Compliance with Accounting Standards in Financial Reporting of Commercial Banks in Bangladesh

Abstract

Financial reporting is the most effective and widely used medium through which management communicates to corporate stakeholders the operating results as well as the latest financial position of the enterprise. Users, both external and internal, depend largely on the financial information contained in the annual financial statements duly signed by external auditors in making informed judgment about an entity. At the same time, it is a tool in the hands of management to mislead the users of financial reporting. Accounting standards are the comprehensive guidelines in preparation and disclosure of financial information and serve as the benchmark for high quality financial reporting. The prime objective of this dissertation is to examine the level and extent of compliance with Bangladesh Financial Reporting Standards (BFRS/BAS) by commercial banks in Bangladesh in preparation and disclosure of financial information. The study investigates all the regulatory and professional requirements relating to the financial reporting of commercial banks and found that a complex set of banking regulation exists in Bangladesh. Some provisions of BFRS/BAS related to disclosure are in contradiction with other regulatory requirements particularly with Bangladesh Bank Circulars. It reveals that Accounting Standards are mandatory for listed companies only. The researcher prepared a disclosure checklist containing 371 items covering all the adopted BAS/BFRS in Bangladesh. Sixty annual reports of ten banks for the period of six years from 2006 to 2011 were examined under un-weighted disclosure index method to measure the compliance level. The findings reveal that the overall mean compliance score is 73.73%, implies satisfactory compliance level over the years under study. It is found that compliance score of State-owned Commercial Bank is lowest among three types of commercial banks under study. Islamic banks on the other hand, have the highest compliance score. Bank-wise analysis shows that prime Bank Limited ranked at the top and Janata Bank Limited ranked at the bottom of the banks in terms of compliance status. The study also investigates the relationship between a number of corporate attributes and extent of compliance with the requirements of accounting standards. Seven hypotheses were tested and results reveal that there exists no significant relationship between compliance score and other independent variables (except for ROA). More specifically, compliance status does not depend on the age of the bank, total assets, total capital, return on equity, earnings per share and net profit after tax (except for ROA). The dissertation also shows the results of questionnaire survey designed for the bank executives of three categories commercial banks under study. Five hypotheses were tested to find out the differences in opinions of the respondents. Total 91 variables categorized into five groups are tested to obtain desired results. Findings reveal that there exists no significant difference in opinions of the respondents regarding compliance with most of the variables of regulatory requirements, application of GAAP and qualitative characteristics of accounting information. It implies that the respondents are in agreement that commercial banks comply most of the requirements of regulatory requirements. The test results also show significant differences in opinion for most of the variables of accounting standards and application of BFRS 7. To measure the differences in opinion of the internal and external auditors, the researcher tested five hypotheses. Total 82 variables categorized into five groups are tested to obtain desired results. Findings reveal significant differences in opinion of internal and external auditors for most of the variables of accounting and auditing standards. The study finds that Lack of overall accountability and transparency, recommendatory nature of BFRS/BAS, contradiction among legal requirements, deep-rooted culture and strong mindset of the management for minimum disclosure, Lack of implementation guidelines for BFRS/BAS application, weak monitoring and supervision by regulatory bodies particularly Bangladesh Bank, lack of professional commitment of professional accountants, complex and less understandable provisions of BFRS, Intensions to give favorable audit treatments to the client and Low audit fee are some of the dominant hindrances of compliance among others. Based on the findings, some policy implications have been suggested in this dissertation which would be of immense use to practitioners and regulatory bodies as guidelines towards improving the compliance level. Disclosure checklist of BAS/BFRS prepared for this study will be useful in further compliance studies in banking sector. Users of financial reports also can take it as a guideline to understand the disclosure status of commercial banks in Bangladesh.