Bangladesh’s banking crisis: More than audit failures

As Bangladesh's banking sector begins to show tentative signs of recovery, attention is increasingly turning to those responsible for years of mismanagement that led to a surge in non-performing loans (NPLs), pushing the sector to the brink of collapse. At the heart of the problem lies a state–business nexus, where bank licences were granted on political considerations to parties loyal to the government.

This, in turn, facilitated the rise of a new class of oligarchs capable of exerting significant influence over commercial banks' lending decisions, often bypassing established accountability and governance mechanisms.

In recent months, the Financial Reporting Council (FRC) has moved to investigate auditors involved in the audits of several troubled banks, with a view to taking disciplinary action. In many respects, the FRC's actions are both justified and commendable. In times of heightened uncertainty, auditors play a critical role as guardians of accountability, and it is evident that some have failed to exercise adequate professional scepticism.

In other jurisdictions, including neighbouring India, auditors have faced substantial fines and disciplinary measures for similar lapses. Indeed, the Institute of Chartered Accountants of Bangladesh (ICAB) has recently drawn media attention for its stance against auditors implicated in a comparable scandal in the non-banking sector.

There is, therefore, little doubt that auditors form part of the problem. The more pertinent question, however, is whether audit failures represent the root cause of the banking sector's crisis. A basic understanding of the financial reporting architecture makes clear that auditors are tasked with expressing an opinion on whether financial statements present a true and fair view. This opinion is based on processes designed to provide reasonable—rather than absolute—assurance, and depends heavily on the resources that audit firms can commit to a given engagement.

In Bangladesh, auditors operate in an environment where investors have a limited appreciation of the value of audited financial statements. This weak demand is reflected in audit fees, which are among the lowest globally—significantly lower even than those in neighbouring India, Pakistan, and Sri Lanka. Such pricing is largely driven by the attitudes of company owners and management, who often view audits as a regulatory burden rather than a value-adding exercise.

While low fees should not compromise auditors' ethical standards, they inevitably constrain firms' ability to allocate sufficient resources to audit engagements. As a result, auditors may become overly reliant on management representations.

Ultimately, responsibility for preparing financial statements and ensuring their integrity rests with company management. Effective discharge of this responsibility requires strong corporate governance, including competent independent directors and robust audit committees. In Bangladesh, however, the process for appointing independent directors is often questionable, leading to the selection of individuals who may lack either the capability or the willingness to hold management to account. This weakens the integrity of financial reporting and elevates audit risk.

It is important to note that these challenges—weak governance, poor accountability, and limited demand for high-quality audits—are not unique to Bangladesh; they are common across many developing economies. However, one feature appears particularly distinctive in Bangladesh's banking sector. Auditors are required by the central bank to attend tripartite meetings involving representatives from Bangladesh Bank, the client, and the auditors before signing off on audit reports. It has been widely alleged that, in such meetings, central bank officials often sided with clients and pressured auditors to accept NPL provisioning practices that may deviate from international financial reporting standards.

In theory, such pressures should not deter auditors from upholding their professional and ethical responsibilities. In practice, however, given the political sensitivity of these engagements, the high stakes involved, and the nature of the regulatory environment that prevailed until recently, it may be unrealistic to expect consistent resistance from auditors. This suggests that while auditors have undoubtedly been part of the problem, disciplining them alone will not resolve the systemic issues afflicting the banking sector.

What is required instead is a comprehensive reform agenda: strengthening corporate governance, enhancing the independence of oversight mechanisms, and curbing undue regulatory interference. Without such structural changes, simply taking disciplinary actions against the auditors in the banking sector would appear to be a temporary fix, akin to placing a plaster over a deep and persistent wound.

Professor Javed Siddiqui, is a Professor of Accounting at the Alliance Manchester Business School, the University of Manchester, UK. E: javed.siddiqui@manchester.ac.uk

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.