The Financial Reporting Council: a policy

review

Dr Javed Siddiqui
Associate Professor of Accounting
The University of Manchester
 Background
• FRA enacted in Bangladesh on September 6, 2015
• Led to the establishment of the Financial Reporting Council-an
independent oversight body for the accountancy profession
• Mixed reaction from professional bodies and other stakeholder
groups
• Objective of this presentation is to present:
• A context for audit oversight in Bangladesh, and the formulation of the FRC
• Concerns regarding the FRC
• Proposal regarding potential ways ahead
 The audit profession in Bangladesh:
institutional context
• ICAB created by the Chartered Accountants Order 1973
• Historically self-regulated
• Problems with
• Poor demand for qualified accountants (at present, ICAB has around 1,600
qualified members)
• Failure to attract the best graduates (also, students entering the profession
sometimes have poor communication skills, sometimes attributed to
weaknesses in the tertiary education system)
• Lack of disciplinary actions against members
• Perceptions regarding poor quality audit
• Poor levels of audit fees (significantly lower than India, Pakistan, Sri Lanka)
 Positioning ICAB within the international
financial architecture
• International Financial Architecture: ICAB is a member of the
International Federation of Accountants (IFAC)
• Has to comply with IFAC’s Statement of Membership Obligations
(SMO) dealing with audit quality, education, disciplinary procedures,
and code of professional ethics
• IFAC’s compliance programme is supported by the international
development community through the Memorandum of
Understanding to Strengthen Accounting and Improve Collaboration
(MOSAIC) programme
• Aim is to improve capacity of local accountancy profession
 The audit profession in Bangladesh:
institutional context
• Following World Bank ROSC and IFAC MOSAIC, the audit profession
has gone through some significant reforms in recent years
• Major initiatives include-
• Twinning arrangement with ICAEW for sustained improved in education and
training provided by the ICAB
• Establishment of ICAB’s Quality Assurance Division (QAD): each audit firm has
to be visited once in every 3 years
 The audit profession in Bangladesh:
institutional context
• Despite such initiatives, concerns regarding investigation and
disciplinary functions of ICAB have remained
• Calls for an ‘independent’ regulator after the stock market crash of
2010
• However, in Bangladesh, (small) investors’ knowledge about the
auditing function is sometimes questionable- prior research
(Siddiqui et al, 2009) suggests presence of ‘knowledge gap’
regarding the actual and perceived functions of the auditors
• ICAB has not been able to allay the concerns of the stakeholders
 Regulatory response: the Financial Reporting
Council
• Originally proposed by the World Bank ROSC report 2003. However,
World Bank ROSC (2015) changed their views on FRC in Bangladesh,
deeming it not to be necessary
• Financial Reporting Act passed by the national parliament on
September 6, 2015
• FRA requires formulation of the FRC
• Mixed reactions
 FRC Bangladesh
• Major areas of concern:
1. Composition of the FRC
2. Potential duplication of work between the ICAB and the FRC
3. Unintended consequences of criminal actions against auditors
4. Lack of Corporate Governance focus
 1. Composition of the FRC
• Led by a Chair appointed by the government
• 12 member body (including Chair and CEO)
• Six government nominees (in addition to chair/ CEO): representatives from
the MoF, MoC, CAG office, Bangladesh Bank, BSEC, NBR
• One Professor of Accounting from a public university
• One representative from FBCCI
• Two representatives of the accountancy profession (as ex-officio members)
• Only ONE chartered accountant!
 1. Composition of the FRC
• Inclusion of broader stakeholder groups to avoid ‘conflict of interest’?
• However, much of FRC's function would involve overseeing the work of
professional accountants as well as adoption of international accounting and
auditing standards
• This requires highest degree of professional skill and competence in the area of
financial reporting and auditing
• Would the proposed members, despite being highly competent in their relevant
fields, be able to deliver this?
 Composition of the oversight bodies in UK
and USA
• PCAOB: five member board, two lawyers and two non-practising CPAs
• FRC UK:
• 15 member board appointed by the government
• Current Chair is a former banker
• Six non-practicing chartered accountants, one qualified actuary
• Two former CEOs of FTSE100 companies
• One former permanent secretary
• All members have substantial experience in accounting and auditing
standards setting
[Link]
Board/[Link]
 UK FRC: recent crisis
• In March 11, 2019, the UK government announced that the FRC will
be scrapped and replaced by a new regulator for accountancy firms:
The Audit, Reporting and Governance Authority
• This follows criticisms of the FRC by the Kingman Commission (2018):

‘A new board should be appointed. It should be significantly smaller

than the FRC’s. It should not seek to be “representative” of stakeholder
interests’ (Kingman Commission Report 2018, p. 9)
 Composition of the FRC: international
comparisons
• India: National Financial Reporting Authority Rules 2013
• The ICAI filed a case against the formulation of the NFRA, which
was overturned by the Supreme Court in November, 2018
• The NFRA’s composition:
• Chairperson being a Chartered Accountant
• Members – Accounting, Auditing, Enforcement;
• Representatives from MCA, RBI, and SEBI
• A retired Justice of a High Court
• President of the Institute of Chartered Accountants of India (ex-officio)
 Composition of the FRC: international
comparisons
• Malaysian Accounting Standards Board (MASB)
• 11 member board
• Chair is a member of ICAA (Australia)
• Three practicing chartered accountants
• All three government nominees, the AG, and the representative from KL stock
exchange and board of revenue Malaysia are chartered accountants
• One university professor: an ACCA with a PhD in auditing
• Two representatives from the industry, both qualified accountants (one
chartered accountant and one ACCA)
 Composition of the FRC: international
comparisons
• Nigeria: Financial Reporting Council established in 2011
• Chair is a professional accountant (members of ICAN or ANAN)
• Four professional accountants (representing ICAN and ANAN)
• Many government nominees: Office of the Accountant General of the
Federation ; Office of the Auditor General for the Federation ; Central
Bank of Nigeria ; Corporate Affairs Commission ; Federal Inland
Revenue Service ; Federal Ministry of Commerce ; Federal Ministry of
Finance ; Securities and Exchange Commission ; National Insurance
Commission ; Nigerian Stock Exchange ; National Pension Commission
2. Duplication of work, capacity development
and resource constraints
• Global regulatory environment: as a member of the IFAC, ICAB is
bound to comply with the IFAC SMOs, including adoption of IFRS and
ISAs
• Adoption of international accounting and auditing standards requires
substantial skills and expertise of the members
…and significant resource commitment
 Duplication of work, capacity development
and resource constraints
• FRC will monitor if the international accounting and auditing
standards, as adopted by the FRC, are being properly implemented
by the companies.
• The implementation of IFRS and ISA is a challenge for many
companies.
• However, this is a mammoth task that will require significant resource
commitments.
• The BSEC, even after 25 years of existence, still struggles to monitor
the implementation of IFRS in listed public companies due to
resource constraints
 Duplication of work, capacity development
and resource constraints
• Bangladesh has a very small number of professionally qualified
accountants
• The vast majority of accountants working in the PLCs do not have a
professional accounting qualification, making implementation of IFRS
difficult
• No ‘second-tier’ accountancy body
• If this remains unchanged, FRC inspections would not be very fruitful
 Duplication of work, capacity development
and resource constraints
• Each practising audit firm will be inspected by the FRC once in every three
years
• such inspection would involve looking at the performance of the auditors as well as
questioning their judgements in individual audit assignments through detailed
inspection of working papers
• this would require substantial resource commitment as FRC would need to hire
professional accountants for such review.
• May not be easy with existing salary offered in competing regulatory bodies (eg
BSEC)
• ICAB has a Quality Assurance Board and a Quality Assurance Department
assisted by ICAEW which has been functioning in the area of audit and
assurance practice review.
• Hence, some activities of FRC may turn out to be mere duplications of the
functions already conducted by the ICAB, and give rise to potential
complications
3. Criminal actions against auditors: potential
unintended consequences
• The FRC has been entrusted with substantial power to take
disciplinary actions against auditors.
• The maximum punishment imposed by similar regulatory bodies is debarring
an auditor (or audit firm) from practice (maximum 10 years, NFRA 2013)
• In Bangladesh’s case, the maximum punishment of 5 years imprisonment
• Bangladesh already has a shortage of qualified accountants, and such
provisions might further reduce the profession’s ability to attract
bright students.
• Providing such sweeping power to any regulatory (non-judicial)
authority may create scope for potential corruption
4. Lack of corporate governance focus
• The FRC’s core functions do not include promoting standards and
codes on corporate governance
• Similar bodies around the world (for example, FRC in the UK) consider
issuing codes on corporate governance (for companies) and
stewardship (for investors) as one of their major functions.

‘The FRC has been an effective custodian of the UK Corporate

Governance Code, which is still rightly regarded as world-leading’
(Kingman Commission, UK, 2019)
4. Lack of corporate governance focus
4. Lack of corporate governance focus

• Similar arrangements in other countries

• FRC Nigeria issues and updates Code on Corporate Governance.
• In January 2019, it issued an updated New Code on Corporate Governance
(Nigeria FRC was formulated through the FRC act in 2011)
 FRC: towards an effective oversight
mechanism
1. Structural issues
• Composition
• Duplication of work
• Criminal actions against auditors
2. Core functions
 FRC: structural issues
• Potential problem with expertise, resulting from the lack of presence
of Chartered Accountants
• The MoF might consider revising the existing formation of the FRC
board so that the right balance between competence and
independence can be achieved
• Alternatively, the ex-officio members (from MoF, MoC, Bangladesh
Bank, NBR, FBCCI, BSEC) can nominate professional accountants who
would represent these agencies in the board.
 Composition of the FRC: international
comparisons
• Malaysian Accounting Standards Board (Financial Reporting Act,
1997)
• the Secretary General of the Treasury or his representative;
• the Governor of the Central Bank or his representative;
• the Chairman of the Securities Commission or his representative;
• the Chairman of the Audit Oversight Board or his representative
• the Registrar of Companies or his representative;
• the Chief Executive Officer of Bursa Malaysia Berhad (KL stock exchange)
• The President of the Malaysian Institute of Accountants
• Four other members who possess knowledge and experience in matters of
financial accounting and in one or more of the following fields: law;
business; or finance
 Composition: MASB
Members Qualifications
Chairman, Malaysian Accounting Standards Board FCA
Accountant General of Malaysia CA
Group Chief Executive Officer, Islamic Banking FCCA, CA
Executive Director & Group Chief Financial Officer, Sime Darby
Property Berhad FCCA, CA
Chief Financial Officer, Prudential BSN Takaful Berhad FCA, ICAEW
Partner, E&Y FCA
Partner, local Malaysian audit firm CA
Professor of Accounting, International Islamic University Malaysia PhD, FCCA
Nominee, Securities Commission Malaysia CA, CPA
Nominee, Companies Commission Malaysia FCCA, CA
Duplication of work, and concerns regarding
resources constrains
• There could be a transitional arrangement that would allow FRC to
delegate some its functions to the ICAB for a mutually agreed period,
until the FRC develops its own capacity to conduct such activities
independently
• Requires changes within the FRC structure
• Such an arrangement is not uncommon- a significant number of
global public oversight bodies have such arrangements in place
([Link]
 2. Core functions of the FRC: Corporate
Governance Regulations
• Bangladesh is one of the few countries in the world without a code of
corporate governance that is applicable to all public interest entities.
• There are corporate governance orders issued by the BSEC and the
Bangladesh Bank, but these are only applicable for listed and banking
companies respectively, leaving the vast majority of public interest
entities (including unlisted public limited companies, large charities,
and NGOs) to operate in a virtually unregulated space.
• The FRC has a much larger remit compared to the BSEC or the BB
 Corporate Governance Regulations
• The high degree of family ownership in the corporate sector in Bangladesh has
given rise to a corporate culture where the value of corporate governance
mechanisms are usually undermined.
• Important corporate decisions are made in informal family meetings, sometimes
making formal board meetings a symbolic practice.
• The scarcity of qualified and skilled individuals in the corporate sector has
resulted in a small pool of non-executive directors that the companies can choose
from, giving rise to a familiarity threat that would undermine the role of non-
executive directors as an important corporate governance mechanism.
• The role of audit committees have remained largely questionable, mainly due to
the tendency of choosing family members (allowed due to the narrow definition
of families in the existing regulations) and close associates as members of the
audit committee.
 Corporate Governance Regulations
• Bangladesh does not have sufficient numbers of qualified internal
auditors.
• The vast majority of companies operate without a Chartered
Accountant
• This, combined with the lack of interest/resistance from the family
owners regarding financial transparency results in poor quality
financial reporting
• An auditor only explains an opinion on the truth and fairness of these
financial statements
• The HORSE needs to come before the CART!
 Corporate Governance Regulations

• The FRC should be the SOLE custodian of the Code of Corporate

Governance
• Will be responsible for the continuous development and updating of
the Code
• The FRC will monitor implementation of the Code
 2. Core functions of FRC: Audit fees
• Audit fees in Bangladesh are significantly lower than India, Pakistan and Sri Lanka
• ‘Dominant family control in listed companies has resulted in a corporate culture
where governance functions such as audit are usually ignored by the family
owners’ (Siddiqui, 2010)

• Clients are reluctant to pay higher audit fees, and they do not see the ‘value’!
• Lack of demand for high quality audit- previous research indicates that larger
firms do not earn significant audit premium in Bangladesh (Siddiqui, 2016)

• Lower audit fees can drive lower audit quality- a comprehensive audit would
require sufficient audit hours- this is not supported by the current fee regime in
Bangladesh
• These are all outside the purview of the FRC!
 Audit fees
• Improvements in audit quality can only be facilitated by higher audit
fees, allowing the audit firms to
• Allocate sufficient audit hours for a client
• Maintain proper documentation/audit trails that can be traced later
• Hire and retain high quality staff
• This would justify the FRC to take stricter disciplinary measures
against audit firms
• The FRC needs to ensure that the audit fees paid to the auditors are
sufficient for the purpose of a quality audit, and ensure compliance
with such an arrangement (reduce undercutting!)
Conclusion
• FRC needs be viewed as an opportunity, not a threat!
• Concerns regarding control needs to be eliminated
• Consideration of issues relating to FRC structure, duplication of work
between the FRC and ICAB, and disciplinary actions against auditors
• Wider cooperation between the ICAB and the FRC
• Rethinking the core functions of the FRC