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Transcript of Accountant July September 2015
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July-September 2015
IDENTIFY
ANALYZE
ACTION
MONITOR
CONTROL
RISK MANAGEMENT
BUSINESS
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Editorial 2President’s Desk 4
ARTICLESFraud Risk Management in Banking Industries: 6Strategy and Schema for Grappling the Challenges
- M Jalal Hussain FCAImplementing the Cash-Basis IPSAS: 10
The First Step in the Journey
- Doctor Wayne Bartlett CPADefaulted Loans and Risk Management in Banking Sector 13- M. Idris Ali FCAMonetary Policy Needs Consistency with other Economic Policies 18- Md. Shahadat Hossain FCARisk Management in Public Financial Sector 20
- Dr Muhammad Abdul MazidManaging Business Risks 28- Ashish Kumar Paul FCAOperational Risk – Role of Accountants in Managing 32Operational Risk in Commercial Banks
- Nigar SultanaBangladesh Economy: Performance, Problems & Prospects 41- Masih Malik Chowdhury FCACorporate Governance and Accountants 47- Dr. Rukshana BegumRisks and Risk Management in Banks 52- Md Abdus Salam FCA, FCSMaking it with ICT – for Emerging Entrepreneurs 57
- K Atique-e-Rabbani FCAEffective Risk Management in Business 59- Md. Hafizur Rahman ACA
A Study on the Compliance of Bangladesh Bank’s 65Policy Guidelines for Green Banking
- 1Md. Ahasan uddin | - 2Sabuj Chandra BhowmikLiquidity Position of Private Commercial Banks (PCBs) 78in Bangladesh: An Empirical Overview
- 1Sujan Chandra Paul ACA | - 2Abdul Alim Baser ACMA- 3Mohammad Rakibul IslamBusiness Risk Management 86- Muhammed Omar Faruk Ripon ACARisk Management by Bangladesh Bank: New Steps 94
- Raihan M ChowdhuryEnterprise Risk Management 98- Aisha Siddiqua ACAImposition of Income Tax on Employee Tax Payers on 104Medical Aid Vis-a-Vis Justice and our Constitution
- Md. Asaddar Ali FCAEvolving Business Risk Management 106- Md. Ziaur Rahman ACAManaging Risk in Banking 110- Md. Ashraful Azim FCAMicro Finance Business & Its Risk Management 117- Naznin Sultana ACAIn Remembrance of Jamaluddin Ahmed and Rezaur Rahman 123- M. Matiul Islam FCA
CONTENTS ISSN 1993-3649
"The opinions expressed in this publication are those of therespective authors themselves and do not necessarily reflect theviews of the Editorial Board of the Institute of Chartered
Accountants of Bangladesh (ICAB) or the ICAB itself."
DISCLAIMER
EDITORIAL BOARD
Chairman
Md Abdus Salam FCA, FCS
Editor
Harun Mahmud FCA
Members
A F Nesaruddin FCA
Akhtar Sohel Kasem FCA
Nasir Uddin Ahmed FCA
Md. Shahadat Hossain FCA
Gopal Chandra Ghosh FCA
Amanullah Khan FCADr. Jamshed Sanyiath Ahmed Choudhury FCA
Md. Liaquat Hossain Chowdhury FCA
Md. Rokonuzzaman FCA
Sabbir Ahmed FCA
Md. Sayeed Ahmed FCA
Mahmudul Hasan Khusru FCA
Snehasish Barua FCA
Muhammad Aminul Hoque ACA
Abdullah-Al-Mamun ACA
Zareen Mahmud Hosein ACA
Muraheb Malik Chowdhury ACAAbu Haider Mohammed Kibria ACA
SK. Md. Tariqul Islam ACA
Shah Md. Jubaer ACA
Dipok Kumar Roy ACA
Abuzer Ghaffari ACA
Mohammad Mosttafa Shazzad Hasan ACA
Bidhan Chandra Mandal ACA
Md. Yasin Miah FCA, Chairman-DRC
Mohammad Saif Uddin FCA, Chairman-CRC
Member SecretaryMohammed Emdadul Haque FCA
Technical Adviser-ICAB
Published by the Editorial Board of the Council
The Institute of Chartered Accountants of Bangladesh (ICAB)CA Bhaban, 100 Kazi Nazrul Islam Avenue, Dhaka 1215Tel : 9117521, 9112672, 9115340, 9137847
Email : [email protected]
Website : www.icab.org.bd
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The Bangladesh Accountant July - September 2015 03
Md Abdus Salam FCA, FCSChairman, Editorial Board andCouncil Member & Past President-ICAB
cent of the national economy..
Finance Minister AMA Muhith, MPdeserves congratulations for
bringing the issue into the open for
all to discuss and create public
awareness against such a social
scourge. Also Financial Institutions
need a prudent approach to
identify the possibilities where
such crimes may happen and to
protect the organization from the
crimes. This issue of theBangladesh Accountant
(July-September 2015) deals with
such facts those affect the
economy in covertly and discussed
way forward to get rid from the
risks.
It is my privilege to communicate to
you, the distinguished Members of
this noble fraternity of accountancy
profession through this journal
covering some crucial economic
issues of the country. The honorable
writers have come up with their
diversified thoughts regarding
business risk management in this
issue.
Dear esteemed Members, we seek
your good self to kindly give us
your feedback about the articles,
contents and any other matterswhich may enrich our only CA
professional mouthpiece. Your
valuable suggestions and opinions
will highly be appreciated.
Please accept our heartiest
greetings on Eid-ul-Azha.
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July - September 2015 The Bangladesh Accountant04
Grooming up members
with recurrentprofessional issues
PRESIDENT’S DESK
This issue of the BangladeshAccountant would reach to your
hands in a critical juncture; the
Institute of Chartered Accountants
of Bangladesh has passed through
& entered into. As we are allaware, recently Jatiya Sangsad (JS)
has enacted the Financial
Reporting Act (FRA). This has led
us in a new confronting situation.
The Council of ICAB had tried its
best to make the Law more
functional in our country
perspective. Sequentially the
Council had divested the time &
efforts to this end. Despite our
tremendous persuasion, the
Government has finally enactedthe Law. It ignored ICAB’s few
recommendations without
pondering our neighbouring
countries practices. We have to
search for ways & means to find
out a respite for us & the way
forward.
We need to observe how the
Financial Reporting Council under
this Law would serve the very
purpose with its composition.Pertinently, Members do not have
working knowledge in accounting
profession especially Financial
Reporting. Apparently FRC would
be professionally dependent on
professional body like ICAB.
However, we are ready to extend
our adroit hands to it and the
Nation for betterment of the
country. We have to do everything
for the betterment of Chartered
Accountancy Profession as well bysowing the seed of a stronger
relationship with the government
& the regulatory bodies. Now we
have to very closely observe the
entire formation process of
Financial Reporting Council (FRC).
We are still working to reaping outoptimum outcome from the FRC
under FRA.
Chartered Accountancy is a
globally acclaimed prestigious
profession. To bring more
dynamism in education, training
and workshop, we are giving
relentless efforts. The
brainstorming actions like training,
workshops, seminars, conference
were organized frequently forMembers so far of the year. CAs as
stakeholders always aspire in quest
of searching knowledge &
wisdom, which was manifested bytheir large scale response to our
Training & CPD programmes. It is
widely believed that such capacity
building would benefit ICAB in
coming days. For major
operational challenges of ICAB,
new fronts are in the offing with
more dynamic operational peoplein coming months.
ICAB has always been searching
for new front where from the
members of the Institute would be
benefited. On 26 July 2015 a
Memorandum of Understanding
(MoU) was signed between ICAB
and CPA Ireland in ICAB Council
Hall. Under this MoU, the two
Institutes will have a partnership
relating to the distribution ofuniquely designed online CPA
Certificate in IPSAS™. This
agreement is aimed at building a
strategic partnership, which
includes mutual pathways to
Membership signed between the
two bodies way back in 2012
through a MRA- MutualRecognition Agreement.
Together with Finance Ministry,
ICAB is working to strengthen
Financial Reporting Framework for
Public Sector Entities under a
project of the World Bank. We
believe that if ICAB and the
Regulatory Bodies responsible for
auditing in public entities, work by
joining hands, the financial sectors
of the country will be stronger.This would also ensure best use of
public revenue.
With the allocation from the ICTMinistry, developing of
comprehensive ERP (Enterprise
Resource Planning) software is in
full swing. An integrated
information system in ICAB is
going on and the task would be
completed in five phases
envisaged in a roadmap. IBCSPrimax Software (Bangladesh) Ltd
will do the work. A steering
committee of ERP Project
Sub-Committee of ICT
Committee-ICAB has been
overseeing the proper
implementation of ERP System.
For the first time, ICPE organized a
day long workshop on "How to
Maintain Quality in Audit and
Assurance Services" for CAStudents on 18 August 2015. In
order to maintain world class
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Masih Malik Chowdhury FCAPresident-ICAB
The Bangladesh Accountant July - September 2015 05
education environment, ICAB
refurbished its new rented campus
building. A private Universityunder ICAB has been approved by
Council –ICAB is on cards for
seeking approval from the
government. We shall not leave
any stone unturned to draw
brighter & meritorious students
into this profession.
Training is a regular & routine
function of ICAB. This year ICAB
re-named its Training Centre as
ICAB Center for ProfessionalExcellence (ICPE). It will impart
training, workshops & seminars on
professional issues anew & afresh.
It will pick up recurrent
discussions with stakeholders &
regulators and at the same time
undertake need based schemes inICAB.
ICPE has organized the 3rd
consecutive yearly training
program on IFRS & IAS forBangladesh Bank Officials. It was
inaugurated by Deputy Governor,
Bangladesh Bank Mr. Abu Hena
Mohd. Razee Hassan on 2 August,
2015. Recently a two-day long
workshop on the IPSAS was
organized jointly by ICPE and CPA
Ireland with large participation
from the Members of the ICAB.
The workshop particularly focused
on IPSAS and its application in
Bangladesh. CPA Ireland publicfinancial management adviser Dr.
Wayne Bartlett conducted the
workshop as the resource person.
Under an MoU CPA Ireland and
ICAB would jointly conduct online
Certificate Courses on IPSAS for
the Members of ICAB.
Grooming up the Members with
recurrent professional issues ICAB
organized CPD seminars and
Members’ conferences. Members’
conference on ‘International
Public Sector AccountingStandards (IPSAS) on 25 July was
made unique with Dr. Wayne
Bartlett, Specialist in Public Sector
Financial Management and
Eamonn Siggins, Chief Executive
Officer, the Institute of Certified
Public Accountants, Ireland as itsresource persons. Mr. Siggins
described their new learning
method and program on online
learning materials and modules of
IPSAS prepared by CPA Ireland.ICAB Members can customize the
modules of IPSAS in the line of
practice & country perspective.
Our rigorous initiatives and efforts
are all for enrichment of our noble
profession. Just before enactment
of FRA, to disseminate ICAB’s
stand, the Financial Express on 13
August 2015 published my
interview over the issue with due
importance. In that interview, Istressed for an effective
functioning of the proposed
Financial
Reporting
Council (FRC).
I reminded that
effective result
reaping out of FRC
would remain a far cry, if
the formation of the body
would not be need based.
"The FRA will fail to yield any
better results as it does not have
any provision for the professional
improvements and corporate
discipline, I also told the FE”.
Finally we can say, FRA is the
outcome of wrong "Public
Perception". It will be proved in
future. Meanwhile we must to rise
against any shortcomings that we
have, amongst the professionals.
We must prove once again that we
are the best professionals who
bear a social as well as operational
responsibility in the economy of
the country.
My heartiest greetings remain to
all the Members of my fraternity
and Eid Mubarak.
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July - September 2015 The Bangladesh Accountant06
IntroductionThe sardonic occurrence of fraud has
taken place in recent times at the
globalized world. All types of business are
susceptible to fraud. Fraud is ubiquitous
within organizations and remains a staid
and costly problem for virtually every type
of organization in every part of the world.The risks of fraud may has been on the
rise, as we see growing globalization,
more acrimonious markets, swift
developments in technology, and periods
of economic difficulty. Banking sector
industries especially handle monetary
transactions of their customers located at
different countries around the world,
confront the greater risk of fraud by the
fraudsters. Spectacular financial and
banking sector corporate downfalls and
frequency of major frauds between theyears 2008 to 2014, have abruptly
focused the cognizance of the
stakeholders, directors and regulators the
extreme need to fathom, manage and
contain the fraud risk. Financial crime and
fraud have become prominent with the
rapid globalization of world and the
financial institutions like bank need to
launch comprehensive fraud prevention
and detection programs. Despite the
serious risk that fraud presents to banking
business, many banks still don’t haveprescribed systems and procedures in
Fraud Risk Management in BankingIndustries: Strategy and Schema for
Grappling the ChallengesM Jalal Hussain FCA
place to prevent, detect, delve and
respond to fraud. Frauds stand as bigger
threat to banking sector than ever before.
Various research and analyses show that
banking sector industries which vigorously
cope with their fraud risk gain, benefit in
terms of plummeting the undesirable way
of frauds. Fraud risks in banking sector
industries have been considered as the
greatest challenge of the time.
What is Fraud?
There’s no universally accepted definition
of fraud. It fundamentally embroils using
fraudulent devices to gain personal
benefits at the cost of others. Frauds are
committed both internally and externally
by individuals or group of individuals.
Fraud embraces an eclectic range of
illegitimate practices and illegal actionsconnecting deliberate dishonesty or
falsification. The International Professional
Practices Framework (IPPF), a Conceptual
Framework of Institute of Internal
Auditors, defines fraud as: “any illegal act
characterized by deceit, concealment, or
violation of trust. These acts are not
dependent upon the threat of violence or
physical force. Frauds are perpetrated by
parties and organizations to obtain money,property, or services; to avoid payment or
loss of services; or to secure personal orbusiness advantage.”
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The Bangladesh Accountant July - September 2015 07
It’s highly essential to know
different types of fraud,
embezzlement, misappropriation
and misdeed that are happening off
and on in banking industries for
effective fraud risk management.Different types of frauds are
prevalent in banking sector
industries. These are broadly
classified as (a) fraud by insiders
and (b) fraud by outsiders.
Fraud by Insiders
Rogue traders
Fraudulent loans
Wire fraud Forged or fraudulent
documents
Uninsured deposits
Theft of identity
Demand draft fraud
Fraud by Outsiders
Forgery and altered cheques
Stolen cheques
Accounting fraud
Bill discounting fraud
Cheques kiting Credit card fraud
Counterfeit credit cards are
known as white plastics.
Booster cheques
Stolen payment cards
Duplication or skimming of
card information
Impersonation and theft of
identity
Fraudulent loan applications
Phishing and Internet fraud Money laundering Forged currency notes
Hi-tech crime
International crime
No-scene crime
Faceless crime
Strategies for Prevention of
Frauds in Banking Industries
From the long time research on
fraud reduction strategies,prevention and disavowal are
considered as one the best
strategies. Prevention is better than
a cure, the universal adage, hasbeen proved to be the most
effective strategy for fraud risk
management. Preventive controls,
measures and ways are designed tohelp reduce fraud,
misappropriation and
embezzlement from occurring in
the first place. The following group
can play an important role in
disavowal of frauds in banking
industries:
Leadership and Governance
The Board of Directors of a
banking industry plays a significantrole in controlling dereliction by
the senior management that helps
prevent frauds and misconducts to
a great extent. The Board is
responsible for setting the standard
of control as the “tone of the top”
and ensure that institutional
support is established at the highestlevel for ethical and accountable
business practices. Board of
Directors has special duty to
ensure that it has active policy andplanning to thwart and encounter
risk of frauds and wrong doings. It
should:
• Review and discuss the issues
relating to entity’s fraud and
misconduct assessment with
the concerned departments;
• Establish code of conducts and
related standards for the
managers of the entity;
• Review and discuss with
internal and external auditors
and take actions on their
suggestion for anti-fraud
strategies.
Senior Management
Senior management to help ensure
fraud control remains effective in
line with international standard.Fraud and risk management
AN EFFECTIVE
WAY TO PREVENT FRAUD
IN THE BUSINESS IS TO
CREATE A POSITIVE
WORK CULTURE. IT’S
IMPORTANT THAT THE
BUSINESS OWNER AND
SENIOR MANAGEMENT
SERVE AS ROLE MODELS
OF HONESTY,
UPRIGHTNESS,
TRUTHINESS AND
INTEGRITY. SET CLEAR
STANDARDS EXAMPLE
AND ZERO TOLERANCE
POLICY FOR FRAUD.
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approach should be shared with
the managers and staff. The Chief
Executive Officer (CEO) is ideally
positioned to influence and guideemployee actions through his
executive leadership. CEO canlead by example, allocate fund for
antifraud efforts and hold
management responsible for any
fraud occurrence. The CEO should
identify the weak and vulnerable to
fraud areas and take steps to
prevent frauds before happening.
Employee & Third Party Due
Diligence
An important part of an effectivefraud risk prevention strategy is the
use of due diligence in firing,
hiring, retention and promotion of
employees, agents, vendors and
other third parties. Such diligence
may be especially important for
those employees having an
authority over financial reporting
process. Screening of vendors,
agents, consultants and temporaryemployees who may have access
to confidential information anddata, may help prevent fraudulent
device.Screening applicants
thoroughly before hiring the right
employees is the best way to stop
fraud before it happens. It’s a good
idea to perform background checks
on potential employees.
Implementing internal controls to
reduce fraud risk is one of the best
strategies.
Be a Role Model and Lead byExample
An effective way to prevent fraud
in the business is to create a
positive work culture. It’s
important that the business owner
and senior management serve as
role models of honesty,
uprightness, truthiness and
integrity. Set clear standards
example and zero tolerance policy
for fraud. Every banking industryshould establish a system that
makes it easy for employees,
vendors and customers to
anonymously report suspected
fraud activities.
Strategies to Detect Fraudsin Banking Industries
Detecting controls are archetypes
to unearth fraud, misappropriationand embezzlement in banking and
financial industries. The followingsteps may help delve fraud andcorruption in banking industries:
• Fraud Delving in Real Time:Fraud, whether less or more, is
dangerous for businesses. Evenanything less is ahole-in-the-wall for thecriminals to get away. For
batch processes, the scoringengine should evaluate thetransaction, and anauthorization or declinedecision should take placeprior to funds movement.
• Analysis of Data: Proper
analytics is the only way toactually detect fraudulentpatterns of behavior efficiently.
The output of the analysisshould contain a customerscore, which determines howthe activity corresponds to thecustomers’ actual behavior. Atransaction fraud score, which
determines the fraudulentnature of the transaction.Understanding customer
performance isindispensable—it helps reducethe impact on the customers
and the fraud operation byreducing false positives.Certain customers transact inways that may appearfraudulent. Ultra-high-net
worth individuals are morelikely to spend at higher edgesand in more outlandishinternational locations. Small
business owners may havemore unpredictable payment
activity and online banking
activity that takes place at widely
varying times, not just during
normal business hours. There
are far too many nuanced
variables within the
customersand the criminals’behavior for verge rules to be
effective. Both good and bad
behavior changes
unpredictably over time.
• Road Map for Fraud
Detection: A well planned
workflow is highly important
to solving challenges with
fraud resources. Financial
institutions have many studs to
work through to correct andmanage each customer’s fraud
issues. Specific actions, data
and processes are required to
manage each type of fraud
case and to use as evidence for
prosecution as per law.
Depending on the type of
payment swindled, there are
specific steps required to make
the customer whole, and every
step to back out the transaction
creates operational costs. Acohesive and flexible
workflow engine allows
analysts to consolidate and, in
many cases, automate the
remediation process.
• Effectual Rules Engine: The
rules engine links the analyticscoring to an action based on
the currently available
information. Rules are
essential to react swiftly to shutdown fraud, and facilitating
management and
documentation of the
processes used to define and
refine the actions, in a
repeatable and auditable
manner.
Strategies to Retort Frauds
in Banking Industries
Retort controls are designed to takecorrective action and remedy the
July - September 2015 The Bangladesh Accountant08
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the fraud, corruption, inefficiencies
of the management of the banking
institutions. Omnipresence of
effective fraud risk management
system would have prevented such
type of loan scam and would havesaved the banking institutions from
incurring massive loss.
Conclusion
Fraudsters while committing frauds
never discriminate. Frauds and
misappropriation can happen in
large or small companies across
various industries and geographic
locations. Occupational fraud can
result in huge financial loss, legalcosts, and ruined reputation and
goodwill that can ultimately lead to
the downfall of an organization.
Having the proper plans in place
can significantly reduce fraudulent
activities from occurring or cut
losses if a fraud already occurred.Making the company policy
known to everyone from top to
bottom, is one of the best ways to
deter fraudulent behavior.
Following thoroughly with thepolicy and enforcing the noted
steps and consequences when
someone is caught is crucial to
preventing fraud. The cost of trying
to control and prevent fraud is less
expensive to a business than the
cost of the fraud that gets
committed. Banking sector
industries today face increasing
pressure to implement robust fraud
protection, prevention, and
response efforts with a strongemphasis on maintaining the
institutions’ safety and soundness.
Legal and structural support from
the governments are sine qua non
for effective fraud risk management
in both developed and developing
countries.
The Author is the CFO of a
private group of companies and
a Fellow Member, ICAB
The Bangladesh Accountant July - September 2015 09
loss and harm caused by fraud. The
following steps may help in to take
action on frauds spotted:
Investigation: When information
relating to potential or actual fraudand corruption is uncovered,
management should be prepared
to conduct a comprehensive and
objective investigation. The
purpose of such an investigation to
gather facts leading to a
trustworthy assessment of the
suspected violation so that
management can decide an
all-encompassing and effective
course of action.
Develop a Risk Response Strategy
Once the risks have been identified
and assessed, strategies to deal
with each risk identified can be
developed by line management;
with guidance from risk
management group. Strategies for
responding to risk generally fall
into one of the following
categories:
• Risk retention
• Risk reduction
• Risk transfer
The chosen strategy should be
assigned and conversed to those
responsible for execution.
Enforcement and Accountability
An unswerving and trustworthy
disciplinary system is a
fundamental control that can be
operative in daunting fraud and
corruption. By authorizing
meaningful sanctions, management
can send a signal to both internal
and external parties that the entity
considers managing fraud and
corruption risk a top most
anteriority. Senior managers,
manager and senior staff should beheld accountable for any fraud or
corruption on their part or on the
part of their subordinates.
Appropriate action is needed to be
taken as written warning,
suspension, pay-cut, transfer,
demotion or termination, legalaction, if necessary to realize any
amount embezzled.
Fraud Risk Management in
Banking Sector in Bangladesh
In the context of Bangladesh,
effective fraud risk management is
extremely essential. The increase
of non-performance-loans (NPL) in
both public and private sector
banking institutions, the alarmingloan scam, notably of Hall Mark
and Destiny Group and increase of
classified loans are really worrying.
A mammoth amount of bad loans
of Tk 15,667 crore was written off
during the last five years which
was almost half of such loans
erased by the banks from their
balance sheets since the system of
loan write-off was introduced in
2002. According to Bangladesh
Bank, loans of Tk 31,500 crorehave so far been written off as of
March 2014. Annual average
amount of write-off loans stood at
Tk 3,066 crore in the last five
years, while it was about Tk 1,583
crore till 2009.
Meanwhile, corrupt bankers are
funneling loans worth crores of
taka to businessmen backed by the
country’s corrupt leaders,
accepting mimic, forged andfabricated documents and ignoring
the collateral security rules. In
August 2014 the central bank
unearthed a 36 billion taka loan
scam at one of the country’s largest
bank, where loans were granted to
a little-known business house
without the minimum collateral
required as security. The present
uneconomic and financially
undesirable situation in this sector
demands effective fraud riskmanagement that helps bring down
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July - September 2015 The Bangladesh Accountant10
It is rather strange that for many years inmany countries it has appeared to have
been the case that lower standards of
financial reporting for the public as
opposed to the private sector have been
acceptable. Various reasons have been put
forward for this: lower accounting
capacity in the public sector, less resilient
financial systems and the fact thatsomehow public servants do not see
public funds as ‘their money’.
All these factors may be present but when
you reflect on their existence it is
somewhat surprising and illogical. It
doesn’t really make sense that sums of
money as large as those invested in the
public sector of pretty much every country
in the world are not looked after with
more care. There is a need to ensure that
not only are controls in place to ensurethat money is spent ‘legally’, in
accordance with the law of the land, but
that it is also spent effectively. Good
quality financial reporting, which reveals
large amounts of important information on
how much has been spent and what
outcomes have resulted, is a key way into
helping stakeholders hold public sector
bodies to account, not just against the
strict letter of the law but also in terms of
achieving results.
So the moves that Bangladesh is making
Implementing the Cash-Basis IPSAS:The First Step in the Journey
Doctor Wayne Bartlett CPA
towards the effective implementation of
financial reporting based on the IPSAS
(‘International Public Sector Accounting
Standards’) framework are welcome and
important. It is of course much easier to
‘adopt’ such Standards than to
‘implement’ them. But the steps that are
being taken should have significant
benefits for key stakeholders in
Bangladesh – especially citizens – though
they are just the first in a journey that
needs to be taken to enable the country to
benefit from fully comprehensiveaccruals-based information in the medium
to longer term.
The ‘IPSAS’ framework has been
developed under the auspices of IFAC, the
International Federation of Accountants.
Under the guidance and direction of the
IPSAS Board (‘IPSASB’) a suite ofAccounting Standards have been
developed: at the latest count there were
37 of these using accruals accounting
principles, many of which are based on
equivalent IFRSs, and a Cash-Basis
Standard which deals with a cash as
opposed to an accruals accounting
environment. It is this Cash-Basis Standard
that Bangladesh is in the process of
implementing.
There are two key financial statementsrequired by the IPSAS Cash-Basis
Standard. The first of them is the
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The Bangladesh Accountant July - September 2015 11
Statement of Cash Receipts and
Payments. This requires an entity
to present its cash receipts and
payments for the financial year as
well as its opening and closing
cash balances if it has any. Notethe terminology: we talk about
‘receipts’ rather than ‘revenue’ or
‘income’ which is a term
associated with accruals rather
than cash accounting. And we do
not concern ourselves with any
assets other than cash or bank
balances. It is in effect a simplified
cash flow statement for the public
sector.
The second financial statement isthe Comparison of Budget to
Actual. This requires the
comparison on a consistent basis of
actual payments and receipts to the
original and final budget for the
year. It is if you like a simple form
of variance analysis enabling the
reader of the financial statements
to see how actual receipts and
spend compare to what was
planned.
We should not ignore the
disclosure requirements that are
part of the Cash-Basis Standard. All
of the IPSASs, accruals or
Cash-Basis, include a number of
requirements concerning
disclosure notes that add additional
information which enrich the
numbers that are included in the
financial statements. These are
crucial and every bit as important
as the numbers themselves. Thefinancial statements paint a picture
but it is somewhat abstract in
nature. The notes help the reader
to interpret that picture, to
appreciate its inner meaning. The
Cash-Basis Standard is no
exception. It has important
additional things to say that go
beyond the numbers. The
disclosures give the numbers true
meaning by explaining more about
their context.
The IPSAS Cash-Basis Standard is
in two parts. The first of them ismandatory and defines what
should be included in the core
financial statements and the
disclosure notes that accompanythem. The second part is
non-mandatory and has a number
of ‘encouraged’ additional
disclosures. These concern issues
such as assets (both short-term
receivables and longer-term
Property, Plant and Equipment for
example) and liabilities such as
payables and provisions.
These additional disclosures are
substantially based on what wemight call ‘accruals-type’
information. They serve several
purposes. Most importantly
perhaps they provide crucial extra
insight into matters that are not
adequately covered by cash-based
information. In a cash accounting
regime once the initial expenditureon an asset has been spent, the
asset gets effectively forgotten
about in accounting terms.
This is again slightly strange. The
assets owned by the public sector
are, in terms of value, truly
enormous. They include buildings,
bridges, roads, machinery,
vehicles. It is difficult to accept that
in accounting terms these are items
that have no ongoing value to the
public sector and the citizens that
benefit from public services. But
adopting an accounting approach
based on the cash basis ofaccounting means that this is
exactly what happens.
Of course the move to
accruals-based accounting and
reporting within the IPSAS
framework will not be easy. It will
challenge both students andeducators. Research from many
countries suggests that a major
accounting transition on this scale
can stretch public sector educatorsto the limit. In this context, it is
IN THE LONGER
TERM WE AS
ACCOUNTANTS NEED TO
ENCOURAGE THE
DECISION-MAKERS IN
THE PUBLIC SECTOR TO
ADOPT BETTER
INFORMED REPORTING
AS ENSHRINED IN
ACCRUALS
ACCOUNTING. OF
COURSE WE NEED TO BEREALISTIC; IT TAKES
TIME TO COMPLETE A
JOURNEY OF THIS
MAGNITUDE. AND THE
MOVE TO CASH-BASED
ACCOUNTING BASED ON
THE IPSAS STANDARD IS
AN IMPORTANT FIRST
STEP.
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The Author is a Member of
CPA Ireland
perhaps timely to remind ourselves
that ICAB have recently signed a
Memorandum of Understandingwith CPA Ireland regarding the
distribution of the latter’s on-line
‘IPSAS Academy’ materials. This is
a unique offering which enables
students to access comprehensive
interactive guidance on IPSAS in
an e-learning environment and use
the knowledge they have
assimilated to deal with a number
of simulated scenarios relating to
the subject matter. It has already
proved itself to be a popular andvaluable aid to students in
countries that have adopted IPSAS
accruals as their chosen accounting
and reporting framework.
In the longer term we as
accountants need to encourage the
decision-makers in the public
sector to adopt better informed
reporting as enshrined in accruals
accounting. Of course we need to
be realistic; it takes time to
complete a journey of this
magnitude. And the move to
cash-based accounting based on
the IPSAS Standard is an importantfirst step. But it should not be seen
as the final destination. There is a
difference between being
unrealistic and unambitious.Without challenging targets, we
would have no planes, no cars, no
internet; all things that would once
have been considered impossible.
We expect inventors to challenge
the norm: why not accountants?
July - September 2015 The Bangladesh Accountant12
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The Bangladesh Accountant July - September 2015 13
Banking sector plays a vital role in theeconomy of a country. Banking system is
the custodian of all deposits of
Government, private sector, individuals
including foreigners, in other words the
entire nation. Banks lend out owners’ and
depositors’ money and earn interest on it
to meet the operational expenses andmake profit finally. If the borrowers do not
repay or fail to repay the lent out money
the defaulted loans make the bank a losing
concern. The accumulated losses hit
owners’ capital and depositors’ money
and ultimately the bank runs into
bankruptcy and if a bank becomes
bankrupt it affects the economy and image
of the country abroad. Here comes the
necessity of risk management in a bank.
The practice of risk management beginswhile appraising a loan. Accurate and
professional appraisal must be done
before disbursement. If appraisal cannot
detect or ignores key points of risk of
recovery, then the loans are very likely to
be defaulted. Sometimes points of risks are
ignored willfully for personal benefits or
under pressure from high-powered
Defaulted Loans and Risk Management in Banking Sector
M. Idris Ali FCA
executives or the Board members who, on
the contrary might be pressurized by the
political leaders. Consequently defaulted
loan stems up as a cancerous element for
any bank. Because once defaulted, it
involves lots of persuasive
actions,correspondence, arbitration etc
failing which legal suits, shuttling between
the court and office and the processcontinues for years. In Bangladesh in the
case of state-owned banks risk
management is very poorly or rarely
practised although private banks imposes
some importance on risk management. As
a result currently total defaulted loans in
the banking sector amount to Tk 54,657
crore out of which the state-owned banks
alone are rearing 30,071 crore Taka.
Privately-owned banks have Tk 22,747
defaulted loans out of disbursed loans ofTk 3,77,000 giving percentage of 6.0%. A
chart of eighteen banks including nine
Government-owned banks having
defaulted loans is given below showing
disbursed loan, defaulted loans and
percentage:
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July - September 2015 The Bangladesh Accountant14
In the first part of this article I wish topresent some facts and incidenceshow defaulted loans arose in thestate-owned banks and what is the
current status of those defaultedloans. On taking over charge fromhis predecessor the PresentChairman of Basic Bank said in aManagers‘ meeting that “It is notirregularity, it is dacoity that hastaken place in our bank, but suchdacoity will no longer be allowed tohappen in future, now it is time toturn the Bank into solvent one and toregain the confidence of depositorssteps will have to be taken in all
phases.” In fact compared to thequantum and nature of irregularitiesthat have happened in Basic Bank,the statement of the chairman wasnot an exaggeration. But hisdissatisfaction, at the same timeassurance had indicated that a fewdacoits will be caught and punished,but so far no visible action has beennoticed. This bank was in a far betterposition in the past, had defaultedloan of about 5% only and used to
pay dividend to Government. Thesituation worsened just within a span
4 to 5 years during formerChairman’s tenure. This bank lent totop 100 defaulters an amount of4,085 crore Taka which was 89% of
total disbursed loans. As on 30th June 2014, the bank had totaldefaulted bad loans of Tk 4,591crore. This amount was lent toalmost 1500 individuals andcompanies/ entities most of whichare owned by one person in groupsand have no addresses. On closingof the year 2014, the state-ownedbank kept aside an amount of Tk2,999 crore in the Financialstatements on the plea that these
loans were disbursed during theperiod of previous Board and theborrowers are non-existent. In facttotal loan balance was shown at Tk8,939 crore although it should havebeen Tk 11, 939 crore and bad loanswere shown at Tk 5,109 crorealthough it should have been Tk8,108 crore. The difference of Tk2,999 crore is hidden,in other wordsmight have been written off. It has tobe noted that Paid up capital of Basic
Bank has been contributed from thetax payers’ money who are public in
RISK
MANAGEMENT IN A
BANK IS EVERYONE’S
RESPONSIBILITY, NOT
JUST THE RISK
DEPARTMENT’S.
LEADERSHIP MUST
NOT ONLY ESPOUSE A
VISION BUT ALSO
BEHAVE IN A MANNER
CONSISTENT WITH IT
AND DEMONSTRATE
TO EMPLOYEES THAT
PRUDENT RISK
MANAGEMENT IS A
CORNERSTONE TO
SUCCESS.
Taka in crore
BANK Disbursed loan Defaulted loan percentage
State-owned:
Basic 8,964 5,080 56.67%Sonali 29,045 8,323 28.66%
Agrani 21,663 4,116 19.0%
Janata 29,907 3,888 13.0%
Rupali 12,470 1,247 10.0%
Krishi 16,308 5,373 33.0%
Rakab 4,450 1,441 32.39%
BDBL 1,409 603 42.81%
Commerce 1,541 495 32.14%
Private and Foreign:
ICB Islamic 920 713 77.49%
NBP 1,563 828 53%
St Bk of India 416 100 24%Habib Bk 388 87 22.23%
Wori Bk 233 24 10%
Std.Chartd 10,516 573 5.45%
Al Falah 677 37 5.45%HSBC 6,264 153 2.45%
City NA 1,000 21 2.13%
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general. If the Bank earns profit thestate or people will get dividend, ifit incurs loss the state or peoplewill lose. The defaulted loanswhich will add to loss of the bank
could be used for developmentwork of the country. Due to badloans capital shortage or deficit ofthe bank is now Tk 3,634 crore. Inthe budget of 2015-2016 fiscalyear a lump sum allocation of Tk5,000 crore has been made to bailout the state-owned banks.Obviously this money will be usedfor making good the deficit. Thustax payers’ money will bail out thesick state-owned banks
continuously for years wastingpublic funds.
The largest state-owned bank,Sonali has an amount of Tk 8,323crore defaulted loans againstdisbursed figure of Tk 29,000 croreindicating a percentage of 28.7%.Sonali Bank had a far betterposition earlier about 2 years backbefore happening of the Hallmarkscandal. Hallmark scandal was
unique and dangerous oneinvolving not only the executivesand officers of Sonali Bank, butalso involving those of otherstate-owned and private banks.This was a cunning forgery for theentire banking practice. If theaccused persons are not punishedbanking sector may face same typeor more clever forgeries in future.Among the state-owned banksAgrani Bank stands third in rank in
respect of defaulted loans showingpercentage of 19% of disbursedloans which is not acceptable.
Janata bank ‘s defaulted loansindicate percentage of 13% ofdisbursed loans which was mainlydue to Bismillah Group’s defaultrecently. These five state-ownedbanks have lost about ten thousandcrore Taka by way of defaultedloans which are very unlikely to berecovered. Except the M.D of
Hallmark Group, the defaulters areat large,touring all over the worldand some of them have bought
houses, cars abroad which they areenjoying. Some of the defaultersseem to be so much powerful thateven the Govt. has failed to detainand take action against them. In
some cases top officials and seniorexecutives of the banks are alsoinvolved, but no action has beentaken against them. This fact isclear from a recent (July) statementof the honourable Minister ofFinance during his budgetsubmission that the defaultersbelong to Government party,hence it is difficult to take actionagainst them. He has alsomentioned that due to corruption
GDP of the country goes down by2 to 3 percent. The Minister mustbe thanked for his honest andsincere statement.
During the years from 2010 to2014 a total amount of almost Tk10,000 crore has become bad debtor in other words it has beenmisappropriated by those involvedin the deal. This has taken place inthe state-owned banks Sonali,
Janata,Basic and Agrani. Givingloans to borrowers who havenames or fake names but noexistence, who have no addressesor have fake addresses, who havesubmitted no collateral documentsor have submitted fake documentsand so on, seem to be willfuloffences. Most of those executivesor officers who have committedthese offences are yet to bepunished. If they are not brought to
legal punishment then this type ormore severe offences will continueto be committed which may turnthe banking sector vulnerable andmay affect the economic growth ofthe country. Bangladesh Bankbeing the authority for control ofbanks, have submitted their reportsafter investigating the offences butACC (Dudak) has not yet imposedany punishment except a fewcases. Ortho Rin Adalat has not
also punished any of the offendersor recovered any loan as yet. Itmay be said that there is an
anarchy going on in thestate-owned banks which is badindication. The banking sector as awhole is therefore, suffering fromtwo sicknesses, firstly those which
have defaulted loans are facingliquidity crisis and have no fundsfor further disbursement unlesstheir capital deficit is made good.Hence their operational losses areaccumulating day by day. On theother hand, those which haveexcess liquidity are unable to lendout it,because businessmen areeither not investing in newindustries or factories or they arewaiting for further reduction of
interest rate. We must rememberthat for the last 2 to 3 years,banking system in Bangladesh hasbeen holding an excess liquidity ofTk 1 lac to 1.3 lacs crore. Thisexcess liquid cash is adding to costof funds but not earning anyinterest by way of loan leading tooverall increase of operationalexpenses and reduction ofoperational profit. This unhappysituation has made some banks
desperate to apply unethicalprocedures to maintain their profitat minimum level or increase it.They are misusing the instructionof Bangladesh Bank. Firstly thesebanks are not keeping adequateprovisions in the relevant yearagainst the defaulted loans butspreading it over the rescheduledperiod in respect of defaulted loanswhich were rescheduled on theplea of loss of business due to
political instability during the lastpart of the year 2013. Not only thatTk 5,000 crore interest wasexempted and Tk 11,000 croredefaulted loan (principal) waswritten off during four and half
years. Due to this practice banks’profits went down during the year2013 and 2014 against thoseduring the previous years. Thesame trend is still going on.Consequently some banks are
playing with provisions. Accordingto an instruction of BangladeshBank in case of loans sanctioned to
The Bangladesh Accountant July - September 2015 15
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general entrepreneurs a provisionof 5% has to be maintained,but incase of loans given to SME, only0.25% provision is acceptable. Inorder to increase their profits, some
banks are classifying generalcustomers’ loans as SME loans andkeeping 0.25% provision only.This way banks’ unrealized profitsin cash are going away toshareholders illegally. Bangladesh
Bank should detect thismalpractice soonest. BangladeshBank should also be strict infollowing up to ensure that itsinstructions are complied.
Risk Management
Banks are invariably faced withdifferent types of risks that mayhave a potentially negative effecton their business. Risk
management in bank operationsincludes risk identification,measurement and assessment andits objective is to minimizenegative effects risks can have onthe profitability, liquidity and
capital of a bank. Banks are,therefore, required to maintain anorganizational unit in charge of riskmanagement. This unit willprescribe procedures for risk
identification, measurement andassessment and will carry outprocedures for prevention oridentification of risks.
The risks to which a bank is
particularly exposed in its
operations are: liquidity risk, creditrisk, market risks (interest rate risk,foreign exchange risk and risk fromchange in market price ofsecurities, financial derivatives and
commodities), exposure risks,investment risks, risks relating tothe country of origin of the entityto which a bank is exposed,operational risk, legal risk,reputational risk and strategic risk.
In Bangladesh total defaulted loansas up to 31 December, 2014amounted to Tk 51,000 crore out
of which according to Financial
Stability report of BangladeshBank, 77.8% ie Tk 39,000 crore isnot recoverable. Compared to2013 the defaulted loans have
increased by Tk 7,100 crore during2014. And 53.60 % of these loans
are existing in 5 state-owned bankswhich has affected the profitabilityand liquidity of overall bankingbusiness. If we analyze thereasons, it can be straightwayopined that there was no practice
or even existence of riskmanagement in those banks. Anaudit committee or an Internalaudit department may have been
in existence which carry out mostof the time post facto examinationor analysis after the loans aredisbursed. This department takesthe place of Risk Managementactivities without producingeffective result. Consequently
identification, measurement andassessment of risk remainsunearthed before sanction anddisbursement of the loans. In someof the banks non professional or
inexperienced officers are giventhe responsibility of appraisal,examination of the auditedFinancial Statements, genuinenessof collaterals,etc. Their reportstherefore, remain defective and
risky. At times reports prepared bythe Audit Committee or Internalaudit department are ignored bythe higher Management with illintention. Had the banks attendedto risk management, then there
would not have been the flood ofdefaulted loans. The banks lostsight of the requirement to managerisk effectively and, in many cases,it is questionable if the basics ofrisk management were ever put in
place. Adhering to managingrisks—not ignoring them orbelieving they can be passedoff—is the cure for the ailment ofhuge defaulted loans. Let us review
“The Seven Tenets of Risk
Management” to see itsfundamental features.
1. Establish one Language System
to Discuss and Categorize Risk
A risk manager is often overheardat intra-departmental meeting: The
Basel II second pillar requires thatthe Board of the bank fulfill theirobligations in all respect. At some
points many of the participantshave no idea what the riskmanager is talking about, but theyare too afraid to ask questions sothey nod their heads in polite
agreement and hope no one willask them for their personalopinion. It is incumbent upon riskexperts to translate risk issues into
a language and terms that allinterested parties can understand,
and it is the responsibility of theother functions to make the effortto understand.
2. Develop a “Big Picture” Viewof Risk Exposure and Focus on the
Most Important
Not all risks are created or endequally. Banks need to be mindful
of credit, market, and operationalrisks. Within the three main areas
of risk, further stratification isembedded to allow for acomprehensive overall view ofrisk. Tools such as VaR (Value atRisk), Monte Carlo simulations,CFaR (Cash Flow at Risk), stress
testing, and others are applied to judge the level of risk andsubsequently the actions requiredto contain the risks
3. Centralize Ownership ofProcess and DecentralizeDecision Making
The Head office of a bank preparespolicies,SOP, rules andregulations, but the branchesshould have the liberty to take theirdecision as per policies and sendreturns to Head Office. The Centralbank in Bangladesh has currentlydecentralized its authorities so thatcommercial banks can take theirown decision in accordance with
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through its behaviors and throughthe systems and programs it putsinto place. In Bangladesh riskmanagement culture and practicehas not grown up. It is high time
now that with a view to preventingconcurrent defaults the banks mustintroduce risk managementexpertise. A risk-managementculture can be embedded in thebank through training,communications and incentives.
Conclusion
The banking sector is now almostover-burdened with defaultedloans. It is high time the Top
Management of all banks mustrealize the importance of riskmanagement. The role of auditcommittee or Internal auditDepartment has proved ineffective,as such this Department should bekept as supplementary to riskmanagement. The Central Bankshould also realize the vitality of arisk management Unit and adviseevery bank to establish it headedby qualified experts andexperienced executives as soon as
possible. On 9th August 2015, in ameeting of Chairmen andManaging Directors of Sonali,Rupali, Agrani and Janata Banksthe Governor of Bangladesh Bankalerted the Top leaders of thesebanks with firm warning that iftheir banks do not make financialprogress by recovering defaultedloans observers will be appointedaccording to CAMELS rating andthe Government will no longer
allocate public funds to make goodtheir capital deficits. The Governordeserves thanks for his concern,but he could also advise banks toopen risk management unitssimultenously.
The Author is a
Fellow Member, ICAB
The Bangladesh Accountant July - September 2015 17
policies and send its returnsimplying post facto control. Riskmanagement can be most effectivewhen it is applied consistentlyacross the banking organization
with policies and proceduresdeveloped by risk experts whohave the training and experiencefor their specific country, area, andclient mix. It is incumbent uponfront-line officers to use the toolsand processes to guide their dailyinteractions with customers.Interactions are clear. Answers aregiven in a timely manner and theresponses leave no ambiguityabout what the bank is able to do
for its customer.
4. Drive the Process from the Topand Clearly Define Roles andResponsibilities
In Bangladesh the banks weremaking unexpected profits duringthe years 2010 and 2011 byengaging in share business andthey piled up huge stock of sharesexceeding the legal limits. Whenbubble in share market burst, thebanks started selling the shares atcost prices and lower than costprices. So the profits starteddiminishing. The situation wasworse due to defaulted loans, theycould not recover their lowprofitability as up to now. Riskmanagement in a bank iseveryone’s responsibility, not justthe risk department’s. Leadershipmust not only espouse a vision butalso behave in a manner consistentwith it and demonstrate toemployees that prudent riskmanagement is a cornerstone tosuccess.
5. Quantify Risk Exposure andCosts/ Benefits
Consistent and rigorous assessmentof risk and quantification of the netbenefits of appropriately dealing
with the risk cannot be replacedwith promises of above-averagereturns with no knowledge of thepotential downsides. Models ofapplying risk management
fundamentals can be preparedwhich would be applied by alldepartments. On the other handeven the most sophisticatedmodels will not make anorganization 100 percent foolproofunless it is given due importanceand applied. Regardless, strongand rigorous analytical capabilitieswill lessen the chance of failure.
6. Embed IT Systems to Facilitate
the Risk-Management Process
The value of IT appears to beincreasing over time to bankingorganizations as the environmentgrows ever more complex—sothere is no change in this variablein troubled times. In most countriesincluding Bangladesh the CentralBank even controls the commercialbanks through online IT modelsand formats. However, the IT valuewill be realized only if IT systemsdevelopment is driven by userneeds and not vice versa. ITsystems, if properly developed andused, can assist the bank in riskmanagement by providing controland compliance monitoringtechnology, databases, market andindustry research and analysistools, and communication tools.These are all critical tools that assistin the delivery of the requiredinformation to decision makers inthe bank. This can happen if the ITsystems are developed with theuser’s needs in mind.
7. Embed a Risk-ManagementCulture
If a bank is serious about riskmanagement, then it should beserious from the top to bottom.Leadership will espouse a cultureof responsible risk management
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July - September 2015 The Bangladesh Accountant18
Monetary policy is one of the importantissues of the economy of a country.Monetary policy means a process by whichthe monetary authority i.e. the central bankof a country controls the supply of moneyoften targeting a rate of interest for thepurpose of promoting economic growthand stability. The objective of monetary
policy is to ensure economic growththrough exchange stability, price, fullemployment, credit control, reduction ofinequality and wealth etc. Every financialyear Bangladesh bank publishes monetarypolicy for the period July to December and January to June. Recently, for the first halfof the financial year 2016, BangladeshBank has published monetary policy. Mainfeatures of that monetary policy are tosupport the 7 percent growth target and the6.2 percent inflation target for the fiscalyear 2016. Reserved money is projected togrow at 16 percent and broad money at15.6 percent which are adequate tosupport the growth and inflation targets.Domestic credit is projected to grow at16.5 percent at the end of the fiscal year2016. Private sector credit has beenprojected to grow at 15 percent and publiccredit sector at 23.7 percent. It isworthwhile to mention that whatever mightbe the objective of the monetary policy, itsultimate target should be the economicdevelopment of the country. For economic
development of the country there must beconsistency among the various policiessuch as monetary policy, fiscal policy,
Monetary Policy Needs Consistency
with other Economic PoliciesMd. Shahadat Hossain FCA
export and import policy etc. But how farthere remains coordination among thevarious policies of the country, is a seriousquestion. Because, to give an overviewabout the objective in the monetary policy,it has been mentioned “The main objectiveof Bangladesh Bank’s monetary policy ismoderation and stabilization of CPIinflation alongside supporting output and
employment growth.” But it is logical tomention that inflation depends on variousissues such as supply of broad money,supply of commodity, fluctuation of pricein international market, indirect tax,government expenditure, growth of creditetc. Bangladesh Bank as the monetaryauthority can only control the supply ofbroad money and growth of credit. Otherissues depend on fiscal policy of thecountry and utilization of governmentfund. For example- higher indirect taxes
can cause cost push inflation which canlead to a rise in inflation, If we pay ourattention to the budget speech of the fiscal2016, it may be observed that as regards tothe inflation it has rightly been pointed outthat average inflation rate graduallydeclined and stood at 6.6 percent by theend of April, 2015. Such declining trendwas supported by lower fuel prices in theinternational market, supportive fiscal andmonetary policies, satisfactory agriculturalproduction and improved distribution
system. From the statement as mentionedin the budget speech it appears thatlowering down the inflation rate was a
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The Bangladesh Accountant July - September 2015 19
combined effort of all the sectors ofthe economy. It was not the monetarypolicy only to control the inflation.The issues as described above, revealthat the monetary policy as published
recently might have someeffect/impact on prevailing fiscalpolicy and how the negative impact,if any, of fiscal policy might beaddressed by the monetary policy.One of the objectives of the monetarypolicy is to maintain equilibrium inthe balance of payment. In themonetary policy of the first half of theFY-16, balance of payment has beenprojected to reach USD 3.55 billiondeficit which will eventually reducethe overall balance to USD 1.13 bill.The jump in current account deficitfrom USD 1.63 billion to USD 3.55billion is mainly originating from anaugmenting trade deficit that isexpected to rise from USD 10.02billion in the financial year 2015 toUSD 13.42 billion in the FY 16.Negative growth of trade deficit is theeffect of 14 percent projected growthof import as against 7.5 percentprojected growth of export. Therecently developed export policy,
which is effective from 1st July 2015,is targeted to achieve the export by2021 by the amount of USD 60billion as against present exportamount is USD 31.20 billion. If welike to achieve the target, the yearlygrowth rate will have to be 12percent instead of 7.5 percent asconsidered in monetary policy. So,the monetary policy which has beenpublished by the Bangladesh Bank isnot consistent with the export policyof the government. Another importantelement behind the decrement of theoverall balance one of thecomponents of balance of payment isabnormal decreasing projectionunder heading ‘other investments’.During the financial year 2014-15,overall balance has been estimatedUSD 4.16 billion but in financial year2015-16 overall balance has beenprojected USD 1.33 billion. In thefinancial year 2015-16, overallbalance has been reduced by the
amount of USD 3.03 billion. Mainreason behind such abnormalreduction of overall balance is
abnormal less projection underheading 'other investment'. Duringthe financial year 2014-15 otherinvestment was projected USD 2.67billion but in the year 2015-16 such
investment was projected USD 1.33billion i.e. 50 percent less than theprevious year’s estimation. Butnothing has been disclosed in themonetary policy as regards to thehuge reduction of the foreign otherinvestment. Issues other than asmentioned above may be pertinent tobring into notice that despite beingone of the objectives of the monetarypolicy no detailed information orways and means have been
mentioned in the recent publishedmonetary policy about fullemployment. Likewise, one of theinstruments of achieving the objectiveor goal of the monetary policy is thebank rate policy. The bank rating isthe minimum lending rate of thecentral bank at which it rediscountsthe first class bills of exchange andgovernment securities held by thecommercial banks.
When the central bank finds that
inflationary pressures have storedemerging within the economy,central bank uses various instrumentssuch as Bank rate policy, OpenMarket Operation, changes inReserve Ratio and selective creditcontrol etc. The expansionary andcontraction impact of differentinstruments in the economy isdifferent. So, it is very important todisclose instrument wise policy to befollowed to increase the total supply
of money in the economy morerapidly than usual underexpansionary policy and undercontraction policy to expand moneysupply more slowly than usual oreven shrinks. Finally for betterment ofthe national economy, the monetarypolicy should be consistent withother economic policies as well asmore detailed, informative, analyticalto make it transparent to all thestakeholders.
IT IS
WORTHWHILE TO
MENTION THAT
WHATEVER MIGHT BE
THE OBJECTIVE OF THE
MONETARY POLICY, ITS
ULTIMATE TARGET
SHOULD BE THE
ECONOMIC
DEVELOPMENT OF THE
COUNTRY. FOR
ECONOMICDEVELOPMENT OF THE
COUNTRY THERE MUST
BE CONSISTENCY
AMONG THE VARIOUS
POLICIES SUCH AS
MONETARY POLICY,
FISCAL POLICY, EXPORT
AND IMPORT POLICY
ETC.
The Author is a
Council Member, ICAB
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July - September 2015 The Bangladesh Accountant20
Risk Management : TheConceptual Frame Work
Risk is a concept that denotes a potential
negative impact to an asset or some
characteristic of value that may arise from
some present process or future event. In
everyday usage, "risk" is often used
synonymously with the probability of a
known loss. Risk perception is an essential
factor in every human decision making.
Many definitions of risk depend on
specific application and situational
contexts. Generally, risk is related to the
expected losses which can be caused by a
risky event and to the probability of this
event. The harsher the loss and the more
likely the event, the greater the overall
risk. Measuring risk is often difficult; an
engineering definition of risk is: Risk=(
probability of an accident) X( losses per
accident)
Financial risk is often defined as the
unexpected variability or volatility of
returns, and thus includes both potential
worse than expected as well as better thanexpected returns. In statistics, risk is often
mapped to the probability of some event
which is seen as undesirable. Usually the
probability of that event and some
assessment of its expected harm must be
combined into a believable scenario (an
outcome) which combines the set of risk,
Risk Management inPublic Financial Sector
Dr Muhammad Abdul Mazid
regret and reward probabilities into an
expected value for that outcome.
In application risk management plan and
its impact analysis are important for any
private business or public financial plan or
activities. Through clear perception
potential risks of the financial sector and
finding ways to managing their impacts,
will help recover quickly if an incident
occurs. Types of risk vary from business to
business, private or public but preparing a
risk management plan involves a commonprocess. Any risk management plan
should detail the strategy for dealing with
risks specific to any financial
management. It's important to allocate
time, budget , research and resources for
preparing a risk management plan and its
impact analysis. This will help meet legal
obligations for providing a safe workplaceand can reduce the likelihood of an
incident negatively impacting on any
financial dealing.
Identifying potential risks and
understanding the scope of possible risks
should help development of realistic,
cost-effective strategies for dealing with
them. It's important to think broadly when
considering types of risks for any business,
rather than just looking at obvious
concerns (e.g. fire, theft, marketcompetition). Before beginning the
identification of risks, the review of critical
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The Bangladesh Accountant July - September 2015 21
business activities, including the key
services, resources and manpower ,
and things that could affect them,
such as power failures, natural
disaster and even public health
issues could be critical. Regular
review of business plan and
identifying what couldn't do without,and what type of incidents could
impact on which area is very
cardinal point to ponder. Always
asking 'what if?' questions like lost ofpower supply , having no access to
the internet, key documents are lost,
premises damaged, one of best staff
members quit, suppliers went out of
business, aid donors are not willing
to provide soft loans and grants ,
economy suffered from a natural
disaster, there is political chaos or
crisis etc.
Brainstorming with different people,
such as accountant, financial adviser,staff, suppliers and other interested
parties in case of private business ,
with stakeholders, strategic
development partners as well will
help the public sector manager get
many different perspectives on risks
to the respective business. In this
respect, thinking or taking into
cognizance of other events that have,
or could have, affected the financial
management . What were the
outcomes of those events? Could
they happen again? Thinking aboutwhat possible future events could
affect the business. Analyzing the
scenarios that might lead to an event
and what the outcome could be. Thiswill help identify risks that might be
external to the business. Assessing
the processes, considering the worst
case scenario etc. might help
identifying risks relating to the
financial management , analyzing
their likelihood and consequences
and then come up with options formanaging them.
IDENTIFYING
POTENTIAL RISKS AND
UNDERSTANDING THE
SCOPE OF POSSIBLE
RISKS SHOULD HELP
DEVELOPMENT OF
REALISTIC,
COST-EFFECTIVE
STRATEGIES FOR
DEALING WITH THEM.
IT'S IMPORTANT TO
THINK BROADLY WHEN
CONSIDERING TYPES
OF RISKS FOR ANY
BUSINESS, RATHER
THAN JUST LOOKING
AT OBVIOUS
CONCERNS.
I d e n t
i f y &
A n a l y z e E x p o s
u r e sL e g a l &
E x a m i n e
R i s k M a n a g e m
e n t
T e c h n i q u e s
S e l e
c t
R i s k
M a n
a g e m
e n t
T e c h n i
q u e s
I m p l e m e n t T e c h n i q u e s
M o n i t
o r
R e s u
l t s
RiskManagement
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July - September 2015 The Bangladesh Accountant22
Once identified, analysed and
evaluated the risks, it is needed to
rank them in order of priority.
Then the question of which
methods to use to treat
unacceptable risks. Treating risksinvolves working through options
to deal with unacceptable risks
which range in severity; some risks
will require immediate treatment
while others can be monitored and
treated later. While developing a
plan for treating the risks,
consideration of: method of
treatment, people responsible for
treatment, costs involved, benefits
of treatment, likelihood of success,
ways to measure the success of
treatments.
A risk management plan is the
prevention step in the prevention,
preparedness, response and
recovery ( PPRR) model of business
continuity planning. Many
risk-management activities at the
enterprise level are influenced by
various types of pressure. Some are
external, such as compliance or
regulatory changes, for example.
Sometimes, unfortunate events in
one’s own company or in the
industry prompt internal soul
searching regarding whether
existing risk-management
approaches are adequate. In more
and more cases, however, CEOs
and business leaders take a more
proactive stance, as their goal is to
further develop risk-management
capabilities (proactively based ontheir strategic and economic
priorities and growing aspiration
levels) into a true competitive
advantage—ultimately improving
business decisions and increasing
the value of the company in a
risk-conscious way.
Systematic approach to
enterprise-risk-management (ERM)
capabilities focuses on five
dimensions, each of which issubstantiated with industry-specific
diagnostics, benchmarks, and
best-practice recommendations: (1)
Risk-return transparency and
insight (2) Risk ownership and
strategy (3) Risk-enabled decisions
and processes (4) Risk governanceand organization (5) Risk culture.
It's important to review the plan
regularly to take into account any
new risks associated with changes
in the business or improvements in
techniques for treating risks.
Different options for treating risks
might be – either (1) Avoid the risk
or (2) Reduce the risk or (3)
Transfer the risk or (4) Accept the
risk. However, in any risk
management scheme there should
be adequate insurance coverage
for the loss of income or any risks
identified.
It is always essential to test,
evaluate and update the risk
management plan regularly as risks
can change as business, industry,
regulatory regime and the
environment change. Regular
review of risk management plan is
essential for identifying new risks
and monitoring the effectiveness of
risk treatment strategies.
Start by taking these actions like (1)
Research similar businesses (2)
Evaluate current market trends. (3)
Knowing the strengths and
preferences. (4) Examining the
family budget. (5) Knowing how
changes in the economy will affectthe business. (6) Writing a business
plan. (7) Assumption means
assuming the risk and the
accompanying financial burdens.
(8) Avoidance means removing the
cause of risk. (9) However, shifting
the risk and responsibility doesn't
necessarily shift the liability. (10)
Self-insurance entails setting aside
a specified amount of money into a
reserve fund each year to cover
any losses incurred. (11) Thesemethods can be used to offset
some of risks a business faces. (12)
Sound insurance planning requires
attention on all fronts.
Responsibility in managing risk
Everyone in an organization hassome responsibility in managing
risk across the organization, not
just the chief risk officer.
Shareholders, rating agencies, and
regulators and policy makers
request that companies involve
their top management and even
their boards. However, the right
structural and organizational
choices, the description of roles
and responsibilities, as well as the
appropriate definitions of
organizational units and reporting
lines, are critical to ensuring robust
and effective enterprise-risk
management. Mind-sets and
behaviors of individuals and
groups inside the
organization—and not only the risk
organization—play a crucial role in
the execution of a company’s
enterprise-risk-management
strategy. We have developed a
proprietary approach to risk culture
that, for the first time ever, allows
for the creation of a specific and
detailed description of the core
elements of a company´s risk
culture, an analytical approach
toward measuring and profiling
that culture, overarching
industry-specific benchmarking,
and the identification of specific
levers for actively influencing and
developing risk culture.
To assess, benchmark, and
improve a client’s
enterprise-risk-management (ERM)
capabilities, a combination of
proprietary data and unique tools,
including the following may be
used (1) ERM Diagnostic (2) Risk
Organization Diagnostic and
Benchmarking Tool (3)
Risk-Culture Survey ( 4)
Compliance Health Check (5) CashFlow at Risk (CFAR) Models .
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Managing Risks in Publicsector
Six Principles
Principle One
An engaged Board focuses the
business on managing the things
that matter
Principle Two
The response to risk is most
proportionate when the tolerance
of risk is clearly defined and
articulated
Principle Three
Risk management is most effective
when ownership of andaccountability for risks is clear
Principle Four
Effective decision-making is
underpinned by good quality
information
Principle Five
Decision-making is informed by a
considered and rigorous evaluation
and costing of risk
Principle Six
Future outcomes are improved by
implementing lessons learnt
Public Financial Risk Management
• Risk assessment is a step in therisk management process. Risk
assessment is measuring two
quantities of the risk R, the
magnitude of the potential loss
L, and the probability P that the
loss will occur.
• Risk assessment may be the
most important step in the
financial risk management
process, and may also be the
most difficult and prone toerror.
• Part of the difficulty of risk
management is that
measurement of both of the
quantities in which risk
assessment is concerned can be
very difficult itself. Uncertaintyin the measurement is often
large in both cases.
• In the estimation of the risks,
three or more steps are
involved, requiring the inputs
of different disciplines.
• The first step, Hazard
Identification, aims to
determine the qualitative
nature of the potential adverseconsequences of the
contaminant (for example,
chemical, radiation, noise, etc.)
and the strength of the
evidence it can have that effect.
• The second step for (chemical)
risk assessment is determining
the relationship between dose
and the probability or the
incidence of effect
(dose-response assessment).
• The third step, Exposure
Quantification, aims to
determine the amount of a
contaminant (dose) that
individuals and populations
will receive.
Potential risks in Public FinancialManagement
• Actual costs of public projects
are typically higher thanestimated costs; costs and time
overruns are common, Actual
demand was often higher than
estimated or approved .
• Due to such cost and demand
risks, cost benefit analysis of
public works projects have
proved to be highly uncertain.
• The main causes of cost and
demand risks are found to beoptimism bias and strategic
misrepresentation. Measures
identified to mitigate this type
of risk are better governance
through incentive alignment
and the use of reference class
forecasting.
Risks in Physical Infrastructure
Investments in Bangladesh
• Inherent Risks arising from the
complexity and magnitude of
construction contracts, nature
of activity
• Administrative Control Risks
arising from administrative
structural or processweaknesses
• Political Control Risks arising
from non supportive of efforts
to address inherent and
administrative control risks
• to make the risk management
effective in the selected
commercial banks operating in
Bangladesh, the major types of
risks, e.g., credit risk, marketrisk, operational risk, interest
rate risk, foreign exchange risk,
equity risk, liquidity risk,
money laundering risk,
information technology risk,
marketing risk and human
resource risk need to be
emphasized by the concerned
bank authority.
World Bank Recommended Risks
Management Plan for Bangladesh
• Using the management
information system effectively
• Building financial management
and control administration in
the departments
• Establishing reliable cost
estimates and standards
• Enhancing transparency andcompetitiveness of
procurement
The Bangladesh Accountant July - September 2015 23
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(4) the application of risk
management throughout
departments’ delivery
networks; and
(5) the need for departments to
continue to develop their
understanding of the common risks
they share and to work together to
manage them.
The Culture Around Risk
Management
The C& AG revisited approaches torisk management in departments
and some arm’s-length bodies in
order to understand the challenges
that they face in making the most
effective use of their risk
management. Their work focused
on: the culture around risk
management: who sets the appetite
for risk; who drives, encourages,
and promotes its use; and what
barriers might be in place to
effective risk management; value
for money in risk management:
where risk management is not just
a process but adds value to the
business and provides
management with assurance that
risks are being managed
effectively; and the benefits of
better risk management: where risk
July - September 2015 The Bangladesh Accountant24
• Maintaining spending control
and creation maintenance fund
• Establishing policy (like
transport policy) review process
• Re establish professionalism
• Establish public oversight of
physical infrastructure built upprojects
• Strengthening the C&AG and
Public Accounts Committee
(PAC)
• Establishing a formal
communications strategy to
develop and promote sectoral
reforms
Empirical Studies I
The British Experience
The British Comptroller and
Auditor General had a common
observation in its 2004 Report in
respect to public financial risk
management was that they found
the departments are often overly
optimistic in their assessment of
the risk to projects and
programmes, and the effectivenessof the mitigating actions they take
to address risk. Management also
tends to consider project risk in
isolation, without considering how
risks in one project can affect other
business priorities.
With the requirement for
departments to achieve challenging
targets for structured cost reduction
whilst maintaining high quality
services, the need for effective risk
management should not be
underestimated. Changes to
organisational structures and
increased delivery at arm’s-lengthfrom government adds to the
complexity in identifying and
managing risks.
Managing Risks to Improve Public
Services the 2004 Report identified
five areas which departments
needed to address to take risk
management forward. The C& AG
highlighted requirements for
(1) sufficient time, resources and
top level commitment;
(2) clarity over responsibility and
accountability backed by
scrutiny and robust challenge;
(3) reliable, timely and up to date
information;
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management is not an end in itself
but contributes to performance
improvements in the delivery of
the organization’s objectives.Within the main body of this
report, they have includedsummaries of the results for
departments as a whole against
each of the questions asked by our
audit teams. Their findings indicate
that there have been improvements
in the processes which underpin
risk management.
The C&AG observed that a large