Corporate governance failure at the Sonali Bank: Some points to ponder
Friday, 21 September 2012
Javed Siddiqui from Manchester
The sensational Hall-Mark scandal at the Sonali Bank has severely exposed the weaknesses of the corporate governance structures currently in place in state-owned banking companies in Bangladesh. As details of the scam unfold, the shortcomings of the internal control and governance systems within the bank, and its inability to withstand pressures exerted by influential groups are being revealed. More importantly, this has perhaps created serious doubts over the way public funds are managed in the state-owned banks. As the nation awaits exemplary punishments for the culprits who misappropriated this massive amount of public money, it is perhaps time to consider steps that can be taken to prevent such incidents to occur in the near future.
The first and the foremost thing perhaps would be to have a proper discussion with top and mid-level managers at the Sonali bank and listen to their views about possible loopholes that exist in the internal control system in the banks. After the recent banking crisis in the UK, top executives from the banks that were deemed to be involved were questioned and at times grilled by the members of the treasury committee in the parliament for their failure in preventing such an incident. The treasury committee also sought the views of experienced bankers, academics, and other experts in this field. The entire process continued for a number of days, and was televised live, so as to restore public confidence on the system. In Bangladesh, newspaper reports suggest that the parliamentary standing committee on finance has already decided to look into the activities of the Sonali bank in the backdrop of allegations of corruption and misappropriation. Perhaps, allowing media access to such committees would have ensured more accountability. The opposition MPs, instead of using vague political rhetoric, should also engage themselves actively with this process.
The board of directors of the bank, despite their frantic efforts to disassociate themselves from the scam, must accept part of the blame. Although some of the state-owned banks have been converted into public limited companies, the government continues to appoint the board of directors, the managing director, and other top positions in the bank. This creates the scope for politically linked persons to be appointed to such important positions in the bank. Realistically, given the political climate in Bangladesh, we perhaps cannot expect such political influence to diminish overnight. However, if political appointments have to be made, preferences should at least be given to those politically linked persons who are experienced and competent enough to be eligible to sit in the board of a major commercial bank.
Newspaper reports seem to suggest that powerful quarters within and outside the bank attempted to influence the internal audit process. Internal auditors trying to perform their duty were repeatedly threatened and intimidated by some top level managers who did not want the scams to be unfolded. One possible way of reducing such management influence on internal audit would be to place the internal audit department directly under the board of directors. This would encourage internal auditors to be more independent and result in earlier detection of such irregularities. The role of the external auditors also remains questionable. It seems that the branch in question was prevented from being internally audited for a considerable length of time. If this is true, the external auditors should have assessed the audit risks associated with such a huge loophole in the internal control system of the entity and flag it up with the management. Perhaps, the ICAB (Institute of Chartered Accountants of Bangladesh) should investigate the role played by the external auditors so that a clearer picture can emerge.
The Hall-Mark scandal re-emphasises the need for introducing whistleblower protection within the state-owned enterprises in Bangladesh. Newspaper reports suggest that the whistleblower, in this case, an internal auditor for the bank, frantically looked for protection from his senior colleagues so that he could perform his duty. His senior colleagues, wary of the dire consequences of displeasing the high-ups, could not prevent him being transferred to a different position. The entire scandal was eventually exposed due to the smartness and commitment demonstrated by this internal auditor. However, by the time it was finally exposed, a huge amount of money was already siphoned away by the culprits. Had there been a whistleblower protection scheme in place, this person could have gone and reported it to them of his suspicion. This could have perhaps resulted in a timely detection of the fraud. Perhaps, the central bank can play a role in ensuring that in future, such identities of whistleblowers are sufficiently protected so that suspicious incidents are reported without fear. The central bank could also be more proactive in terms of ensuring that the rules and procedures are being followed. Apparently, the manager of the branch in question was allowed to remain in his position for an extended time period, violating the rules of the bank. Perhaps, a performance audit could detect such an incident.
The central bank could perhaps also play a role in ensuring better disclosures in the annual reports and website of the bank. Currently, the disclosures made in the bank's website are appalling. The website does not even seem to contain the bank's annual reports (only excerpts from some financial statements have been uploaded). Also, the website does not contain any information regarding the backgrounds of the members of the board, and of the individuals who sit in important committees such as the audit committee, although such disclosures are common in private banks operating in Bangladesh. A detailed disclosure regarding the quality of management, along with financial and CSR (corporate social responsibility) activities of the bank would certainly make the bank more transparent and go a long way in restoring public trust on way state-owned banks are managed in Bangladesh.
Dr Javed Siddiqui is Assistant Professor in Accounting, Manchester Accounting and Finance Group, Manchester Business School, the University of Manchester, UK. javed. siddiqui@mbs.ac.uk
The sensational Hall-Mark scandal at the Sonali Bank has severely exposed the weaknesses of the corporate governance structures currently in place in state-owned banking companies in Bangladesh. As details of the scam unfold, the shortcomings of the internal control and governance systems within the bank, and its inability to withstand pressures exerted by influential groups are being revealed. More importantly, this has perhaps created serious doubts over the way public funds are managed in the state-owned banks. As the nation awaits exemplary punishments for the culprits who misappropriated this massive amount of public money, it is perhaps time to consider steps that can be taken to prevent such incidents to occur in the near future.
The first and the foremost thing perhaps would be to have a proper discussion with top and mid-level managers at the Sonali bank and listen to their views about possible loopholes that exist in the internal control system in the banks. After the recent banking crisis in the UK, top executives from the banks that were deemed to be involved were questioned and at times grilled by the members of the treasury committee in the parliament for their failure in preventing such an incident. The treasury committee also sought the views of experienced bankers, academics, and other experts in this field. The entire process continued for a number of days, and was televised live, so as to restore public confidence on the system. In Bangladesh, newspaper reports suggest that the parliamentary standing committee on finance has already decided to look into the activities of the Sonali bank in the backdrop of allegations of corruption and misappropriation. Perhaps, allowing media access to such committees would have ensured more accountability. The opposition MPs, instead of using vague political rhetoric, should also engage themselves actively with this process.
The board of directors of the bank, despite their frantic efforts to disassociate themselves from the scam, must accept part of the blame. Although some of the state-owned banks have been converted into public limited companies, the government continues to appoint the board of directors, the managing director, and other top positions in the bank. This creates the scope for politically linked persons to be appointed to such important positions in the bank. Realistically, given the political climate in Bangladesh, we perhaps cannot expect such political influence to diminish overnight. However, if political appointments have to be made, preferences should at least be given to those politically linked persons who are experienced and competent enough to be eligible to sit in the board of a major commercial bank.
Newspaper reports seem to suggest that powerful quarters within and outside the bank attempted to influence the internal audit process. Internal auditors trying to perform their duty were repeatedly threatened and intimidated by some top level managers who did not want the scams to be unfolded. One possible way of reducing such management influence on internal audit would be to place the internal audit department directly under the board of directors. This would encourage internal auditors to be more independent and result in earlier detection of such irregularities. The role of the external auditors also remains questionable. It seems that the branch in question was prevented from being internally audited for a considerable length of time. If this is true, the external auditors should have assessed the audit risks associated with such a huge loophole in the internal control system of the entity and flag it up with the management. Perhaps, the ICAB (Institute of Chartered Accountants of Bangladesh) should investigate the role played by the external auditors so that a clearer picture can emerge.
The Hall-Mark scandal re-emphasises the need for introducing whistleblower protection within the state-owned enterprises in Bangladesh. Newspaper reports suggest that the whistleblower, in this case, an internal auditor for the bank, frantically looked for protection from his senior colleagues so that he could perform his duty. His senior colleagues, wary of the dire consequences of displeasing the high-ups, could not prevent him being transferred to a different position. The entire scandal was eventually exposed due to the smartness and commitment demonstrated by this internal auditor. However, by the time it was finally exposed, a huge amount of money was already siphoned away by the culprits. Had there been a whistleblower protection scheme in place, this person could have gone and reported it to them of his suspicion. This could have perhaps resulted in a timely detection of the fraud. Perhaps, the central bank can play a role in ensuring that in future, such identities of whistleblowers are sufficiently protected so that suspicious incidents are reported without fear. The central bank could also be more proactive in terms of ensuring that the rules and procedures are being followed. Apparently, the manager of the branch in question was allowed to remain in his position for an extended time period, violating the rules of the bank. Perhaps, a performance audit could detect such an incident.
The central bank could perhaps also play a role in ensuring better disclosures in the annual reports and website of the bank. Currently, the disclosures made in the bank's website are appalling. The website does not even seem to contain the bank's annual reports (only excerpts from some financial statements have been uploaded). Also, the website does not contain any information regarding the backgrounds of the members of the board, and of the individuals who sit in important committees such as the audit committee, although such disclosures are common in private banks operating in Bangladesh. A detailed disclosure regarding the quality of management, along with financial and CSR (corporate social responsibility) activities of the bank would certainly make the bank more transparent and go a long way in restoring public trust on way state-owned banks are managed in Bangladesh.
Dr Javed Siddiqui is Assistant Professor in Accounting, Manchester Accounting and Finance Group, Manchester Business School, the University of Manchester, UK. javed. siddiqui@mbs.ac.uk