Only FRC-listed auditors can audit listed firms

The Financial Reporting Council (FRC), an independent government regulatory body, is imposing new obligations on the audit of about 5,500 public interest entities (PIEs), including companies listed on the country's capital market.

Under the new rules, only auditors enlisted with the FRC will be able to audit PIEs, and firms that are willing to carry out these audits will need to apply for enlistment with the council by 30 May.

From among the enlisted auditors, the council will form separate auditor panels for the Bangladesh Bank, the Bangladesh Securities and Exchange Commission (BSEC), and other regulatory bodies.

The council will set up the panels in the next six months, FRC Chairman Md Hamid Ullah Bhuiyan said at the "CMJF Talk" organised by the Capital Market Journalists' Forum (CMJF) on Monday.

He said that worldwide the FRC is the regulator of auditors, but that has not been the case in Bangladesh. CMJF General Secretary Abu Ali moderated the event, which was presided over by its President Ziaur Rahman.

What are public interest entities?

Companies with significant public interest because of the nature of their business, size, number of employees, or corporate status, including banks, insurance firms, and listed companies, are considered to be public interest entities.

Initially, a company with revenue of Tk5 crore or more, assets worth Tk3 crore, and liabilities worth Tk1 crore used to fall into this category.

According to the new rules, a company with revenue of at least Tk50 crore or more, assets worth Tk30 crore or more, liabilities of Tk10 crore or more, and human resources of at least 50 people is considered a PIE.

Even if the revenue of the microcredit institutions is not Tk50 crore, they will be treated as PIEs.

The number of PIEs in India is 6,500. A company with revenue of Rs. 1000 crore, assets worth Rs. 500 crore, and liabilities of Rs. 500 crore falls into this category.

Hamid Ullah Bhuiyan said on the basis of revenue, about 3,400 companies will be covered by the FRC. Around 2,000 microcredit lenders will also come under the purview of the council.

Penalty for flawed audits

Bhuiyan said that there are two types of financial reports of Silver Composite Textile Mills. It submitted the highly overstated reports to banks for loans. But there cannot be separate financial reports by the same auditor.

However, the council could not take action against the auditor as it was not FRC-listed. It was later let go with an undertaking not to make such mistakes again.

Then, action has been taken against auditors at various times for preparing flawed financial reports. The FRC has penalised auditors through the Institute of Chartered Accountants of Bangladesh (ICAB).

Meanwhile, the certificates of practice of 13 auditors have been cancelled, and another 30 firms have been barred from posting their audit reports in the central data system.

Currently, there are about 250 audit firms and 800 individual auditors in the country.

'Distortion of the capital market'

Bhuiyan termed Robi Axiata and Walton's going public by issuing a small number of shares as "distortion of the capital market".

He stressed the need for bringing large private companies to the capital market for its development, saying 30% ownership of such companies entering the market should be shared with institutional and marginal investors.

The FRC chairman said Robi entered the market with only 9% of its shares, of which a major part was given to its employees, and Walton entered the market with less than 2% of its shares.

"I think it is a distortion of the capital market. Can you guess how much the company's market capitalisation has increased as a result of issuing these shares?" he wondered.

Bureaucratic tangles in making rules

Due to bureaucratic complications, there is a lot of delay in making rules.

As an example, Hamid Ullah Bhuiyan said, "A desk has been set up with an additional secretary in the finance ministry. But after I took charge of the FRC, four officers changed. When someone new takes over, it means a fresh start, or we need to apprise him of all the matters anew."

"It took a year and a half to draft the enlistment rules for auditors. The draft has been submitted for the formation of another rule, which is long overdue for a gazette notification."

'Capital market control is essential'

Bhuiyan said, "After appointing the manpower in the FRC, we will start looking into the financial reports of the companies listed in the capital market. This is because marginal investors suffer due to manipulation in the financial reports of listed companies."

"Many companies do not have price-sensitive information. But the price is going up."