jessica chew cheng lian : corporate governance at the central bank of malaysia opening speech by ms jessica chew cheng lian, assistant governor of the central bank of malaysia, at the third institute of chartered accountants in australia - the malaysian institute of certified public accountants ( icaa - micpa ) audit forum, kuala lumpur, 27 september 2012. * * * it gives me great pleasure to be here this morning at the 3rd icaa - micpa audit forum. the theme for the forum this year is the role of the audit committee within the context of corporate governance in insurance companies. it has been said that an audit committee is like a good insurance policy - it is better to have it and not need it, than to need it and not have it. i am certainly happy to know that we have established strong audit committee practice within our financial industry, and while admittedly, some institutions have moved further than others in improving the effectiveness of the audit committee, it represents without exception a core pillar of governance systems in our financial sector. i say this because as we speak, there are countries that are now debating the requirement for financial institutions to establish separate audit committees. there are a number of reasons why the theme chosen for this forum is particularly relevant in current times. corporate governance problems have once again come under intense global scrutiny since the outbreak of the global financial crisis. it is however worth noting that quite aside from the crisis, recent episodes of compliance and market misconduct issues surrounding financial institutions have had very little to do with the crisis, but nevertheless have their roots in corporate governance problems. poor governance allowed, and in some cases, likely encouraged, internal control failures leading to large - scale fraud, excessive risk - taking, market manipulations, and an endemic disregard for compliance with laws and regulations. while such issues have not plagued our domestic financial industry to nearly the same extent as they have in some other parts of the world, there are other reasons why we need to continue to pay close attention to corporate governance in malaysia. for one, global economic and financial conditions have become considerably more uncertain. in the last monetary policy statement, the bank negara malaysia observed that economic activity is slower in most major advanced economies. there is considerable policy uncertainty in these economies, while conditions in the international financial markets continue to be volatile. in this environment, effective leadership reinforced by a robust framework within financial institutions for directing strategy and for regulating behaviour will be especially important. domestically, the financial industry also faces greater competition as a result of the

central bankers ’ speeches regulation equals deregulation or less regulation. it is in fact neither. the move is mainly motivated by two key considerations : first, a recognition that in an environment of fast - paced innovations, attempts to regulate prudent behaviour through detailed and prescriptive rules is just not sustainable as they risk becoming outdated almost as soon as they are written. second, common rules often do not adequately capture the risks of larger and more complex institutions, or when they do, they are disproportionately onerous for smaller institutions and this can choke off innovation. the adoption of more principles - based regulation is therefore about re - regulating the industry in a manner that better reflects the risks which an insurer faces. there is a third consideration. with greater focus on principles of sound practice, it is left to insurers to design appropriate internal rules that will govern their activities. this has the intended effect of encouraging firms to shift from a compliance focus to developing a deeper understanding of the risk drivers in their business. in turn, conversations between management and the board, and between insurers and supervisors, have moved to focus on how key risks are being controlled rather than on whether particular rules have been breached. this reflects our expectation that boards, supported by the audit and risk committees, must monitor changes to their risk profiles and actively review risk strategies and internal controls in the light of those changes. an area in which bank negara malaysia is currently seeking to better understand industry practice is with respect to the interactions between the audit and risk committees of the board. audit committees have a clear interest in risk management within their organisations. most internal audits adopt a risk - based approach to auditing which requires an understanding of material risks within the organisation. audit committees also obtain independent assurance from internal audit on the effectiveness of risk management processes within the organisation and this requires a reasonably deep knowledge of risk management. conversely, risk committees must consider the quality of internal controls, including financial reporting practices, which are an important part of any risk management framework. the walker review of corporate governance in the financial industry acknowledged an important link between these two functions. in malaysia, we have moved ahead of many countries in requiring an organisational separation of the audit and risk committees in order to encourage an enhanced focus on audit and risk. this move is now validated by similar directions in other countries including canada, australia and the uk to require separation. moreover, the enormous challenges of implementing new financial reporting standards, have substantially