The formation of the proposed Financial Reporting Council (FRC) would not bring desired outcomes unless capacities of the core regulatory bodies in checking audited financial statements of their entities are strengthened further, a World Bank study has said.
Terming the official move to enact a law to pave the way for establishing the FRC a 'too advanced step', the WB study has stressed the need for making the six existing regulatory authorities more vibrant before creating such oversight body.
"Establishment of a new independent oversight authority for accountants and auditors in Bangladesh may be a 'too advanced step'
considering the relative (smaller) size of the corporate sector and profession in more developed countries," said the WB report.
The study also said: "In the short to medium term, it may be better option to prioritise the improvement of the capacities of six key regulatory authorities…" to improve governance in the audit and accountancy sector.
The WB report titled "Bangladesh: Report on the Observance of Standards and Codes- Accounting and Auditing (ROSC A&A)," a follow-up of the WB's similar report released in 2003, was prepared at the request of the Ministry of Commerce (MoC).
However, analysts have different opinions over the WB study's observation and recommendation on formation of the much-talked-about FRC.
A section of them have favoured the above findings while others opined for moving forward with the FRC initiative.
A bill of the draft Financial Reporting Act (FRA), having provisions to form the FRC, was recently tabled in the Parliament amid strong debate among the stakeholders, and is now awaiting passage.
Demand for establishing FRC was raised even strongly after the 2010 capital market debacle from the people's perception that mainly auditors' failure to check fraud audit led to the scams.
Earlier, the issue came to light following the WB's 2003 recommendation to do so and got momentum thanks to the reform initiatives under a capital market development programme funded by a Manila-based development partner.
Retracting from its earlier position, the follow-up ROSC report favoured strengthening the foundations of the six regulatory entities first.
The bodies are: securities regulator, central bank, Registrar of the Joint Stock Companies and Firms (RJSC), IDRA, the insurance regulator, Institute of Chartered Accountants of Bangladesh (ICAB) and monitoring cell of the finance ministry.
The report further said that significant improvements took place especially at ICAB and the securities regulator in the last few years in the areas of education, training, regulatory activities and organisational capacity building.
In case of not forming the FRC, the ROSC report recommended to make ICAB 'truly independent and effective' by bringing changes in its weighted governance structure through amendments to relevant policy and law, under which it was set up.
The recommended changes include separation of ICAB's executive function from its governing body (council) to enable its executives to run their activities independently and effectively.
Some other proposed changes are inclusion of certain number of ex-officio from other stakeholders in ICAB Council, Quality Assurance Board (QAB) and Investigation and Disciplinary Committee (IDC).
"This will make the QAB and IDC not only truly independent but also be seen to be independent by various stakeholders," the report said, and also suggested empowering ICAB to call for audit reports for inspection.
If the government proceeds to form the FRC, the WB report recommended, it should adopt the principles set by the International Forum of Independent Audit Regulators (IFIAR) for an effective oversight body.
Among others, composition of FRC should be carefully determined and independent competent professionals should be nominated to make it effective.
"The proposed FRC should concentrate on its oversight function rather than taking over the professional regulatory activities, which ICAB is currently performing," it said.
It is the prerogative of the government to choose any of the two options on FRC formation.
When concocted, Hedayetullah Al Mamoon, senior secretary of MoC, told the FE Monday, "We will move with the FRA bill. Besides, we are also taking steps to strengthen the ICAB."
An eminent expert, seeking anonymity, said that when any institution is seen to have failed to perform expectedly, the first step should be identifying its problems and providing extra support (legal and logistics) aiming to strengthen it to play its due role.
"If the proposed oversight body fails, will you then move to form another body to watch over it?" he said and opined for further strengthening regulator's strengths, and bringing structural changes in ICAB.
An ICAB high official said that the follow-up report made such recommendation as a lot of improvements in audit regulatory framework took place after the 2003 report. He also preferred not to be named.
Agreeing with him, a senior official of the prime bourse said, "After that, the need for having FRC still remains especially to bring all the preparers of financial statements, standard setter, regulator, auditors and users of the report to a single regulatory platform to improve the overall accounting and audit environment."
A past president of Institute of Cost and Management Accountants of Bangladesh (ICMAB) Mohammed Salim said that formation of FRC is no longer a matter of advice of WB rather that of ADB-funded development programme.
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