FRA versus international practices

The proposed Financial Reporting Act (FRA) has been of much interest to the stakeholders after its approval in principle by the cabinet. Debates have been sparked over its purpose and the way it has been drafted. The Institute of Chartered Accountants of Bangladesh (ICAB) has expressed anxiety saying that the proposed law would not work, as it would not aid corporate governance in the long run. The law, as has been drafted, does not at all meet all the requirements.
There are misconceptions that the ICAB does not like the law in fear of being regulated by the FRA in doing their job of audit. Most of the critics are not aware of the exact regulatory role the ICAB plays and its remarkable success stories. There are vested interest groups who are trying to establish that the CA firms are solely responsible for small investors' purchase of shares with abnormal PE (price/earning) ratio-above 50-and losing money thereafter. Some agencies have also become hyperactive to hide their failure of raising awareness of small investors and taking action against gamblers who were responsible for the share market debacles. Interestingly and quite unfortunately, some intellectuals have also avoided their responsibility to study the relevant international laws and come up with constructive criticisms and suggestions. Instead, under the influence of different quarters they are irresponsibly provoking opposition to ICAB's constructive suggestions.
There is sub-standard financial reporting, for which the parties preparing the reports and also the auditors are responsible. Also there are fake audit reports, which are not issued by any chartered accountancy (CA) firm. These are the setbacks for governance, but not the main reason behind the share market debacles. The share market debacles brewed, as gamblers applied different techniques to capitalise on the greed of investors who did not invest money taking into consideration the market fundamentals. Instead, they invested based on rumours. The regulatory authorities so far could not set any visible example by taking action against the gamblers.
The ICAB was formed as per the Presidential Order (P.O. 2 of 1973) to develop and regulate the accounting and auditing profession. The ICAB never declared that all of the audit firms were running their practices following acceptable norms and never disowned its regulatory responsibilities. The ICAB recognises that more rigorous action is needed to ensure better financial reporting. The highly-experienced members of the Quality Assurance Board and the Disciplinary Committee of the ICAB are working hard to improve the practices of CA firms and penalising the members for any breach of the code of conducts and for not maintaining the practice standard.
THERE IS NO SUCH ACT IN THE USA, THE UK AND SAARC COUNTRIES: The rationale of the proposed Financial Reporting Act (FRA) has been founded on the practices in the USA and the UK. But the FRA has not been drafted making it commensurate with the similar standards and structures.
In Bangladesh, the Financial Reporting Council (FRC) under the proposed FRA will be formed comprising nine ex-officio members and three other members without requiring expertise in accounting and auditing. The nine part-time ex-officio members will include the governor of Bangladesh Bank (Chairman of FRC), Chairman of Bangladesh Securities and Exchange Commission (BSEC), Chairman of Insurance Development and Regulatory Authority (IDRA), President of ICAB, President of ICMAB. The three other members will be from the Finance Division, the Banks & Financial Institutions Division and the Ministry of Commerce have the Additional Secretary status.
In the US the Public Company Accounting Oversight Board (PCAOB) comprises five members, including the chairman, appointed for a five-year term. The PCAOB was created under the Sarbanes-Oxley Act of 2002 which is completely different from the FRA. The current Chairman Mr. Doty had been a partner at the law firm of Baker Botts LLP since 1969. At Baker Botts LLP, he practised securities and corporate law and counselled boards of directors and audit committees on regulatory and compliance matters, including matters arising under the Sarbanes-Oxley Act of 2002. Other members are mainly taken from the law and the Govt. Audit wings or experienced accounting professionals with exceptional personal achievements.
In the UK, the Board of the Financial Reporting Council (FRC) comprises six non-executive and 10 executive directors. The current Chairman  is a senior independent director of BG Group plc, Lead Independent Director of HM Treasury, Director of the John Lewis Partnership and Chairman of Frontier Economics Ltd, a consultancy firm founded in 1999. Other members are mainly having senior level management experiences and expertise in corporate governance.
Sri Lanka also has "The Sri Lanka Accounting and Auditing Standards Act" which was promulgated to impose certain obligations on specified business enterprises and their directors, officers and auditors, the default on which would result in various penalties applicable to all the parties concerned. Sri Lanka Accounting Standards and Sri Lanka Auditing Standards are the standards adopted by the Institute of Chartered Accountants of Sri Lanka. The case is not same with the FRA.
The Securities and Exchange Board of India (SEBI) formed the SEBI Committee on Disclosures and Accounting Standards (SCODA) in 2006. It is mandated to suggest ways for improving disclosure framework for listed companies and accounting practices of various market entities. The SCODA was originally set up under the chairmanship of renowned chartered accountant, Mr. YH Malegam. The 17-member panel is now chaired by Tata Sons' Director Finance, Mr. Ishaat Hussain, while other members include the NSE chief, AMC managing director, chief of Bombay Shareholders' Association and IT major Wipro's CFO and executive director.
Unlike the cases with the USA and the UK, the majority of the proposed FRC members will not be experienced in accounting, auditing and business governance. Only a highly skilled and experienced professional with proven track records can judge the situation of jobs performed by another professional. For the same reason, a chartered accountant cannot vet the job of a doctor. The majority of the proposed FRC are ex-officio members without requiring expertise in accounting and auditing. Availability of such senior level busy members is also a matter of question. Moreover, five will make the quorum. The majority of them, only three, can take a decision without presence of any expert member. There is every possibility that imprudent decisions would come out from such a structure.
FRA OBJECTIVES CAN BE FULFILLED BY RESTRUCTURING ICAB: Continuous policy changes, improvement and restructuring of Bangladesh Bank, Bangladesh Securities and Exchange Commission (BSEC), the Insurance Development and Regulatory Authority (IDRA), the Registrar of Joint Stock Companies and Firms (RJSCF) and the stock exchanges are going on to get rid of the failures and existing limitations. No separate body is being formed to oversee functions of these agencies jeopardising their roles of working independently and improving gradually.
The ICAB was formed under the supervisory authority of the Ministry of Commerce. The ICAB already has a supervising authority to oversee its performance. As a part of continuous improvement, the ICAB can be restructured through bringing necessary amendments to the Bangladesh Chartered Accountants Order. Provisions can be included to induct independent and experienced audit professionals, business law practitioners and corporate governance specialists as members of the Council, Quality Assurance Board and the Disciplinary Committee of the ICAB. Specialist independent members can be employed by the Ministry of Commerce with defined authorities and responsibilities. These and similar other changes can be made. The ICAB has clearly been making these views known for the last few years.
There is no reason for chartered accountants, with their hard-earned skills, experiences and dynamism, to fear about coming under surveillance of any new law, if it is professionally done maintaining international quality practices. The non-visionary approaches, as delineated in the proposed FRA, are really worrying.
The writer is a Fellow Chartered Accountant (FCA), Fellow Cost & Management Accountant (FCMA) and fellow              member (FIPA) of the Institute of Public                       Accountants (IPA) of Australia.                                                                                             [email protected]