Rankings report: Malaysia

Malaysia puts its hopes in Madani

Malaysia’s economy is struggling and the country is looking to its new Prime Minister’s Madani policy to lift it out of the doldrums. Che Golden reports.

Malaysia has gone from being Asia’s fastest growing economy to a struggling one. The global downturn has hit the country hard and it is looking to a new government and a new policy framework to boost its fortunes once again. The local accounting industry is facing a very competitive environment. Financial scandals have led to increased and tougher regulation, while staff shortages have led to sprialling rises in wages. Local firms have tried to pass these increased costs to clients, who are pushing back.

The series of financial scandals that took Malaysia by storm in 2022 affected certain sectors and exposed their irregularities and unethical practices. It highlighted the critical role of auditing services in ensuring financial transparency and accountability.  “Auditing practices and stricter standards were intensified to restore public confidence. These financial standards had far-reaching consequences involving businesses and the overall economy,” says Lynette Lee, audit partner, Morison LC Malaysia. “It made investors wary and had an impact on the capital market. Auditors and auditing services recognised the urgent need to restore accountability within the financial sector.”

The Securities Commission Malaysia (SC) and the Malaysian Institute of Accountants (MIA) introduced regulatory reforms to improve audit quality, independence and transparency. Stricter standards, guidelines and procedures were brought in as well as an increased penalty for non-compliance and unethical behaviour, signalling a zero-tolerance approach towards financial misconduct. Greater emphasis was placed on the independence of auditors and tenures of audit firms were limited.

“Non-audit services provided by these firms were tightened to prevent conflict of interest, ensure fresh perspectives, and maintain the integrity of the audit process,” said Lee. “Regulators in Malaysia recognise that maintaining public trust is an ongoing process requiring sustained efforts. For instance, the Audit Oversight Board (AOB) in Malaysia adopts a risk-based approach to the selection of engagements and issues an Inspection Report that summarises all the findings and observations. This helps to ensure proper checks are carried out, while instilling confidence in the audit process and ensures that registered auditors are responsive to market developments.”

The AOB also strengthens its commitment to uphold the high-quality standards of auditing, amid the challenges highlighted by the audit industry, by accelerating digitalisation in the industry and by pushing for increased professional scepticism and professional judgement by auditors, due to the increased complexity of public interest entities’ business models. Specialised units have been established to monitor audit quality, conduct inspections and enforce compliance. Regulators actively collaborate to adopt global best practices, which Lee says enables them to stay up to date with international standards, strengthening the credibility of auditing services and enhancing their effectiveness in preventing financial irregularities.

“The financial scandals of 2022 in Malaysia served as a wake-up call for regulators and the auditing profession,” said Lee. “These ongoing efforts contribute to the stability and integrity of Malaysia’s financial system, providing a solid foundation for sustainable economic growth.”

Staff poaching in Malaysia is still a serious issue and has broadened to include the global landscape. Local accounting firms have hired staff from other accounting firms from overseas countries such as Philippines, Cambodia and Indonesia. The primary driver for this is a more economical remuneration package and the accounting technical knowledge in those countries are of similar standing to Malaysia. “However, internally, we have also seen an outbound trend,” said Lee. “Local accounting firms tend to lose staff to accounting firms located in Singapore, Hong Kong, China, Australia and even the United Kingdom. One of the biggest reasons for people leaving is the weakening Ringgit, which has resulted in talented staff accepting lucrative compensation packages that are far superior to the pay packages they could have obtained in Malaysia. With the talent shortage that is facing our industry, foreign companies resort to poaching talent from competitors or foreign firms with specialised expertise or technical knowledge.”

While poaching may seem beneficial to the hiring company, Lee warns it can lead to negative consequences for both firms involved and the employees themselves such as loss of expertise, escalating inflated salary expectation, ethical concerns of fostering a cutthroat corporate culture and damaging trust among industry peers.

The staff shortage has had a knock-on effect on fees, according to Kok Wai Lee, managing partner of Crowe Malaysia. “High staff attrition necessitated salary adjustments across the profession to retain talent,” said Wai Lee. “The combination of higher costs and a shortage of talent has caused firms to increase fees across the profession. While recruitment for fresh graduates is not an issue, it’s a challenge to recruit experienced staff. We expect the attrition rate to moderate to pre-pandemic level this year. Demand for our services remains strong, helped by an increase in IPOs in the capital market.”

While increasing staff costs are encouraging firms to put their fees up, there is pushback from clients who want to negotiate them lower, citing Covid hardship as a reason, according to Gary Yong, senior partner at Nexia SSY.  However, new areas to exploit are in the pipeline and economic reform is on the way. “The present government has put a huge emphasis on ESG trends and the policy has been taken up mainly by public entities and also large private enterprises,” he said. “Demand for forensic services has increased and audit risk assessments have moved to higher levels.”

Kok Wai Lee, managing partner of Crowe Malaysia

Malaysia’s rapid economic growth and development over the past few decades has resulted in environmental degradation and social inequality. As a result, there has been growing pressure on businesses to take responsibility for their environmental and social impacts. The Malaysian government has taken steps to address ESG issues, one of the principial policies being the establishment of the Malaysia Sustainable Finance Initiative (MSFI).  The MSFI aims to promote sustainable finance practices and encourage investments in sustainable development projects.

Malaysia has set ambitious targets to reduce its greenhouse gas emissions, and businesses are increasingly investing in renewable energy projects such as solar and wind power. Another emerging trend is the focus on social impact and community engagement. Malaysian businesses are recognising the importance of engaging with local communities and addressing social issues such as poverty and inequality. This includes investing in education and healthcare projects, as well as supporting SMEs.

The nation’s tax system is also facing a shakeup. The Malaysia Inland Revenue Board (IRB) has announced that it will use e-invoices from June 2024 onwards as part of preparations for the new tax system. IRB CEO Datuk Dr Mohd Nizom Sairi said the implementation of e-invoices aims to streamline and enhance the country's tax system, leading to more accurate risk assessment. He said that the move will indirectly contribute to increased compliance among voluntary taxpayers and combat Malaysia’s shadow economy. In 2020, the shadow economy was estimated to be worth RM300 billion – about 21% of Malaysia’s overall gross domestic product.

The 15th Malaysian general election was held on 19 November 2022. The elections resulted in a hung parliament and a coalition government was formed, dubbed as the ‘Unity Government’ and led by Dato’ Sri Anwar Ibrahim. He has introduced a policy framework named Madani, which he hopes will reform the Malaysian economy.  Madani is a policy framework that focuses mainly on good governance, sustainable development and racial harmony in the country.

In July 2023, President Ibrahim unveiled a plan to reset the Malaysia’s economic growth trajectory, with an eye on boosting incomes and participation of women in the workforce, while lowering the budget deficit to reduce stress on government finances. The plan involves attracting companies that create high-income jobs for locals with tax breaks, boost manufacturing and implement reforms to make its stock markets attractive. The main aim of the plan is to achieve a fiscal deficit of 3% of gross domestic product or lower, placing Malaysia among the top 30 global economies and improving its human development index ranking to the top 25.

“My utmost priority in the near term is to rebuild the country’s fiscal capacity. We are all aware of the national debt situation,” Anwar said, referring to government debt at over 60% of GDP. “Without any reforms, we will face a very serious crisis that would undoubtedly affect the country’s structure.”

Political stability is key to narrowing the budget deficit sustainably, as also lowering the government’s net debt to below 60% of GDP, according to S&P Global Ratings, which last month reaffirmed Malaysia’s ‘A-’ investment-grade credit score. Malaysia’s economy expanded at a more moderate pace in recent months, as slowing external demand weighed down on exports, according to the central bank. The government expects the economy to expand from 4%-5% in 2023, a stark contrast from last year when it was the fastest growing economy in Asia.

But Madani appears to be working. Prominent economist Anthony Dass believes that Malaysia’s economy has “somewhat come out of the woods”, thanks to the clear governance, better confidence from domestic consumers and businesses, and improving engagement with foreign investors and the local business community by Prime Minister Ibrahim. Dass said the cost of living and the ease of doing business had improved slightly.

2023 will no doubt continue to be a challenging year for the Malaysian accountancy industry. It can only be hoped that the regulatory, tax and political reform will bring foreign investors flocking back to its shores, bringing enough business to offset beleaguered local clients.