Expanding external audit of banks' assets

The Bangladesh Bank (BB) has embarked on an important task of getting a true picture of the financial health of some domestic banks. It has started the audit of six troubled Islamic banks in the private sector employing a reputed global audit firm, Ernst and Young (EY). To make the audit work transparent and interference-free, the boards of these banks have already sent their managing directors/ chief executive officers on 'forced' leave for 90 days. The Asian Development Bank (ADB), which is funding the reform process of the banks, has reportedly recommended a comprehensive review of the asset quality of these banks facing huge liquidity shortages. The banks now under an external auditor's scrutiny had witnessed widespread financial irregularities by powerful quarters during the ousted regime of Sheikh Hasina.
Not only six Islamic banks but also some more banks are strong candidates for similar external reviews. There have been stories of extensive irregularities in approving loans and disbursement by many private and state-owned banks galore. It cannot be denied that the state of the country's banking sector has never been perfect. But the extent of irregularities had reached an unbelievable proportion during the last one and a half decades. With political indulgence coming from the highest authority of the government and deliberate regulatory oversight, loan sharks like S.Alam, Salman F Rahman, Sikdar brothers, Majumder, Bacchu and many more people like them had plundered bank depositors' money indiscriminately with total impunity. The size of non-performing loans (NPLs), as estimated by the BB, is a pointer to that fact. Over Tk 2.0 trillion, representing 17 per cent of the total outstanding loans of all banks had become classified at the end of September last. Sector insiders, however, say the actual size of the NPL is far bigger than the BB estimate, for banks often resort to window dressing to show a reduced size of their respective distressed loans.
Here, it will not be out of place to raise questions about the quality of audit work done by local firms Allegations have it that a section of local audit firms resort to preparing doctored financials, as demanded by some of their clients. The Institute of Chartered Accountants of Bangladesh (ICAB) take measures often against delinquent members, but the malpractice has been going on. The Financial Reporting Council (FRC), a state regulatory body overseeing the activities of audit firms and audit works, though formed in 2016, is yet to assert itself, as far as punishing the errant audit firms is concerned. The securities regulator too had been lenient towards the listed firms that had cheated the investors year after year by submitting doctored financials. Overall, the situation in the financial sector for more than one and a half decades was conducive to resorting to massive irregularities by the people in power and their cronies.
Under the direct guidance of its incumbent governor, the BB has initiated a primary step to find the state of the six most troubled Islamic banks, four of which had come under the control of one individual businessman through the direct intervention by the most powerful intelligence agency of government. Hopefully, the external audit firm would be able to assess the actual asset quality of the six banks. A similar assessment of the asset quality of some other weak banks also needs to be initiated with the financial assistance of multilateral donors. Getting to know the problems is one thing and amending those is altogether a different issue. The central bank will have to implement some reforms that might prove painful for bank sponsors and others concerned. Is BB ready for that?