Controversy over effectiveness of FRA still on

The enactment of the much-talked-about Financial Reporting Act (FRA) has been deferred as the bill that was scheduled to be passed in the budget session of the Jatiya Sangsad (JS) has been sent back to the parliamentary standing committee for further scrutiny. But the controversy over its effectiveness still lingers on.
The bill was in order for being proposed by the Finance Minister for its passage but was sent back to the JS body for ratification sensing that some recommendations might create serious disputes between the chartered accountants (CAs) and the cost and management accountants (CMAs) over a few core issues.
Media reports mentioned, Finance Minister AMA Muhith proposed sending back the bill to the standing committee seeking one month for it to submit a revised report on it following strong criticism that came from various quarters and stakeholders over effectiveness of enactment of the law with such drawbacks.
The purpose of enactment of the FRA, what the government felt necessary, was to empower it to form a separate regulatory body styled Financial Reporting Council (FRC) to properly regulate the country's financial reporting activities.
But financial sector experts, analysts and stakeholders expressed doubts over the effectiveness of the proposed law for constituting FRC, a body for overseeing  financial reporting, when the Institute of Chartered Accountants of Bangladesh. (ICAB) itself functions as a regulatory authority.
"Overseeing a regulatory body by another authority formed by parliament is not realistic," observed Dr Abdul Mazid. If there is any problem with a regulatory body like the ICAB or if there are weaknesses, then its law can be amended or the body can be strengthened for yielding better results, he further suggested. The FRA has some inherent problems as the government is planning to form a regulatory body to regulate other regulatory bodies, which will actually be difficult to function, he commented.
Another big problem that will arise in the functioning of the FRC is that it is to be set up under the Ministry of Finance while other regulatory bodies like the ICAB and the ICMA are under the Ministry of Commerce, he pointed out.
Now, the question arises whether the motive of better oversight of the financial sector through forming the FRC will be effective or it will create a big mess.
Some analysts expressed doubts as they think the FRA 2015 would fail to yield any better results as it does not provide any provision on professional enrichment and corporate discipline. The transparency of financial reporting will not be ensured unless there is corporate discipline. So, the government rather should concentrate on establishing good corporate governance, they opined.
The corporate discipline does not depend only on chartered accountants. Good and effective corporate governance system can bring discipline in corporate governance and ensure transparency in the financial reporting.
Enacting the law in the form as it is now is something like trying to tighten the mouth of a bottle keeping thousands of leaks on its body. If we review the Sarbanes and Oxley Act, 2002 of the USA, we find a lot of provisions on auditors and corporate houses there to ensure effective professional services and corporate discipline, they opined.
On June 01, 2015, the parliamentary committee submitted its report to parliament recommending some changes in the bill, which earlier was placed in the House on January 26 this year.
CHARTERED ACCOUNTANTS VERSUS COST AND MANAGEMENT ACCOUNTANTS: Among the recommendations that the JS body made, one is terming cost and management accountants (CMAs) as 'professional accountants' alongside the CAs. This has triggered strong protests from the financial sector experts as well as the CAs and intensified a battle between the two groups, which many analysts fear would make the act ineffective.
Opposing the recommendations, the ICAB said the CMAs are professionals but their inclusion as professional accountants in this Act is irrelevant. The ICAB earlier raised a six-point objection to the standing committee's recommendations where 'professional accountant' meant the members of both the ICAB and the Institute of Cost and Management Accountant, Bangladesh (ICMAB), and their working sectors were defined 'financial audit' and 'cost and management audit' respectively. But the ICAB opposed inclusion of CMAs in the purview of FRA and said allowing them for cost and management audit under this act is illogical and unexpected.
ICAB president Masih Malik Chowdhury categorically mentioned that there is nothing about 'management audit' in the existing legal provisions. It was not also necessary as the management of a company any time can appoint anybody for management audit.
Clarifying the issue, he elaborated that the CMAs can do 'cost audit' in some government institutions if they are appointed for it and so it is not compulsory. But CA audit of financial statement is mandatory.
Referring to section 212 of the Companies Act and Bangladesh Chartered Accountants Order-1973, he said both 'professional accountant' and 'auditor' mean 'CA'.
Section 62 (Ga) of FRA proposed amendment to section 212 of Companies Act requiring the CAs to obtain audit certificate from the FRC but the parliamentary standing committee did not make any recommendation for CMAs, which also came under protests from the ICAB.
PRACTICE IN NEIGHBOURING COUNTRIES: In our neighbouring countries, the CAs are given appointments as auditors. As per the Companies Act, 2013 of India (section 141. (1), a person shall be eligible for appointment as an auditor of a company only if he or she is a chartered accountant, provided that a firm whereof majority of partners practicing in India are qualified for appointment  …. , where a firm including a limited liability partnership is appointed as an auditor of a company, only the partners who are chartered accountants shall be authorised to act and sign on behalf of the firm.
As per the Companies Ordinance 1984 of Pakistan, a person shall not be qualified for appointment as an auditor in case of a public or private company unless he or she is a chartered accountant within the meaning of the Chartered Accountants Ordinance 1961 (X of 1961).
In Sri Lanka, as per Company Act of 2007 of Sri Lanka, a person shall not be appointed or act as an auditor of a company unless that person is a member of the Institute of Chartered Accountants of Sri Lanka or is a registered auditor.
Though both the ICAB and the ICMAB agreed that any member of the 12-member FRC can be removed in case of their incapability, failure and disqualification, but the JS body recommended that only five of the 12 persons, including the ICAB president, might be removed but not the ICMAB president. This also came under strong criticism.
The Indian government formulated the Draft National Financial Reporting Authority Rules, 2013, under the Companies Act, 2013, where in clause 2, it also defined 'professional' as a Chartered Accountant registered under the Chartered Accountant Act, 1949.
There is no definition of 'financial report' and 'financial reporting' in the proposed FRA though the law is being made for this purpose. The issue of enacting FRA came to light after a World Bank report titled 'Bangladesh: Report on the Observance of Standards and Codes - Accounting and Auditing (ROSC A&A)' recommended for it in 2003 to bring the auditing sector in a properly regulated structure. But the WB's follow-up report later recommended strengthening of other regulatory bodies to deal with the audited financial statements to get expected outcome from the proposed FRC. So, there is no obligation from the World Bank to constitute FRC at this moment, some experts opine.
Implementation of the FRA will be difficult without cooperation of relevant professionals, as its functioning will be very technical, professionals opined. The effectiveness of the act will not be so easy as the two groups are apparently at two ends and CAs are deadly against its passage. Some even threaten to take the matter to the court.
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