Lately, there has been a lot of discussion among people, both in Pakistan and abroad, regarding the role of audit firms. In Pakistan, many cases of money laundering, tax evasion and falsification of accounts have come to light. Here I propose to share some insights from my experience with an auditing firm and my impressions of how most auditing firms operate in Pakistan and what needs to change.
In Pakistan, ICAP is responsible for adopting and issuing auditing standards. Under the Companies Act 2017, accounting standards are approved for use as adopted by the Securities and Exchange Commission of Pakistan (SECP). However, the SECP has delegated responsibility for developing and adopting accounting standards to the Institute of Chartered Accountants of Pakistan (ICAP).
Insurance companies and banks are also required to follow financial reporting standards issued by ICAP. In 2016, an independent Audit Oversight Board (AOB) was established with the responsibility of regulating the audit profession in Pakistan. Only ICAP members are authorized to audit the financial statements of companies, with the exception of small limited liability companies (with a paid-up capital of less than Rs 10 million).
Most auditing firms, it is said, are just looking to make money. Little emphasis is placed on customer satisfaction, employee development or research and development. These people know that all businesses need an audit and therefore the demand for their services will never decrease. It is a widely known but rarely reported fact that audit points are compromised in management and board letters for contract renewal and substantial fee increases.
It is relevant to note that ICAP has also established minimum audit fees. With employees and interns being paid peanuts (below the legal minimum wage) at these companies, it shouldn’t be difficult to analyze the profit margins of these companies. After all, most of the fieldwork is done by new interns, who have little or no experience in the audit/business environment.
Auditing firms generally charge reimbursable fees. This provision is frequently misused by employees of audit firms. There are many cases of very experienced staff in auditing firms charging personal expenses to the companies they audit. Surprisingly, most companies do not require any validation of the disbursements billed to them.
There is a culture of discrimination within audit firms that inhibits innovation. If you are not a CA (ICAP) or follow the course, you are considered inferior. Members of other accountancy bodies (ACCA, CA (ICAEW), CPA, ICMA) are routinely discriminated against in promotions, job interviews, salaries and skill determination. A few years ago, they tried to ban ACCA student interns from auditing firms, fearing that they would do well and outrank them in the corporate world. Trying to keep and maintain a monopoly has, in my opinion, weakened the institute.
One good thing that ICAP has tried is to encourage university graduates to obtain the CA designation. I was told that the initiative was a moderate success. I have heard more stories of people dropping out of the CA program than people entering it.
I heard a senior vice president of ICAP brag in an interview about the success of ICAP members, many of whom work globally. It is undeniable that the members of ICAP are competent. But there is also another side to the story. Most ICAP members have become members of other accountancy bodies, which may have contributed to their professional success. Many ICAP members are known to chase foreign body memberships. How many foreigners wish to become members of ICAP? It also happens that the UDC has suggested that the AOB is essentially managed by ICAP since ICAP members sit on it.
It’s hard to believe that to date only about 12,500 candidates have passed the CPA exam. The exams can be tough, but this number is an anomaly compared to other professional accountancy bodies known for their integrity. Moreover, despite the fact that SECP regulations inherently favor accountants for CFO/Secretary General/Internal Audit positions, more and more graduates from other institutions are taking on this role in multinational companies, where growth opportunities are perceived as fairer. . Most ICAP members, on the other hand, work in local businesses.
The world has moved from manual auditing to digital auditing. Audit firms, especially the big four firms here and in the UK, in the United States, have started to onboard technology professionals to help execute audit engagements. System audits are becoming the norm with the adoption of ERP solutions. However, in Pakistan, even with ERP in place, digital audits are not the norm. We simply refuse to take advantage of technology while the world exploits it.
Pakistan is now the largest country by population – and the only one among the world’s ten largest by population – not to have all four major accounting firms. Several economies in other parts of the world that are one-hundredth the size of Pakistan have all four major corporations supporting their business sector. In Pakistan, almost all Big 4 business partners are ICAP members across all service lines, a stark contrast to the global profile, as one banker recently pointed out on Twitter. Perhaps the SECP should come out of its silence and review its regulations to allow foreigners to share their experience.
One good thing that ICAP has tried is to encourage university graduates to obtain the CA designation. I have been told that this initiative has been a moderate success. I have heard more stories of people dropping out of the CA program than people entering it. The problem with this approach is that ICAP wants to introduce CA members to the technology. Instead, tech graduates should be introduced to CA. We have to follow the CPA model which has been hugely successful. Very few tech graduates will be willing to spend another three years in training for little pay and take eight more exams. Most of them prefer other certifications.
During this time, the public lost confidence in the listeners. If Pakistan is to regain investor confidence, it must address these challenges and make bold decisions. Change will be difficult. The silence of government agencies and ICAP members in influential positions will resist, if not reject, any demand for change. I find it difficult to understand how ICAP can be both an institute and a regulator. There is clearly a conflict of interest. Members will always promote their own interest (reference regulatory capture theory).
If the government wants to change the game, it must begin by defining the role that ICAP should play in society. Is it acting as a regulatory body or as an institute? Should there be open competition between different accounting bodies in the field of auditing to foster innovation? This might encourage some expatriates to come back and serve Pakistan. The government must act. Soon. I hope and pray that this is the case.
The author is an IGS project manager