The era of self-regulation of the financial audit profession in America and Europe came to an end following bad things done by the big corporate giants like Enron, WorldCom, Tyco, Adelphia, Sunbeam etc. in the beginning of this century. Stakeholders of America lost their trust on corporate financial audit reports because the impressive financial results showed by those companies were found erroneous and, in some cases, fraudulent, even after they were audited by world's biggest chartered accounting firms like Arthur Anderson.
General investors became scared and there was a strong demand to reform the financial auditing regime to protect them from the greedy behaviour of the companies. The US Congress passed the Sarbanes-Oxley Act in 2002 to oversee audit works performed in connection with publicly-held companies. Under this act, a regulator - Public Company Accounting Oversight Board (PCAOB) - was created as an independent, not-for-profit body to protect the interest of the investors.
Like PCAOB, the Financial Reporting Council (FRC) is the UK's independent regulator to oversee the transparency of financial reporting and promoting high quality corporate governance. It also works for setting standards for accounts, audits and actuarial practices for public interest. It is independent of the audit profession and its main duty is to regulate the practising accountants and auditors. The first function of the FRC/PCAOB is to maintain the registration of all auditing firms and the second function is to inspect the registered auditing firms periodically. As such, practising accountants and auditors are not included in the matters of regulation of FRC/PCAOB.
There is a "Disciplinary and Appeals Tribunal" in UK's FRC where the members are taken from a panel that includes lawyers, non-practising accountants, and other suitable lay persons and the tribunal is always chaired by a lawyer.
As per the global practice, the regimes of FRC/PCAOB differ. Some like the PCAOB are independent agencies; others are housed in the local securities regulator. But they share certain common attributes: they are either government agencies or bodies that are independent of the audit profession, they conduct regular inspections of audit firms, and they possess disciplinary and sometimes licensing and standard-setting power.
Over a period of last 11 years, many other countries have also adopted independent audit supervisory regimes and now almost all advanced or emerging market countries have an independent audit regulator. Bangladesh also has taken a welcome step to form a Financial Reporting Council (FRC) under the proposed Financial Reporting Act (FRA). It is learnt that the FRA is likely to be placed in parliament very soon. The FRA is expected to ensure transparency and accountability in the financial sector of the country and prevent bad auditing practices.
FRA is a wake-up call for the accountants and auditors of Bangladesh, because they are also blamed for the poor quality corporate reporting. The present capital market scenario demands that the accountants and auditors draw a line between right and wrong practices and they must do the right to prove their importance in strengthening corporate governance and reporting regime.
International Forum of Independent Audit Regulators (IFIAR), the organisation of the regulators of auditors (FRC or PCAOB) formed in September 2006, has issued core principles to promote effective independent audit oversight globally. The core principle of IFIAR is that all statutory auditors and audit firms shall be subject to public oversight and the FRC/PCAOB staff members should not be practising auditors and they should be free from conflict of interest. The system of public oversight shall be governed by non-practitioners who are knowledgeable in the areas relevant to statutory audit. The persons who carry out quality assurance reviews shall have appropriate professional education and relevant experience in statutory audit and financial reporting combined with specific training on quality assurance review. They should serve public interest and should have public accountability in the use of their power and resources.
Bangladesh desperately needs foreign investments and looks forward to achieving higher GDP (Gross Domestic Product) growth in trade, industry and service sectors in the days ahead. As such, the reality of today's global business environment means that regulators around the world must do the same thing to ensure that financial reporting is done as per International Financial Reporting Standards (IFRS), audit quality remains high on which both local and foreign investors can rely and that interest of general investors are protected.
So, Bangladesh should have FRA as early as possible, but before finalising the FRA, the policy makers should check the global practices to make it effective in real sense. The very purpose of formation of FRC in Bangladesh is to establish an independent agency and as such, well-trained, experienced and trusted non-practising professional accountants, lawyers, regulators and relevant government officials having proven track records may be selected to form the first Board of FRC.
The UK's Accountancy and Actuarial Discipline Board (AADB) in the FRC regulates the activities of accountants and actuaries. Among others, the participating accountancy bodies in this board are: Institute of Chartered Accountants in England and Wales (ICAEW), the Association of Chartered Certified Accountants (ACCA), the Chartered Institute of Management Accountants (CIMA) and the Chartered Institute of Public Finance and Accountancy (CIPFA).
So, while forming FRC in Bangladesh, it is necessary to take adequate care to eliminate conflict of interest. It is also necessary to identify the major cause of poor quality of financial reporting and auditing in the country so that any vested quarter cannot defeat the major objective of FRA. There should be a system in FRC of getting opinions and services from professional accountants who do not have any conflict of interest but possess global accounting and auditing knowledge. FRC should be formed in line with global practices so that it can work independently in public interest and becomes able to promote high standards of corporate governance, ensure transparent financial reporting and thus foster private investments in the country.
Writer: Abu Sayed Md. Shaykhul Islam, FCMA, is Vice-president of the Institute of Cost and Accounting Management Bangladesh (ICMAB). firstname.lastname@example.org