The independence of the members of an audit committee is crucial for making checks and balances of the committee really effective. If the country circumstances so permit, an audit committee should be composed of and chaired by non-executive members to enable it to exercise truly objective judgment and ask the awkward and critical questions.
There are two main aspects of independence, both related to the appointment procedures. One is derived from the duration of membership of Audit Committee, and the other is the respect of strict qualification criteria to ensure that members have the required skills and expertise to exercise good judgment. Underlying independence is also the application of the safeguards against conflicts of interest that are already found in many central bank laws for appointments to key positions.
The duration of members' terms must strike a balance between building institutional knowledge and bringing in valuable external expertise. Rotation should not be too rapid since stability in Audit Committee membership requires consistency and the building of institutional knowledge. A minimum term of three years is usually considered appropriate. The duration of the terms of appointment should strike a balance between being long enough to allow members to become effective, making a useful contribution to the work of the committee, but short enough to ensure a representation of current best practice skills and knowledge and avoid a too cosy relationship with the management. For a smooth transition, staggered terms may be considered, as well as a predetermined transition period during which both outgoing and incoming members attend the committee meetings.
Qualification requirements demand that members are competent, though not necessarily experts, in the areas that fall within the committee's responsibility. The basic procedure is for Audit Committee members to be nominated by the board, subject to specific criteria to reflect diversity in technical backgrounds. Audit committees are not necessarily composed of experts, although all members tend to be conversant in financial, accounting, or audit matters. The basic requirement for all members is to be sufficiently financially literate to be able to ask pertinent questions and form objective opinions on internal controls, financial reporting, and risk management. In general, the broader the scope of the audit committee is, the wider is the necessary skills mix. In this case, one member may act as the financial expert for the committee as a whole, drawing on his (or her) experience as a senior financial officer with oversight responsibilities.
Access to resources will also be a determining factor for the effectiveness of the Audit Committee. The Audit Committee may require access to external expertise if the issues at hand are particularly complex. A training budget should also be envisaged, as external members drawn from the private sector would benefit from induction into central bank objectives and operations.
RELATIONSHIP BETWEEN THE AUDIT COMMITTEE AND THE BOARD OF DIRECTORS: The relationship between the audit committee and the board of directors is based on delegated authority. After all, one of the reasons for establishing the audit committee is to offset the practical difficulties that the board may have experienced in fulfilling this task due to alternative claims on its time and resources, especially if it does not operate on a full-time basis. A continuing dialogue between the board, management, and the audit committee, as well as more formal reporting at a pre-determined schedule is, therefore, an important element of effectiveness. Several audit committee guidelines recommend the creation of specific reporting protocols.
The chairperson of the Audit Committee plays a key role in maintaining an open dialogue with his (or her) counterparts in the central bank. He (or she) may or may not be a financial expert, but, as a focal point for communicating with the board and coordinating the internal and external audit, strong leadership qualities and the ability to establish good working relationships should also be considered among the qualification requirements.
The form of reporting depends on the relationship of the Audit Committee with other components in the central bank governance framework. The Audit Committee's formal lines of reporting are such that all findings and recommendations are directed toward the board, since the latter can challenge the internal controls and reporting policies established by management. If it is established as an independent body, a statutory board of auditors for instance, the audit committee may release a full report to stakeholders summarizing its duties and findings. Several Audit Committees established as specialist sub-committees of the board are also issuing a separate summary report as part of the annual report disclosures.
Overlapping membership and the exchange of minutes between the board of directors and the Audit Committee strengthens the relationship between the two bodies. Common membership may be envisaged between the Audit Committee and the board if the latter includes non-executive directors. This may tighten the relationship between the audit committee and the board of directors, and would help the committee better understand the board's priorities, thereby adding value to the governance system. The link between the two bodies may also be strengthened by virtue of the board secretary (rather than an internal audit official) acting as the secretary of the audit committee. Regardless of the composition of the two bodies, however, minutes of the audit committee meetings that include the rationale underlying any decisions taken should be readily available to all board members. A pre-announced schedule of meetings providing the core programme of seasonal work that the audit committee will be expected to carry out in the course of a financial year would also be helpful in terms of establishing a clear institutional allocation of responsibilities.
AUDIT COMMITTEE IN CENTRAL BANK LAWS: Audit committees have a formal authority that is either delegated by the board of directors, or directly derived from the central bank statute, or reaffirmed in a charter. Whether the audit committee is constituted in a purely advisory capacity or specific authority has been delegated to it, the board will be ultimately responsible for oversight.
An explicit reference to the Audit Committee, either in the central bank statute or in by-laws of the board, may be helpful where corporate governance principles are less developed. If a government or the central bank decides to formally establish an audit committee-in case these functions are perceived as not being adequately performed by an existing governing body-the first stage is to determine whether it is an implied responsibility of the board or whether there should be a specific legal provision referring to these functions. In the first case, it might not be necessary to amend the statute. In the second case, it may be necessary to create a legal basis for assigning explicit financial oversight responsibilities to the board. Whether this is done through statute or by-laws should be carefully considered.
While including an explicit mandate within the central bank statute may contribute to its credibility, it could also undermine the operational flexibility of the Audit Committee. Resorting to by-laws may be preferable, since this allows more flexibility to adjust the operations of the Audit Committee without having to amend the central bank statute. The Audit Committee would then be able to engage in regular self-assessments to evaluate whether its terms of reference are adequate for the pursuit of their duties. The by-laws would provide further details on the committee's objectives, tasks, functions, and composition, as well as qualification and appointment criteria for its members.
Regardless of the extent of the reference to the Audit Committee in central bank legislation, a charter is instrumental in defining the scope of an audit committee. It serves to clearly establish features such as the objectives of the Audit Committee, the source of its authority and its relationship with other parts of the organisation. A charter defines its operational procedures and provides a yardstick for self-evaluation. Various handbooks and guidelines on audit committee terms of reference have been issued, both in the private and public sectors. A critical factor in drafting the charter is to strike a balance between being flexible enough not to restrict the scope of oversight, yet specific enough not to lead to unreasonable expectations. Indeed, an open-ended mandate might lead to unrealistic claims on the Audit Committee members, conflicts with other governance functions within the central bank or unwarranted involvement in operational or management decisions.
Compiling the survey demonstrates that the terminology varies widely, and is to a large extent misleading. In some countries, the body discharging the functions of an Audit Committee is referred to as an audit sub-committee, an audit unit, an audit council, an accounting commission, an audit board, or a board of auditors. However, the term 'Audit Committee' is the most widely used with some variations due to translation.
When an Audit Committee exists, it is directly or indirectly referred to in central bank legislation. This is the case for the majority of countries, notwithstanding a bias towards statutory references. Eighteen out of 39 central bank statutes include an explicit provision on their Audit Committees, and a further two establish the Audit Committee in by-laws of the board of directors. Eight of the remaining 19 statutes that do not refer to the Audit Committee directly still provide the board of directors with the authority to establish such a committee.
The Audit Committee's core functions and operations are remarkably similar, in spite of differences in legal tradition and terminology. The Audit Committee's interaction with the board of directors and/or the internal audit department is frequently discussed in the central bank publications, many of which also refer to the existence of a charter. In spite of the fact that the number of members and the frequency of meetings vary from country to country, the existence of cross-membership with the board of directors is widespread, as most of the central bank boards include non-executive members.
Many Audit Committees are actively engaged in the central bank's reporting strategy, upholding accountability. Nearly all the central banks discuss the role of their Audit Committees in a section of their annual report which describes the activities they carried out during the year. The external auditors frequently refer to the work of the audit committee within the notes to the financial statements. Three central banks issue corporate governance statements, giving special prominence to the discharge of their Audit Committees' duties. Such disclosure is either based on the information compiled by the audit committee for the purpose of reporting to the board of directors throughout the financial year, or on the statement issued for discharging their own statutory obligations.
THE BANGLADESH SCENARIO: In the case of Bangladesh, the Governor presides over Board and Executive and Monetary Policy Committee meetings of the Bangladesh Bank (BB), the central bank. However, in line with the provisions of Section 11(3) BB Order, the Deputy Governor is empowered with equality of votes and casting votes to preside over the Board meeting in the absence of the Governor, and in the absence of Deputy Governor for any reason, any other Director, authorised by the Governor, shall preside over the meeting. Compared to many other countries, the Bangladesh Bank Order does not include provision for Audit, Risk Management, ICT, HR and Corporate Governance Committees at the Board level for making effective oversight process. However, by a Board decision, the Audit Committee has been working some years now.
STRUCTURE OF THE BOARD AND COMMITTEES: The Board of Directors of the Bangladesh Bank consists of- (a) the Governor; (b) a Deputy Governor to be nominated by the government; (c) four Directors who will not be government officials to be nominated by the government, from among persons who, in the opinion of the government, have had experience and shown capacity in the field of banking, trade, commerce, industry, or agriculture; and (d) three government officials to be nominated by the Government (Section 9). There shall be a Council hereinafter called the Co-ordination Council (section 9A), consisting of- (i) Minister for Finance as Chairman (ii) Minister for Commerce- Member (iii) Governor, Bangladesh Bank- Member (iv) Secretary, Finance Division - Member (v) Secretary, Internal Resources Division-Member (vi) Member (Programming), Planning Commission Member for co-ordination of fiscal, monetary and exchange rate policies.
There is an Executive Committee consisting of (a) the Governor; (b) the Director nominated under sub-clause (b) of clause (3) of Article 9; (c) one Director elected by the Board from among the Directors nominated under sub-clause (c) of clause (3) of Article 9; and (d) one Director appointed by the government from among the Directors nominated under sub-clause (d) of clause (3) of Article 9.
Except when the Board is in session, the Executive Committee shall deal with and decide any matter within the competence of the Board and shall keep minutes of its proceedings, which shall be submitted to the Board for information at its next meeting.
CONCLUSION: Time has come to review the Bangladesh Bank Order whether this goes in line with the developments taking place within the country and elsewhere in the world in the changing economic scenario of the digital World. For Bangladesh, it is more important to reassess the position of the central bank in view of the changing political economy of development philosophy and bring on the central bank show in tune with the changing economic perception. We should recognise the reality of difference between the situations of 1972, 1982, 1992, 2012, and 2021 and onwards and redesign our central banking and financial system to elevate Bangladesh's journey from agro-economy to industrial economy, from industrial economy to service economy and from service to knowledge economy. The central bank is the key institution that advises the government to implement its economic policy to get the demographic and digital dividend.
The article has been abridged . A fuller version of the article, under the heading 'Transparency of a modern central bank for democratic accountability', is available at the
Jamaluddin Ahmed, PhD and FCA, is General Secretary, Bangladesh Economic Association and Member, Board of Directors, Bangladesh Bank.
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