he Institute of Chartered Accountants of Nepal (ICAN) is an autonomous body dedicated to the development of chartered accountancy education and the regulation of accountants in Nepal. Sujan Kumar Kafle, who has been leading ICAN since June 2023, feels there is a lack of understanding of the role and importance of accountants. In a conversation with Madan Lamsal of New Business Age, Kafle talked about ICAN and the audit business, highlighting efforts that he has made to make the organisation's service delivery systematic and efficient along with upgrading chartered accountancy education. Excerpts:

What are the challenges within the auditing industry in Nepal?

We are currently in the process of implementing Nepal Financial Reporting Standards (NFRS). It is our responsibility to explain this matter to the concerned bodies and individuals, as well as to our members. To facilitate this, we are conducting awareness programs, training sessions, interactions and seminars all over the country. Although NFRS should have been implemented in small and medium businesses by 2018, we could not proceed due to the COVID-19 pandemic. Now, it has been applied to small and medium businesses as well. Our next step is to ensure the complete implementation of NFRS.

Companies have started preparing financial statements based on the NFRS system. How do you evaluate their progress?

In 2006, ICAN became a full member of the International Federation of Accountants (IFAC)—the global umbrella organisation for accountants. As a member, it is our responsibility to implement international standards recommended by IFAC. We are applying these standards to accountants, audits, chartered accountant education, sustainable accounting practices, and more. Implementing NFRS in Nepal, however, was challenging. In 2012, we began implementation of NFRS with national companies. It has since been extended to private companies through public limited companies. We have also developed a separate 'customised' NFRS for small and medium-sized companies that cannot fully implement the standard. We are committed to the full implementation of NFRS and provide training to facilitate this process where needed.

Since NFRS is a new concept, it took time to understand its implications and the consequences of non-implementation, and implementation. Once implemented, NFRS creates accounting reports that are globally comparable. Additionally, it requires disclosure of many indicators which enhance the transparency and accountability of companies.

What is the reason for the discrepancies between the figures in the quarterly and annual financial reports of some public companies?

Since quarterly financial statements are not audited, some topics may not have been fully accounted for. These statements are published based on the management's report. In the final financial statement, additions, reductions and adjustments are made based on the auditor's examinations which may result in different figures. However, there are generally no significant discrepancies in the financial statements of public companies. Even if there are notable discrepancies, the auditor is not responsible for the initial quarterly figures. The auditor's role is to examine the financial statements and ensure they comply with accounting standards. Ensuring the accuracy of the financial statements is primarily the responsibility of the management. The auditor's job is to provide an independent opinion on these statements and recommend necessary adjustments if there are any omissions or non-compliance issues, which may result in some differences from the unaudited quarterly reports.

What new developments are on the horizon in the field of auditing?

Sustainability standards, namely 'Sustainability Standard 1' and 'Sustainability Standard 2', have been introduced in the audit business. Additionally, the 'Associate Sustainability Standard' has also been introduced. These standards stem from the concept that businesses worldwide should prioritise sustainability, transcending mere auditing practices.

To ensure business sustainability, it is important to adhere to principles of environmental, social, and corporate governance (ESG). This entails safeguarding the environment, addressing social issues and upholding good governance practices. Accounting and auditing standards have been developed accordingly. Our accounting and auditing board is preparing for their implementation. Sustainable accounting standards may be introduced as early as this year.

We have realised that audit standards should be separate for small companies (less complex entities) which means distinct audit standards should apply to small and low-risk companies. Other countries have set timelines for implementation. For example, Sri Lanka has announced that these standards will be implemented from January 2025. Our board of auditors is also preparing for this change.

About 80% of businesses in Nepal are small and medium-sized, and our auditing firms primarily serve these businesses. They do not require the full set of audit criteria. It is not appropriate to apply the same standards to businesses with revenues of Rs 20 million as those with revenues of Rs 2 billion.

The topic of business sustainability is becoming widespread globally. Doing business is not just about making profit; it should also be sustainable and address employee issues. Good governance must be maintained as well. There is also a provision that companies should make non-financial indicators public. For example, companies should disclose their efforts in pollution control, reducing the use of plastic materials and their role in reducing carbon emissions.

Nepali CA firms often serve as expert advisors and provide internal reports to management but are not authorised to sign financial statements.

There is a tendency to impose certain international standards only on poor countries. Are the international accounting standards causing any issues for Nepal?

This analysis is superficial. When a country fails to develop itself sufficiently, it often finds itself making agreements with developed nations and donor agencies. Take, for example, India's decision regarding IFRS implementation. India opted to develop its own standards rather than adhering to international ones. Nepal lacks the necessary resources and workforce to implement these standards on its own.

Auditors appear to operate within small partnerships rather than large firms. Can ICAN facilitate consolidation among accounting firms, similar to the Nepal Rastra Bank's merger initiative that specified capital requirements?

ICAN can strive to create an environment conducive for the growth of large audit firms. The presence of such large firms contributes to sustainability and capacity building within the auditing industry. However, the current culture in Nepal tends to favour individual practices over partnership models.

While we recognise the importance of larger firms, the formation of such entities has been hindered by a lack of partnership mindset. ICAN does not aim to force mergers by imposing capital requirements akin to those set by the NRB for banks and financial institutions. Instead, we encourage voluntary mergers if firms choose to pursue them on their own accord.

Can criteria be established to encourage the growth of firms?

That can be done. We have implemented minimum fee standards to uphold the quality of accountancy services. Furthermore, we are actively promoting the formation of larger partnership firms. However, in Nepal, there exists a tradition of individual work rather than partnership ventures. This trend is also observed in India where about 75% of chartered accountants operate as individual firms.

How is Nepali chartered accountants internationally recognised?

Currently, there is a high demand for Nepali chartered accountants in many countries. Over 250 chartered accounts are employed in Gulf countries, with more than 100 working in Canada. Gulf countries are the preferred destination for Nepali chartered accountants seeking opportunities abroad, followed by Canada, the US and Australia. One of the main reasons for this trend is the restriction on chartered accountants entering government services in Nepal. While engineers and doctors can secure positions in government service, chartered accountants cannot. Since chartered accountants can make significant contributions in government accounting, auditing, taxation, and other areas, ICAN has taken needful initiatives in this regard.

What initiatives has ICAN taken in this direction?

We have submitted a report to the government outlining the potential roles chartered accountants can undertake in government services and proposed pathways for their admission. During discussions with ministers and secretaries, there has been a positive reception to this initiative. However, establishing specific positions is crucial for implementation. Currently, chartered accountants are often appointed as experts which may not provide sustainable opportunities for career growth and personal development. Legal reforms are necessary to open avenues for chartered accountants to enter government service more systematically.

What initiatives are you undertaking to ensure educational equivalence for Chartered Accountants which has become more complex?

The issue of educational equivalence for chartered accountants has become more complex recently. Previously, Tribhuvan University issued a booklet stating that the chartered accountant qualification is equivalent to a Master's degree. However, this statement has since been retracted, raising concerns about the status of individuals who obtained equivalence under the previous guidelines. It is difficult to address this situation, and many feel unfairly treated as a result.

Unlike other countries where the University Grants Commission determines equivalence, in Nepal, this authority lies solely with Tribhuvan University. Notably, no other university or agency in Nepal has the authority to grant equivalence. Currently, the university refers to the chartered accountant as an 'undergraduate' degree. This inconsistency in recognising the CA qualification's equivalence seems to stem from a tendency in Nepal to make decisions based on personal considerations whenever there is a change in personnel of a certain status. This discrimination is cited as one of the reasons many CAs are seeking opportunities abroad.

To address this issue, initiatives are needed to ensure a consistent and transparent process for determining educational equivalence for professional qualifications like the CA. Some potential initiatives could include:

Is there any work being done to export accounting services from Nepal?

Nepalis are involved with multinational CA firms, and many chartered accountants have gone abroad to work. However, audit services alone cannot be exported as the laws of other countries do not grant the necessary rights. Permission must be obtained to conduct audits. So Nepali chartered accountants can typically work only as consultants or internal auditors.

Some CA firms are working in partnership with foreign entities, right?

Yes, but these roles are limited to internal audits or assisting rather than acting as the principal auditor. If a foreign entity wishes to enter into a partnership in Nepal, they can hold up to a 49% share, while the remaining 51% must be owned by a Nepali. Nepali CA firms often serve as expert advisors and provide internal reports to management but are not authorised to sign financial statements.

It has been alleged that despite being a regulatory body, ICAN has not been able to fulfil its role effectively and has failed to take action against CAs who have conducted audits according to the desires of company directors. What is your response to this?

ICAN's statutory mandate is to develop chartered accountancy education and regulate accountants. Our responsibilities are focused on these areas. We take action if an auditor is found to be at fault in instances of misconduct. However, addressing misconduct by company management falls under the purview of other regulatory bodies or the police. If an auditor has made a mistake or engaged in unethical behaviour, that falls within our jurisdiction, and we will take appropriate action.

After the audit, if there is no improvement according to the auditor's comments, what is the responsibility of the auditor?

The appointment of an auditor in any company is for one financial year. Once we provide an opinion on the financial report prepared by management for that financial year, our responsibility is completed. Further action based on our opinion is the responsibility of the concerned regulatory body. There is a misunderstanding about the auditor's role in this context.

Can't ICAN take action based on the weaknesses identified by the auditor after analysing the audit report?

We have set a limit on the number of organisations auditors can audit and control the number of financial statements an auditor signs through the 'UDIN' system. However, it is not feasible to identify weaknesses by reviewing all the financial statements signed by our members, as the number of mistakes is in millions. If a company's financial statement receives public comments or if we receive a complaint, we conduct a detailed study. If we find that our members have made mistakes during the audit, we will take appropriate action.

In the current fiscal year, the government collected taxes from companies that received tax exemptions during mergers and acquisitions through a retrospective law. How do you respond to the allegation that ICAN did not provide any opinion on this matter?

It is not appropriate to comment on issues that have been enacted into law by the government and implemented through the court process. However, during discussions held at the finance ministry before the budget, we advised against imposing this tax. We were prepared to provide our opinion in writing if requested formally. Since it was directly included in the financial bill, we had no platform to voice our opinion.