Making FRC a strong actor

The financial reporting regulatory space in Bangladesh has suddenly turned a little turbulent in recent times, with two of the major actors, the Financial Reporting Council (FRC) and the Institute of Chartered Accountants of Bangladesh (ICAB) engaged in what appears to be a war of words against each other. According to a recent article published in the Financial Express on August 22, 2022, the FRC has written to various ministries of the government accusing the ICAB of overstepping its authority. The FRC appeared particularly dissatisfied with the ICAB's attempt to propose some amendments to the Bangladesh Chartered Accountants Ordinance of 1973 bypassing the independent oversight body for the public accountancy profession. The FRC also claimed that they were the sole regulator of the public accountancy profession in Bangladesh. In response, the ICAB issued a strongly worded rejoinder (published in the Financial Express on August 25, 2022) refuting such claims. The ICAB reminded the FRC that unlike many other professional bodies, it was established on the strength of a government charter, giving it complete autonomy to regulate the profession. The ICAB also mentioned that the proposed changes to Bangladesh Chartered Accountants Ordinance of 1973, which in FRC's view, was outside the scope of ICAB's work, were in response to a government request to translate the ordinance in Bengali and make it more up to date. Both the ICAB and the FRC, however, seemed to have enough confidence that the Ministry of Commerce would make the right call to resolve the differences in opinion. Therefore, it can be expected that the current stalemate would be over soon. However, the tension between two of these major actors in the audit regulatory space is unlikely to disappear quickly. This is primarily due to the process through which the FRC was promoted and established. 

Historically, the accounting regulatory space in Bangladesh had been occupied by two major players-- the ICAB and the Institute of Cost and Management Accountants of Bangladesh (ICMAB) for a long time. The members of the ICAB primarily provide financial accountancy and auditing services, whereas the members of the ICMAB focus on the cost and management accountancy area. The ICAB was established by the Chartered Accountants Order of 1973 (President's order no 2 of 1973) for the purpose of 'regulating the profession of accountants and for matters connected therewith' (The Bangladesh Chartered Accountants Order, 1973). In the decades that followed, the ICAB acted as a primary regulator for the financial auditing profession in Bangladesh, engaging itself in activities ranging from development and adoption of financial reporting standards to taking disciplinary actions against its own members.  

Consequently, chartered accountancy started being viewed as a highly prestigious profession and an attractive career option for many. During this period, the ICAB, however, also attracted significant amount of criticism for its failure to ensure high quality audit on a consistent basis. This is, however, primarily due to the family-dominated corporate culture in Bangladesh, where corporate governance mechanisms, including external audit, is sometimes viewed as intrusive and unnecessarily burdensome.  

Following the collapse of Enron, the global public accountancy profession moved from a self-regulation model to an independent oversight model, with independent oversight bodies, such as the PCAOB in the USA and the FRC in the UK, gradually taking responsibility of watchdogs for the profession.  In Bangladesh, the idea of an independent oversight body for the public accountancy profession was not home-grown. Rather, the notion of an independent oversight body for the public accountancy profession first came from a World Bank (2003) Report on Observance of Statutes and Codes (ROSC).  The ROSC (2003) proposed that the FRC, the secretariat of which might be 'housed' within the Bangladesh Securities and Exchange Commission (p. 12), should monitor and enforce the accountancy and auditing requirements for preparation of general-purpose financial statements.  Although the establishment of the FRC was actively promoted by the World Bank, the government took a considerable amount of time to establish the body. This is perhaps due to confusion among policymakers over the rationale behind this new oversight body. The structure of the FRC, and the scope of its sweeping power also drew considerable criticism from many stakeholders. Eventually, the Financial Reporting Act was passed in parliament in 2015, paving the way for establishment of the FRC. 

Fast forward to 2022, five years since its inception, the FRC still seems to be struggling to establish itself as a strong actor within the financial accounting regulatory space in Bangladesh. Understandably, the FRC's ability to operate efficiently has been severely handicapped by its resource constraints.  

For any new actor entering an established regulatory space, it is important to quickly establish its own legitimacy. This can be achieved strategically by recruiting persons of indisputable repute and expertise to leadership positions. These leaders would not only have sufficient social capital that are widely recognised and appreciated, but also established networks with important stakeholder to be able to lead the organisation pragmatically. Visibility issues can be addressed to some extent by connecting with the relevant stakeholder groups and co-hosting high-profile events. For example, the FRC can consider co-hosting a series of theme-based events jointly with organisations such as the ICAB, ICMAB, FBCCI, MCCI, the BSEC, the stock exchanges, and with universities. This will provide the organisation with some much-needed media attention and will help gradually establish its legitimacy within the regulatory space. The FRC also needs to spend a considerable amount of time in understanding the audit profession in Bangladesh and the way it operates. It is common knowledge that the audit fees paid by even listed companies in Bangladesh are amongst the lowest in the world. This is partly due to the management's treatment of external audit as an unnecessary deterrent and only a regulatory requirement. The Bangladesh corporate sector still does not appear to understand the value of good quality audit and corporate governance mechanisms. Although the ICAB has a chart of fees, it is hardly implemented. As a starting point, it might be of help for the FRC to sit with related stakeholder groups, including management of listed companies, and agree audit fees that can allow auditors to perform an audit of reasonable quality. This, along with a focus on corporate governance practices that allow the production of high quality financial statements, can go a long way in enhancing audit quality in Bangladesh, and elevate the reputation of the FRC.  

Javed Siddiqui is a Professor of Financial Reporting at the Alliance Manchester Business School, the University of Manchester. 

[email protected]