The Accounting System in Malaysia

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A history of Malaysia

Malaysia is one of the countries in south East Asia that lies in Malay, Peninsula. The country’s head of state is Tuanku Mizan Zainal Abidin ibni al-Marhum Sultan Mahmud. The prime minister is Datuk Seri Najib Razak. It has an estimated population of over 26 million people and a growth rate of 1.7%. Its capital city is Kuala Lumpur and uses the Ringgit for its currency. Malaysia is among the few countries that have a constitutional monarchy.

The earliest ancestors of Malaysia had contact with the Chinese and Indians. When the Muslims conquered India, Islam was also spread to Malaysia and became deep rooted in the region. The British East African Company established its trading quarters in Singapore and later, a protectorate in Malaysia.

Economic reform and growth

Dr. Mohamad Mahathir, the prime minister in the 1980s, instituted economic reforms that saw Malaysia grow to become one of the Asian Tigers. During the Asian currency crisis of 1997, Malaysia ignored the World Bank and IMF economic prescriptions and pursued a policy of fixed exchange rates and capital controls. These measures worked for the country. It recovered by 1999.

According to a report by the Bank Negara Malaysia (1), Malaysia is among the leading economies in Asia. It has a vast number of natural resources and an exploration in the science, tourism, commerce and medical tourism sectors.

The legal system

Malaysia’s system of government is similar to the Westminster parliamentary system. The legal system is based on the English common law, like many other former British colonies. The country’s supreme law is based on the constitution of Malaysia, which defines the roles and duties of the citizens and government in the three arms. The secular and the Sharia laws are recognized and factored in the constitution. It has both written and unwritten laws.

Property rights

Property rights are the degree to which a country’s laws protect private property and the extent to which the government enforces these laws to effectively protect the people’s property. This is an important factor in determining the desirability of a country to investment, especially by foreigners.

Malaysia scores quite well in the property rights index. It has an overall score of 66. It is the 53rd freest country in terms of property ownership in the world and in the 9th position in a region of 41 states (the Asia-pacific region). These scores are both above the world and regional averages, making the country a favorite destination for many investors within and foreigners.

This index has been enabled by the liberalist economic strategy employed by the country. It allows and encourages private ownership of property. The country eased limits on foreign ownership in the financial sectors and eliminated equity requirements between the domestic population and foreigners. This has made it easier in property ownership and foreign investment, which has greatly improved.

The country however, is yet to enforce the intellectual property rights. Therefore, there still is rampant manufacture and sale of counterfeit products. This has compromised, to a great deal, industries of consumer products. This happens mostly in production of pharmaceuticals.

Foreign direct investment

This is the process by which a company from one country makes a physical presence investment in another country. It invests directly in buildings, machinery and equipment. This is in contrast to portfolio investment, whereby the investor invests indirectly without his physical presence. This mode of investment provides a firm with market in the host country, labor from the hosting country and cheaper production facilities. In return, it provides employment for the host country. It also earns it revenue in terms of tax and introduces new technology that can be used by other indigenous companies.

Between 2009 and 2010, Malaysia saw a US$ 5 billion (409%) increase in foreign direct investment. This shows a significant increase in investor confidence in Malaysia within the year. This was the highest in the region and in 153 countries in the world studied by UNACTAD.

These were as a result of endeavored measures to improve the government delivery system, reduction of the cost of doing business and continued incorporation of the private sector into government agenda and support.

The country has seen a massive foreign investment in the manufacturing sector. It is currently a host to more than 500 foreign companies, among them multinational corporations. Other companies have indirectly outsourced their manufacturing activities to Malaysian companies, while some have physically moved in to set their operations directly in the country. These companies have continued to grow and expand their operations within the country. This is a clear show of their confidence in the county.

The country’s rubber industry, the largest in the country, remains an investment opportunity by the European and USA companies.

Incentives for investment

A major factor that has attracted a lot of foreign investors to Malaysia is the government’s conceited efforts to create and maintain a business environment, conducive to companies’ growth and maximizing profits. To obtain this, the government has instituted regular dialogues between the government and the private sector. These channels offer a feedback mechanism so that the private sector is enabled to report back to the government on their satisfaction of the government measures and areas that need to be improved. This way, the private sector contributes in the formulation of policies which concern them by the government. Therefore, the overall outcome of such a measure is the formulation of informed policies that will favor the functioning of the private sector.

The liberal equity policy adopted by the government is another incentive working well to attract foreign investors to the country. A foreign investor in Malaysia is allowed to own up to 100% equity. While most countries only allow this for projects whose exports are limited, Malaysia allows this for projects, whose exports are at least 80% of the total production. This law was modified in 2003 to allow the 100% foreign equity holding for companies irrespective of their amounts of exports. This made it flexible and attractive to investors.

The tax incentive is another of the major incentives for foreign companies in Malaysia, at 25% since 2008. This applies to both nationals and foreigners investing in the country. This non-discriminatory gesture is most attractive for foreigners. The Promotions of Investment Act of 1986 and the Income Tax Act of 1967 offer a wide range of investment incentives for manufacturing projects. The incentives are: the Pioneer Status, the Investment Tax Allowance, the Reinvestment allowance, Incentives for High Technology Industries, Incentives for Strategic Projects and incentives for setting up of regional or international service-based operations permanently filled by foreigners.

These acts cover the investments in the manufacturing, agriculture, tourism and services sectors. These are both direct taxes, which grant a company total or partial relief from paying income tax for a given period of time. The indirect taxes exempt companies from paying other taxes like the import duty tax, sales tax or the excise duty. All these incentives offer lucrative opportunities by foreign companies, who cannot afford to ignore them. Many have therefore taken advantage of these and hence, the large number of foreign investors in the country.

Malaysia has a large, young, educated and highly productive labor force in can offer to investors at quite competitive costs. The country’s literacy levels are quite high, at 94%. Even the school leavers have a minimum of 11 years of basic education and can handle manual jobs and some low sophisticated jobs quite well. This is a key attraction for the investors, who do not have to worry about work force availability, nor expertise. Most of the labor force is well qualified to handle detailed tasks with diligence.

Accounting regulations

An accounting system is an organizes set of both manual and computerized accounting methods, controls and procedures that are used to gather, record, classify, analyze, summarize, interpret and present accurately financial data. This is mainly for managerial decision making purposes.

The accounting profession is regulated and managed by the Malaysian Institute of Accountants (MIA). This agency is under the ministry of finance. The agency sets rules of professional procedures and ethics in line with the International Federation of Accountants (IFC) and the International Auditing and Assurance Standards Board (IAASB)

The Malaysian government adopted and uses the cash basis International Public Sector Accounting Standards (IPSAS). Government businesses are however, not consolidated to this system yet. The New Economic Model for Malaysia unveiled in 2010 outlines among its reforms to adopt the accrual accounting to be used by the public sector. This system is still under plan and will be effective form 2015. It will policies that are consistent with the accrual basis IPSAS.

There are other accountancy bodies in Malaysia that regulate accounting procedures in the country. The Malaysian Institute if Public Accountants is responsible for the training of accountants in Malaysia. Other accounting agencies from countries in the commonwealth like the Chartered Institute of Managements Accountants, the Institute of Chartered Accountants in Australia and CPA Australia take part in training professional accountants in the country.

The performance of the accounting sector

The Malaysian service and education industry have not received substantial attention towards using of management practices. Malaysia, like many other developing countries, has a strong executive which takes control over the financial resources and institutions.

The Malaysian accounting profession therefore, exerts little or no influence at all on government accounting. The Malaysian Institute of Accounting (MIA) and MACPA, another accounting body in Malaysia, have not expressed any interest in setting government standards. On the other hand, the Malaysian Institute of public Sector Accounting (IPSAM), whose members are public sector workers and with the potential of influencing the government into adopting public sector accounting and reporting, has failed in this mandate.

Accounting in the government is aimed at enhancing the effective and efficient utilization of resources. In 1992, the government introduced a micro accounting system in order to facilitate the collection and preparation of cost information. It was also meant to produce cost information that was reliable and optimize the use of resources. This was a step towards strengthening management accounting at an organization’s departmental level and eventually improves accountability in the public sector.

The Malaysian accounting system uses the ICS accounting system. The system is quite effective on use in businesses like banks, offering quality and accurate results.

Financial reporting

This is the presentation of a company’s financial information about its position, operating performance, and financial flow within a particular accounting period. Financial reporting therefore entails the reporting and presentation of financial statements. These are used by many agencies in relation to the company. Investors use this information to base their investment options, insurance companies use this information to assess and regulate the company’s benefits, liabilities, assets and costs.

The government of Malaysia, all along since independence, has strove to improve the quality of services in the private sector as a measure for development. In this regard, it introduced office automation and information technology to improve information and subsequently service delivery. The government however realized the inherent endangering of values with these innovations. It therefore introduced several programmes to instill values in the people. These are values like trustworthy, honesty, transparency and quality.

This is an agency established under the Financial Reporting Act of 1997. Its major role is to supervise the operations of the MASB. It is used to reflect the consistent performance of a company. The Malaysian Financial Reporting Standards was first implemented in the country in 2006. This had a big impact on the non-private business entities.

Since 1999 when the Kuala Lumpur stock exchange recommended that all companies listed in the exchange carry out quarterly financial reporting, the trend has become popular in Malaysia replacing the half yearly reporting. This system was adopted as a measure to enable investors to make well informed decisions and avoid investment risks. It also was meant to increase companies’ accountability and to enhance corporate governance among companies.

A recent study in Malaysian companies showed that the quarterly financial reports are quite helpful for companies. They are not only important in forecasting forthcoming results but also help predict results beyond the current season and provide a comparison with earlier expectations.

The adoption of financial reporting system is an act by the regulatory bodies to control market disorders like the Asian currency crisis.

Another trend of financial reporting in Malaysia is using the internet. This was a government policy requirement and has been seen to succeed in both the private and public sector. Quite a number of Malaysian countries are now using the internet if their financial reporting.

The traditional paper based reporting has been limited by a number of factors like it being less timely and therefore, of less importance to the company’s decision makers. The paper system is also limited in its capacity to reach everyone (the investor or the potential investor), who happens to be every where and anywhere at any time. The electronic system therefore is more timely, accurate and relevant with the changing global systems.

A study to assess the effectiveness of the internet financial reporting (IFR) showed that 51% of the companies listed in the Kuala Lumpur Stock Exchange (KLSE) were satisfied with the quality of the internet method.

However, not all firms in Malaysia have realized to importance of constantly updating their websites with fresh information. A majority of them still use press releases, which are not usually up to date. Some are even two weeks old.

This is a set back for the government, which has provided a lot of support for the private sector in terms of infrastructure for internet use. The private sector needs to take advantage of this so as to improve their effectiveness and catch up with the highly web-casted western sectors. The companies are yet to fully exploit the available technology in providing information to their customers and investors. This is only 26% of the companies however, meaning that more than half of the companies are embracing the website.

Accounting Measurement

This can be defined as the computation of financial activities in terms of money or time spent in working. It is a unit of some measurement that is used to compare and evaluate accounting data.

Many if not all companies measure their accounting operations within a given period of time. Traditionally, accounting has been done based on the historical prices of products. Most companies are now using the fair value concept, which is the price of the product in the current market. This therefore, gives a true reflection of the company’s worth at a particular time.

This concept helps companies measure and assess their performance over shot periods of time. This way, they are able to realize eventualities in trade and remedy them in time. A company does not have to wait till the closure of the trading period for it to realize that some of its measures were detrimental and have caused losses to the company.

Malaysia has adopted this concept of fair value measurement and has continued to progress. Malaysia has for instance, adopted the financial instruments IAS 39, a complex standard in the world issued by the International Accounting Standards Board. This is likely to change the way that companies account for financial instruments and will change systems, processes and documentation.


It is quite evident from the discussion above that Malaysia is among the leading developing countries in the world. With a steady investor confidence and a vast availability of natural resources, it can only soar in terms of economic growth.

A striking feature however, is the government and the role it has played since independence in the development of this country. Koshy (1) says that, its, is a government that has adopted both religion and secular laws, blended them finely to fit and reinforce each other in the development ladder. The government has encouraged the development of the private sector, a better sector in terms of effectiveness and efficiency in production than the public sector.

Realizing that it is limited in capital fo0r development, it has encouraged investment in terms of foreign direct investment by providing them with incentives for investment. This has paid off well, considering the country’s rate of development and GDP index.

Lastly, the government realizes the importance of accounting in any economy, and in that case, effective accounting. To achieve this, it has encouraged the country’s use of electronic accounting and financial reporting, both which are superior to the traditional paper based methods.

There are a few hiccups though, with the executive largely controlling the financial instruments. The people also and the companies are yet to appreciate the full potential and benefits accruing to the use of internet compared to traditional methods.

Works Cited

Koshy, Shaila. The Star: Call to Replace Common Law Baseless, 2007. Web.

Bank Negara Malaysia. International Reserves and Foreign Currency Liquidity-MALAYSIA, 2011. Web.

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