Reform of audit profession The inside and outside

The objective of reforms of any system and structure is to reorganise the existing one in order to ensure efficiency and effectiveness by improving quality, governance and accountability. Efficiency means doing the things right, whereas effectiveness means doing the right things. In case of audit, reform is intended to ensure (a) efficiency i.e. the applied scopes, methodologies and processes are right (appropriately done), and (b) effectiveness, i.e. all right scopes, methodologies and processes are applied (adequately done) while conducting the audit. So, in reforming the audit profession we must focus on the gap of two issues: (a) the appropriateness of scopes, methodologies and process, and (b) the adequacy of scopes, methodologies and process.
In Bangladesh, reforming the audit profession is a very highly-debated issue. As a result of this, the audit and accounting profession oversight act, the Financial Reporting Act, 2015, and the oversight body, the Financial Reporting Council (FRC), have emerged. The reforms and development are continuously going on inside the profession thanks to ICAB and outside the profession thanks to the FRC and the government. Under the aforesaid act, both the statutory audit and cost audit will be regulated as defined in the audit service in Section 2(16), and the FRC shall (a) adopt the International Financial Reporting Standard (IFRS), International Standard on Auditing (ISA), (b) ensure transparency of the financial reports through monitoring, (c) uphold and improve the quality audit as per standards by review of audit practices, and finally (c) ensure enforcement of the law. The ICAB has taken initiatives like workshops, seminars and Continuous Professional Development (CPD) programmes on audit process and methodology, including annual review of the firm in order to find the gap and recommend how to improve quality. If we review the historical reforms of the audit profession across the globe, we find the reform of regulation for accountability and improvement of audit quality. We do not see anywhere in the world that the Cost & Management Accountant (CMA) profession is included as part of reform in the statutory audit framework because of its different objective, legal and professional framework across the globe.
In the UK, in order to improve and oversee the quality and integrity of corporate reporting, auditing, and governance in the UK, the oversight body Financial Reporting Council (FRC) was formed in 1990, replacing the Accounting Standards Committee (ASC). The FRC was formed to (a) ensure high standards in financial reporting and corporate governance, (b) enhance investor and public confidence in financial markets, (c) provide a unified regulatory framework for accounting, auditing, and actuarial professions (d) respond to concerns about accounting scandals and failures in the late 20th century, which highlighted weaknesses in existing regulatory oversight. In the same year (1990), Recognized Supervisory Body (RSB) was formed with ICAEW (Institute of Chartered Accountants in England and Wales), ICAS (Scotland), ACCA (Association of Chartered Certified Accountants) in order to register and supervise auditors, monitor compliance, provide training and guidance. As a part of continuous reform, following the multiple reviews, including Brydon Review (2019) and Kingman Review (2018) of the FRC, the UK government decided to replace the FRC with a new regulator - Audit, Reporting and Governance Authority (ARGA) which is still in progress with a proposal to (a) expand audit scope to cover broader risks and fraud detection, (b) consider operational separation of audit and consulting within firms, (c) ensure mandatory audit firm rotation (every 10 years), possibly shared audits, and (d) increase fines and enforcement action against negligent auditors. The FRC was a private company limited by the government guarantee, whereas the new proposed ARGA is a statutory body established by law for overseeing RBS with more enforcement and regulatory power.
In the USA, Sarbanes-Oxley Act (SOX) , 2002 was enacted following the Enron and WorldCom scandals in 2001 with the key elements of (a) Creating the Public Company Accounting Oversight Board (PCAOB), (b) Prohibiting certain non-audit services to audit clients, (C) ensuring mandatory auditor rotation (lead audit partner every 5 years), (d) enhancing internal control reporting (Section 404) and (e) inspecting audit firms, members (CPA) of the American Institute of Certified Public Accountants (AICPA) being only eligible professionals for statutory audit, by PCAOB regularly.
In European Union, the EU Audit Reform Directive (2014) was introduced amongst its members in 2016 with the key elements of (a) ensuring mandatory audit firm rotation: every 10 years (extendable to 20 with tendering or joint audits), (b) prohibiting certain non-audit services to reduce conflict of interest, (c) enhancing audit committee oversight, and (d) overseeing the public interest entities (PIEs) subject to stricter rules. The member countries, especially Germany, France, Italy, the Netherlands and Spain, have separate regulatory authorities like FRC in different names. The CA or CPA is registered with regulators like FRC and complies with the regulation of each country and the EU directive.
In Australia, the FRC was formed in 2000, legislated in 2001 in accordance with Australian Securities and Investments Commission (ASIC) Act 2001 in order to oversee auditors, enhance transparency and independence, align with international best practices and restore public confidence. Upon parliamentary inquiry (2020) into audit quality, the recommendations are made to (a) increase transparency of audit firm revenues, (b) consider operational split between audit and consulting, (c) strengthen regulatory oversight and disciplinary powers, and (d) introduce cooling-off periods for audit staff joining client companies. Here, CA, CPA and PA (Public Accountant) are registered with FRC for regulation.
In India, the National Financial Reporting Authority (NFRA) as audit regulator was established in 2018 in accordance with the Companies Act 2013 and following the financial scandal Satyam (2009) with a view to (a) ensuring independent oversight of auditors of listed and large companies, (b) delegating power to investigate and penalise auditors and (c) ensuring mandatory auditor rotation (listed companies: every 5 years). The adoption of accounting and auditing standard is in the hand of the Institute of Chartered Accountant of India (ICAI) and the oversight and enforcement of non-compliance are vested in NFRA.
Upon review of the above audit reforms in different countries representing the statutory audit, it is obvious that in question of improvement of audit process, the reform initiatives everywhere in the world are focused on improvement of quality, governance and accountability. Inside the profession, the professional institute of the members (i.e. CA or CPA) has programmes like workshop, training and Continuous Development Programme (CPD) on audit methodology and process including the update of local laws, International Financial Reporting Standards (IFRS) and International Standards on Auditing (ISA). The institute ensures the continuous review and keeps an eye on the audit process of the audit firm for quality and ensuring standard audit practice required by laws and standards. Outside the professional institute, the regulator like the financial reporting council (FRC) or public company accounting oversight board (PCAOB) ensures compliance frameworks, adoption of standards and continuous oversight of the process and review of the financial reporting with a view to ensuring accountability and standard input and output. Inclusion of CMA in the statutory audit panel by destroying the national legal frameworks and global standards will be an unacceptable audit practice globally questioned.
The writer is a partner of Basu Banerjee Nath & Co., Chartered Accountant Firm.
dkroy.ca@gmail.com