Task force suggests separate auditors' panel for IPO proposals

Task force of the capital market has recommended criteria for individual auditors to be eligible to examine financial statements that issuers submit with IPO proposals; the main objective is to make them answerable for any misconduct.

It said auditors would have to score at least 60 on a scale of 100 to be on the list of auditors' panel from where companies will hire a relevant person for auditing their pre-IPO (initial public offering) financial accounts.

Scores will be determined based on one's experience in the auditing job and their professional integrity. For example, a partner of an audit firm will get 15 points if they have work experience for at least 15 years. Another 7 points will be added if the auditor has the experience of auditing at least 10 IPOs as a partner of the audit firm.

The partner would get 15 more points if he/she has no record of facing any disciplinary action or penalty in the previous five years.

"Experience and integrity of individual partners [of any audit firm] matter for good, credible outcomes. That's why the task force has laid importance on the qualifications of individual partners," said a member of the task force wishing not to be named.

While the individual minimum score is important to qualify for the job, the firm that eligible partners work with must also earn a score of 40 out of 100 points on the basis of its experience and the nature of partnerships between members.

The panel of IPO auditors will have 20 qualified members, as recommended by the task force.

Presently, there is a panel of 36 firms for auditing listed companies. A company willing to go public also has to get an audit done by a firm from the BSEC panel.

The panel is formed based on the guidelines of the securities regulator but no gazette notification has been issued on the guidelines by the regulator.

Talking to the FE, BSEC spokesperson Md. Abul Kalam said the market watchdog was working to revise the guidelines for the selection of auditors to examine the financial health of listed firms.

"We are framing the guidelines in such a way that it will be accepted by the FRC (financial reporting council) and the central bank," said Mr. Kalam. Public opinions will be sought on the guidelines before incorporating them into a law.

He made it clear that the auditors' panel meant to probe IPO proposals will be separate from the panel responsible for financial scrutiny of more than 350 listed firms.

In its recommendations, the task force said an enlisted partner, even if he/she represents an audit firm, will be solely responsible for their activities.

An audit firm may have members with expertise in separate areas, such as IT sector. For instance, only one partner out of the three of an audit firm may have the ability to audit listed companies but the two other partners will also be allowed to conduct financial scrutiny of listed enterprises if the audit firm is in the BSEC panel.

"It creates a problem and the reputation of the firm is at stake [in that case]," said the task force member.

Individual auditors enlisted in the panel of IPO auditors should be accountable for any misconduct committed by them, said the task force. The scoring will facilitate the selection process of qualified auditors.

If a firm having an experience of 30 years has got itself embroiled in a scandal whereas another firm with 5-year experience has a clean image, partners from the latter will be eligible for the panel of IPO auditors.

Did the BSEC panel serve the purpose?

In 2016, the securities regulator for the first time formed a panel of 40 audit firms to audit financial statements of the listed entities.

The panel has been revised from time to time. Although the securities regulator said it had formed the panel based on a set of guidelines, the criteria set for appointing the auditors have not been made public.

Though the audit panel was meant to contain irregularities in the audited financial statements of corporate entities, many auditors have been found guilty of wrongdoings.

In July 2019, the BSEC removed Ahmad & Akhtar Chartered Accountants from the BSEC list over allegations of anomalies in the financial report of Coppertech Industries, prepared by the firm's managing partner Kanchi Lal Das.

Among other scams, the managing director of FAR Group, Abdul Kader Faruk appointed four auditors to manipulate the financial statements of Ring Shine Textiles to make the company appear good for listing.

Industry insiders raised questions about the eligibility criteria for auditors to be on the BSEC panel. They suspect that political or personal allegiance might have been considered in choosing auditors by the regulator.

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