European Journal of Developing Country Studies, Vol.1 2006 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.

org

A regulatory review on statutory requirement for the Financial Reporting and role of Financial Reporting Act Bangladesh perspective
Mohammad Abdul Ohab Miah FCA, CFO Capital Market Operation, IDLC Finance Limited

Abstract The objectives of the proposed Financial Reporting Act are very fair and very necessary for the establishment of financial discipline over public interested Companies including listed and non listed Companies. I believe there are very few professional accountants who will disagree with above. I would like to point out one thing at the beginning of my writing that is still following BAS and BFRS in preparation of Financial Statements and BSA in performing audit by a chartered Accountant are not compulsory under Companies Act. These are being followed by chartered Accountants from their own initiatives from the Institutes of Chartered Accountants of Bangladesh as professional responsibility. The only issue is how we will achieve the objectives. Generally it is the Government who is responsible to protect public interest and ensuring financial discipline over all institutes of public interest including private companies, public companies, statutory corporation, NGOs and other business organizations. Government itself is nothing but an organization and government protect and ensure public interest thorough various institution and branches of Government organization like Securities and Exchange Commission, Bangladesh Bank, National Board of Revenue, Registrar of Joint Stock Companies and Firms including Parliament, Judicial bodies and executives bodies etc. Government of Bangladesh has three existing organizations for establishing financial discipline over public interested Companies 1. The Institutes of Chartered Accountants of Bangladesh (P.O. No. 2 of 1973- Bangladesh Chartered Accountants Order) 2. Securities and Exchanges Commission and 3. The Institutes of Cost and Management Accountants of Bangladesh (Order No. LIII of 1977- Cost and Management Accountants Ordinance). Do we need really another organization to establish and achieve our objectives on financial reporting? I have gone through the details of each chapter of the proposed Financial Reporting Act 2010 and opine that Government of Bangladesh does not require to establish separate department or body under financial reporting Act 2010 as Financial Reporting Council rather we can strengthen the Institute of Chartered Accounts of Bangladesh by incorporating more responsibility and accountability under P.O. No. of 1973.We might know Securities and Exchange Commission working on with some mandates as per Securities and Exchange Ordinance including with the objective of protecting public interest on all listed and non listed ( to some extend) companies . We might know that all listed companies are required to submit quarterly and yearly financial statements to SEC and Stock Exchanges. We can make compliance of BAS and BFRS compulsory in recording and preparation of financial statements of listed and non listed companies by SEC laws as well as we can make auditors of the listed and non listed companies binding that they have to follow the ISA or BSA compulsorily in performing their audit and an investigation team of SEC may review the audit working paper of an auditor where necessary. So we can work to build more capacity of SEC to establish Financial discipline of all listed companies where more public interested are involved. We would not like to avoid role of registrar of joint stock Companies to establish all the objectives of proposed Financial Reporting Act 2010 and its role to establish financial discipline over all registered Companies, Firms and Societies. We can make binding to follow Accounting or
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European Journal of Developing Country Studies, Vol.1 2006 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.org

Financial Reporting Standards adopted by the Institutes of Chartered Accountants of Bangladesh compulsorily and simultaneously we can add one section in Companies Act that Auditors have to follow the ICAB adopted Auditing standards in each of their relevant assignment compulsorily. Instead of drafting new laws and forming another department of we can empower SEC and Registrar of joint stack Companies to impose penalties for non compliance with these provisions for both Auditors and Companies concerned. Review of relevant papers on Financial Reporting requirements: Financial Reporting Act has been enacted in NZ in different way and they formed independent Financial Reporting Council and define the duties. SOA 2002 enacted in USA to ensure more effective control over financial reporting and restrict the some scope of external auditors. Financial Reporting Act has been enacted in Mauritius in different way and they formed independent Financial Reporting Council and define the duties. UK has financial reporting oversight Bodies which is active to monitor the functions of auditors and ensuring public interest from the Public interest Companies. (P.O. No. 2 of 1973- Bangladesh Chartered Accountants Order and Order No. LIII of 1977- Cost and Management Accountants Ordinance

Points from the proposed Financial Reporting Act 2010:

Section 2: 2(4) Financial year, definition will contradict with the definition of Financial year in Companies Act 1994 Section 183(4). 2(10) The definition of Audit firm should be more specific because without having formal qualification on auditing only an audit function cannot established a non qualified auditor as Audit firm ( internal audit/ management audit or other inspection or compliance audit)

The definition missing in the Act: 1. Professional Auditor: All Professional Accountants are not auditors/ Chartered Accountant but a professional auditor is also accountant. We might know to be certified auditors we need to complete specialized training at least for three years under a licensed Chartered Accountant. 2. Definition of Chartered Accountants is missing. 3. Professional Audit service: need to incorporate definition professional audit services in line with the Companies Act 1994, Income Tax Ordinance 1984 and Foreign Exchange Regulation 1947. 4. The order of sequence of 2(19) should be in 2(5) then accordingly. 5. Annual Report the definition might be more elaborative and exhaustive here Bangladesh bank existing guidelines/ BAS may be followed. 6. Licensed Auditors need more specific definition. All professional Accounting Bodies ( both ICAB and ICMAB) cannot provide license for statutory audit. Only ICAB is authorized to issue practicing license to its member on application for statutory audit. Section 3: This section empowered this law to override other laws except Comptoller and Auditor General (additional Functions) Act, 1974. This is very weak law even weaker that SEC Laws (2CC). I proposed to delete this clause or may replace as Follows: If any thing is not defined or clarified in this laws definition and clarification of Companies Act and SEC laws will be applicable

European Journal of Developing Country Studies, Vol.1 2006 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.org

Section 6: Formation of Council- We found that Governor of Bangladesh Bank will be the Chairman of the Council by position and other three members would be Chairman SEC, Chairman Insurance Regulatory Authority and Chairman, NBR. These Four honorable positions are very important and they are busy with their regular activities of the concerned organization. We dont understand how they will concentrate on new job roles which are also very public sensitive matters. I dont like to address details on the daily operation of the proposed Financial Reporting Council and its other supporting units. I would like to put one comment that is we have to appoint more professional Accountants and professional auditors in the proposed Council. Section 13, 14 &15-The purposes and Function of the FRA 2010: ICAB and SEC have been working on all general and specific objectives of the proposed Financial Reporting Act 2010 since long with some instance of success and failure. We might know the success and failure of these two dignified institutes. You might agree with me that all departments of government have some success and failure history. There might be some limitation of these two institutes with respect to resources, capacities etc. Without setting up Financial Reporting Council under FRA, If we can find out the limitation and take necessary initiatives from the Government to eliminate the limitation, we can make these grand institutes more functioning to ensure financial discipline over all publicly interested organizations.

Section 24: There should have scope for another appeal before High Court against the order of Appellate Tribunal otherwise this may jeopardize the rights of the aggrieved party. Section 47: Gha: This will create critical contradiction with all existing laws. It is suggested to delete and the Auditor should have same meaning save as existing in Companies Act 1994. The proposed FRA is limiting its scope only with public interested companies. The financial transparency and discipline are required very badly for all companies irrespective of listed and non-listed. Due to deficiency of financial transparency and discipline over all business and commerce organization, Bangladesh government is losing huge revenue both VAT and Income Tax. I can tell you that if we can ensure effective transparency and discipline over all Companies, revenue from business and tax would be more than double instantly. The proposed Financial Reporting Act referred several times Rule of the Act on many important issues, before finalizing the rule none can conclude on these important issues for example definition of Public interest organization and condition for practicing license etc.

How can we eliminate the limitation of existing regulators and build more capacity in existing regulators?
1. We need to amend the Companies Act 1994 and incorporate that; a) following of BAS and BFRS are compulsory for the recording and preparation Financial statements.

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European Journal of Developing Country Studies, Vol.1 2006 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.org

b)

c)

d)

Insert a separate clause that Auditor shall perform their duty following BSA and the report specifically on compliance of BAS and BFRS as separate check list. Insert separate clause on penalties of Auditors for non compliance with BSA and for any negligence in performing their professional duties and incorrect assertion on check list above (b). The reporting organizations Board of Directors, Managing Directors and Chief Financial Officer will be penalized significantly in case of non compliance with BAS and BFRS (Should not be Tk. 200 to 10000 like existing Companies Act, these should be Tk. 500,000 to 2,000,000).

2. We need to amend P.O. No. 2 of 1973- Bangladesh Chartered Accountants Order; a) b) c) Make professional Chartered Accountant accountable for their professional duties clearly in the Order. Assess the necessity for the amendment of code of conduct/ ethics of Chartered Accountants. Imposition of some conditions to grant practicing license of Chartered Accountants ie capacity of the proposed audit firm, office set up, staffing of the firm, No. qualified accountants in the firm etc.

3. Enhance the capacity of ICAB: a) Set up all departments as proposed under section 23 of FRA in ICAB and establish separate reporting line directly to Ministry of Finance quarterly on the function. Staff involved with these departments will have dual reporting ICAB management and Ministry of Finance. Include Bangladesh Bank Governor, SEC Chairman, Secretaries of Ministry of Finance and Commerce and Industry, chairman Insurance Regulatory Authority, Registrar RJSC and President FBCCI to the ICAB Council along with elected council members from the ICAB. Make separate pay scale for the ICAB staff to attract more competent and qualified human resources. Separate ICAB Council from their management functions. Leave ICAB management influence free from the council. The ICAB Council will play as supervisory and review role over management like a Company Board.

b)

c) d)

4. Strengthen the SEC like Bangladesh Bank: a) b) c) d) e) Set up all departments as proposed under section 23 of FRA Make it autonomous body like Bangladesh Bank Build more capacity in SEC with respect to infrastructure and competent staff Make separate pay scale for the SEC staff to attract competent and qualified human resources. Set up a serrate department in SEC as Financial Statement and Audit Review Department. It will review the published financial statements and

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European Journal of Developing Country Studies, Vol.1 2006 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.org

audit work of the auditor concerned. The department will ensure compliance with section 12 of The Securities and Exchange Rule 1987.

5.

Strengthen the RJSC: a) Set up a serrate department in RJSC as Financial Statement and Audit Review Department. It will review the audited financial statements and audit work of the auditor concerned. Ensure compliance by all registrant organization under RJSC on all of the proposed in clause 1 above.

b)

I am suggesting the above because to make the proposed Financial Reporting Council upto capacity level of ICAB and SEC, it will take another 25 years of our government. It is better to build more capacity in existing organization to serve the purpose of the proposed FRA 2010 with minimum time, efforts and cost of the government.

Conclusion:
Regulatory reform is required on Companies Act 1994, P.O.No. 2 of 1973- Bangladesh Chartered Accountants Order, SEC Ordinance and other Commercial laws where necessary etc. to incorporate all the objectives and purposes of proposed Financial Reporting Act 2010. Country like Bangladesh has so many burning issues to address by the Government from the peoples money. Without investing additional public money to separate department of Government for ensuring financial control, government is suggested to strengthen ICAB, SEC and RJSCF which will be more cost effective and less cumbersome to establish all the objectives of the proposed Financial Reporting Act 2010. We can work on how can we build more capacity of ICAB, ICMAB, SEC, RJSCF and make them more accountable for their activities and duties.

Abbreviations:
BAS- Bangladesh Accounting Standards as adopted by ICAB time to time from the International Accounting Standards. BFRS- Bangladesh Financial Reporting Standards as adopted by ICAB time to time from the International Accounting Standards. BSA- Bangladesh Standards on Auditing as adopted by ICAB time to time from the International Auditing Standards. SEC- Securities and Exchanges Commission ICAB- The Institute of Chartered Accountants of Bangladesh ICMAB- The Institute of Cost and Management Accountants of Bangladesh RJSCF- Registrar of Joint Stock Companies and Firms FRA- Financial Reporting Act 2010 NBR- National Board of Revenue ISA- International Standards on Auditing

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