Draft RFA and accounting profession
Saturday, 23 June 2007
Sabbir Ahmed ACA
ACCOUNTING profession has been criticised by many including politicians, civil society, government officials, the World Bank (WB) and other donor agencies on several occasions for their performance and the roles they have played. Their criticisms include inter se: accounting and auditing standard setting process, non-compliance with accounting and auditing standards, quality of financial reports certified by the auditors, disciplinary and investigation process of professional bodies, compliance with ethics and independence rules, education and training facilities, institutional weakness of professional accounting bodies in delivering expected service, and institutional weakness of practising firms to provide training and education. To deal with these issues the caretaker government of Bangladesh has issued Draft Financial Reporting Act, 2007 after long persuasions by donor agencies particularly by the World Bank. The draft Act may be passed hurriedly by promulgating an ordinance.
Sarbanes-Oxley Act of 2002 was passed in the United States after discovery of financial irregularities of Enron, Worldcom, Parmalat, and some other Wall Street giants. The Sarbanes-Oxley Act of 2002 established Public Company Accounting Oversight Board (PCAOB). PCAOB is overseeing financial reporting by the listed companies and monitoring licensed audit firms. Similar legislations have been passed in some other developed countries also after the Sarbanes-Oxley Act. In the SAARC region no such legislation or body have yet been enacted or established. The draft Financial Reporting Act, if passes, will establish a similar body, Financial Reporting Council (FRC) in Bangladesh.
The World Bank, as did in many cases, compelled the interim caretaker government of Bangladesh to issue the draft Act in compliance with their prescription that is made in line with the developed countries. Bangladesh is not a developed country. Its capital market deals with only 5.0% of the economy whereas in the US, capital market controls about 60% of the economy. The context of the capital market is completely different in Bangladesh. The prescription for a developed country could not work in a developing country. The interim government is going to swallow the WB prescription without considering the capital market scenario.
According to the draft Act, the council will consist of neither less than seven nor more than twelve members appointed by the government. The twelve-member body will consist of five ex officio permanent members: (i) the Governor of the Bangladesh Bank (BB), (ii) the Chairman of the Securities and Exchange Commission (SEC), (iii) the Chief Controller of Insurance (CCI), (iv) the Chairman of the National Board of Revenue (NBR), and (v) the President of the Federation of Bangladesh Chambers of Commerce and Industries (FBCCI); and two expert members will be selected by the permanent members from a panel of five non-practising experienced professional accountants nominated by the Institute of Chartered Accountants of Bangladesh (ICAB). The government on the basis of the permanent and expert members will appoint the Chief Executive Officer (CEO) who will be a full-time member of FRC and four additional executive members who will be full-time members of the council.
The FRC with its objectives of promoting high quality reporting of financial and non-financial information by public interest entities, promoting the highest standards among auditors -- whether or not registered, enhancing the credibility of financial reporting, strengthening the quality of accounting and audit services, improving the integrity, competence and transparency of professional activities in accounting and auditing, and promoting development of the accountancy profession, will be governed by mainly seven members (five ex officio permanent and two expert).
Five of the seven members are non-technical in these fields. How will these non-technical members contribute to setting up financial reporting and auditing standards, which are so technical that requires years of study and practical experiences to understand?
Frequent change in the top positions of the BB, the SEC, the CCI, and the NBR is very common. If it continues in the future also, such changes could make the FRC ineffective.
Three out of five ex officio members will be holding the top positions of regulator in the field of banking companies, insurance companies and public companies listed in stock exchanges. Four out of five ex officio members (BB, CCI, SEC, and NBR) are appointing auditors to audit companies under their jurisdiction if the circumstances warrant. In addition, these bodies (except for NBR) are being audited by the auditors registered by the ICAB. If the Act is passed as proposed, then conflict of interest between the auditor and the client would arise. Inclusion of the President of the FBCCI, the apex body of business entrepreneurs is highly questionable. Through unscrupulous utilisation of this proposed provision, business leaders will have the opportunity to control accountancy profession who are the independent eye of the shareholders, bankers, lenders, business partners, government and public at large. Considering the current socio-economic context of the country, this inclusion might jeopardise the whole system of public interest entity overseeing matters in the relevant areas and the professions working in these fields.
The Registrar of Joint Stock Companies and Firms and the representative from NGO Affairs Bureau (NGOAB) are not included in the proposed FRC as ex officio members in spite of the fact that the Registrar is the primary regulator of the companies registered under the Companies Act and non-government organisations are receiving foreign contributions, registered with the NGOAB.
The proposed council includes only two expert members that are about 29% of the body. That means that the 71% non-technical members could dominate minority technical members. In the United States, the PCAOB comprises two technical members out of five members i.e., 40% is technical members.
To avoid the problems mentioned above, appointment of nine members from among prominent individuals of integrity and reputation who have a demonstrated commitment to the interest of investors and the public may be made to form the Council. At least four out of nine members should be appointed from the chartered accountants as nominated by the ICAB. Such appointments may be made for a specific period and they may serve full time basis. The members so appointed should not be employed by any other persons or engage themselves in any profession or business. The government may select one person from the members as the Chairperson.
As proposed, number one function of the Council will be to establish and implement financial reporting and auditing standards, which is currently done by the ICAB. Will the ICAB stop the setting of accounting and auditing standards? Or, will both the ICAB and the Council simultaneously be setting the standards? The draft act does not say anything about the future role of the ICAB in this regard.
In the USA the financial reporting standards are not established by the Public Company Accounting Oversight Board (the similar organisation of the proposed FRC). Rather, accounting standards are set and established by Financial Accounting Standard Board (FASB) (which is a separate independent entity). The US Securities and Exchange Commission allows foreign issuers to use International Financial Reporting Standards (IFRS), a private international body based in London.
Establishment of financial reporting and auditing standards is a highly technical job. That requires on-hand long time accounting and auditing experiences. Monitoring of the capital market, registered auditors, the accuracy and fairness of financial reporting, overseeing the regulatory and professional development activities of the professional accountancy bodies, and establishment of financial reporting and auditing standards cannot go simultaneously. As proposed, non-accountants and non-auditors will predominantly govern the proposed council. A body governed by no technical persons in this field should not establish the financial reporting and auditing standards. The ICAB with demonstrated adequate expertise should continue the adoption of financial reporting standards and auditing standards. The FRC may make these standards mandatory for public interest entities and work for implementation of these standards.
The other major function, as proposed under the draft Act is to oversee the regulatory and professional development activities of the professional accountancy bodies i.e., ICAB and ICMAB. Overseeing the regulatory and professional activities of the professional accountancy bodies is not done by a separate body in any country. If anybody oversees the regulatory and professional development activities of the professional accountancy bodies, their independence will be vulnerable. A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. Therefore, a professional accountant's responsibility is not exclusively to satisfy the needs of an individual client or employer. In acting in the public interest a professional accountant should observe and comply with the ethical requirements of the profession. To do so she/he is to be independent. Independence of the profession is a must. The FRC should not have overseeing authority over professional accountancy bodies.
Generally, people treat audit as "work for work's sake", enforced by legislations. They do not think about the usefulness of the audit and its social and financial impact. In fact, audit is a diagnosis of financial health of an entity. On the other hand, auditors have failed to make all other relevant circles understand the utility of the audit report and the auditor's letter to the management, where financial issues including assessment of the internal control systems are addressed. The main causes behind the failure may be the poor quality of audit report and management letter. Auditors argue that the audit fee is the main hindrance to providing quality audit service. In Bangladesh, auditor's remuneration is very low compared to those in the developed countries. One study showed that auditor's remuneration in Bangladesh was roughly one per cent of the remuneration of the Chief Executive Officer (CEO). How would auditors provide quality services with this meagre remuneration?
To improve things for creation of a congenial audit environment, auditor's independence should be ensured first. Auditor's independence will be ensured if Code of Ethics for Professional Accountants and International Auditing Standards, adopted in Bangladesh, can strictly be complied with. The government should enforce existing legislations to ensure auditor's independence.
Monitoring of the audit reports by regulators is the key issue to be revisited. The BB, the SEC, the NGOAB, and other regulators can strengthen their monitoring wing with adequate, efficient and effective mechanism and competent human resources. These regulators should not be happy only with receipts of with reports from public interest entities. They should also scrutinise such reports carefully and provide appropriate feedback to the auditors and their clients. In case of any malpractice, regulators should ensure disciplinary actions against the both auditor and the audit. The existing legislations allow regulators to do so. However, the regulators do not exercise the power effectively.
Improvement of the quality of the auditors and the professional accountants is necessary for achieving the highest quality audit service. To attain this quality audit service, auditors should be equipped with modern technologies, adequate library and audio-visual facilities. Besides, professional sharing with other professions, etc. are pre-requisite.
Imposition of solutions that have been worked out in the context of the situation prevailing of the developed not generally work in the developing countries. Bangladesh experienced many problems in the past due to adoption of policies that were not suited to its situation. To make accounting professions effective and efficient, and maintain the bridge between management and the owners, the government should take pragmatic measures immediately.
The writer is a Chartered Accountant. He can be reached by email to [email protected].
ACCOUNTING profession has been criticised by many including politicians, civil society, government officials, the World Bank (WB) and other donor agencies on several occasions for their performance and the roles they have played. Their criticisms include inter se: accounting and auditing standard setting process, non-compliance with accounting and auditing standards, quality of financial reports certified by the auditors, disciplinary and investigation process of professional bodies, compliance with ethics and independence rules, education and training facilities, institutional weakness of professional accounting bodies in delivering expected service, and institutional weakness of practising firms to provide training and education. To deal with these issues the caretaker government of Bangladesh has issued Draft Financial Reporting Act, 2007 after long persuasions by donor agencies particularly by the World Bank. The draft Act may be passed hurriedly by promulgating an ordinance.
Sarbanes-Oxley Act of 2002 was passed in the United States after discovery of financial irregularities of Enron, Worldcom, Parmalat, and some other Wall Street giants. The Sarbanes-Oxley Act of 2002 established Public Company Accounting Oversight Board (PCAOB). PCAOB is overseeing financial reporting by the listed companies and monitoring licensed audit firms. Similar legislations have been passed in some other developed countries also after the Sarbanes-Oxley Act. In the SAARC region no such legislation or body have yet been enacted or established. The draft Financial Reporting Act, if passes, will establish a similar body, Financial Reporting Council (FRC) in Bangladesh.
The World Bank, as did in many cases, compelled the interim caretaker government of Bangladesh to issue the draft Act in compliance with their prescription that is made in line with the developed countries. Bangladesh is not a developed country. Its capital market deals with only 5.0% of the economy whereas in the US, capital market controls about 60% of the economy. The context of the capital market is completely different in Bangladesh. The prescription for a developed country could not work in a developing country. The interim government is going to swallow the WB prescription without considering the capital market scenario.
According to the draft Act, the council will consist of neither less than seven nor more than twelve members appointed by the government. The twelve-member body will consist of five ex officio permanent members: (i) the Governor of the Bangladesh Bank (BB), (ii) the Chairman of the Securities and Exchange Commission (SEC), (iii) the Chief Controller of Insurance (CCI), (iv) the Chairman of the National Board of Revenue (NBR), and (v) the President of the Federation of Bangladesh Chambers of Commerce and Industries (FBCCI); and two expert members will be selected by the permanent members from a panel of five non-practising experienced professional accountants nominated by the Institute of Chartered Accountants of Bangladesh (ICAB). The government on the basis of the permanent and expert members will appoint the Chief Executive Officer (CEO) who will be a full-time member of FRC and four additional executive members who will be full-time members of the council.
The FRC with its objectives of promoting high quality reporting of financial and non-financial information by public interest entities, promoting the highest standards among auditors -- whether or not registered, enhancing the credibility of financial reporting, strengthening the quality of accounting and audit services, improving the integrity, competence and transparency of professional activities in accounting and auditing, and promoting development of the accountancy profession, will be governed by mainly seven members (five ex officio permanent and two expert).
Five of the seven members are non-technical in these fields. How will these non-technical members contribute to setting up financial reporting and auditing standards, which are so technical that requires years of study and practical experiences to understand?
Frequent change in the top positions of the BB, the SEC, the CCI, and the NBR is very common. If it continues in the future also, such changes could make the FRC ineffective.
Three out of five ex officio members will be holding the top positions of regulator in the field of banking companies, insurance companies and public companies listed in stock exchanges. Four out of five ex officio members (BB, CCI, SEC, and NBR) are appointing auditors to audit companies under their jurisdiction if the circumstances warrant. In addition, these bodies (except for NBR) are being audited by the auditors registered by the ICAB. If the Act is passed as proposed, then conflict of interest between the auditor and the client would arise. Inclusion of the President of the FBCCI, the apex body of business entrepreneurs is highly questionable. Through unscrupulous utilisation of this proposed provision, business leaders will have the opportunity to control accountancy profession who are the independent eye of the shareholders, bankers, lenders, business partners, government and public at large. Considering the current socio-economic context of the country, this inclusion might jeopardise the whole system of public interest entity overseeing matters in the relevant areas and the professions working in these fields.
The Registrar of Joint Stock Companies and Firms and the representative from NGO Affairs Bureau (NGOAB) are not included in the proposed FRC as ex officio members in spite of the fact that the Registrar is the primary regulator of the companies registered under the Companies Act and non-government organisations are receiving foreign contributions, registered with the NGOAB.
The proposed council includes only two expert members that are about 29% of the body. That means that the 71% non-technical members could dominate minority technical members. In the United States, the PCAOB comprises two technical members out of five members i.e., 40% is technical members.
To avoid the problems mentioned above, appointment of nine members from among prominent individuals of integrity and reputation who have a demonstrated commitment to the interest of investors and the public may be made to form the Council. At least four out of nine members should be appointed from the chartered accountants as nominated by the ICAB. Such appointments may be made for a specific period and they may serve full time basis. The members so appointed should not be employed by any other persons or engage themselves in any profession or business. The government may select one person from the members as the Chairperson.
As proposed, number one function of the Council will be to establish and implement financial reporting and auditing standards, which is currently done by the ICAB. Will the ICAB stop the setting of accounting and auditing standards? Or, will both the ICAB and the Council simultaneously be setting the standards? The draft act does not say anything about the future role of the ICAB in this regard.
In the USA the financial reporting standards are not established by the Public Company Accounting Oversight Board (the similar organisation of the proposed FRC). Rather, accounting standards are set and established by Financial Accounting Standard Board (FASB) (which is a separate independent entity). The US Securities and Exchange Commission allows foreign issuers to use International Financial Reporting Standards (IFRS), a private international body based in London.
Establishment of financial reporting and auditing standards is a highly technical job. That requires on-hand long time accounting and auditing experiences. Monitoring of the capital market, registered auditors, the accuracy and fairness of financial reporting, overseeing the regulatory and professional development activities of the professional accountancy bodies, and establishment of financial reporting and auditing standards cannot go simultaneously. As proposed, non-accountants and non-auditors will predominantly govern the proposed council. A body governed by no technical persons in this field should not establish the financial reporting and auditing standards. The ICAB with demonstrated adequate expertise should continue the adoption of financial reporting standards and auditing standards. The FRC may make these standards mandatory for public interest entities and work for implementation of these standards.
The other major function, as proposed under the draft Act is to oversee the regulatory and professional development activities of the professional accountancy bodies i.e., ICAB and ICMAB. Overseeing the regulatory and professional activities of the professional accountancy bodies is not done by a separate body in any country. If anybody oversees the regulatory and professional development activities of the professional accountancy bodies, their independence will be vulnerable. A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. Therefore, a professional accountant's responsibility is not exclusively to satisfy the needs of an individual client or employer. In acting in the public interest a professional accountant should observe and comply with the ethical requirements of the profession. To do so she/he is to be independent. Independence of the profession is a must. The FRC should not have overseeing authority over professional accountancy bodies.
Generally, people treat audit as "work for work's sake", enforced by legislations. They do not think about the usefulness of the audit and its social and financial impact. In fact, audit is a diagnosis of financial health of an entity. On the other hand, auditors have failed to make all other relevant circles understand the utility of the audit report and the auditor's letter to the management, where financial issues including assessment of the internal control systems are addressed. The main causes behind the failure may be the poor quality of audit report and management letter. Auditors argue that the audit fee is the main hindrance to providing quality audit service. In Bangladesh, auditor's remuneration is very low compared to those in the developed countries. One study showed that auditor's remuneration in Bangladesh was roughly one per cent of the remuneration of the Chief Executive Officer (CEO). How would auditors provide quality services with this meagre remuneration?
To improve things for creation of a congenial audit environment, auditor's independence should be ensured first. Auditor's independence will be ensured if Code of Ethics for Professional Accountants and International Auditing Standards, adopted in Bangladesh, can strictly be complied with. The government should enforce existing legislations to ensure auditor's independence.
Monitoring of the audit reports by regulators is the key issue to be revisited. The BB, the SEC, the NGOAB, and other regulators can strengthen their monitoring wing with adequate, efficient and effective mechanism and competent human resources. These regulators should not be happy only with receipts of with reports from public interest entities. They should also scrutinise such reports carefully and provide appropriate feedback to the auditors and their clients. In case of any malpractice, regulators should ensure disciplinary actions against the both auditor and the audit. The existing legislations allow regulators to do so. However, the regulators do not exercise the power effectively.
Improvement of the quality of the auditors and the professional accountants is necessary for achieving the highest quality audit service. To attain this quality audit service, auditors should be equipped with modern technologies, adequate library and audio-visual facilities. Besides, professional sharing with other professions, etc. are pre-requisite.
Imposition of solutions that have been worked out in the context of the situation prevailing of the developed not generally work in the developing countries. Bangladesh experienced many problems in the past due to adoption of policies that were not suited to its situation. To make accounting professions effective and efficient, and maintain the bridge between management and the owners, the government should take pragmatic measures immediately.
The writer is a Chartered Accountant. He can be reached by email to [email protected].