Malaysia’s ESG strategy heralds growth

The business community in Malaysia seems to have gone into a frenzy of activity since lockdown ended, setting up new companies and eager for investment opportunities. The government has also been developing an ESG strategy in the last year that could develop into a potentially huge growth area for local accountancy firms. Industry experts say that if accountants want to prove their worth to the economy, they not only need to offer more non-regulated services, they also need to engage with other sectors to help set the standards for a brave new world of ESG companies and digitally-revolutionised accountancy firms.

There have been significant regulatory developments in Malaysia on the environmental, social and governance (ESG) front in the last year. In December 2021, the central bank Bank Negara Malaysia (BNM) issued an exposure draft on climate risk management and scenario analysis. In March 2022, the country’s stock exchange, Bursa Malaysia, issued a public consultation paper on proposed amendments to the listing requirements with the aim of elevating sustainability practices and disclosures of listed issuers. In June 2022, BNM published a guide to facilitate the adoption of application of the Task Force on Climate-related Financial Disclosures (TCFD) Recommendations on more effective climate-related disclosures by the Malaysian financial industry. In addition, in June 2022, the Securities Commission Malaysia (SC) launched the Sustainable and Responsible Investment linked (SRI-linked) Sukuk Framework to facilitate fundraising by companies in addressing sustainability concerns. The SC will also be releasing the Sustainable and Responsible Investment (SRI) Taxonomy framework by the end of 2022.

Malaysia has also taken an increasingly aggressive stance in enforcing transfer pricing (TP) rules in recent years, where recent developments include stricter TP regulations, measures to counter effects triggered by the COVID-19 pandemic on TP matters, increased compliance with the OECD TP regime and additional restrictions on Labuan entities.

“We anticipate more TP issues to surface in the foreseeable future and they need to be addressed on an ongoing basis,” says Mok Chew Yin, executive director, advisory, BDO Malaysia. “Based on the 2023 Pre-Budget Statement by the Ministry of Finance of Malaysia (MOF) published on 3 June 2022, the MOF intends to implement new rules to deal with the taxation on the digital economy under the Base Erosion and Profit Shifting Action Plan 1. The government has also agreed in principle to implement the OECD’s Two-Pillar approach, which includes introducing Qualified Domestic Minimum Top-up Tax under the Pillar 2. Given the many developments in the global TP environment, it is crucial for Malaysian taxpayers to review their TP policies and documentation on an annual basis and to keep updated with the latest TP requirements in order to identify and mitigate any potential areas of TP compliance risk.”

The pandemic and the subsequent lockdown has led to some significant failures and financial scandals. As a result, regulators have intensified scrutiny and oversight on companies and in turn, auditors have had to revise upwards their risk assessments of their audits. “This has led to increasing numbers of modified audit opinions of audits of public interest entities and the Securities Commission Malaysia’s Audit Oversight Board (AOB) has called on auditors to strengthen their audit quality to better address the challenging business environment,” says Jason Sia, managing partner of Nexia SSY. “AOB has been imposing stiffer monetary penalties and sanctions on auditors who did not satisfy criteria of AOB’s inspection process.”

While the pandemic made the business environment tough, it did not stop entrepreneurs setting up new companies in Malaysia. Based on data from the Companies Commission of Malaysia, the number of companies grew from 1.2 million in 2016 to 1.4 million in 2021. This is leading to a greater demand in professional services and accountants are having to diversify to keep up with demand, particularly in non-regulated services. According to ACCA’s Market Demand for Professional Accountancy Services in the Asia-Pacific Report FY 2021-2024 (May 2021), the services most in demand from clients are IT advisory, risk management and governance and tax advisory. Surprisingly, despite the governments focus on ESG, the non-regulated service least in demand was sustainability and climate change.

“We need more qualified accountants in Malaysia and we need to maintain our relevance to capital markets, not just by providing quality assurance services but also rendering emerging services,” says Yin. “Accountants have a critical role in driving ESG reporting as well as leveraging on technology. Global convergence of sustainability reporting standards, consequential expectations on assurance standards over ESG reporting, and the impact of technology on ethical and audit quality considerations necessitate thoughtful contributions from the accounting profession to shape expected standards and regulations in these areas.”

Fee pressure and staff retention are the biggest stumbling blocks to the expansion and development of Malaysia’s accountancy industry at the moment. “Fee pressure continues to plague a majority of the Small Medium Practitioners (SMP’s) as audit fees have remained stagnant over the last decade as clients view this service as purely a statutory obligation,” says Ralph Ratnaswamy, partner at MustaphaRaj Chartered Accountants, an MGI Worldwide member firm. “Accounting fees have also felt pressure, with the release of new accounting software platforms driving down accounting fees. In general compliance costs have remainder stagnant. In contrast, advisory related services have seen a surge as clients are willing to pay for quality of service – in this case, they can see the need and the value.”

According to Ratnaswamy, staff recruitment has remained challenging post-pandemic with many graduates, mid-level associates and seniors leaving firms due to pressures felt during the pandemic and seeking other opportunities in the sector. As the borders have opened up, many firms have also seen staff opting to move to Singapore and Hong Kong for more lucrative opportunities.

Auditors are having a particularly rough time, according to Gary Yong, partner at Nexia SSY. “Due to the increasingly demanding nature of audit especially within the limitations of working from home and office, customer demand and compliance had exerted enormous fee pressure and sustainability of the audit practice,” he says. “Additional demands of staff recruitment and retention only adds to the challenges faced by the audit practice. The accounting industry is at its lowest ebb as witnessed by the unethical “poaching” of staff – currently there is an outflow of resources to apparently lucrative offers by other firms and talents to neighbouring countries such as Singapore, where SGD currency continues to strengthen against the Ringgit Malaysia.”

The ‘poachers’ tend to be overseas companies rather than local firms competing with each other as client demand grows. “A staff crunch in the market due to more demand from overseas firms’ shared service centres set up in Malaysia and also recruitment drives by companies based overseas,” says Chong Fah Yow, managing partner of Mazars Malaysia. “Hence, it is challenging to retain staff and has put pressure to increase pay to recruit and retain staff.”

However, the accounting industry itself must take some of the blame for making local accounting jobs less palatable, according to Kok Wai Lee, partner at Crowe Malaysia.

“The profession experienced high attrition rate of professional staff post covid in the second half of 2021 and first half of 2022,” he says. “Most departures were to the commercial sector with some to overseas accounting firms (Singapore specifically) driven by a better work life balance and/or higher remuneration. As a result, many firms have adjusted remuneration to retain talents and this in turn has resulted in higher fees in the market. We expect this to stabilise in the second half of 2022.”

One of the biggest areas for growth in accountancy services is the IPO market, which has bounced back from the deadening effects of lockdown. Despite the global economic conditions, the listing plans for local companies are on track with 37 initial public offerings (IPOs) in 2022, compared to 30 last year. Bursa Malaysia Bhd said from January 1 to July 13, 2022, the local bourse saw 20 new listings, raising about RM2.3 billion. The exchange believes that the domestic investors’ appetite for IPOs would remain strong for the rest of the year as demonstrated by the level of oversubscription for most IPOs. Bursa said it is optimistic that the vibrancy and momentum of new IPOs will remain throughout 2022, particularly in the key promoted areas of technology, consumer, healthcare, halal and ESG-compliant businesses.

But while Malaysia’s economy is growing now, it cannot avoid being affected by a possible global recession.

“Economic crises globally will continue to mount as evidenced by the recession and inflation warnings emanating from most countries,” says Yong. “The general populace continues to face adversity in the face of economic survival, reduced income and access to sustenance due to increased and increasing costs of living. The next 12 months must be confined to consolidation and recovery of the global economies; resolution of conflicts in Ukraine, USA, China and Russia, Sri Lanka and other troubled countries and (hopefully) bringing Covid-19 under control. On an optimistic note, we do hope that these seemingly insurmountable ‘obstacles’ can be overcome.”

Main image credit: Syafiq Adnan