The Bangla Spring: An opportunity to recalibrate the country’s audit regulatory architecture

The unprecedented student movement of July has presented Bangladesh with an enormous opportunity to revamp and repair its important institutions. In the banking sector alone, thousands of crores of taka have been siphoned over the last 15 years. Loans were extended against collaterals that either did not exist, or were grossly exaggerated. Related party transactions, where bank owners formed a syndicate to provide reciprocal credits to each other, were rampant. 

All these events raise questions regarding the efficacy of governance mechanisms in the private sector. There might be an urgent need for revising the existing Corporate Governance Code, especially to curb family influence in the board. However, this article will focus on an integral aspect of corporate governance: external auditing. All these troubled banks were externally audited, and received clean chits. Yet, we see very little discussion regarding such audit failures. 

This 'absence' of auditors in discussions relating to corruption, transparency and accountability, raises serious questions regarding the quality of auditing, and the status of the auditing profession in Bangladesh. The corporate sector in Bangladesh is characterised by a high ownership concentration, where important decisions are often made in family meetings, rather than in board meetings. These companies view external auditing as an unnecessary deterrent. Moreover, the Bangladesh capital market does not really appreciate the value of a quality audit. 

This has resulted in the creation of a vicious cycle, where even large listed companies are only prepared to pay a minimal amount of audit fees, and in turn, poorly paid auditors cannot perform a fair job, essentially harming the quality of the audit. The Bangla Spring, led by students with a strong appetite for change, gives us a chance to break this status quo. In what follows, this article proposes a number of audit regulatory reforms that the policymakers might want to take note of.

Revamping the Financial Reporting Council (FRC)

In 2016, the government established the FRC as a new regulator for financial reporting, auditing and audit firms in Bangladesh. However, even after nine years since its inception, the FRC has very little to show in its progress report. At times, various ex-chairs of the FRC openly expressed their sheer helplessness in regulating businesses controlled and owned by powerful businessmen who had close connections with politicians. The composition of the FRC's council, which allows the council to be dominated by bureaucrats, has also not helped its cause. 

In order for the FRC to function better, the regulator needs to be allowed to operate independently. This can only happen when the council generates its own income and is run by its own employees, rather than waiting for the government to provide it with financial and logistical support. The council needs to be revamped completely to allow professional accountants, both from practice and the corporate sector, to be able to participate in the decision making process of the FRC. 

In addition, the FRC can benefit from the presence of an advisory group, allowing a wider range of stakeholders, such as trade bodies, academics, human rights activists, and journalists who can hold them accountable for its activities. At the moment, several functions of the council overlaps with the functions of two professional accountancy bodies, the Institute of Chartered Accountants of Bangladesh (ICAB) and the Institute of Cost and Management Accountants of Bangladesh (ICMAB) that it is supposed to regulate; this needs to be streamlined. Also, practicing auditors should only be required to pay annual registration fees either to the FRC or the professional bodies they are members of. 

Scope of FRCs work

At the moment, the FRC regulates a very large number of public interest entities (PIEs) in Bangladesh. Given that a well-established regulator such as the Bangladesh Securities Exchange Commission (BSEC) still struggles to regulate 350 odd companies listed in the stock exchanges due to capacity limitations, it would be rather unrealistic that the FRC would be able to regulate a significantly larger number of companies. 

There was a recent attempt to redefine PIEs in order to manage the workload of the FRC, but this requires another serious rethink. The FRC should also be able to take leadership in promoting emerging issues, such as Environmental, Social and Governance (ESG) disclosure and audit, which would be pivotal in defining the role of the auditors. There is a recent initiative in many western economies to make audit more socially relevant. As the case of post-Rana Plaza certifications in the RMG sector in Bangladesh has demonstrated, stakeholders can actually appreciate the role of audits if it caters to its needs. 

Recruitment and remuneration of auditors

The exceptionally poor levels of audit fees offered in Bangladesh has lowered the quality of audits, and discouraged top students to join the profession. FRC needs to find a way to ensure that auditors, at least in listed companies in Bangladesh, receive a reasonable amount of audit fees that allows them to perform a decent job. The regulator can set minimum audit fees for companies based on their size, complexity,  and industry, and ensure that these are being implemented. Moreover, in Bangladesh, audit firms are recruited by company executives, putting auditors in a strange situation where they have to negotiate their fees with the persons whom they are supposed to audit. This situation can be avoided by assigning audit committees with the responsibility to recruit auditors–a practice commonly followed in many parts of the world. 

In addition to such regulatory reforms, there is a need for reviewing the governance structures of the two professional accountancy bodies: the ICAB and the ICMAB. These professional bodies need to strongly rethink if their governance structures actually can cater to the needs of the accountancy profession in Bangladesh, and especially, the aspirations of the younger generation of accountants. 

Professor Javed Siddiqui is a Professor of Auditing and Corporate Governance at the Alliance Manchester Business School, the University of Manchester, UK.

Views expressed in this article are the author's own. 

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