Why we need to change our audit environment

May 15, 2022

Audit firms usually charge out of pocket expenses. This provision is frequently misused by audit firm employees

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ately, there has been a lot of talk among people, both in Pakistan and abroad, regarding the role of audit firms. In Pakistan, numerous cases of money laundering, tax evasion and falsified accounts have come to light. I propose here to share some insights from my experience of dealing with an audit firm and my impressions on how most audit firms operate in Pakistan and what needs to change.

In Pakistan, the ICAP is responsible for adopting and issuing auditing standards. Under the Companies Act of 2017, accounting standards are approved for use as adopted by the Securities and Exchange Commission of Pakistan (SECP). The SECP, however, has delegated the responsibility of developing and adopting accounting standards to the Institute of Chartered Accountants of Pakistan (ICAP).

Insurance companies and banks too are required to follow financial reporting standards issued by the ICAP. In 2016, an independent Audit Oversight Board (AOB) was set up with the responsibility to regulate the auditing profession in Pakistan. Only members of the ICAP are permitted to audit the financial statements of companies, except for small private limited companies (with paid up capital less than Rs 10 million).

Most of the audit firms, it is said, are interested only in making money. There is little focus on client satisfaction, employee development or research and development. These people know that all companies require an audit and therefore demand for their services will never decline. It is a widely known but rarely reported fact that audit points are compromised in management and board letters for renewal of contract and substantial increase in fees.

It is pertinent to note that the ICAP has also set out minimum audit fees. With employees and trainees being paid peanuts (below minimum legal wage) in these firms, it shouldn’t be difficult to analyse the profit margins for these firms. After all, most of the field work is carried out by fresh trainees, who have little to no experience of audit/ business environment.

Audit firms usually charge out-of-pocket expenses. This provision is frequently misused by audit firm employees. There are many cases of very senior personnel in auditing firms charging personal expenses to companies they audit. Surprisingly most companies seek no validation of out-of-pocket expenses they are charged.

There is a culture of discrimination within audit firms that inhibits innovation. If you are not a CA (ICAP) or following the route, you are considered inferior. Members of other accountancy bodies (the ACCA, the CA (ICAEW), the CPA, the ICMA) are routinely discriminated against in promotions, job interviews, salaries and determination of competency. A couple of years ago, they tried to banish the ACCA trainee students from audit firms fearing that they would perform well and get ahead of them in the corporate world. Trying to keep and sustain a monopoly has, in my view, rendered the institute weak.

One good thing the ICAP has tried is getting in university graduates to pursue the CA qualification. I have been told that the initiative has been a moderate success. I have heard more stories of people dropping out of CA programme than people getting in.

I have heard a senior vice president of the ICAP boast in an interview about the success of ICAP members, of whom many are working globally. There is no denying the fact that ICAP members are competent. But there is also another side to the story. Most of the ICAP members have acquired membership of other accountancy bodies, which may have been instrumental in their professional success. Many ICAP members are known to chase foreign body memberships. How many foreigners seek an ICAP membership? The SVP also happened to imply that the AOB is run essentially by the ICAP since ICAP members sit on it.

It is hard to believe that to date only around 12,500 candidates have passed the chartered accountancy examination. The exams may be hard but this number is an anomaly when compared to other professional accountancy bodies known for their integrity. Moreover, despite the fact that the SECP regulations inherently favour accountants for the positions of CFOs/ company secretary/ internal audit, more and more graduates of other institutions are taking up this role in multi-national companies, where growth opportunities are seen to be fairer. Most of the ICAP members, meanwhile, happen to work in local companies.

The world has moved on from manual audit to digital audit. Audit firms, especially the big four firms here and in the UK, US have started bringing on-board technology professionals to help execute audit engagements. System audits are becoming the norm with the adoption of ERP solutions. However, in Pakistan, even with the implementation of ERPs, digital audits are not the norm. We are simply refusing to benefit from technology while the world exploits it.

Pakistan is now the largest country by population – and the only one among the ten biggest in the world by population – to not have all Big Four accounting firms. Several economies in other parts of the world that are one-hundredth the size of Pakistan have all the Big Four firms supporting their corporate sector. In Pakistan, almost all partners of Big 4 firms are ICAP members for all service lines, a sharp contrast to global profile, as highlighted recently on Twitter by a banker. Maybe the SECP needs to break its silence and review its regulations to allow foreigners to share their experience.

One good thing the ICAP has tried is getting in university graduates to pursue the CA qualification. I have been told that this initiative has been a moderate success. I have heard more stories of people dropping out of the CA programme than people getting in. The problem in this approach is that the ICAP wants to introduce CA members to technology. Instead, technology graduates should be introduced to CA. We need to follow the CPA model that has been a tremendous success. Very few technology graduates will be willing to spend another three years in training for low remuneration and take eight additional exams. Most of them prefer other certifications.

Meanwhile, the public has lost trust in auditors. If Pakistan is to regain investors’ trust, it needs to tackle these challenges and make bold decisions. The change will be difficult. The silence of governmental agencies and ICAP members in influential positions will resist if not reject any request for change. I find it difficult to comprehend how the ICAP can be both an institute and regulatory body. There is a clear conflict of interest. The members will always promote their own interest (reference regulatory capture theory).

If the government wants to change the situation, it has to start by defining the role the ICAP has to play in the society. Is it to act as a regulator or an institute? Should there be an open competition between various accounting bodies in the field of audit to promote innovation? This might encourage some expats to come back and serve Pakistan. The government must act. Soon. I hope and pray it does.


The writer is an IGS project director



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