Auditors sound alarm as support lags and warnings go unheeded

Auditors make observations on businesses' financial reports, but no regulatory actions follow critical opinions on data mismatches or other anomalies. The accumulation of non-performing loans is just one outcome of that regulatory failure, say auditors.

This is the backdrop to repeated attempts by both listed and non-listed companies to manufacture forged financial statements.

"Neither the shareholders of a company nor the regulators take auditors' opinions into account," said Sk Ashik Iqbal, a local partner of Deloitte, one of the 'big four' global audit firms.

Despite anomalies in financial statements, companies do not face any obstacle to getting loans from banks. Listed companies get shareholders' approval of their financial statements without a hitch at annual general meetings (AGMs).

Talking to The FE, several auditors explained how challenging their job had become and that they were not always the ones to blame when companies were found to have misled shareholders and others to whom they were accountable.

Why are audit reports not serving their purpose?

Auditors do not prepare financial statements. What they do is verify the statements prepared by companies' managements and point out hidden liabilities, overstated assets, the absence of evidence of transactions and assets, and what they have found missing in the physical examination of raw materials, finished goods and inventories.

Iqbal said audited reports are prepared largely as a tokenistic exercise to ensure compliance and for other purposes, such as seeking bank loans.

"Our job has almost turned into a function of giving tick or cross marks mainly because of insufficient support from companies' managements and boards," he said.

Md. Sultan Mahmood, a chartered accountant and partner of MABS & J Partners, said they check whether the claims made by a company are right or wrong. For example, if a company claimed that it had land, the auditor would check whether the company had any mutation or other relevant ownership documents of the land.

"If the company fails to provide such documents, we will mention it in our opinions," Mahmood said. In most cases, auditors face "limited scope" to verify claims as evidence is not provided by companies' managements.

On such occasions, auditors issue qualified opinions, adverse opinions, and disclaimers of opinion.

As per local and global audit standards, a company's audit committee is supposed to sit with the auditors. The audit committee is responsible for making the company's board aware of any negligence of the management in producing evidence in favour of financial claims.

The problems identified by the auditors could be addressed promptly if the audit committee and the board played a supportive role.

"Surprisingly, the audit committees remain reluctant to communicate the matter [of negligence] to the boards," said Mahmood.

Many companies also do not have any audit committee.

Regulatory inaction

The managing director of Pubali Bank, Mohammad Ali, said the central bank and the securities regulator should have a role in addressing auditors' qualified opinions attached to financial statements.

For example, the securities regulator can impose an embargo on the issuance of dividends by a listed company if it is identified to have furnished window-dressed financial statements.

Similarly, a multinational company having qualified opinions in its financial statements can be barred from expatriating dividends to foreign shareholders.

Asked whether banks look at qualified opinions before granting loans to a company, Ali said such opinions are qualitative judgments about a company.

"We are not aware of what other banks do. But we check many documents, including the DVC (document verification code) of the financial statements," Ali added.

The BB spokesperson, Arief Hossain Khan, said banks approve loans for their clients in line with their own credit policy.

"No breach of the credit policy is allowed. The central bank's inspection teams at first want to see whether there is any audit objection against any loan that has already been disbursed."

On fresh loans, Arief said the banks themselves would take decisions on loan disbursements. "But they certainly will disburse loans considering the safety of the [specific] bank's investments."

The central bank will not interfere in any financial institution's internal operations, including sanctions of loans.

However, the accumulation of classified loans given to companies having qualified opinions about their financial performance is proof that banks have not considered auditors' opinions.

Some auditors said many state-run companies are ahead of private entities in preparing window-dressed financial statements.

For example, the qualified opinions included in the financial statements of Power Grid Company of Bangladesh for FY25 disclosed serious mismatches in assets and loans.

Among the mismatches, the company cited a loan of Tk 3.59 billion taken from the Dhaka Power Distribution Company (DPDC), but no document, according to its auditors, was found to verify the loan balance.

Surprisingly, the audited financial statements of the DPDC for FY25 did not show the loan in receivables.

"Employees of state-run companies don't have the fear of losing jobs. So, it doesn't matter if auditors have cited a large number of financial anomalies [in opinions on financial statements]," said another auditor wishing not to be named.

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