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Widen the spectrum of audit

Updated May 04, 2015


The role of accounting, audit and regulators is essential to safeguarding the interests of all stakeholders. But unfortunately, both auditors and regulators have failed to perform their due roles effectively.

Auditing performance and costs is critical for the competitive pricing of various utilities and other items of public importance — and is the mainstay of Ogra, Nepra, PTA and other such regulators. In spite of the financial audits well in place, the regulators cannot safeguard the interests of all investors and stakeholders in the absence of credible audits.

The present era of opportunity and risk has also enhanced the responsibility and spectrum of audit. It is no longer restricted to financial statements, physical verification, stocktaking and compliance with so-called regulatory requirements.

Conflicts of interest and monopolistic rights in audit areas are compromising the scope of the audit and accounting practice, denying a level playing field to investors, audit firms and even accounting bodies

The increasing numbers of non-performing loans, financial scams, bleeding financial health of public sector entities and poor governance reflect the poor audit performance.

There is no institution for regulating audit and accounting bodies in the country. And conflicts of interest and monopolistic rights in audit areas are compromising the scope of the audit and accounting practice, denying a level playing field to investors, audit firms and even accounting bodies.

Only two local accounting bodies are members of the IFAC: ICMA Pakistan and CA Pakistan. Currently, only members of the ICAP have audit rights, whereas accountants in India, US, New Zealand and other countries generally have the right to perform audit.

These monopolistic rights have restricted the reliance of stakeholders only to chartered accounting firms in general, and to 4-5 audit firms in particular. The representatives of these firms retain a majority in the ICAP Council. All audit firms are being regulated and their procedures have to comply with various ICAP directives, which again is a serious conflict of interest.

How can the ICAP regulate firms whose partners or members are serving on its Council and allied committees? There is a quality assurance board having representation of different segments, but the board was formed by the ICAP Council, where the few big audit firms have greater influence.

On the other hand, the renowned audit firms also provide consultancy services to their clients, contrary to best global audit practices. The fact that consultancy and audit services are being provided by two different partners is an eyewash mechanism, as it is still the same firm.

The code of corporate governance for the public and private sector requires the rotation of auditors every three years, but the rotations are made through a change of partners and not firms. Thus the same firm may continue, compromising the essence of the code.

Oftentimes the audit manager, supervisor and other team members remain the same, but by changing the name of the partner at the top, it is portrayed that the audit becomes transparent. The ex-partner often remains involved in the audit of the client, which is again a conflict of interest and against the prescribed code.

When the sustainability of audit firms relies upon a few clients or a specific sector, it becomes a challenge for the firms to remain neutral. That is why it is recommended that the revenue of any audit firm from one customer shall not exceed 10pc of the firm’s total revenue. Similarly, there shall be a ceiling of 25pc for income from one sector.

The two statutory institutions — ICMAP and ICAP — have failed to consolidate the accounting profession in the country, which has provided an opportunity to foreign accounting institutions to fill the gap and to capture ever-growing domestic market. The ICAP and the ICMAP have exclusive rights in their respective fields, but both are invading each other’s jurisdiction and are getting support from foreign bodies in fulfilling their self-centred interests.

Recently, the ICAP joined hands with CIMA, UK, to provide an opportunity to its members to get foreign management accounting qualification, whereas the ICMAP had earlier collaborated with ACCA UK to open avenues for its members to get foreign chartered accountancy. The ICAP Ordinance and the ICMAP Act allow the two statutory institutions to only regulate and promote their professions in the country.

The two bodies may enter into collaboration with foreign institutions, but those foreign institutions shall not become a threat for the growth of local qualifications in any way.

This has created a non-conducive environment for existing and prospective auditors. The business community and other stakeholders are relying up to some extent only on the 4-5 big audit firms.

The situation calls for an independent financial reporting council (FRC), which should bring in a mechanism that satisfies the compliance requirement. But this body should also ensure the protection of shareholders’ and investors’ rights in every area, including during the devising of rules and laws and their compliance.

The FRC rules should be convenient so they could be adopted by its users, and attract interest rather than develop fear. It should have the representation of the accounting bodies, management accountants, auditors, finance professionals, professional advisers, public sector finance leaders, entrepreneurs, economists, tax experts and business leaders.

In Australia, the UK and Singapore etc, the financial reporting council is the prime body responsible for overseeing the effectiveness of the financial reporting framework.

Transparent financial reporting is a building block for a performance-based economy. It ensures market-based monitoring of companies, which allows shareholders and the public to assess the management’s performance. High quality financial reporting may also contribute to improving the assessment and collection of taxes on corporate profits.

This is high time when our finance minister — who is from the accounting and finance profession — and when the finance act is underway, that the government constitute an FRC that comprises the ICAP, ICMAP, finance ministry, SECP and other segments of the society.

This would help improve financial reporting, disclosures, transparency and corporate governance, while also serving the interest of the state, investors, industry, trade and businesses.

Published in Dawn, Economic & Business, May 4th, 2015

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