Financial Reporting Practices in Private Sector Commercial Banks of Bangladesh

Abstract

Banks as the most important functionary of the financial system play a dynamic role in the economic development of a nation through mobilization of savings and allocation of credit to productive sectors. Most individuals and organization make use of banks either as depositor or borrow or investor. Hence, there is a considerable and wide-spread interest in the well-being of banks and in particular their risks, solvency, liquidity and profitability. It is expected that these aspects of banks will be disclosed fairly and timely basis through financial and other reports prepared by the management of the banks so that the users of these reports can make wile decisions. The present study on Financial Reporting Practices in Private Sector Commercial Banks of Bangladesh has been conducted to evaluate the accounting and reporting practices of the banking sector in private sector. Accounting and reporting practices are guided by a multiplicity of rules, regulations, and professional requirement and also depends on the willingness of management. The objectives of the study were: to identify the reporting requirements of private sector commercial banks in Bangladesh; examine the extent of disclosure in the financial reporting by private sector commercial banks in Bangladesh; examine the consistency of disclosure among different categories of information; examine the difference between the reporting practices of Islamic and Conventional Private Commercial Banks; determine the factors influencing the extent of disclosure in the annual reports of listed Commercial Banks in Bangladesh; and provide constructive suggestion for better financial reporting of the Banking sector on the basis of the findings of the study. In examine the legal requirements of financial reporting; it has been found that The Companies Act, 1994 and The Bank Companies Act, 1991 plays the most vital role in financial disclosure of banking companies in Bangladesh. In addition, banks in Bangladesh are bound to follow the circulars issued by Banking Regulation and Policy Departments (BRPD) of Bangladesh Bank (BB) and The Bangladesh Securities and Exchange Commission from time to time. Securities and Exchange Rules, 1987 requires compliance with IASs/IFRSs as adopted in Bangladesh (these are known as Bangladesh Financial Reporting Standards and Bangladesh Accounting Standards). Among the IASs/BASs and IFRSs/BFRSs IAS-1: Presentation of Financial Statements” and “IFRS-7: Financial Instruments: Disclosure” are the widely followed standard in financial reporting of private sector commercial banks in Bangladesh. To examine the extent of disclosure in financial reporting by private commercial banks, five years’ annual reports of six sample banks that cover about 27.5% of the eligible population were studied by using a researcher developed Unweighted Disclosure Index (UDI) that contains 247 disclosure items and follows the dichotomous method where one (1) is given for any disclosed item and zero (0) is given for any undisclosed item of information incorporated in the disclosure index. Empirical findings from the analysis of the annual reports, on the basis of disclosure index, reveal that the mean disclosure of five years is 76.18 percent which was 67 percent in 2008 and 84.6 percent in 2012. The trend shows that the mean disclosure score of the banking sector is increasing. However, the rate of its increase from year to year is very high with a yearly average rate of increase 6.02 percent. The average size of annual report in terms of number of pages was increasing from year to year to a significant extent. The average number of pages in the annual reports of the sample banks was 155.2 pages in 2008 which became 330.6 pages in 2012. On the other hand, it has been observed that in 2008 about 66.67% of the banks used Bengali version beside the English version which was constant in 2009 and it gradually decreased to only 16.67% in 2012. The ranking of the banks on the basis of overall disclosure level features three banks topping the list, they are: Prime Bank Limited with a score of 87.85 percent followed by Islami Bank Bangladesh Limited with a score of 81.86% and then Bank Asia Limited with a score of 77.81 percent. But still there are some mandatory items undisclosed by the banks in Bangladesh and the mean disclosure percentage is 76.18% which implies that there are still some scopes of improving disclosure percentage in private sector commercial banks in Bangladesh. Paired sample t-test rejects the null hypothesis-1 (HO1) that there is no significant difference in the level of disclosure among the Private Sector Commercial Banks in Bangladesh. The paired sample t-test among the disclosure of different years, especially the years before and after 2010, rejects the null hypothesis-2 (HO2) at 5% level and accepts alternative hypothesis that says “There is a significant difference between the disclosure percentages between the periods before and after the supersession of BAS-30 by BFRS-7 in 2010” Among the ten categories of disclosures, a very high degree of consistency was found in the disclosure categories related to basic financial statements of which the highest consistency was seen in “Income Statement Items and Appropriation of Profit (ISA)” category. The minimum percentage of this category is 92% and the maximum is 100% while the average of this part is the highest 96.8% the standard deviation was the lowest 2.44. On the other hand, the highest standard deviation (24.29) was seen in Financial Statements (FS) category; therefore, it was the most inconsistent part of the annual reports of banking sector. Next to this the inconsistent part is General Corporate Information (GCI) category having the minimum 40.63%, maximum 100%, mean 74.79% and standard deviation of 17.11%. The paired sample test among disclosure percentage of different parts of annual report shows that 36 pairs (80%) are statistically significant difference at 95% level of confidence among the pairs. It rejects the null hypothesis-3 (HO3) and concludes that there is a significant difference among the different categories of information disclosed in the annual report of the Private Sector Commercial Banks in Bangladesh. The descriptive statistics of both the Conventional and Islamic banks indicates that Conventional banks had the higher percentage of disclosure 78.41% which was 73.95 in Islamic banks. In order to test hypothesis four, independent samples test of different disclosure categories between Islamic and Conventional banks were conducted. The test accepts null hypothesis-4: “There is no significant difference between the financial reporting practices of Islamic Commercial Banks and that of Conventional Commercial Banks in Bangladesh” at 95% confidence level. In the regression model Overall Disclosure Index (ODI) was the only dependent variable and there were eight independent variables. The model summary in Table-6.19 shows the F-Statistics 12.647 at p < 0.001 which indicates the model as a whole was well specified. The t-statistics were positive for log total asset (LTA), Earnings per Share (EPS), Debt equity ratio (DE), and Capital adequacy ratio (CAR) and negative for Log shareholders (LSH), Return on Equity (ROE), Credit deposit ratio (CD) and Listing age (LA). Log total asset (a size variable) and the listing age were the only two variables that were significantly associated with accounting disclosures at p < 0.01. The other variables, LSH, ROE, CD, DE, and CAR were not found to have explanatory power. Therefore, the null hypothesis-5 is rejected and the alternative hypothesis is accepted that there is a significant association between the extent of disclosure and some selected corporate attributes of Private Sector Commercial Banks in Bangladesh. Though, the impacts of all the variables are not equally significant. The study recommends that adequate steps should be taken by regulatory bodies to ensure full compliance with relevant accounting disclosure requirements applicable in Bangladesh; The Institute of Chartered Accountants of Bangladesh (ICAB), should be given the regulatory power that may results in compliance of reporting and quality disclosure in annual report of the companies; Those who abide by the regulatory and other reporting requirements should be awarded, whereas stern actions should be taken against the culprits in order to ensure that all listed companies comply with the mandatory accounting standards in Bangladesh; the high degree of compliance and disclosure can be related to low disclosure costs which could have resulted by giving tax shield on printing cost of annual reports. All the banks should disclose the compliance status of both the National and International Standards that will in turn enhance the confidence among international users of financial reporting. This will make the financial statements comparable and will, therefore, enhance global competition, inflow of foreign direct and indirect investment, and international listings. In order to enhance the quality and transparency of financial reporting, which is imperative to build up the confidence of a large variety of users (like investors, depositors, regulators etc.); banks should disclose all the necessary information fairly. Besides mandatory disclosure requirements, additional information should be disclosed voluntarily so that the users can take prudent decisions. The study will at least give an idea of how the banking sector of Bangladesh specially the listed private sector commercial banks are disclosing their financial information. The scope of the study can be expanded by including unlisted banks, nonbank financial institutions, manufacturing companies etc.