11/19/2016

TheFinancialexpressbd

Publish:06Feb,201600:00:00

ProposedFRCneedscorporategovernancefocus
JavedSiddiqui

TheenactmentoftheFinancialReportingAct(FRA)byParliamentlatelastyearpavedthewayfortheformulation
of a Financial Reporting Council (FRC) in Bangladesh. The concept of an independent regulatory body for
overseeingthefinancialreportingprocessisnotnovel.Theaccountingscandalsintheearlierpartofthiscentury
triggered a global movement that has seen the public accountancy profession to gradually move from self
regulationtoindependentregulations.Maybe,itisBangladesh'sturntofollowsuit.Sincetheenactmentofthe
FRA,therehasbeenalotofdebates,mainlysurroundingthestructureandfunctionsoftheFRC.Thepurposeof
thisarticle,however,istoinitiateadiscussiononthemainfocusoftheproposedFRCinBangladesh.

Anindepthanalysisofthehistoryofaccountingsuggeststhataccountingreformsaregenerallytriggeredbyhigh
profileaccountingscandalsthatresultinsignificantlossinmarketconfidence.Typically,regulatorsallaroundthe
worldrespondtosuchacrisisbypromulgatingnewregulations.Sucharesponsenotonlyhelpsrestoreadegreeof
confidenceinthemarket,butalsosometimeslegitimisestheircontinuedexistenceasregulators.Inlinewiththis
trend,thefallofEnronandotherhighprofilescandalsatthebeginningofthiscenturybroughtaboutsignificant
changesfortheaccountancyprofession,includingashiftfromtraditionalselfregulationtoindependentoversight.
However, rather than concentrating on accounting regulations, the independent regulatory bodies in most
countries actually focused on bringing in significant changes in the corporate governance regulatory arena. For
example,intheUK,theFinancialReportingCouncil(FRCUK)wascompletelyrevampedin2004tobringtogether
allpublicaccountancyoversightbodiesunderoneumbrella.OneofthemajorfunctionsoftherevampedFRCUK
wastorevisetheexistingCombinedCodeofCorporateGovernanceintheUK.Atthattime,itwasrecognisedthat
thelongtimeexistenceandsuccessofacompanywouldonlybepossibleatthepresenceofaprudentcorporate
governance structure. The existence of such mechanisms would lead to longterm wealth creation and
subsequentlybenefittheinvestorsimmensely.

Thebankingcrisisin2008triggeredfurtherreformsinthestructureoftheFRCUK.Thistime,theFRCUKwas
restructuredtocreatetwomaindivisions:thecodesandstandardsdivision,andtheconductdivision.Themain
purposeofthecodesandstandardsdivisionistoupdatecodesofcorporategovernanceandrelatedaccountingand
auditing standards. On the other hand, the conduct division would monitor the application of such codes and
standards.Thus,therecentrestructuringoftheUKFRCreemphasisesitsfocusoncorporategovernancereforms
andcompliance.

Despitehavingacapitalmarketthathaslittleconnectionwithglobaleconomy,Bangladeshwasnotimmuneto
postEnron reforms in the financial reporting arena. As part of its Observance of Standards and Codes (ROSC)
2003 programme, the World Bank identified the need for an independent oversight body for the public
accountancy profession in Bangladesh. However, the World Bank's involvement with the FRC project ended in
2006,withthedraftingoftheFRAbill.Sincethen,thedraftFRAwentthroughanumberofmajorrevisionsand
changes.

TherealimpetusonthepassingontheFRAcameafterthestockmarketcollapseof2010andthesubsequentloss
ofconfidenceinthemarket.Interestingly,unliketheEnronorotherhighprofilecollapsesthattriggeredregulatory
interventioninUSAandtheUK,thestockmarketcollapsein2010inBangladeshwasnotdirectlylinkedtoany
accounting or auditing failures. Rather, the report of the governmentformed enquiry committee on the stock
marketcollapsesuggestedcolossalfailuresofcorporategovernanceandregulatoryoversightmorethananything
else. Therefore, if a regulatory intervention was necessary, it should have been in the area of corporate
governanceregulatoryreforms.However,themainfunctionsoftheFRCdonotseemtoincludedevelopmentof
corporate governance mechanisms. Rather, the FRC appears to be entirely focused on regulating the public
accountancyprofession.

It needs to be acknowledged that financial statement auditing operates as part of a wider network of mutual
assuranceandcodependency.Thequalityofworkofanauditorisdirectlylinkedtothelevelofassuranceprovided
bytheinternalcontrolmechanismswithinthecompany.Inasense,financialstatementauditingprovidesathird
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TheFinancialexpressbd

line of defence for the shareholders. The corporate governance structure, including the ownership pattern of a
company,andthecompositionofimportantboards,isalwaysthefirstlineofdefence.Thisisaidedbytheworkof
internalauditors,whoprovidethesecondlayerofdefence.

Bangladeshisoneofthefewcountriesintheworldwithoutacodeofcorporategovernancethatisapplicabletoall
publicinterestentities.TherearecorporategovernanceordersissuedbytheBangladeshSecuritiesandExchange
Commission (BSEC) and the Bangladesh Bank, but these are only applicable for listed and banking companies
respectively,leavingthevastmajorityofpublicinterestentities(includingunlistedpubliclimitedcompanies,large
charities and NGOs) to operate in a virtually unregulated space. This raises serious concerns regarding the
protection of investors' interests. Even for the regulated, listed companies, the state of corporate governance
portrays a largely grim picture. The high degree of family ownership in the corporate sector in Bangladesh has
givenrisetoacorporateculturewherethevalueofcorporategovernancemechanismsareusuallyundermined.
Thus, important corporate decisions are made in informal family meetings, sometimes making formal board
meetingsasymbolicpractice.

Thenarrowdefinitionof'families'intheexistingcorporategovernanceregulations,borrowedmostlyfromwestern
settings, has allowed close family members to occupy important positions within the board. The scarcity of
qualifiedandskilledindividualsinthecorporatesectorhasresultedinasmallpoolofnonexecutivedirectorsthat
thecompaniescanchoosefrom,givingrisetoafamiliaritythreatthatwouldunderminetheroleofnonexecutive
directors as an important corporate governance mechanism. The role of audit committees has remained largely
questionable, mainly due to the tendency of choosing family members (allowed due to the narrow definition of
families in the existing regulations) and close associates as members of the audit committee. Also, Bangladesh
doesnothavesufficientnumbersofqualifiedinternalauditors.

Understandably,likeanyotherpublicaccountancyprofessionintheworld,theauditingprofessioninBangladesh
also needs to go through a continuous reforms process so that it remains globally competitive. Especially, the
InstituteofCharteredAccountantsofBangladesh(ICAB)needstodoabetterjobincreatingabetterbrandimage
forthepublicaccountingprofessionalsinBangladesh.However,itneedstoberealisedthataccountingreformson
itsowncannotbringinthedesiredoutcomesintermsofmarketconfidence.Rather,suchreformswouldneedto
besupplementedbycomprehensiveandfarreachingreformsintheareaofcorporategovernance.Attheendof
the day, auditors can only provide an opinion on financial statements produced by the management, and the
qualityofanauditwoulddependonthequalityofsuchfinancialstatements,withorwithouttheFRC.Hence,for
the sake of making the proposed FRC more effective, more discussions appear to be necessary not only to
determine its optimal structure, but also to identify issues that it should address on a priority basis, corporate
governancebeingone.Otherwise,therewouldbelimitedjustificationsforputtingthecartbeforethehorse.

Dr Javed Siddiqui is Associate Professor of Accounting at the Alliance Manchester Business School, University of
Manchester,UK.

javed.siddiqui@manchester.ac.uk

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