Memorandum presented at the Reshaping the Accountancy Profession in Kenya Seminar organised by World Bank & ICPAK

1. COAST Branch
Memorandum on Financial Reporting Oversight Law Bill 2012
From: Institute of Certified Public Accountants of Kenya -Coast Branch
To: Council of ICPAK and Facilitator, Reshaping the Accountancy Profession
Date: 26th June 2012
RE: COMMENTS ON THE PROPOSAL FOR THE FINANCIAL REPORTING OVERSIGHT LAW
We have read the above proposed bill which is has been sponsored by the World Bank in its noble
initiative to increase institutional capacity to improve the quality of financial reporting in Kenya. The
primary source of weaknesses were identified in a review of accountancy and auditing in Kenya and
documented in the World Bank Report on Observance of Standards and Codes (ROSC) in Kenya and
documented in a Kenya Country Action Plan. We document below our views on it.
1. PART I – Section 3 - Definitions
Issue
The definition of a Public Interest Entity (PIE) needs to be expanded to specifically include other
entities in which the public has an interest in other than those stated.
Recommendation
The list of PIE’s to include at least co-operative societies other than SACCO’s, Retirement benefit
schemes, NGO’s and national/county government owned/partly owned corporations.
2. PART II - ESTABLISHMENT OF FINANCIAL REPORTING OVERSIGHT BOARD Section 5 (3)
Issue
The composition and manner of appointing the board may not be in the spirit of the “New” Constitution
of Kenya. Extract below of contested clauses;
“(3) The Board shall consist of –
(a) a chairman and a vice-chairman to be appointed by the President on the recommendation of the
Minister;
(b) five other members appointed by the Minister, two of whom shall be experienced fellows or full
members of the Institute (hereinafter referred to in the context of the Board as “experts”;
(c) the Auditor General or a person deputed by him in writing for the purposes of this Act;
(d) the Accountant General or a person deputed by him in writing for the purposes of this Act;
(e) the chief executive of the Board.

2. (4) The chairman, vice-chairman, and every member appointed under paragraph (b) of Subsection (3),
shall be appointed from amongst persons who have experience and expertise in accounting, auditing,
financial regulation, capital markets, finance, business, corporate law and the preparation, presentation
and interpretation of financial information.
Implication
The Financial Reporting Oversight Board shall be at the mercy of the executive arm of the government
and its appointees. This will have the potential to gag ICPAK members who are vocal and wish to serve
their profession and the Kenyan public as being seen anti-establishment will hinder their appointments.
The Board shall be (potentially) dominated by non-CPA’s who will not be able to understand the
financial reporting framework, and if not members of another professional body not bound by any
ethical code of conduct, hence potential to politicise or trivialise issues they do not understand.
Recommendation
 Increase the number of members of the Board who are persons regulated by ICPAK.
 The members be appointed by a competitive process and vetted by a suitable body.
3. PART IV CHIEF EXECUTIVE AND OTHER STAFF – Section 10
Issue
The Chief Executive is appointed by Minister (Cabinet Secretary), no indication of the recruitment
process for other senior staff and it is not specified that the persons should be a member of a regulated
professional body.
Implication
Being appointive positions suitable persons might not be appointed by the minister/ cabinet secretary.
Recommendation
The appointments must be by a competitive process and the person should be a member of one of
these bodies: ICPAK, ICPSK or Law Society.
4. PART V – OBJECTIVES, FUNCTIONS AND POWERS OF THE BOARD – Section 13
Issue
We feel there are certain objectives and functions which overlap with the Role of ICPAK. Noted below.
(e) Oversight of the regulatory, disciplinary and related post-qualifying training and support functions
of the Institute;
(f) Oversight of the content and quality of the pre-qualifying education, training and examination of
accountants and auditors.
Implication
These provisions are simply a duplication of the functions of ICPAK and should remain with ICPAK.
Recommendation
 These clauses should be removed from the functions of the FROB.
 Oversight of other significant parties in corporate governance and company direction like Company
Secretaries (ICPSK) and members of Institute of Directors Kenya (IoD Kenya).

3. 5. PART VI – CERTIFICATION AND REGISTRATION OF PIE AUDITORS AND PIE AUDIT FIRMS
Issue
The Financial Reporting Oversight Board (FROB) shall be certifying and registering PIE auditors, who also
will have to be members of ICPAK hence also regulated by their professional body. Implication
Implication
Certifying implies issuance of a certificate on meeting certain criteria like passing an examination etc,
A two tiered profession will be created the Pie registered auditor – Superior and non PIE registered
Inferior in the perception of the public.
Recommendation
The criteria for certifying should be disclosed i.e. which benchmarks need to be met, before a firm can
be a PIE auditor. The list of auditors meeting the benchmark should be obtained from ICPAK.
The direct oversight of firms providing public accounting services should be left to ICPAK, i.e. FROB
should not get into operational management of the audit and accountancy profession.
A unified profession is in the best interest of the public as being a PIE registered Auditor can become an
unfair marketing tool used to imply to the public one group of CPA’s are better than another. Adequate
public awareness should be done and policies put in place whereby PIE registered auditors status does
not result in unfair practices by firms.
6. PART VIII – PROVISIONS RELATING TO PRACTISING PIE AUDITORS AND FIRMS
Issue
FROB shall have the powers to review work of PIE Auditors and shall have the ability to institute a
separate disciplinary process.
Implication
The PIE Auditors can be subject to two different disciplinary processes for the same offence, therefore
violating the principle of double jeopardy.
Recommendation
There should be one disciplinary process for all Accountants whether in public practice, self employed,
employed in business or in whichever sphere of life they earn their living and this should be in the hands
of ICPAK, which understands the regulatory standards, rules and norms of the profession. FROB should
only oversee that ICPAK carries out its mandate.
7. PART VII – DISCIPLINARY AND RELATED PROVISIONS – SECTION 31
Issue
The composition of the Public Interest Entity Tribunal is dominated by lawyers.
Implication
Lawyers while useful as a quasi-judicial body , however the issues will relate to financial reporting.
Recommendation
ICPAK representation should be increased as these discussions would relate to financial reporting.

4. 8. Part IX - Oversight of Institute of Certified Public Accountant of Kenya (ICPAK)
Issue
Creation of the Financial Reporting Oversight Board to have oversight ICPAK and Kenya Accountants and
Secretaries National Examinations Board (KASNEB) (Part XI).
Implication
The Accountancy Profession has always been a self regulating profession in the Commonwealth and
most other parts of the world, this principle is being violated by giving the oversight of ICPAK to an alien
body under executive control of the government in power.
Recommendation
ICPAK should remain a self regulated profession to maintain its independence. If there were any
shortcomings in ICPAK due to lack of legislative support, should seek to build the capability and capacity
of ICPAK rather than subject it to oversight by a body under executive control of the government.
ICPAK should be the body exercising oversight of KASNEB, as it is a body which determines the content
of accountancy education and conducts the examination of future members of ICPAK.
9. PART X - FINANCIAL PROVISIONS AND REPORTING REQUIREMENTS
Issue
The fees from registration of PIE firms and other unspecified sources are to fund the operations of this
Board and its Public Interest Entities Tribunal. Extract below of the act.
“37. (1) The Board shall have its own general fund.
(2) There shall be paid into the general fund -
(a) all such sums of money as may be paid as fees under this Act; and
(b) all such sums of money as may be received by the Board for its operations from any other
source approved by the Minister.
(3) There shall be paid out of the fund all such sums of money required to defray the expenditure
incurred by the Board in the exercise, discharge and performance of its objectives, functions and
duties.”
Implication
If PIE auditor registration fees are going to provide the biggest share of the Boards budget then the
annual fees are expected to be beyond the reach of most Small and Medium Practices. A point to note
is that a SACCO is a Public Interest Entity but whose audits are mainly performed by SMP’s as a majority
of them are quite small in size.
Recommendation
 The board should be fully funded by another source like NSE/CMA or Consolidated fund of the
Government of Kenya like in the US the Public Company Accounting Oversight board is funded
by Securities and Exchange Commission. See extract from Wikipedia
http://en.wikipedia.org/wiki/Public_Company_Accounting_Oversight_Board

5. “The PCAOB has five members, including a chairman, each of whom is appointed by the U.S.
Securities and Exchange Commission (SEC). Precisely two members of the PCAOB must be or
have been a Certified Public Accountant. However, if the chairman of the PCAOB is one of
those two members, he or she may not have been a practicing certified public accountant for at
least five years prior to being appointed to the Board. Each member serves full-time, for
staggered five-year terms. As of 2009, the salary of the PCAOB's chairman is $672,676 per year,
while the salaries of other board members are $546,891 annually.[1] The Board's annual budget
of approximately $180 million,[2] which must be approved by the SEC each year, is funded by
fees paid by U.S. securities issuers. The organization has a staff of over 600, and its headquarters
is in Washington, D.C.”
 Alternatively, the burden of the costs be shared equitably by CMA/NSE, regulators of PIE’s i.e.
Bankers, Insurance, Retirement Benefit schemes, SACCO’s, Co-operatives, and PIE auditors
 The issue of recovery of costs of investigating complaint’s should be addressed costs should be
borne by the PIE and/or PIE Auditor (proportionately as the primary responsibility for the
financial statements and disclosures in the notes and other statements in the annual report is of
the board of directors) if found on the wrong and by the complainants if the PIE and PIE
auditors are cleared of the allegations. This is to ensure frivolous claims are not brought to the
FROB and natural justice is served.
CONCLUSION
We believe the intentions behind the initiative of having the Financial Reporting Oversight Board are on
the overall good for the economy of Kenya, as it will inspire confidence to international investors in
Kenya. However, a few Key area’s of concern need to be addressed summarised below.
 It should strengthen the Accountancy profession through ICPAK.
 It is an oversight body whose composition is ironically by the executive arm of the government,
without reference to a competitive process or vetting by Parliament or another body.
 The funding is also supposed to come from fees charged to ICPAK’s membership not the
appointing authority or the supposed beneficiaries Public Interest Entities.