Making Financial Reporting Council functional

Last July, the government appointed a chairman for the Financial Reporting Council (FRC). The FRC is a key requirement of the Financial Reporting Act, passed by parliament in 2015. It is largely viewed as an instrument for restoring public confidence in the capital market. Indeed, a number of policymakers within the government have claimed that the enactment of the FRC will lead to a significant improvement in the quality of audit and consequently ensure greater financial reporting transparency. Discussions in the media suggest that investors in the capital markets, especially the risk-takers who went through a turbulent period in recent times, consider this to be a quick-fix solution to the volatile capital market. To live up to such expectations, however, the FRC would need to be constituted in a manner that it can perform its functions properly and silence its sceptics.
This, however, would not be an easy task for the newly appointed chairman of the FRC. After all, the FRC did not have a smooth passage in parliament. Before the commission got its final nod in 2015, the draft act was sent back and forth a number of times by the parliamentary standing committee for further consideration. The main cause for concern was the opposition from the accounting fraternity in the country. Especially, the Institute of Chartered Accountants of Bangladesh (ICAB), the body responsible for regulating the financial reporting supply chain in Bangladesh, was critical of the FRA for the need to constitute the FRC.
To the general reader, the reason for ICAB's opposition may appear to be simple. Until recent past, it used to be the sole regulator of the auditing profession in Bangladesh. Therefore, the institute is likely to oppose any move that would significantly restrain its self-regulatory power. However, the actual reason for ICAB's opposition may not be so straightforward. After the Enron scandals that rocked the financial markets in the earlier part of this century, independent public oversight systems (POS) have gradually replaced the traditional self-regulation arrangement for the accountancy profession in different parts of the world. Such transition has not only taken place in the Western countries such as the USA, the UK and many other European countries, but also in many countries in Asia (for example, Malaysia, Indonesia, Sri Lanka). Very recently, in December 2017, the Government of India also confirmed its intention to set up an independent National Financial Reporting Authority (NFRA) to regulate the auditing profession in that country, despite opposition from the Institute of Chartered Accountants of India. Naturally, as a member of the International Federation of Accountants, the ICAB would be well aware of such developments across the world, and should be open to similar regulatory initiatives in Bangladesh.
The ICAB's opposition to the FRC, however, was grounded on a number of requirements of the FRA. Especially, the institute was not happy with the manner the FRC would be constituted and the disciplinary powers it would hold. The public oversight bodies in most countries are mostly comprised of non-practising members of the accountancy profession, although in many cases, the chairperson does not necessarily possess an accountancy qualification. The rationale is simple -- the sheer nature and terms of reference of these regulatory bodies require its members to have significant level of expertise and experience in the area of accounting standard setting and regulation. The recently proposed NFRA in India would not only be led by a professional accountant but also will have a majority of its members coming from the profession. On the contrary, the Financial Reporting Act in Bangladesh requires the FRC to be comprised mostly of non-accountant government nominees. It is interesting to note that the structure of the FRC, as required in the FRA, is significantly different from the structure originally proposed by the World Bank in 2003. The ICAB was also concerned with the enforcement powers entrusted with the FRC. Like the public oversight bodies constituted in other countries post-Enron, the FRA empowers the FRC in Bangladesh to take disciplinary actions against members of the auditing profession for professional misconduct. In most cases, the maximum punishment for a professional misconduct is debarring the auditor from providing auditing services for a number of years. However, in case of Bangladesh, the FRC would be able to recommend a maximum punishment of five years of imprisonment for the same offence. This is not only highly unusual but also might have a counterproductive impact on the auditing profession in Bangladesh. This may discourage prospective students to pursue a career in accountancy. Also, in the socio-political context of Bangladesh, giving such sweeping power to a government agency may create significant risks of abuse and increase the cost of doing business further.
Despite all these debates and concerns, however, it has to be accepted that the FRA has been approved and the formulation of the FRC is now a reality in Bangladesh. When formulated, the FRC will need cooperation from all quarters so that it can perform its desired role. However, as pointed out in this article, the existing structure of the FRC might not be completely conducive to achieving its objectives. There is no doubt that the nominated members of the FRC, mostly bureaucrats, will be distinguished and well established in their relative fields. However, much of the FRC's function involves setting of accounting and auditing standards and monitoring the activities of professional accountants. Surely, this job description requires someone with significant qualification and experience in professional accounting. One way to get over this problem would be to ask the relevant government agencies such as the Bangladesh Bank, the Bangladesh Securities and Exchange Commission (BSEC), the ministries of commerce and finance to nominate non-practising professional accountants as their representatives to the FRC. Possessing relevant qualifications and expertise, these members would be independently accountable to their nominating government agencies.
The enforcement role of the FRC is going to be more problematic as this requires direct involvement of professional accountants to look into the quality control procedures followed within the audit firms. This involves checking actual working papers produced during the conduct of an audit. At the moment, this function is carried out by the ICAB. As a non-professional body, however, the FRC is not likely to possess such expertise. Therefore, the FRC might consider an oversight role and let ICAB continue such quality control activities at least for an initial period until it has enough resources to conduct such procedures independently. Based on the quality control procedures, the ICAB may recommend appropriate disciplinary actions to be approved by the FRC. Such an arrangement is not uncommon. Out of 35 global public oversight bodies, five perform such oversight functions, with four more conducting joint audit with professional accountancy bodies. In the early stages of the FRC, the adoption of such an arrangement may be beneficial for both the regulators and the profession.
As Bangladesh embarks on the development highway, the country requires sufficient number of qualified accountants to be able to cater to the needs of the growing economy. In this critical juncture, the accountancy profession needs to present itself as an attractive career for the brightest young minds of the country, and the regulators need to provide an environment that will enable them to do so. It is, therefore, imperative for all concerned that the FRC is allowed to play its part in the development of the overall financial architecture of the country.
Dr Javed Siddiqui is an Associate Professor of Accounting at the Alliance Manchester Business School, University of Manchester.
[email protected]