Guidelines for Firms acting as Auditor of a Company where a Partner’s Spouse is an Officer

16 April 2024

BACKGROUND

Section 264(4)(b) of the Companies Act 2016 (“the Act”), among others, stipulates that a firm of auditors shall not knowingly consent to be appointed, and shall not knowingly act, as an auditor for any company and shall not prepare, for or on behalf of a company, any report required by the Act to be prepared by an approved company auditor, unless no partner of the firm is disqualified under section 264(1) of the Act from acting as auditor.

Section 264(1) sets out the circumstances in which a person is disqualified from acting as auditor of a company. In particular, paragraph (A) of section 264(1)(c)(iii) disqualifies a person from acting as an auditor of a company if that person or his spouse is an officer of the company.

Section 264(2) of the Act provides that for the purposes of section 264(1)(c)(iii), a person shall be deemed to be an officer of a company if he is an officer of a corporation that is deemed to be related to the company by virtue of section 7¹ of the Act (“related corporation”) if he has been an officer or promoter of the company or such a corporation at any time within the preceding period of 12 months, unless the Minister of Domestic Trade and Cost of Living directs otherwise.

RECENT AMENDMENTS

The Act was amended pursuant to the Companies (Amendment) Act 2024 (“the Amendment Act”) which came into operation on 1 April 2024. Among others, the Amendment Act introduced new sections 264(4A) and 264(4B) which provide as follows:

“(4A) Notwithstanding [section 264(4)(b)], no partner of the firm is disqualified by reason of his spouse being an officer of the company, if such reason does not compromise the independence of the auditor and the firm of auditors.

(4B) The Registrar may issue guidelines for the purpose of determining the independence of the auditor and the firm of auditors.”

To provide guidance to auditors under the new section 264(4A), the Registrar on 1 April 2024 issued the Guidelines Pursuant to Subsection 264(4A) of the Companies Act 2016 for a Firm of Auditors (“the Guidelines”).

At the same time, the Registrar also issued a set of Frequently Asked Questions (“the FAQs”) to assist in the understanding of the Guidelines.

THE GUIDELINES AND THE FAQs

The key points of the Guidelines and the FAQs are highlighted below.

Terms and conditions under section 264(4A) of the Act

Where the spouse of the partner of a firm is an officer of the company, or any related corporation, in which he is appointed as an auditor, the firm must ensure that:

the partner must consistently adhere to the By-Laws (On Professional Ethics, Conduct, and Practice) issued by the Malaysian Institute of Accountants (“MIA”);

the partner whose spouse is an officer or employee of the audited company, or any related corporation, shall not:

be part of the audit team auditing the companies; and

be directly or indirectly involved in the planning, execution or supervision of statutory audit assignments on the financial statement of such company or any related corporation;

the spouse shall not hold the position of a director or company secretary in the company or any related corporation; and

the spouse shall not be involved, directly or indirectly, in the preparation or the keeping of the accounting and other records in relation to the preparation of the financial statements of the company.²

Declaration by the firm

Before commencing the audit for each financial year, the firm must prepare and lodge with the Registrar a copy of declaration in the form of Appendix 1 to the Guidelines (“the declaration”) stating that the firm will undertake the following measures to safeguard the independence of auditors and to reduce any potential risks that may arise:

prohibit partners with spousal ties from participating in the audit team while auditing the company;

ensure such partners are not directly or indirectly involved in the planning, execution or supervision of statutory audit assignments on the company's financial statements, accounting and other records relating to those financial statements;

adhere to the By-Laws (On Professional Ethics, Conduct, and Practice) issued by the MIA;

take appropriate steps to ensure compliance with international standards, specifically the "Code of Ethics for Professional Accountants" issued by the International Federation of Accountants (IFAC);

ensure compliance with international standards, in particular, the "International Code of Ethics for Professional Accountants” (including International Independence Standards) (IESBA Code) regarding family and personal relationships with the audit firm's clients; and

comply with the requirements of the audit policy applicable to that auditor appointed under the Act issued by Bank Negara Malaysia, the Securities Commission Malaysia or any regulatory body if the audited company is supervised by the respective regulatory body.³

Documentation requirements

The firm of auditors is required to maintain a register of declarations in the form set out in Appendix 2 to the Guidelines (“the register”).⁴

A copy of the declaration and the register must be:

kept in a manner, electronic or otherwise, that allows the information to be easily accessible and reproduced into written form; and

kept and made available for inspection by the Companies Commission of Malaysia (“CCM”) at the principal address of the firm or at the address of branch of the firm (where the clients’ audit files are handled by the firm’s branches), which was registered with the Registrar pursuant to section 265(1) of the Act.⁵

The firm is also required to submit a copy of the declaration electronically to the CCM by email to the email address stated in paragraph 9 of the Guidelines before the commencement of the audit for each financial year even if there are no changes on the auditor’s appointment.⁶

Monitoring for compliance

The firm must monitor adherence to the Guidelines and take corrective actions if any deviations are identified.⁷

Effective date

The Guidelines are effective for audit reports to be prepared pursuant to section 264 of the Act on or after 1 April 2024, regardless of the date of the auditor’s appointment.⁸

If an audit has commenced before 1 April 2024 but the audit report has not yet been prepared, the declaration must be submitted by the audit firm prior to the signing of the audit report.⁹

Comments

It is to be noted that the exception introduced under the new section 264(4A) of the Act that allows an audit firm to be the auditor of a company in which the spouse of a partner of the firm is an officer of the company or of its related corporation is subject to the overriding requirement that the relationship will not compromise the independence of both the auditor and the firm. Audit firms will welcome the leeway given under section 264(4A) and the guidance provided in the Guidelines on measures to be implemented to ensure independence of the auditor-client relationship and the audit process is maintained.

Article by Phua Pao Yii (Partner) and Chong Cai Yi (Associate) of the Corporate Practice of Skrine.

¹ Section 7 of the Act states that a corporation is deemed to be related to each other if: (a) it is the holding company of another corporation; (b) it is a subsidiary of another corporation; or (c) it is a subsidiary of the holding company of another corporation.

² Paragraph 6 of the Guidelines.

³ Paragraph 7 of the Guidelines.

⁴ Paragraph 8 of the Guidelines.

⁵ Ibid.

⁶ Paragraph 9 of the Guidelines and Question 7 of the FAQs.

⁷ Paragraph 10 of the Guidelines.

⁸ Paragraph 11 of the Guidelines and Questions 1 and 3 of the FAQs.

⁹ Question 8 of the FAQs.

This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact skrine@skrine.com.

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Guidelines for Firms acting as Auditor of a Company where a Partner’s Spouse is an Officer