Fake audits no more: Software to assure corporate compliance

The Document Verification System (DVS) appears to be a game changer in ensuring corporate compliance in financial reporting as regulators are finding it effective in verifying the authenticity of audit reports and identifying irregularities, perhaps done by companies or audit firms.

The DVS is a software that ensures one audited financial statement for one company and allows corporate regulators access to the server using the unique document verification code.

The DVS was made mandatory in 2020 requiring companies to submit tax returns along with financial statements certified by chartered accountants. 

The following year the central bank asked banks and nonbank financial institutions to use the software, developed by the Institute of Chartered Accountants of Bangladesh (ICAB), to reduce the risk of non-performing loans and ensure credit discipline.

The system is designed to check submission of different audit reports to the authorities – like showing higher profits to get loans from banks or lower profits to evade taxes.

In one-and-half years since the system was put into effect, the National Board of Revenue (NBR), one of the key regulators to use it, has reported a good outcome.

Revenue officials say prior to the introduction of the DVS, around 27,000 companies used to submit audited financial statements to the NBR every year. But around half of the auditors would not be found.

This practice could largely be checked as the DVS helped the authorities verify audited statements filed by about 32,000 companies along with their tax returns last year. 

The NBR expects to receive financial statements of 40,000 companies this year and 1 lakh over the next five years. 

Revenue mobilisation has also ticked up thanks to the new system. Seeking anonymity, a senior official at a Dhaka tax office told The Business Standard that in the last fiscal year, they realised Tk2 crore in tax deduction at source from a company that used to pay Tk60-Tk62 lakh a year. 

All in all, there was a 30% hike in tax collection from companies in the last fiscal year, the official added.

ICAB President Shahadat Hossain told TBS that they found evidence of irregularities by some auditors after the online document verification came into force. They have already taken disciplinary action against nine auditors. 

An investigation is also going on against some other firms, he said.

According to the ICAB, nine types of firms, such as the NBR, Bangladesh Securities and Exchange Commission , most bank and non-banking financial institutions, Credit Rating Agencies Association, Bangladesh Investment Development Authority (BIDA), and Registrar of joint stock companies and firms, signed an agreement with the ICAB on the sharing of DVS data.

As a result, these organisations are getting the opportunity to verify audited financial reports online.

Some ICAB member firms would reportedly audit hundreds of companies annually. One firm used to audit more than 1,000 companies in a year, an impossible task considering their strength.

Shahadat Hossain said after the introduction of DVS, organisations, which have to access the DVS server, will be able to find out which auditors have signed in.  Besides, they will come to know revenue, equity, liability, profit/loss and assets of companies.

To bring corporate governance

Selim RF Hussain, managing director of Brac Bank Limited and president of Association of Bankers Bangladesh, told TBS that the DVS will play a positive role in bringing about corporate governance, which will be seen in the next two to three years.

In the long run, it will also help in reducing non-performing loans of banks, he said.

NKA Mobin, director of the Emerging Credit Rating Ltd and president of Credit Rating Agencies Association of Bangladesh, told TBS, "Companies now will see a fall in their credit ratings because of quality audit reports. But overall, the DVS will help in bringing transparency to companies in the future."

Dr Ahsan H Mansur, economist and chairman of Brac Bank, believes that the DVS will have a positive impact in ensuring compliance in the financial sector in the long run. 

From now on, if someone takes out an additional loan, he or she will have to pay more taxes. Similarly, if they evade taxes, they will not get loans according to their eligibility.

ICAB's council member Mohammed Forkan Uddin has worked closely with the DVS process since its inception. The DVS process exists in neighbouring India, Sri Lanka, and Nepal as well, but in a slightly different way, he said.

Shabbir Ahmed, head of NBR's Corporate Compliance Taskforce, told TBS, "After the launch of DVS, we have already started reaping its benefits. In the future, company tax as well as payroll tax will increase." 

He also feels that this system will help to bring about revolutionary changes in the field of corporate compliance.

According to NBR sources, about 2 lakh companies as well as 3 lakh directors in the country cover less than 7% of the total taxpayers, but they account for 90% of total tax collection.

Mohammad Hatem, managing director of MB Knit Fashions Limited, said besides DVS, the country's tax system should be made business and taxpayer friendly.

On condition of anonymity, a senior NBR official said, "We are giving unwritten amnesty to the companies to bring them into compliance."

Verbal instructions have been given to the field offices in this regard, so that they do not harass the companies unless they find major irregularities, he also said.

However, a senior accountant of the ICAB said some companies are still afraid of giving correct information fearing penalties. In this case, the issue of the NBR's amnesty needs to be clarified.

On the other hand, regarding the audit cost, ICAB President Shahadat Hossain said since there will be quality audits, the cost will also increase slightly.