Financial reporting in Bangladesh

--Tofazzul Hussain FCA

September 16, 2014 - ICAB

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Writing an article on Financial Reporting is a daunting task mainly because of the jargon and
technical terms involved; they are much heard, seen and used. Readers as well as the writer
are likely to feel bored and withdrawn from the topic for straight forward and delicate
expressions of the editorial. Hardly there is any space to put some reader-enticing humors
while filling in the account owing to the fact that an essay on such a topic usually revolves
around: real life accounting cases; stigmatizing scandals; squabbling about who is to be
ultimately blamed for the protection of investors money and for any unfortunate financial
debacle; and volumes of related books on rigid rules, regulations and abstract principles of
the financial reporting regime. So the article is destined to be an informative literature with
some yawn producing prosaic elements, but on the other hand it is a delight both for me and
the readers who are avid learners and who take financial reporting business seriously.
Needless to say, I had been torn between elaborating the article and keeping it to a precise
size to attract readers attention. For making it precise some information might be implicit or
isolated; I am responsible for any limitations in this piece of writing on Financial Reporting.
Importance of Financial Reporting
It is an old clich that Financial Reporting (FR) provides useful information to a wide rage of
users in making their economic decisions. Nonetheless, the term, FR, is being uttered too
often by the people in economic game. Following the Enrorn, WorldCom, Sunbeam, Parmalat,
Global Crossing, Halliburton, Nicor Energy and many other cases of real life corporate
accounting scandals which preceded the ongoing global recession -originated in 2007 in the
USA partly from a creative accounting and reporting of notorious sub-prime mortgages
known as derivatives- and the recent Stock Market Crash in Bangladesh, market regulators
and various users of corporate financial information are now clamoring for quality financial
reporting after being badly hurt by the devastating effect of the financial disasters.
Bangladesh Stock Market plunge particularly has caused bewildering financial loss and
embarrassed people from all walks of life including the government. Financial reporting is
blamed in those instances as there are ostensible claims that the reported financial
information could have saved the damage to some extent, though not entirely. The cited
cases are classic examples of Corporate Crime or White-collar Crime which in its own right
entails several misdeeds perpetrated by educated people with responsible duties in business
organizations. And at times financial reporting can be instrumental in committing such a
crime as we can now vouch from these remarkable scams where FR had been compromised
abusing the loopholes of the financial reporting regulations.
Within the Reporting Framework
Financial Reporting, that underpins accountability, is a process to provide information
about the financial position, financial performance, and cash flows of an entity through a set
of general purpose financial statements that is useful to a wide range of users to make a
diversity of investment, credit, and other decisions including tax assessment. Users, the
buyer of the information in the reported financial statements, need to know the status of the
business as a result of its past performances to expect and predict current or future capacity
of the entity. They at varying degrees hinge upon the information that the concerned
organization supplies to allure them. Therefore, it is of paramount importance that the
information be useful and attributive of qualitative characteristics.

Considering the information need in the market and its role in economic activities, the
International Accounting Standard Committee (IASC), the predecessor of the International
Accounting Standard Board (IASB) of which the Institute of Chartered Accountants of
Bangladesh (ICAB) is a member has issued a FRAMEWORK explaining the purpose of a set of
general purpose financial statements, and the concepts that underlie the preparation and
presentation of financial statements for external users. With the fundamental assumptions of
Accrual Basis and Going Concern on top, these concepts such as:
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understandability

relevance

timeliness

reliability

prudence

comparability

truthfulness

fairness

recognition and measurement of:

asset, liability, equity, income, and expenses to maintain capital are to be adhered to while
the preparers of the financial statements apply the relevant Bangladesh Financial Reporting
Standards/ Bangladesh Accounting Standards (BFRS/BAS) and Bangladesh Financial
Reporting Interpretations/ Bangladesh Accounting Standards Interpretations (BFRI / BASI) -all
of these together form the BFRS.
In addition to the Framework and BFRS, the local regulators like the Registrar of Joint Stock
Companies and Firms, the Securities and Exchange Commission, NGO Affairs Bureau,
Bangladesh Bank etc. can prescribe industry specific formats of presentation of financial
statements. Thus an applicable Financial Reporting Framework emanates from local statute,
and international standards. The range of regulatory activities typically includes setting
minimum standards and requirements for corporate reporting, requiring submission of the
financial reports to the oversight body for its review, making regular inspections, and
investigating and prosecuting misconduct by the corporate entities for breaching and
abusing reporting framework. Therefore, strongly active Financial Reporting Regulations can
encourage and compel standardized financial reporting within applicable framework.
The Pledge of the Framework
The application of the principal qualitative characteristics and appropriate accounting
standards normally results in financial statements that convey what is generally understood
as a true and fair view of, or as presenting fairly such information.
Our practical work life experiences also confirm that companies sincerely applying and using
the reporting framework including BFRS can present the true and fair view of their business
status and performances. Despite the abundance of readymade guidelines for appropriate
reporting, entities sometimes willingly or unwillingly (due to lack of resources and indifferent
attitude to statutory reporting) tend to show an altered scenario of their business results
which is discussed next.

Creativity and Motivations

While supplying information to external parties, the reporting entities may create the figures
to their best advantage and report them in the financial statements. This is called relative
accounting -the active manipulation of accounting results for the purpose of creating an
altered impression of the underlying financial position or performance (contrary to true and
fair view) of an enterprise by using accounting rules and guidance in a spirit other than that
which was intended when the rules were written.
This is a potential problem for auditors, and the users of the financial statements. Recent
evidence suggests that it is one of the major issues facing financial reporting. Chapter 4:
Topic 6.2 of Audit and Assurance Study Manual.
. Certain provisions under some accounting standards allowing managements, the
responsible parties for financial reporting, judgment and estimates pave the way for willful
distortion of reported items. Such creativity normally falls within permitted regulations and is
not therefore illegal. Eg, hedge accounting to reduce or eliminate the volatility in profit or
loss associated with hedging activities, which is a part of the managements financial risk
management process.
Management can deliberately fail the conditions to chive the best advantageous
performance result by not choosing to opt for hedge accounting. Fortunately hedging
activities are not yet widely practiced in Bangladesh. Warranty provision, and Provisions
against numerous lawsuits are illustrative examples in our country. BAS 37 requires the best
estimate of future obligations for those activities in the past, but the process can be
sometimes complicated; management can get away with making higher or lower provisions
whilst prima facie presence of some warranty provision and disclosures of contingent
liabilities may be gratifying for us, the external parties.

Revenue is the most frequently hit item for earnings management via creative accounting,
so it tops the list of prone items; there are few other legitimate areas as follows:
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inventory valuations (policy may be abused or erroneous policy may be adopted;
NRV test may not be done properly due to products uniqueness)
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depreciating asset over useful lives (mainly capital intensive companies may grab
the opportunity)
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revaluing the non-current assets while impairment test is rarely performed by the
management (in this era of fast pace technological advancement, perhaps Land and some
intangible assets such as license, permissions are appreciating in value; most of the other
long-lived assets are often impaired at any point in time of a period, however, management
overlooks the fact!)
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businesses with related parties within group companies

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prevalence of complicated accounting information processing system (those who
use integrated operating systems may not be always able to generate specific reports in line
it BFRS; they usually export the data and may manipulate the figures in excel sheet)
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capitalization of intangible assets (mainly companies in IT and telecom sector)

altering the contractual terms to fail revenue test or lease BAS 17 tests

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impairment of accounts receivables (bad debtors can be shown as collectible per
management discretion; but aging analysis may reveal long outstanding receivables)
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deferring income and/or expenditures; and adopting alternative costs capitalization
policy (eg Companies Act 1994 allows certain expenses to be capitalized)
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delaying investment or financing decisions

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absence of clear accounting guidelines (for example we have not yet adopted SIC
21- Income Taxes Recovery of Revalued Non-Depreciable Assets, so revaluation surplus on
land is not shown net of capital gain tax; total comprehensive income is inflated).
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lenient regulators and NOT SO STRONG financial reporting regulations may
instigate an indifference to quality reporting
Motivations
Uncapped profit motives of companies coupled with our avarice for material gain trigger the
habit of creative accounting; both the owners and the managers can play role -owners to
maximize return by reducing tax burden and to avoid it and other revenue or profit sharing
requirements eg BTRC shares revenue with telecom operators, companies also have to share
profit with workers under labor code and WPPF-managers to earn desired bonuses or target
incentives.
SEC listed ie publicly traded companies are the most vulnerable to income smoothing
technique for the reputation and sensitivity issues attached to their reported profit, EPS and
share value. Boosting share price can be their topmost priority.
When companies try to attract new investment or seek finances, they may be inspired to
show stronger financial health than the actual fitness. After obtaining required finances, the
companies may be conditioned to maintain a certain liquidity or business status, which can
put the management and shareholders under duress.
Intellectually challenging interpretations and mere negligence of law can also be causes of
altered reporting. Reporting entities generally form alliances and trade associations to
influence regulators to get favorable requirements which also facilitate careless reporting.
Therefore, it is palpable that business entities always have reasons to look for opportunities
to provide misleading financial statements for various motivations of different people
engaged and involved in the organizations.
Red flags and Detections
Professional and educated eyes with considerable knowledge on business, industry sector,
and respective country regulations can identify the abnormal areas in the financial
statements. Should they engage themselves in ponderous and careful review and analysis of
the reports, they can pin-down the bulged and tilted areas after a scrutiny of the following
items:
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cash flows- operating cash flows are out of line (when bank statement collection
does not tie with receipt from customers, and non-operating, and financing receipts; the
difference needs some explanations)
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reportable income differ with taxable income without adequate explanation

acquired assets under deal or business acquisitions

journal entry episodes at year end

unexplained unusual ratios and trends

inadequate policy notes and insufficient disclosures in the financial statements

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actual results significantly differ with estimated figures (budget not achieved or
overly achieved)
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management reward is target based and incentives linked to profit or other asset
based parameters
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audit qualification and change in auditors (rotation of auditors in listed company is
explicable)
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complex business structure- mingled together with group head office, possibility of
unrecorded and arbitrary transactions with related party(ies)
This part is exciting; it warrants a separate long discourse. The pointers as above are merely
eye-openers. Once detected, the items should be normalized by adding and/or removing
required and/or undeserving amounts and/or disclosures.
Streamlining Financial Reporting
Since there can be a relationship between weak financial reporting regulations and shoddy
financial reporting, strengthening the regulations should be the most important initiative to
regulate Bangladeshi entities financial reporting practice.
Continuing the earlier discussion on regulations ie the laws and rules that act as a guardian
of financial reporting regime to guide and govern statutory reporting by corporate entities it
can be safely said that the range of regulatory activities should entail penalizing and
punishing defaulter of standard based reporting practice. ICAB can lead the movement.
State regulatory agencies at times due to their constraints transfer some of their monitoring
duties to autonomous bodies like the professional audit firms operating under the license
from the ICAB, who is entrusted with the responsibility of adopting and promulgating
International Financial Reporting Standards (IFRS) and International Standards on Auditing
(ISA) in Bangladesh. However, local rules prevail over those adopted requirements.
ICAB and BFRS can guard against ill motive behind financial reporting; fear of noncompliance with ICAB guidelines by auditors and BFRS by reporting entities should be
enhanced.
Conclusion
Financial reporting is no more a score keeping job, its importance is much felt now. New roles
are evolving for financial accountants in the economy. Reporting standards are also being
updated to keep pace with the changed economy. Businesses are becoming more global
than ever before; the whole world is a connected global village, and we-Bangladesh- are a
part of it. Good news is that Bangladesh is moving forward, albeit the ongoing global
economic turmoil, to join the league of the Middle Income Countries in tandem with the
target to achieve Millennium Development Goal within the shortest possible time. These
targets have been manifested in global forum; investors from both the developed and the
developing countries find interest in Bangladesh for its growth potential.

They are calling for globalized standards under the auspices of the development partners
-bilateral and multilateral -and international organizations. In time, if not sooner, the
demand for standardized reporting of financial information will be at its peak.
ICAB and its members in practice and in employment are vital for the improvement of
standard financial reporting practice in Bangladesh. We should not our pursuit of quality
untill we reach the prestigious stage where people will accept our reports at face value.
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