Stock manipulation: The role of auditors

An article published in the November 09, 2017 issue of the Financial Express titled 'The Role of the FRC in the Economy' gives an outline of FRC's journey, leading to 2015. The 'cold war' of accountants, the writer, Md. Toufique  Hossain, a faculty at the Royal University of Dhaka, has referred to, is, however, his own perception. It was indeed a professional approach.

As a matter of fact, Bangladesh had been pondering about the formation of a financial reporting council since 2003. This was materialised in 2015  when the present writer was the president of the Institute of Chartered Accountants of Bangladesh (ICAB). So the Chartered Accountants (CAs) got the FRC over them as watchdog from the government.

Mr. Toufique  has, however, righty mentioned that the Auditors do not prepare the Financial Statements (FS). Indeed, in the Auditors Report features a disclaimer under the paragraph, Managements Responsibility: Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards (IFRS) and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. As such, the preparation of FS does in no way falls within the ambit of Auditors of the company, as was pointed out in the article under consideration.

Only on the Financial Statements, signed & duly owned by the Company, the Auditors put their signature with an opinion. Auditors may not sign in the components of FS like Statement of Financial Position, Statement of Comprehensive Income and Statement of Changes in Equity & Cash Flow Statement, etc., in cases where these are printed in the letter Heads of Company. In those cases the Auditors can do away with the misnomer of their being one in preparation of these. Because the FS reflect the operational result of a period or year run by the management, Auditors cannot take nor accept this onus on them, both theoretically and practically. They perform this task on tests applied on randomly picked up samples.

The purpose of Audit is wrongly perceived as bringing in books the delinquent reporting. How the Auditors can influence the day-to-day price movement of stock prices? This is a big question? Mr. Hossain has talked about price bubbles & crashes in stock market trying to link these with Audited Financial Statements. Again, the Auditors perform Audit of FS after 2/3 months of closing of accounts on June 30 or December 31 when financial statements are prepared & authenticated by management. The FRC would surely evaluate these realities. The Bangladesh Securities and Exchange Commission (BSEC) currently is the oversight body of daily matters of the Stock Market.

The purpose of FRC is implied in its own name, the Financial Reporting Council. This means this council is entrusted with the task of dealing with Financial Reporting (FR). Who does the FR - is not an ambiguous question. The financial reporting comes from the entrepreneurs or, for that matter, it is the enterprise management's responsibility. The issue of International Financial reporting Standards (FRS) & International Accounting Standards (IAS) and other regulatory regimes and compliance thereof stems from the preparer. Indeed, the core responsibility of Financial Reporting is with those who make the Financial Statements. The onus lies, prima facie, on the management as preparer of Financial Statements. The Financial Reporting Act also indicates this. Consequently, the Auditors' cannot in any way be held liable for the preparation of Financial Statement. That is why the disclaimer of preparation of FS is given in Auditors Report.

Who prepares the FS? It is the enterprise management's onus. Of course, in most cases, especially of publicly listed companies, we find Chartered Accountants & other Qualified Accountants as CFOs or Chief Accounting Officers. But FS is signed evidencing to be owned by the Entrepreneurs when Directors or Board people authenticate it.

When the members of the Board of Directors sign the FS as per Section 189 of the Companies Act 1994, the Financial Statement obtains the ownership of management. That is why when the Auditors find Financial Statements are signed by the Management these are primarily sent to the company for signing off by them to evidence authentication and ownership. The likelihood or widely perceived apprehension of Auditors' role in price manipulation or day-to-day speculations of stock prices is ridiculous. It is apparently a blame game to defame Auditors. This blame game misguides the investors who think Auditors have impacts on market mechanism or price bubbles. In Bangladesh, Auditors have not ever been held responsible by any report on Stock Market scam, including the one by Ibrahim Khaled in 2010.

The Audit is done in compliance with sections 210, 211, 212, 213,215, 217 of the Companies Act 1994. The Act lays down the Auditors responsibilities & penalties of Auditors in its sections 218 & 219. The punishment & penalty clauses about Auditors are in the Companies Act already. The rights & obligations of Auditors are also specifically enshrined in the Act.

Let the FRC take its own course. If it can save the market from upheavals, we shall appreciate its birth or else, think twice for better options from the Government. Auditors would prove themselves innocent in the playing field of stock market. They do not want to be scapegoats any more.

Masih Malik Chowdhury, FCS FCA was President of Institute of Chartered Accountants of Bangladesh in 2015.

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