Accounting Environment

Md. Saiful Alam, PhD FCMA

Professor
Dept. of Accounting & Inf. Sys.
University of Dhaka
Agenda
• Introduction
• Global Bodies
• Local Bodies
– Institutional Arrangements
– Regulations

• Accounting Scandals and Changes in Environment

– Scandals
– Changes
– Public Oversight System

• POS in BD
– FRC

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Introduction

• The forces or factors that directly or indirectly influence the affairs of

accounting can be termed as the accounting environment.
– For example, the reporting practices of any Bangladeshi listed company is affected by

– the Companies Act,

– securities exchange rules,

– listing requirements and other regulatory requirements of Bangladesh

– the industry norms,

– global best practices,

– international requirements of concerned industry etc.

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Therefore…

Accounting Environment

Global Bodies Local Bodies

Regulations
Institutional Arrangements

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Global Bodies

• International Accounting Standards Board (IASB)

• International Federation of Accountants (IFAC)
• International Organization for Securities Commission (IOSC)
• World Trade Organization (WTO)
• International Monetary Fund (IMF)
• The World Bank

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IASB
• IASC (1973) to IASB (2001)

• Operates under the oversight of IFRS

foundation and works as an
independent private sector body to
develop and approve IFRSs.

• 17 IFRSs and 28 IASs effective for the

preparation/presentation/disclosures of
the Financial Statements

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IFAC
• The International Federation of Accountants (IFAC) was established in 1977 at the 11th World
Congress of Accountants.
– To serve the public interest by continuing to strengthen the worldwide accountancy profession and contributing to the
development of strong international economies by establishing and promoting adherence to high-quality professional
standards, furthering the international convergence of such standards, and speaking out on public interest issues
where the profession’s expertise is most relevant.

• At present, IFAC has 179 member and associate member organizations in 130 countries,
representing more than 2.5 million accountants in public practice, education, government service,
industry, and commerce.

• It has five different boards that set out standards for use in practice, develop professional code of
ethics and devise guidelines for the accountants.

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IOSCO
• IOSCO brings together the world's securities regulators and is recognized as the
global standard setter for the securities sector.

• IOSCO develops, implements and promotes adherence to internationally recognized

standards for securities regulation.

• One of the objectives of IOSCO is that members have to cooperate in developing,

implementing and promoting adherence to internationally recognized and consistent
standards of regulation, oversight and enforcement in order to protect investors,
maintain fair, efficient and transparent markets, and seek to address systemic risks.

• In September 2013, IOSCO and the IFRS Foundation announced agreement on a set
of protocols to improve consistency in the implementation of IFRS. (The Statement
of Protocols for Cooperation on International Financial Reporting Standards).

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WTO
• Established in 1995, the World Trade Organization (WTO) is an international agency
dealing with the rules of trade between nations.

• Immediately after its establishment in 1995, WTO in a ministerial meeting in 1996

encourages the successful completion of international standards.

• One of the expectations from the member countries of the WTO is that they should
adopt measures to follow global accounting standards (e.g. IFRSs).

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IMF and World Bank
• Following the emerging market crises of the 1990s, the IMF’s and the
World Bank’s work on standards and codes was initiated.
– Countries are motivated to adopt international standards and codes so that greater
economic and financial stability at both the domestic and international levels can be
achieved.

• The IMF and the World Bank have recognized international standards
in 12 policy areas, segregated in 3 broad categories, related to their
work.
– One of such category is institutional and market infrastructure where the IMF and the
World Bank recommends IASB’s IFRSs as the acceptable accounting standards.
– Set IFRS compliance as preconditions for financial and technical assistance.
– In frequent interval, World Bank prepare Reports on the Observance of Standards and
Codes (ROSC) which document the compliance status of respective country regarding
standards and codes.
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Local Bodies
• Bangladesh Securities and Exchange Commission (BSEC)
• Bangladesh Bank
• Institute of Chartered Accountants of Bangladesh (ICAB)
• Institute of Cost and Management Accountants of Bangladesh
(ICMAB)

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BSEC
• As a member firm of IOSCO, BSEC is committed to the IOSCO’s
commitment to the convergence of IFRSs for financial reporting of
listed companies.
• Moreover, the Securities and Exchange Rules (SER) 1987, as
amended in 1997, requires all listed entities to comply mandatorily with
the requirements of all applicable IAS/IFRSs, as adopted by the
Institute of Chartered Accountants of Bangladesh-ICAB, in the
preparation and presentation of their financial statements.
• However, full convergence is yet to come due to the inconsistencies in
prevailing accounting regulatory framework, namely Companies Act,
BSEC Ordinances and IFRSs (Nurunnabi, 2014).

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Bangladesh Bank
• Banks and NBFIs are subject to the requirement of Bank Companies Act
1991, amended in 2013 and 2017.

• As per the Act, Banks are required to prepare and present their financial
statements as per Bangladesh Accounting Standard (BAS) 30 (similar to IAS
30).

• However, IASB issues several other standards (IAS 32, 39 and IFRS 7, 9) for
the recognition, measurement and disclosure of financial instruments, most of
which are relevant for banks and NBFIs of Bangladesh.

• Moreover, Bangladesh Bank at regular intervals issues policy directives in

various accounting matters including loan-loss classification, provisioning,
contingent items recognition etc.

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ICAB
• As a member of IFAC, ICAB has to comply with IFAC’s Statement of Membership Obligations
(SMO) dealing with audit quality, education, disciplinary procedures, and code of professional
ethics.

• IFAC’s compliance program is supported by the international development community through the
Memorandum of Understanding to Strengthen Accounting and Improve Collaboration (MOSAIC)
program.

• ICAB is also committed in converging with the global accounting and auditing standards.

• Following World Bank’s ROSC and IFAC’s MOSAIC, the audit profession has gone through some
significant reforms in recent years. Major initiatives include-
– twinning arrangement with Institute of Chartered Accountants of England and Wales (ICAEW) for sustained improved
in education and training provided by the ICAB; and
– the establishment of ICAB’s Quality Assurance Division (QAD) requiring each audit firm to be visited once in every 3
years.

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 Accounting Scandals and the Changes in Accounting Environment

Scandal and Company Major Accounting Fraud

Year
Enron Scandal Enron The company had been using accounting loopholes to hide billions of
2001 Corporation was dollars of bad debt, while simultaneously inflating the company’s
a US energy, earnings. The scandal resulted in shareholders losing over $74 billion
commodities, as Enron’s share price collapsed from around $90 to under $1 within a
and services year.
company.
WorldCom WorldCom was a WorldCom had inflated its assets by almost $11 billion. The company
Scandal 2002 US had underreported line costs by capitalizing instead of expensing
telecommunicati them and had inflated its revenues by making false entries.
ons company.
Satyam Scandal Satyam The company misrepresented its accounts both to its board, stock
2009 Computer exchanges, regulators, investors and all other stakeholders. Basic
Services was an facts such as revenues, operating profits, interest liabilities and cash
Indian IT balances were grossly inflated to show the company in good health.
services and Nearly $1 billion—or 94% of the cash—on the books was fictitious.
back-office
accounting firm.

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Key Changes
• Sarbanes-Oxley Act (SOX) 2002 and Other Regulations

• Establishment of Public Oversight Systems (POS) For example-

– PCAOB was established in USA in 2002

– Financial Reporting Council (FRC) in the United Kingdom,

– FRC in Australia,

– Auditor Oversight Body (AOB) in Germany,

– the Certified Public Accountants and Auditing Oversight Board (CPAAOB) in Japan,

– the National Financial Reporting Authority (NFRA) in India and

– in Canada the Canadian Public Accountability Board (CPAB)

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FRC in Bangladesh
• Back in 2003, the World Bank recommends Bangladesh to establish an independent oversight body
in a report.

• After couple of failed attempts, Bangladesh entered into the independent POS era in 2016 with the
establishment of FRC under the Financial Reporting Act (FRA) of 2015.

• The FRC shall act as an independent oversight body to bring trust, credit worthiness, transparency
and accountability in the audited reports and financial reporting of the publicly listed companies. For
such, the FRC will regulate the financial reporting process and auditing profession of the country.

• The FRC works through a 12-member body, comprising of representatives from the government, the
Bangladesh Bank, the BSEC, the FBCCI, the academia, and the professional accounting bodies.

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FRC in Bangladesh- Challenges

• 2016—2017—2019 concerns regarding the functioning capability of FRC.

• Siddiqui (2018) has identified four key areas of concerns that the
policymakers should consider for future revision-

– Composition of FRC Board

– Potential duplication of work (adoption of accounting auditing standards, monitoring

the implementation of standards and audit practice review) between ICAB and FRC

– Unintended consequences of criminal action against auditors

– Lack of corporate governance focus

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References
• Nurunnabi, M. (2014), ‘The role of the Securities and Exchange Commission in a developing economy:
Implications for IFRS’, Advances in Accounting, Volume 30, Issue 2, Pages 413-424,
https://doi.org/10.1016/j.adiac.2014.09.018.

• Siddiqui, J., Nasreen, T. and Choudhury‐Lema, A. (2009), ‘The audit expectations gap and the role of audit
education: the case of an emerging economy’, Managerial Auditing Journal, Vol. 24 No. 6, pp. 564-583.
https://doi.org/10.1108/02686900910966530

• Siddiqui, J. (2018, February 3), Making Financial Reporting Council functional, The Financial Express,
Retrieved from: https://thefinancialexpress.com.bd/views/making-financial-reporting-council-functional-
1517669468

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Q&A
• Raise Your Questions

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