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MEMBERS’ CONFERENCE On

ICAB. MEMBERS’ CONFERENCE On. Harmonization of Financial Reporting and Audit Practices: Bangladesh Perspectiv e. Dhaka – 23 February 2013. Anwaruddin Chowdhury fca Member Council & Past President ICAB, Director CAPA Board. Regulators, Standards Setters & Professional Bodies. 2. 3. 4.

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MEMBERS’ CONFERENCE On

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  1. ICAB MEMBERS’ CONFERENCE On Harmonization of Financial Reporting and Audit Practices: Bangladesh Perspective Dhaka – 23 February 2013 Anwaruddin Chowdhury fca Member Council & Past President ICAB, Director CAPA Board

  2. Regulators, Standards Setters & Professional Bodies 2

  3. 3

  4. 4

  5. 5

  6. 6

  7. 7

  8. 8

  9. 9

  10. PREAMBLE • Recent Developments – Impact on FR & AP • Global Scenario – Economic Recession (DAVOS/IMF) • Global Financial Crisis/ Euro zone Debt Crisis • Regulatory Failure – Sub-prime Lending / Derivatives • G-20 Pittsburg Summit 2009 Declaration • Critical Nature of Financial Markets • Convergence to Globally Harmonized High Quality Independent Accounting/FR Standards • Important Role of Accountants - Global Recovery • Simplification of FI Standards • Lessons Learnt & Way Forward 10

  11. PREAMBLE • Political implications of 9/11 • Corporate Frauds of New Millennium – Enron • Corporate Governance Failures (Greed) • Role of Auditors and Rating Agencies • Collapse of Arthur Andersons ? • Lessons Learnt / Way Forward • Strengthening CG Practices • Oversight Regulatory Bodies • ASEAN Financial Crisis (late 90s) • Inadequacy of Financial Reporting • Lessons Learnt / Way Forward 11

  12. IAS/IFRS AND ISA –GLOBAL ACCOUNTING/ REPORTING AND AUDIT CODES FOR HARMONIZATION OF FR & AP • Moving to IAS/IFRS – Rationale. • Forces Driving Harmonization • Accounting as ‘lingua franca’ –Dimensions • Role of IASB & IFAC (IAASB/IPSASB) • Role of IOSCO • Role of ISAR • Role INTOSAI 12

  13. HARMONIZATION OF ACCOUNTING AND FINANCIAL REPORTING PRACTICES /POSITIVE DIMENSION • Forces Driving Harmonization • General Considerations • Significance of IFRS Harmonization • Benefits of IFRS Harmonization • Harmonization Benefits to Multinationals • WTO Ministerial 1996 – Implications • G-20 Pittsburg Summit Declaration • European Convergence 2005 • American Convergence 2015 ? 13

  14. FACTORS DRIVING STANDARDIZATION • Deregulation & Liberalization of Economies • Accelerated Globalization Catalyzing Harmonization • Entry by Multinational Corporations • Increased External Competition • Need for Regional/Global HFR&AP • - Donors/Transparency/Corp Govnce. • Foreign Competitiveness – FDI • Increased Government/Society/Client Expectations • Rapidly Evolving Inform. & Comm. Technologies • Increased Clientele Knowledge & Changed Attitudes • Global Economic Scenario –Recession (GFC/EDC) • Transferability of Knowledge, Skills and Competence 14

  15. INTERNATIONAL STANDARDS SETTING BODIES • Standard Setting Bodies • IFAC • - IAASB = ISA/IAPS (Prvt Sec AudStds) • - IPSASB= IPSAS (Publ Sec AccgStds) • IASB = IFRS (Prvt Sec Accg/FR Stds) • INTOSAI = ISSAI (Publ Sec AudStds) • UNCTAD ISAR = (Prvt Sec AccgGudls) 15

  16. STANDARDS SETTING/ADOPTION PROCESS • Standard Setting Process • IAS/IFRS • ISA/IAPS • ICAB Adoption Process • BAS/BFRS • BSA/BAPS • IPSAS (OCAG) • ISSAIs(OCAG) 16

  17. INTERNATIONAL STANDARDS SETTING BODIES/PROCESS Accounting Auditing IASB IFAC (Steering Comm) (IAASB) (Exposure Drafts) (Discussion Drafts) IFRS (formerly IAS) ISA (and IAPS) 17 17 17

  18. HARMONIZATION MEANING • Harmonization of Financial Reporting refers to the process of standardized convergence through overcoming inconsistencies and narrowing differences in accounting principles and treatment (recognition and measurement) and presentation (disclosure) of items in Financial Statements. Harmonization of Audit refers to the process of standardized convergence through overcoming inconsistencies and narrowing differences in conducting the audit (methodology application) and reporting on the audit of Financial Statements (audit report). HFR&AP ensures greater accountability of management decisions and credible transparency of reported financial information - thereby enhancing good governance in corporate sectors and providing reliable information to user groups (stakeholders) for decision making purposes. 18

  19. NEED FOR IAS/IFRS HARMONIZATION • Implementation of International Best Practices • Global Convergence of Accounting/FR Regimes • IOSCO Compliance- Cross Border Listing of Securities • Enable Structured Uniform Presentation of FS • Encourage Global Investment Opportunities • Facilitate Cross-border Mergers and Acquisitions • Credibility of FS by Regulators & Stakeholders • Reduce Capital Cost for Foreign Companies • Ensure Global Comparability of Financial Statements • - Accounting Principles, Treatment (Recognition & Measurement) • - Presentation/Disclosure of Items in FS 19

  20. BENEFITS OF IFRS HARMONIZATION • Global Comparability of Financial Information • Access to Foreign Capital Markets • Credibility of Domestic Capital Markets for FDI • Reduced Cost of Capital to Foreign Companies • Compliance with GATS/WTO Provisions • Greater Objectivity in Audit of FS • Reduced National Standard setting Costs. • Local Implementation Guidelines, Adaptation • Global Professional Credentials - Transparency - Understandability - Relevance - Reliability 20

  21. HARMONIZATION BENEFITS TO MULTINATIONALS • Improved Accessibility to Foreign Investor Funds. • Improved Management Control • Enhanced Appraisal Facilitation • Ensures Foreign Stock Exchanges Compliance • Permits Consolidation of Subsidiaries and Associates • Audit Costs Reduction • Transferability/Mobility of Accounting Personnel • Determination of Global Tax Assessments 21

  22. HARMONIZATION OF AUDITING PRACTICES • General Considerations • Stewardship System of Financial Reporting • Audit Administration Methodology • Significance of ISA Harmonization • Benefits of ISA Harmonization 22

  23. ACCOUNTABILITY FOR STEWARDSHIP SYSTEM OF FINANCIAL REPORTING Shareholders Directors Auditor Ownership Management 23

  24. AUDIT ADMINISTRATION PROCESS Initial Discussion Knowledge of Business Risk Assessment Letter of Engagement Accounting System & Internal Control Planning Controlling Documentation Evidencing Review of Financial Statements Commencement of Audit Audit Methodology Post Audit Review Completion of Audit Submission of Audit Report Audit Report 24

  25. HARMONIZATION OF PUBLIC SECTOR ACCOUNTING AND AUDITING PRACTICES • Objectives & Dimensions • Strengthening PSFM/Public Sector Accg & Audit • OCAG Accounting & Auditing Function • Implementation of D.E. Accrual Accounting • Application of IPSAS in PS Accounts • Application of ISSAIs in PS Audits • Performance Audit/Environment/Forensic Audits 25

  26. GOVT / PUBLIC SECTOR FINANCIAL ACCOUNANTABILITY Stakeholders Govt. Agencies Constitution SAI / CAG CAG FUNCT ACT-1974 Ownership Citizens 26

  27. PUBLIC SECTOR PURVIEW • IPSASB Framework • “Public sector refers to Governments, Regional Government, Local Governments & Related Government entities including Agencies, Boards, Commissions & Enterprises” • Bangladesh Public Sector - All Arena of Public Services: • Government Ministries • Divisions /Directorates / Departments • Government Sub-Ordinate Offices • Local Government Authorities • Autonomous/Semi-Autonomous Bodies • Public Sector Corporations • Foreign Aided Projects (SCOPE/SPEMP B) • State Owned Enterprises (SOEs) • State Owned Bank (SOB) • Hospitals/Educational Institutions etc. • LGIs –City corps, Municip, UPs 27

  28. IMPORTANCE OF FINANCIAL REPORTING SYSTEM FOR GOVERNMENTS / PUBLIC SECTOR • Increased Accountability/Transparency of Public Funds • Developing Public Sector Awareness of Govt. Spending • Credibility of Financial Information for Public Trust • Timeliness for Good Governance and Decisions • Increased Credibility for Attracting FDI • Assurance to Development Partners • Improved Sovereign Rating Awards • Efficient Financial Reporting System for Economic Development & Public Welfare. 28

  29. GOVERNMENT PUBLIC SECTOR REPORTING - CASH / ACCRUAL ACCOUNTING Cash Accounting (SE) Cash Flows Budget Cash Flows Actuals Revenues, Expenses Budget Revenues, Expenses Actuals Accrual Accounting (DE) Assets, Liabilities Estimate Assets, Liabilities Actuals 29

  30. CASH-BASIS IPSAS: TRANSITION STEP TO ACCRUAL IPSAS (OCAG BANGLADESH) Accrual Accounting IPSAS 1-32 (Accrual DE) Cash-Basis IPSAS (Transition Step) Current policies (Cash SE ) 30

  31. ACCRUAL AND CASH ACCOUNTING : AN INTEGRATIVE APPORACH Accrual and Cash Accounting are Fully Integrated Adoption of Cash-Basis IPSAS is Facilitated Requiring Direct Method Cash Flow Statement 31

  32. PUBLIC SECTOR AUDITOR’S ROLE • Determining Oversight • Facilitating Foresight • Increasing Insight • Conducting Objective Independent Financial Audit • Conducting Performance/VMA Environment and IT Audit • Enhancing Economy, Efficiency & Effectiveness • of Resources Utilization of Audit Entities • Meet Expectations of Development Partners • Ensuring Transparency of Financial Information • Assuring Accountability of Management Decisions • Combating Corruption, Misuse & Wastage 32

  33. PUBLIC SECTOR AUDIT FOCUS • Emphasis on Expenditure • Availability of Budget • Authorization By Competent Authority • Payment Acknowledged By Right Person • Government Rules And Procedures Complied • Expenditures Properly Classified • Justification Of Expenditures • Emphasis on Cash Expenditures And Cash Income - Not on Accruals (Cash Basis IPSAS) 33

  34. PROSPECTIVE HARMONIZATION NEEDS • Harmonization for SME Reporting • Harmonization for NGO/MFIs Reporting • Harmonization for Sustainability Reporting • Harmonization for Integrated Reporting • Harmonization for Alternative Financial System • Harmonization for Other Forms of Reporting Entities 34

  35. REGIONAL HARMONIZATION OF FINANCIAL REPORTING AND AUDIT PRACTICES • South Asian Federation of Accountants (SAFA) • Confederation of Asian & Pacific Accountants (CAPA) • Role of Regional Harmonization Role • Standardization of Adoption Process • SAFA BPA & CG Awards – Positive Dimension • ICAB National Awards for BPA&R • – Catalyst for Best Presented Corporate Reports (Highest Winner in SAFA contest) 35

  36. INSTITUTIONAL LEGAL REGULATORY FRAMEWORKS IN BANGLADESH • Responsibility for Preparation & Audit of FS • Legal Regulatory Framework • -CA/SER/BCA/IA/Listing Rules • - RJSC/SEC/BB/IDRA/Stock Exchanges • ICAB - Role / Bye Laws • Current Adoption Status – (Appendices) • Legal Enforceability of Standards • Implementation Status of Standards 36

  37. FINANCIAL REPORTING IN BANGLADESH REGULATORY AND INSTITUTIONAL FRAMEWORK • Annual FS are prepared and presented within a framework of recognized accounting principles, rules and regulations some mandatory some recommendatory. • CA 1994 provides basic requirements for accounting and reporting of all companies - Silent about IAS/BAS. • SER 1987 [Rule 12 (2) & (3)] requires mandatory compliance with the adopted IAS/IFRS and the ISA. • BCA ‘91 mandates reporting formats and disclosures • IA ‘12 Compliance requirements • Govt Orders – Public Sector corporations/SOEs/SOBs • NGOs and MFIs Accounting and Reporting • Tax Laws Effecting FR Presentation (Non-Listed) 37

  38. ADOPTION STATUS OF STANDARDS IAS/IFRS & IPSAS = Appendix I & III • Total IAS Extant = 29 • Total Adopted = 28 • Not Adopted = 01 (Hyperinflation) • Total IFRS Issued = 13 • Total Adopted = 12 • Not Adopted = 01 (Fin Ins) • IFRS on SMEs = Adopted (1-1-13) • IPSAS Issued 33 = Not Considered by ICAB • (Cash IPSAS by OCAG) • SIC/IFRIC = Not Adopted by ICAB 38

  39. ADOPTION STATUS OF STANDARDS ISA /IAPs & ISSAIs – Appendix II & IV • Total ISA Issued/Extant 36=All Adopted • IAPS Issued & Adopted= 8 • ISA Framework, BSQC1, Glossary = Adopted • IFAC Code of Ethics, BSQC1 = Adopted • IFAC SMOs (7) = Fully Compliant • ISSASIs Issued 37 = Not Considered by ICAB • (Implemented by OCAG) 39

  40. ENFORCEABILITY STATUS OF ADOPTED STANDARDS • Legal Mandate – • Statutorily Enforceable for listed companies under SEC Rules 1987 (including Banks, Insur Cos & NBFIs). No legal observance requirement in CA/other statutes • Professional Mandate – • Not yet professionally mandatory/Enforceable through CA Bye-Laws 1973 • Other Considerations 40

  41. CHALLENGES AND PROSPECTS OF HARMONIZATION IN BANGLADESH • Challenges/Limitations of Harmonization • = Refer Conference Paper • Major Challenges • Opportunities /Prospects • = Refer Conference Paper • Major Prospects 41

  42. MAJOR CHALLENGES • Major Challenges - Standard Setting/Adoption stage • Speedy adoption of IFRS & ISA suffers from lack of technical and financial resources. • Existing laws sometime contrary to IFRS provisions, acting as major impediments to the adoption process. • Fair Value Accounting Limitations – market imperfections; lack of familiarization, information flow and reliability of available data & stats. 42

  43. MAJOR CHALLENGES • Major Challenges at Implementation Stage • Management Mindset –Averse to Changes • Lack of awareness, understanding & application skills by preparers and auditors about IAS/IFRS and ISA • Lack of accountability of management decisions and transparency of financial information • Lack of resources, knowledge, technical skills and competence of regulatory agencies to monitor /enforce compliances with Standards. 43

  44. MAJOR CHALLENGES • Need for constant updating • Fund and technical resource constraints to monitor implementation of IAS/IFRS & ISA • Lack of mandatory legal compliance provisions • Lack of implementation guidelines for BAS/BFRS • Low level of audit fees • Demand–supply gap of qualified accountants • FVA limitations-market imperfections • Concerted training program on IAS/IFRS and ISA • Capacity building and institutional development of regulatory agencies and professional bodies • Technical assistance for training • Mandate Professional enforceability of standards 44

  45. MAJOR PROSPECTS • Mindset Changes – Regulators/Business Entities • Transformation of Corporate Culture • Significant Improvement in Financial Reporting Practices • SAFA BPA & CG Awards- Positive Dimension • ICAB National Awards for BPAR- Catalyst for Remarkable Corporate Reporting Harmonization • Corporate Governance Practices • Role of SAFA/CAPA in Regional Harmonization • Credit Rating Requirement • QAB -Incentivization for Harmonization • Proactive Role of ICAB : • - PPP for Improved Quality Assurance with OCAG • - Training of NBR/BB Officials/ Others Agencies 45

  46. POLICY ISSUES & RECOMMENDATIONS • Policy Issues & Recommendations • = Refer Conference Paper • Major Issues & Recommendations • NO FRA / FRC B • = Superimposition of Redundant Oversight Body 46

  47. MAJOR ISSUES AND RECOMMENDATIONS • Composition of multi-disciplinary Task Force for HFR&AP • Different reporting regimes need to be established for: • Public limited companies (listed & unlisted) • Large private companies • Small & medium sized entities (SMEs) • State owned enterprise (SOEs) • NGOs & MFIs • Other Forms of entities- Cooperatives • Strategic Project - capacity building/institutional development project should be undertaken of ICAB • TRC & QAB of ICAB should be strengthened • Effective Seminars/Workshops – Stds Dissemination • Preparation of Implementation Guidelines for Stds 47

  48. MAJOR ISSUES AND RECOMMENDATIONS • Listed Cos must employ qualified accountants • Audit/Professional Fees Enhancement • Awareness of IAS/IFRS & ISA in Entities & Auditors • SAFA/CAPA platform for regional Harmonization • Mandatory implementation of Corporate Governance practices (codes) for strengthening HFR&AP • Broadening credit rating mandate • Refer Conference Paper 48

  49. THE WAY FORWARD • Enabling Environment for Application of Standards • Capacity Building/Strengthening of Institutions • Regulatory Mandate for Application of Standards • Establish SEC/ICAB Joint Monitoring Board • Stimulate Changes Leadership Decisions for HFR&AP • Strengthening Learning Partnership with ICAEW • OCAG PPP for Improved AQA Knowledge Sharing • Impart Knowledge Sharing Training (NBR/BB) • Adequate Implementation of ICAB Strategic Plans • Finalization of ICAB Council Composition Reforms • Top Priority – No Superimposition of FRC 49

  50. CONCLUSION • Application of harmonized Standards impact positive dimension for achievement of qualitative characteristics to reflect high quality globally comparable true & fair view Financial Statements • Standard-setting/adoption should be sustained as a progressively continuous process • Government must legislate, the Business, Profession and Regulators must work cohesively to ensure convergence onto IAS/IFRS & ISA - thereby playing their due roles for HFR&AP • Think global > See regional > Act local 50

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