BSEC to curb leeway of unruly auditors

The securities regulator on several occasions felt that their hands were tied against auditors, which had helped market intermediaries commit financial frauds, to the disadvantage of investors.

The auditors were not from the panel that the Bangladesh Securities and Exchange Commission (BSEC) formed and revised from time to time for the listed companies to choose from for the audit of their financial statements. The panel was aimed at making auditors accountable to the regulator.

However, market intermediaries -- mutual funds, asset managers, merchant banks, portfolios managers, and the custodians -- do not fall within the purview of the measure taken to ensure accountability.

When the BSEC discovered that financial statements did not reflect the true position of the companies concerned, it was unable to take action because the auditors involved were under other bodies of governance, such as Financial Reporting Council (FRC) and the Institutions of Chartered Accountants of Bangladesh (ICAB).

Often, the BSEC was not happy with actions taken by FRC or ICAB. Auditors got away by paying a nominal penalty, said Md Abul Kamal, a BSEC director.

Hence, the securities regulator through a directive made it mandatory for the market intermediaries to hire auditors from the panel so that it can check financial crimes detrimental to the capital market.

It will declare any firm of chartered accountants, or an auditor, if found guilty, ineligible to carry out audits of any entity registered with the commission for a maximum period of five years, according to the directive issued on Thursday.

The regulatory order also makes it obligatory for all registered entities to submit financial statements within the stipulated time as per their governing rules or within 90 days after the end of a financial year, whichever comes later.

"The regulator has issued the order in an effort to ensure accuracy of the financial statements of all market intermediaries," said Mr Kamal. Scams prompted the regulator to make the move, he added.

For example, the fund manager of Universal Financial Solutions (UFS) embezzled Tk 2.35 billion from four mutual funds. Money kept in FDR (Fixed Deposit Receipt) was also siphoned off but the auditor, instead of raising a red flag, certified that everything was alright.

Auditor did not play the due role when a top official of Alliance Capital set aside funds from the accounts of the mutual funds that it managed. When the financial anomalies are not addressed in the financial audits, unitholders and investors pay a heavy price.

Now, if an auditor is excluded from the auditors' panel because of any wrongdoings, it will suffer damage to its reputation.

Earlier, the BSEC blacklisted Ahmed Zaker and Co. after one of its partners failed to draw attention to financial mismatches in the audit report of a listed company. The audit firm then expelled the partner from the organisation and pleaded with the regulator to get it back in the panel.

The BSEC stuck to its position. The audit firm went to the High Court and received an order in favour of its inclusion in the panel.

The BSEC did not budge and in June this year appealed against the HC order.

Stock exchanges, brokers and dealers, and alternative investment funds have separate sets of rules determining how to appoint auditors and so they will stay beyond the latest disciplinary action.

The securities regulator issued the order in compliance with the Securities and Exchange Ordinance, 1969.

It say, "notwithstanding anything contained in any other law for the time being in force, the commission can issue, by orders in writing, directions as it deems it fit to any stock exchange, stock dealer, stock broker, issuer or investor, or any other person associated with the capital market".

BSEC Director Mr. Kalam said the new provision introduced under the ordinance would be incorporated in the rules to make it permanent.

Underlying challenges

The BSEC panel of auditors, which is revised from time to time, has 39 members. Up until now, they served listed companies and the entities willing to float IPOs (initial public offerings).

The work volumes of the panel auditors will significantly increase as all registered entities, including mutual funds and fund managers, will seek to appoint them.

"It [regulator] needs to see whether the existing panel of auditors will be capable of auditing all registered entities and funds," said Asif Khan, chairman of the EDGE Asset Management.

"It is, however, a good step for the market," He said.

BSEC spokesperson Mohammad Rezaul Karim said the regulator might expand the panel if necessary.

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