Time for forensic audit of banks!

The country's state-owned banks (SoBs) are in deep soup. One recent news report says that the banking division of the finance ministry sought Tk 150 billion for replenishing the six SoBs in next three years. Earlier, another report quoted the finance minister saying that financial health of the SoBs is not sound and the government needs to give them money to meet their capital needs and provisioning requirements.
The obvious question now: is dishing out fund the only recourse to address the problems of these banks? It is well known that problems of these banks lie mostly with bad governance and irregularities often stoked by political quarters-a culture that grew over the decades. Though some steps were taken during the 2001-2008 period for restructuring the state-owned commercial banks (SoBs) -- the then nationalised commercial banks (NCBs)-- the course of reform got strayed and reversed in later years. The ultimate goal of the reform programmes, designed and backed by the International Financial Institutions (IFIs), was full privatisation.
Reform process of these banks was gradually abandoned since 2009. Besides this, strengthening the governance of the overall banking system also got subdued. As a result, political intervention in these banks increased. Two of the much talked outcomes of such interventions are the Hallmark scam involving embezzlement of Tk 35 billion from Sonali Bank and the BASIC bank scam involving misappropriation of Tk 45 billion.  No effective action was taken by the government to penalise the masterminds of these embezzlements.
The default loan situation of these banks is also in precarious shape. The total default (officially termed as 'classified') loan of five state-owned commercial banks (SCBs: Sonali, Janata, Agrani, Rupali and BASIC) was 17.80 per cent of the total outstanding loans of these banks at the end of December, 2014. The ratio increased to 21.46 per cent at the end of December, 2015. Total classified loans in the overall banking sector stood at 8.8 per cent at the end of December 2015 which was 9.70 per cent at the end of December 2014.  
 The central bank data shows that ratio of default loans in the SCBs gradually came down from 29.9 per cent in 2007 to 11.3 per cent in 2011. But it again rose significantly in later years (Chart-1). In a similar vein, the ratio of default loans in the overall banking sector first came down and then rose significantly.  
One of the devices resorted to by central banks in bringing order in governance of banks as well as detecting and removing irregularities is known as forensic auditing. India, among others, practises forensic auditing. Early in this month, Indian Finance Standing Committee of Parliament asked the Reserve Bank of India (RBI) to conduct forensic audit of all bad loans.

In fact, forensic auditing of bank borrowers in India is not a new thing.  Commercial banks in this country regularly go for such kind of auditing which is a 'process of reviewing a person's or a company's financial statements to determine if they are accurate and lawful.' According to investopedia, forensic audit is 'an examination and evaluation of a firm's or individual's financial information for use as evidence in court.  A forensic audit can be conducted in order to prosecute a party for fraud, embezzlement or other financial claims.' Thus, forensic auditing requires special technical know-how and tools for the auditors.
According to a recent Indian newspaper report, "Top accounting firms (In India) have seen a surge in requests by banks to conduct forensic audits on borrowing companies that are suspected to be involved in fraud, or in cases where repayments to lenders have been consistently delayed." It implies that banks are becoming more serious to contain fraud or wilful default, and there is an increased pressure from the RBI to do so.
Forensic audit is yet to be encouraged in Bangladesh where the financial sector, especially the banking sector, is vulnerable to fraud and misappropriation. In both the cases of Sonali Bank's Hallmark and BASIC Bank's scams, the central bank didn't go for forensic audit although it launched special investigations.      
In India, there is an 'Institute of Forensic Accounting and Investigative Audit' which works on educating and conducting forensic audit. In Pakistan, the Institute of Forensic Accounts of Pakistan (IFAP) is an authorised body to conduct this special type of auditing.
The Institute of Chartered Accountants of Bangladesh (ICAB) is the professional body for training and conducting financial audits in the country. But members of the institute is yet to conduct any forensic audit as there is no demand or request from their clients, i. e. banks and financial institutions. Neither the central bank, nor the Bangladesh Securities and Exchange Commission (BSEC) came forward in this regard.
Only few United Nations (UN) bodies' resident offices, multinational corporations and bigger non-government organisations (NGOs) go for forensic auditing. The works are usually done by international audit teams or accounting firms like EY (formerly known as Ernst and Young) and KPMG.   ICAB officials said that some of their members have the capacity to conduct forensic audit. They also recognised that Bangladesh needs to do a lot to develop a pool of competent forensic auditors.
As the default loan scenario in the country's banking sector is dismal, it is now time to seriously think about introduction of forensic auditing.
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