Relevant and reliable financial information are essential to the integrity of capital markets, and independent and high-quality audits are an important tool in ensuring trustworthy financial reporting. The Institute of Chartered Accountants of Pakistan (ICAP), representing a key part of our country’s financial ecosystem, firmly believes that the effectiveness of quality control management approaches and assurance systems are the foundation for achieving consistent audit quality. However, ICAP recognizes that there can be varying approaches to this and indeed, its role in this area has evolved over the last decade.
In 2016, the Pakistan Audit Oversight Board (AOB) was created by an Act of Parliament and since then it has been playing a pivotal role in safeguarding the public interest by enhancing the quality and reliability of financial statements. However, the process to establish and operationalize the AOB took several years and stakeholder engagement, which was considerably supported by ICAP.
The AOB’s journey truly began in 1987 when ICAP members raised concerns in an Annual General Meeting (AGM) regarding the quality of services being provided by the members of the profession. The ICAP’s Council, appreciating the significant public interest matter, and created a four member-committee to carry out the first Quality Control Review (QCR) Program of ICAP members on a voluntary basis. After twelve years, in 1999, the voluntary program was converted into a mandatory program for all audits of listed companies. Three years later it received recognition by an external regulator, when the Securities Exchange Commission of Pakistan (SECP) made it obligatory for all listed companies to appoint an external auditor, who was certified under ICAP’s QCR program. In 2005, it was determined that the the QCR program should be placed under a Quality Assurance Board (QAB), independent of the ICAP. The QAB was comprised of members from ICAP, the SECP, the State Bank of Pakistan, and the Pakistan Stock Exchange.
Subsequently in 2009, a proposal for an oversight board was introduced by the government in part due to the EU withdrawing its exemption for the auditing profession in Pakistan for all EU subsidiaries operating in Pakistan because of a lack of independent oversight. ICAP realized the need for more action and progress and based on its experience with the QCR program, took the initiative of engaging with the relevant stakeholders including the Ministry of Finance and SECP. The government acknowledged ICAP’s expertise when it set up a joint committee in 2012 and invited members of ICAP and the Securities and Exchange Commission of Pakistan to develop a way forward in creating an independent oversight board. The report issued by this committee eventually led to legislation for setting up an independent oversight board.
In making recommendations to the government, the committee explored other oversight models. The structure of Pakistan’s AOB is based on the system of audit oversight in Japan in which the PAO continues to play a key role in achieving high-audit quality while the oversight board provides a strict oversight over the PAO’s quality assurance activities. The governance of the AOB is entrusted to an independent board, which is also financially independent of other regulators. A nominating committee appoints the members of the AOB through a robust process. This committee consists of the President of ICAP, the Secretary Finance GOP, the Governor Central Bank, and the Chairman Securities Exchange Commission of Pakistan.
Today, the AOB has a set of three important functions to perform. First, it reviews and examines the work of the QAB mentioned earlier. Second, it oversees and reviews policies, procedures, programs of the QAB to ensure an effective oversight of quality of audit of public interest companies. Third, it may specify any improvement required in the QAB’s policies, procedures, and systems. The AOB also has authority to register, deregister and directly intervene and inspect the work of practicing firms, when exceptional circumstances so require.
Notably, over the years, the QCR program and framework has been regularly reviewed, revised, and realigned with the IFAC’s requirements on quality assurance. ICAP’s advocacy and engagement with first the QAB in 2014, and thereafter, the AOB, has ensured that the framework remains in line with these best practices. This is illustrated by recent revisions that were approved in April 2019 and effective in June 2019.
The establishment of an audit oversight board has not diminished the relevance or value of ICAP and our story demonstrates how PAOs can leverage their expertise and experience by engaging early on with stakeholders and keeping its focus on serving and protecting the public interest. With the recent approval of new quality management standards by the IAASB, it will perhaps be more important than ever that PAOs maintain close dialogues with regulators, firms, and other key stakeholders to ensure proper adoption, implementation, and compliance in attaining audit quality.