ICAP’S role as regulator of Accounting and Audit

ICAP and Its Role

as Regulator of
Accounting &
Audit
FATIMA MUKHTAR
M.COM 3RD (2009-11)
ACCOUNTING SPECIALIZATION
2009-AG-989

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ICAP’S role as regulator of Accounting and Audit

ACKNOWLEDGMENT

I wish to praise almighty ALLAH, the most Merciful, the Beneficent and the
HOLY PROPHET MUHAMMAD (peace be upon him) who give courage and
enable me in accomplishment and submission of this project

I specially want to pay my thanks and regards to most respected, proficient,

distinguished and well learned guide Mr. UMER SAEED QADRI (Lect,
Auditing) and Mr. ZAHEER QAMAR (Lect. Financial reporting & disclosure
practices) for their keen interest, noble guidance, encouraging attitude which
inspired me to carry on the task.

I am especially thankful to Mr. YASIN ZIA (Ast. Professor Finance), who

provided his great cooperation in spite of his personal engagements and
gave his valuable suggestions during my research work.

My parents, classmate, friends come next in the list of those whom I have to
thank.

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ICAP’S role as regulator of Accounting and Audit

TABLE OF CONTENTS

 Introduction of ICAP

 Accounting Profession in Pakistan

 ICAP’s Role as Regulator of Accounting

Profession

 Auditing Profession in Pakistan

 ICAP’s Role as Regulator of Auditing Profession

 Conclusion

 References

GLOSSARY
WORDS MEANINGS
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ICAP’S role as regulator of Accounting and Audit

SECP security and exchange commision of Pakistan

IFAC International financial accounting commettee

ICAEW institute of chartered accountant of England and wales

Prosecution trial

Endeavors activities

Significant Major

Mechanisms instrument

Precedence priority

Confederation Union

Robust healthy

Deliberate purposeful

Reprimand warning

Imperative very important

Consolidate merge

Compliance fulfillment

Reluctant unwilling

Impediments obstacle

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ICAP’S role as regulator of Accounting and Audit

The Institute of Chartered Accountants of Pakistan (ICAP) is the accounting

standards setting body in Pakistan. It works closely with the Securities and
Exchange Commission of Pakistan (SECP), which is the regulator of corporate
sector and stock exchanges. ICAP also works closely with the State Bank of
Pakistan. In recent years, Pakistan has made significant progress in adopting
and implementing IFRS for listed companies through joint efforts and close
cooperation of the accounting profession and regulatory bodies. This report
presents the regulatory framework, enforcement of accounting standards
and challenges faced in the process of converging to IFRS and capacity-
building issues.

Introduction of ICAP

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ICAP’S role as regulator of Accounting and Audit

The Institute of Chartered Accountants of Pakistan was established under The

Chartered Accountants Ordinance, 1961 as a self regulatory body and it
operates under the CA Bye Laws 1983.

ICAP is an examining body for the candidates aspiring to become Chartered

Accountants. It regulates the accounting and auditing profession in Pakistan,
which include

 Standard setting
 Quality control
 Investigation

Affairs of ICAP are governed by a Council comprising of 19 members. 15

members of the Council are elected by ICAP members and 4 council
members are nominated by the Federal Government. Current nominees of
the Government are Chairman SECP, Deputy Auditor General of Pakistan,
Secretary Planning and Development (formerly Chairman FBR) and Secretary
Finance.

Affairs of ICAP are governed by a Council comprising of 19 members. 15

members of the Council are elected by ICAP members and 4 council
members are nominated by the Federal Government. Current nominees of
the Government are Chairman SECP, Deputy Auditor General of Pakistan,
Secretary Planning and Development (formerly Chairman FBR) and Secretary
Finance.

Apart from its core functions, ICAP contributes in promoting corporate

governance, formulating economic policies of Federal and Provincial
Governments including federal budget making with specific focus on
taxation.

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ICAP’S role as regulator of Accounting and Audit

ICAP is also a prominent participant of professional activities and

development at international level. Presently, ICAP nominees are working in
the following capacities on various international bodies:

 Member of the IFAC Board

 Member of the International Auditing and Assurance Standards Board

 Member of the IFAC Developing Nations Committee

 Member of the IFAC Professional Accountants in Business Committee

 Chairman of International Standards of Accounting & Reporting of

UNCTAD

 Member of the Board of Confederation of Asia and Pacific Accountants

 Member of the Board of South Asian Federation of Accountants

 Member of Asian-Oceanian Standard-Setters Group

Management and day to day running of the Institute is the responsibility of

the Secretary who is appointed by the Council of the Institute.

Vision

'The profession of Chartered Accountants in Pakistan should be the

benchmark of professional excellence upholding the principles of integrity,
transparency and accountability'.

Mission

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ICAP’S role as regulator of Accounting and Audit

'Our mission is to achieve excellence in professional competence, add value

to businesses and economy, safeguard public interest; ensure ethical
practices and good corporate governance while recognizing the needs of
globalization.'

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ICAP’S role as regulator of Accounting and Audit

The Institute of Chartered Accountants of Pakistan (ICAP) is the premier

accounting body in the country, with its head office in Karachi, and regional
offices in Islamabad, Lahore, Faisalabad and Multan.

ICAP is introducing a new concept of providing easy access to modern rental

facilities at its premises. This services manual has been designed to share
with you information pertaining to the facilities and services which ICAP will
provide.

Accounting Profession in Pakistan

Accounting profession has its deep roots and is the modern form of
stewardship. This profession has its deep roots prior to the independence of
Pakistan through the Income Tax Acts, Companies Act, and Sales Tax Acts.
Almost all of these legislations contain the names of foreign accounting
bodies like ICAEW, ACCA [under old name] etc. In 1956, Industrial
Accountants body was formed followed by ICAP in 1961. Almost all the
members of these two accounting bodies are foreign qualified either from
India or England and Wales.

ICAP emerged as the leading body owing to the understanding of the

concept of external audit by the general public. However, ICMAP [industrial
accountants] had open heartedly shared the still unknown concept of cost
audit with the ICAP members. ICMAP members are also doing training under
chartered accountants for getting the qualification of ICAP for practice
purposes. However, the students of ICMAP have already studied those
subjects.

ACCA showed its presence in mid-nineties in Pakistan and majority of the

students are nowadays training with QCR-rated companies of ICAP for the

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ICAP’S role as regulator of Accounting and Audit

last 4 to 5 years on a continual basis and the number is growing day by day.
To prepare its Pakistani students for the local environment, ACCA has
adopted the Pakistani Company and Tax laws as part of its syllabus. Currently
ACCA is conducting its examinations in almost all major cities of Pakistan
through the British Council Library.

PIPFA [formerly known as AAT] is a body jointly sponsored by ICAP, ICMAP

and Auditor general of Pakistan (AGP) to replace SAS. It is a second tier body
with enormous syllabus and its final stage contains the crux of final stage of
ICAP syllabus, except for IT. Within a decade this body had emerged as the
only alternate for 2nd tier accountant apart from Certified Accounting
Technician [CAT – a similar technician body of ACCA].

All the above referred accounting bodies require a minimum number of

training periods ranging from 3 to 5 years. ICAP requires 4 year article ship
under its member, ICMAP and PIPFA require a 3 year period. However,
ACCA’s training of 3 years is a bit structured and documented. The student is
required to fill diaries signed by their supervisor and may be selected for
audit by ACCA. The diary contains a diversified exposure portfolio which
includes audit, internal audit, cash management, finance, taxation etc.

ICAP’s Role as Regulator of Accounting

Profession
The main roles of ICAP are

1. Adoption of IFRSs
2. Adoption and enforcement of ISAs
3. Continuing Professional Development of members & other
professionals
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4. Education and Examination

5. Technical Committee
6. Taxation Committee
7. Quality Control Committee
8. Investigation Committee
9. Corporate Governance Committee

 Advisory Role to the Government of Pakistan and Regulators:

1. SECP : Joint Coordination Committee
2. SBP : Joint Coordination Committee
3. CBR : Joint Coordination Committee
 Commitment to continuing improvement in line with International Best
Practices
 Commitment to full implementation of SMOs

Quality Control Program

 Mandatory for all members: once in two years for every firm.
 Listed companies can only appoint auditors who are “rated as
satisfactory” by QCR committee of ICAP.
 Two unsatisfactory reviews or gross negligence leads to investigation
for misconduct.
 Not a peer review.
 QCR performed by full time employees (CAs) to ensure compliance with
ISAs and quality of work.
 QCR framework and list of firms rated as satisfactory are on the ICAP’s
web site.

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Statements of Membership Obligations

Benchmarks for member bodies of IFAC

 SMO 1: Quality Assurance

 SMO 2: International Education Standards for Prof. Accountants.
 SMO 3: Compliance with International Auditing & Assurance Standards.
 SMO 4: IFAC Code of Ethics for Prof. Accountants.
 SMO 5: International Public Sector Accounting Standards
 SMO 6: Investigation and Discipline
 SMO 7: International Financial Reporting Standards

Accounting Framework
 Financial Statements of listed companies & banks are prepared:
1. In accordance with approved accounting standards and the
requirements of Companies Ordinance, 1984 (CO).
2. Apprd Acctg Stds: comprise of IASs notified by SECP.
3. Wherever the requirements of the CO / BCO or directives issued
by the SECP / (SBP for Banks) differ with the standards, the
requirements of CO /BCO or the requirements of the directives
take precedence.
 Legal Requirements now largely in line with IFRSs.
 Accounting Standards are notified by SECP on Recommendation of
ICAP.
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 SBP has issued a circular detailing disclosure requirements / format of

banks, based on ICAP advice.
 IASs adopted except for:

1. IAS 29 (hyper inflationary Economy)

2. IAS 41 (Agriculture)
3. Six IFRSs
4. IASs 29 not applicable and little relevance of IAS 41 in Pakistan.

Auditing Profession in Pakistan

In the year 1952 the registered accountants formed a private body known as
Pakistan Institute of Accountants with the object of looking after their own
interest and taking up with the ministry of commerce, Government of
Pakistan matters affecting the accountancy profession. It was realized that
the accountancy profession had hitherto been well nursed by the
government but the Registered Accountants in the profession had in their
mind the ultimate goal of having an autonomous association the profession
instead of a section office.

The Pakistan Institute of Accountants persisted with the idea of

establishment of an independent body. An advisory body called the council of
accountancy was set under the auditor’s certificates rules 1950 which
recommended the establishment of the Institute of Chartered Accountants in
Pakistan. The government accepted the recommendations and the
department of accountancy assisted by the officials of the Institute and a
number of its members prepared the draft ordinance to be passed. The

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chartered accountants ordinance 1961 received the asset of the President of

Pakistan on March 3, 1961 and was published in part 1 of the extraordinary
gazette of Pakistan on March 10, 1961.

External & Internal Audit

 External Audit

1. The objective of an audit of financial statements is to enable the

auditor to express an opinion whether the financial statements are
prepared, in all material respects, in accordance with an identified
financial reporting framework.
2. Auditor’s opinion helps establish credibility of the Fin. Stats. It provides
reasonable, not absolute assurance, about the fair presentation of Fin.
Stats.
3. Reports to shareholders / work used by external parties.

 Internal Audit

1. An independent, objective assurance and consulting activity that adds

value to and improves an organization’s operations. It helps an
organization accomplish its objectives by bringing a systematic,
disciplined approach to evaluate and improve the effectiveness of risk
management, control, and governance processes.
2. Reports to the Audit Committee/ Board & CEO.

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ICAP’s Role as Regulator of Auditing

Profession
It should be noted that ICAP has placed the comments on its website
regarding QCR checked firms for listed companies that they have not
received any complaint in respect of these firms; hence, they are QCR
checked firms. This approach does not suit a body like ICAP and raises
doubts regarding the quality procedure. People see section 254 of the
Companies’ ordinance as free advertisement for the Institute of Chartered
Accountants of Pakistan as any illiterate person can conduct the audit apart
from them.

The suggested scenario of increasing the number of external audit bodies

may be new in Pakistan but people will be surprised to know that in England
CCAB comprises of six accounting bodies and all of them can conduct audits.
CCAB includes ACCA and CIMA [a parallel body of ICMAP in UK]. The apparent
solution of section 254 seems to be that private limited company with paid
up capital of less than 3 million and not being a subsidiary of a listed
company needs to be audited by PIPFA/CAT. The rest needs to be audited by
ICAP, ACCA and ICMAP. This will create a healthier competitive environment
within the accounting profession in Pakistan and may prove worthwhile to
restore the image of investors. In furtherance, quality of audit is the primary
goal of each accounting body’s member; however, SECP is making a cold
review.

Future challenges

Following are the key issues we face in the near future.

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1. Future regulation of Accounting profession

2. Internal Control Certification by External Auditors

Future regulation of accounting profession

Following the Enron and WorldCom scandals, there is a loss of confidence in

the ability of the accounting profession to regulate itself. But this cannot be
solved merely by adding independent members to existing governing Boards
or Councils.

Pure self-regulation may no longer be appropriate for statutory accounting

bodies. But direct government intervention in the regulatory and monitoring
process would undermine professional judgment. There is also a danger that
it would stifle innovation as accountants seek merely to demonstrate
minimum compliance rather than striving for continuous improvement in
standards.

The best balance may be obtained through the model of “independent

regulatory agencies” comprised of a mix of senior accounting and auditing
professionals and a majority of informed non-accountants, drawn from all
sectors of the user and public interest community.

All professional bodies should adopt fully transparent disciplinary procedures.

Cases involving significant public interest issues relating to alleged under-
performance or negligence should be dealt with by appropriately qualified
multi-constituency agencies which are demonstrably free of direct political or
professional control. However, audit monitoring by a specialist unit of the
relevant professional body remains a superior alternative to the now largely
discredited peer review approach. Control of professional ethics should stay
within the profession itself.

At the same time, accounting professionals should try to achieve a balance.

They must protect the public interest – and they must be seen to do so. And

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they must also protect and enhance professional standards and

independence. There is no conflict between the two. The best protection for
the public is said to be achieved when professionals work to the highest
technical and ethics standards.

Internal Control Certification by External Auditors

It is suggested that the law must require the CEO and CFO to certify that the
controls related to financial reporting are effective. This ensures that senior
management takes personal responsibility for the financial statements of
their company. It is further suggested that external auditors must be required
to attest to management’s assessment of the financial reporting controls.
Auditors must consider management’s process of assessing financial
reporting controls; they would also be required to form a view on whether the
controls were effective or not.

However, people think this as a futile exercise due to the additional cost but
effort would provide an important safeguard for the shareholders and those
who felt that attention would be diverted from top management and that
implementation would be unnecessarily expensive.

This requires extensive documenting, testing, reporting and auditor

attestation on existing financial processes and controls. Full compliance
needs to be required annually. Not every company will achieve a clean
controls certification and the reaction of the marketplace and regulators to
companies with control problems will be hard to predict. This may not be
without a cost but for investors that cost is worth paying!

Hence, it is suggested that each company's annual report must contain (1) a
statement of management's responsibility for establishing and maintaining
an adequate internal control structure and procedures for financial reporting;
and (2) management's assessment, as of the end of the company's most
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recent fiscal year, of the effectiveness of the company's internal control

structure and procedures for financial reporting. However, the company's
auditor is required to attest and report on management's assessment of the
effectiveness of the company's internal controls and procedures for financial
reporting.

Conclusion
SECP should promote healthier competition for the betterment of accounting
profession in Pakistan. It should allow other professional accounting bodies to
work as external auditors. SECP should not promote the monopolistic
competition within the accounting profession through section 254 of CO1984.

From now on, SECP approach should be forward-looking and I must respond
to the issue of corporate scandals in Pakistan by issuing a white paper for the
sake of better future. It must also look at the future regulation of
accounting profession and Internal Control Certification by External
Auditors.

References
www.icap.org.pk/

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www.icap.org.pk/userfiles/file/news/IAASB_IFAC.pdf

www.icap.org.pk/.../Tax_Audit_Chartered%20_Accountants_SM_ICAP_JAN
_2010.pdf

www.icap.org.pk/userfiles/file/Pakistancasestudyprtn.ppt

www.accountancy.com.pk/newsprac.asp?newsid=600

www.iasplus.com/asia/0711pakistanupdate.pdf

www.secp.gov.pk/CS/ChairmanSpeeches/PDF/160404_ICAP_Lhr.pdf

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