Regulator targets errant auditors over links to financial statement frauds

Six audit firms are likely to be barred from auditing the financial statements of listed companies for what the market watchdog describes as their involvement in preparing fabricated balance sheets.
According to the Bangladesh Securities and Exchange Commission (BSEC), auditors from those firms overlooked serious anomalies and violations of securities rules while auditing financial statements.
A BSEC investigation also revealed their role in producing window-dressed statements published by scam-hit companies, including Ring Shine Textiles. The firms that may face an embargo are: A Hoque & Co., Ahmad & Akhtar Co., Mahfel Huq & Co., Ata Khan & Co., Shiraz Khan & Basak & Co., and Islam Quazi Shafique & Co.
These firms are part of the BSEC-approved panel of auditors from which listed companies are required to choose. The list is revised periodically to improve financial reporting standards.
"But in many cases they did not carry out their due role," said BSEC spokesperson Md. Abul Kalam.
In a statement issued last week, the regulator said it had decided to call representatives of the firms and auditors concerned to explain why they should not be declared "disqualified" for five years over their failure to raise red flags.
According to the Securities and Commission Rules, 2020, any audit firm and its engagement auditor are separately and jointly liable for anomalies identified in financial statements audited by them.
Earlier, punitive measures had been taken against some auditors over corrupt practices. Still, the regulator continued to find financial statements containing fictitious numbers.
Mr. Kalam said the BSEC had forwarded proof of such misconduct to the Financial Reporting Council (FRC) and the Institute of Chartered Accountants of Bangladesh (ICAB), which then revoked the partnerships of the auditors concerned in the relevant firms.
However, the outcome has been "not promising" as other partners of those firms were also caught committing similar illicit activities. The regulator has expressed dissatisfaction with the measures taken by the FRC against the partners.
"That's why the regulator has decided to restrict these audit firms for five years on completion of the hearings," the BSEC spokesperson said.
The firms will have to explain why they and their partners should not be restricted from all types of audit functions related to the capital market. If their explanations fail to satisfy the regulator, they will be declared "disqualified" for five years from auditing listed companies, mutual funds, and exchange-traded funds.
The securities regulator is empowered to take action against any audit firm 60 days after forwarding complaints against an auditor to the FRC and ICAB.
Anomalies in financial statements
According to BSEC findings, scam-hit Shurwid Industries produced fabricated financial statements for FY19. Despite significant anomalies and gross violations of securities rules, the auditor failed to mention these issues in the company’s statements.
Shurwid incurred losses for three consecutive years through FY17 but later showed a profit of Tk 21.25 million in FY18. In FY19, its reported profit jumped to Tk 79.25 million—a figure the regulator deemed irrational. An inquiry committee also found irregularities that the auditor did not disclose.
Ring Shine Textiles is another widely known scam-hit company, whose owners fled the country after embezzling investors’ money. The company’s financial statements were audited by different firms in successive years: Ahmad & Akhtar Co. in FY17, Mahfel Hoque & Co. in FY18, Ata Khan & Co. in FY19, and Shiraz Khan & Basak & Co. in FY20.
According to Dhaka Stock Exchange (DSE) disclosures, Ring Shine reported a profit of Tk 134.60 million in FY20. In subsequent years, however, it suffered steep losses, which ballooned to Tk 1.53 billion in FY24.
Islam Quazi Shafique & Co. audited the FY20 financial statements of Aman Cotton Fibrous, while Mahfel Hoque & Co. audited Fareast Life Insurance Company in FY18 and FY19.
BSEC officials said auditors of these companies were required to issue qualified opinions or other observations in light of the anomalies and violations of securities rules.
“But the auditors refrained from giving observations and that’s why the financial statements failed to reflect the companies’ actual financial statuses,” said a BSEC official.

mufazzal.fe@gmail.com