SAFA CONFERENCE ACCOUNTING PROFESSION IN SOUTH ASIAN REGION - VALUES & PERSPECTIVES ICAI-CHENNAI 30 SEPTEMBER 2006 MANAGING PROFESSIONAL RISK - A RECIPE FOR SMPs ANWARUDDIN CHOWDHURY Member Council and Past President THE INSTITUTE OF CHARTERED ACCOUNTANTS OF BANGLADESH
PREAMBLE A SAFA Conference on the Theme “Accounting Profession in the South Asian Region – Values & Perspectives” is both timely and topical. It would serve as a forum of interaction amongst the leaders of the SAFA accounting profession. The policy issues and recommendations emerging from the Conference deliberations may be used for future policy formulations of our Institutes and other concerned authorities. The professional firms in the SAFA region being predominantly Small and Medium sized Practices (SMPs), their Values and Perspectives on the South Asian Accounting and Auditing Profession impacts a significant dimension. SMPs, being relatively more vulnerable to practice risks, need to ensure proper management of professional risk through quality assurance of their services. Hence a Technical Paper on Managing Professional Risk – A Recipe for SMPs has been aptly chosen to elucidate on the conference theme.
There are several debatable, futuristic and pluralistic connotations in the subject and the field of discussion is so extensive that one can hardly do justice to its magnanimity in a limited page Paper (Slide PPP) endeavouring to synthesize the Importance of Managing Professional Risks by SMPs for enhancing appropriate Values and Perspectives of the SAFA accounting profession. It is hoped that the deliberations of the Paper, and particularly the esteemed contributions of the learned discussants will reflect meaningful “recommendations” for strengthening the SMPs in their Professional Risk Management and contributing relevant value addition to the Accounting Profession in the South Asian Region.
INTRODUCTION WHY PROFESSIONAL RISK MANAGEMENT IS A RECIPE FOR SMPs ? • Unlike Non SMPs (Large Practices), • SMPs have peculiar characteristics of client portfolio and nature of services. • SMPs suffer from inherent limitations of capacity and resources. • SMPs are more “risk prone” in terms of work performance and quality assurance.
CHARACTERISTICS OF SMPs SERVICES • Majority of clientele are SMEs • Substantial number of public sector & non-corporate clients • Very few pure or large company audits • Low level of fees receivable • Professional work is undertaken essentially by articled students • Audit programme / methodologies are often lacking • Inadequate expertise for specialized professional services .
INHERENT LIMITATIONS OF SMPs CAPACITY & RESOURCES • Majority of SMPs are sole practitioners or small partnerships • Limited qualified, senior or experienced staff • Excessive dependence on articled students and mid level staff • Capacity limitations preclude quality assurance • Resource constraint precludes specialization in practice areas (IAS/IFRS & ISA, IT or Tax work) • Inadequacy of capital base and limited accessibility to finance • Non affordability of technological innovations • Limited data base or information availability (particularly compared to Big 4s or largest firms)
RISK VULNERABILITY OF SMPs • Lack of adequate, appropriate client/audit core risk assessment • Lack of specialization for catering to needs of larger clients • Excessive reliance on articled students for senior level work • Peer reviews are not effected • Lack of audit quality assurance in terms of: • -Quality control of audit • - Relevant degree of expertise • - Adequate and proper application of audit methodology • Often acting in a “conflict of interest” situation • Prof Ethics and Audit Independence are often jeopardized • Non affordability of “professional indemnity insurance” or policies for third party / public liability actions.
COMPARATIVE STATUS OF MEMBERSHIP AND SMPs IN SAFA MEMBER COUNTRIES AT
PRACTICE SCENARIO IN SAFA REGION • Based on the Comparative Membership Status in SAFA Region and arbitrary categorization of CA Firms (No. of Partners) the following prominent feature emerge = • Strong predominance of SMPs • Proprietorship / Partnership Firms are more or less equally balanced • Small sized Firms of 02-05 Partners are dominant • Small - Medium sized Firms of 06-10 Partners are substantial (India) • Medium - Large sized Firms of more than 10 Partner exist only in India ?
BASIC PROFESSIONAL RISKS • Risk of “incorrect audit opinion” on FS “truth & fairness • Risk of “fraudulent allegation” for professional services • Risk of “negligence” for third party liability under Law of Tort
PROFESSIONAL RISK MANAGEMENT • Risks - Possibility/probability of an occurrence/event materialization which impacts on the activities of a firm or entity. - Reflection of an opportunity, threat or uncertainty • Classification of Risks - Strategic and Operational Risks - Dependent upon Probability, Time and Occurrence • Risk Dimensions - Causes - - Analyses - - Identification - Mitigation
Risk Management - Linkage between Performance and Conformance • Professional Risk Management - Identification, Analysis and economic control of all such risks, which threaten assets, resources or earning capacity of a professional firm and/or may give rise to legal actions - Professional Risk Management is a vital ingredient of successful accounting practice. • Broad Categories of Professional Risks Requiring Management - Business (Practice Risk) - Pure Insurable Risks
Governance and Risk Management - Special Relationship • Integration of Professional Risk Management with SMP functional Strategies - Quality Control Standards to avoid Negligence actions. • Enterprise Governance and Risk Management
IFAC RECOMMENDATIONS FOR SUPPORTING - SMALL AND MEDIUM ACCOUNTING PRACTICES (SMPS) • Recognizing the growing number, influence and expanding services of SMPs in the global market place, the IFAC has focused significant attention for supporting the SMPs. • IFAC SMP working party published its report on “An Assessment of International Needs and Analysis of Activities Offered within Member Bodies” - Including current initiatives for addressing Needs of SMPs and Recommendations for international action. • The Working Party Report (based on analysis of programmes and initiatives in the US, UK (2). Canada, Italy, Israel & India) focused in five key areas:
Quality Enhancement through: - Development of quality assurance standards - Improvements of practice management quality • Member services through: - Development of educational courses and training, marketing support, technical aids, web-related services and networking • Participation of SMPs in Standard-Setting through: - SMPs presence on standard-setting committees and on governing bodies / Councils of the Institutes • Innovative service areas that can help SMPs develop their business and meet expanding client needs. • Advocacy and Alliances, including contacts with public authorities, governmental agencies and regulators, advertising promotion and market placement services.
IFAC Working Party Conclusion • Need for International Level Support to assist SMPs through implementation of following measures -Development of an international database for providing continuous updates and research on relevant professional issues worldwide. - Establishment of networking facilities among firms (SMPs) for ensuring regular communication linkages.
Assistance in helping SMPs develop innovative new service areas, such as providing assurance services in e-business, advice on risk management and strategic planning. • Establishment of a strong advocacy role for SMPs, including regular contactswith Government and regulatory agencies.
IFAC REPORT ON ASESSMENT ON INTERNATIONAL NEEDS FOR SMPs • MAJOR AREAS OF INSTITUTIONS FOR SUPPORTING SMPs - Quality Enhancement - Services to Members - SMPs Participation on Standards Setting - Innovative Service Areas - Advocacy and Alliances
Quality Enhancement - Development of Standards for Quality Assurance & Quality Control Systems - Practice Management Quality - Education & Training Quality - CPE/CPD (Continuous Learning Process) - Ethical Codes of Practice.
Services to Members - Courses & Training - Publications for Clients - Publications for Members - Research - Technical Aid - Database Access - Web related Services - Networking Support - Library Support - Resolving Professional Queries - Members Discussions - International Activities
Participation in Standards Setting - Presence of SMPs on Standards Setting Committees - Presence of SMPs on Governing Bodies/Councilors of Institutes • Innovative Services Areas - Web Trust - System Trust - Insolvency Practice - Environment & Social Reporting • Advocacy & Alliances -Contact with regulators, public authorities & Govt. Agencies - Advertising & Promotional Publicity - Placement Services
IFAC RECOMMENDATIONS FOR STRENGTHENING - The Global Presence of SMPs • Development of an International Database - SMPs Information Accessibility • Establishment of Contacts Among Firms - SMPs Networking Linkages • Development of Innovative New Service Areas - SMPs Response of Professional Services • Playing a Strong Advocacy Role - SMPs liaison/interaction with regulators & Govt. Agencies
These Recommendations are vital for SMP services facilitation leading to improved quality assurance and thereby more effective Professional Risk Management. The Policy Issues in various jurisdictions – particularly the Councils of the Institute of Chartered Accountants of the SAFA Region are in the process of implementing these and other facilitation measures for supporting the SMPs for improving quality assurance and professional risk management.
MEASURES TAKEN BY ICAB FOR STRENGTHENING THE NEEDS OF SMPs The membership profile of ICAB is predominantly comprised of SMPs. In cognizance of this issue, the Institute’s, Council has formulated several initiatives, policies and programmes designed to strengthen the SMPs in enhancing their technical expertise, competence and quality assurance of their services. Such Measures encompass: - Revision and regular updating of curriculum reflecting dynamics of the accounting profession - Structured CPE/CPD Seminars and Workshops particularly catering to the needs of SMPs
Adoption of IAS/IFRS and ISA by the TRC/Council • Participation of SMPs in Standards Setting process • Issuance of Technical Guidelines for SMPs by TRC/PDC of Council • Holding of discussion meeting and training programmes for SMPs • Formation of Advisory Committee for responding to professional needs and queries of SMPs • Dissemination of professional learning materials through ICAB web site and printouts • Networking of Firms/SMPs for enhancement of knowledge, skills and competence • Regular interaction/consultation with regulatory authorities and Government agencies
INTERNATIONAL STANDARDS ON AUDITING The IAASB of the IFAC has issued several ISA covering the various dimensions and management of “professional risks” generally confronted in the conduct and reporting on the audit of corporates and other forms of entities (audit clients) These Auditing Standards are applicable in varying degrees both for SMPs and non SMP firms. The different aspects of “professional audit risk” emphasizing an applicability to SMPs are highlighted hereafter.
ISA 200 – Objective and General Principles Governing the Audit of Financial Statements ISA 315 – Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatements ISA 320 – Audit Materiality ISA 330 – The Auditors Procedures and Response to Assessed Risks ISA 400 – Risk Assessments and Internal Control ISA 401 – Auditing in a Computer Information Systems Environment (Assessment of Risk)
ISA 200 – OBJECTIVE AND GENERAL PRINCIPLES GOVERNING THE AUDIT OF FINANCIAL STATEMENTS • Audit Objective – Independent “true & fair view” Opinion • General Principles–Technical Standards & Ethical Guidelines • Professional Skepticism • Reasonable Assurance • Audit Risk and Materiality • - Evaluation of audit evidence/ reasonable assurance for audit opinion • Reduction of Audit Risks • Risk of Material Misstatement • Components of Audit Risks • -Inherent Risk • - Control Risk • - Detection Risk
AUDIT RISK MODEL Control Risk Detection Risk Audit Risk Inherent Risk = x x • What is inherent risk, control risk and detection risk? • What factors should be considered for inherent risk? • Why does control risk exist? • Why does detection risk exist? • Which of these components can the auditor influence? • What should auditors do to maintain low audit risk? • What if control risk is very high (internal control is very weak)? • What if control risk is reasonably low or very low? • How can we lower detection risk?
RISK OF MATERIAL FRAUD • Two types • - Fraudulent financial reporting (management fraud) • - Misappropriation of assets (defalcations) • Procedures to assess fraud risks • - Discussion among engagement team • - Inquiries of management and other personnel • - Planning analytical procedures • - Considering fraud risk factors • Responding to Fraud Risks • - Overall response • - Alterations in audit procedures • - Response to the possibility of management override • Discovery of fraud - Communication to appropriate level of management - If fraud involves senior management or material misstatement communicate to audit committee
ISA 315 – UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENTS • Purpose – Assessment of Risks in Financial Statement Audit • Understanding of Entity & its Environment for Identification & Assessment of Risks from Material Misstatements. • Risk Assessment Procedures (RAP) • - Familiarization with the entity, its environment & internal control • - Communication with governance & management executives • - Audit Documentation • Performance of RAP • - Management Enquiries • - Analytical Procedures • - Observation & Inspection • - Prior Period Information and Relevant Changes • Discussion among Engagement Team
Assessment of the : - Entity, Nature, Environment and Internal Control - Industry, Regulatory & Other Externalities - Measurement & Review of Auditee’s Financial Performance - Objectives/ Strategies & Related Business Risks - Internal Control Considerations - Review & Testing - “manual” and “automated” elements of characteristics relevant to “audit risk assessment” • Internal Control Limitations and Risk Assessment • The Entity’s Risk Assessment Control & Monitoring Process: - Assessing Risks of Material Misstatements - Significant Risks Requiring Special Audit Considerations - Revision of Risk Assessment – Evaluations & Reevaluations. - Communication with Governance & Management Executives - Audit Evidencing and Documentation
BSA 320 - AUDIT MATERIALITY • Purpose • Materiality Considerations & Relationship with Audit Risks • Materiality Perspectives • Relationship Between Materiality and Audit Risk for Evaluating of Audit Evidence • Assessment the Effects of Misstatements
ISA 330-THE AUDITORS PROCEDURES & RESPONSE TO ASSESSED RISKS • Purpose • Overall Responses • Audit Procedures Responsive to Risks of Material Misstatements at Assertion Level • Considering the Nature, Timing and Extent of Further Audit Procedures • Tests of Controls • Substantive Procedures • Adequacy of Presentation & Disclosures • Evaluating Sufficiency & Appropriateness of Audit Evidence • Audit Documentation • Audit Opinion
BSA 400 – RISK ASSESSMENT AND INTERNAL CONTROL • Purpose - Establish Standards and Provide Guidance on Accounting & Internal Control System and on Audit Risks • "Audit Risk" Definition • - The risk of an unqualified audit opinion when the FS are materially misstated • Components of Audit Risk • - Inherent Risk • - Control Risk • - Detection Risk
Meaning of : • - Accounting System • - Internal Control System • - Control Environment • - Control Procedures • • Discussion an Audit Risk Components • - Limitation of Internal Controls • - Inter relationship of Risk Components • - Audit Risk in SMEs • - Letter of Weakness – Deficiency and Remedies
BSA 401 – AUDITING IN A CIS ENVIRONMENT • Purpose • Skills & Competence • Audit Planning • Risk Assessment • Audit Procedures
CONCLUSION AND WAY FORWARD CONCLUSION • The structure of the Accountancy Profession in the SAFA Region significantly dominated by SMPs. They provide professional services in diverse areas to a wide variety of clientele (just like non-SMPs), catering particularly to the professional services requirements of SMEs. • SMPs market share of professional services is very significant in the SAFA region but varies from country to country.
CONCLUSION • SMPs have certain peculiar characteristics. • SMPs suffer from capacity and resources constraints - organizational, operational and financial limitations, which in turn adversely impact on their competitive edge compared to non-SMPs or larger professional firms. • It is essential for the SAFA regional Institutes to strengthen the SMPs, so as to enable them to address the wide variety of professional services requirements, and ensure requisite quality assurance for effective management of professional risks.
CONCLUSION AND WAY FORWARD WAY FORWARD • Identification and Addressing the emerging Needs of SMPs in SAFA Region, which would impact significant benefits to the regional professional services and institutes. • Providing a level playing field for SAFA SMPs, which would impact a position dimension on their competitive edge as professional service providers at national regional and international markets. • Providing adequate facilitation to SAFA SMPs which would develop and enhance their levels of technical skill and professional competence for quality assurance and effective professional risk management in serving the public interest
EPILOGUE • This has now come for appropriate authorities, particularly the professional Institutes and SAFA Assembly to recognize the important contribution of SMPs and strengthen them adequately for addressing their needs of technical skills and professional competence development /enhancement, quality assurance and professional risk management. • However a robust burgeoning SMPs segment of the profession is not necessary for its own sake. It is indeed needed as a professional power house to propel the requisite level of corporate and financial sector growth and thereby contribute towards the economic development of the region.
The SAFA must resolve to work together coherently, by pooling their resources, sharing each other’s experiences, in responding to the emerging challenges and opportunities of global financial markets, competitive business and profession – as a means of ensuring the well-being and emancipation of our people and thereby contribute towards the socio-economic upliftment, leading to overall development, peace, progress and prosperity of the region. • We must, however, keep pace with the effluxion of time as otherwise we would be answerable to posterity for our actions and attitudes. May ALLAH’s Providence be our guide!
FOSTER AND STRENGTHEN SAFA SMPs FOR PROFESSIONAL VALUE ADDITION THANK YOU FOR YOUR KIND ATTENTION