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Bangladesh audit reform moves forward, despite disagreements

THE BANGLADESH CABINET has finally proposed a long-awaited law to regulate Bangladesh’s audit profession, which had been stalled amid disagreements between auditors and management accountants

A draft Financial Reporting Act will now be presented for a vote by the country’s parliament, the Jatiyo Sangshad, although the government has yet to release full details. It is seen as a critical weapon to deter companies from falsifying their books to inflate stock prices, aided by corrupt accountants.

The decision follows a promise last month by Bangladesh’s junior finance minister Mohammad Abdul Mannan, who told reporters in Dhaka that the bill would be introduced to parliament this month.

Redrafts

It was first drafted in 2007 and has been redrafted several times. Its approval has been held up partly by a disagreement between the Institute of Cost and Management Accountants of Bangladesh (ICMAB) and the Institute of Chartered Accountants of Bangladesh (ICAB) over membership of a new ten-member independent council policing the profession.

The ICAB has opposed management accountant participation, as only its members can stage audits by law, arguing it should decide who serves on the council. By contrast, the ICMAB has argued that management accountant representation would make the council impartial and reduce potential conflict of interests. At the time of publication, it was not clear which side had prevailed in the proposed law – the accounting associations were reserving judgement until the full draft has been published.

The ICAMB has been pressing hard for full involvement with the committee. Mohammed Salim, its president, told Accountancy Age: “It’s all about financial reporting. We prepare financial statements, so our relevance is unquestionable. You need to pick people who can spot mistakes of auditors and have no conflict of interest. Since we don’t do financial audit, our role will be neutral,” he said.

Showkat Hossain, president of ICAB, indicated that while his association had accepted that “the council will supersede us”, he hoped the government would listen to the body’s requests on future Bangladesh audit controls. These, he said, included protecting the ICAB’s authority to accord licences to auditors and removing a provision enabling erring auditors to be jailed, although under the proposal licensing would be a key role of the council. It was not known as Accountancy Age went to press whether these rights had been written into the cabinet-approved law.

Spat played down

The government has been playing down the disagreements. Finance secretary Mahbub Ahmed said: “I’m not aware of any disagreement [between chartered accountants and cost accountants]. We’ll form the council anyway,” he told Accountancy Age. He said it would play a key role, enforcing International Accounting Standards and International Standards on Auditing for listed companies, for example.

Dr Mizanur Rahman, an associate profession of accounting and information systems at Dhaka University, blamed the two accountancy groups for holding back the reform by feuding. “The audit system must be overhauled. The ICAB can’t be a regulator.

There should be an independent body,” he said. Indeed, a World Bank, in a 2009 report on corporate governance denounced the ICAB’s role, noting it “rarely disciplined its members.” Also, a research paper written in 2012 by Khondaker Golam Moazzem and Mohammed Tariqur Rahman, of Dhaka think-tank the Centre for Policy Dialogue, had argued that a lack of accredited institutions monitor for audit firm reporting standards has left “ample opportunities and scopes to misuse the audit system, to the detriment of the common shareholders”.

Such problems have been blamed for a crash in the Bangladesh stock market in 2010/11 when the Dhaka Stock Exchange Index (DHAKA) fell by about 50%, losing 22% of GDP in market capitalisation by between December 2010 and October 2012, according to an Asian Development Bank (ADB) analysis.

And many politicians and experts think shoddy and fraudulent bookkeeping persist: “In most cases, chartered accountancy firms prepare unrealistic reports,” finance minister Abul Maal Abdul Muhith said, vowing to push ahead with securing approval for the law to help boost confidence among small investors who opened a record 3.5 million retail brokerage accounts in 2010. Many of them were ruined by the crash and a high-profile government probe panel in April 2011 blamed auditor manipulation of accounts and “unreliable” financial reporting standards as key reasons for extreme market volatility.

Implementation is key

That said, the new system will only work if it is properly implemented and Adeeb Hossain Khan, a senior partner with KPMG Bangladesh, said: “New institutions or laws will only work if they are based on proper identification of weaknesses in the existing system and are designed to address those in a practical manner.”

Indeed it could be possible to reform Bangladesh’s financial reporting under the current system, he argued: “Improving the quality of financial reporting in Bangladesh is possible by strengthening existing institutions and better enforcement of existing laws and standards,” said Khan, also a fellow at the ICAEW.

If the government does succeed however, it could help Bangladesh secure a $150m Asian Development Bank loan meant to develop its fragile capital market. The bank had linked the release of a second tranche of the credit to the bill’s adoption.

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