Audit reports are hardly to be believed in Bangladesh. It is a common perception with the stakeholders, particularly with the investors, that auditors sign whatever they are asked to sign by the business management. These reports are needed by the tax authorities, by the lending banks, by the equity holders and by the regulators.
But when the audit reports are not trustworthy, and in some cases, turn out to be trash, then how do the above-mentioned users use those to protect the interests they represent? As audit reports are, by and large, written as per wishes of the management of the businesses, the tax authorities receive less tax, the equity investors less dividends and the bank lends more money than they should.
The format the auditors follow while writing audit reports remain unintelligible to the common people. The same is true with the intending stock investors if they want to invest in any listed company or a company offering IPO (initial public offering). Investors hardly go through the financial reports the auditor and the issue managers prepare for them. They take decision to invest on the basis of shallow knowledge about the company, or when the broker or somebody else told them to invest in the company's stock.
The detailed financial and audit reports rest with the regulator and the stock exchanges. Only a summarised version, containing very scanty information, appears in the media that investors normally go through. Behind the summarised version of information there is other information which investors are not let to know. The summarised IPO prospectus that appears in newspapers does not contain anything about the company's tax payment records, history of its earnings of minimum three years, the company's business expansion history, its present products and capacity use and sources of the company's fixed assets including those of machinery.
Moreover, the usual technique the company uses to cheat the investors is the so-called valuation. Just before applying for IPO clearance from the regulator, the company's management revalues all its old assets and the company suddenly becomes two-three times more valuable than what it was before the IPO proposal. Here again the auditor, may be another licensed auditor, acts as the valuer. No detailed report of revaluation is presented before the intending IPO applicants. As a result, selling overvalued IPO becomes a big business for many unscrupulous entrepreneurs. In this cheating scheme, the auditor occasionally is found to be the main collaborator. Auditors almost signs anything in the name of signing an audit report if he is paid for, as nothing can be presented before investors without the auditor's signature.
Our audit laws and regulations in this respect are not well-defined. Taking advantage of the absence of clarity of laws and regulations, the auditors develop a careless attitude to remain accountable. Yes, there is an authority to give punishment for certifying something untrue, but that authority is manned and led by the auditors themselves.
The very auditors, who elect members of the so-called administrative body of auditors, do everything from preparing the syllabus for CA courses to be taught, punishing wrong-doing members and conferring certificates on the passed-out students. As a result, a complex conflict of interest paradigm develops in the auditing industry. There is no independent oversight body to lay down the regulations for auditing nor to punish auditors if they don't go by the rules. There are many gross professional irregularities and misconduct perpetuated by the auditors, but we hardly hear about any punishment that has kept them deterred from doing the same thing again.
The proposed Financial Reporting Act, we believe, will make the auditing firms transparent and accountable. There will be opposition, but the government should not keep this vital piece of legislation pending. In other countries, the same law, with some variations, is already there.
If the proposed Financial Reporting Act gets nod from parliament, it will pave way to set up the Financial Reporting Council (FRC). Then the FRC will be the watchdog for the auditing firms. The composition of the FRC can always be changed from time to time, but it should be formed in such a way that the members of the FRC remain free from conflict of interest. Bangladesh's auditing firms have lagged behind in adopting international auditing standards. Formation of the FRC will help adopt the globally-accepted audit standards.
At present, the audit reports for banking companies are up to the mark. That too has come at the initiative of the Bangladesh Bank (BB). The BB has laid down detailed requirements for what audit reports should contain. But audit reports for other types of companies are lagging behind in providing vital information. The Bangladesh Securities Exchange Commission (BSEC) - the regulator of the stock market - should come up with what audit reports should contain. The BSEC's corporate governance regulations are not enough to provide investors with required information.
The writer is a Professor of Economics, University of Dhaka,
abuahmedecon@yahoo.com
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