Playing with numbers, unscrupulously

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Shamsul Huq Zahid
The Securities and Exchange Commission (SEC), according to a report published in the FE, is in a helpless state as far as the cases of suspected corporate accounting fraud are concerned.
The securities regulator, reportedly, detected, at least, 443 cases of suspected cases of audit dress-ups between July 2004 and December 2009. Since the number of listed companies is well below that figure, it could be that a good number of companies had submitted defective audit reports over and over again.
Many tend to believe that the number of irregularities detected by the SEC is, actually, the tip of the iceberg. Under a lax regulatory environment, submission of cooked-up audit reports has become more of a habit on the part of many companies, listed or unlisted, in Bangladesh. Some unscrupulous audit firms are being used to help achieve the evil ends of the equally unscrupulous management of these companies.
The basic objective behind preparing the cooked-up audit reports has always been tax evasion. But in the case of listed companies, intentions behind making such reports do vary in nature. It could be done deliberately to raise stock prices as a part of the broader plan to offload shares held in 'benami' by the sponsors- directors of a listed company or get higher and attractive dividends at the cost of the company's financial health or lure investors to buy shares of companies that are otherwise financially weak.
The opposite does happen at times, in the case of takeover bids. The top management of a company can manipulate figures related to the expected expenses and revenue earning, engage in off balance sheet transactions to make the company's profitability appear temporarily poorer and engineer a highly pessimistic future earning report. All these actions generally result in the fall in the stock prices of that company, making the takeover bid easier. In the process, the successful bidder rewards the top management, who takes all the troubles to lower the stock prices, adequately. However, in Bangladesh, takeovers are rare events except for the unlisted state-owned enterprises (SoEs).
The SEC, which is not legally empowered to take actions against audit firms involved in preparing cooked-up audit reports, is claimed to have sent notices from time to time to the Institute of Chartered Accountants, Bangladesh (ICAB) to take necessary actions against its members concerned. But the response from the ICAB has not been encouraging.
The ICAB is a professional body that is supposed to promote fair and sound accounting practices by its 1000-plus member audit firms. It cannot impose fine or send a member to jail for indulging in unethical practices. But the ICAB could very well strike off the membership of a guilty audit firm. That should be enough to throw the firm concerned out of business.
Accounting frauds are nothing unusual in the corporate world. The large corporations, particularly those in the United States, are more prone to such scandals. More than 80 per cent of the accounting scandal-hit corporations during the last two decades were from the US. Globally renowned audit firms such as Arthur Anderson and PwC were involved in accounting scandals. Some top US executives and auditors are now serving their prison sentences for accounting frauds. The Bush government though did not create any separate oversight bodies to put a leash on corporate accounting frauds it enacted a new law and strengthened the regulatory oversight in this connection.
Unfortunately, the policymakers in Bangladesh have never been serious about dealing with the issue of accounting frauds by the listed companies. A proposal was mooted several years back to create a financial reporting council (FRC), headed by the central bank governor. It was materialised later, during the rule of the last caretaker government through a presidential ordinance. However, the move met a premature death as the concerned ordinance was not later tabled in the first session of the current parliament.
However, the creation of the FRC as a peripheral entity is unlikely to meet the objectives. The government has two options to deal with issue of accounting frauds. It can either legally empower the SEC to punish the rouge audit firms and listed companies or establish a separate entity to deal firmly with financial crimes, including accounting frauds.
The scale of account-related irregularities is feared to be enormous in the absence of any controlling mechanism. Both the government and the investors in the capital market have been paying a heavy cost because of this white-collar crime. The government must not drag its feet and find an appropriate method to deal with this lingering issue.