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November 14, 2008

Cambodia in urgent race ahead of stock exchange opening

In the lead-up to the 2009 opening of the Cambodian stock exchange, the small southeast Asian nation is desperately in need of audit regulation and legislation.

The auditing industry in Cambodia is in its infancy following the turmoil of the Khmer Rouge. Regulations are an even more recent development, and a major criticism has been the lack of oversight and enforcement of auditing regulations. The impending opening of a new stock exchange has refocused attention on implementing audit regulation.

Skills shortage

Cambodia’s accounting and auditing industry is made up of just 75 licensed members of the Kampuchea Institute of Certified Public Accountants and Auditors (KICPAA). Less than half are Cambodian citizens, the others obtained their qualification outside Cambodia.

“We don’t have enough people,” KICPAA president Key Kak says. “Cost of education is one difficulty, but the basic education of the country does not provide enough students who are qualified to pursue the [Association of Chartered Certified Accountants] syllabus.”

The auditing standard-setter in Cambodia is the National Accounting Council (NAC). Prior to 2008, statutory audits were only required for financial institutions and other public interest entities. From this year, large companies satisfying two of three criteria require a statutory audit. These criteria are annual revenue exceeding KHR3 billion ($735,000), assets at the end of 2007 exceeded KHR2 billion and more than 100 staff as of 31 December 2007.

However, there is little evidence this new requirement has had any effect on the number of audits being undertaken. Companies are more likely to undertake an audit on the request of their bank.

Kak believes stricter sanctions are required to encourage more companies to follow the new rules.

This is a familiar theme in auditing regulation in Cambodia. While the industry is developing, regulation intentions have not yet crystallised into legislation. A 2007 World Bank report on accounting and auditing in Cambodia cited inconsistencies in legislation and the need to strengthen institutions as key issues that must be addressed.

The lack of auditing oversight in Cambodia is one of the most pressing issues, according to NAC chair and Under Secretary of State at the Cambodian Ministry of Economy and Finance (MEF) Ngy Tayi.

“Some parts [of the legislation] are not clear, particularly regarding authority,” Tayi says.

Cambodian law does not state who is authorised to oversee auditing and enforce accounting standards. An authority responsible for oversight will be created following an anticipated recommendation from the World Bank.

Tayi says new legislation will build confidence, which is a constant issue in a country notorious for its lack of accountability. In March this year, the government suspended inflation reporting after January’s consumer price index figures reached 19 percent. The government cited disagreements in methodology as the reason for the suspension but critics claimed the July election was the true motivation. In a country where corruption invades all facets of life, there are inevitably doubts about the accuracy of auditing.

Kak acknowledges gaining public confidence in Cambodia is difficult, however, he notes that the most difficult part of auditing in Cambodia is the lack of understanding of accounting practices among businesses.

Another issue is that although ISAs have been adopted in Cambodia, some businesses believe they can “shop around for subjective auditors”, Kak says. Neither the NAC nor KICPAA have received any complaints of auditor misconduct, but it is difficult to gain meaning from this as nobody has the necessary authority to oversee auditing practices.

However, Tayi says the new authority to oversee auditing will have the power to revoke licenses or fine firms if they are not conducting audits properly.

With Cambodia’s stock exchange planned to be launched in September 2009, implementing these changes is becoming more urgent. The opening of the stock exchange has been delayed twice already. However, the required auditing oversight provisions are yet to be implemented.

“All companies who wish to list on the stock exchange will be required to be audited,” Tayi says.

KICPAA claim that they have not yet been approached by representatives of the body setting up the stock exchange.

“We are expecting someone will come and ask us if we are ready to cope with the work,” Kak says, adding quickly: “No auditors – no stock exchange.”

John Boxsell

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