Maiden external auditors rules require auditing 80% of banks’ risk-weighted assets

For the first time, the Bangladesh Bank has formulated rules for "external auditors" aimed at ensuring standards in the financial reports of banks.

According to the "Rules for External Audit of Bank-Companies, 2024" issued by the central bank today, institutions will have to audit about 80% of banks' total risk-weighted assets in their annual audits.

The managing directors of banks have been directed to comply with the rules starting from the next audit year, 2025.

The same external auditor cannot be appointed to a bank for more than three consecutive years. Additionally, no individual related to the bank, nor any agent or representative of the bank, can serve as an external auditor, says the circular.

However, an individual can still serve as an auditor if their relationship with the bank is limited to holding a deposit or credit card.

According to the new guidelines, the external auditor will audit whether institutions have resorted to "window dressing" to inflate capital, provisioning, and profits.

Additionally, they will report on issues related to loan classification irregularities, foreign exchange irregularities, verification of expired loan information, rescheduling, and interest waivers.

A bank shall select external auditors annually. However, by August of each year, banks must issue the final appointment letter to the external auditor with clearance from the Bangladesh Bank.

Salehuddin Ahmed, a former governor of the Bangladesh Bank, told The Business Standard, "It is very good that there are now rules for the appointment of external auditors. Previously, auditors would provide reports as requested by the banks, often influenced by financial incentives, and categorise banks into A, B, C, or D. This raised questions about the credibility of these audits."

"It would be beneficial if audit firms could highlight irregularities in banks' loans and foreign exchange practices. With the new rules in place, they should be able to conduct audit activities more effectively than before," he added.

External auditor institutions must audit at least ten branches of a bank that show progressively higher levels of loans and deposits.

The external auditor firms are required to submit the interim report of the bank as of 30 September each year exclusively to the central bank. However, this report must be submitted by 30 December.

Subsequently, the bank will update its audit report based on December data by February. If needed, this timeline can be extended by another 60 days with approval from the central bank.

The audit report will encompass five types of reports, covering irregularities related to loan classification and provisioning, foreign exchange transactions, regulatory reporting, transmission of CIB information, and monthly monitoring related to liquidity preservation.

Special report submission 

If any section of the Bank Companies Act is violated, and a criminal offence related to fraud is committed, or if the required capital of the bank falls below 50% of the required capital, if the certainty of payment to depositors is disrupted, or if any serious irregularity occurs, the external auditor shall immediately inform the Bangladesh Bank through a special report.

Confidential report

The external auditor will submit a confidential report to the Bangladesh Financial Intelligence Unit (BFIU) if any irregularities are found related to suspicious transaction reporting and cash transaction reporting during the audit.

Monitoring of foreign currency transactions and loans

The audit institutions will check whether there is any violation of the prescribed regulations in the conduct of import-export activities, whether there is irregular financing in export bill discounting/negotiation/purchase.

There are now 31 qualified audit firms for auditing the financial reports of banks and non-bank financial institutions. 

The Bangladesh Bank publishes a list of eligible audit firms every two years. Last year, 21 institutions were removed from the list due to their involvement in various irregularities. Five audit firms got a new place on the list. According to the latest list, the number of qualified audit firms has now dropped from 47 to 31.

In the sixth chapter, it is said that, in view of the review of the overall financial indicators of the bank, the Bangladesh Bank may give instructions for the appointment of multiple external auditors in any bank at the bank's own expense. 

Besides, the central bank can disqualify the external auditor in cases of negligence or failure to fulfil the duties according to the provisions of the Bank Companies Act.