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Need for financial reporting council

There is dire need to establish Financial Reporting Council (FRC) in Pakistan as an autonomous regulator to promote corporate governance and reporting to safeguard the interest of all stakeholders. The FRC will oversee accounting and audit profession through regulating the accounting bodies in Pakistan. The FRC should have representation of ICMAP, ICAP, PIPFA, Accountant General of Pakistan, Ministry of Finance, Stock Exchange, Academia, Federation of Chamber of Commerce and experts from other sphere of business community. It will not only attract investment but also strengthen accounting and auditing profession in Pakistan. It will bring transparency and eliminate some regulatory conflicts which otherwise will become severe and serious in coming days. The quality and dependability of financial reporting in Pakistan remained fail to get the confidence of concerned stakeholders but FRC is only solution and will assure corporate governance and reporting in private and public sector.

It may be possible that the existing regulators and accounting institutions are putting their hard to bring transparency and disclosures but they are restricted by their mandate and as a result maximization of share value and interest of shareholders are still not addressed as it supposed to be taken care. The focus of SECP is to have strong documentation leading to corporatization whereas FBR focuses towards revenue generation with the target to bring as many businesses into its network as possible. There is no two opinion about the measures they are taking towards documenting the businesses and revenue generation but all these measures should be seen from shareholders point of view because ultimate interest whether it relates to disclosure or profitability or taxation remains with the shareholders.

The Securities & Exchange Commission of Pakistan (SECP) is currently overseeing corporate governance within the corporate sector of which many activities are in line with international benchmarks of such Commission’s role whereas some of the functions performed has now been assigned to other authorities and bodies to ensure enhanced level of transparency. The Commission is envisioned to initiate and implement sound regulatory principles for the development of modern and efficient corporate sector and capital market leading to high economic growth and foster social harmony in the country. There are certain areas which are now globally looked after by separate bodies such as financial reporting council and audit assurance boards such as recently in Bangladesh, Financial Reporting Act has been passed to regulate and monitor auditing services. Similarly, FRC in UK and other countries provide sufficient reasons to have an independent organisation to also establish FRC in Pakistan. Keeping a separate role, SECP also had provision of Audit Oversight Board in Companies Ordinance which in a recent amended draft of new ordinance, with the name of Companies Bill 2016, has been eliminated. It shows that the Commission itself have views to have a board or council which may work independently to ensure audit and financial reporting services.

The purpose of any audit is to facilitate and streamline the activities so as to satisfy shareholders while taking care of all stakeholders including consumer, creditor, supplier and employees. The issue of satisfying shareholders is being intensified as all focus is remained only towards compliance and financial audit. Such compliances strengthen the controls but as a matter of fact it has also created a resistance due to the reason that awareness about its effectiveness and repercussions are not being effectively communicated to stakeholders. Despite financial audit well in place, the level of fraud and crime is still prevailing. The integrated reporting – mix of corporate and financial performance management, is a step towards shareholders’ interest but it is yet to be broadly implemented. All these areas need to be addressed for which there shall be an overseeing authority which should create an effective linkage of basic rights of all stakeholders, compliance and audit.

Throughout the world in general and Pakistan in particular, have been passing through issue of transparency and governance and this is the reason that lot of work has been done in this area specially in last two decades. Although there is a significant improvement in reporting but still there are grey areas that need not only to be fixed but special attention be given in an organised manner. There are still many businesses including SMEs and small traders working in Pakistan which either don’t know the importance of financial management or they do not consider it important for their operations and progress. There are many Chartered Accountants and Cost and Management Accountants produced by the two institutions namely ICAP and ICMAP but not more than 1/4th of them are in practice. Whatever their total strength, but it is the hard fact that they are unable to cater the size of businesses which is also growing at a much faster pace. If we will be unable to address this issue now then it would be beyond our control.

The auditors on the other hand never took responsibilities for shareholders on behalf of the companies they are appointed as auditors. They do not owe a duty of care any individual shareholder, creditor, employee or any other stakeholder affected by their negligence. Further, auditors are already well shielded from negligence lawsuits. As a matter of fact, rather than improving the quality of audit work, to safeguard the interest of shareholders and to reduce risks, the auditors and their industry demands and continues to receive liability concessions to improve its profits. In other walks of life, the threat of lawsuits and damages encourages organisations to improve the quality of their goods and services. In contrast, auditors receive liability concessions to shield them from the consequences of their own negligence. There is no theory or evidence to show that reduced liability somehow encourages organisations to improve the quality of products and/or services. With less accountability of auditors will have less economic incentives for auditors to be vigilant and to improve the quality of company audit. More audit failures are sure to follow. Hence, despite being long services of the auditors to the industry, financial transparency is still a question.

Commenting on audit failures at Enron, WorldCom, Global Crossing, Qwest and other scandals in his book The Roaring Nineties, Joseph Stiglitz, one time World Bank and President Clinton administration adviser, noted, Quote: “there are plenty of carrots encouraging accounting firms to look the other way … there had been one big stick discouraging them. If things went awry, they could be sued … In 1995, Congress adopted legislation intended to limit securities litigation … in doing so, they provided substantial [liability] protection for the auditors. But we may have gone too far: insulated from suits, the accountants are now willing to take more ‘gambles’.” Unquote

Under such situation, there is an immense need for independent “Financial Reporting Council” (FRC) which shall while keeping the interest of shareholders brings in a mechanism that should satisfy compliance requirement on one hand and shall also benefit shareholders. The lawmakers, parliamentarians and think-tank need to put thoughts to make legislation to create a body which should ensure shareholders and investors’ rights. These rights shall be protected in every field including devising rules and laws and their compliances. The FRC shall also make sure that rules are convenient to adopt by its users and it shall attract interest rather than to develop fear.

Foregoing above, the world is moving toward in the right direction and have established independent FRC to attract investment in private and public sector. The leading and growing economies of the world have given due importance to this area and it now depends on Pakistan that how early we can adopt these best practices.

In Australia, Financial Reporting Council (FRC) is a government’s statutory regulatory body prime body responsible for overseeing the effectiveness of the financial reporting framework in Australia. Its key functions include the oversight of the accounting and auditing standards setting processes for the public and private sectors, providing strategic advice in relation to the quality of audits conducted by Australian auditors, and advising the Minister on these and related matters to the extent that they affect the financial reporting framework in Australia. It has nominations from the government, business association, regulatory authorities and professional bodies and institutions such as CPA Australia, Chartered Accountants Australia and New Zealand and Institute of Public Accountants.

Similarly in United Kingdom, Financial Reporting Council exists. UK has 09 leading professional accounting, audit and taxation institutions ie, Institute of Chartered Accountants in England & Wales (ICAEW), Association of Chartered Accountants (ACCA), Chartered Institute of Management Accountants (CIMA), Association of International Accountants (AIA), Chartered Institute of Public Finance and Accountancy (CIPFA), European Accounting Association (EAA), Institute of Financial Accountants, Chartered Institute of Taxation (CIOT) and Institute of Internal Auditors (IIA).

In the UK, holders of ACCA/CAT, AAT, ACA, AIA, CA, ICAEW, ICAS, ICAI, CIFA or CIPFA and CCAB qualification/membership are allowed to perform audit and all these institutions / qualification are being regulated by either Financial Reporting Council (FRC) or some overseeing body such as CCAB, etc.

The Financial Reporting Council is the UK’s independent regulator responsible for promoting high quality corporate governance and reporting to foster investment. We promote high standards of corporate governance through the UK Corporate Governance Code. We set standards for corporate reporting, audit and actuarial practice and monitor and enforce accounting and auditing standards. We also oversee the regulatory activities of the actuarial profession and the professional accountancy bodies and operate independent disciplinary arrangements for public interest cases involving accountants and actuaries. The FRC has representation of banks, stock exchanges, business organisations, regulators, accounting firms, accounting council, civil organisations, investment companies, etc.

In Singapore, the Accounting Standards Council (ASC) was established under Accounting Standards Act of the government. It is responsible for prescribing accounting standards on Corporate Disclosure and Governance (CCDG). In addition to prescribing accounting standards for companies, the ASC will also prescribe accounting standards for charities, co-operative societies and societies. The creation of the ASC was a positive step towards ensuring consistency in accounting standards, facilitating comparison of financial statements between different entities and enhancing the credibility and transparency of financial reporting. The ASC is responsible only for the formulation and promulgation of accounting standards. The monitoring and enforcement of compliance with accounting standards will remain the prerogative of the respective regulators, viz. ACRA for companies, Commissioner of Charities for charities, Registrar of Co-operative societies for co-operative societies and Registrar of Societies for societies. It has the representation of ministries, regulators, audit firms, professional associations, banks and business communities.

In Mauritius, the Financial Reporting Council (FRC), a body corporate set up under the Financial Reporting Act 2004. It is an organisation under the aegis of the Ministry of Finance and Economic Development. The FRC is mainly responsible for promoting confidence in corporate reporting and good corporate governance. The Council main objects as defined in the FR Act are to promote the provision of high quality reporting of financial and non-financial information by public interest entities as well as highest standards among licensed auditors; to enhance the credibility of financial reporting and to improve the quality of accountancy and audit services.

In Hong Kong, the Financial Reporting Council (FRC) is an independent statutory body set up under the Financial Reporting Council Ordinance, 2006 and became fully operational on 16 July 2007.Its main role is to promote high quality financial reporting and better investor protection in Hong Kong. The main responsibilities of FRC are to investigate possible auditing irregularities and enquire into possible non-compliance with accounting requirements in relation to Hong Kong listed entities.

In Nigeria, the Financial Reporting Council (FRC) is a federal government agency established by the Financial Reporting Council of Nigeria Act, No 6, 2011. It works under the supervision of the Federal Ministry of Industry, Trade and Investment with objective to enhance the credibility of financial reporting and improve the quality of accountancy and audit services, actuarial, valuation and corporate governance standards. The FRC is responsible for developing and publishing accounting and financial reporting standards to be observed in preparation of financial statements of public entities in Nigeria. It also provides guidance on issues relating to financial reporting and corporate governance to professional, institutional and regulatory bodies in Nigeria.

In Canada, the Financial Reporting and Assurance Standards boards and oversight councils comprise the Accounting Standards Oversight Council, Accounting Standards Board, Public Sector Accounting Board, Auditing and Assurance Standards Oversight Council, and Auditing and Assurance Standards Board. The boards establish and maintain standards on accounting and auditing to serve the public interest. The oversight councils appoint board members and oversee and provide input into the boards’ activities, ensuring that the process for setting standards functions as it should.

In Bangladesh, a Financial Reporting Act 2015 (known as FRA 2015) has been passed by the Bangladesh National Assembly on September 6, 2015 with the aim of ensuring accountability and transparency in financial reporting procedures of the country. On September 9, 2015 the Act was officially published as the gazette of government of Bangladesh. The FRC will be the watchdog body to monitor the function of auditors and ensure transparency and accountability in accounting and auditing of financial organisations, including various autonomous and non-government institutions. All auditors and audit firms must register with the Financial Reporting Council.

In addition to independent Financial Reporting Councils, there are overseeing bodies to ensure transparency and governance that shall enhance the confidence of investors and stakeholders. Such overseeing bodies are operative under the name of Accountancy Commission, Accounting and Auditing Standard Setters, Accounting Standards Board, Accounting Standards Council, Accounting Standards Oversight Council, Auditing and Assurance Standard Boards, Business Accounting Council, Consultative Committee of Accountancy Bodies, External Reporting Board, Financial Accounting Foundation, Financial Accounting Standards Advisory Council, Financial Accounting Standards Board, Financial Services Council, Government Accounting Standards Board, Professional Accounting Council and Public Accountants Council.

The objective of all these commissions, councils and boards is to ensure financial reporting having disclosures to the satisfaction of investors and stakeholders. Some of the benefits are as follows:

— To promote private sector growth and investment in the sector;

— To strengthen countries’ financial architecture in order to reduce volatility and the risk of financial market crises;

— To contribute to foreign direct and portfolio investment;

— To help mobilize internal and domestic savings;

— To safeguard the interest of small investors in particular and large investors in general;

— To facilitate smaller-scale corporate borrowers to credit from the scheduled banks and formal financial sector;

— To take measures to boost investment by lowering the barrier of more formalities, massive information and borrowing costs for SME investors;

— To allow investors to evaluate corporate prospects and make informed decisions resulting in lower cost of capital and better allocation of resources;

— To facilitate integration into global financial and capital markets;

— To oversee accounting issues related to Audit, Financial Instruments, Fair Value, SMEs, Insurance, Impairment, Liabilities, Disclosure, Pensions, Financial Statement Presentation, Hedge Accounting, and Revenue Recognition.

— To develop and ensure implementation of standards related to Convergence, Consultations, Exposure Drafts, Standards, Interpretation, IFRS Adoption and Sarbanes-Oxley Act.

The transparent financial reporting is a building block for performance based economy. It ensures market-based monitoring of companies, which allows shareholders and the public at large to assess management performance, thus influencing behaviour and assessing outcomes. The high quality financial reporting may also contribute to improving the assessment and collection of taxes on corporate profits. There is need to establish a Financial Reporting Council in Pakistan to make the Accounting and Audit profession reliable. Such Councils will enhance credibility of professional institutions and will also address issues of foreign intervention to safeguard national interest at all levels.

In this view, there is a dire need to have (i) more and more accountants doing audit of financial disclosure; (ii) cost/system audit be made mandatory starting from large enterprises to SMEs and then traders; (iii) Financial Reporting Council under the leadership of Ministry of Finance (MoF) having representation of SECP, ICMAP and ICAP; (iv) the SECP laws may be broadened to provide wider opportunity to the qualified accountants to perform financial and cost audit and (v) FBR shall through their revenue/tax generation mechanism shall facilitate such controls and audits.

This would help improve financial reporting, disclosures, transparency and corporate governance while also serving the interest of the state, investors, industry, trade and businesses.

Muhammad Iqbal Ghori, "Need for financial reporting council," Business Recorder. 2016-07-10.
Keywords: Economics , Stock exchanges , Financial security , Local taxation , Economic growth , Financial statements , Australia , Pakistan , England , ACCA/CAT , AAT , ACA , AIA , CA , ICAEW , ICAS , ICAI , CIFA , CIPFA , FBR , SECP , ICAP , ICMAP , MOF , IFRS , FRC , FRA , CCDG , ASC , CCAB