US courts -- an experience she recounted in two books that became bestsellers in her home country.
  
Ed Byrne, an American lawyer who worked with Gu, recalled her as "smart, charismatic, attractive". "I was very impressed with her," he said in a television interview.
  
As her husband's political career took off, Gu gave up the law, a sacrifice to which Bo paid tribute at a press conference in March that was to prove one of his last appearances before the couple vanished from public view in April.
  
He described her as a stay-at-home mother who had given up a promising career to take care of her family, and hit out at allegations -- which at that stage were not yet public -- that he said had been made against her.
  
Details that have emerged in recent months of Gu's life with Bo, however, suggest that his portrayal of a humble housewife was far from the reality.
  
She is reported to have spent several years in Britain while her son was at school there -- a place arranged by Neil Heywood, the 41-year-old Briton she is charged with murdering after their business relationship went sour.
  
While in Britain, she stayed at the most expensive hotels and enjoyed access to a private jet owned by a billionaire friend, according to sources quoted in the New York Times.
  
Such privilege will have offered scant preparation for a life in jail -- experts in the Chinese legal system say she is likely to be sentenced to around 15 years -- although Gu's life had not always been so comfortable.
  
During the Cultural Revolution her parents were detained and her four sisters sent to the countryside for re-education, forcing her to drop out of school and scrape a living variously as a construction worker, a butcher and a lute player.
  
State news agency Xinhua has said the evidence against Gu and her co-accused, a family aide, is "irrefutable" and suggested she was acting to protect her son from unidentified threats by Heywood.
  
This has been seen as a possible mitigating factor in her sentencing, along with the bouts of depression that she reportedly suffered in recent years.

Source: AFP

The Standard Chartered Debacle; How Not To Go After A Big Bank?

There’s a big bad bank in London doing all sorts of bad things with a member of the Axis of Evil.

That’s what the head of the New York State Department of Financial Services is alleging and he’s done so by releasing some pretty ugly details about the bank, Standard Chartered. Unfortunately for Benjamin Lawsky, head of the NYSDFS, he’s become a bigger story than the actual allegations.

Why? Lawsky went after Standard Chartered without the assistance of fellow regulators like the Department of Justice, U.S. Treasury and New York Federal Reserve Bank. All of which had their own ongoing investigations related to Standard Chartered’s alleged $250 billion money laundering transactions tied to Iran. But Lawsky moved forward with his allegations without giving the others much of a heads up.

The move has some calling Lawksy a rogue regulator.

Lawsky’s allegations against the London bank make his solo attempt that much more delicate. Typically regulators act together when they go after financial institutions–especially when they’re investigating such serious issues like money laundering.

Think Barclays and Libor. In that record $450 million settlement regulators from both the U.S. and the U.K. worked together and included the Financial Services Authority, the US Commodity Futures Trading Commission  and the United States Department of Justice.

Serious allegations like the ones Lawsky is throwing at Standard Chartered need to be handled with care. If Standard Chartered broke the rules the way Lawsky and his group say it did then there should have been greater fire power behind them. (You know, like the number one federal criminal investigation and enforcement agency, the DoJ.)

Instead, Lawksy went it alone and it’s starting to work against him. The New York State Department of Financial Services is a new regulator created just last year, and its first major action could be viewed as a way to make a name for itself.

What’s worse is that its fellow U.S. regulators are apparently angry with Lawsky for going rogue. Treasury and the Federal reserve were blindsided and angered by Lawsky’s move, Reuters reports. Signs of frustration are also being shown among British members of parliament who think the U.S. is unfairly targeting London’s banks.

Of course, if Standard Chartered engaged in illegal behavior (it denies the extent of the NYDFS’s claims) then none of that should matter. The problem is that the story is now becoming much more focused on all these political and regulatory riffs rather than the alleged massive wrong-doing by the British bank.

By Halah Touryalai, Forbes Staff
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