Why improving financial reporting quality in Bangladesh is essential to combat corporate malpractice

The recent fall of Bangladesh's autocratic regime has opened the floodgates to information about the country's corruption and economic mismanagement. Alarming details of rampant corruption across various sectors are surfacing almost daily.

As we come to grips with the extent of this malpractice, particularly in the financial sector, questions are being raised about why the true financial health of these banks and companies was often hidden in their books.

The serious concerns about the state of financial reporting and audit quality in Bangladesh points to a need for overhauling the industry. I will focus on potential solutions and explore how the key actors in financial reporting—business entities, auditors, and regulators—can address this pressing issue.

Improved corporate governance

The responsibility for accurate financial statements lies primarily with company management. Auditors can only do their job well if management is committed to maintaining the integrity of their accounts.

However, Bangladesh's current corporate culture, where family-owned companies often disregard corporate governance, poses a major challenge. To improve this, companies must prioritise the selection of independent directors and audit committee members. Given Bangladesh's context, such changes are unlikely without external intervention.

This is where regulatory bodies like the Financial Reporting Council (FRC), the Bangladesh Securities and Exchange Commission (BSEC), and Bangladesh Bank can play a crucial role. They should create a pool of independent directors through careful selection and training. Additionally, these regulators must ensure that Chief Financial Officers (CFOs) are granted

reasonable independence in their roles and are protected from undue pressure or dismissal for upholding professional standards.

Introduction of second-tier accountancy qualification

Another major problem plaguing the corporate sector is the shortage of chartered (fully qualified) accountants in the country. While many accountants lack full qualifications, they are still valued by corporations due to their years of experience in the field.

As a result, a vast number of corporations decide to recruit accountants who, while skilled, do not possess any formal memberships in professional accountancy bodies such as the Institute of Chartered Accountants of Bangladesh (ICAB) or the Institute of Cost and Management Accountants of Bangladesh (ICMAB).

This is cause for concern because the lack of membership in professional accountancy bodies means these accountants do not have to adhere to any code of ethics or cannot be monitored by any professional body.

This problem can be resolved by introducing second tier professional accountancy qualifications, in line with Certified Bookkeepers or Accounting Technicians as seen in the UK.

Re-examining the role of professional accountancy bodies

The main problem with auditing in Bangladesh is the appallingly poor levels of audit fees that are paid, even by listed companies. Audit fees in Bangladesh are one of the lowest in the world and are significantly lower than any of our neighbouring countries. At such a low rate, there is absolutely no way auditors in Bangladesh can deliver decent quality of audit

Additionally, in the absence of attractive pay packages, audit firms struggle to attract or retain top quality accounting graduates.

Therefore, the first and foremost responsibility of any regulator wishing to improve the quality of audit in Bangladesh should be to make sure that auditors are being compensated fairly for their service.

The next step for regulators should then be to take strict measures against auditors for any wrongdoing.

There is also scope for rethinking the governance structure of the two major professional accountancy bodies in Bangladesh: the ICAB and the ICMAB. As these bodies play a major role in monitoring the conduct of their members, it is crucial for them to promote good leadership and operate efficiently.

Revamping the Financial Reporting Council (FRC)

Since its inception in 2015, the Financial Reporting Council (FRC) has been almost invisible as a regulator for the audit profession in Bangladesh. This is largely due to resource constraints and structural limitations.

The FRC is responsible not only for regulating a highly qualified profession, but also for considering adoption of international accounting standards that are highly technical in nature. As such, it is rather surprising that the majority of the members of the council are non-accountant bureaucrats, who have limited knowledge and expertise in this area.

The governance structure of FRC needs to be revamped completely. The council should be run by a full time CEO and several other executive directors, all of whom should be professional accounting or legal experts.

In order to ensure transparency and accountability within the council, it is necessary to create a board composed of independent directors coming from diverse backgrounds and stakeholder groups, including bureaucracy, business, non-practicing professional accountancy, and academia.

This board must not interfere with the day–to–day operations of the FRC. Rather, they will carry out the function of oversight. Such structures are common for many similar accounting regulatory bodies in different parts of the world.

One of the primary reasons for the unprecedented revolution that changed the socio-political landscape of the country is the sense of unfairness and discrimination felt by the population, especially with regards to corporate corruption. Such a sense of disparity can be effectively mitigated by improving the quality of accountability, transparency, and financial disclosure.

Therefore, the policymakers should think of ways to strengthen the accountancy profession so that the current policy reforms can be effectively supported and sustained by well-developed institutions of accountability. This requires significant reforms within the financial and auditing institutions. 

Professor Javed Siddiqui is a Professor of Auditing and Corporate Governance at the Alliance Manchester Business School, the University of Manchester, UK and a member of the academic advisory board of the Institute of Chartered Accountants of England and Wales (ICAEW).   

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.