External auditors to get additional power to ensure transparency in banks

The Bangladesh Bank is set to formulate guidelines granting external auditor institutions more powers to ensure transparency in the financial reports of banks and non-bank financial institutions.

According to the draft guideline, external auditors will be able to scrutinise whether financial institutions have resorted to "window dressing" to increase capital, provisioning and profits.

In addition, auditors will be able to report irregularities related to loan classification and foreign exchange, verify the correctness of overdue loan information, and assess rescheduling and interest waiver issues.

The guideline, tentatively named "Bank-Company External Audit Regulations 2024," has not yet been approved. The Bangladesh Bank will issue the guidelines through a circular very soon, a central bank official told The Business Standard.

A bank can be audited by multiple external auditors. However, no institution shall conduct more than three consecutive years of inspection, the draft report, seen by TBS, says.

A bank will select external auditors annually and will issue the final appointment letter to the institution by August every year with no objection from the Bangladesh Bank.

Salehuddin Ahmed, a former governor of the Bangladesh Bank, has appreciated the initiative, saying, "Earlier external auditors used to give reports as per the wishes of a bank."

"Based on money, the inspectors divided them into A, B, C and D categories. So, there are questions about the acceptance of these tests. It is very good if audit institutions can properly bring up irregularities in bank loans and foreign exchange corruption. As guidelines are being made, they will be able to conduct inspection activities better than before," the economist told TBS. 

The managing director of a private bank, who did not want to be named, told TBS, "Issuing regulations is not very important. Because according to the instructions of Bangladesh Security and Exchange Commission, we have been following the rules of external auditors for a long time. They check the balance sheet of the bank, check the dividend, verify the loan information and give the final report.

"It comes up again in the Annual General Meeting. This is how it goes. I don't know the reason for issuing the new rules."

If a bank employs more than one external auditor, the head office shall be jointly audited. However, the bank concerned will determine which branch will be inspected by which institution.

The external auditor institutions shall send the interim report of the bank as on 30 September every year to the central bank only. But the final report has to be submitted by 30 December.

The audit report will encompass five types of reports, covering irregularities related to loan classification and provisioning, foreign exchange transactions, regulatory reporting, transmission of CIB information, and monthly monitoring related to liquidity preservation.

Special report submission 

If any section of the Bank Companies Act is violated, and a criminal offence related to fraud is committed, or if the required capital of the bank falls below 50% of the required capital, if the certainty of payment to depositors is disrupted, or if any serious irregularity occurs, the external auditor shall immediately inform the Bangladesh Bank through a special report.

Confidential report

The external auditor will submit a confidential report to the Bangladesh Financial Intelligence Unit (BFIU) if any irregularities are found related to Suspicious Transaction Reporting (STR) and Cash Transaction Reporting (CTR) during the audit.

Monitoring of foreign currency transactions and loans

The audit institutions will check whether there is any violation of the prescribed regulations in the conduct of import-export activities, whether there is irregular financing in export bill discounting/negotiation/purchase.

There are now 31 qualified audit firms for auditing the financial reports of banks and non-bank financial institutions. 

The Bangladesh Bank publishes the list of eligible audit firms every two years. Last year, 21 institutions were removed from the list due to involvement in various irregularities. Five audit firms got a new place in the list. According to the latest list, the number of qualified audit firms has now dropped from 47 to 31.

In the sixth chapter, it is said that in view of the review of the overall financial indicators of the bank, the Bangladesh Bank may give instructions for the appointment of multiple external auditors in any bank at the bank's own expense. 

Besides, the Bangladesh Bank can disqualify the external auditor in case of negligence or failure to fulfil the duties according to the provisions of the Bank Companies Act.