Auditors, investors and speculators in capital market

--Masih Malik Chowdhury FCA

Audit means to Audire. An audit according to dictionary is a hearing or audience. An auditor is “a hearer, listener, one of an audience”. Recurrent usage of the term is believed to have been derived from the days when officials were required to give an oral account of monies handled on others’ behalf. Auditing is a legalistic function. Unlike accounting, its development is more directly linked to changes in the law than with commercial trends- albeit that much of the relevant legislation was only one or two steps lagging behind innovation needs. Broadly, in earlier days audit was meant for detecting apprehended fraud & misappropriation. That type of Audit actually is currently termed as Investigation. Many learned people of various professional specialties like journos refer Audit & Investigation as synonyms. It is however mainly ICAB’s onus to inform the society that CAs do audit of the Financial Statements as produced to them by Management. Indeed the Auditors and Preparers of Financial Statements are distinct professionals.

Indeed this is an utterly wrong perception. As a statutory auditor or one of the profession of Chartered Accountancy (CAs) let me endeavor for giving a clarity on it. These Auditors in Bangladesh alike many other countries are none but CAs or CPAs. They are responsible for auditing with a view to put their independent opinion on FS at a cutoff date. Now the opinions on a company’s Financial Statements for a period generally a year expressed by the Auditors or CAs are valued by people like users or readers of the Statutory Audit Report in the readers’ way.

This is because the Companies Act 1913 and as its legacy 1994 very categorically out lined about format of Audit Report to be adhered to by CAs. The area of Audit is defined in section 213 of the incumbent Companies Act 1994.Section 213 of the Act spells it under the nomenclature Power and Duties of Auditors. It states that “(1) Every auditor of a company shall have a right of access at all times to the books and accounts and vouchers of the company, whether kept at the head office of the company or elsewhere and shall be entitled to require from the officers of the company such information and explanation as the auditor may think necessary for the performance of his duties as auditor.”

This does bestow on not the auditors the onus of accounting and preparers’ responsibility. Indeed the onus is not to investigate but to inquire about matters of transactions that may deem needed by the Auditors for forming an independent opinion. Section 213 (3) spells on where, how and to whom the Auditors are to report. It is Annual General Meeting (AGM) wherein the accounts are presented by management after the audit has been performed. It is relevant that the Audit Report clarify Auditor’s position quoting “Management is responsible for the preparation and fair presentation of these financial statements in accordance with Bangladesh Financial Reporting Standards (BFRS/IFRS) or Bangladesh Accounting Standards (BAS), and for such internal control as management considers necessary to enable the preparation of financial statement that are free from material misstatement, whether due to fraud and error.

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Bangladesh Standards on Auditing. Those standards require that we comply with ethical requirements and plan to perform the audit to obtain a reasonable assurance about whether the financial statements are free from material misstatements.”

The language could be different but the intrinsic spirit remains same. Thus the accounts preparation is done by management contrary to what is publicly perceived and also by many including stalwarts in government and capital market. As a Statutory Auditor by profession I have so far not found any rationale that Auditor can impact on price escalations, market volatility, and trade booms or for all matters like lackluster trade of stocks.

In an open market economy the price of stocks depends on supply and demand equilibrium. It is brokers and stock traders who can hoard stocks and fetch feeble price for it in all situations. The audit report only talks about fixed matters required by the statute for them. The EPS, NAV, Dividend Yield are presented with the Financial Statements as disclosures by the management. Indeed except for the independent opinion the Auditors cannot be blamed by brokers, investors and stalwarts for the accounts audited by them.

There again Audit and Investig-ation are completely different terminologies. Investigations only cover a particularly defined arena under ToR for that matter. The Statutory Audits in Bangladesh are performed as per Companies Act 1994, Securities & Exchange Rules 1987, Insurance, Bank and other pertinent regulations as would be relevant for the Audited entity.

The Statutory Auditor under the caption- “we also report that-” puts their opinion on extended issues. These opinions can lead the reports under BSA 700 to be classified as unqualified with or without emphasis of matters, modified with qualified, adverse and disclaimer of opinion.

The Companies Act 1994 in sequence to the legacy inherited from Act 1913 has spelled out about the Audit functions. The incumbent Act in its section 210 to 219 deals with auditors role and the company. Alike this Act, Bank Companies Act 2013, Insurance Act 2010, BSEC rules & ordinance and all other Act have all outlined with caution the responsibilities and functions of Auditors. All these Acts have stressed for their own format of reports by the Chartered Accountants Firm working as statutory auditors. The investigation, financial accounting services including cost auditing and audit are all performable assignments by CAs.

 

The CA’s as Auditors sign the FS after audit on a cutoff date. They certify EPS and NAV computed by management from its own prepared accounts. It is to be noted that the accounts are prepared by management on the basis of the books maintained for that year/period by them. And then these Accounts duly prepared and finalized, called Financial Statement are duly signed by management and forwarded to Auditors. In responsibility of these FS the management issues management letter of engagement for the Auditors. The Auditors performs the audit after appointment and then after duly sending the acceptance of the appointment.

Thus only in one point of time the Auditor CA Firm certifies the Financial Statement. That is the year/period end date is the cutoff date. Even if the Auditor signs Audit report on having examined the FS after 4/5 months from the cutoff date such certification is strictly for the year/period ended as referred to in the report. This means for any stock price upheavals the Auditors bear no responsibility. The commonly misconstrued belief and saying that Auditors prepare FS is a sheer misnomer. There is no rationale to make Auditors scapegoat for all blame game by speculators or for that matter regulators. The price fluctuation is a function of stock supplies and demand on day to day basis. The auditors cannot do nor can bear the onus of stock price volatility.

In fact the Auditors Report if analysed can be seen to be in compliance with many statutory requirements including their professional ethics and  ensuring compliance to a large number of issues for FS preparation like IFRS/BFRS etc.

In capital market Auditors are often made escape goats. These are only to save the roles of top notches in capital market. Let us make a brief analysis of their role. In our capital market say DSE a listed company has paid up capital of Tk. 18 crores. Its face value is Tk. 10. There have been speculations that its group would change from one to another. On that speculation only its price climbed over to about Tk. 900. Could or did the Auditors have a role in it? Again in Bangladesh Shipping Corporation its face value is Tk. 100. With huge accumulated loss speculations floated that its denomination will change from Tk. 100 to Tk. 10 and people started buying the stock and hoard it. These acts always lead to and consistently sustain volatility in stock market. Indeed speculation is their strength and basis of market price manipulation

A micro investor like me who understands Financials could not rationally believe it having seen its published accounts in DSE website. It showed an enormously large amount of loss on the FS. But the price spiraled to Tk. 600 plus in only a couple of weeks from less than Tk.300. The only reason is speculation to make profit out of splitting the face value at Tk. 10.The speculation yet persists and the split is yet awaited. Was the speculation made by the Auditors? As one of the profession of Statutory Auditors, I rather made myself fool by not profiting from buying and paying hid to prevalent speculations. Otherwise like stock traders who blame Auditors for capital market crush, one could have made money. Example of ICB is also citable here. Its price was Tk. 2200 plus on the speculation of splitting of Tk. 100 shares into Tk. 10. The fact that Tk. 10 shares can go to Tk. 500 but Tk. 100 share cannot fetch over 1000 is not unknown to readers. Thus the market price is the function of Demand vs. Supply of shares. Again this demand and supply are influenced by speculations. The Statutory Auditors are unduly held responsible for the price bubbles by the wrongdoers. The speculators earn money, create price and make investors market prone or deviated. It may be pertinent to note that the Capital Market Investigation Committee recommended the Asset valuers must not be same CA firm which is the statutory auditors. Indeed ICAB has its ethics in the same spirit of the committee report led by Mr. Khondoker Ibrahim Khaled an esteemed banker, erudite personality and a progressive think tank.

The speculators are under watch dogs BSEC, DSE and CSE management. They are not under statutory auditors nor can the stock market bubble or its lackluster state in any way be related to Audit qualities etc. The opinions of Auditors on FS cannot ever be considered relevant in speculations. Rather rumors dominate our stock market. And so are these prevailing elsewhere. However delinquent professionals are dealt with by regulators and ICAB in their own way. So the speculations should come under the regulator’s domain of responsibility. Should they seek I am sure ICAB would come forward very enthusiastically if their capacity needs augmentation.