Flawed audit oversight system in Pakistan — II
The scope of proposed FRC model for Pakistan should cover monitoring auditors of all
The writer is president of the Institute of Cost and Management Accountants of Pakistan
Readers, especially from the accounting and finance community, have given an overwhelming and encouraging response to the first part of my article on the flawed audit oversight system in Pakistan published last Sunday. It is a good omen that the professional community is realising the dire need for forming an independent regulatory body for the auditing profession that should conform to international standards.
Insight on global audit oversight models
The International Forum of Independent Audit Regulators (IFIAR) is a viable source of information on global audit oversight function. Majority of members on oversight boards are outside the auditing profession and include retired professionals such as lawyers, academics, professional bankers, former civil servants, directors or former directors of leading companies; representatives of the central bank, regulators and government departments.
In France, the members of audit oversight board, ie, High Council for Statutory Audit (H3C) are appointed by the government and comprise 12 members. Three members are magistrates (civilian officers who administer the law); three members with qualification in finance and economics; three statutory auditors; one member from academia; a finance ministry representative and head of financial markets authority. In Romania, there is a ‘Council for the Public Interest Oversight of the Accounting Profession’ which comprises seven members, out of which only two represent the audit professional bodies (CECCAR and CAFR), whereas others are non-practitioners. Other members include President of Romanian Trading Chamber; representatives from the finance and justice ministries; Romanian National Bank and Authority for Financial Services.
Five members of the Canadian Public Accountability Board (CPAB) are non-accountants. There are three professional accountants with professional accounting designation on the board who are not partners or directors in any audit firm. Two other members have oversight regulatory experience. In Germany, the Audit Oversight Commission (AOC) has nine non-practitioner members including a Chairman who by profession is a professor of accounting and auditing at a German university. The other members on the commission represent the academia, business, judiciary and government organisations.
In Finland, there are two basic criteria for composition of public oversight body, known as Tilintarkastusvalvonta, ie, at least two members should be lawyers by profession, whereas the other five to eight members must have a good understanding of audit. Other members are by default outside the audit profession. In Malaysia, the Audit Oversight Board (Lembaga Pemantauan Audit) consists of seven members, including executive chairman and six non-executive members, all of them are independent from the audit profession. In Switzerland, board members of the Federal Audit Oversight Authority (FAOA) are independent from the audit profession with a term of four years and are appointed by the Swiss government (Federal Council). The board consists of a maximum five members and must be persons of expert knowledge. There are no other criteria.
The Sri Lanka Accounting and Auditing Standards Monitoring Board (SLAASMB)is headed by Director of Central Bank of Sri Lanka and its governing board constitute 13 members out of which only three members are practicing accountants nominated by ICA Sri Lanka . Other members are nominated by government and private sector organization including the academia.
In Turkey, the Public Oversight, Accounting and Auditing Standards Board is composed of nine members and appointed by the Council of Minister. All members are independent from the auditing profession. Even Botswana, a small southern African state, has an accounting oversight authority whose board members are independent from the audit profession. The nine ex-officio members of Botswana AOA include representatives from government and private sector. Two professional accountants are also appointed on board by the finance minister on recommendation of ex-officio members.
Ideal audit oversight model for Pakistan
The ideal role of an independent oversight system is that it should be free from any influence; have adequate check and balances, independence and transparent dispensation. Above all, it must safeguard the interests of all the stakeholders. In this perspective, if we see the Pakistan model of Audit Oversight Board, we find that equal standards for all professions have not been maintained. The professionals of one accounting body have been provided opportunity to continue their supremacy and enjoy monopolistic rights under the guise of the oversight board. This is contrary to the global practice as we see that in South Africa, India and some other countries, the external audit regulatory bodies have been set up outside of the profession and they are also setting limits on the number of chartered accountants sitting on the boards.
The self-regulation drawbacks, questionable standard of audit and ineffectiveness of existing regulatory mechanism have therefore rendered the creation of an independent and powerful Financial Reporting body which could also regulate the auditing firms and make them accountable to the public.
The suggested FRC-model must operate in the public interest. It must have greater oversight powers to tackle corporate governance issues with financial autonomy. It must also ensure that audit firms are confined to audit only and they may not be allowed to market consultancy services to their clients. In Germany and UK, the auditors are prohibited from selling consultancy services to audit clients. Pakistan should, therefore, also adopt global audit standard practice as we are doing in adopting the International Financial Reporting Standards (IFRS).
The scope of proposed FRC model for Pakistan should cover monitoring auditors of all listed and non-listed companies instead of confining it merely to public interest companies. The TORs of existing Audit Oversight Board (AOB) mentions that its funds shall be utilized for AOB’s own affairs as well as for affairs of Quality Assurance Board of ICAP. This use of funds for another body is questionable as it is not seen elsewhere.
As already discussed, the membership of FRC should be broad and come from wide constituency to ensure that public interest is adequately represented. The presence of a management accountant (FCMA/ACMA) on the proposed Finance Reporting body is highly recommended as per international practice. The Public Company Accounting Oversight Board (PCAOB) has five members on the board including the chairman, out of which one member; Jeanette M. Franzel also holds the qualification of a ‘certified management accountant (CMA)’. She is on the board of PCAOB since 2012 and making efforts towards overseeing audits of public companies in order to protect the interests of investors in the US. Similarly, in Sri Lanka, three members of the Sri Lanka Accounting and Auditing Standards Monitoring Board (SLAASMB) viz S N Jayasinghe, PL C Peiris and N Sivapragasam are ‘certified management accountants (FCMAs) by qualification. Furthermore, in the Botswana Accounting Oversight Authority, one member namely Ramasedi is an FCMA from CIMA UK. These examples are ample proof of the fact that management accountants have vital role of audit oversight boards. It also testifies that wherever recognised bodies of management accounting profession exists like in the US, Britain, Canada, Australia, Sri Lanka, etc, the nominated members of such bodies are a part of the financial reporting authorities.
Lastly, it may be clarified that this article must not be construed as a vilification campaign against any profession or institution rather it is meant only to engage all the stakeholders for paving the way for developing a sound policy and autonomous regulatory framework in order to safeguard private sector and investments in the country.
It is concluded that the regulation of profession under the supervision of an independent public oversight system would definitely lead to strengthening public confidence in the accounting profession. This would also raise the performance, quality as well as independency and objectivity of auditing profession.
(Concluded)
Published in The Express Tribune, September 17th, 2017.
Insight on global audit oversight models
The International Forum of Independent Audit Regulators (IFIAR) is a viable source of information on global audit oversight function. Majority of members on oversight boards are outside the auditing profession and include retired professionals such as lawyers, academics, professional bankers, former civil servants, directors or former directors of leading companies; representatives of the central bank, regulators and government departments.
In France, the members of audit oversight board, ie, High Council for Statutory Audit (H3C) are appointed by the government and comprise 12 members. Three members are magistrates (civilian officers who administer the law); three members with qualification in finance and economics; three statutory auditors; one member from academia; a finance ministry representative and head of financial markets authority. In Romania, there is a ‘Council for the Public Interest Oversight of the Accounting Profession’ which comprises seven members, out of which only two represent the audit professional bodies (CECCAR and CAFR), whereas others are non-practitioners. Other members include President of Romanian Trading Chamber; representatives from the finance and justice ministries; Romanian National Bank and Authority for Financial Services.
Five members of the Canadian Public Accountability Board (CPAB) are non-accountants. There are three professional accountants with professional accounting designation on the board who are not partners or directors in any audit firm. Two other members have oversight regulatory experience. In Germany, the Audit Oversight Commission (AOC) has nine non-practitioner members including a Chairman who by profession is a professor of accounting and auditing at a German university. The other members on the commission represent the academia, business, judiciary and government organisations.
In Finland, there are two basic criteria for composition of public oversight body, known as Tilintarkastusvalvonta, ie, at least two members should be lawyers by profession, whereas the other five to eight members must have a good understanding of audit. Other members are by default outside the audit profession. In Malaysia, the Audit Oversight Board (Lembaga Pemantauan Audit) consists of seven members, including executive chairman and six non-executive members, all of them are independent from the audit profession. In Switzerland, board members of the Federal Audit Oversight Authority (FAOA) are independent from the audit profession with a term of four years and are appointed by the Swiss government (Federal Council). The board consists of a maximum five members and must be persons of expert knowledge. There are no other criteria.
The Sri Lanka Accounting and Auditing Standards Monitoring Board (SLAASMB)is headed by Director of Central Bank of Sri Lanka and its governing board constitute 13 members out of which only three members are practicing accountants nominated by ICA Sri Lanka . Other members are nominated by government and private sector organization including the academia.
In Turkey, the Public Oversight, Accounting and Auditing Standards Board is composed of nine members and appointed by the Council of Minister. All members are independent from the auditing profession. Even Botswana, a small southern African state, has an accounting oversight authority whose board members are independent from the audit profession. The nine ex-officio members of Botswana AOA include representatives from government and private sector. Two professional accountants are also appointed on board by the finance minister on recommendation of ex-officio members.
Ideal audit oversight model for Pakistan
The ideal role of an independent oversight system is that it should be free from any influence; have adequate check and balances, independence and transparent dispensation. Above all, it must safeguard the interests of all the stakeholders. In this perspective, if we see the Pakistan model of Audit Oversight Board, we find that equal standards for all professions have not been maintained. The professionals of one accounting body have been provided opportunity to continue their supremacy and enjoy monopolistic rights under the guise of the oversight board. This is contrary to the global practice as we see that in South Africa, India and some other countries, the external audit regulatory bodies have been set up outside of the profession and they are also setting limits on the number of chartered accountants sitting on the boards.
The self-regulation drawbacks, questionable standard of audit and ineffectiveness of existing regulatory mechanism have therefore rendered the creation of an independent and powerful Financial Reporting body which could also regulate the auditing firms and make them accountable to the public.
The suggested FRC-model must operate in the public interest. It must have greater oversight powers to tackle corporate governance issues with financial autonomy. It must also ensure that audit firms are confined to audit only and they may not be allowed to market consultancy services to their clients. In Germany and UK, the auditors are prohibited from selling consultancy services to audit clients. Pakistan should, therefore, also adopt global audit standard practice as we are doing in adopting the International Financial Reporting Standards (IFRS).
The scope of proposed FRC model for Pakistan should cover monitoring auditors of all listed and non-listed companies instead of confining it merely to public interest companies. The TORs of existing Audit Oversight Board (AOB) mentions that its funds shall be utilized for AOB’s own affairs as well as for affairs of Quality Assurance Board of ICAP. This use of funds for another body is questionable as it is not seen elsewhere.
As already discussed, the membership of FRC should be broad and come from wide constituency to ensure that public interest is adequately represented. The presence of a management accountant (FCMA/ACMA) on the proposed Finance Reporting body is highly recommended as per international practice. The Public Company Accounting Oversight Board (PCAOB) has five members on the board including the chairman, out of which one member; Jeanette M. Franzel also holds the qualification of a ‘certified management accountant (CMA)’. She is on the board of PCAOB since 2012 and making efforts towards overseeing audits of public companies in order to protect the interests of investors in the US. Similarly, in Sri Lanka, three members of the Sri Lanka Accounting and Auditing Standards Monitoring Board (SLAASMB) viz S N Jayasinghe, PL C Peiris and N Sivapragasam are ‘certified management accountants (FCMAs) by qualification. Furthermore, in the Botswana Accounting Oversight Authority, one member namely Ramasedi is an FCMA from CIMA UK. These examples are ample proof of the fact that management accountants have vital role of audit oversight boards. It also testifies that wherever recognised bodies of management accounting profession exists like in the US, Britain, Canada, Australia, Sri Lanka, etc, the nominated members of such bodies are a part of the financial reporting authorities.
Lastly, it may be clarified that this article must not be construed as a vilification campaign against any profession or institution rather it is meant only to engage all the stakeholders for paving the way for developing a sound policy and autonomous regulatory framework in order to safeguard private sector and investments in the country.
It is concluded that the regulation of profession under the supervision of an independent public oversight system would definitely lead to strengthening public confidence in the accounting profession. This would also raise the performance, quality as well as independency and objectivity of auditing profession.
(Concluded)
Published in The Express Tribune, September 17th, 2017.