Dr Khalid Maniar is a veteran in the field of accountancy. Being in the profession in the country for more than quarter of a century, he is considered to be an authority to comment on the auditing industry's achievements in the country - and its shortcomings. As founding and managing partner of one of the oldest firms in the country, AGN Mak, he has many worries. During an interview with The Business Weekly's CL Jose, he expressed concerns about the way property companies book huge profits from revaluation of assets. Stating that this is not advisable in a new and emerging market like the UAE, he took a dig at the disparate ways the different audit firms follow in approaching areas like fixed assets, related party transactions, investment property and so on. Calling for the establishment of uniform standards in the industry, he said training is the best way to achieve this. Excerpts:
When was AGN Mak established and how big is it now?
Established in 1981, AGN Mak is one of the oldest accountancy firms in the UAE. The firm, which has got 12 offices in the UAE alone, has also expanded into Sultanate of Oman, Azerbaijan, Iran and Afghanistan. Our international partner AGN International is present in 88 countries through more than 500 offices.
How big is AGN group globally?
It is the ninth largest after the Big Four - KPMG, PricewaterhouseCoopers, Ernst & Young and Deloitte Touche.
All the Big Four are present here. What will be your ranking here?
Frankly speaking, here in the UAE, ours should come immediately after the four. Anyway, officially, I would prefer to put it like this - we are in the top five after them. We have more than 3,000 accounts and 12 offices in the UAE and this makes us the number one in terms of the number of accounts as well as in the number of offices.
The fact that you alone handle more than 3,000 clients means the number of companies going for auditing and other services keeps increasing in the UAE. Why is this so?
The legislative requirement requires accounts to be audited for several purposes, including the renewal of licence. The second reason for this is the insistence from financial institutions on producing audited financial statements when these companies seek credit facilities. If you are a new company, the first question a bank raises is who the auditor of the company is. If you are not audited, most of the banks will not entertain you. Moreover, when new companies set up office in the UAE, they invariably have to fall upon an audit firm to get the formalities done and their future audit work to be carried out.
How many audit firms does Dubai have?
Dubai alone has 100-odd audit firms. There is good business for all audit firms though, at the beginning, they may find it difficult to establish their initial jobs.
Is there competition among audit firms and does this affect the quality of work?
Competition is there and to a good extent, this competition is prompting at least a few to compromise on the quality of job they undertake. But this is only for the short term because at the end of the day, clients would certainly realise who can deliver better. If the audit firms seek to dilute the requirements laid out by the standards, it would affect the companies being serviced. Moreover, the user of the accounts (mostly financial institutions) will come to know the quality of such audits and subsequently, may ask the companies to change their auditors. There are some firms known for this in this market.
Are there no bodies for audit firms which could look into these matter?
Yes, we have two bodies - Accountants and Auditors Association (AAA) and there is an auditors group, which is an elected body under the Dubai Chamber of Commerce. Though I am also a member in this group, this body has proved to be rather passive. There has not been a single meeting of this group during this year. This is because we ourselves are very busy with our jobs. Both these bodies are weak, to be frank.
Don't you think this is not enough?
True, as an auditors' body, we should be doing much more. Fortunately, banks prepare a list of auditors and categorise these firms on the basis of performance and banks may not accept the financials produced by the firms that do not figure on this list.
Is there any uniformity in fee?
That cannot be. Even within a firm, uniform fee is not possible. There could be even different fees for a particular company charged by the same audit firm, depending not only on the type of job but the urgency of the job as well. There are times when urgent work will call for higher rates.
Getting talent in the financial services industry is a big challenge. Is there a similar issue with your industry?
Yes there is. With India's economy booming, even junior chartered accountants are being offered high salaries there. This has a negative impact on the UAE's audit firms which depend on Indian talent extensively. India has a very good market for chartered accountants now.
Almost all bank accounts are with the Big Four. Why is it so?
This is a fact. But for one or two banks, all other bank accounts are with the Big Four. No one can get into these banks and this reminds us of cartelisation. We don't get a chance to do the auditing of banks and this is ridiculous. In neighbouring Doha, banks' accounts have to be done by two firms - one from the Big Four and another from other firms. This way, everyone gets a chance to do bank auditing, in turns. In India, the Institute of Chartered Accountants of India (ICAI) allocates bank audits. Of course, this is done in co-ordination with the banks' bureau. If you are a registered firm in India, you will definitely get to audit a bank after a certain period. You can have a rotating system, whereby the banks' audit is given to other firms also in turns. But this is not being done here.
You have two bodies to represent the audit firms. Why don't these bodies take up the matter with the higher authorities?
The bodies are also dominated by the Big Four. We want to raise these issues through our media and I am sure you will do this. I am sure the government will support us.
What is the Central Bank's stand on this?
If the Central Bank follows this rule (of giving bank audits to all competent firms in turns), then we can implement the rotating audit system among banks, which would work in favour of the banking industry.
Is the system of rotating audit existent in any other country?
Yes, this is existent in many countries. I think the Central Bank has to take the initiative.
How will this help the banks?
Rotation will help eliminate the monopolistic tendencies in the market. In the present scenario, the client is likely to be denied of its due services from an audit firm. If the rotation is introduced, the audit firms cannot be careless or be negligent about their services. There are value-added services that could help the banks in a big way and these could help banks design their business in a much better way.
Can you elaborate?
Audit firms, for example, can advise banks on clients, they can assess the real potential of a client and thus help banks reposition certain clients. It isn't mere audit that an audit firm can offer. They can offer a lot towards business development as well.
Is there room for audit firms to compromise on standards and quality?
Yes there is room for anything. An audit firm can help a property company to show higher profits than the company could have ideally made. This could lead to shareholders and investors losing trust in that company in the long term. There are areas like revaluation of assets for a property company where an audit company can help the company show a higher profit for a particular year. Earlier, as per IFRS, these have been done on a historical basis meaning that unless the gain is realized, it cannot be booked.
The revaluation of assets has, of late, become a controversy. Why is this so?
There is no harm in recognising the revaluation profit or loss, as the case may be in profit and loss (P&L) in a matured market. But whether this pattern can be followed in a new market like the UAE is questionable. What will happen if the huge revaluation profit comes down the next year? Can the shareholders of a property company digest a huge loss from the next year's revaluation? These are areas where we need to think aloud and draw a conclusion. We don't know whether the changes in value are sustainable for our markets.
Many banks here are apparently not doing revaluation on their fixed assets. How do you view this?
Revaluation of fixed assets is different. Whether you may or may not do a revaluation on fixed assets is not an issue. When it comes to investment assets, this is very important. You construct a building, and in between, you revalue the assets and book a profit. Take a scenario where after two years you want to sell the building. If the value has come down by that time, your P&L account can invite a chaos.
All companies here invariably follow IFRS. Can we say that all audit firms are following the standards the same way?
Ideally, all firms should be applying them in the same way. But unfortunately, they vary from firm to firm in implementation. Take for example, the case of fixed assets. Though everyone knows how the audit has to be performed and which aspects have to be taken into consideration while assessing fixed assets, many seem to be ignoring them. There are also other areas like related party transactions and investment properties where audit professionals apply differing standards. Whereas in the developed countries, the application would be more or less uniform, the standards here differ from country to country and this has to be viewed seriously in the light of the GCC countries' preparation for single currency and monetary union. However, there are various other areas that are very subjective and they would have to be addressed globally. In the case of bad loans, some banks follow dubious ways in order to save loans from being non-performing; they bring in transactions to these accounts and keep them live and buy time.
Are our firms equipped to audit Islamic banks?
This is an issue. There are various issues specific to Islamic banking alone. It would be difficult for auditors who are not well-versed with Islamic banking to verify whether the Islamic banks have complied with terms they claim to have complied with.
© The Business Weekly 2007
