Audit Committees in Malaysia and the Blue Ribbon Committee Report: A Comparative Study

Audit committees gained prominence amidst clamours for corporate accountability by the investing community. Issues on audit committees' mandatory establishment and its effectiveness, have always been widely discussed. One of the most authoritative contributions towards this cause was the Blue Ribbon Committee Report (BRC). This paper will provide a brief account on the mandatory establishment of audit committees and, its effectiveness in Malaysia as compared to the recommendations in the BRC report. It will objectively analyze the adequacy of the provisions on strengthening audit committees' effectiveness in Malaysia. A Brief History of Audit Committees in Malaysia In August 1993, the Malaysian Securities Commission gave notice to all companies listed on the Kuala Lumpur Stock Exchange to form audit committees. A grace period of one year (1994) was allowed to implement this requirement. The extent to which this mandatory stipulation was complied can be seen in Table 1. This survey showed that in 1994, only 56 percent of the sampled main board firms and 24 percent of the sampled second board firms had formed audit committee. However, by 1998 all the sampled firms had audit committees in compliance with the listing requirements (see Table 1). But, in 1998, fuelled by the Asian financial crisis, the Malaysian Institute of Corporate Governance (MICG) was established to pioneer the corporate governance domain in the country. One of its most pressing responsibilities was to chum out good practices guide for companies in the same fashion as other advanced countries around the world. The MICG, hence, developed the Malaysian Code of Corporate Governance in March 2000. Initially, the Code was introduced as a voluntary requirement for companies to use as a guide in their quest to ensure and enhance corporate governance. By January 2001. however, its voluntary nature was removed. This move was to create an environment that demands higher standards of conduct and higher quality of disclosures from public listed companies and their board of directors. The change also added a listing requirement (Para 15.26) that requires the board of directors to make a statement in the annual report of how they have applied the principles in Part I of the Principles of the Corporate Governance Code and the extent to which they have complied with the best practices in Part 2 of the Code. It is deemed that, notwithstanding the mandatory requirement for the establishment of an audit committee as per Section 344A (now under Para 3.15), the intent here is to mandate disclosure. As it can be discerned here, the development of corporate governance and audit committee in Malaysia seems to replicate what had happened in the UK and other developed countries. Only the time frame of its implementation has been different. Provision for Audit Committees' Effectiveness In this section, a diagnostic approach will be undertaken to identify and highlight the similarities and the inadequacies, if any, as compared to the recommendations in the Blue Ribbon Committee's Report (BRC). In a way, it is to create awareness among investors, local and foreign, that Malaysia, too, is concerned about the effective role of audit committees and sees it as a way forward to assist in enhancing corporate governance. Independence of audit committee members Recommendation 1 and 2 of the BRC stressed on the definition of independence of the audit committee members. It emphasized that an audit committee member will be considered as independent if he/she has no relationship to the corporation that may interfere with the exercise of their independence from management and the corporation. It also suggested that the audit committee should comprise solely of independent directors. The KLSE Listing Requirements has not specifically defined independence, but has emphasized in Para 15.10(1)(b) that a majority of the audit committee members must be independent directors. …