Audit Standards, Guidelines, By-Laws, and Supervision of Auditors

This chapter examines the professional standards, guidelines, and by-laws that govern auditors, focusing on those issued by regulatory and professional bodies. It critically evaluates the effectiveness of these institutions in supervising and regulating auditors, particularly in upholding professional conduct and safeguarding the interests of stakeholders. These bodies act as watchdogs, playing an essential role in maintaining audit quality and public trust. However, shortcomings in their standards and enforcement mechanisms have contributed to audit failures and financial scandals, highlighting the need for more robust oversight. Audit standards, guidelines, and by-laws are integral to defining the responsibilities and expectations placed on auditors. Yet these instruments are not without deficiencies. Their limitations—particularly in addressing auditor independence, ethical conduct, and non-audit services—have undermined the profession’s ability to prevent and detect financial irregularities. This chapter will explore these gaps in greater detail, emphasizing the need for reform. The Companies Commission of Malaysia (CCM), while tasked with approving and overseeing auditors, primarily serves an administrative function. Its role is largely confined to compliance and procedural approvals, with limited focus on audit quality. The CCM rarely exercises its enforcement powers, raising concerns that audit failures may persist without sufficient regulatory intervention. To enhance its impact, the CCM must adopt a more active stance in investigating audit lapses, enforcing sanctions, and collaborating with other regulatory bodies. The Securities Commission (SC), through the Audit Oversight Board (AOB), plays a central role in supervising auditors of public interest entities. However, its effectiveness is constrained by regulatory fragmentation and jurisdictional limits, as it does not oversee auditors of private companies. Additional challenges include inconsistent disciplinary actions, weak enforcement in high-profile scandals, and a heavy reliance on complaints-based investigations. For the SC to fulfil its mandate more effectively, it must broaden its jurisdiction, strengthen enforcement mechanisms, impose more stringent penalties, and enhance cooperation with the Malaysian Institute of Accountants. Ultimately, a coordinated and enhanced regulatory approach is essential. All regulatory bodies must strengthen their supervisory and enforcement functions to prevent the recurrence of financial scandals involving auditors. A proactive and collaborative effort—grounded in transparency, accountability, and stakeholder protection—can restore confidence in the auditing profession and reinforce the integrity of financial reporting.