The proposed Financial Reporting Act (FRA)-2015 has already created controversy over some key issues following recommendation of the parliamentary standing committee and is yet to see any light of hope. Media reports have said that the report by the committee is still biased on some vital points like treating cost and management accountants (CMA) as professional accountants. Moreover, an additional secretary of the ministry of finance is a member of the Institute of Cost and Management Accountants of Bangladesh (ICMAB) council when he is the FRC (Financial Reporting Council) focal person in the Finance Ministry. Thus there is a conflict of interest over his integrity and unbiased role that has raised doubts among accounting professionals over a much-coveted FRC which is planned to be a true and meaningful accounting watchdog in the real sense.
As per recent media reports, the shortcomings of the bill that lacks setting definition of professional accountants, a major issue, as the ICAB has pointed out, have not yet been looked into. The committee that has been assigned for making report suggesting any amendments to the recommendations of the parliamentary body which was sent back from the parliament recently, has apparently failed to address those issues. The highest office took cognisance of these weaknesses to instruct the Finance Minister to withdraw the bill. If these are not corrected, the concerned stakeholders fear that the flawed bill would make the financial sector reform measures a futile exercise.
Concerned financial sector stakeholders fear that the report of the committee that includes a finance ministry deputy secretary, who is also a councillor of the ICMAB, might be biased on some vital issues including the trial of appointing CMAs as auditors. The CMA Ordinance of the military regime of 1977 has only limited their activity in cost and management accounting. It left for CMAs no scope for auditing whatsoever. It will create a mess in the statutory auditing and thus severely affect the credibility of the audit reports and hamper the sector. Appointing people like CMAs from the non-audit sector will not make FRC need-driven. CMAs never had audit experience as they have only theoretical or academic degree. They attend classes in the evening and pass exams to become CMAs having no practical exposure like CAs in accounting and auditing for 36 to 48 months.
 The entrepreneurs who prepare the financial statements, own these when they put their signatures. After three/four months of preparation of the financial statements, the management sends it to the CAs, being the auditors, for their opinions. So, for the financial reports, the parties involved are only two- they are entrepreneurs and auditors.
The CMA Ordinance 1977 only allows them to perform in cost and management accounting. There is no scope for them to work at cost and management audit so called in PSC draft FRA. There is a ridiculous perception that auditors prepare the financial statements. This is totally baseless. The financial auditors get the statements after the year-end and from three months from the year-end, it is sent to the auditors for their opinion. Once the financial statements come to the auditors, they give sometime, may be one or two or even five or ten weeks, following an appointment letter of the company concerned approved at its AGM.
Auditors are appointed by the stakeholders - the owners of the company, at AGM, which is duly covered by all financial rules and regulations etc, whether you talk about banking company act or other rules or insurance act.
They are appointed by the shareholders in AGM. This means auditors protect the interests of the shareholders, not the management.
On the contrary, the management, when it feels necessary to assess certain things, may appoint another auditor. He or she does not need to be an accountant to assess cost. S/he does not need to be a CA. In case of an engineering firm, the audit can be made by an engineer and so on and so forth.
The bill was earlier proposed by the Finance Minister for its passage but was sent back to the parliamentary body for ratification sensing that some recommendations in the parliamentary body report might create serious disputes between the chartered accountants and the cost and management accountants over a few core issues.
On June 01, 2015, the parliamentary committee submitted its report to the parliament recommending some changes in the bill, which earlier was placed in the House on January 26 this year. But financial sector experts, analysts and stakeholders expressed doubts over effectiveness of the proposed law for constituting FRC, a body for overseeing financial reporting when the ICAB itself functions as a regulatory body.
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 ICAB has suggested for bringing some changes in the proposed FRA which include fixing the working fields of professional accountants. The parliamentary body recommended the ICAB to be appointed for financial audit and the ICMAB for cost management audit. The finance division committee has suggested for fixing the working area for the ICAB under the Bangladesh Chartered Accountants Order 1973 and for ICMA under the Cost and Management Ordinance, 1977. These are respectively auditing by CAs and cost and management accounting by CMAs.
Another recommendation termed CMAs as 'professional accountants' alongside the CAs. It has triggered strong protests from the financial sector experts as well as CAs and intensified a battle between the two groups which are totally unequal on expertise and accountability. This, many analysts fear, would make the act ineffective. Opposing the recommendations, the ICAB said the CMAs are professional accountants but their inclusion as professional accountants in financial reporting is irrelevant, unjust and concocted.
The ICAB earlier raised a six-point objection to the standing committee's recommendations where 'Professional Accountant' has meant the members of both ICAB and 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 cost and management audit under this act was illogical and unexpected.
Section 62 (Ga) of the FRA proposed amendment to section 212 of the 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 protest by the ICAB. But the practice of other neighbouring countries is that only CAs are appointed as financial auditors. In India, a person is 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 practising 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 are authorised to act and sign on behalf of the firm.
As per the Companies Ordinance 1984 of Pakistan, a person is not 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 the Company Act of 2007 of Sri Lanka, a person is not to be appointed or is not to act as auditor of a company unless that person is a member of the Institute of Chartered Accountants of Sri Lanka or is a registered auditor.
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 opine. The ICAB said since the law is being enacted to regulate the financial reporting activities, external auditor and management and the CMAs are involved in none of them. Only a CA can do the job of an external auditor and so inclusion of CMAs as professional accountants in this act is illogical and unexpected.
The legal position of chartered accountants and CMAs as per the Companies Act, 1994 is that a chartered accountant is recognised as an auditor in the Companies Act under section 212 and a CMA as a cost auditor under section 220. The qualification for auditors shall be holding a chartered accountancy degree. The section 220 of the Companies Act states that if the government feels it necessary to audit certain matters by cost and management accountants on the basis of section 181(1) of the Companies Act, it may engage a practising member of the ICMAB to perform services involving costing or pricing of goods or services. The main objectives of cost accounting are assessment of cost, determination of sale price, cost control and cost reduction, verification of cost elements in ascertaining profits of a company, audit of such particulars relating to utilisation of materials, labour and other items of overhead cost.
The writer is an analyst on financial issues.
 waduzzaman@gmail.com
In quest of a standard and meaningful FRC
Waduzzaman Chapal | Published: August 30, 2015 00:00:00 | Updated: November 30, 2024 06:01:00
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