Three years of FRC: Taking stock of the super regulator

Bangladesh's new audit market regulator, the Financial Reporting Council (FRC), has been modelled after the UK's Financial Reporting Council – renamed as the Auditing, Reporting and Governance Authority – and the USA's Public Company Accounting Oversight Board.  

The World Bank's Report on Observance of Standards and Codes (ROSC) on accounting and auditing proposed the idea of a new audit regulator for Bangladesh in 2003. 

Since then, the idea went back and forth several times along the legislative corridor, before getting the parliament's nod in 2015 through the promulgation of the Financial Reporting Act (FRA). 

By that time, the World Bank had produced another ROSC report that discouraged the idea of a new audit regulator, as it deemed the Bangladesh audit market not ready for such regulatory intervention. 

However, the FRC finally started working in 2017 through the appointment of a new chair.

Given the political economy of Bangladesh and the serious resource limitations of the FRC, it is unfair to expect the new regulator to bring any radical change in three years. 

However, a comparison with India's National Financial Reporting Authority (NFRA) may provide some meaningful insights.

Following the Satyam scandal, the idea of a new audit market regulator was floated in the Companies Act of 2013. However, due to the legal challenges initiated by the Institute of Chartered Accountants of India related to jurisdiction on audit oversight, the formation of the NFRA was delayed. 

Eventually, the regulatory body was set up in October 2018 with the Indian Supreme Court granting the NFRA the full authority to act as an audit oversight body. 

In nearly two years of its existence as an audit oversight body, the NFRA – headed by a retired bureaucrat – have taken some stern actions, including banning of the former managing partner of Deloitte India for professional misconduct. 

The NFRA's informative website shows that the regulator issued inspection reports, for audits into three public interest entities (PIEs) in India, with a review of the process. 

Also, several audit firms were served show-cause notices for their professional misconducts. 

The NFRA website contains detailed procedures regarding public grievance related to a company and whistleblowing mechanisms, too. 

There are other examples of the activities of independent audit oversight bodies in our region.

The Sri Lanka Accounting and Auditing Standards Monitoring Board (SLAASMB), established by Sri Lankan Accounting and Auditing Standards Act 1995, has gained a reputation as a respected audit oversight body. 

The SLAASMB's activities, as reported on its website, provides a testament to its well-earned reputation. 

For example, in 2018, the SLAASMB reviewed the financial statements of 638 PIEs – special business entities, as defined by their regulation – to detect if they were prepared following the Sri Lankan accounting standards. 

Some of these business entities were asked to correct their financial statements in line with the observations. Also, 50 audits conducted by 10 audit firms were reviewed. 

The regulatory body has regularly referred audit firms to the Institute of Chartered Accountants of Sri Lanka for taking actions for professional malpractices. 

Compared to the NFRA and SLAASMB, the activities of the FRC seem less visible.  

However, a closer look at the FRC's activities over the last three years reveals that after overcoming the teething troubles, the regulator has started becoming active. 

Over the last year or so, several companies have been in the FRC's radar for failing to comply with accounting standards. Also, it issued directives to different sectors regarding the application of financial reporting standards. 

Yet, it will be fair to point out that the FRC's activities are not making headlines like its counterparts in the neighbouring countries. Several factors are responsible for this. 

The structure of the FRC does not allow many professional accountants to be in its board. Given that one of the main objectives of the FRC is to adopt international accounting and auditing standards, this lack of expertise in the board certainly does not help.

The FRC also has a very broad remit of reviewing the financial statements of all the PIEs in Bangladesh – which require extensive capacity in its part – something the organisation lacks until now. 

Also, unlike the case of Sri Lanka, where audit malpractices are referred back to the institute, the FRC has significant power to hold the auditors to account. 

Although this might have been intended as a force for good, such power may have some unintended consequences, given the socio-economic conditions of the country. 

The financial reporting regulatory space in Bangladesh is already shared by well-established and reputed players such as the Bangladesh Securities and Exchange Commission (BSEC), the Bangladesh Bank, the Institute of Chartered Accountants of Bangladesh (ICAB) and the Institute of Cost and Management Accountants in Bangladesh (ICMAB). 

To establish itself as an important player within this space, the FRC must gain legitimacy with the parties it wishes to regulate. 

The regulatory body must convince its constituents that it has developed processes to operate effectively and professionally in addressing their needs, to bargain authoritatively with other regulators in establishing its operational boundaries, and to engage politically with the government and constituents. 

Despite all the powers entrusted upon it by the FRA, the FRC has so far shown restraints in imposing itself over the audit regulatory space.

This is a very good first step, as persuasion rather than imposition always goes a long way in gaining legitimacy with the stakeholders. 

As a next step, the FRC needs to be able and willing to provide moral and cognitive leadership to the accounting profession. It must remember that the audit market in Bangladesh is characterised by very poor levels of audit fees, and severe competition. 

The concentrated family ownership structure in most public limited companies have resulted in a culture where corporate governance mechanisms, such as external audit, are largely unappreciated and undermined. 

The limited number of professional accountants working in PIEs in Bangladesh implies that most of these companies are being deprived of the services of qualified accountants, making it more difficult to apply financial reporting standards, which can, at times be very complex. 

The auditors only give an opinion on financial statements prepared by the companies. So, if the companies do not have a proper system of corporate governance, and adequate in-house financial reporting expertise, it will be very difficult for the auditors to ensure compliance with the provisions of the FRA. 

So, going after the auditors will not necessarily make a lot of sense. 

If the FRC can take lead in producing a road map for the auditing profession for short, medium and long terms, and make recommendations regarding measures to improve audit quality – based on consultations with accounting bodies – it will go a long way in enhancing the credibility with its constituents. 

Also, credibility can be enhanced by regular training and knowledge dissemination events, allowing professional accountants to be able to contribute to the discussions. 

Also, the FRC can work with the ICAB and ICMAB to explore the possibilities of creating a new second-tier professional accountancy body so that the supply of qualified accountants in the country can be ensured. 

Finally, the FRC must have a focus on corporate governance. 

In Bangladesh, there is a BSEC Corporate Governance Code, and a Bangladesh Bank order on corporate governance, but these regulations only apply to listed and banking companies. 

For the large majority of companies that are not listed on the capital market, there is no corporate governance code. 

In the UK, its Financial Reporting Council has always been responsible for the drafting and updating of the combined code of corporate governance. 

In a developing country context, the FRC can probably take a leaf out of the book of the FRC Nigeria, which issues a code of corporate governance for all PIEs in that country. 

If the FRC can have a strong regulatory focus on corporate governance, it can go a long way in ensuring sustainable development of audit quality in the future. 

Dr Javed Siddiqui, an associate professor of financial reporting at the Alliance Manchester Business School, The University of Manchester, UK. He can be reached at [email protected].