Righting the wrong financials  

Shamsul Huq Zahid   | Published: December 23, 2018 22:10:50

The truth about the quality of financials prepared by the companies listed on the country's bourses has started coming out, but only partially.

The securities regulator, the Bangladesh Securities and Exchange Commission (BSEC) had amended a relevant order in 2015 and formed a panel of auditors and asked all listed companies to pick auditors from the panel for auditing their respective annual financial statements. The BSEC revised the panel in 2016.

None bothered to know what has happened since then. However, a newspaper report recently said that some auditors on the BSEC panel detected anomalies in financials of a number of listed companies, including some having large government ownership.

It is a piece of encouraging news that some audit firms have decided to be bold enough to detect and publish financial anomalies in listed companies that usually are prone to hiding facts from the general shareholders.

The issue is whether the regulator concerned does take the anomalies detected by audit firms into cognizance and initiate necessary actions against errant companies. If that is not done, the very purpose of forming the auditors' panel gets defeated.

However, regulatory actions in the matters of preparing inaccurate financials or hiding facts in those have not been too many until now. The BSEC should widely publicise its actions relating to audit reports of listed companies as a measure to discourage others from indulging in similar irregularities.

One has to admit the fact that the lack of accountability and financial transparency on the part of the listed companies is one of the major weaknesses of the country's capital market.

The lack of transparency starts with the submission of financials by companies willing to go public. Most companies submit doctored financials with a view to misleading the regulator. In many cases, investors find the most financial information furnished in the relevant IPOs false and inflated. But regulatory actions on this account have been very few until now.

It has been said time and again that much of the troubles with listed companies could be avoided if the regulator concerned exercised the much-needed caution before allowing them to go public. Usually, unscrupulous companies tend to give wrong and concocted information about their financial health since it is considered the most important part by the investors while making investment decisions. It remains an important job for the BSEC to verify the information meticulously and thoroughly. Such verification may need some additional time. Yet the task needs to be accomplished.

There is no denying that the market does need a continuous flow of new issues. But to meet that need, it would not be prudent to allow wrong companies to come in. Here the regulator should follow the age-old saying; it is better to keep the cow-shed empty than having errant cattle in it.

The financials that the listed companies submit every year are not rigorously examined either by the regulator or the shareholders. Had those been reviewed seriously, many companies would have been on the dock by now.

However, the regulator could have avoided the task of reviewing the financials prepared by the listed companies had the audit firms maintained their professional honesty and integrity. Some are true to their task, but some others are not. There lies the problem.

To resolve the problem with audit work and financial reporting by the listed companies, the government after lots of foot-dragging passed the Financial Reporting Act (FRA) and constituted the Financial Reporting Council (FRC) as a watchdog under it.

The FRC is not yet visible conspicuously. But it should be, for the greater interest of the capital market and overall financial transparency in the country's financial sector.

One has to admit the fact that the stock market has been playing a far less important role in the economy than it should have. It has become more of a non-entity with an insignificant contribution to the economy that has been progressing at a decent growth rate.

A lack of investors' confidence is cited as a major cause behind the poor performance of the stock market. Financial transparency on the part of the listed companies might largely help restore that confidence.

The preparation of a panel of auditors by the BSEC for the purpose of auditing the financials of listed companies was a move in the right direction. But it needs to keep watch on the work of the audit firms and also the quality of the financials submitted by the listed companies. If and when necessary, the securities regulator should seek help of the FRC. It is important for both BSEC and FRC to work jointly to help ensure financial transparency in the country's corporate sector. 


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