‘The move to introduce DVS has changed the entire spectrum of financial auditing’

As Bangladesh's graduation from LDC draws nearer, questions regarding the quality of our audits have become vital. The Business Standard sat down with Chartered Accountant Masud Khan FCA, FCMA Chairman of Unilever Consumer Care Limited to know more about the state of audits in the country, how things are changing and what has been the impact of the Financial Reporting Council (FRC).

Many investors do not have much faith in audits, as they doubt the credibility of this practice. Many users of financial statements feel that the quality of audits in Bangladesh leaves much to be desired. What is your take on the issue? 

When auditors say that the financial statements show a true and fair view of the state of corporate affairs they try to obtain reasonable assurance that this has been done true and fairly. They use the sampling method to reach a level of reasonable assurance. But this doesn't mean 100% material omission, material treatment, and fraud will be detected; no one can give that assurance. The most important thing at the end of the day is whether they have exercised due diligence through this process.

Accounting scandals like Enron, and WorldCom did however happen. I recently saw a statistic that in the United States, in the last few years, almost one-third of the audits have not been done properly. Even in Bangladesh, there have been situations when audits were not done properly and later oversight bodies detected these (discrepancies). Even the Institute of Chartered Accountants of Bangladesh has a team that assesses this, sometimes they sanction their auditors, and at times they even debar them. IFRC has recently become involved in this process as well. 

In Bangladesh, there are two types of companies, listed and unlisted. Big listed companies are not that much of an issue but there are small listed companies as well as unlisted companies, and these are family-owned companies in most cases. They treat auditing as a necessary evil: it needs to be done due to compliance issues, but they don't want to. But they have to get audited due to pressure from tax authorities and banks. Also, our Institute of Chartered Accountants is relatively new compared to that of our neighbouring countries. This is another issue in my opinion.

Auditors on the other hand cite budget and time constraints as well as the lack of cooperation from management and paltry fees for gaps in quality. Do you agree? 

In many cases, we have seen auditors accepting audits for a very poor fee. Obviously what is happening is that when you accept an audit at a very poor fee you are going to spend time proportionate with the fees, because time has a cost as far as the auditors are concerned. 

The point from my side is that auditors are bound by the code of professional ethics, and they should not accept audits in a situation in which they know their audit will be compromised, because the moment I accept an audit at a very poor fee, I know that I am going to compromise my audit and my due diligence will be impacted. In that case, why am I accepting these audits even though I am bound by a code of professional ethics? If one turns auditing into a business, thinking that just because I am doing business I have to earn a profit, one should not be in the audit profession, that is my clear answer.

Lack of cooperation happens in some cases. But since he is bound by a code of professional ethics, when the auditor is giving his opinion he should mention that they have faced this issue of lack of cooperation from the management. That is their job in fact. When you don't get cooperation you can't conduct an audit in the manner you want in terms of getting the audit evidence. This should be mentioned in the report.

Time constraint is also an issue. Let me give you a practical example. Let's say nowadays the audit has to be completed by 30 October. If the company submits the financial report at the beginning of October, the auditor doesn't get the time to complete the audit properly. 

Some experts have suggested that the government should bear the cost of annual audits to ensure transparency. Can it be a way out?  

This is a bit of a farfetched idea if you ask me. We have got a lot of public interest entities in Bangladesh and if the government has to bear the cost of all, it will not be very feasible. The cost of audits should be borne by the company.

The question is how do we ensure the transparency of audits. That can be done through oversight bodies, standards and the quality of auditors. The government just making the payment for the audits won't ensure the standard of audits. You have to ensure that through other means.

Masud Khan. Illustration: TBS

The oversight bodies like the Bangladesh Securities and Exchange Commission, Institute of Chartered Accountants and IFRC have to act in unison to ensure the transparency of audits. If you ask me, over the years this has been improving. From 10 years back to today, there is quite a big change in terms of the quality of reports.

I will not say we have reached the desired level but over the years there has been a marked improvement in the quality of audits because of the oversight of these regulatory bodies. Things are improving, but there is no end as far as improvement is concerned. 

Has the adoption of the International Financial Reporting Standards (IFRS) coupled with the new Financial Reporting Act of 2015 brought about any changes? 

IFRS is being updated continuously, we are actually up to IFRS 16. These standards are like the laws of Bangladesh, simply propagating rules is not enough. We need to have a proper understanding of what the laws are and we must make sure these laws are actually implemented. It is a question of enforcement.

Honestly speaking, IFRS is pretty complicated. And if I look at the quality of Bangladeshi audit firms, I think this varies. The big audit firms who are affiliated globally, like the big four and other big firms with global affiliation have got a quality check in place. Because these big firms get technical support from other firms across the globe, they understand IFRS better compared to the smaller local firms of Bangladesh who lack the associates to interpret IFRS. 

As a result, when I see the financial reports, there is non-compliance as far as IFRS is concerned. I can see that there is not adequate disclosure. Why? This audit firm actually lacks the expertise to understand what is the discretion required by IFRS or interpretations of IFRS.

How effective is the Financial Reporting Council (FRC), our watchdog of auditors?  

FRC started its journey a little late, in 2017. It's doing a good job but it's not visible. Then why do I say they are doing a good job? They have started looking into the audit reports of certain companies, they have issued some directives to restructure the financial reporting standards they have maintained. However, beyond that, they are not very visible. 

There are a couple of reasons why they are not so visible. First and foremost, the job of FRC is to review the reports of public interest entities (PIE). The definition of PIE in Bangladesh is a company which has a turnover of more than five crore or assets of more than three crore or a liability of more than one crore. If I look at this definition, there are thousands of companies that qualify as PIE.

If I look at the resources FRC has, we see a lack of resources to perform this daunting task of reviewing the financial statements of all these organisations.

Point number two, if we take a look at the composition of the body of FRC - they have got professional accountants and at the same time they have got people from the bureaucracy. That also adds to the issue of limited resources.

FRC has sweeping powers that they can fine companies directly. In Sri Lanka, they can only refer these cases to the institute, they don't deal with the companies directly. So far they have been subdued in fining companies, what they try to do is that they try to pursue companies to toe the line as far as financial reporting is concerned. I think the time will come when they start being a bit tougher with companies not complying with financial reporting standards.

In India and Sri Lanka they are a little ahead in terms of making the companies toe the line as they have managed the resource issue a bit better.

Companies have been known to give different versions of their financial statements. To curb this practice the Institute of Chartered Accountants of Bangladesh (ICAB) introduced the document verification system (DVS) late last year. Did the move achieve its intended result?

I would say it is a very innovative move by ICAB. Before DVS, companies had a number of statements - one for the banks which showed profits, one for the tax authorities which showed loss, one for their own internal purposes. 

The move to introduce DVS has changed the entire spectrum of financial auditing. Now everybody, including tax authorities, banks, stock exchanges and Bangladesh Bank is accessing the DVS, everybody is accessing the same set of numbers. 

Manipulation of audit reports is far, far less now. So I can see a good result coming out of this move.