Getting numbers right in company financials

The Financial Express October 19, 2019 

Numbers in the financials of companies, listed or otherwise, are always important. No less important is the role of the auditors who prepare the financials. Their honesty and integrity do matter most, particularly in the case of companies seeking to go public or those which are already listed on the bourses. Given such important role being played by the auditors in the corporate world, the Bangladesh Securities and Exchange Commission (BSEC) has rightly decided to include on its ‘Panel of Auditors’ the names of auditors along with audit firms. As of now, the BSEC panel includes only the names of audit firms, not those of auditors. Listed companies are required to employ only the audit firms that are on the panel.

It is understood that the securities regulator does not put an audit firm on its panel only going by the name of the latter. Rather it is expected to put greater emphasis on the track record of auditors manning the firm and their professional integrity. The inclusion of auditors’ names in the BSEC panel might also help the listed companies to make a choice from among the auditors included in the panel.

There is no denying that audit of listed companies remains a problematic area. Allegations of irregularities in the preparation of financials by the listed companies and also those seeking to float initial public offerings (IPOs) have been found to be widespread. The problem with the financials of IPO-seeking companies has been more prominent. In a number of cases, investors were misguided by inflated profit figures of the pre-listing days of companies. The BSEC had not been adequately sensitive to the quality of financials of the IPO- seeking companies and also of the listed ones until the latest collapse of the market in 2010.

However, problems with quality of financials is nothing unique in the case of Bangladesh. Even the developed world does encounter incidence of corporate frauds in the case of audit reports. The role of the audit firm Arthur Anderson & Company in the collapse of US corporate giant Enron in 2001 does remind people time and again how investors could be misguided by doctored books of accounts. Following the Enron collapse there was a growing scepticism whether accountants were able to police themselves.

The detection of irregularities in maintenance of accounts by a section of listed companies in Bangladesh, from time to time, has also put to question the professional honesty and integrity of some audit firms. Effectiveness of the Institute of Chartered Accountants of Bangladesh (ICAB), the professional body of the auditors, as a voluntary watchdog has also come under scrutiny. In response to demands coming from relevant quarters, the government has, finally, put in place an independent regulatory body named the Financial Reporting Council (FRC). However, the FRC, because of some limitations, is yet to make its presence felt in true sense.

Hopefully, the FRC would soon overcome its limitations and ensure that the companies prepare their financials truthfully. It needs to be watchful in the case of companies willing to go public and the ones that are already listed on the bourses. The current moribund state of the country’s stock market does highlight the lack of investors’ confidence. A section of investors tend to believe that the companies are not truthful while preparing their financials. However, this problem can be sorted out through united and serious efforts on the part of BSEC, FRC, ICAB and other stakeholders.