THE ROLE OF ACCOUNTANT'S IN NATIONAL ECONOMY height that everyone in the society understands the value that the CA professionals put. During our visit to ICAEW and meeting with Senior

July-September 2013

THE RO

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July - September 2013

NATIONAL ECONOMYTHE ROLE OF ACCOUNTANTS IN

Editorial 2President’s Desk 3An exclusive Interview by President, ICAB 5

ARTICLESAccountants’ Value Creation 7- Md. Rokonuzzaman FCA

Loan Loss Provisions: 19Purpose, Desirability and Necessity- Dr. Atiur Rahman

The Role of Accounting for Capital 26Market Development in Bangladesh- Dipok Kumar Roy ACA

Is proposed FRA a substitute of ICAB? 32- Raihan M Chowdhury

Appeals under Tax Laws need fair 37and Rational Judgment- Akhter Zamil FCA

Charge of Excess Profit Tax on 45Bank Companies and its Calculation Base:Some Fallacy- Abdullah-Al-Mamun ACA

Private Commercial Banks: 51Threats or Prospects- Md. Kishlur Rahman ACA, ACMA

Online Banking Frauds in the UK- 61Lessons for Banks in Bangladesh- 1Mohammed Shahedul Quader- 2Md. Shahid Ullah- 3Sajib Barua

Changing Landscape in Auditor Reporting 75- Abu HM Kibria ACA

CONTENTS ISSN 1993-3649

"The opinions expressed in this publication are those of the respective authors themselves and do not necessarily reflect the views of the Editorial Board of the Institute of Chartered Accoun-tants of Bangladesh (ICAB) or the ICAB itself."

DISCLAIMER

Md Abdus Salam FCAGopal Chandra Ghosh FCAAkhtar Sohel Kasem FCAMasih Malik Chowdhury FCANasir Uddin Ahmed FCASabbir Ahmed FCAMd. Sayeed Ahmed FCAMahmudul Hasan Khusru FCAMd. Abu Bakar FCAMd. Mahamud Hosain FCAMohammed Jashim Uddin FCASnehasish Barua FCAAjit Kumar Paul FCAMd. Abid Hossain Khan FCAMuhammmad Aminul Hoque ACAZareen Hosein ACAMd. Shahidul Islam ACADipok Kumar Roy ACAChairman DRC-ICABChairman CRC-ICAB

S M Abu Nayem Ahmed, pscSqn Ldr (Retd.)Senior Deputy Secretary-ICAB

EDITORIAL BOARD

ORIALEDIT

Economy of a country essentially depends on trade and commerce, its socio-economic culture and overall financial system where good governance is the key issue. To contribute directly to the good governance and widen the scope of trade and commerce, the role of Chartered Accountants at home and abroad is widely recognized being national assets.

The Institute of Chartered Accountants of Bangladesh (ICAB) has been constantly pursuing to groom up CA professionals ensuring international quality. To keep pace with the further demand, it is imperative that accounting professionals have the right qualification, skills, and expertise in accounting and auditing.

As we are aware, professionals with CA background having been equipped with specialized training and professional expertise in Accounting, Auditing,

July - September 2013 The Bangladesh Accountant2

M. Farhad Hussain FCAChairman, Editorial Board

Taxation, Corporate Laws, Management Consultancy, and IT Knowledge, are capable to bring international standards of compliance in accounting and auditing sectors. Their opinions regarding VAT/TAX and every other financial matter are valuable not only for accelerating government revenue income but also mitigating the judiciary complexities.

We know that for infrastructural development, government needs to attract new tax payers and the recovery of maximum income tax largely depends on fair presentation of financial statements of business organizations. If we review the government’s revenue of last few years, we shall find that maximum income tax realized (about 70 percent) was from corporate sector where audit is mandatory.

It is mentionable that due to the professional virtues, CA professionals, other than their professional practices are also engaged in many top positions of listed companies/ autonomous bodies or of industrial, financial, commercial or even educational sectors. This leaves Chartered Accountants enormous scope to enrich national economy.

It is at this backdrop, the theme of this issue 'The role of Chartered Accountants in National Economy" is selected. I believe, it is time to realize the true spirit of this profession both by the Professionals and the public in general. The transparency and accountability has been inbuilt in ICAB's very being, and all we need is to march forward in right direction.

I firmly believe, the readers will find the core professional essence in some of the write-ups and many other technical writings will be worth reading.

To conclude, we would appreciate any comments, suggestions from our valued readers and patrons to enrich the journal.

Tying the Tide.....

The Bangladesh Accountant July - September 2013 3

PRESIDENT’S DESK

We are indeed very grateful to Almighty Allah and all, who love CA profession and truly believe in their noble roles, for their overwhelming support. We must be aware that ICAB had been passing a critical juncture in last few months or so. A vested quarter had been trying to sabotage the accountancy profession suggesting unusual proposals in the proposed Financial Reporting Act (FRA).

I am confident that we are being able to convince that much is needed to do before taking such enactment. It became clear that FRA was drafted on wrong "Public Perception" which came to the notice of the responsible assigned.

Our rigorous intellectual efforts have finally paid off. Now, the minimum I can do is that to pay gratitude to the Council Members and ICAB employees who have worked day and night to stop such unexpected to occur.

We can't maintain wait and watch policy. We must be able to rise against any shortcomings we have, amongst the professionals and prove once again that we are the best of the best professionals who bears

social as well as economical responsibility.

I will not do justice if I don't mention some of the initiatives taken, among those; to make the people aware about the roles/ functions of CA profession and meeting with the responsible government officials, organized Press Conference at the National Press Club and Roundtable Conference on FRA, called Advisory Committee meeting which got huge media response from electronic and print media. In the Round Table Conference on the same issue at the Pan Pacific Sonargoan Hotel, eminent personalities, print and electronic media personnel were present and received enormous coverage in newspapers and most of the TV channels. This kept on getting prominence to the Medias with greater importance which continued for long.

I am especially grateful to the Members/ Council Members, ICAB and the Civil Society who helped me with their valuable suggestions. Many writes ups of our members were published in print media and several Talk shows held in electronic media on the issue that drew attention of the public/Government

highlighting its potential impact on the trade and commerce.

However, we must not stop till we gain highest professional standard. We are committed to develop the profession to a height that everyone in the society understands the value that the CA professionals put.

During our visit to ICAEW and meeting with Senior Management Team including Mr. Vernon Soare, Executive Director at ICAEW Office in London, we discussed about updating of ICAB Syllabus and learning materials in line with ICAEW 2014 Syllabus, Transfer of Payment of Exam fees of ICAEW Students, continuity of ICAB Tuition and Kaplan Revision Classes for ICAEW registered students who are aiming to appear ICAEW July 2014 Exam etc. On all these issues, ICAEW showed positive response and we hope that the continued cooperation between the two Institutes will be more dynamic and fruitful in foreseeable future.

On invitation from ICAEW, I gave a presentation on Islamic Finance titled "Concepts and Applications of Islamic Banking with Financial Reporting

Md Abdus Salam FCAPresident, ICAB


Implications" on 5 September 2013 at ICAEW Office, Moorgate Place, London. ICAEW experts in Curriculum and their Senior Management Team participated in the presentation. The audience showed their deep interest on the presentation.

Meanwhile, ICAB keeps providing trainings to public sectors’ organizations. It conducted 2nd Phase Training on Tax Audit for NBR Officials for the 1st, 2nd and 3rd batches in August and September, as well. This adds to the number of already received large group of Tax officials trainees in the rank of Assistant Commissioner to Additional Commissioner of Taxes, NBR.

As part of our regular activities, we arranged the Members’ Conference / CPD seminar on 'An Analytical Study of Significant Amendments Made by the Finance Act-2013 and SROs Issued thereunder on Income Tax and VAT Regulation' and also on ‘Integrated Reporting-Challenges and Opportunities. This effort to keep the members abreast with current happenings will remain on.

Considering the whole situation, I believe, the topic for the journal 'The role of accountants in National Economy' is timely chosen to reiterate the contribution of CA professionals. I am sure anyone will be

benefitted reading the issue irrespective of any background.

Lastly, I urge all to work with courage besides maintaining highest level of integrity while dealing professional matters at all times so that we can tie the tide with the time in our favours.

PRESIDENT ICAB TALKS ABOUT FRA, CAPROFESSION AND OTHER CONTENTIOUS ISSUES

An exclusive Interview by President, ICAB with Raihan M Chowdhury, Business Editor,The Daily Financial Express; published in the daily on September 17, 2013


The Institute of Chartered Accountants of Bangladesh (ICAB) said that the proposed Financial Reporting Act (FRA) will give a blow to the existence of chartered accountants profession as the act is littered with some 'ambiguity and dualism' against the country's existing law.

Under this Act, a new oversight body 'Financial Reporting Council (FRC)' will be formed which will be a super functional body over ICAB.

"Our profession carries a long, enduring and sustainable glory to help develop the country's financial sector but a sudden move from the government without any consultation with us will not only stymie the national development, rather it will strangle the accounting profession," Md Abdus Salam, president of ICAB told The FE in an interview recently.

He said the members of ICAB are united to raise the issue with the government and are also ready to extend any kind of cooperation in reviewing the proposed law.

The proposed law, if implemented, will create serious problems in preparing financial reports and audit jobs of thousands of private and government companies/entities.

Md Abdus Salam FCAPresident, ICAB

INTERVIEW


• According to registration related section 40(3) (KA), although the condition of issuing the certificate to an auditor from the ICAB is mentioned as necessary, but the definitions on getting IcAB membership are not clear and remains contradictory with section 40.

• If the council's chairman remains absent, who will take his charge? There are two versions in section number 6(3) and 19(3).

• The definition of financial statement under section 2(3 was not prepared in compliance with International Financial Reporting Standard.

• According to the proposed law, the definition of public interest organisations is vast which includes the non-listed companies, NGOs, trade bodies and SME's as well.

At present, a total of 359 ICAB members out of 1416 are engaged in audit profession and the rest 1057 are engaged with different business entities.

"Despite significant progress and advancement in the field of professional education of CAs, international recognition from ICAEW, CPA Ireland, International Federation of Accountants (IFAC), reward

from South Asian Federation of Accountants (SAFA) and beyond, some vested quarters are trying to ignore the role of ICAB by defaming its noble role and advocating for FRA/FRC at the cost of our noble profession," Mr Abdus Salam asserted.

The ICAB urged the government to strengthen the ICAB through creating skilled accounting professional and maintain professional and independent ethics instead of creating another parallel body.

Pointing out some conflicts in the proposed law, the ICAB president said according to section 2(11) of the proposed Act, a person who is not a CA professional can also get opportunity to work as an auditor and it is against the international policy.

According to section 212(1) of Companies Act, 1994, a Chartered Accountant registered with ICAB can be appointed for account audits. But according to the proposed law, chartered accountants will have to be registered with the FRC.

Mentioning the loopholes and contradictions of the proposed FRA 2013, the ICAB president said according to registration related section 40(3)(KA), although the condition of issuing the

certificate to an auditor from the ICAB is mentioned as necessary, but according to section 2(10) audit firm and section 2(11), there are no condition over getting membership from the ICAB. The definitions are not clear and thus contradictory with section 40.

He said Bangladesh's economy has not reached up to the mark as USA or UK and there is no such law in neighbouring countries.

After completing their course of qualifying part, more than 15 thousand CA students are engaged with different organisations in the country and abroad. The numbers of students are increasing due to international approval of ICAB's training courses and examinations.

Mr Salam said Bangladesh achieved the highest number of Best Published Accounts and Reports Awards among the SAARC countries in 2012.

The term ‘value creation’ has become almost a buzz terminology in the recent days across our work places. Every piece of your work/service should carry some value. Although measuring the magnitude is a very subjective and debatable matter, people tend to measure it in terms of their expectation. It is often measured in terms of the payment made to you against the respective service you have provided. Perhaps it is not very important criticizing the way people measuring such value; rather one should try to grasp the intrinsic sprit of such expectation! It is critically important to realize what is value in my work and how can I generate the best of it satisfying my customers and employers. Disregarding the conventional definition of value we can try to redefine it in the light of our service fields.

A service would be recognized as value generating, if it helps a business house avoiding various fiscal risks, fighting competitions effectively, safeguarding assets, reducing costs of business, creating more business opportunities and last but not the least making more profits.

When the caption has been chosen using the term accountant, we would limit our discussion around business houses and in broad term the field of trade and commerce where accountants are

Accountants’ Value CreationMd. Rokonuzzaman FCA

expected to play a pivotal role. The focus of this discussion will throw lights mainly on the qualified accountants, and more close to the Chartered Accountants. However, the situations discussed here would more or less apply to all other accountants coming from various institutes, like CMA, ACCA etc. Accountant in a business society is one of the vital organs which if functions well many things of the organisation go well otherwise result goes adverse. Perceiving this critical reality, accountants at any place, be at service or private practice may try to reopen their pages where they might find their responsibilities and deliverables which their customers expect out of them. Accountants of today must be capable of producing very high quality services which enable a business house to ensure sustainable growth mitigating various financial risks and risks of fiscal compliances.

Big picture-wise accountants work in two fields, such as:

a. Accountants in service, and b. Accountants in private practice

It is critical that one can add or create value to the respective services based on one’s capacity. So it may be equally critical to briefly discuss about the field where accountants prepare themselves to


THE CURRICULUM OF THE ACCOUNTANTS IN VARIOUS INSTITUTES WHICH CREATE ACCOUNTANTS VERY WELL COVERS ALL THESE THREE CRITICAL OBJECTIVES. BUT SURPRISINGLY ACCOUNTANTS ARE BADLY CRITICIZED TODAY FOR THEIR FAILURE IN DEMONSTRATING ANY ONE OR MORE OF THESE QUALITIES. IN REBUTTING THE MARKET CRITICISMS WE OFTEN ARGUE THAT MARKET DOES NOT PAY US WELL, ORGANISATIONS DO NOT EMPOWER US DOING MORE, MARKETING PEOPLE IN THE ORGANISATION GET MORE ATTENTION AND SO ON. AS A MEMBER OF THE ACCOUNTANTS’ FRATERNITY, I STRONGLY BELIEVE THAT NOTHING OF THESE WOULD HELP US UNLESS WE TRY TO RECOGNIZE AND WORK ON OUR OWN WEAKNESSES!

be capable of providing services to their customers.

An ideal accountant creating value in the field s/he works is expected to have minimum following critical qualities:

Communication Skill, Technical Competence and Ethical Standard

In addition to the above, although not critical, one might possess some extra capabilities enabling one to be more confident and thereby effective. For example, having driving skill with a valid driving license might give you an extra strength. Likewise, you may have debating skill, updated knowledge on the ongoing national and international hot topics, knowledge on national and international history, reasonable knowledge on national/international politics, knowledge on ongoing important sports events and so on.

The curriculum of the accountants in various institutes which create accountants very well covers all these three critical objectives. But surprisingly accountants are badly criticized today for their failure in demonstrating any one or more of


these qualities. In rebutting the market criticisms we often argue that market does not pay us well, organisations do not empower us doing more, marketing people in the organisation get more attention and so on. As a member of the accountants’ fraternity, I strongly believe that nothing of these would help us unless we try to recognize and work on our own weaknesses!

Accountants in many cases proclaim themselves to be expert in their field of working, at least in the fields of accounting, auditing, financial management and taxation. But they might not know that their own evaluation is not good enough so long it does not meet the expectation of the customer. Moreover, they also might not know that their conventional expertise is not well usable unless it is marrying with many other modern dynamics. For an example, an accountant without knowledge of information technology is just not a very useful one today.

Taking few examples of weaknesses from the market generally accountants suffer from, we can categorize them under the criteria as mentioned above:


Communication Skill

- Accountants hardly demonstrate courage to share a new idea in the senior management meeting

- They tend to find risk without assisting management to move forward with alternative mitigating factors

- They feel shy presenting things before the audience, even if it is their core strength area

- They do not feel attending cross functional meetings and programs- They hardly see success in the negotiation meetings

Technical Competence

- Accountants tend to remain accountant where market perhaps want them to be business managers

- Lack of appropriate knowledge of IFRS/BFRS and other reporting standards- Auditors including audit staff lack appropriate knowledge of ISA/BSA- Lack of knowledge of information technology and related modern

developments- Lack of analytical skill- Lack of writing business literature and articles- Lack of knowledge on the contemporary legal and fiscal matters - Ignorance about the width of their field of services, and so on- Lack or improper application of theoretical knowledge in business

operation like financial management, management accounting, MIS etc.-

Ethical Standard

- Lack of precise knowledge about ethical codes (IFAC prescribed) applicable for the accountants working at different capacity

- Inappropriate or no application of ethical codes- Inappropriate use of accounting and auditing standards- Unprofessional assistance to the clientele - Non-support to the development requirement to the audit and accounting

staff- Use of unskilled manpower in highly sensitive assignments- Not acting in the ‘Public Interest’.- End up providing poor quality work to our valuable clientele.

Considering the expectation of various departments, accountants in the service can volunteer some services, although not their regular duty. It may not necessarily require that other managers would request and we respond, we may proactively volunteer these. Doing so, we can enhance value as well as create demand of our services in the minds of the cross functional managers. Few of the indications are given in the table below:

While listing above few of the weaknesses/potential initiatives, it is not intended to provide a conclusive list, nor is even it possible. We may now revisit our own capacity and the field where we gain such capacities in the light of the foregoing discussions.

Sl. No. Departments Services can be volunteered1. MD/CEO’s office Various financial ratios and MIS; progress results on recently introduced

projects; exciting market information; major compliance threats etc. 2. Marketing

DepartmentA volunteer feedback on their proposal to launch new product/services, not just a criticism of their proposition!

3. IT Department A cost-benefit analysis on their proposed IT Project.4. HR Department Analysis on the CTC (Cost to Company) while recruiting new employees,

conducting annual appraisals etc.


Communication Skill

Long way back I read from an American business literature, that ‘one is sufficiently knowledgeable but cannot express oneself would be counted half’. This is talking about communication, more of conversation skill. Indeed this is one of the areas we have substantial weaknesses, but surprisingly our focus on this area is not noteworthy. Although skills related to drafting letters, emails and various reports fall under the category of communication skill, we will discuss this part later in the Technical Skill area. Let us pay some focus in the fields from where our trainee accountants are expected to gain such skill sufficiently. The organisations where we offer training are:

- Related Institute (ICAB- not considering others in this write up)

- Professional firms (CA Firms)

Conversation skill in both Bengali and English are essential, but English being mostly used as business language, we will pay more focus in this area.

Institute as learning platform

The ICAB has best possible curriculum to make marketable accountants at this point in time. But it offers only few classroom based coaching classes in two or more sessions in the year which discuss more of examination oriented topics than market oriented skill requirements. The other aspect of this arrangement is just a mandatory requirement of class attendance as a matter of prequalification to be eligible for professional examinations. Therefore attending such classes simply encourages students to meet their mandatory attendance

requirements and examination preparation. It is clear that, focus of learning about marketable skill is badly missing here, whereas a student immediate by after his qualification is attained is treated to be a professional accountant.

The students hardly get any chance to interact with teachers and other students on the matters which are important for the profession at market level. There is no course that offers scope of conversation on the market matters with teachers or vice versa. So far as I know there is no urge from the Institute upon the teachers creating special environment that would encourage students overcoming their inertia of tongues. Moreover, Institute does not have a requirement for the qualifiers to be member to the body, even the incumbent might not be capable of speaking out of confidence and knowledge. As of now, merely passing all professional written examinations is good enough to get a passport to enter the world of accountants. Institute might introduce:

- Few of the classes during the coaching session mandatory for conversation skill on various

pre-identified market topics

- A brief but mandatory interview prior to qualifying each level of the professional examination

- Prior to offering final result, a mandatory standard presentation based on a pre-selected topic

It is understandable that Institute believes all firms where students get their working experience would offer adequate scope for the students to learn both technical skill and communication skill. Here it may be worth mentioning that, merely a belief might not be good enough unless there is solid monitoring on the part of the Institute being the sole licensing authority. It needs to be remembered that in reality ground, the Institute gets the bad name for the failure of an accountant. It is a CA produced by the Institute has done a sub-standard work, or not being able to perform up to the expectation, or as performed an unethical task! Whatever criticisms we come across from the market are not just rocket science which accountants cannot overcome. So, it appears that Institute is at fault for all failures and not taking suitable measure.


As part of Continuous Professional Development (CPD) responsibility for the members, Institute organizes various seminar and workshops where only qualified accountants (members) are invited to join. Again, not having solid base of communication the present audience ensure a very little participation. A substantial number of accountants just attend making sure that their annual CPD credit hour requirement is met. As a result, the expected output in terms of members’ development does not appear to be well achieved. It is again noteworthy that a very commonly used evaluation tool is also not used to assess the effectiveness of such expensive CPDs.

CPD may at least require all members attending the program filling out a predefined form containing question as follows:

- Description of the development/learning activity.

- Did you choose this activity and how is it relevant to you?

- What did you learn and how did/will you apply it?

In view of the above, it is imperative that quality of the accountants is a subject that Institute always keeps at its high priority. Institute introduces suitable initiatives that enable future accountants to face market demands with high level of confidence. If necessary appropriate mechanism can also be devised through which Institute can monitor the professional development activities of the firms. Some sort of reward or punishment can also be introduced measuring the degree of the performance of a firm on their responsibility relating to the training and teaching to the students.

Professional firms and learning environment

Talking about Chartered Accountancy, students are mandatorily required to undergo an articleship period of 3 or 4 years depending upon the academic background with a professional firm, dealing with auditing, accounting, taxation and various other services under the license of the Institute of Chartered Accountants of Bangladesh. Under the articleship agreement, the

proprietor of the firm is entrusted to provide a learning environment for the students on various professional matters enabling a student to be competent accountants facing and fighting market challenges. Here we are perhaps little bit confused about the training boundary.

Primarily it becomes the duty of a firm to teach or train a student about all technical pronouncements and standards directly relevant to the accounting and auditing profession. We hope to discuss this area later in a section dedicated for technical competence. As part of the training processes, students are put into various professional assignments into the clientele of the firm without or with very little briefing about the client’s business and required skill for that assignment. It is critically important that a student needs solid communication skill in successfully accomplishing the assignment. But surprisingly, this essential part of the overall required skill gets hardly any attention. On the contrary, similar to our conventional social culture, a student is always hesitant to speak to his mentor/principal. Most of the cases it becomes one-way traffic where the principal or a manager speaks and students listen with little counter speeches or none. In our society, from our boyhood age we learn not to raise voice over the elderly people and over time we become familiar to a situation where it seems that even asking question to an elderly man is also kind of disobedience. You have to always listen to the seniors until you turn to be a senior. Similarly in the firms students feel that it is just a duty to comply with the instructions of the seniors and principal. They will not ask question from the senior even if the instructions given by the


Communication skill in both languages is equally essential. But in this write up English has been given emphasis.

- Principal/Partners may encourage staff accountants to speak in English even they are not very comfortable initially. Here, Bengali conversation may be kept at lower extent;

- Firm may introduce in house training on spoken English

- Partners/Managers may make few things mandatory for presentation by the job-in charges before starting an assignment and after completion of the same. Here he may be encouraged to use bi-lingual approach with greater emphasis on English.

Although not conclusive, all these should be made regular activities in a firm with a mechanism of monitoring of the progress among the staff member

principal or senior is unclear to him. Moreover, firms do not offer appropriate program that deals with development of conversation/communication skill. As a result most of the students pass the whole period of articleship under a very suppressive working environment without learning how to smartly ask questions or describe something addressing a person or group of persons.

In the place of working in their audit or other assignments, students hardly meet and talk to higher officials like Managing Directors or other directors whereas they are required to, if they strictly go by the working methodologies. They end up completing their assignments talking to the mid-levels or to the best the Chief Financial Officers. Thus it can be uttered without any hesitation that most of the cases the output remains far from the desired level.

A student finally passes through all professional examinations and turns into a qualified accountant when market expects him to straight forward contribute to the corporate in the role of a senior manager (Finance Manager/Accounts Manager/Internal Audit Manager etc.). Naturally this expectation entails with lot of high level responsibility to be delivered matching with the ultimate goal of an organisation. Here communication has pivotal role to play. Although one can still keep learning all required skills, it may create negative impression upon accountants’ capabilities if he/she fails to match the expectation.

A firm can take some initiatives so that trainee accountants/articled students would be benefitted as follows:

- There may be regular debating competition in both Bengali and English language.


Technical Competence

An accountant’s effectiveness is primarily measured in terms of one’s technical competence reflected in his/her deliveries. Thus, perhaps the first and foremost quality of an accountant should be technical competence in his field of service.

Being an inseparable part of an accountant’s fundamental learning, I would not much discuss about the requirement of the knowledge of accounting and auditing. Merely having knowledge in conventional accounting and auditing, an accountant would not add value to the today’s complex business environment and hence not be treated as a valuable accountant. Business people believe that processing accounting transaction is not the work of an accountant today. By the support of a computing machine, a graduate of history can also do the processing work.

An expert accountant has more critical functions dealing with

processed data (financial figures) and related decision making processes in the business. On these processed data one has to lot of analysis applying technology, compliance requirements, and other requirements of the

marketing fitting to such data to make them well usable by the decision makers. To describe this idea following hypothetical diagramed presentation is expected to give better idea:

DecisionMaking(15%)

Data Analyzing (25%)

Transaction Processing (60%)

Accountants’ duty in the past- Figure: 1

DecisionMaking(40%)

Data Analyzing (45%)

Transaction Processing (15%)

Accountants’ duty today- Figure: 2


From the given diagrams, it can be understood that accountants’ job used to be considered as mainly transaction processing and rest two were less important or tertiary. But over time the idea has been just reverse. Computing machines have widely grabbed the functions of transaction processing where the respective executive in duty does not need to have expert knowledge on accountancy. Situation has been so easy, that a history graduate can play the role of an accountant in some of the computerized systems. On the other hand, trade and commerce have become more complex where success and sustainability are heavily dependent on the critical analysis and appropriate use of financial information.

In the light of the above discussions, we can emphasize that today’s accountants must reposition themselves to be of required performance through attaining adequate knowledge and competence from their field of training; else they would continue to face criticisms.

To deal with the expectation as diagramed, an accountant must have appropriate technical competence. Such critical competence requirements can be briefly discussed in the in the following sub-categories:

i) Knowledge of IFRS and ISAs:

- Interpretation of IFRS and ISAs guidelines

- Application of IFRS/ISA guidelines in respective fields

As part of global convergence towards harmonized accounting and auditing practices, companies (mandatory for listed companies) in Bangladesh also need to prepare their financial statements

complying with IFRS guidelines. However, in order to ensure possible best practices, from the date of promulgation of the International Accounting Standards (IAS), it has always been imperative for the organisations to prepare their accounts in line with IAS guided framework. But the level of response from the organisations was miserably poor. In the recent days, remarkable effort is being noticed particularly in the listed companies. But still we have lot of mileage to go on this path.

Professional accountants have substantial role in the process of implementation of such objective. While preparing or guiding preparation of financial statements respective accountant needs to have adequate interpretation capacity of the requirement of the respective IFRS. Similarly while auditing the financial statements, the respective audit staff must be capable of reviewing, if the reported facts/figures were

appropriately measured, valued, interpreted in the light of the requirements of the IFRS.

As already described in the foregoing sections, Institute operates curriculum based academic coaching classes which are far away from the market focus. May be Institute does not want to separately offer learning environment as CA firms are expected to offer adequate training on IFRSs and ISAs to their trainee students. If so, Institute must ensure through appropriate initiatives that accountants gain appropriate knowledge before entering the market. They should also ensure through proper monitoring that all firms undertake minimum initiatives towards development of market based technical skills as regards IFRS and ISA to their students and staff members.

On this area Institute and firms can complement by offering following activities:


- As a regulatory body Institute may consider enacting IFRS mandatory for all companies. This would create an urge among all accountants to learn more about IFRS and ISAs;

- On regular basis, Institute may offer training on IFRS and ISAs as the case may be, on payment of requisite fees;

- On certain interval workshop may be very useful for the members (not just current CPD type) picking up practical cases of IFRS issues from the market;

- Institute may publish any changes on IFRS and ISAs immediately on their monthly magazine.

- Firms may organize training programs for their own students. They can even use their own brilliant staff members as instructors. This would tremendously benefit all parties

in the form of students’ (future accountants) development, firms quality initiatives, and last but not the least our ultimate customers at market level.

To build capacity on this area, some leading firms may make trainers in their own house through offering training inviting expert trainers from international market.

ii) Knowledge of Fiscal and Corporate laws

This part of the skill has direct impact on the performance of an accountant. Hence an accountant must be appropriately capable of using and interpreting fiscal laws (Income Tax and VAT) and certain aspects of other corporate laws, like Companies Act, Banking Companies Act, Foreign Exchange Regulations, Capital market Regulations etc.

On this area, knowledge on Income Tax, VAT and Companies

Act is relative more necessary for the success of an accountant.

iii) Various analytical knowledge

Analytical skill has no clear boundary. An accountant is expected to be able to assist the decision making authority with adequate inputs analyzing processed financial numbers. Such analyses would highly depend on the nature of the organisation, related regulation, nature of the user etc. Sufficient knowledge on financial tools, respective regulations, related technology and related market information can make an accountant effective in analyzing data for the decision makers. We should remember that the effectiveness of a decision has very high dependence on the data we provide.

In the recent days, computerized financial environment has made our lives much easier. By applying our knowledge on computer


applications or buying suitable applications from the market we can sharpen our analytical capacity. In a nutshell, all we need is to be well equipped with analytical knowledge based on the industry requirement we represent.

On this area practicing firms can do a lot for the trainee accountants. Rather than working conventionally, firms can encourage their staff members to effectively apply analytical tools in accomplishing respective assignment which would in turn enhance our value in the market.

iv) Good writing skill

This is an essential skill one accountant must be gaining throughout the career. Every single day an accountant is to write something to describe results and facts of the transactions to the superior authority and decision makers. Everything including various numeric/diagramed analyses, calculations etc. is good with poorly written narrative reports, the face of the accountant would be black on the table of the superiors. Due to the poor narrations the decision makers might find the report confusing and thereby misleading.

On the other hand accountants dealing with public practices are to write various types of reports communicating results of their review, appraisals and tests. Without good writing skill success on this area is almost impossible.

Therefore the necessity of good writing skill for an accountant is beyond question today. Few initiatives on the part of the Institute and the respective firms may help improving writing skill of the accountants:

- There may be writing competitions among the students on emerging market topics organized by the Institute;

- There may be one Magazine dedicated for the students write up only. Institute as it does for its members and other communities through The Bangladesh Accountant, it should also introduce a similar magazine for the students;

- Institute may introduce separate training courses on writing skill development;

- Firms should also seek suitable alternatives that help students improving the quality of their write ups.

v) Knowledge of related ICT

There is no debate today that an accountant is to be substantially capable to work in a computerized environment. From data processing to various analyses, computer has been increasingly popular. A computerized environment offers speed, efficiency and last but not least the accuracy of data. Over time computer has grabbed a very wider space of accountants’ job. From small to large enterprises, everywhere people are deploying computerized accounting systems removing their manual books of accounts.

In an effort to deploy major business systems or an ERP (Enterprise Resource Planning) on the part of a business house, the CFO has most substantial role in the successful implementation. People have fallacy that an IT system deployment should be taken care of by the IT Manager. This is a wrong perception; in essence, conversion of conventional business system into IT enabled environment cannot be

an IT project, indeed a business project where experienced business Manager (CFO or Sr. Finance Manager) must be key role player.

In the recent days entire auditing processes have been turning to be computerized incorporating requirements of ISAs. So, accountants both in practice and service today should be capable to deal with computerized accounting. An auditor having knowledge merely on accounting and auditing may not be able to satisfactorily do an audit in a computerized accounting environment. Hence, dealing with both accounting and auditing in a modern business house an accountant must be skilled in computer technology. An accountant must have minimum working knowledge on:

- Spreadsheets with ordinary to very highly technical analysis

- Various computerized accounting systems;

- Various control techniques (General Control and Application Control) around computerized environment

- Word and various data processing

Better knowledge on computerized system may create opportunity for the practicing accountants to open a new service for their clientele. They can offer designing suitable accounting systems including appropriate chart of accounts. On this area firms can allow their trainee accountants to:

- Participate in suitable training programs on spreadsheet analysis;

- Take suitable programming courses


- Participate in the project management deploying major business systems (ERP, major and complex accounting systems)

vi) Other pertinent knowledge

- Knowledge of capital market operation;

- Knowledge of macro economics supporting national economy;

- Knowledge of corporate secretarial matters, and so on.

Ethical Standard

Ethics in a profession, in fact sit in the heart of respective professionals. Without having appropriate ethical value, an expert professional is as good as another unscrupulous person in the society. It is to be remembered that the knowledge of ethics must be well discussed among professional as well as trainee accountants. Due to improper understanding and use of ethics by the individuals, the entire community gets blamed of unethical behavior. Unethical practice by the professional accountants may create serious damage in the trade and commerce, which in turn badly affect the economic development of the whole nation.

Ethics have been defined as the study and application of moral principles and values that govern the actions and decisions of an individual or groups. While personal ethics vary from individual to individual, at any point in time, most people within a society are able to agree as to what is considered ethical and unethical behavior. In putting human behavior in right direction, in fact a society passes laws and regulations that define the presence/ non-presence of ethics in an action or a set of actions.

The pattern of ethics may vary in different professional context of actions and behaviors. However, the question of ethics arises when people are in relationship with duty and responsibility bondage. The relationship between public accountants and clients offers a number of interesting challenges. The society or a client has expectations where a public accountant performs duties and responsibilities to them independently and being unbiased.

Professional Ethics and Professional Accountants in Bangladesh

In codifying the behavioral pattern of professional accountants, IFAC has promulgated a set of code of ethics for its member bodies to follow. ICAB has hence, adopted those ethical codes and published in its members handbook captioned ‘Hand book of Bangladesh Standards on Auditing, Assurance and Ethics Pronouncements’ for its members to put in their practice effective from January 01, 2009.

To fit into the business of accountants the entire set of ethical codes has been described in following 3 sections in the Hand book:

Part-A: General Application of the Code 100 Introduction and fundamental

principles110 Integrity120 Objectivity130 Professional competence and

due care140 Confidentiality150 Professional behavior

Part-B: Professional accountants in public practice

200 Introduction210 Professional appointment220 Conflicts of interest230 Second opinions240 Fees and other types of

remuneration250 Marketing professional

services260 Gifts and hospitality270 Custody of client assets280 Objectivity- All services290 Independence- Assurance

Engagements


Part-C: Professional accountants in business

300 Introduction310 Potential conflicts320 Preparation and reporting

information330 Acting with sufficient

expertise340 Financial interest/Public

Interest350 Inducements

In addition to the effort of the Institute as a matter of curriculum activity, the professional firms have substantial role in building solid ethical backbone of the profession. Like all technical skills, trainee accountants are expected to learn

how to deal with various elements of ethics into their day to day work. In this regard, firm may:

- Discuss on a regular basis with the staff and accountants on the potential consequences of unethical practices;

- Conduct in-house training for the trainee accountants based on the literature in the above mentioned handbook;

- Organize workshop picking up suitable cases as examples, so that the understanding gets clearer;

- Introduce suitable penalty for diluting ethics into the professional duty;

- Brief about public interest: How many people would be affected by our action

- Are these people that we know or care about?

- The speed of the consequences;

- The impact and likelihood of the consequences;

- How society would view our action.

The Author is a Fellow CharteredAccountant of ICAB and Partner,ACNABIN Chartered Accountants

None can deny that there has been a phenomenal growth both in the financial and real sectors in Bangladesh over the last forty years or so. The per capita income this year has been estimated to be USD 923, barely a hundred dollars less than the magic number USD 1,024 which will take Bangladesh to the club of middle income countries. Of course, the threshold itself may rise to some extent. Yet, Bangladesh looks likely to cross this threshold within a couple of years or so. Then it will have to maintain its upward moving per capita income trend for another consecutive four years. I am sure Bangladesh will be able to maintain this trend and is certain to be confirmed as a middle income country even before 2020. One must give enough credit to the financial sector which has witnessed 765 times growth in its asset mobilization over the last 40 years. It is thanks to the Government and its pro-market, pro-reform liberation policies that the financial sector has been able to demonstrate such a spectacular growth. The pace of banking sector reform, together with its watchful regulation, has been further accelerating in recent times. The use of IT in the financial sector and in the regulatory authority’s supervision drive, while enhancing financial inclusion, have been facilitating more inclusive growth in the real sector.

Loan Loss Provisions:Purpose, Desirability and Necessity

Dr. Atiur Rahman

Over the past four years, Bangladesh Bank has gradually and dramatically increased the intensity of its financial sector regulatory activities. Both the scheduled banks and the financial institutions are under more careful watch than ever before, submitting more data, being inspected more often and more thoroughly, and subject to minimum standards and guidelines to promote the continual adoption of “best banking practices.” Despite some scams which too were unearthed by BB, the quality of banking supervision has improved a lot. It has become more digitized integrated and focused. A number of innovative supervision related toolkits are unfolding gradually. The goal of banking supervision has been, and always will be, to protect the deposits of the hard-working people of Bangladesh from avoidable failures, thereby preserving their wealth and increasing their confidence in the system and the mobilization of funds for productive investment.

And to that extent, we have been successful. Not a single taka has been lost by any depositor in any of the scheduled banks or financial institutions. Deposits are growing, and the banks are still utilizing the deposits to increase their lending to the private sector, although more slowly than before. If we add the cost-saving foreign private loans to better


UNCERTAINTY IN OUR KEY ECONOMIC SECTORS IS TROUBLING, AND MAY WELL LEAD TO A RISE IN NON-PERFORMING LOANS AT SOME BANKS THAT ARE OVER-CONCENTRATED IN THESE PARTICULAR SECTORS. A PRUDENT BANKER WOULD ANTICIPATE THIS RISE, AND INCREASE GENERAL PROVISIONS ON GOOD LOANS NOW, TAKING INTO ACCOUNT THE INCREASED LIKELIHOOD THAT SOME OF THESE LOANS WILL DETERIORATE IN THE FUTURE, NECESSITATING HIGHER PROVISIONS FOR EXPECTED LOSSES. THIS RESPONSE WOULD BE PROACTIVE, RATHER THAN REACTIVE (SIMPLY WAITING UNTIL THE LOANS BECOME NON-PERFORMING).

rated companies to the latest private credit flow (12.7%) this will be around 15%, which was good enough to accommodate a six plus real growth rate in the midst of near 8 percent inflation. And while the activities of the banks have been expanding, the expectations placed on the banks by policymakers, the business community, and the general public have been increasing even more rapidly. These days, our banks are expected to be miracle workers, financing almost without limit the credit appetites of the public and private sectors, unhesitatingly supporting the capital markets, and all the while lowering their rates, charges, and fees. At least that is what one can be led to believe by well known media commentators and even experienced economists.

With the possible exception of the state-owned commercial banks and


specialized banks, it must be remembered that banking is a business, not a public utility. Banks cannot automatically be called upon to resolve all problems that exist elsewhere in the economy as is normally expected here in Bangladesh. Among private companies, banks play a unique role as repositories of the public trust, in addition to being responsive to their shareholders and to their customers as all corporations have to be. Having this set of multiple stakeholders – depositors, shareholders, borrowers, and the regulatory authority, whose interests are not always in alignment – it seems sometimes that banks often fail to please anyone. This is a big challenge and we all have to face it every day.

These days, all the talk about banks seems to be centered on the topic of


loan loss provisions. The higher provisions that are being required by Bangladesh Bank are said to be responsible for a number of difficulties currently being faced by banks and their customers. We, of course, have responded more than a couple of times in fine tuning the circulars to help customers tide over their difficulties in a politically challenging and globally depressive year. Yet there are allegations galore. Before addressing these allegations, I’d like to take a moment to explain what loan loss provisions are, and why they are necessary in banking.

Importance of capital and its accurate measurement

Capital – also called net worth or shareholders’ equity – is the single most important indicator of a bank’s financial condition. If a bank has enough capital relative to its assets, it can withstand a sudden “meltdown” in the value of those assets before the bank finds itself with fewer assets than liabilities. And having fewer assets than liabilities is not a sustainable situation for any bank. Not only is it extremely difficult to earn a profit in such a situation, but also, depositors and other creditors can rapidly lose confidence in the bank, withdrawing their funding and creating a liquidity crisis.

It is therefore in the interests of depositors, creditors, and, indeed, the shareholders of the bank to preserve capital at a substantial level. Indeed, over the past few years, Bangladesh Bank has raised capital requirements several times, to bolster the stability of individual banks and the system as a whole.

But for all the stakeholders, including Bangladesh Bank, to feel comfortable with the banks’ levels of capital, that capital must be

measured accurately. Liabilities are easy to measure accurately. But over on the asset side of the balance sheet, there are many items whose value is difficult to ascertain. We see securities that don’t trade frequently as the secondary market has not been developing despite continuous propping up, real estate that was bought a long time ago – and nobody really knows the true value of these important assets.

The same is true of the most important type of asset in the banks’ portfolios – their loans to businesses and households. The true value of these loans is always uncertain, because of one of the most basic risks of banking – borrowers sometimes do not repay their loans (most, in normal circumstances, regularly do, except a few powerful ones mostly linked to the opportunistic political nexus engaged in deriving private gains through public offices), together with interest and other charges, on time, or in full. This situation of borrowers not repaying is not unique to Bangladesh, and is not unique to 21st-century banking. It has existed ever since modern banking was invented by the Venetians in the 15th century.

Because of this basic credit risk, as inevitable as the ebb and flow of the tides, banks have to make estimates of the probability of repayment as well as the timing of repayment. And if the probability of repayment on time or in full is less than 100 percent, a downward adjustment has to be made to the value of the loan on the balance sheet.

Why is this so? Why shouldn’t banks continue to carry these loans on their balance sheets at 100 percent of their face value (the outstanding principal amount of the loan)? To a very great extent, to do so would represent a false hope. If all or part of a loan is not likely to be repaid, that is as much a loss to the bank as if the bank had placed a stack of banknotes in an incinerator and set it ablaze. And it is not prudent, nor is it desirable, to show on the balance sheet assets – claims on future cash flows – that no longer likely exist.

Appropriate timing of recognition of loan losses

The next question is more complicated: when should expected loan losses be


recognized? The amount and timing of future cash flows – on a loan where there is substantial doubt of full or timely repayment – is highly uncertain. Just as the reading on a thermometer gradually drops as the temperature declines, say, from 30C to 20C, so too should the value of a loan on the balance sheet drop gradually as the borrower becomes less and less likely to repay the loan. It wouldn’t make sense for the thermometer to register the drop in temperature all at once. Equally, it wouldn’t make sense for the bank to continue to maintain the loan on its balance sheet at its full value, only to suddenly register a drop in value – to zero, in some cases – as the borrower goes out of business and is completely unable to repay.

Accordingly, expected loan losses should be recognized on the balance sheet as soon as they occur. This recognition is accomplished through the use of loan loss provisions. A liability (or a contra-asset) is established by means of a debit to “provision expense.” It should be noted at this point that this is an accounting entry and does not involve a cash outlay. Timely recognition of loan losses is so important to the accuracy of banks’ balance sheets that it is required not only under International Financial Reporting Standards, but also under the International Convergence of Capital Measurement and Capital Standards, also known as “Basel II.” Banks in Bangladesh are required and have agreed to adopt Basel II, and are well along the way in doing so. Despite the recent shoot up in loan losses provisioning, Bangladeshi Banks on the whole remain Basel-II compliant. Some public banks are struggling with this mandate, and the owner (i.e. the government) appears to be aware of it and is prepared to do what is necessary

in maintaining their capital requirement.

What are the signals that a borrower is either unwilling or unable to repay his or her loan on time and in full? The list is long, but skipping required principal or interest payments is the most powerful signal. When any payment on a loan becomes past due by three months, in which case the loan is designated as Substandard, the likelihood skyrockets that a substantial amount of the principal will remain unpaid. Three months is not a long time in a person’s life, but it is an extremely long time for a banker to wait for a required payment from a borrower. Therefore, it is logical for a bank to begin writing down the value of the loan, by means of a provision, at that relatively early stage, to reflect the expected loss.

Impact of provisioning on banks’ profitability and share value

Over the life of any loan, from origination to the collection of the last required payment (or, in the case of a problem loan, the seizure

and sale of the collateral), there is always the possibility of a loss. It is the amount of these losses over time that plays a huge role in determining the long-run profitability of the bank. Long-run profitability is not affected by provisioning, which affects only the timing of recognition of loan losses, not their frequency or magnitude. Higher provisions shift profitability from the present into the future; lower provisions shift profitability from the future into the present.

Put differently, provisions are not separate costs. Earlier recognition of loan losses may cause a one-time jump in the level of loans designated as non-performing (Substandard, Doubtful, and Bad/Loss), and a one-time jump in the level of formed provisions on the balance sheet. But over the long run, banks’ profitability will continue to be determined by the skill with which they select and service their borrowers, and by the performance of these borrowers in repaying the loans. And whether or not borrowers repay their loans is not affected by how these loans are designated in the banks’ financial statements, or the timing and amount of provisions


established to reflect expected losses on these loans.

And since share value of any company is dependent upon long-term and not short-term profitability, a bank’s share value should be unaffected by its provisioning policy. In fact, higher provisions today can even give a positive signal to the share market that the bank is adequately recognizing the expected loan losses that are inherent in its portfolio, avoiding the possibility of a nasty earnings surprise in the future that could shock the investing public.

Impact of provisioning on credit availability

One of the most common misconceptions that appear from time to time in our national discourse is the idea that higher provisioning decreases credit availability. It is unfortunate that some of our experienced bankers too tend to think this way. It is, therefore, essential to point out that the factors that influence the flow of credit to the economy are numerous and complex, and

understanding them is extremely important, but provisioning is not one of these factors. Put simply, bankers do not set out to make problem loans. When a loan is originated, the bank has every expectation that it is going to be repaid. Accordingly, whether or not provisions must be made at an earlier stage, if and when the loan does start showing weaknesses, does not influence the decision to grant credit at inception.

Sometimes, this argument is made more specific. In the 2012 version of the rule on classification and provisioning, a loan is to be classified no more favorably than Substandard (and at least a 20 percent provision established) if any required payment is past due by three months or more. (In prior versions of the rule, the time period was six months.) It is said that a bank would be less likely to extend a fresh loan to a borrower whose existing loan has already been declared Substandard, thereby impeding the flow of credit.

Setting aside for a moment the troubling issue of whether a bank

should make a fresh loan to a borrower that is three months or more behind in payments on an existing loan, it is difficult to see how the mere designation of the loan as Substandard could play a role in the lending decision. The economic essence of the transaction has remained the same: before and after the 2012 rule was adopted, the borrower was past due by three months on an existing loan and applied for a fresh loan. In both cases, the bank must evaluate the borrower’s willingness and ability to repay the fresh loan, given his past credit history and current financial condition. For his part, the borrower need not know, or even care, that his loan was designated Substandard (although it could be a point of embarrassment for him outside the banking community if the information got out, which it shouldn’t because of banking secrecy laws).

And for those borrowers who may fear this embarrassment, or – what is even worse, to be declared a “defaulted borrower” and be ineligible for additional loans – I have a simple message: repay your loans on time and in full. If you are having cash flow difficulties, draw up a workout schedule with your bank, consistent with Bangladesh Bank guidelines and the bank’s internal policies. Do not expect infinite patience from your bank – it is a business, too, and has many stakeholders itself.

Impact of provisioning on bank liquidity

It has often been casually suggested that higher provisioning reduces banks’ liquidity, at a time when liquidity may be growing more slowly or even declining for other reasons. However, liquidity


Bangladesh Bank should go a bit easier on the banks, who might then go a bit easier on their customers, and make more credit more freely available, at lower costs.

For all the reasons cited above, there is considerable doubt that the higher loan loss provisions demanded by Bangladesh Bank are somehow contributing to this economic slowdown. And all the same, there is considerable doubt that a relaxation of the provisioning requirements would suddenly kick the economy into high gear again. The time to implement robust provisioning requirements is right now, when banks are relatively healthy, showing respectable, if somewhat diminished profits, and higher capital ratios – not when economic slowdown itself takes a bite out of profitability. Even then, Bangladesh Bank has revised its policy on classification and provisioning particularly for the

comes from cash flow, and higher provisioning does not affect cash flow at all. It does not affect banks’ ability to attract deposits or other borrowed money, nor does it affect their ability to sell assets or obtain contractual payments from their borrowers and other customer. As previously stated, higher provisioning is an accounting adjustment that brings the stated value of a loan on a bank’s balance sheet down to the amount that the bank is reasonably expected to obtain from the borrower.

Impact of provisioning on interest rates

Some commentators have suggested that banks will increase interest rates or other charges on loans in response to the higher provisioning requirements. This reaction by banks is highly unlikely. The interest rate on a loan is set as a sum of several factors: the marginal cost of funds, administrative costs in originating and servicing the loan, profit on the additional capital needed, and a credit risk premium based on expected loan losses. Altering the schedule of provisioning does not alter the intrinsic credit risk (these expected loan losses) of a loan over its entire life. Moreover – and this point bears repeating – no loan officer intentionally sets out to make a bad loan that will, in the future, require specific provisions. Therefore, there is no reason to believe that the initial interest rate on the loan will be affected. In fact, given the liquidity situation, enhanced discipline in the banking sector and easing inflation, the rate of interest has already started falling and I hope this trend will continue in the coming days as well. This is already being reflected in a less than five percent spread in May 2013.

Appropriateness of higher provisions at a time of global and local economic uncertainty

These are indeed challenging times for the world economy, and for Bangladesh. In many countries, particularly in Europe and East Asia, growth appears to be turning down and even becoming negative. In Bangladesh, some recent very unfortunate and tragic incidents, combined with these international developments, have put some sand in the gears of our well-oiled export economy. But we have nearly come out of this gloomy backdrop and things are improving every day in our export front. I want to thank all the stakeholders, including foreign buyers, development partners, government, bankers, media, etc., for standing by Bangladesh at a difficult patch of time and helping us in pulling up the image of the country. Given this challenging time, one hears discussion that


long term loans, recently keeping the growth issue in perspective.

Uncertainty in our key economic sectors is troubling, and may well lead to a rise in non-performing loans at some banks that are over-concentrated in these particular sectors. A prudent banker would anticipate this rise, and increase general provisions on good loans now, taking into account the increased likelihood that some of these loans will deteriorate in the future, necessitating higher provisions for expected losses. This response would be proactive, rather than

reactive (simply waiting until the loans become non-performing). Put simply, troubles in this or that key industry call for higher provisioning not lower. If this higher provisioning, in turn, necessitates fresh injections of capital into any bank, it is better to do that now, when we can see our capabilities clearly, rather than wait until some unspecified time in the future that we can today only glimpse blurrily through our forecasting lenses. Most bankers, apparently are aware of this scenario and I am sure will take appropriate actions, keeping the long term perspective in mind.

Conclusion

Throughout the world, over the last six years, banking has been subjected to turbulence on an unprecedented scale. Vast fortunes have been lost in the blink of an eye, and this turbulence has spilled over into the real economy, as credit has contracted and still has not recovered to pre-crisis levels in many countries. Fortunately, Bangladesh has been spared these hardships. But this does not mean that we can relax and let our guard down. From the central bank to the banking sector and its customers, everyone must be prudent and cautious, taking steps to mitigate the potential impact of possible future events that are difficult to foresee. Bankers need to continue to carefully analyze borrowers’ proposals, together with their cash flows and future prospects, and make sound loans that will be profitable both for them and timely and beneficial for their customers.

And to this end, loan loss provisions that reflect the real credit risk in our banks’ portfolios will contribute mightily to preserving the stability of our banks, allowing them to continue to occupy their rightful and vital place in the growth and continued development of our economy. I have full confidence in our banking community and I am sure they will always keep their eyes open and rise up to the occasion as and when called for.

The Author is Governor,Bangladesh Bank

There was a workshop held in July 2012 at Dhaka University on ‘ The Role of Accounting for Capital Market Development’ organized by a project titled ‘Higher Education Quality Enhancement’ of World Bank and with the collaboration of University Grants Commission. In a discussion session the some accounting professionals from the Institute of Chartered Accountants of Bangladesh (ICAB) and Institute of Cost & Management Accountant (ICMAB), professors of accounting and economics of Dhaka university, Former Chairman of Bangladesh Securities and Exchange Commission (BSEC) and president of Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) and other professional from different fields took part to conclude some issues need to be done for transparent & fair accounting practice for capital market development. Deliberately some important issues came up in discussion for reasonably transparent and adequate informative accounts/financial statements. Some issues were discussed in such a way as if the auditors’ are primarily responsible for the capital market debacle in 2011 as (i) auditors were accused for preparation of financial statements and (ii) it was said that people have lost faith on accounting standards. Both are improper statement as the auditors are not responsible for

The Role of Accounting for CapitalMarket Development in Bangladesh

Dipok Kumar Roy ACA

preparing the financial statements and there is no reason to lose faith on accounting standards as today’s miserable condition of the market is not a product of wrong accounting or abuse of globally accepted accounting standards. If there is a question to accuse on untrue and unfair accounts, the management would be primarily responsible for preparation thereof and an auditor will be responsible for negligence, if any, in accomplishing audit to express an opinion on the financial statements based on his working to opine so. In the audit report it is clearly stated the responsibility of management and auditors. In auditors’ report it is also stated that the auditors conduct their audit in accordance with adopted standards and those standards require that they comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free of material misstatements. So, the auditors would express an opinion as to free of material misstatements or in other way true and fair view and the auditors would never certify the financial statements prepared by the management. The auditor is neither accountant nor investigator- the auditor is examinee or reviewer of prepared financial statements to get adequate information of reasonable assurance as to true and fair view of the statements checked/reviewed, which is termed as unqualified report. If the


DUE TO FRAUDULENT OR MALPRACTICE OF ACCOUNTING BY ANY ACCOUNTING PROFESSIONAL EITHER AS ACCOUNTANT OR AS AUDITOR, BSEC AND THE CONCERNED REGULATORS SHOULD TAKE PENAL ACTION AS PER THE BSEC LAWS, COMPANIES ACT AND OTHER RELEVANT LAWS APPLICABLE FOR REGULATORS. IN ADDITION TO THAT, THEY MAY REFER TO ICAB TO TAKE PENAL ACTION AGAINST SUCH FRAUDULENT PROFESSIONAL PRACTICE AS PER REGULATIONS/BYE-LAWS OF ICAB TO REGULATE THE MEMBERS.

information pertaining to auditor obtained from audit lead to (i) material misstatement or (ii) insufficient & inappropriate audit evidence, the auditor may express on the financial statements either as qualified opinion (stating the disagreement or misstatement) or adverse opinion (negative opinion) or disclaimer opinion (no opinion) depending on the pervasiveness of its effects or possible effects on the financial statements. Hence, auditor could be responsible for failing to accomplish his duty to reach the reasonable assurance of his opinion as to true and fair view, but he never can be accused grossly. It is of course a great argument on the reluctance or negligence to perform their duty with due professional care and integrity to express such opinion.

No question remains against the necessity of transparent accountings with proper disclosures for the companies listed in stock exchanges for the interests of investors. But of course there is a question- who cares the accounts in investing in capital

market in Bangladesh? Raising this question is just to remind our investors to care the informative financial statements and to invest considering the fundamental judgments on these, and does not unnecessarily mean to overlook the responsibilities of accountants and auditors who may be involved intentional or unintentional accounting scandals in preparing financial statements and auditing thereof.

The main points of discussion of the workshop may be summed up relating to financial reports only in accordance with news papers are (i) audit committee should act proactively (ii) proper share valuation for IPO and right shares (iii) no internal capacity of regulators to judge the quality of financial reports (iv)enacting Financial Reporting Act so that intended crime cannot be included (iv) to bring the auditor under scanner (v) 3% to 4% investors invest analyzing the fundamental of financial statements and hence, to make them educated (vi)



non-acceptance of financial reports unless prepared as per applicable accounting standards (vii) as per a study, 87% of the listed companies other than banks and FIs missed at least one out of four accounting criteria or corporate governance guidelines, companies act, SEC rules while preparing financial statements (viii) accounting leading to benefit of insider trading (ix) as per an international study about 70% of fraudulent practice of corporate and financial statements take place due to interventions of managements of the companies. (x) The companies need to adhere to policies for transparency and fairness of accounting etc.

Efficient Capital Market is of course backed up by proper accounting information and disclosures in the financial statements and prices of shares reflect based on those fundamentals information- never based on rumors or emotion or acting of super powerful players for unduly influence of price. So,

proper accounting information are necessary as necessary the use of them by investors to reflect in price to form an efficient capital market. However, based on the above findings on the workshop, in order to ensure the effective role of accounting in developing the efficient capital market, the following courses of actions are essentials:

Compliance of Corporate Governance

BSEC needs to ensure the implementation of Corporate Governance. The Corporate Governance issued by BSEC is not only for tick mark for presenting in the annual report. BSEC must ensure proper compliance with effective monitoring and obtaining report on this time to time. In corporate governance practice, constitution of Board should be in such a way which represents impartial and democratic structure to ensure transparent operation and present true pictures of

operational result. In standard corporate governance practice, there will be nomination committee who would nominate for directorship amongst sponsors, shareholders, employees and outsiders as independent and directors are appointed in general meeting amongst each group. Our recent corporate governance guidelines issued on 08 August, 2012 does not ensure such process of constitution of Board. However, BSEC should ensure to comply with the provisions of corporate governance effectively and efficiently to get true and fair view of operational result in financial statements and to attain the goal of the company as well.

Formatting General Purpose Financial Reporting Framework There should be a committee consisting of all regulators like Bangladesh Bank, BSEC, ICAB, IRDA, and NBR to work together for preparing a framework of general purpose financial statements with format of each category of companies, necessary disclosures and process of finalization in accordance with respective laws, regulations & standards. The Reporting framework would be uniform in presentation and easier for investor to analyze the financials and compare with previous period of the same and with others within the sector.

Codification Audit Process and area

The Companies law or Securities laws could codify audit process and areas in line with the International Standards on Auditing that will never contradict with international standards and methodology but will ensure a guideline to cover international process and specific areas and to


be leader in formulating policies under existing framework of laws and regulations. The above monitoring and review committee of regulators will have power to review the accomplishment of responsibilities of Board and management as well.

Introducing Effective Internal Control Systems

Internal control systems in operation are essential to trail good output of financial transparency because of designing the process of transaction, recordkeeping and maintaining and dealing with the assets and liabilities in such a way that ensure internal checking systems to protect irrational and fraudulent practice. SEC should take effective steps to introduce Internal Control Guidelines for each listed company. Bangladesh Bank ensured such guidelines for banks and FIs. SEC must ensure the compliance of such guidelines as well meticulously.

Ensure Management CapacityEfficient management provides efficient operations, information and compliant feature in all respect. The Regulators and BSEC have to have the responsibility to assess their capacity and capability of efficiency of management on technical, professional and integrity grounds to avoid any fraudulent and malpractice in preparing the financial statements and presenting thereof with disclosure of facts and figures as required by applicable laws, regulations and standards. BSEC would obtain the list of key employees engaged in planning and decision making points and based on assessments, would advise to employ technical and professional manpower for efficient and transparent operation.

bring the uniformity of works to get the reasonable evidence to express opinion. The provision in law could refer to international auditing standard as adopted by ICAB and some specific areas for special attention to review/check. This codification will never restrict or limit the scope of work as needed professionally or the auditor wants to conduct or provide more professional efforts for his satisfaction to reach his decision. This would ensure minimum issues to cover for negligence of which he can be responsible and bring under scanner.

Reasonable & Standard Professional Fees

Regarding professional fees and audit jobs, there are reciprocal complain about lower paid and substandard quality of work. However, ICAB should be strict to render standard professional services in audit and comply with applicable fee chart against services rendered. In no way, there will be no compromise with professional integrity & due care in accomplishing the duty against low charges of fees.

High Technical Monitoring and Review Committee

The BSEC, DSE and CSE should have high technical monitoring and review committee with professional manpower capable of analyzing the financial statements, operations, polices laws and accounting standards. This committee would review the finical statements of those who are already listed and those who have applied for raising capital through Initial Public offering (IPO) and right offer with professional due care and integrity. The review committee would have power to call for any information on financials and refer to Chairman or commission for any action or investigation, if required.

Professional Practice without Unduly Interference of Board This is very common practice in Bangladesh to interfere management by Board in preparing and presenting financial statements. The Board and management work will be completely distinguished. The management would work under specific guidelines, standards, laws and regulations and the Board will

Legal Action

Due to fraudulent or malpractice of accounting by any accounting professional either as accountant or as auditor, BSEC and the concerned regulators should take penal action as per the BSEC laws, Companies act and other relevant laws applicable for regulators. In addition to that, they may refer to ICAB to take penal action against such fraudulent professional practice as per regulations/bye-laws of ICAB to regulate the members.

Enlisting Competent Firms as Auditors of Listed Companies

BSEC should enlist audit firms capable to conduct of audit of listed companies. In judging the capability & competency of firms, BSEC must ensure the audit

process and methodology entailed in conducting audit and availability of different tier of professional having soundness of accounting standards, technological, technical and legal aspects for those desired and standard audit process & methodology. So, BSEC must have a set of criteria to evaluate & enlist after obtaining the proposal or expression of interest with CV of firms, key persons, related experiences and other issues ensuring good audit practice.

Protect Insider Information and Trading

The auditor has to sign for complying with ethical standard of the Company to protect the information that he would maintain confidentiality and not publish intentionally or unintentionally any information to others and never induce to or

abstain from doing anything related to securities traded in capital market and with a view to ensuring this, the laws related to insider may be more strengthened.

Periodical Audit Committee Reports

In corporate governance guidelines, reporting to BSEC is optional and reportable only when rectification unreasonably ignored on any finding came to notice of the committee. BSEC should notify all listed company to report periodically of audit committee with finding, if any, and their functions of that period. Being proactive, audit committee would review the function of internal audit department and review of operation with financial presentation and compliance and report to the Board & BSEC.


The Author is an Associate Memberof ICAB and Head of Finance,Venture Investment PartnersBangladesh Ltd.


interest to keep up public confidence in the capital market. External auditor never should compromise for any reporting or certification while IPO or offering right share and issue manager should act under the regulating law and never should undertake the responsibility to get the approval from BSEC unduly furnishing manufactured documents in spite of having incapability. In necessity, the respective laws may be harder for regulation of them or total process of IPO or right offer may need to check thoroughly with knowledgeable professional personnel of regulators. Publishing Message Alert on Webpage with Caution and Fundamentals

BSEC should be more active in publishing message alert everyday while market is in operation on necessity of analyzing PE Ratio, EPS with dividend payout ratio, growth trend analysis, safety investment criteria and others market influence cautionary statements to avoid any fraudulent or rumor based investment. BSEC must educate investors the features of efficient capital market.

Arranging Workshop for Investors to Educate Investors

Workshop may be arranged to educate and alert the investors to consider basic information of the company analyzing the financials with historical trends and ratios. BSEC should not provide any information either to induce to or to abstain from doing anything by the investors. BSEC should make aware the investors as to basic idea of investment, portfolio management and how to analyze the financials and performance.

Strengthening ICAB with Professional Enrichment and Accountability

The existing draft financial reporting act is not a good form to provide an intended result which is simply an attempt to tighten the mouth of bottle keeping a lot of leaks on it. We must ensure proper corporate governance, internal control, reporting framework etc. to get proper accounting ground. In addition to that, the proposed Financial Reporting Council would be a traditional non professional council rather than a result oriented professional institution. Rather the ICAB council may be

reformed consisting of 3(three) Board - (i) Accounting Standard Board (ii) Auditing Standard Board and (iii) Financial Reports Review Board to ensure compliance of international standard and effective implementation. The first two boards will be consisted of maximum members of ICAB and minimum number of ICMAB to analyze and adopt standards in a professional manner and the last review board may be consisted of ICAB, ICMAB, BSEC, BB and other regulators with a chairman of civil society or professor having experience in accounting, finance and economics to ensure the review of financial report and oversight of professional integrity of accounting professional upon suo motto basis or submission of any review petition by the regulators to the Board. A political led non professional council never can bring financial reporting transparency unless ICAB can work with full independence to enrich the profession.

Role of External Auditor & Issue Managers

Both external auditors & issue manager should act as per their respective laws with professional due care for the sake of public

The members of the Institute of Chartered Accountants of Bangladesh (ICAB), the lone professional body to protect and promote the interest of chartered accountants are now sailing in uncharted waters as the proposed Financial Reporting Act 2013 is contradictory with the constitution of Bangladesh and also littered with a lot of ambiguities and confusion as well.

It is widely questioned whether the proposed FRA would be an alternative or parallel body of the ICAB.

The ICAB is a legislative body formed through Presidential Order (P.O. 2 of 1973) to regulate the accountancy profession but under the new act, a new oversight body ‘Financial Reporting Council (FRC)’ will be formed which will be a super functional body over ICAB.

In the historical back-ground of the role of accounting professionals around the world, FRA is a new phenomenon but truly not in this forms and norms.

In the USA under the Sarbanes-Oxley Act, a Public Accounting Oversight Board was formed to oversee the activities of the listed companies. In Bangladesh, the FRC’s work area is bigger; it is really questionable how efficiently the activities

Is proposed FRA a substitute of ICAB?Raihan M Chowdhury

of a huge number of listed, non-listed and state-owned entities will be handled by the proposed body.

Pointing out some conflicts in the proposed law, the industry analysts said according to section 2(11) of the proposed Act, a person who is not a CA professional can also get opportunity to work as an auditor and it is against the international policy.

According to section 212(1) of Companies Act, 1994, a Chartered Accountant registered with ICAB can be appointed for account audits. But according to the proposed law, chartered accountants will have to be registered with the FRC.

According to registration related section 40(3)(KA), although the condition of issuing the certificate to an auditor from the ICAB is mentioned as necessary, but according to section 2(10) audit firm and section 2(11), there are no condition over getting membership from the ICAB. The definitions are not clear and thus contradictory with section 40.

There is doubt over the function of the proposed FRC to ensure true and fair representation of the company in its Financial Statement. The members of the FRC should have core competency in accounting profession to scrutinize the


IT IS ALSO

MENTIONABLE THAT

BANGLADESH

ACHIEVED THE

HIGHEST NUMBER OF

BEST PUBLISHED

ACCOUNTS AND

REPORTS AWARDS

AMONG THE SAARC

COUNTRIES FOR

PREPARING

EXCELLENT FINANCIAL

STATEMENTS IN 2012.

THE ICAB IS THUS

PLAYING A VITAL ROLE

IN SCRUTINIZING THE

REPORTS WHICH IS

OTHERWISE

ENCOURAGING THE

CORPORATE ENTITIES

TO SUSTAIN.

corruption in Financial Statements. Without core competency, one cannot function properly. Would the members of proposed FRC understand the accounting language! In many aspects, politics and bureaucracy is likely to undermine the very purposes of FRA, because, the members of the body will not be truly independent, many analysts fear.

Only ICAB has the statutory power to prepare and implement the Accounting and Auditing standard according to International Financial Reporting Standard (IFRS) and International Standards on Auditing (ISA). It is unexpected to give the responsibility to FRC to conduct the same function, presumably it cannot have the professional expertise, many analysts said. The proposed FRC will be a crippled organization, if competent and skilled people are not employed in core functional areas of Financial Reporting Council, they further envisioned.


The ICAB held a joint meeting among Advisory Committee and Council, ICAB on14 September 2013 where it’s President Md Abdus Salam FCA, Council Members, Past Presidents, Members of Advisory Committee and Senior Members were present.

In the meeting, the ICAB members exchanged their views about CA profession and commented on proposed Financial Reporting Act 2013. The members opined that despite significant progress and advancement in the field of professional education of CAs, international recognition from ICAEW, CPA Ireland, International Federation of Accountants (IFAC), reward from South Asian Federation of Accountants (SAFA) and beyond, some quarters are trying to ignore the role of ICAB by defaming its noble role and advocating for FRA/FRC at the cost of the profession. They expressed their disappointment regarding the propaganda about the auditors’ role in stock exchanges


debacle which is deliberated, more of emotion than the logic.

They vehemently opposed the idea of shifting the burden of responsibilities from the defaulter on to the innocent auditors. They appealed to the people specially, having misconception about the CA's role, by saying that the responsibility of preparing accounts is on to the management of the company and auditing/checking those are done at auditor’s end with lot of limitations which are not unknown to us working in financial sectors. They expressed their concern over the recent remarks about CAs by saying that where there are malpractices widespread, without looking at those, putting blame only on CAs will make the situation worse. Every conscious

citizen should raise their voice against the effort of ruining an established profession which could be done duly following the path of equity and justice.

The Members also made critical argument on to the performance of the Institute and vowed to strengthen the effort further and not to spare any defaulters bringing bad name for the integrity of this profession.

At present, a total of 359 ICAB members among 1416 are currently engaged in audit practice and the rest 1057 are engaged with different business organizations. Besides, after completing their course of qualifying part, more than 15 thousand students are engaged with different organization in the country and abroad. The numbers

of students are increasing due to international approval of ICAB’s training and exams.

It is also mentionable that Bangladesh achieved the highest number of Best Published Accounts and Reports Awards among the SAARC countries for preparing excellent Financial Statements in 2012. The ICAB is thus playing a vital role in scrutinizing the reports which is otherwise encouraging the corporate entities to sustain.

The ICAB and stakeholders feel that the Government should strengthen the ICAB through creating skilled accounting professionals and maintain professional and independent ethics instead of creating another parallel body.


They said Bangladesh’s economy has not reached up to the mark as USA or UK and there is no such law in neighbouring countries.

Bangladesh achieved the highest number of Best Published Accounts and Reports Awards among the SAARC countries in 2012.

The ICAB has a good number of very specialized accounting professionals. To bring the professional excellence, ICAB took part in a specialized Training Program. The ICAB and the International Finance Corporation (IFC) jointly organized a Roundtable on Effective Implementation of Corporate Governance in Bangladesh in May 2013. Bangladesh Bank high officials, IFC representatives and ICAB members took part in the discussion.

Through a Memorandum of understanding signed between The Institute of Chartered Accounts in England and Wales and ICAB in

2009, the articleship and other exams conducted by any ICAB members get approval as international standard.

ICAB is grooming with international accounting auditing standard by adapting as BAS/BFRS and BSA. Moreover, the Institute is fully compliant with the IFAC’s Statement of Membership Obligations (SMOs); including implementation of the IAS/IFRS and ISA, quality assurance, CPD, audit independence and professional ethics.

ICAB's advancement to build partnership to World Bank, Professional Bodies, and Educational Institutions through MoU and MRA is remarkable event of the recent past.

Interaction with IFAC, CAPA, and SAFA was extensively pursued for ICAB to be more efficient in producing standard sustainable reporting. The IFAC Appreciation of ICAB Plan on IFAC SMOs was a great recognition for Bangladesh in

the year 2012. In this year, ICAB has also qualified for the ISLQ International Star for Leadership in Quality Award – Paris 2012, in recognition of Commitment to Quality and Leadership.

The ICAB is playing a significant role to disseminate these standards through various workshops, seminars and knowledge sharing programs towards different regulatory bodies and stakeholders. The ICAB annual event of National Awards for Best Published Accounts and Report inspires harmonization of best national, regional and global financial reporting, corporate governance and audit practices. On the other hand, ICAB Members are instrumental with IAS/IFRS and ISA and they are striding for the sound financial reporting, good corporate governance and true and fair auditing practices for the corporate and other entities in Bangladesh. Proper application of accounting and financial reporting standards ensures that financial reports achieve a “comparable” and “fair


application of accounting and financial standards will ensure a comparable and fair presentation of the financial information and help decision-makers in formulating economic policies.

Finally it is the humble suggestion of ICAB members that the Government will seriously re-consider the enactment of FRA so that it does not affect the normal operation and activities of ICAB, rather efforts should be geared up to strengthen the ICAB.

presentation” of financial information which is highly expected for economic decision making. In this regard, a tangible and fast track action plan deserve the top priority in the top most action plan agenda of the Government, the Regulators, the stakeholders, the Financial Institutions and the Professionals. ICAB is always there in its respective capacities to help improve the level of authenticity in Financial Reporting and Audit Practices in the Banking sector.

It has become imperative for the accounting professionals to regain confidence and credibility of stakeholders to serve the public interest through establishing effective integrated financial reporting that could ensure

corporate good governance and sustainability.

ICAB is also working very sincerely on how to address market issues through catalyzing high quality financial reporting and credible audit practices through technical skills, professional competencies besides ethics.

It is to be ensured compliance with the provisions of all applicable International Accounting and Auditing Standards and International Financial Reporting Standards in the preparation and presentation of the Financial Statements is maintained.

These standards are duly adopted by ICAB as BAS/BFRS and BSA. Integrated reporting through proper

The Author is Business Editor ofThe Daily Financial Express

Right of appeal by an aggrieved person has been given in the Income Tax Ordinance 1984 under Chapter XIX against Appellate Commissioner and Commissioner (Appeal) under section 153 to 156 and sections 158 to 159 related to Appellate Tribunal and Reference Application to Honourable High Court u/s 160-162. Besides, Revisional Application may also be filed u/ s 121A to Commissioner of Taxes for revision of the case.

Under this Chapter, we find that the Ordinance provides two tires of appeals. According to section 153(1), any assessee (individual AOP, HUDF, etc.) not being company if aggrieved by the order of the DCT may appeal to the Commissioner (Appeal) and Appellate Joint Commissioner of Taxes.

On the other hand, a company if aggrieved by the order of the DCT or any assessee aggrieved by any order of an Inspecting Joint Commissioner may prefer an appeal to the Commissioner (Appeal) against such order.

Disputes may be arisen due to arbitrary assessment of DCT regarding computation of the amount of loss u/ s 37, Assessment of income and arbitrary determination of Tax liabilities u/ s 83(2). Imposition of interest u/ s 73, imposition of penalty u/ s

Appeals under Tax Laws need fairand Rational Judgment

Akhter Zamil FCA

124, 125, 126, 127, 128 or 137, refusal to allow claim of refund and arbitrary determination of the amount of refund under chapter XVIII.

Appeal against these types of disputes may be sorted out by filing of appeal by an individual assessee to Appellate Joint Commissioner of Taxes and also to Commissioner (Appeal) against the order of Inspecting Joint Commissioner of Taxes. The company and individual assessee may also file appeal to C. T. (Appeal). This procedure is adopted in the first appeal.

Authority to dispose off the appeals under different sections are stated as under:

153 (1a) Under this sub-section, any assessee being a company aggrieved by any order of DCT or any assessee aggrieved by any order of IJCT in respect of the following may prefer an appeal to the Commissioner (Appeal) against such order. However, u/s 10, the Board may on application or its own motion, transfer an appeal from AJCT to CT (appeal) and vice versa. These are (a) any matter specified in clauses (1) of section 153(6) imposition of penalty under Chapter XV or section 137 and (c) assessment under section 10 or 120.


IN SOME

CASES, THE TRIBUNAL

AUTHORITY MAY

ADMIT AN APPEAL

SUBMITTED BEYOND

THE PERIOD OF 60

DAYS PROVIDED

THERE IS SUFFICIENT

CAUSE FOR NOT

PRESENTING THE

APPEAL WITHIN THAT

PERIOD

ACCOMPANYING WITH

AN APPLICATION FOR

CONDONATION OF

DELAY U/ S 5 OF THE

LIMITATION ACT 1908

WITH A FEE OF ONE

THOUSAND TAKA.

(1b) Under this sub-section, it is provided that all pending appeal files prior to amendment of Finance Act 1990 will be dealt with by the Appellate Joint Commissioner of Taxes and from First July 1990 all appeals to be filed with Commissioner of Appeal for its disposal. The Appellate Joint Commissioner will resolve the appeals upto 30th June 1999 as if this section were not amended by Finance Act, 1990.

(2) Any partner of a partnership firm may appeal to the Appellate Joint Commissioner against the order of DCT who determined the total income or loss of the firm or apportionment thereof between several partners but single partner may not be able to agitate in any such appeal relating to his own total income.

(3) No appeal shall lie against any order of assessment under this section unless the admitted tax as per return is paid u/ s 74 before filing appeal.

Section 154 is related to forms of appeal and limitation in accepting appeal for hearing. An assessee is required to follow certain procedures for filing appeal with C. T. (Appeal) or Appellate Joint Commissioner of Taxes in case of individual and


company which are as under:

(a) Every appeal shall be filed in prescribed form and verified in a manner as required by I. T. Rule.

(b) Such appeal shall accompany a fee of Tk. 200/- (two hundred) for each appeal for an individual year.

(c) Appeal shall be filed within the prescribed time limit of 45 days from the date of receipt of the notice or orders relating to assessment or penalty as the case may be.

(d) In any other case from the date on which the intimation of the order to be appealed is served.

(e) The Appellate Joint Commissioner or the Commissioner (Appeals) may also admit an appeal after expiration of the time limit of 45 days if he satisfied that the appellant was prevented by sufficient cause from presenting the appeal with that period u/s 158(4) of!. t. Ordinance, 1984.

(f) In case of late submission of appeal beyond the time limit of 45 days, an assessee may also file an application with condonation


of delay u/s 5 of the limitation Act 1908 stating the reasons for delay.

The point of late submission of appeal is highly debatable for the assessee and to get admission of appeal from the relevant appeal authorities. The causes may be found in the following paragraphs.

Section 155 deals with the procedure to dispose off the appeals only by Appellate Joint Commissioner (AJCT) or Commissioner of Appeals. It includes adjournment of hearing of appeal from time to time, acceptance of additional grounds from assessee, further enquiry by DCT as per order of the AJCT or Commissioner (Appeal). Non- admission of documentary evidence and materials from assessee or accept the same in due course.

Section 156 this section is related to decision by the Appellate Joint Commissioner or Commissioner (Appeal) against the appeal. Disposal of appeal by Joint Commissioner or Commissioner Appeals are sufficiently described. The time limit for communicating of the order to the Appellant is within 30 days of the passing of such order is vested under another sub-section 5 of the section 156. If the order is not passed by the Appellate Joint Commissioner or Commissioner Appeals within 150 days from the end of the month on which the appeals was filed shall be deemed to have been allowed.

Appeal to the Appellate Tribunal

The second tier of appeal is related to appeal to the Tribunal u/ s 158 of the I. T. Ordinance 1984.

The limitations, procedures,

disposal of Appeal by the Appellate Tribunal are more of less same except in some cases which are as under:

An individual assessee and company may appeal to the Tribunal if he is aggrieved by an order of Appellate Joint Commissioner, Inspecting Joint Commissioner u/ s 120 to the Commissioner of Appeals as the case may be under section 128 (penalty) 156 (5) 6), (failure to communicate the order and non-delivery of order deemed to be allowed if not delivered within 150 days).

Here also appeal shall not lie for hearing if the assessee fails to pay 10% of the demanded Tax after adjustment of Tax paid u/s 74 or on total demanded Tax u/s 74 (4) of the 1. T. Ordinance 1984.

Every appeal u/ s 158(1) or sub-section (2A) shall be filed within 60 days of the receipt of the order from Commissioner of Appeal, Appellate Joint Commissioner/Inspecting Joint Commissioner of Taxes against section 120.

In some cases, the Tribunal authority may admit an Appeal submitted beyond the period of 60 days provided there is sufficient cause for not presenting the appeal within that period accompanying with an application for condonation of delay u/ s 5 of the limitation Act 1908 with a fee of one thousand Taka.

Under sub-section 4 of section 159, the Appellate Tribunal after giving an opportunity of being heard to the assessee passed the order to the assessee and relevant Commissioner within 30 days from the date of such order. The orders passed by the Appellate Tribunal on appeal shall be final.

Under sub-section 6 of section 159, if the Appellate Tribunal fails to make the order within a period of six moths from the end of month in which the appeal is filed in that case, it shall be deemed to have been allowed by the Appellate Tribunal.

This is precisely the procedures followed by the above two tires under which i. e. the action of the AJCT, Commissioner (Appeal) and Tribunal authorities are regulated. .

We may now discuss as to how the appeal applications are admitted by the Commissioner (Appeal) and Appellate Tribunal for hearing. The question of disputes arises are


found common both at the stage of Commissioner (Appeal) and Appellate Tribunal.

The question of admission of appeal application by the Appellate authorities for hearing of the case requires-

(a) The date of Receipt of the Assessment Order and filing of appeal which in case of filing appeal beyond the time limit of 45 days and 60 days before the Commissioner (Appeal) and Appellate Tribunal respectively are the fixed time for submission of appeal. If applications are filed in time no dispute arises.

(b) The next question comes whether the assessee has paid the admitted Tax u/s 74. In any case, if the amount of Tax falls short the appeal authorities do not accept the application for

hearing, right of appeal is denied against the assessee. There should be a provision, to pay shortfall amount before, hearing by Commissioner (Appeal) and Appellate Tribunal for the cause of natural justice. Error is natural for a human being and it needs excuse of course by appeal authorities. Tax authority has made a provision in the Finance Act 2013 to pay 10% of the demanded Tax for exparte assessment by the DCT as per clause 51 of the Finance Act 2013.

(c) No tax is payable before filing of Appeal before C. T. (Appeal) but 10% payment to be made before filing of appeal to Appellate Tribunal is a bit harsh. Some time assessee find sit difficult to pay the requisite Tax against huge arbitrary demand of Tax created by the

DCT. This is questionable whether demand of Tax is rightly claimed or not by the DCT for payment of Tax before appeal.

(d) There is no scope to seek waiver against demand from higher Tax authority and ultimately the assessee is denied of his right of appeal. This is not fair and rational. Appellate Authority may be given a right to consider appeal with less payment of Tax over demanded Tax for the cause of justice. In case of Reference Application such provision is there and it may also be considered in case of appeal to Commissioner (Appeal).

Disputes to Resolve by Taxes the Appellate authority.

(a) From the view point of delivery of Assessment Orders and Appeal orders we find that these orders are not communicated to assessee in time by the offices of the DCT, C. T. (Appeal). In some cases, delivery of Assessment orders are given in times but other documents like IT 30, Demand note are not delivered with assessment order which makes the order incomplete. This sort of situation creates the great impediment to file appeal in time. But Tax authority can overcome the situation provided they make strict vigilance over the activities of the employees in Appellate. Time limit for filing and disposal of appeal are provided in the Tax Ordinance. But such time frames are not truly followed by respective departments and in consequence assessee faces all the troubles while getting


contain any counter arguments by the Appellate Authority against the arguments put forward by the assessee. This attitude of the appeal authority encourages the assessee to file Reference Application to High Court. Counter arguments by the Appeal authorities could check this situation if they attempt to controvert the arguments of the assessee. The assessee in this situation could understand his weakness in the arguments and refrain from filing further Reference Application to the High Court and ultimately the number of Reference Application could be reduced to a great extent. Sometimes orders of appeals are confirmed by the Appellate authority in a simple language stating simply i. e. "we declined to interfere the

admission of the appeal application by C. T. (Appeal) and Appellate Tribunal.

(b) Sometime we find that disputes with respect to appeal referred on the reason that" appeal is out of time". The appellate authority has the power to consider appeal even if filed beyond the time limit of 45 days but if commissioner (appeal) finds that assessee is prevented by sufficient cause from presenting the appeal then C. T. (Appeal) may consider such appeal us 5 of the limitation Act, 1908. We also noted that on some occasions the date of filing of appeal fells on holiday and in that case the next working day should be the basis for accepting the appeal as mentioned in the Tax

Ordinance, 1984 but C. T. appeal did not accept such appeal.

But C. T. (Appeal) very often refused the appeal ignoring the law, we feel a C. T. (Appeal) can not indulge in this type of fault rather his/her office staff were found to be very much instrumental to get the appeal rejected (for their own interest) and instigate the C. T. (Appeal) to reject the appeal. This is very unfortunate and painful. Such action gives more pain to assessee to get the appeal resolved. The appellate authority should be very cautious before rejecting the appeal for the shake of justice and equity.

(c) Another point as may be raised that appeal orders do not


decision of the DCT or C. T. Appeal", "Assessee did not produce any documentary evidence at the time of hearing" which has no legal substance and can not be considered as good counter arguments from Appellate bodies.

(d) In most of the cases relating to determmation of rate of Gross Profit, the C. T. (Appeal) and Appellate Tribunal appear to be "scared" to put their arguments in the appeal order which are very disappointing for the assessee and in that case they are forced to take the shelter of the High Court. But in reality we observed that High Court while reviewing the case with reference to past records, relevant sections and reference cases in similar line of business effortlessly issued the judgements in favour of the assessee. But this sort of review could be taken by the

Appellate authority and matter could be resolved there to avoid time and money to help Govt. in Collecting Revenue.

(e) Examples may be cited here as to how the appeals of the assessee are treated by the C. T. (Appeal) and Appellate Tribunal.

An assessee claimed income from Brokerage Commission u/ s 82C and other income under different sections of the Ordinance. Since the said income of Brokerage Commission to be assessed separately u/s 82C read with sub-section (1), (2), the DCT is required to deduct the brokerage income from combined total income for separate consideration. But DCT here instead of doing that converted the amount of TDS so far collected by the rate of Tax on the basis of Tax Ordinance and sub-section 2 of section 82C of the respective year which resulted reduction of the claim of Brokerage

income. This action of the DCT is inconsistent and arbitrary in law with reference to sub-section (1) & (2) of 82C, which raised the following questions against constituted income being illegal and unlawful results:

(i) Original claim of income is reduced as opposed to income tax policy.

(ii) Two rates of Taxes (TDS rate and rates applicable for assessment year) are applied on the same assessee as envisaged in section 82C read with sub-section (1) & (2).

(iii) As per section 82C read with sub-section (1) & (2) which describes TDS rates which shall be applied on the" source" mentioned in sub-section 2 and Tax so far collected shall be treated as final discharge of tax liability from that "source" for the assessee. Thus any transaction


u/s 82C ends here with respect to"source", (income), and "TDS" being full and final discharge of Tax liability.

But disregarding the above two sub-sections (1) & (2) the DCT found to be prompt to apply sub-section (4) and sub-section (6) on the assessed income u/s 82C (2). With Bad intention the DCT converted the TDS amount by rate of Tax as per Finance Act. (37.5%) to make the income reduced to against original income under sub-section (4). To find out "excess" profit under sub-section (6), the DCT deducted reduced income from the amount of claimed income of the assessee which result in "excess" income and charged at 37.5%. If you see carefully you will find that both the

reduced income under sub-section (4) and under sub-section 6, the "excess" income are charged at 37.5% as against sub-section (1) & (2) of section 82C.

If this is the situation, the commitment of the Govt. as expressed toward assessee in sub-section (1) & (2) does not hold good under the circumstances. As such the section 82C, read with sub-section (3) to (8) becomes arbitrary, inconsistent, incongruous, controversial and defiant of law.It is surprising that Taxes Appellate authority with out making any controvert arguments and law passes the order which does not end the matter.

(iv) Question arises what benefits

of Tax are allowed to assessee by section 82C of the IT Ordinance 1984.

(v) Section 82C and sub-section (1) & (2) itself admitted that Tax collected and deducted is the final discharge of Tax liability. But C. T. (Appeal) could give its decision in the light of the above sections at least TDS amount on Brokerage Commission basis claimed by assessee on income arises from" source". But Appeal authorities remain silent on this point and without pin pointing the reasons for rejection of the grounds under this situation. Assesses are being denied of their legistmate claim though no fault of him.


Here, we feel that these appeal officers are being departmental personnel having some sort of blessings towards sub-ordinate officers. This affects the hearing showing arguments in favour of the revenue. This way the assessees are being deprived from their claim in contrast to justice upon the Appellants.

(1) The situation could be avoided if the appellate Tribunal authority would have been careful and patiently review the arguments put forward by the assessee.

The matter could end there and the question of filing Reference Application may be declined. We could see that large number of applications pending with the honourable High Court.

(2) Section 82C and sub-section (1) & (2) itself admitted that tax deducted from source as per chapter IX shall be treated as full and final discharge of tax liability of the assessee for the income from the said "source". The matter ends there, no further action requires with the DCT. Thus, the sub-section 3, 4, 5, 6, 7, and 8 appears to be superfluous, and contradictory and have no bearing on the said income.

(3) But unfortunately, the Appeal authorities could not conceive the sprit of the law and unlawfully settled the appeal against assessee in respect of claim of Brokerage Commission.

(4) This is a situation which is raised just to understand the problem not to malign the appellate authority. If, we see the appeal orders of the appellate authority of the neighboring countries, we find those order are full of arguments and counter arguments with reference to case laws referred to by the judges of the honourable High Court and Supreme Court.

(5) It is also true, that problems which the C. T. (Appeal) and Tribunal authority could not resolve the High Court of our country can resolve it easily by citing different sections of the Ordinance and from the view points of reality. But by than time and money of the assessee have already been spent unreasonably.

Under section 121A: Revisional power has been vested to Commissioners of different Zones to resolve the grievance of the aggrieved persons in the matter of Tax. But it is restricted that against

the order of commissioner, the assessee shall have no right to appeal further to Tribunal or at the High Court. This is injustice to an assessee when an assessee gets the opportunity of filing appeal to the Appellate Tribunal and also in the High Court normally, there should not be any restriction to file appeal to the Tribunal and High Court for the sake of justice by the assessee when he is aggrieved by the adverse Revisional Order by C. T. Although there is a provision that the order of the Commissioner should not be prejudicial to the assessee.

Another situation arises after the delivery of Appellate order for the purpose of Revised order u/s 156(4), 159(3) by DCT. But in reality, such orders remain pending with the DCT for month after month despite the fact, that such Revised order to be communicated to assessee within 90 days u/s 156(5) & 159(3), which need to be addressed.

The Author is a Fellow Chartered Accountant & ProprietorAkhter Zamil & Co.

Abstract

The objective of this article is to clear the concept of reserve from the viewpoint of general accounting norms, which is used as a strong base along with capital for a bank company to pay excess profit tax as per Section 16C of Income Tax Ordinance 1984. The article also tries to justify whether the statutory reserve only (it is supported by Bangladesh Bank by its Explanation issued on 07 March 2011) be considered as the base for calculation of excess profit tax or all other reserves which are also created by bank out of post-tax profit are to be considered. The intention of the writer is not to criticize the regulators but to draw their attention to consider such fallacies and take reasonable steps to resolve those so that bank companies can get the reasonable treatment regarding charging of excess profit tax.

Charge of Excess Profit Tax: An Overview

The concept of charging excess profit tax to bank companies was introduced first time in the Income Tax Ordinance 1984 through Finance Act 2002. As per Section 16C of Income Tax Ordinance 1984 (hereinafter referred to as Ordinance), where a banking company operating

Charge of Excess Profit Tax on Bank Companiesand its Calculation Base: Some Fallacy

Abdullah-Al-Mamun ACA

under Bank Companies Act 1991, shows profit in its return of income for an income year at an amount exceeding fifty percent (50%) of its capital as defined under the said Act together with reserve, the company, in addition to tax payable under this Ordinance, shall have to pay an excess profit tax for that year at the rate of fifteen percent (15%) on so much of profit as it exceeds fifty percent (50%) of the aggregate sum of the capital and reserve as aforesaid.

If we critically analyze the provision of Section 16C of the Ordinance, we will see that Bank Companies Act 1991 is referred to determine the capital component only not the reserve. This view was also supported by the Paripatra issued by National Board of Revenue (NBR) in 2002 for making clarification of the provision of new Section (i.e. Section 16C) inserted in the Ordinance. The intention of NBR at that time was very clear that they would use their own professional judgment to determine the reserve for calculation of excess profit tax.

Basis for Calculation of Excess Profit Tax

As per Section 16C of the Ordinance, the following two components of a bank company are used as the base for calculation of excess profit tax:


THE CONCEPT OF CHARGING EXCESS PROFIT TAX TO BANK COMPANIES WAS INTRODUCED FIRST TIME IN THE INCOME TAX ORDINANCE 1984 THROUGH FINANCE ACT 2002. HOWEVER, NO JUSTIFICATION REGARDING CHARGING OF SUCH ADDITIONAL TAX TO BANK COMPANIES WAS GIVEN BY NBR THROUGH ITS PARIPATRA ISSUED IN 2002 OR BY ANY OTHER MEANS. THE EXCESS PROFIT TAX IS NOTHING BUT THE IMPOSITION OF FURTHER TAX ON POST-TAX PROFIT. TAX ON TAXED PROFIT IS UNETHICAL AND IRRATIONAL AND GOES AGAINST THE NORMAL TAX NORMS.

1. Capital defined under the Bank Companies Act 1991 and

2. Reserve

Capital defined under the Bank Company Act 1991

Section 5 of Bank Companies Act 1991

The Section 5 of Bank Companies Act 1991 deals with Definition. However, under this Section, no definition of Capital is given.


Under Section 13 of this Act, also, no definition of Capital is given but the definition of “Risk-based Capital” is given.

As per Section 13(2) of the Act, the paid up capital and statutory reserve of a bank company shall not be less than one hundred crore Taka (time to time increase by BB, now this amount is four hundred crore Taka), or the amount equivalent to the risk based capital that is determined from time to time by the Bangladesh Bank (BB), whichever is higher.

At the end of Section 13 an explanation is given. In this


explanation the definition of “Risk-based Capital” is given. As per the explanation of Section 13, Risk-based Capital means the capital required to be kept, according to the rate fixed by BB, against the total property assessed based on weighted risk on the assets of the bank concerned.

Base to be used for calculation of excess profit tax

Now the question is which capital is to be used for calculation of excess profit tax: “Paid up Capital” or “Risk-based Capital”. If we analyze the provisions of Bank Companies Act 1991, we will not get a conclusive answer.

If we use our professional judgment, the answer will be Paid up Capital. Because the concept of Risk-based Capital is used by BB for a special reason i.e. protecting the interest of depositors. The rationale of this concept is, bank is doing business mostly on the depositors’ money. So, as a regulatory authority it is the duty of BB to regulate bank companies for the betterment of depositors. More specifically, regulate bank companies from misuse of depositors’ money. To protect the interest of depositors, BB instructed bank companies to keep a certain amount of money against their


risk-weighted assets. Currently, the capital adequacy ratio is 10% based on the risk-weighted assets.

To support Paid up Capital as the base for calculation of excess profit tax, BB issued an “Explanation” dated 07 March 2011.

Reserve – another base for calculation of excess profit tax

As mentioned earlier, Section 16C of the Ordinance referred to Bank Companies Act only for Capital not for reserve and this view is also supported by the Paripatra issued by NBR in 2002.

In financial accounting, the term reserve is most commonly used to describe any part of shareholders' equity, except for basic share capital. Reserve is the profit achieved by a company where a certain amount of it is put back into the business that can help the business in their rainy days. There are different types of reserves used in financial accounting like capital reserves, revenue reserves, statutory reserves, realized reserves, unrealized reserves.

Equity reserves are created from several possible sources, which are as follows:

• Reserves created from shareholders' contributions, the most common examples of which are:

Legal reserve fund - it is required in many legislations and it must be paid as a percentage of share capital.

Share Premium - amount paid by shareholders for shares in excess of their nominal value.

• Reserves created from profit, especially retained earnings,

i.e. accumulated accounting profits, or in the case of nonprofit making organization, operating surpluses. However, profits may be distributed also to other types of reserves, for example:

Legal reserve fund from profit - many legislations require creation of the fund as a percentage of profits. In Bangladesh, as per the Section 24 of Bank Companies Act 1991, a bank company shall have to transfer not less than 20% of its profit before tax to “Statutory Reserve Fund” in each year until the sum of statutory reserve and share premium will be equal to the paid up capital of the bank.

Remuneration reserve - will be used later to pay bonuses to employees or management.

Dividend equalization reserve – will be used later to pay dividend to shareholders in a consistent manner. According

to BRPD Circular Letter No. 18 dated 20 October 2002, in case of declaring dividend in cash at a higher rate i.e. more than 20%, a sum equal to the amount of dividend in excess of 20% shall have to be transferred to the Dividend Equalization Reserve Fund, which shall be treated as “Core Capital” of the bank.

Translation reserve - arises during consolidation of entities with different reporting currencies.

General Reserve - created out of distributable profit to meet up various purposes as and when required, even it can be used to pay dividend to the shareholders.

Reserve mentioned in Bank Companies Act 1991

Section 5 of Bank Companies Act 1991:

The Section 5 of Bank Companies

Tax Charge

Some Fa lacy

Tax Charge

Some Fallacy


Act 1991 deals with Definition. However, under this Section, no definition of Reserve is given.


Under Section 13 of this Act, also, no definition of Reserve is given.

Under Sub-section 2 of Section 13, only the provision of statutory reserve is included along with paid up capital.


Again in Section 24 of this Act, only the requirement of maintaining statutory reserve is given. It is mentioned that a bank company shall have to transfer not less than 20% of its profit before tax to “Statutory Reserve Fund” in each year until the sum of statutory reserve and share premium will be equal to the paid up capital of the bank.

Therefore, the Bank Companies Act 1991 makes discussions only on statutory reserve of a bank company not other reserves. The rationale may be this Act wants to provide more emphasis on this reserve to protect the interest of depositors. Based on this Act, BB provided an Explanation (dated 07 March 2011) to NBR and mentioned that reserve means only statutory reserve. Although this Act makes discussion only on statutory reserve, it does not mean that a bank company does not have any other reserves. Of course, a bank company has other reserves i.e. retained earnings, share premium, dividend equalization reserve, and general reserve.Base to be used for calculation of excess profit tax

Now the question is which reserves are to be used for

calculation of excess profit tax: only “Statutory Reserve” or “other reserves e.g. retained earnings, share premium, dividend equalization reserve, and general reserve” will also be taken into consideration. If we analyze the provisions of Bank Companies Act 1991, we will only get the statutory reserve. However, this limitation of the Act has been addressed in the “Bank Companies (Amendments) Act 2013”. As per Section 13(2) of the Bank Companies (Amendments) Act 2013, reserve includes share premium, retained earnings, and statutory reserve.

If we use our professional judgment, the answer will be all reserves i.e. reserves created from shareholders' contributions e.g. share premium and reserves created from distributable profit (i.e. post-tax profit) e.g. retained earnings, dividend equalization reserve, and general reserve. The justification is, share premium is the contribution made by shareholders (most likely same as paid up capital) and all other reserves are created from

distributable profit, more specifically out of post-tax profit. If all reserves are considered, in many cases, additional tax would not be payable by the bank companies. Tax on taxed profit is also unethical and irrational and contradicts with normal tax norms.

Observation and Recommendation

The writer is drawing kind attention to the regulatory authorities, specially, NBR and BB to consider the following issues:

• Consideration of all reserves created from distributable profit for calculation of excess profit tax

Currently NBR (also supported by BB through its Explanation dated 07 March 2011) is considering statutory reserve only as the base for calculation of excess profit tax. All other reserves created from distributable profit (more specifically from post-tax profit) should also be considered. That is, retained earnings, dividend


equalization reserve, general reserve and other reserves created from post-tax profit needed to be considered.

The limitation of Bank Companies Act 1991 regarding inclusion of other reserves has already been addressed in the latest Bank Companies (Amendments) Act 2013. As per Section 13(2) of the Bank Companies (Amendments) Act 2013, reserve includes share premium, retained earnings, and statutory reserve.

• Consideration of reserves created from shareholders' contributions

The reserves created from shareholders' contributions should also be considered as the base for calculation of excess profit tax. The most typical example of reserve created from shareholders' contributions is share premium. It is very similar to paid up capital as per the source is concerned. Since paid up capital is considered as the base for calculation of excess profit

tax, share premium should also be used.

Non-inclusion of share premium as a reserve was a limitation of Bank Companies Act 1991. Such limitation has been duly addressed in the latest Bank Companies (Amendments) Act 2013. Section 13(2) of the amended Act duly considered share premium as a reserve.

• Definition of Capital and Reserve not given in the Act

The Bank Companies Act 1991 does not provide any definition of “Capital” and “Reserve” in Section 5 (this Section is designed for Definition) of the Act and also not addressed in relevant Sections i.e. Section 13 and Section 24 of the said Act.

Moreover, the latest Bank Companies (Amendments) Act 2013 also does not provide any definition of “Capital” and “Reserve” in Section 5 (this Section is designed for Definition) of the

Act. In Section 13 of the Act, only the “Explanation of Capital” is given, which is not conclusive. Definition/ Explanation regarding reserve has not also been addressed in Section 13 and 24 of the said Act.

In Section 5 of Bank Companies (Amendments) Act 2013, a clear and conclusive definition regarding “Capital” and “Reserve” of a bank should be incorporated. These definitions may also be incorporated in Section 13 or Section 24 of the said Act in lieu of Section 5 of the Act. However, the definition of Capital and “Reserve” of a bank company may also be provided by BB through its Circular or Explanation.

• All reserves are not included in the last Amendments of Bank Companies Act

Under Section 13(2) of the latest Bank Companies (Amendments) Act 2013, only share premium, statutory reserve and retained earnings are considered as reserve.


The Author is Faculty &Associate Member of ICAB andManager, Finance Division,Eastern Bank Limited

The dividend equalization reserve, remuneration reserve, general reserve and other reserves crated out of distributable profit is not considered or recognized.

Since dividend equalization reserve, remuneration reserve, general reserve and other reserves are created from the same source like retained earnings and statutory reserve, these may also be included in the Bank Companies (Amendments) Act 2013.

• Amendments of Explanation issued on capital and reserve of a bank company

The Explanation issued by BB on 07 March 2011 regarding the capital and reserve of a bank company should be reconsidered. Most of the bank companies are now struggling for calculation of excess profit tax made by NBR based on the said Explanation. Most of bank companies’ assessment is pending due to not resolving the said issue. It is needed to be amended as per the provision of Section 13(2) of the latest Bank Companies (Amendments) Act 2013 and considering the norms regarding reserves mentioned in Financial Accounting.

• No justification regarding payment of excess profit tax is given

The concept of charging excess profit tax to bank companies was introduced first time in the Income Tax Ordinance 1984 through Finance Act 2002. However, no justification regarding charging of such additional tax to bank companies was given by NBR through its Paripatra issued in 2002 or by any other means. The excess profit tax is nothing but the imposition of further tax on post-tax profit. Tax on taxed profit

is unethical and irrational and goes against the normal tax norms.

Banking Industry is providing taxes on income at the highest rate (except Tobacco and Telecom Industry); currently the tax rate is 42.5%. Since banking industry is the largest taxpayer industry in Bangladesh, based on the current condition of the industry, NBR may reconsider the provision of imposing excess profit tax upon this industry.

Concluding Remarks

There is no difference between the reserves created and kept by other companies with those of bank companies. So, all kinds of reserves created from shareholders' contributions (e.g. share premium) and reserves created from distributable profit (e.g. retained earnings, dividend equalization reserve, and general reserve) should be considered for calculation of excess profit tax for bank companies mentioned in Section 16C of Income Tax Ordinance 1984. It is quite arbitrary and unlawful when statutory reserve, general reserve, dividend equalization reserve, and retained earnings are created from profit and only statutory reserve is considered for calculation of excess profit tax. If these reserves are not considered, it will create huge tax burden upon the shoulder of bank companies. The said reserves are also needed be incorporated in the latest Bank Companies (Amendments) Act 2013. In considering with the global meltdown, existing macro-economic condition, and volatile political environment in Bangladesh, NBR may reconsider the provision of imposing excess profit tax upon the banking industry. Most of the bank companies’ assessment is pending due to not resolving the excess

profit tax issue. NBR may use the concept of reserve mentioned in financial accounting and may also use the components of reserves mentioned in the latest Bank Companies (Amendments) Act 2013 to resolve the pending tax assessment of bank companies which has not been finalized/ cleared yet due to dispute regarding calculation of excess profit tax. However, Bangladesh Bank as the guardian of all bank companies in Bangladesh can play an instrumental role to resolve the pending tax assessment of bank companies by providing further Explanation of “Capital” and “Reserve” of a bank company.

References

1. Bank Companies Act 1991.

2. Bank Companies (Amendments) Act 2013.

3. BRPD Circular Letter No. 11 dated 14 August 2008.

4. BRPD Circular Letter No. 18 dated 20 October 2002.

5. BRPD Explanation dated 07 March 2011.

6. Finance Act 2002

7. http://en.wikipedia.org/wiki/ Reserve_(accounting)

8. Income Tax Ordinance 1984.

9. NBR Paripatra for Financial Year 2002-2003.

Preamble

The commercial banking system dominates Bangladesh's financial services sector. Bangladesh Bank is the Central Bank of Bangladesh and the chief regulatory authority in the sector. The banking system is composed of four state-owned commercial banks, five specialized development banks, thirty private commercial Banks and nine foreign commercial banks. The Nobel-prize winning Grameen Bank is a specialized micro-finance institution, which revolutionized the concept of micro-credit and contributed greatly towards poverty reduction and the empowerment of women in Bangladesh. Bangladesh Bank has issued licenses to nine new banks to act as commercial banks early in the first half of 2013. Many concerned persons and institutions related to national economy raised question and asked for justification for new banks again when even the existing banks are not performing up to mark.

Banking and Financial Systems in Bangladesh

Bangladesh Bank

Pursuant to Bangladesh Bank Order, 1972 the Government of Bangladesh

Private Commercial Banks:Threats or Prospects

Md. Kishlur Rahman ACA, ACMA

reorganized the Dhaka branch of the State Bank of Pakistan as the central bank of the country, and named it Bangladesh Bank with retrospective effect from 16 December 1971.

Other Banks

After the independence, banking industry in Bangladesh started its journey with 6 nationalized commercialized banks, 2 State owned specialized banks and 3 Foreign Banks. In the 1980s banking industry achieved significant expansion with the entrance of private banks. Now, banks in Bangladesh are primarily of two types:

Scheduled Banks: The banks which get license to operate under Bank Company Act, 1991 (Amended in 2003) are termed as Scheduled Banks.

Non-Scheduled Banks: The banks which are established for special and definite objective and operate under the acts that are enacted for meeting up those objectives, are termed as Non-Scheduled Banks. These banks cannot perform all functions of scheduled banks.

State owned commercial banks

As at 30 June 2013, there are 4 nationalized banks as outlined in the below list:


IN 2012, A NUMBER OF TWENTY NINE (29) LISTED BANKS HAD TOGETHER MADE A PROFIT OF TK 24.33 BILLION, BUT THEIR SHOWING THIS YEAR HAS BEEN TK 10.49 BILLION. ANALYSTS BLAME THE DROP ON THE POLITICAL SCENARIO, IRREGULARITIES IN LOAN MANAGEMENT, CORRUPTION AND THE AVAILABILITY OF COMPETITIVE LOANS FROM FOREIGN BANKS.

1. Sonali Bank Limited2. Janata Bank Limited3. Agrani Bank Limited4. Rupali Bank Limited

Private commercial banks

Private Banks are the highest growth sector due to the dismal performances of government banks (above). They tend to offer better service and products. Under private commercial banks there are two types of banks in terms of traditional Vs Shariah Based Banking. Banks operating under traditional banking system are as listed below:

1. Uttara Bank Limited2. Dhaka Bank Limited3. United Commercial Bank Limited4. Mutual Trust Bank Limited5. BRAC Bank Limited6. Eastern Bank Limited7. Dutch Bangla Bank Limited8. Pubali Bank Limited9. IFIC Bank Limited10. National Bank Limited11. The City Bank Limited12. NCC Bank Limited13. Mercantile Bank Limited14. Prime Bank Limited15. Southeast Bank Limited16. Standard Bank Limited17. One Bank Limited18. Bangladesh Commerce Bank

Limited


19. The Premier Bank Limited20. Bank Asia Limited21. Trust Bank Limited22. Jamuna Bank Limited23. AB Bank Limited24. NRB Commercial Bank

Limited**25. NRB Bank Limited**26. Meghna Bank Limited**27. Farmers Bank Limited**28. Modhumoti Bank Limited**29. South Bangla Agriculture and

Commerce Bank Ltd**30. Midland Bank Limited**

There are 8 Islamic Commercial Banks:

1. Islami Bank of Bangladesh Limited

2. Shahjalal Islami Bank Limited3. First Security Islami Bank Limited4. Export Import Bank of

Bangladesh Limited5. Al-Arafah Islami Bank Limited6. Social Islami Bank Limited7. ICB Islamic Bank8. Union Bank Limited**

** these are newly licensed banks and started operation in small scale while others newly licensed banks are waiting start operation after fulfilling some pre-conditions and requirements.


Foreign commercial banks

9 foreign commercial banks are operating in Bangladesh. These are:

1. Citibank NA2. HSBC3. Standard Chartered Bank4. Commercial Bank of Ceylon5. State Bank of India6. Habib Bank Limited7. National Bank of Pakistan8. Woori Bank9. Bank Alfalah

Specialized development banks

Specialized Banks (SDBs): 4 specialized banks are now operating which were established for specific objectives like agricultural or industrial development. These banks are also fully or majorly owned by the Government of Bangladesh.

1. Bangladesh Krishi Bank2. Rajshahi Krishi Unnayan Bank3. Bangladesh Development

Bank Ltd4. BASIC Bank Limited

(Bangladesh Small Industries and Commerce Bank Limited)

5. Karma Sangsthan Bank

Non-banking financial institutions

There are 31 licensed non-banking financial institutions (NBFI) operating in Bangladesh under the regulations of Bangladesh Bank. The list of NBFI is as follows:

1. Cosmopolitan Finance Limited (CFL)

2. Uttara Finance and Investments Limited

3. United Leasing Company Limited (ULCL)

4. Union Capital Limited5. The UAE-Bangladesh

Investment Co. Ltd

6. Saudi-Bangladesh Industrial & Agricultural Investment Company Limited (SABINCO)

7. Reliance Finance Limited8. Prime Finance & Investment

Ltd9. Premier Leasing & Finance

Limited10. Phoenix Finance and

Investments Limited11. People's Leasing and Financial

Services Ltd12. National Housing Finance and

Investments Limited13. National Finance Ltd14. MIDAS Financing Ltd. (MFL)15. LankaBangla Finance Ltd.16. Islamic Finance and

Investment Limited17. International Leasing and

Financial Services Limited18. Infrastructure Development

Company Limited (IDCOL)19. Industrial Promotion and

Development Company of Bangladesh Limited(IPDC)

20. Industrial and Infrastructure Development Finance Company (IIDFC) Limited

21. IDLC Finance Limited22. Hajj Finance Company Limited

23. GSP Finance Company (Bangladesh) Limited (GSPB)

24. First Lease Finance & Investment Ltd.

25. FAS Finance & Investment Limited

26. Fareast Finance & Investment Limited

27. Delta Brac Housing Finance Corporation Ltd. (DBH)

28. Bay Leasing & Investment Limited

29. Bangladesh Industrial Finance Company Limited (BIFC)

30. Bangladesh Finance & Investment Co. Ltd.

31. Agrani SME Finance Co. Ltd.

Matters of Concern

The matter to analyze from the description made so far regarding banking industry, number of participants, new entrants is to seek the answer regarding effectiveness of new banks or not. For last one decade there were 47 banks including 4 state owned commercial banks and 5 specialized development banks operating in Bangladesh having the


population of about 160 million. While most of the banks were operating at a better profit, the financial scams were not very rare at all. The economy of Bangladesh faced financial scandals like Hall Mark, Bismillah Group one after another as reported in the media. It was continuously urged by the economists, civil society to maintain discipline in financial services sector to save the country from the meltdown like some other countries faced during the period 2008-2012 of global world crisis. Bangladesh is now much more prudent in regulation in comparison to the previous time. But getting licenses for 9 new banks under the turmoil condition of both questionable banking practices and profitability decline of most of the banks is really observable.

The matter of issuing licenses to new banks may be analyzed in terms of:

1) Banking Culture in Bangladesh;

2) Profitability trend of the existing banks operating in Bangladesh;

3) Decentralization of branch network;

4) Number of banks should operate in a country like Bangladesh.

If we discuss each issue depicted above we may draw some conclusion toward threats or prospects regarding new banks in Bangladesh.

Banking Culture in Bangladesh:

Bangladesh bears a long heritage of habit of not repaying the bank

money. In the past, we observed many instances in this aspect. Report of Bangladesh Bank revealed that total non-performing loans and advances (NPL) of the country significantly increased in the year 2012 over the year 2011 resulting in threat to less recovery of loan already disbursed. As per information reported in Bangladesh Bank Quarterly, October-December 2012 related information regarding NPL is self-explanatory as follows:

Table 1: Gross NPL Ratios (in percentage) by Type of Banks

Type of Banks 2007* 2008* 2009* 2010* 2011* 2012*

State Owned Commercial Banks 29.87 25.44 21.38 15.66 11.27 23.87

Specialized Banks 28.58 25.45 25.91 24.15 24.55 26.77

Private Commercial Banks 5.01 4.44 3.92 3.15 2.95 4.58

Foreign Commercial Banks 1.43 1.9 2.27 2.99 2.96 3.53

All Banks 13.23 10.79 9.21 7.27 6.12 10.03Source:Banking Regulation and Policy Department, Bangladesh Bank.* Indicates end December data.


As per latest report published regarding non-performing loans and advances by Bangladesh Bank, non-performing loan has increased by Tk 23, 308 crore within just one year. At the end of the financial year 2012-2013 the non-performing loan has stood at Tk. 52,309 crore from Tk. 29,001 crore of the financial year 2011-2011(Bdnews24.com, 6 August 2013). At the end of financial year 2012-2013 NPL ratio stood at 11.91% of total outstanding loans.

Profitability trend of the existing banks operating in Bangladesh

Generation of profit on capital employed for any organization is a must for survival of it. Banks are not also out of this requirement. Moreover, sufficient profit generation is very important for banks for growth and survival through generation of capital from internal source to maintain capital adequacy as per capital accord of Basel-II. It implies that if a bank fails to generate profit continuously

for some years it will be very difficult for that bank to act as a going concern without further injection of fresh capital by its owner, as a temporary solution.

If we look into the profitability scenarios of banks in Bangladesh, most of the banks except some foreign banks are losing their profits over the years especially from the year 2010. The information below will support this observation as pervasive:

Table 2: Profitability Ratios by Type of Banks (in percentage)

Type of Banks Return on Assets (ROA) Returnon Equity (ROE)2007 2008 2009 2010 2011P 2012P 2007 2008 2009 2010 2011 P 2012 P

State Owned Commercial Banks

0.0 0.7 0.96 1.11 1.34 -0.56 0.00 22.52 26.15 18.43 19.66 -11.87

Specialized Banks -0.27 -0.6 -0.37 0.19 0.03 0.06 -3.40 -6.94 -171.68 -3.17 -0.92 -1.06

Private Commercial Banks

1.28 1.37 1.55 2.14 1.59 0.92 16.65 16.37 20.95 20.94 15.69 10.17

Foreign Commercial Banks

3.10 2.94 3.18 2.87 3.24 3.27 20.44 17.75 22.38 16.99 16.58 17.29

All Banks 0.89 1.16 1.37 1.78 1.54 0.64 13.78 15.60 21.72 20.97 17.02 8.20

P= Provisional.Source: Department of Off-site supervision, Bangladesh Bank.


It may also be reported that earnings per share (EPS) of most of the banks in Bangladesh fell over the years especially from the year 2010. EPS is required to be observed from the information outlined below:

Table 3: EPS of Private Commercial Banks in Bangladesh

Sl. No. BankEarnings Per Share (EPS)

2012 2011 2010

1 AB Bank Limited 3.25 3.60 11.53

2 Bangladesh Commerce Bank Limited 5.09 3.51 3.18

3 Bank Asia Limited 1.44 3.65 6.43

4 BRAC Bank Limited 1.32 5.15 5.05

5 The City bank Limited 1.21 4.00 3.70

6 Dhaka Bank Limited 1.50 6.03 4.68

7 Dutch Bangla Bank Limited 11.57 10.80 10.01

8 Eastern Bank Limited 3.72 3.65 6.43

9 IFIC Bank Limited 1.12 2.16 5.95

10 Jamuna Bank Limited 2.32 3.65 2.92

11 Mercantile Bank Limited 2.26 3.01 2.85

12 Mutual Trust Bank Limited 1.33 1.60 3.90

13 National Bank Limited 1.05 7.07 7.97

14 National Credit & Commerce Bank Ltd 2.06 3.28 5.92

15 One Bank Limited 2.55 4.54 3.49

16 The Premier Bank Limited 1.30 1.34 6.08

17 Prime Bank Ltd 2.88 4.70 5.69

18 Pubali Bank Limited 2.10 4.68 6.51

19 Southeast Bank Limited 1.89 2.33 3.77

20 Standard Bank Limited 2.57 2.80 4.32

21 Trust Bank Limited 0.55 2.32 5.75

22 Uttara Bank Limited 3.74 4.99

23 United Commercial Bank Limited 1.90 4.20 5.33

24 Al-Arafah Islami Bank Limited 2.69 3.73 4.14

25 Exim bank Limited 2.05 2.18 3.77

26 First Security Islami Bank Limited 2.04 1.71 1.61

27 Islami Bank Bangladesh Limited 4.42 3.87 3.57

28 Social Islami Bank Limited 2.25 1.81 2.15

29 Shahjalal Islami Bank Ltd 3.11 2.10 6.05

30 ICB Islamic Bank Limited -1.60 -2.70

Source: Published Annual Report and Financial Statements


Moreover, EPS for half year ended 30 June 2013 of most of the banks decreased over the same period last year. As per a report published in the daily Jai Jai Din of 7 August 2013, 19 banks out 30 listed banks disclosed less EPS for the second quarter of 2013 as against the second quarter of 2012. Some of the banks even have borne loss in second quarter of 2013 despite having some profit in the first quarter of 2013.

Report reveals that the profits of banks listed on the stock market

were less than half during the first six months this year compared to what they had earned during the corresponding period last year (Bdnews24.com, 5 August 2013). In 2012, a number of twenty nine (29) listed banks had together made a profit of Tk 24.33 billion, but their showing this year has been Tk 10.49 billion. Analysts blame the drop on the political scenario, irregularities in loan management, corruption and the availability of competitive loans from foreign banks. The Dhaka Stock Exchange has published the

profit details, until Thursday, of 29 of the 30 enlisted banks. The data show the profits of 21 banks had fallen; one had actually suffered a loss, while seven had managed to push up profits. Analysts say the situation was particularly bad during the first three months but the banks managed to cut the profit gap from April and June. The banks made a profit of Tk 10.06 billion in the second quarter (Apr-Jun) of this year. Last year, the amount was Tk 12.22 billion during the same period.

Table 4: Earnings per Share (EPS)

Private Commercial Banks in Bangladesh

For the h alf-year ended 30 June 2013

Sl. No. Bank Net Profit after Tax

EPS 30 June 2013

EPS 30 June 2012

1 Bank Asia Limited 664,867 0.96 1.08

2 Brac Bank Limited 369,650 0.83 0.91

3 Eastern Bank Limited 997,009 1.63 1.40

4 Dhaka Ba nk Limited 377,810 0.70 0.42

5 Dutch-Bangla Bank Limited 814,461 4.07 6.17

6 IFIC Bank Limited 609,202 1.60 0.48

7 Jamuna Bank Limited 93,390 0.21 1.60

8 Mercantile Bank Limited 227,880 0.35 1.06

9 Mutual Trust Bank Limited 36,230 0.13 1.44

10 National Credit & Commerce Bank Ltd 202,795 0.27 0.60

11 One Bank Limited 737,545 1.55 1.49

12 The Premier Bank Limited (1,997,794) -3.90 0.25

13 Prime Bank Ltd (679,327) -0.66 1.08

14 Pubali Bank Limited 1,114,142 1.33 1.70

15 Southeast Bank Limited 1,187,507 1.36 1.17

16 Trust Bank Limited 159,842 0.42 0.81

17 United Commercial Bank Limited 1,058,693 1.27 0.75

18 Uttara Bank Limited 518,868 1.43 1.93

19 First Security Islami Bank Limited 246,197 0.60 0.78

20 ICB Islaimic Bank Limited (86,633) 0.13 0.12

21 Islami Bank Bangladesh Limited 1,980,804 1.35 2.91

22 Shahajalal islami Bank Limited 208,903 0.31 1.29

Source: Published Half-Yearly financial statements for the year ended 30 June 2013.


Decentralization of branch network

Bangladesh Bank maintains strict supervision while providing approval for new branches of the bank. There is a pre-condition of opening branch in rural areas as a

mandatory requirement before opening branches in urban areas. This requirement is indeed a good one from the perspective of financial inclusion as Bangladesh (being 40% under financial inclusion) stands behind Srilanka(being 69% under financial

inclusion) only and ahead of all other countries in South Asia through emphasis of decentralization of branch network as a compulsory requirement by Bangladesh Bank ( Zaman, 2013). Table 5 shows the branch network distribution across the country.

Table 5: Branch Network Distribution(in percentage)

Type of Banks No. of Banks *

Urban Rural Total

State Owned Commercial Banks 4 36.03 63.97 100Specialized Banks 4 12.15 87.85 100Private Commercial Banks 30 61.96 38.04 100Foreign Commercial Banks 9 100 0.00 100All Banks 47 42.80 57.20 100

*Up to December 2012.Source: Bangladesh Economic Survey 2013.


But it must also to be considered that strict emphasis of decentralization of branch without considering the business viability of the banks may jeopardize the existence of banks through continuing losses from the rural branches since Bangladesh is basically a centralized economy depending heavily on Dhaka and Chittagong Cities rather than a

decentralized country like developed countries. Though rest of the divisions has some economic activity through financial institutions, they have concentration in the city area only rather than across the division. So, it may jeopardize the banks for its survival due to losses in rural branches having more branch network in rural areas.

Number of banks should operate in a country like BangladeshIt is predominantly true that considering the economy size of Bangladesh there is a large number of banks (47 up to Dec’12) and branches (8,322 up to Dec’12). Comparative position of banks in SAARC countries and UK is gathered here in Table-6 for better analysis:

Table 6: Comparative Position of banks in SAARCand United Kingdom

Type of Banks State Owned Commercial Banks

Specialized Banks Private Commercial

Banks

Foreign Commercial

Banks

All Banks

Bangladesh 4 4 30 9 47India 27 0 17 32 76Pakistan 5 2 16 4 27Nepal 0 87 31 0 118Bhutan 0 1 1 0 2Srilanka 0 3 15 4 22Maldives 0 0 1 0 1Afghanistan 0 0 16 1 17United Kingdom 0 5 5 18 28

Source: Wikipedia, the free encyclopedia


The Author is FAVP & Head,Finance & Planning and Basel-IIImplementation, IFIC Bank Limited

It could be easily observed from the information outlined in the table above that only India and Nepal are ahead of Bangladesh in terms of banking companies. Number of banks in India is quite comprehendible with regard to economy size of India while considering Nepal as exception having some financial indiscipline.

Conclusion

Banking is obvious for economic growth. The progress of the banking industry goes in line with the economic and social develop-ment of the country. Bangladesh is termed as amazing country by many veteran economists and the influential development and investing agencies around the globe. Bangladesh growing on an average rate of 6% for last 10 years has positioned itself as one of the fast growing economies in the world. It is well mentionable that Bangladesh has grown by 6.30% in the year 2012 despite a sloth economic growth around the world. Even the veteran Nobel Laureate Indian Economist Prof. Amarta Sen (2013) in his recent lecture in the Indian Institute of Technology Bombay (IIT-B) on ‘India: A Defense and a Critique’

on Saturday’ acclaimed and acknowledged that Bangladesh is ahead of India in every aspect of HDI.

Bangladesh needs to grow at more than 8% for at least continuous 8-10 years to be a medium level earning country. For securing this continuous and consistent growth for the country like Bangladesh we must build the financial discipline and prudent regulatory and development strategies as well. Considering all the pitfalls and challenges we must wait for future to see the results of issuing licenses to new banks. At last but not the least we must hope that anyhow our country should not go back due to the effect of un-timely decision.

References

1. Bangladesh Bank (2013), Annual Report 2011-2012, available from www.bangladeshbank.org.bd.

2. Zaman, Dr. H. & Bangladesh Bank (2013), Bangladesh Bank Quarterly, October-December 2012, Bangladesh Bank, available from www.bangladeshbank.org.bd.

3. Bangladesh Bank (2013), Monthly Economic Trends, December 2012, Bangladesh Bank, available from www.bangladeshbank.org.bd.

4. Government of Bangladesh, Ministry of Finance, Financial Division, Financial Advisory Micro Division (2013), Bangladesh Economic Survey 2013, Bangladesh.

5. The Daily Hindu (2013), January 5, 2013.

6. Bdnews24.com (2013), 5 & 6 August 2013, available from www. bdnews24.com.

7. Zaman, Dr. H. & Bangladesh Bank (2013), Bangladesh: Recent Socio-Economic Trends and Prospects, Bangladesh Bank.

8. Annual Reports of private commercial banks in Bangladesh.

9. www.wikipedia.org

10. www.bangladeshbank.org.bd

Abstract

This paper focuses on information security (IS) in an Internet banking environment. The first security issue addresses the general consensus of consumer awareness to the risk of online banking fraud. The second explores the transition in authentication processes. These two issues are closely related since even the best solution relies on the assumption that end-users’ computers are secured. The paper attempts to present an overview and evaluation of the authentication techniques used by banks, together with improvements for the future. Amid the growing concern, there is scope for improvements in both usability and security of Two-Factor Authenticator (2FA), for instance, by combining one security layer with a biometric protocol. The best current practice in the UK with proper balance between security and cost is still 2FA that utilizes One Time Passcode (OTP) from hardware token, as biometric, still constitutes a solution that seems to be too expensive and complicated for UK banks.

Key words: Online Banking, Fraud, Customers’ Awareness, Authentication Process

Online Banking Frauds in the UK -Lessons for Banks in Bangladesh

1Mohammed Shahedul Quader | 2Md. Shahid Ullah | 3Sajib Barua

Introduction

Background

Internet banking provides customers with a novel platform to conduct their banking activities. Various time consuming activities have been simplified by the more user- friendly interface of these highly sophisticated internet banking systems, which allow customers to connect directly to the bank’s computer system (Soroor, 2005). More than 15 million people in the UK now use the Internet to access their bank accounts and 21 million regularly shop online. (BankSafeOnline.com). Nonetheless, this technological advancement also means that customers banking through the Internet are more vulnerable to attacks from outside (APAC, 2008). This has exerted a new business risks on banks worldwide - the risk of online banking fraud. According to Deloitte (2008) global security survey identified that theft and account fraud are two priorities that 58% of Financial Institutions (Fl) will be focusing shortly. A finding no doubt bolstered by the fact that 51% of the respondents have themselves experienced some form of breach due to phishing/ pharming. These findings have revealed that there are deeply rooted problems in the way banks have been managing sensitive customer information. In the UK


THE USE OF ONLINE BANKING IN BANGLADESH IS GETTING POPULARITY AND BEING EXPANDED. HOWEVER, THEY ARE ALSO FACING DIFFERENT TYPES OF THREATS AND FRAUDULENT. SO TO REAP THE BENEFIT OF ONLINE BANKING BANKS IN BANGLADESH SHOULD TAKE SOME CAUTIONARY MEASURES.

FIRSTLY, BANKS SHOULD CONTINUE TO DRIVE FOR IMPROVEMENTS IN ONLINE SECURITY BY EVALUATING CONSUMER EDUCATION EFFORT MORE RIGOROUSLY TO DETERMINE IF ADDITIONAL STEPS ARE NECESSARY.

losses from online banking fraud at the end of 2008 rose sharply following a surge of nearly 1,500% in the number of bogus bank email and websites used by criminals to plunder people’s account (APAC, 2008). Online banking fraud losses amounted to £22.5m in the first six months of 2008 up 55% on the £14.5m of losses during the same period in 2007 (see Table 1). These trends mark an era in which technological developments have enabled fraudsters to carry out identity theft more easily by exploiting the potential weaknesses in the information security (IS) systems adopted by banks (APAC, 2008).

With this in mind, banks are deliberately failing to report incidents of online fraud to the police, probably because of the potential damage to their reputation and also the lack of confidence in law enforcement to deal with the problem (Jones, 2008). As a result, the true cost of identity theft to the UK economy could be much greater than


the reported official figure of £1.7bn a year. With so much money at stake and lack of enthusiasm from banks in pursuing fraudsters, the problem is unlikely to disappear anytime soon. Identity theft has become a form of espionage, where confidential information is stolen by fraudster, with the intention of selling them to competitors or for the use of individuals business exploits (Deloitte and Touche, 2007). The rapidly expanding number of people banking online has raised questions over whether consumers are adequately protected against the growing threat from cybercrime (FAP, 2008). In the past, many banks have failed to successfully manage the risk of online fraud due to their lack of awareness and/or because of the stigma associated with being seen as a victim of fraud (Deloitte & Touche, 2007). This approach is no longer acceptable and banks must now act to ensure that their information security (IS) systems and customers are adequately protected from and take actions in respect of online fraud.

Table 1: UK Online Banking Fraud Losses 2006

Jan to June2007

Jan to Ju ne2008

Jan to JuneOnline Banking Fraud 4m 14.5m 22.5mPhishing incidents 126 312 5,059Source: http://www.apacs.org.uk/media_centre/press/06-07-11.html


Objectives of the Study

To address the two key security issues mentioned previously and to fulfill the purpose of this paper, the paper has the following objectives: one, to determine the level of consumer awareness and the risks exposure to banks; two, to review the fundamental concepts behind authentication technology; three, to identify the levels of perceived risk and the corresponding authentication systems implemented to mitigate the risk; four, to identify the authentication technologies that should be implemented to improve security and awareness and evaluate the success of such change, provide recommendations on how bank’s online security can be improved relativity; and five, to suggest some lessons for Banks in Bangladesh

Research Questions

In any period of great technological advancement, the controls on such changes exercised

by society can lag behind the changes themselves (IIA, 2006). However, in the case of online banking security, the situation has been exacerbated firstly by the lack of a full understanding of the underlying technology and secondly a sense of naivety in banks in estimating the full risks that came with computerization. In order to determine whether security measures have lagged behind the sophistication of attacks, the following research questions will be employed.

• What are the current risk exposures faced by banks in the UK?

• What is the authentication systems adopted by UK banks?

• How is the state of authentication systems changing within UK banks?

• Are these changes aligned with the rest of industry?

• What are the main consumer knowledge gaps?

• How can banks fill these knowledge gaps?

Literature Review on Online Banking Fraud and Authentication System

Operational Definitions

In an event of online fraud, generally the fraudster is only interested in gaining customers’ information to empty the account. This is fundamentally different from identity theft; whereby an individual identity is effectively taken over for the benefit of a fraudster so that they can take out additional products and services as that individual (Levene, 2009). It is important from the outset to understand the nature of some of the most widely used social engineering techniques and malicious software.

Phishing

“Phishing” is the name given to the practice of sending e-mails at random posing as a genuine bank, in an attempt to trick online customers into disclosing


information at a bogus website operated by fraudsters (APAC, 2008). APAC (2008) also stated that, “these e-mails usually claim that it is necessary to ‘update’ or ‘verify’ your password and they urge you to click on a link from the e-mail that takes you to the bogus website”. Any information entered on the bogus website will be captured by the criminals for their own fraudulent purposes. In addition, by adding a secondary form of contact via phone, this only gave the users more confidence to give out their information (Banks Safe Online.com; Arumuga, 2006).

Pharming

Pharming is an attack in which a user can be fooled into entering sensitive data such as a password or credit card number into a malicious web site that impersonates a legitimate web site. It is different than phishing in that the attacker does not have to rely on having the user click a link in an email to deceive the user even if the user correctly enters a URL (web address) into a browser’s address bar, the attacker can still redirect the user to a malicious web site (pharming.org). The author of the website also points out that sophisticated measures known as anti-pharming are required to protect against this serious threat since Antivirus and spyware removal software cannot protect against this threat.

Trojans

APAC (2008) defined “Trojans” as a type of malicious spyware that can be installed on end-user’s computer. The virus is capable of installing a keystroke logger, which captures all of the keystrokes (credentials) entered onto a computer keyboard (APAC, 2008).

Consumer Awareness

Security is something that should be handled discretely and that consumers trust their banks to keep their information and assets safe (Savvas, 2009). As awareness of identity theft and online fraud grows, people want to feel reassured that they are being adequately protected (Dale, 2008). The Financial Service Authority (FSA) has warned that banks must do more to help consumers deal with online banking fraud, since consumers’ confidence in Internet banking is currently very fragile. “Half of active Internet users are ‘extremely’ or ‘very’ concerned about the potential risk of making an online transaction”, said the FSA. In conjunction, FSA research also revealed that although consumers are taking steps to protect themselves against online fraud by installing security software on their PCs, many are still unaware of additional security that may already be in place. As a result security issues must be addressed in order to maintain trust in the Internet and boost online consumer confidence (FFIEC, 2008).

Risks Exposure to Banks

Information is a unique asset owned by the banks, which represents a valuable and vulnerable resource that acts a business enabler (Sawyer, 2009). The risk of conducting business with unauthorized or incorrectly identified individuals in an Internet banking environment can result in financial loss and reputation damage through fraud, disclosure of customer information, corruption of data, or unenforceable agreement (FFIEC, 2008). APAC (2008) also noted that once sensitive information is acquired, phishers can use a person’s details to create fake accounts in a victim’s name, ruining a victim’s credit, or even prevent victims from accessing their own accounts. There continues to be an exponential increase in the sophistication of threats and their potential impact across organizations. Deloitte (2007) recognized that attackers are changing from viruses and worm attacks to sneakier methods such as phishing/ pharming to avoid detection. Nevertheless, this risk has been intensified because of


the ease with which unsuspecting people often divulge personal information to phishers (APAC, 2008).These losses grew in conjunction with the growth of businesses now offering transactions made by phone or online (FAP, 2008). Internet banking has made the life of fraudsters far easier due to the degree of anonymity permitted (FAP, 2008). This is reflected by the increased in phishing incidents targeted at UK banks (Table 2). Moreover, the low cost needed to set up a spam server relative to the high rewards that can be obtained is also a contributing factor (BanksSafeOnline.com).

According to Deloitte (2007) global security survey, financial institute appear to be more concerned with threats from the outside, since in their minds they bring a higher degree of publicity and damage to their reputation. The key objective of the bank’s electronic commerce system is to encourage users from outside to make use of the systems; hence damaged reputation is likely to be more costly than damage to the systems itself. On this basis Sawyer

(2005) emphasized that once confidentiality is breached, it is very hard to recover; substantial public relation initiatives are usually required to rebuild the customers’ confidence. There are significant risks when banks accept new customers through the Internet or, other electronic channels because of the absence of the physical cues that banks traditionally used to identify customers (FFIEC, 2008). In today’s Internet banking environment, reliance on traditional forms of paper-based verification decreased substantially (FFIEC, 2008). Under the banking code, banks have to bear the loss from online fraud, unless they can prove that account holders were complicit in the theft (Levene, 2009).

Finally, the risk of online fraud has always existed, however the threat is intensifying with the widespread dependence on computerized information systems (FAP, 2007). Although online fraud alone is not widespread enough to sink the whole business, it has the potential to undermine the reputation of banks, stunting the prospects for growth as resources are being

drained (Deloitte and Touche, 2007).

Authentication Systems

Online processes have created significant cost reductions and savings opportunities for banks. However, in the absence of appropriate security to protect identities online, banks open themselves to considerable damage to their reputation, including the erosion of user confidence in online services (Deloitte, 2008). As a result, Identity theft and account fraud continued to receive a lot of attention as banks continued to deal with the ongoing challenge of identifying, managing and controlling users and their access permission in an effective and efficient way. Organizations are beginning to recognize the threat and take action. The DTT Global Security Survey found that of the top five initiatives that organizations plan to address in the near future, the top three deals with the people dimension of security and privacy (Figure 1).


one factor (multifactor) are more difficult to compromise than single factor methods. Deloitte (2006) explained that this is because addition of another layer will likely to stop failures (errors, miss-configurations or deliberate actions), in one, thus ensuring no single point of’ vulnerability. FFIEC (2008) stressed that when risk assessments indicate that the use of single-factor authentication is inadequate, banks should implement multifactor authentication or other reasonable controls needed to mitigate those risks. Accordingly, well designed and properly implemented multifactor authentication methods are more reliable and stronger fraud deterrents (Arumuga, 2006). A comprehensive approach to authentication requires a strong adherence to the bank’s IS standards and integration of authentication processes within the overal IS framework.

Fundamental Concept of Authentication Mechanism

Information Security (IS) is a measure designed to reduce vulnerability to identity theft by acting as protectors of information (Sawyer, 2009. One of the primary goals of IS is to ensure ‘Authenticity’. Sawyer (2009 defined authentication as the process of validating the identity of a user to ensure that the appropriate user is getting access to the appropriate resource. The process is handled by the bank’s authentication server to verify that account holders are who they claimed to be (Sawyer, 2007). In terms of security requirements, online consumers need to be sure that they are communicating with the real bank before sending sensitive information to it. On the other hand, banks need to know the identity of the user before authorizing access to the system and subsequently processing the transaction (Soroor, 2009.

Authentication methods fall into three broad type:

(a) Something you know — a password, PIN, a piece of personal information, etc.

(b) Something you have — a token, a swipe card, a smart card passport etc.

(c) Something you are (biometric) — your voice, fingerprint, signature, a face scan etc.

There are a variety of technologies and protocols that banks can use to authenticate customers, which all have different levels of risk protection. These techniques can be divided into single-factor authentication and multi-factor authentication. Single-factor authentication involves the use of one factor to verify customer identity whereas multi-factor utilizes two or more. FFIEC (2008) identified that authentication methods that depend on more than

SecurityRegulatoryCompliance

Perc

enta

geof

Ban

ks

60

50

40

30

20

10

0

Access andIdentity

Managment

DisasterRevovery

InfrastructureImprovement

Governance forSecurity

Figure-1

Source: Deloitte Global Security Survey 2008


Transition in Authentication Process

Deloitte and Touche (2007) identified that the most commonly used authentication mechanism is the user ID and password. With this in mind Arumuga, (2006) found that authentications done through passwords alone are not adequate, thus there is an urgent need to improve authentication process in the Internet banking system. Moreover, concerns over the security of online transactions have risen over the years, prompting banks to do more to secure their Internet banking channels (Chan, 2007). Based on these findings, the author considered single factor and possibly certain combinations of multifactor authentication inadequate for high-risk transactions involving access to customer information or the movement of funds to other parties. Meanwhile, the two factor authentication (2FA) process is growing in popularity, fuelled by the emergence of a number of technologies i.e. Token and biometric (Deloitte, 006). This trend demonstrates the continual evolution of security measures as banks begin the transition from physical protection to information protection.

Cost of Implementation

In the UK banks continue to operate in an environment of increasing regulation and government legislation, pushing them to invest more and more resources to comply with these regulations (Deloitte, 2008). Dale (2008) noted that security measures needed to prevent certain risks at the same time impose a certain cost. Whilst costs incurred to manage most security incidents continue to decline the cost to manage incidents that target

sensitive information continue to rise. With this in mind, an appropriate compromise is needed between improved IS and costs (Soroor, 2005). However, in practice, Soroor (2005) found that banks try to have a basic level of security thus alleviating most but not all of the risks. Customers are therefore left to their own devices in defending themselves against phising and pharming.

End-user Platform

Soroor (2005) emphasized that additional security measures i.e. a secure channel between users and an authenticated bank are the most critical ones. However, Soroor (2005) also pointed out that this is not true in practice since malicious programmes (Trojans) can intercept communication before security credentials are securely sent to the banks. Although a typical user platform is inherently insecure, Soroor (2005) reveals that most problems could be solved by an educated, careful and security-conscious user. In addition, the bank’s server should

form a secure end point thus appropriate measures (i.e. firewall, penetration testing) should also be taken to prevent hackers from breaking into the site.

Methodology

Primary Research

Structured Interviews

The literature review raised a number of complex issues that warranted further analysis, however due to the confidentiality of authentication processes and the delicate nature of online fraud, closed question in the form of postal questionnaires would not be effective in systematically gathering the required information. Instead, structured interviews were used to ensure that a consistent line of inquiry was met. This is a qualitative technique that relies on a number of open questions; the same questions will be put to each of the interviewees, in doing so a comprehensive comparison of their responses can be made. This


approach facilitates systematic data collection, because it allows various experts in the field to express their personal views (Saunders et al., 2003). By gathering 2 - 3 different samples from major banks and audit firm, provides a relatively accurate perception of the effects of different authentication processes on mitigating the risks of online banking fraud. Although structured interviews make use of a smaller sample population than postal questionnaires, a sequence of well planned and well thought out questions allow better clarification or probing of vital information where necessary (Saunders et al., 2003).

Participants Selection Process

The scope of this paper encompasses key banks with worldwide presence and with head office operations in the UK. To maintain a level of consistency, and to preserve the value of the answers, the majority of banks were interviewed in the UK. Attributes such as size, global presence and market share were all taken into consideration during the selection process. Particular attention was paid to selecting those that have been targeted by phishers in the past.

In selecting these participants, benchmarking within a peer group will assist banks in identifying those practices that have the potential to produce superior performance when certain improvements or adaptations to their information system are implemented.

Contacting the Interviewee

Obtaining sensitive information from banks about there IS may cause unwillingness to participate and bias in responding to interview

questions, such limitations maybe circumvented by making initial contact with known participants in order to secure their cooperation and willingness prior to arranging for interviews. With this in mind, the author contacted the relevant participants in the following steps:

(a) Using personal contacts to gain access into the relevant banks

(b) Viewing companies for specific contact details such as email address, telephone and fax number

(c) Email sent out to individual once address identified

(d) Calls made to participants if no reply were received within 1 week after initial contact

As a mark of respect for all potential respondents there will be no invasion of privacy or any form of deception involves during the process of gaining their informed consent to take part in the study. If required the author will guarantee anonymity to certain respondents, by doing so more honest views on certain key security issues could be obtained. Moreover, to safeguards the respondent’s reputation and interests, the findings will not be disclosed directly or indirectly by the author to other respondents both within the same or different organizations.

Secondary Research

A systematic review of published literature and research were carried out during the project by searching a variety of databases (Athens, Factiva, Business Source Complete) and the Internet. No date limit was set as it was essential to capture as much information as possible on the two security issues; authentication and customer awareness. Electronic and printed

journals were collected from Internet searches on online banking frauds and authentication systems in general. Free text searches were created around the following terms and explored:

(a) Online banking fraud

(b) Consumer’s Confidence in Internet Banking

(c) Information Security

(d) Transition in Online Authentication.

The initial sift was done by collecting all the articles related to the search term and from this, those that seemed irrelevant were discarded. The second sift was done by reading the abstracts of the remaining articles and the third sift was done by reading the full text obtained from the previous sifts. The reference lists of included studies were also scrutinized for further key word searches of the Internet.

Data Collection and Sampling

Initial literature reviews were carried out to identify the growing risk of online banking fraud and its relevance to consumer awareness, which formed a good foundation for the rest of the research. This provided a basic framework for the analysis of customer authentication processes and illustrated the authentication technologies banks should consider in the future. The data collection process took place through face-to-face interviews with key informants from the relevant banks and audit firms between May and July 2008. Some interviewees were extremely busy and opted for telephone interviews instead. Those that were unable to participate gave the following reasons:


(a) Time constraints

(b) Absence from workplace (Vacation etc) and

(c) Confidentiality issues associate with banks’ IS systems.

Respondents of the interviews were subsequently analyzed and consolidated and are presented in qualitative formats. Additional surveys on consumer awareness and potential authentication technologies obtained from secondary research. Data Analysis

Comparative Data Analysis Authentication Strength

Primarily, all three banks (HSBC, Barclays and SCB) performed extensive risk assessment prior to implementing their respective authentication processes. As part of the risk assessment process,

various considerations (cost, usability, market direction etc) were taken into account, thus further reinforced the creditability of banks’ justification for adopting the systems in the first place. More specifically, while IFA is still used for online transactions with low risk potential such as fund transfers within the same accounts etc, the IS systems of these banks also support 2FA that relies on OTP (One Time Passcode). OTP are dynamic because it is unrelated to the user’s name or bank account thus making it much harder for fraudster to guess or obtain through social engineering and/ or keystroke logging. As evident security breach from phishing were virtually nil for HSBC and SCB, thereby indicating that banks’ own IS systems have proven very difficult to breach. At present, each bank has a different approach to implementing theirs 2FA protocols. For example HSBC utilized 2FA that comprises of Password

generating token device (Thailand) whereas, Barclays and SCB used smart card and Public Key Infrastructure (PKI) technology to augment their online security. The fact that all these banks used 2FA for log-on and services with higher risk potential such as third party fund transactions indicates that in general authentication strength are appropriate to the perceived levels of risk. In conjunction, additional security employed by the three banks in the form of monitoring and profiling capabilities has undoubtedly helps maintain the integrity of its authentication systems in mitigating these risks. Nevertheless, the losses sustained from online banking fraud due to identity theft are actually increasing despite what seems to be an impregnable part of the overall IS framework.

Operational Efficiency

Initially it was observed that


although authentication processes varies across Barclays and SCB banking operations, effort has been made to design and integrate the systems to provide a common platform across business operations. While Barclays chose to outsource its monitoring and profiling capabilities to specialist system vendors, it was observed that for all three banks the core authentication systems itself are far too critical to be entrusted to another party. Likewise it has been affirmed that online banking activity will go up if banks began offering the stepped up security measures. This positive correlation is illustrated by the fact that customers are performing higher value online transactions more regularly. As consumers demand for stronger security grow with the corresponding transaction functionality, the degrees of protection and usability of the current and future authentication processes are likely to become more scrutinized. With regards to future authentication processes, despite the higher security levels’ offered by the new home chip and PIN reader to be adopted by Barclays, its inconvenience is likely to spur ongoing customer complaints. This is because in effect it will be less portable than password generating tokens currently being used by HSBC and SCB, which are easier to replace if lost, damaged or stolen. Moreover, the card reader does not have in-built chip so customers will always need to have their debit card or its associated PIN number ready. On this basis, to maximize operational efficiency Barclays in particular is willing to remove some functionality that required 2FA for the minority who do not need it. As a result, those customers will still be able to use their static security credential for logging on and performing non-high risk transaction.

Future Improvements

As evident, Barclays is adopting new handheld chip and PIN reading device to provide a higher level of online banking security while HSBC and SCB are still considering, which technologies to adopt. The big security breakthrough of this chip and PIN technology is that there is no contact between the end-user computers and their card readers thus minimizing the risk of online fraud through keystroke logging whereby security credentials are captured as they are entered. In line with Barclays’ justifications for adopting new technologies, security wise this solution helps to ensure that the individuals using online services are genuine customers and will make these types of transactions even safer. The introduction of chip and pin at home scheme coincides with the industry wide ‘faster payment” scheme, noted by Levene (2009). On the other hand, HSBC believes that its fraud losses are so low that the expense of the new authentication systems would out-weight the potential fraud savings. Nevertheless, amid’ the growing concerns customers will increasingly find their banks

introducing some form of new security measures to prevent online fraud in the future as technological spending for all three banks are expected to increase.

Customer Initiatives

In general it was observed that HSBC, Barclays and SCB Websites now have a list of frequently asked questions about Internet security and warnings to educate customers on how to better protect their online transaction from fraud. In compliance with regulatory requirements and IS standards, these banks also regularly monitor security advisories and provide software patches when required. In terms of communication; all three banks have stressed that they will never request confirmation of consumers’ login details by email since email can be faked even though they appear to come from a trusted source. These results show that banks are taking on some responsibility to educated online customers. However, these initiatives may not be suffice and effective given that the consumer’s survey conducted by HSBC illustrated that often the security of information is still compromised by human behavior, whereby the


individual customers who have been entrusted with managing personal information lack the adequate knowledge.

Secondary Findings

A poll of 1,678 adults conducted by the RSA, suggests that online banking customers are becoming more concerned about evolving security issues and would like banks to take more steps to combat fraud. However, opinions vary when it comes to the preferred methods of user-identification. Risk-based authentication proves to be the most desirable while Deloitte (2008) survey of 5000 online customers found that, ‘using devices for authentication was the least preferred security. With an increase in demand for stronger might be the key to solving online banking fraud given its uniqueness and user-friendly nature. Moreover, the potential flaw associate with storing analogue templates, which make biometric vulnerable to abuse is currently being overcome by authentication system vendors.

Discussion

The success of phishing and related techniques highlighted earlier is something that banks must take into account when looking to accelerate their business by introducing new online features and functionality. As infrastructure security becomes more effective, fraudsters have shifted their focus onto application layer attacks by turning their attention to target individual internet users in order to gain sensitive information. This is often compounded by the fact that user’s platform is insecure, due to the lack of security knowledge of end user that was also already pointed out. As a result banks must always take into account the increasing vulnerabilities and

responsibilities associated with interdependence risks from factors outside their control when performing their risk assessment. As banks begin piloting and implementing new technologies, formal risk management efforts will also need to become more integrated and cross-functional.

The global security survey (2009) affirms that the market is moving in the right direction, with more than 90% of customers willing to use stronger security. However, the fact that customers want banks to adopt risk-based authentication and reject the use of tokens, shows that they want to shift more responsibility to the banks. With more advance technologies available in the future; banks may afford to become more dependent on its own logging and monitoring system through its information centric approach. Detection mechanism may range from passive logging to active monitoring (e.g. sending an alert to the customer as a precaution if certain transactions do not match a user’s regular profile). In this circumstance, biometric protocols

also present a viable solution to online fraud as less responsibility will be place on be consumers to be security conscious.

In deciding whether to adopt a new technology, timing is critical. Deloitte (2008) noted that those who wait too long run the risk of being left behind the pack saddled with out dated technologies. Arguably, this may be the case for HSBC because of the decision not to adopt the new chip and PIN device. Nonetheless, it must be remembered that meanwhile HSBC will retain the convenience of its existing authentication system, which may prove critical in maintaining customer satisfaction that may outweigh the need for stronger security. In practice, the author found that customers do not choose or change their bank based on the level of security unless they have become a victim of fraud and the bank fails to deal with it properly. On the other hand, Deloitte (2006) also noted that those who invest too soon may run the risk of entering into costly implementation fraught with integration difficulties. The latter


issue is unlikely for Barclays, who was awarded Anti-Fraud Strategy of the Year, which recognized the best use of new technologies to improve business processes. Instead being an early adopter of the chip and PIN device, Barclays faced the market risk of customer rejection if too much usability is compromised in favor of stronger security. As a result, although Barclays believes that the cost of sending out devices at no cost to customers would be viable, they must also recognize that customers resent any additional procedure or change.

Whilst security technology deployment continues to receive the majority of IS spending, there is also an increase in effort to include security awareness and communication costs. As evident, fuelled by regulatory compliance and consumers’ concerns banks are buying into the belief that the human aspect of an information security protocol is critical to its overall success. This belief shows that spending priorities will be different as less money will be

spent on hardware due to the advent of virtualization and Web-based technology. Instead, spending will increase in services especially those related to online’ security improvement. As Arumuga (2006) noted, strategic technology planning will be required to upgrade banks’ visions and budget for the new age of technology. Nonetheless, it must be remembered that one can never achieve perfect security by only substantially increasing the cost required for a successful attack since there are some security breaches (phishing) that cannot be completely prevented. As a result, IT Audits will continue to evolve in scope and increase in importance as banks view IS as a business issue first and compliance issue second.

Lessons for Banks in Bangladesh

Online banking is relatively in a nascent stage in Bangladesh. Earlier only the foreign banks operating in Bangladesh like Standard Chartered Bank, HSBC,

etc provided it. But current many local banks, especially the local private commercial banks are doing well in providing online banking services in Bangladesh. The number of online bank branches in Bangladesh as on December 2012 are 3445 which are more than 41 percent of total bank branches in the country. The use of online banking in Bangladesh is getting popularity and being expanded. However, they are also facing different types of threats and fraudulent. So to reap the benefit of online banking banks in Bangladesh should take some cautionary measures.

Firstly, banks should continue to drive for improvements in online security by evaluating consumer education effort more rigorously to determine if additional steps are necessary. In this context banks should educate consumers about new security measures in place, even if they are invisible. Liaising more closely with online consumers will assist banks in filling the knowledge gaps, assessing the potential areas of weaknesses in risk management procedures as to determine where the business vulnerabilities are. On a wider scale, the Bangladeshi banking industry need to work closer together to develop solutions that not only make it safer for customers but also improve the convenience enjoyed by customers and possibly interchangeable between providers.’ This can be achieved by maintaining close collaboration with Government agencies, system vendors and professional advisory organizations to report how they manage there IS systems.

Secondly, banks should enhance Login security by making use of stronger user identification in line with new functionality demands. When adopting new technology


banks must not try to cut cost at the expense of innovation. Currently most banks do not authenticate their websites to customer before collecting sensitive information. Banks can aid customers against fraudulent attacks by differentiating legitimate sites from spooled sites by authenticating their Website to customers.

Thirdly, it is advisable that banks appoint one separate director to oversee where, business strategy warrants a higher level of supervision, attaching responsibility for operational risk in relation to online fraud especially. From an audit perspective banks should be reviewing at the board level their Internet strategy and related risk management issues. As published guidance emphasis, organizations need to determine how their access security controls align with the relevant global legislations, business risk and the customers’ requirements. This will help ensure that is approached in a manner consistent with the corresponding level of risk.

On the whole, banks should refer to these recommendations when evaluating and implementing new authentication systems whilst at the same time enhancing consumer knowledge. Although this research is focused on the risks and risk management techniques associated with Internet Banking, the principles are applicable to all forms of, electronic banking activities.

Conclusion

To conclude, the popularity which virtual banking services have won among customers owning to the speed, convenience and round the clock access is likely to increase in the future. However, it is clear that the public is concerned about

online fraud, and the best response for the bank is to educate people as well as taking tougher security measures to protect information in accordance to its value as to reassure customers. On this basis, banks are treading the fine line between making the customers’ online banking experience a safe and positive one and interfering with the convenience factor, which is the key reason for banking online in the first place. It must be remembered that 2FA is’ not a solution for all online problems, since online fraud is not all about technology. Consumers must also play their part in making sure that they avoid becoming a victim of online fraud by simply taking the following steps to protect themselves.

There were some limitations to this study that may have affected the overall outcome of the findings. One important limitation is the number of interviews, which needs to be increased in order to provide a more accurate analysis of banks’ security position in relation to

online fraud. The period when interviews were carried out was a time when many of the key members were on their annual leave. This limited the qualitative information that may have been gathered had the study been done at a different point during the year. The qualitative results were solely based upon the interviewees’ opinions thus it is important to remember that these opinions may not represent the reality of what is happening, but gives a view of the perceptions on current situations Nevertheless, it must be stressed that those who participated are senior professionals within the banks with specialist knowledge in this field. Secondly, some information on future security technology was also limited to what could and could not be shared with people from outside the banks: Thirdly, this paper only looked at the authentication aspects of the bank’s IS system and there were also other important security issues on the banks system i.e. firewall etc that were not taken into account.


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The Authors are:1Assistant Professor, Department of Marketing Studies and International MarketingFaculty of Business Administration, University of Chittagong2Assistant ProfessorBangladesh Institute of Bank ManagementFaculty of Business Administration, University of Chittagong3Assistant ProfessorDepartment of Marketing Studies and International MarketingFaculty of Business Administration, University of Chittagong

Introduction

Over the last few years we have experienced some significant changes in the field of accountancy, most notable one being the introduction of International Financial Reporting Standards (IFRSs). IFRSs have, unequivocally, brought about qualitative changes in financial reporting to a large part of the world. At the very least, IFRSs have provided a unified language to financial reporting across jurisdictions. While as accountants we are still acclimatising to IFRSs, there is a possibility that as auditors we may experience a major shake-up in auditor reporting. The recent draft pronouncements by the International Auditing and Assurance Standards Board (IAASB) on auditor reporting could, potentially, make dramatic changes to the way audit reports get presented.

The IAASB is currently inviting comments on the Exposure Draft (ED) containing proposed changes to a number of auditing standards. These include:

• ISA 700 (Revised): Forming an Opinion and Reporting on Financial Statements

Changing Landscape in Auditor ReportingAbu HM Kibria ACA

• ISA 701 (New): Communicating Key Audit Matters in the Independent Auditor’s Report

• ISA 260 (Revised): Communication with Those Charged with Governance

• ISA 570 (Revised): Going Concern

• ISA 705 (Revised): Modifications to the Opinion in the Independent Auditor’s Report

• ISA 706 (Revised): Emphasis of Matter Paragraphs and Other Matter Paragraphs in the

• Proposed Conforming Amendments to Other ISAs in relation to communicating key audit matters

The Proposed ISAs represent the culmination of IAASB deliberations to date on the topic of auditor reporting, which were informed by international research, public consultation, and stakeholder outreach undertaken by the IAASB.

To keep this article concise and focused we shall confine our discussions primarily around proposed ISA 700 and ISA 701 with occasional drift into other proposed changes.


THE INTRODUCTION OF A BRAND-NEW CONCEPT OF REPORTING “KEY AUDIT MATTERS” IN AUDIT REPORT. KEY AUDIT MATTERS ARE DEFINED AS THOSE MATTERS THAT, IN THE AUDITOR’S PROFESSIONAL JUDGMENT, WERE OF MOST SIGNIFICANCE IN THE AUDIT OF THE FINANCIAL STATEMENTS OF THE CURRENT PERIOD (PARAGRAPH 7 OF PROPOSED ISA 701). KEY AUDIT MATTERS ARE TO BE SELECTED FROM MATTERS COMMUNICATED WITH THOSE CHARGED WITH GOVERNANCE DURING THE COURSE OF THE AUDIT.

Background to the proposed changes

In order to identifying and providing information and insights on user perceptions regarding the financial statement audit and the auditor's report among different classes of financial statement users, the IAASB started a joint initiative with the Auditing Standards Board of the AICPA in 2006 in the form of academic research. The research was conducted in different jurisdictions and covered different topics like “auditor’s report”, “audit expectation”, “users’ perceptions” etc, and was completed in 2009. By then the world had started experiencing the effect of global financial crisis (GFC). The advent GFC and its painful impact on investors, not to mention the impact on global economies, put increased focus and scrutiny on corporate reporting in general and auditor reporting in particular. Many influential regulators including the US Public Company Accounting Oversight Board (PCAOB) and the European Commission (EC) have voiced out for change in auditor reporting.

To improve auditor reporting, the IAASB has undertaken a number of initiatives to reach out to stakeholder


groups and obtain their feedback and comments. These included:

• May – September 2009: Jointly commissioned international academic research on user perceptions of the standard auditor’s report;

• May 2011: Consultation Paper - Enhancing the Value of Auditor Reporting: Exploring Options for Change incorporating findings from the above-mentioned research and input obtained from the IAASB’s dialogue with stakeholders around the world;

• June 2012: Invitation to Comment (ITC) - Improving the Auditor’s Report seeking views on the indicative direction to improve how and what auditors communicate to users through the auditor’s report;

• July 2013: Exposure Draft - Reporting on Audited Financial Statements: Proposed New and Revised International Standards on Auditing (ISAs), was developed and approved by the International Auditing and Assurance Standards Board (IAASB).

The objectives of this project on


improving auditor reporting and associated outreach initiatives are to:

• Appropriately enhance the communicative value and relevance of the auditor’s report through proposed revisions to ISA requirements that address its structure and content; and

• Determine whether and how the IAASB’s reporting ISAs, in their design, can be modified to accommodate evolving national financial reporting regimes, while at the same time ensuring that common and essential content is being communicated.

According to the IAASB, the message from the outreach initiatives was quite clear - change is essential. IAASB’s take from the outreach initiative is that the auditor’s opinion on the financial statements is valued; however, the auditor’s report needs to be more informative – in particular, for auditors to provide more relevant information to users based on the audit that was performed. IAASB believes there is support for the direction the IAASB is exploring, and for a global solution.

Key changes proposed

a) Independence declaration

Revised ISA 700 proposes new required reporting elements, including a requirement for the auditor to include an explicit statement of auditor independence and disclose the source(s) of relevant ethical requirements. It also includes statement on application of professional skepticism.

While ISAs currently do not require explicit confirmation of

auditor independence and exercise of professional judgement in audit report, these are fundamental to an audit. Many jurisdictions already have requirements in place for auditors to make independence declaration as part of the audit deliverables. For example, Australian Corporations Act requires an independence declaration by Auditors to be made to the directors and included in the financial report.

The requirement of independence declaration will undoubtedly bring in fresh change in auditor reporting. However this is likely to be palatable without much difficulty given that we are just making a shift away from implicit mandatory compliance to explicit mandatory declaration.

b) Naming the engagement partner in the audit report

Another change proposed is the inclusion of the name of the engagement partner in the audit report. Although this is already being practised in some countries, such practice is not widespread and may cause some uneasiness amongst countries where this is not practised yet as auditors may feel this to be too intrusive.

c) Key audit matters (KAM) and going concern

Let’s now turn our focus to the proposed changes in the new auditing standard ISA 701. The standard proposes some fundamental changes to auditor reporting from the way it is currently prepared and presented.


There are two main changes proposed, namely,

i) The introduction of a brand-new concept of reporting “key audit matters” in audit report. Key audit matters are defined as those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period (paragraph 7 of proposed ISA 701). Key audit matters are to be selected from matters communicated with those charged with governance

during the course of the audit. Communication with those charged with governance (TCWG) may be in the form of a formal or informal report to the audit committee or the equivalent committee(s) of the client; and

ii) The requirement of auditor reporting on going concern. This is primarily to express auditor’s views on management’s assumptions of going concern and identification/non-identification of material uncertainties around going concern assumption.

It is to be noted that the above changes are to be applied to listed entities unless national jurisdictions widen their applicability to other entities like Public Interest Entities (PIEs).

Potential impacts

Many respondents to the ITC in 2012 were of the view that proposed changes/enhancements to auditor reporting would add further value to the current model of pass/fail opinion and help to reinvigorate the public’s trust and confidence in the independent


auditor and increase the relevance of the audit. However many respondents commented that incorporating auditor’s commentary in the audit report goes against the fundamental principles of auditing that it is management’s responsibility, not auditor’s, to provide information to assist users in interpreting the financial statements. Respondents commented that by incorporating auditor’s comments on the significant aspects of financial statements, there is likelihood that:

• Users may misinterpret that it is auditor’s responsibility to determine what is of most significance to them;

• Highlighting similar information by both auditor and management may further confuse users about the respective responsibilities and respective roles of

management, those charged with governance and the auditor;

• This may further the expectation gap between what auditor’s actual role is and what is perceived by some stakeholders;

• Determining key matters to disclose may be subjective and may widely vary between auditors;

• Simply confirming existence or otherwise of material uncertainties in relation to going concern is not to be much helpful to users who are not educated on these. The very definition of going concern may be misunderstood by many users.

In addition, the following issues have also come to surface which may impact the relationship

between auditor, its client and client’s shareholders. For example,

- How will the Key Audit Matter (KAM) be determined that will be reported in the audit opinion? It’s supposed to be taken from auditor’s reporting to TCWG. It is assumed that KAMs will be agreed with TCWG. For large companies this may require significant time and effort by TCWG and auditors leading to increased audit cost;

- How detailed the descriptions on KAMs need to be? A short description may not make the issue understandable while readers can get easily lost if it becomes too detailed and too technical;

- Auditors are likely to discuss the key issues based on their assessment of significant risks and significant accounts from


The Author is a Manager KPMG, 10 Shelly St, Sydney

an audit point of view. However users may easily misinterpret a significant audit risk to be a business risk potentially furthering the expectation gap;

- Certainly, inclusion of KAMs in audit opinion will attract questions from shareholders during AGMs. Does this put onus on auditors to answer to all the questions shareholders may have on the KAMs? There is likely to be an element of uncertainty as to how much information auditors can share with shareholders in an AGM – there is not much guidance in this area;

- Circumstances requiring significant modification to audit approach – this could become quite technical and also confusing for readers as they might interpret this to be a ‘modification of audit opinion’ rather than ‘modification of audit approach’. Also, could this infringe the confidentiality between the auditor and the client by divulging sensitive information?

- In an audit it is not uncommon that management make an adjustment to a transaction based on audit findings. It is unclear whether the new requirements make inclusion of commentary on such adjustments mandatory, when material. If so, it is likely to be unhelpful for performance of an audit as management will be increasingly non-receptive to making such adjustments leading to a potential stoush between auditors and their clients;

- There are alternative views amongst stakeholders that whether there can be a ‘report of key issues’ prepared by management/Board/audit committee and certified by auditor which may take care of some of the concerns arising out of the proposed changes.

Field testing

The IAASB has proposed that auditors across the globe perform some field testing on the proposed changes particularly around KAMs and how they can be identified, agreed and reported. Some global audit firms are perceived to be undertaking some field-testing. However all have expressed concerns about cost blow out in doing the field testing and the unknown benefit coming out of the exercise.

Providing comments

The IAASB published the ED on 25 July 2013 and is inviting comments from practitioners and other relevant parties. The comment period is open until 22 November 2013. ICAB may take an active part in this consultation process and submit its reasoned response so that our view is heard at a global stage.

Effective date

The final standards are likely to be effective for the reporting periods ending on 31 December 2016 or any date thereafter assuming the proposed ISAs will be issued as final standards in the fourth quarter of 2014.

Source

IAASB publications and relevant public comments including:

• Reporting on Audited Financial Statements: Proposed New and Revised International Standards on Auditing (ISAs) – (July 2013)

• Invitation to Comment: Improving the Auditor’s Report – (June 2012)

• Enhancing the Value of Auditor Reporting: Exploring Options for Change – (May 2011)

Useful links

• IAASB link - https://www.ifac.org/publications-resources/reporting-audited-financial-statements-proposed-new-and-revised-international

• At a Glance: Exposure Draft, Reporting on Audited Financial Statements: Proposed New and Revised International Standards on Auditing

• Guidance to Assist in Field Testing of Proposed International Standard on Auditing (ISA) 701, Communicating Key Audit Matters in the Independent Auditor’s Report

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Documents

THE ROLE OF ACCOUNTANT'S IN NATIONAL ECONOMY height that everyone in the society understands the value that the CA professionals put. During our visit to ICAEW and meeting with Senior