CORPORATE GOVERNANCE - icab.org.bd malpractices in the recent history. It only meant that it is a...

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January-March 2014

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January-March 2014

CORPORATEGOVERNANCE

Editorial 2President’s Desk 3

ARTICLESCorporate Governance in Developing 5Countries: Frailties and Challenges- M Jalal Hussain FCA

Harmonization of Corporate Governance 12Guidelines issued by BSEC and BB:Analysis of the Similarities and Dissimilarities with some Recommendationsto Bridging the Gaps- Abdullah-Al-Mamun ACA

Reforming Companies Act to cater 21Corporate Governance Framework- Dipok Kumar Roy ACA

Audit Report – Fair Presentation 29vs Compliance Framework - Abu HM Kibria ACA

CEO CFO Partnership in Economic Crisis 35- Muallem A Choudhury FCA

ADR (Alternative Dispute Resolution) 38Under the Income tax Ordinance 1984Chapter XVIII B Sections 152F-152S- A. Wahab FCA

Investment Journey to Share Market 44- Nasim Anwar FCA

Turbulence Hits Bangladesh Economy 48in 2013 But Resilience Keeps Alive- Raihan M Chowdhury

Human Resource Accounting: Current Issues, 51Recent Advancements and Future Directions- 1Mohammad Ahsan Uddin- 2Md. Nahid Ullah ACA

CONTENTS ISSN 1993-3649

"The opinions expressed in this publication are those of the respective authors themselves and do not necessarily reflect the views of the Editorial Board of the Institute of Chartered Accoun-tants of Bangladesh (ICAB) or the ICAB itself."

DISCLAIMER

Md Abdus Salam FCAAkhtar Sohel Kasem FCA Masih Malik Chowdhury FCA Nasir Uddin Ahmed FCA Gopal Chandra Ghosh FCA Amanullah Khan FCA Md Liaquat Hossain Chowdhury FCAMd Salim Uddin FCA Sabbir Ahmed FCA Mohammod Masud Rana FCA Md. Sayeed Ahmed FCAMahmudul Hasan Khusru FCA AKM Saif Ullah Kowchar FCA M Abu Bakar FCA Md. Mahamud Hosain FCA Mohammed Jashim Uddin FCAMohammed Moshiur Rahman FCASnehasish Barua FCA Mohammad Abdul Ohab Miah FCAAjit Kumar Paul FCAMuhammmad Aminul Hoque ACAAbdullah-Al Mamun ACA Zareen Mahmud Hosein ACADipok Kumar Roy ACAMohammad Mosttafa Shazzad Hasan ACAChairman DRC-ICAB Chairman CRC-ICAB

S M Abu Nayem Ahmed, pscSqn Ldr (Retd.)Senior Deputy Secretary-ICAB

EDITORIAL BOARD

ORIALEDIT

Corporate Governance (CG) is not merely a set of laws, policies and procedures. It is more than that. Corporate Governance is a practice by which the institutions and business enterprises are directed, administered and controlled. It also includes the interrelationship of the stakeholders, i.e., shareholders, management, the board of directors, employees, suppliers, customers, banks and other lenders, regulators, the environment and the community and so on. Good Corporate Governance is the reflection of the efforts as to how dearly a corporate aims to achieve its objective.

Not long ago the term Corporate Governance meant little to all of us. Today shareholders and other stakeholders have become mainstream concern for the policy circles around the globe. Lack of good Corporate Governance frequently takes the lead news affecting many. It happened in the past and is likely to repeat in the future even though more stringent checks and balances are being introduced. Many rated well managed enterprises have been involved in stunning malpractices in the recent history. It only meant that it is a concept not only to exercise but to believe in by all related parties.

It endangered the stability of the global financial system in the past. The confidence in the corporate sector shaken by Corporate Governance scandals in the United States and Europe raised some of the largest insolvencies in history. In the aftermath, not only has the phrase Corporate Governance become nearly a household term, but economists, the corporate world, and policymakers began to recognize the potential macroeconomic consequences of weak CG systems.

January - March 2014 The Bangladesh Accountant2

M. Farhad Hussain FCAChairman, Editorial Board

In Bangladesh, capital market is still in an emerging stage and the investors’ confidence on Corporate Governance has got a blow by the recent share market scams. The issue got special attention after witnessing a massive fall in the stock markets; a series of banking frauds/malpractices. Destiny and Hallmark scams are unlikely to be forgotten for next decades or so. Here, most of the companies depend on the banks as their major source of financing. A vital reason for slow progress in adopting CG is that many companies are family oriented. Such concentrated ownership and hierarchy weakens the Corporate Governance mechanisms.

Motivation to disclose information and improve governance practices by companies is also viewed indifferently. There is neither any value judgment nor any consequences for Corporate Governance practices. Many believes, the current system in Bangladesh does not provide sufficient legal, institutional and economic motivation for stakeholders to encourage and enforce Corporate Governance practices. Getting immunity has become a part of culture and many suggest such horrific practices need immediate elimination if we have to grow.

In recent days, the Regulators are taking due steps to stem up the corporate good practices in our country and it is encouraging that awareness of the importance of Corporate Governance in Bangladesh is growing. The Securities and Exchange Commission of Bangladesh issued a notification on Corporate Governance Guidelines (CG Guidelines) for the publicly listed companies of Bangladesh, is one of such examples.

The Bangladesh bank has taken a move to ensure good governance in the country's banking sector through updating responsibilities and formation of banks' Boards of Directors. The Bangladesh Bank (BB)

issued circulars in this regards in the light of the amended BCA to improve the quality of governance in banks.

Many believe, all Corporate Governance systems revolve around four core principles namely; Fairness, Accountability, Responsibility and Transparency. The specific challenges of upholding these principles depend on the ownership structure of an entity. In Bangladesh, the corporate structure is dominated by family members. Such practice, in many cases, hinders the level of fairness, accountability and transparency. Good Corporate Governance practice leads to reduction of risk and improve company performance ensuring profitability. It also enhances the marketability of goods and services with better leadership and ultimately demonstrates transparency and social accountability.

To conclude, we can say that good governance is a potent and viable concept rather than a myth, though some unfortunate incidents have overshadowed our aspiration for good Corporate Governance practices in this land. To stop such recurrences, we have to overcome the challenge and work hard to achieve our desired goal.

This issue of the Bangladesh Accountant is an analytical presentation of our contributors on Corporate Governance and related subjects. Though, the issue is old, its appeal isn't. We hope that the readers will find many illuminating thoughts from the contents of this Quarterly Journal.

Lastly, I shall encourage valuable opinions of the readers.

Chartered Accountantspursuing the bestand the just

The Bangladesh Accountant January - March 2014 3

PRESIDENT’S DESK

At the beginning of my assumption as President-ICAB, I am extremely delighted to see that ‘Bangladesh Accountant’ has taken a place where the intellects of different background are coming together to put their valuable thoughts. The ICAB quarterly journal has reached to a stage where the intellectuals are truly eager to publish their write-up. I believe the theme of this issue is timely and important particularly for those who are the important part of the country’s corporate sector. More importantly, Accountant’s role in corporate governance can hardly be underestimated. They are instrumental to ensure the good corporate governance. Undoubtedly ICAB keenly shares that venture in its regular activities.

This issue is going to be published at a time when the Institute is passing a crucial time. It is a matter for choosing the best and the just. Of course, everybody has their own way of judging the matter, though, at the end, it has to be weighed on the balance of gain and loss for our economic activities when the issue is related to finance, trade or commerce. I am sure, by this, one can guess, I am talking about the much controversial Proposed Financial Reporting Act 2013; some vested quarters are trying to introduce Financial Reporting Act. We are afraid that due to inherent limitations, the ruling of this Act will be self defeating. The proposed FRA has not been drafted

based on the ground reality of our country. Even there is no existence of such type of Act in any SAARC Countries. Only Sri Lanka has “The Sri Lanka Accounting and Auditing Standards Monitoring Board” which basically recognizes the adopted international accounting and auditing standards by CA Sri Lanka and makes these standards mandatory for financial statements since 1999. That Board also empowered CA Sri Lanka to revise, alter or amend those standards. Now, it will not be wise for us if any contradictory body is formed under pressure from donor agency. The root of FRC was the World Bank ROSC Report issued on 16 May 2003 more than 10 years ago. Many development, changes and improvements/ advancement of the institutional and professional upliftment have already taken place in CA profession at home and abroad and that too in ICAB, without any doubt.

The ICAB was formed under the supervisory authority of the Ministry of Commerce which means that ICAB already has a supervising authority to oversee its performance. As part of continuity and to assure more acceptability, transparency and accountability of the Institute, ICAB has decided to restructure the Council, empower the Quality Assurance Board (QAB), the Investigation and Disciplinary Committee (IDC) and the Technical and Research Committee (TRC) ICAB has also proposed to ensure participation of

different stakeholders as the members of the Council, Boards and Committees through amendments of the provisions of the existing CA Order and Bye-Laws.

The Institute has been striding for fostering excellence in the profession marching with international standards of financial reporting and audit practices in the country. As you are aware that the Institute has been following IAS/IFRS and ISA as Bangladesh Accounting Standards (BAS)/Bangladesh Financial Reporting Standards (BFRS) and Bangladesh Standards on Auditing (BSA). These standards are duly adopted by ICAB. Every chartered accountant and auditing firm is compelled to follow these standards. In its recognition, Bangladeshi enterprises have got the highest number of Awards for Best Presented Annual Reports for last consecutive years among the SAARC countries, where in maximum cases the contribution of Chartered Accountants both in Business and in Practice was showcased.

Besides setting up accounting standards, ICAB is known as recognized training provider/centre to government, NGOs, MFIs, NBR, OCAG, Bangladesh Bank, etc round the year. ICAB also provides consultation, volunteer service and works to adopt technical accounting and auditing standards in the country. ICAB’s effort on

such affairs is surely bound to expand as the country progresses.

ICAB is working with the World Bank’s projects under Public Private Partnership (PPP) for improved quality Audit and assurance. Besides, ICAB works closely with the government and other regulatory bodies, accounting bodies, corporate world, commercial opportunities, employers and communities at home and abroad for ensuring transparency and accountability in the accounting profession. It maintains liaison with international and regional organizations like IFAC, IASC and CAPA and SAFA. It regularly participates in Conferences/ Seminars/ Workshops organized under the auspices of these International and regional bodies. ICAB’s certification is accepted by leading international accounting bodies. The Institute of Chartered Accountants in England and Wales (ICAEW) has renewed its partnership with ICAB. Beside occasional visits to ICAEW tutors, ICAEW trained members tutors are regularly providing tutorial support to the ICAEW registered CA students to enable them to quality ICAEW exams.

Despite all those progress and advancement, the ICAB has agreed to except FRA & FRC with little modification. For that the senior members of the Institute have

worked very hard held discussion with hon’ble Minster of Finance, Commerce, Law, Plan as well as the hon’ble Secretary of those ministries. ICAB is hopeful that the FRA will be passed in this Budget Session of the Parliament with ICAB’s recommendations for certain amendments in draft FRA/FRC.

Now to highlight some of its recent activities it needs to be mentioned that the Institute participated in SAFA Assembly, 30th SAFA Board, different Committees and Task Force meetings, Round Table Discussion, IFAC PAO Development Workshop in January 2014 to strengthen international partnership. ICAB organized training Program on ‘Financial Management’ for NGO-MFI Officials registered under Microcredit Regulatory Authority (MRA), held a meeting with the World Bank Senior Representatives and discussed on the implementation status of WB financed project titled ‘Promoting Public Private Partnership for Improved Quality Audit & Assurance’, attended SAFA Conference Marking Session & ITAG Committee Meeting in February 2014. In knowledge Sharing session of World Bank Project between OCAG & ICAB, speakers agreed to take such mutual cooperation between OCAG and ICAB one step ahead

ensuring greater transparency and accountability.

Based on our best performace, The WB Team assured another approval of the project for ICAB titled ‘Strengthening Financial Reporting Framework and Audit Practice’. Through this, we further re-iterate our commitment to improve the capacity building of CA Firms through training under this project to enhance IT based audit capacity, in the days ahead.

In March 2014 ICAB delegates attended day long ICAP CFO Conference titled “From Conformance to Leadership-Evolving Role of CFOs” held in Karachi. Veteran CA professionals attended the Conference. The Professional Excellence Awards 2014 was distributed among the Winners in the Conference. To ensure dynamism in activities of Chartered Accountants, ICAB organized a 2-day long Training program on ‘The Art of Leadership’. The prime focus was to grow leadership quality, particularly among the young members of the Institute.

To conclude, I must urge the members to hold their professionalism to the highest esteem despite odds and eventualities. We should continue pursuing for the best and the just as we did in the past. I firmly believe, time will always be on the side of true professionals.

At the beginning of my assumption as President-ICAB, I am extremely delighted to see that ‘Bangladesh Accountant’ has taken a place where the intellects of different background are coming together to put their valuable thoughts. The ICAB quarterly journal has reached to a stage where the intellectuals are truly eager to publish their write-up. I believe the theme of this issue is timely and important particularly for those who are the important part of the country’s corporate sector. More importantly, Accountant’s role in corporate governance can hardly be underestimated. They are instrumental to ensure the good corporate governance. Undoubtedly ICAB keenly shares that venture in its regular activities.

This issue is going to be published at a time when the Institute is passing a crucial time. It is a matter for choosing the best and the just. Of course, everybody has their own way of judging the matter, though, at the end, it has to be weighed on the balance of gain and loss for our economic activities when the issue is related to finance, trade or commerce. I am sure, by this, one can guess, I am talking about the much controversial Proposed Financial Reporting Act 2013; some vested quarters are trying to introduce Financial Reporting Act. We are afraid that due to inherent limitations, the ruling of this Act will be self defeating. The proposed FRA has not been drafted

based on the ground reality of our country. Even there is no existence of such type of Act in any SAARC Countries. Only Sri Lanka has “The Sri Lanka Accounting and Auditing Standards Monitoring Board” which basically recognizes the adopted international accounting and auditing standards by CA Sri Lanka and makes these standards mandatory for financial statements since 1999. That Board also empowered CA Sri Lanka to revise, alter or amend those standards. Now, it will not be wise for us if any contradictory body is formed under pressure from donor agency. The root of FRC was the World Bank ROSC Report issued on 16 May 2003 more than 10 years ago. Many development, changes and improvements/ advancement of the institutional and professional upliftment have already taken place in CA profession at home and abroad and that too in ICAB, without any doubt.

The ICAB was formed under the supervisory authority of the Ministry of Commerce which means that ICAB already has a supervising authority to oversee its performance. As part of continuity and to assure more acceptability, transparency and accountability of the Institute, ICAB has decided to restructure the Council, empower the Quality Assurance Board (QAB), the Investigation and Disciplinary Committee (IDC) and the Technical and Research Committee (TRC) ICAB has also proposed to ensure participation of

different stakeholders as the members of the Council, Boards and Committees through amendments of the provisions of the existing CA Order and Bye-Laws.

The Institute has been striding for fostering excellence in the profession marching with international standards of financial reporting and audit practices in the country. As you are aware that the Institute has been following IAS/IFRS and ISA as Bangladesh Accounting Standards (BAS)/Bangladesh Financial Reporting Standards (BFRS) and Bangladesh Standards on Auditing (BSA). These standards are duly adopted by ICAB. Every chartered accountant and auditing firm is compelled to follow these standards. In its recognition, Bangladeshi enterprises have got the highest number of Awards for Best Presented Annual Reports for last consecutive years among the SAARC countries, where in maximum cases the contribution of Chartered Accountants both in Business and in Practice was showcased.

Besides setting up accounting standards, ICAB is known as recognized training provider/centre to government, NGOs, MFIs, NBR, OCAG, Bangladesh Bank, etc round the year. ICAB also provides consultation, volunteer service and works to adopt technical accounting and auditing standards in the country. ICAB’s effort on


such affairs is surely bound to expand as the country progresses.

ICAB is working with the World Bank’s projects under Public Private Partnership (PPP) for improved quality Audit and assurance. Besides, ICAB works closely with the government and other regulatory bodies, accounting bodies, corporate world, commercial opportunities, employers and communities at home and abroad for ensuring transparency and accountability in the accounting profession. It maintains liaison with international and regional organizations like IFAC, IASC and CAPA and SAFA. It regularly participates in Conferences/ Seminars/ Workshops organized under the auspices of these International and regional bodies. ICAB’s certification is accepted by leading international accounting bodies. The Institute of Chartered Accountants in England and Wales (ICAEW) has renewed its partnership with ICAB. Beside occasional visits to ICAEW tutors, ICAEW trained members tutors are regularly providing tutorial support to the ICAEW registered CA students to enable them to quality ICAEW exams.

Despite all those progress and advancement, the ICAB has agreed to except FRA & FRC with little modification. For that the senior members of the Institute have

worked very hard held discussion with hon’ble Minster of Finance, Commerce, Law, Plan as well as the hon’ble Secretary of those ministries. ICAB is hopeful that the FRA will be passed in this Budget Session of the Parliament with ICAB’s recommendations for certain amendments in draft FRA/FRC.

Now to highlight some of its recent activities it needs to be mentioned that the Institute participated in SAFA Assembly, 30th SAFA Board, different Committees and Task Force meetings, Round Table Discussion, IFAC PAO Development Workshop in January 2014 to strengthen international partnership. ICAB organized training Program on ‘Financial Management’ for NGO-MFI Officials registered under Microcredit Regulatory Authority (MRA), held a meeting with the World Bank Senior Representatives and discussed on the implementation status of WB financed project titled ‘Promoting Public Private Partnership for Improved Quality Audit & Assurance’, attended SAFA Conference Marking Session & ITAG Committee Meeting in February 2014. In knowledge Sharing session of World Bank Project between OCAG & ICAB, speakers agreed to take such mutual cooperation between OCAG and ICAB one step ahead

ensuring greater transparency and accountability.

Based on our best performace, The WB Team assured another approval of the project for ICAB titled ‘Strengthening Financial Reporting Framework and Audit Practice’. Through this, we further re-iterate our commitment to improve the capacity building of CA Firms through training under this project to enhance IT based audit capacity, in the days ahead.

In March 2014 ICAB delegates attended day long ICAP CFO Conference titled “From Conformance to Leadership-Evolving Role of CFOs” held in Karachi. Veteran CA professionals attended the Conference. The Professional Excellence Awards 2014 was distributed among the Winners in the Conference. To ensure dynamism in activities of Chartered Accountants, ICAB organized a 2-day long Training program on ‘The Art of Leadership’. The prime focus was to grow leadership quality, particularly among the young members of the Institute.

To conclude, I must urge the members to hold their professionalism to the highest esteem despite odds and eventualities. We should continue pursuing for the best and the just as we did in the past. I firmly believe, time will always be on the side of true professionals.

Showkat Hossain FCAPresident, ICAB

Prologue

Recent financial crises and financial scandals around the world and the collapse of major corporate businesses and financial institutions in the USA, Europe such as Merrill Lynch, Lehman Brothers, American International Group (AIG), Parmalat, Siemens, Global Crossing, Adelphia have brought to the fore, once again, the need for the practice of good corporate governance. The large-scale financial scams in Asia including Bangladesh, the current banking crises in Africa, the ethical scandals from Enron to WorldCom have necessitated the introduction of good corporate governance in developed and developing countries. Corporate governance (CG) is exceedingly pivotal to protect and safe-guard the interest of the shareholders, the investors, the financiers, the suppliers, the customers, managers, employees, the society, the regulators and other stake-holders of a corporate entity.

Several changes have taken place to corporate governance horizon during the last few decades and the volume and velocity of corporate governance are going to be changed in the years to come. Corporations (companies) that take a strategic approach to the challenge of complying with the touch of new

Corporate Governance in DevelopingCountries: Frailties and Challenges

M Jalal Hussain FCA

corporate governance requirements can create opportunities to strengthen their internal processes and enhance their business at sub-national, national and international levels. Most companies strive to have high level of CG. In the current complicated and cut-throat competitive business environment, it’s not enough for a company to merely be profitable; it also needs to demonstrate good corporate images through ethical behavior, environmental awareness, sound and prudent governance practices.

Definition of Corporate Governance

Corporate governance is a much-talked dogma that refers to the systems by which the companies are directed and controlled by the Board of Directors to achieve the targeted aims, goals and plans. Wikipedia defines corporate governance as “The framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in a company's relationship with its all stakeholders (financiers, customers, management, employees, government, and the community). The corporate governance framework consists of (1) explicit and implicit contracts between the company and the stakeholders for distribution of responsibilities, rights, and



rewards, (2) procedures for reconciling the sometimes conflicting interests of stakeholders in accordance with their duties, privileges, and roles, and (3) procedures for proper supervision, control, and information-flows to serve as a system of checks-and-balances”. Investopedia defines corporate governance “The system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of the many stakeholders in a company - these include its shareholders, management, customers, suppliers, financiers, government and the community. Since corporate governance also provides the framework for attaining a company's objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure”.

Corporate Governance Framework

The system of corporate governance varies from company to company, country to country and owner to owner. The owners of a company use to influence the

management (managers) of the company. The owners generally apply the three different ways to control the work of the managers: owners directly influence the corporate strategy and selection of the top management team; the owners delegate their rights to the board but ensure that compensation and other incentives are aligned with share price maximization and the owners rely on the market mechanisms of corporate control, such as a takeover, when due to a decreasing share price new owners take over a company and change to management in order to rehabilitate the company and increase its market value. The corporate governance mechanisms can be both internal and external. The internal mechanisms of corporate governance include: ownership concentration; board of directors; ways of rewarding managers and multidivisional organizational structure. The external mechanism of corporate governance refers to the market for corporate control, i.e., a group of potential owners attacking the undervalued companies in order to change the ineffective top management team and improve the competitive position of the company.

COMPANIES DON’T WORK IN VACUUMS OR IN ISOLATED ENVIRONMENTS. THEY ARE SUBJECT TO STATE-IMPOSED RULES, REGULATIONS, LEGAL AND JUDICIARY SYSTEMS. CORPORATE GOVERNANCE IS DIRECTLY AND INDIRECTLY AFFECTED BY THE OVERALL PUBLIC GOVERNANCE. IF THE POLITICAL, LEGAL AND JUDICIARY SYSTEMS OF A COUNTRY ARE DEFECTIVE AND VULNERABLE, THE IMPACTS OF THE WEAKNESS AND VULNERABILITY FALL ON THE CORPORATE GOVERNANCE WITHIN THE COUNTRY. IT IS LOGICAL THEREFORE THAT CORPORATE GOVERNANCE MAY BE VIEWED AS A COMPARTMENT OF BROADER, OVERALL COUNTRY GOVERNANCE.


transparency and politics. Researchers have identified the salient problems on the way of good CG in the developing and emerging countries are narrated in short as under:

Complex Corporate Ownership Structure: Generally the ownership of small and middle size private companies is highly concentrated on the individual and family owners. Potential problems as insufficient disclosure, imprudent decisions and weak and ineffective board of director could arise. The demand for good corporate governance is based on two main realizations: first leadership starts at board level and second, corporate governance is a means of enabling and driving business performance. Defective corporate ownership structures in the developing countries work as a deterrent to good corporate governance. All corporate

The Frailties of corporate governance in developing countries

CG has been successfully set up and well established in the developed economies to meet business challenges of the present century. In developed market economies, a system of CG has been built gradually through centuries, and today it can be defined as a complex mosaic consisting of laws, regulations, politics, public institutions, professional associations and ethical codes. But in sharp contrast, the developing economies around the world remained far abaft in corporate governance. Many companies were bloated, unfocused and run by entrenched and complacent managers. These companies were tolerated and sustained by a different environment from that of

developed economies. Disappointing progress has been noticed in the companies in the developing countries especially the companies were lacking in the independence of the director, disclosure and transparency of the businesses. Most of the companies are owned and managed by family-owners who are not serious about good corporate governance. Developing countries in the globalized world are at various stages of development, at different legal traditions, some have good capital markets and some don’t have capital markets, some countries have credit-worthy credit rating agencies and some don’t have. So the problems in CG faced by them are identical and unique in itself.

Research and study in the arena of CG spans multiple disciplines, namely, finance, laws, regulations, strategic management, sociology,

Source: World Bank, Corporate Governance: Framework for Implementation

Figure1: Modern corporations are disciplined by internal and external factors


governance systems have four core principles: Accountability, fairness, transparency and responsibility. In the developing countries like Bangladesh, India, Pakistan and Nigeria, the general practice is that the corporate structure is dominated by family members and such practice constantly constrains the level of accountability, fairness and transparency.

Weak Legal and Judiciary Systems: Companies don’t work in vacuums or in isolated environments. They are subject to state-imposed rules, regulations, legal and judiciary systems. Corporate governance is directly and indirectly affected by the overall public governance. If the political, legal and judiciary systems of a country are defective and vulnerable, the impacts of the weakness and vulnerability fall on the corporate governance within

the country. It is logical therefore that corporate governance may be viewed as a compartment of broader, overall country governance. Arthur Mitchell and Clare Wee of Asian Development Bank’s legal department put it elegantly in their article on Corporate Governance in Asia when they contend: “It is not possible to establish an island of good corporate governance in a sea of poor or underdeveloped public governance.”

Corruption and Lack of Transparency: Corruption is a major obstacle to social, economic, and democratic development in developing countries. It is one of the most evil practices affecting social economic development. Corruption thrives well in countries with weak corporate governance. It is a

misuse of power and position with negative social economic impacts on development. Corruption occurs in various ways from abnormal gift giving to bribing, denying a service to hiring unqualified relatives, and awarding contracts to unqualified. Unaccountable and opaque corporations are more than likely to undermine the rule of law and the effectiveness of government, creating and sustaining a vicious circle of corruption, bribery and mismanagement not only in the private sector but also in the public sector. CG, on the other hand, is the set of processes, norms, policies, laws and institutions affecting the way a corporation is managed. Large-scale loan scandals in the banking companies of developing countries from Asia to Africa to America, have taken place due to lack of transparency


and corruption committed by the managers and the directors of the companies. It’s observed that the practice of transparency is not followed while presenting the financial statements to the stakeholders and the general people.

Lack of transparency makes the financial statements of many companies as cosmetics and far from showing a true and fair view of the real state of affairs. Corruption and lack of transparency have been considered as the formidable constraints on the way of good CG.

Lack of business Talent: This is a common drawback in noticed in the CG of most of developing countries. Dynamic and talented leaders, entrepreneurs, professional and specialist executives are rarely available in

the management of the companies that results poor performance and poor CG in the business arenas.

Non-Protection of Whistleblowers: Whistle blowers-managers or employees who reveal the improper, unethical and illegal conduct of business by their employers-can be a critical and valuable source of corporate information. In developing countries, such whistle blowing practice is almost absent since there’s no protection of whistleblowers and none of the managers or employees is dare to reveal the misconduct and malpractices by their employers.

Other shortcomings of CG are: Ineffective board of directors, weak internal control systems, weak external audit procedures, lack of disclosures, weak capital market role, weak pressure groups,

governments’ interference in state-owned companies, inclusion of political persons in the management of companies, undervaluation of professionals, inactive roles of shareholders.

The Challenges of Corporate Governance in Developing countries

Developing countries around the globe are encountering challenges while attempting to develop and design effective CG principle that can be actively implemented in the corporate management system. If the challenges are not properly dealt with, those thwart the administration of a company. Some common challenges have been identified from the Roundtables on CG sponsored by Organization for Economic Cooperation and Development (OECD) and non-OCED countries and these are: enforcement; ownership and control; shareholders rights and equitable treatment; responsibilities of the Board of Directors; transparency and disclosure and the role of stakeholders.

Enforcement: Most of the developing economies have laws, rules and regulations on corporate governance. Main challenge arises from lack of effective enforcement of existing laws, rules and regulations. Bureaucratic and lengthy rules for companies, starting from company registration to production and selling of products, need to be changed for good CG.

Ownership and control: Corporate ownership structures are dominated by family members in case of private companies and by political personnel, non-professional personnel in case of state owned companies. It’s a


big challenge under good CG to change the ownership structures and control for the private and state owned companies.

Shareholders right and equal treatment: Responsibilities of Board of Director: The Board of Directors is to ensure that the company is properly managed in order to protect, safeguard and enhance stakeholders’ value and to meet the company’s obligation to: stockholders, the company which the Board operates and the law. The Board of Directors of a company in the main executive body and it should play the role of dynamic and effective leader, decision makers, planners and

executors. Good CG of a company is exceeding dependent on the performance of the Board of Directors.

Transparency and disclosure: Public disclosure in an important element of governance in the corporate world because it builds trust, helps brining new investors and ensures smooth functioning of the capital markets and excels the company growth. For good CG, public disclosure of: directors’ selling or buying shares of the company, background of the directors, their qualifications, remuneration, fees paid to the consultants, policies on strategic decisions and risk management,

significant changes in the ownership and corporate governance structure and policies; are extremely essential.

Role of stakeholders: The importance of stakeholder vigilance and commitment to ensuring compliance with regulation cannot be over-emphasized, the regulators are also tasked with the challenge of implementing sustainable and effective enforcement mechanisms that ensure operators adhere to comply with over time. Stakeholders’ active role in CG needs to be enforced by imposing legal provisions.

comes with a heavy price. If the laws, rules and regulations are not supportive, these need to be changed or amended for good corporate governance. Developing countries have long way to go since they are far abaft in CG and need to strive all efforts to establish good CG to keep pace with developed and advance world and it’s a great challenge for the developing economies.

The Author is the Group FinancialController of a Private Group ofIndustries and a Fellow CharteredAccountant of ICAB


Epilogue

With the globalization of businesses and industries, the convergence of science and technology and the hyper competition in the national and international markets, good CG has become a sine qua non for the corporate entities, its stakeholders and others. The state policy makers, the regulators, the owners of the companies, the business professionals in the corporate management of developed and developing countries should ensure that good CG systems are followed, monitored, evaluated, tweaked and updated to meet challenges of 21st century. A company is running with a view to

earning profit, providing employment and contributing to GDP. CG ensures better guidance for better performance. There’s should not be any compromise on the performance of the company. Incapable Boards who fail to achieve better performance, unwilling to rein inefficiencies, operational improvements, should be targeted and changed. Directors whose skills don’t support value creation and ossifications, complacency and atrophy more broadly should be targeted and changed. Dynamic CG demands robust and continual evaluation of the Board’s performance as well as the identification and development of talented people. Neglecting these elements of dynamic CG


Abstract

The objective of this article is to analyze the similarities and dissimilarities between the latest Corporate Governance (CG) Guidelines issued by two regulatory authorities in Bangladesh i.e. Bangladesh Securities and Exchange Commission (BSEC) and Bangladesh Bank (BB). In this article the writer has highlighted the issues which are common in both guidelines and which are uncommon with some recommendations to bridge the gaps. It is not an intention of the writer to criticize the latest CG Guidelines issued by BSEC and BB but to provide some guidelines through which harmonization can be made between the two said CG Guidelines.

Introduction

Bangladesh Securities and Exchange Commission (BSEC) issued its latest CG Guidelines (No. SEC/ CMRRCD/ 2006-158/ 134/Admin/ 44) on 07 August 2012 in order to enhance the corporate governance practices of the companies listed with any stock exchange in Bangladesh, in the interest of investors and the capital market. This notification supersedes its earlier Notification No. SEC/ CMRRCD/ 2006-158/ Admin/ 02-08 dated 20 February 2006.

Harmonization of Corporate GovernanceGuidelines issued by BSEC and BB:

Analysis of the Similarities and Dissimilaritieswith some Recommendations to Bridging the Gaps

Abdullah-Al-Mamun ACA

Bangladesh Bank (BB) issued its latest CG Guidelines through BRPD Circular No.11 dated 27 October 2013, and BRPD Circular Letter No. 18 and 19 dated 27 October 2013 respectively which superseded its earlier guidelines issued from time to time. BRPD Circular No.11 dated 27 October 2013 deals with the provisions regarding formation and responsibilities of Board of Directors (BoD) of all bank companies registered/ incorporated in Bangladesh. BRPD Circular Letter No. 18 dated 27 October 2013 incorporates the provisions relating to appointment and responsibilities of Chief Executive of all banks doing business in Bangladesh except the specialized banks. BRPD Circular Letter No. 19 dated 27 October 2013 deals with the provisions regarding contractual appointment of Advisor and Consultant of all banks doing business in Bangladesh.

The writer has written following two articles on the above mentioned two CG Guidelines:

• The latest Corporate Governance Guidelines issued by Bangladesh Bank: Analyze the changes made with some observations and recommendations (The Bangladesh Accountant, October-December 2013, 09-26) and

TO MAKE THE HARMONIZATION OR BRIDGING THE GAPS, IT IS REQUIRED TO ARRANGE DIALOGUES BETWEEN THE OFFICIALS OF BSEC AND BB. JOINTLY OR ANY OF THEM E.G. BSEC CAN TAKE INITIATIVES TO MAKE HARMONIZATION OF THE LATEST CG GUIDELINES SINCE MOST OF THE BANKS IN BANGLADESH ARE LISTED IN THE STOCK EXCHANGE.


• Corporate Governance Mechanisms in Bangladesh: A Critical Analysis of BSEC’s latest Corporate Governance Guidelines (The Bangladesh Accountant, April - June 2013, 43-50).

In the above two articles the writer highlighted the changes made and new issues included in the latest CG Guidelines issued by BSEC and BB. The writer has also made critical

analysis of the said two CG Guidelines and provided his observations and recommendations upon them. In the observation and recommendation sections and also in conclusion the writer emphasized the harmonization of the said two CG Guidelines which will be useful for listed companies especially for the listed bank companies in Bangladesh to follow without any contradiction.

SL. No. Particulars CG Guidelines

issued by BSEC CG Guidelines issued by BB Remarks

1. Size of the Board(number of Directors)

The number of the Boardmembers of the company shall not be more than 20 (twenty).

In compliance with the amendments made in Section 15 of Bank Company Act 1991 (amended up to 2013), the Directors of a bank company shall not be more than 20.

2. Independent Directors

At least one fifth (1/5) of the total number of Directors in the company’s Board shall be independent Directors. . Previously it was one tenth (1/10) of the total number of the company’s Board of Directors.

The concept of independent Director has been included in the CG Guidelines for first time in the latest CG Guidelines in compliance with the amendments made in Section 15 of Bank Company Act 1991 (amended up to 2013). Nowthe independent Directors of a bank company shall be 3 (three). Provide that if the total number of Directors is less than 20 then the number of independent Directors shall be at least 2 (two).

The proportion of independent Directorsmentioned in the two guidelines is not same.

3. Chairman and CEO

The positions of the Chairman of the Board and the Chief Executive Officer (CEO) of the companies shall be filled by different individuals.

Like the earlier one, in the latest CG Guidelines, BB clearly defined the roles and responsibilities of Chairman of the Board of Directors and the CEO of a bank company. That means the Chairman and the CEO shall be separate individuals.

Moreover, in the latest CG Guidelines, BB elaborately mentioned the provisions on appointment of CEO.

Similarities Between CG Guidelines issued by BSEC and BB

If we analyze the latest CG Guidelines issued by BSEC and BB, we will get thefollowing similarities between them:


SL. No. Particulars CG Guidelines

issued by BSEC CG Guidelines issued by BB Remarks

4. Audit Committee

The company shall have an Audit Committee as a sub-committee of the Boardof Directors. The Audit Committee shall be composed of at least 3 (three) members and shall include at least 1 (one) independent Director.

The Audit Committee shall be formed to assist the Board in fulfilling its oversight responsibilities. The Audit Committee shall be formed with maximum of five members and two of them shall be independent Directors.

Maximum limit of members have been mentioned in the CG Guidelines issued by BB but the same has not been mentioned in the CG Guidelines issued by BSEC. Moreover, the proportion of independent Directorsin the committee is not same in both guidelines.

5. Roles and Responsibilities and Reporting of the Audit Committee

In the latest CG Guidelines BSECspecifically mentioned the roles and responsibilities of the audit committee.Under the reporting section of audit committee, BSEC mentioned the reporting responsibilities of the audit committee to the following: Reporting to the Board of Directors, Reporting to Authorities (i.e. BSEC) and Reporting to the Shareholders and General Investors.

In the latest CG Guidelines BBmentioned the roles and responsibilities and reporting of the audit committee under the following key issues: Internal control, Financial reporting, Internal audit, External audit, Compliance with existing laws and regulations and other responsibilities.

The roles and responsibilities given in the latest CG Guidelines of BB are more comprehensive than those of BSEC. However, the reporting requirements mentioned in the latest CG Guidelines of BSEC are more comprehensive than those of BB.


Dissimilarities Between CG Guidelines issued by BSEC and BB

If we analyze the latest CG Guidelines issued by BSEC and BB, we will get the following dissimilarities between them:

SL. No. Particulars CG Guidelines issued by BSEC CG Guidelines issued by BB Remarks

1. Number of Directorsfrom the same family

In the latest CG Guidelines BSEC didnot provide any clause regarding how many Directors can be appointed in the Board of Directorsof a listed company from the same family at a time.

In compliance with the amendments made in Section 15 of Bank Company Act 1991 (amended up to 2013), not more than 2 (two)members can be appointed as Director of a bank company from the same family at a time.

The restrictions imposed on appointment of Directors from a family will reduce the autocracy of Directors in taking decisions at Boardmeetings.

2. Provision regarding appointment, vacancy and removal ofDirectors

In the latest CG Guidelines BSEC did not mention any clause regarding appointment, vacancy and removalof Directors in the listed company.

In the latest CG Guidelines BB specifically mentioned the appointment, vacancy and removal procedures ofDirectors with some specific formats to furnish information at the time of taking approval from BB.

More transparency can be ensured by mentioning appointment, vacancy and removalprovisions of BoD in the CGGuidelines.

3. Provision regarding appointment of CEO

In the latest CG Guidelines BSEC did not mention any detailed guidelines regarding appointment of CEO in the listed company.

In the latest CG Guidelines BB specifically mentioned the appointment procedures of CEO with some specific formats to furnish information at the time of taking approval from BB.

More transparency can be ensured by mentioning appointment provisions of CEO in the CG Guidelines.

4. Roles and Responsibilities of the Board of Directors

In the latest CG Guidelines BSEC did not specifically mention the roles and responsibilities of the Board of Directors (BoD).

In the latest CG Guidelines BB specifically mentioned the roles and responsibilities of the Board of Directors.

The accountability of BoD can be ensured more effectively by mentioning the roles and responsibilities of the Board of Directors in the CG Guidelines.

5. Roles and Responsibilities of the Chairman and CEO

In the latest CG Guidelines BSEC only mentioned that the Board of Directors shall clearly define respective roles and responsibilities of the Chairman and the Chief Executive Officer. But BSEC did not specifically give the roles and responsibilities of the Chairman and CEO in its latest CG Guidelines.

In the latest CG Guidelines BB specifically mentioned the roles and responsibilities of the Chairman and CEO.

The accountability of Chairman and CEO can be ensured more effectively by mentioning the roles and responsibilities of them in the CG Guidelines.


6. Directors’ Report to Shareholders

In the latest CG Guidelines BSEC specifically mentioned which statements/ informationshall be included in the Directors’ Report in addition to those mentioned under Section 184 of the Companies Act1994.

In the latest CG Guidelines BB did not include any section specifying the information/ statements to be included in the Directors’ Report.

7. SupportiveCommittees of the Board

In the latest CG Guidelines BSEC only described about the audit committee of the Board and did not mention any guidelines regarding other supportivecommittees of the Boarde.g. how many committees can be formed, their organizational structure, qualification of members, roles and responsibilities of the Committee and conducting of Committee meetings.

As per the latest CG Guidelines, the Board of Directors of every bank company shall have to form an Executive Committee, an Audit Committee and a Risk Management Committee with the members of the Board. There shall be no other permanent or temporary Committee or subcommittee of the Board can be formed except the said three Committees.

More transparency and accountability can be ensured by mentioning the formation of supportive committees of the Board in the CG Guidelines.

8. Chairmanof the Audit Committee

The Board of Directors shall select 1 (one) member of the Audit Committee to beChairman of the Audit Committee, who shall be an independent Director.

In the latest CG Guidelines BB did not mention any clause regarding who shall be the Chairman of the Audit Committee.

For ensuring good governance, it would be better to have a clause in the CG Guidelinesthat the Chairman of the Audit Committee shall be an independent Director.

9. Guidelines on meetings of Boardand Supportive Committees

In its latest CG Guidelines BSEC did not mention any clause regarding holding of Board and supportive committees meeting.

In its latest CG Guidelines BB specifically mentioned theguidelines on holding of Boardmeetings (once or more than once in a month upon necessity and not less than one meeting of the Boardin three months to be held) and supportive committee meetings(audit committeeand risk management committee meetings: the audit committee and risk managementcommittee shall have to hold at least 4 meetings in a year and upon necessity, the Committees can call meet ing at any time).

The accountability of BoD can be ensured more effectively by specifying the guidelines onholding of Boardand Supportive Committees meeting in the CG Guidelines.

More accountability can be ensured and adequate information can be provided to the stakeholders by mentioning some information/ statements that shall be furnished in the Directors’ Report in the CG Guidelines.

6. In the latest CG GuidelinesBSEC specificallymentioned whichstatements/ informationshall be included in theDirectors’ Report inaddition to thosementioned under Section184 of the Companies Act1994.

7. In the latest CG GuidelinesBSEC only described aboutthe audit committee of theBoard and did not mentionany guidelines regardingother supportivecommittees of the Boarde.g. how many committeescan be formed, theirorganizational structure,qualification of members,roles and responsibilities ofthe Committee and conductingof Committee meetings.

More transparencyand accountabilitycan be ensured bymentioning theformation ofsupportivecommittees of theBoard in the CGGuidelines.

8. The Board of Directors shallselect 1 (one) member ofthe Audit Committee to beChairman of the AuditCommittee, who shall bean independent Director.

For ensuring goodgovernance, itwould be better tohave a clause inthe CG Guidelinesthat the Chairmanof the AuditCommittee shallbe an independentDirector.

9. In its latest CG GuidelinesBSEC did not mention anyclause regarding holding ofBoard and supportivecommittees meeting.

The accountabilityof BoD can beensured moreefffff ectively byspecifyfyf ing theguidelines onholding of Boardand SupportiveCommitteesmeeting in the CGGuidelines.

More accountability can be ensured and adequate information can be provided to the stakeholders by mentioning some information/ statements that shall be furnished in the Directors’ Report in the CG Guidelines.

Directors’Report toShareholders

SupportiveCommitteesof theBoard

Chairmanof the AuditCommittee

Guidelineson meetingsof BoardandSupportiveCommittees

In the latest CG Guidelines BB didnot include any section specifyfyf ingthe information/ statements to beincluded in the Directors’ Report.

As per the latest CG Guidelines,the Board of Directors of everybank company shall have to forman Executive Committee, an AuditCommittee and a RiskManagement Committee with themembers of the Board. There shallbe no other permanent ortemporary Committee orsubcommittee of the Board can beformed except the said threeCommittees.

In the latest CG Guidelines BB didnot mention any clause regardingwho shall be the Chairman of theAudit Committee.

In its latest CG Guidelines BBspecifically mentioned theguidelines on holding of Boardmeetings (once or more than oncein a month upon necessity and notless than one meeting of the Boardin three months to be held) andsupportive committee meetings(audit committeeand risk management committee meetings: the auditcommittee and risk managementcommittee shall have to hold atleast 4 meetings in a year and uponnecessity, the Committees can callmeet ing at any time).




10. Restriction to become the Member of Audit Committee

In its latest CG Guidelines BSEC did not mention any clause regarding who can/ cannot be the members of the audit committee other than the independent Director.

In its latest CG Guidelines BB specifically mentioned that audit committee shall comprise with the Directors who are not the members of the executive committee of the Board.

For ensuring good governance, such restriction clause can be included in the CG Guidelines.

11. Training of Directors

In its latest CG Guidelines BSEC did not mention any clause regarding training of Directors.

As per the latest CG Guidelines of BB, the Directors of the Board shall have to acquire appropriate knowledge of the Banking laws and other relevant laws, rules and regulations to effectively discharge the responsibilities as a Director ofthe bank.

For ensuring good governance, it would be better to have a clause in the CG Guidelines regarding training of Directors.

12. Facilities and benefits taken by Chairman of the Board

In its latest CG Guidelines BSEC did not mention any clause regarding facilities and benefits that can be taken by Chairman of the Board of a listed company.

In its latest CG Guidelines BB specifically mentioned the facilities and benefits that can be taken by Chairman of the Board of a bankcompany.

For ensuring more transparency, it would be better to have a clause in the CG Guidelines regarding facilities and benefits that can be taken by Chairman and other Directors of a company.

13. Certification of Financial Statements by CEO and CFO

The CEO and CFO shall certify to the Board that: They have reviewedfinancial statements for the year and that to the best of their knowledge and belief: These statements do not contain any materially untrue statement or omit any material fact or contain statements that might be misleading; and these statements together present a true and fair view of the company’s affairs and are in compliance with existing accounting standards and applicable laws.There are, to the best of knowledge and belief, no transactions entered into by the company during the year which are fraudulent, illegal or violation of the company’s code of conduct.

In its latest CG Guidelines BB did not mention any clause regardingcertification of financial statements by the CEO and CFO of a bank company.

The transparencyand accountability of CEO and CFO can be ensured more effectively by mentioning a clause regarding certification of financial statements by the CEO and CFO in the CGGuidelines.



14. Restriction on services provided by external/ statutory auditors

In its latest CG Guidelines BESC provided a section mentioning that the issuer company should not engage its external/statutory auditors to perform the following services of the company:

• Appraisal or valuation services or fairness opinions.

• Financial information systems design and implementation.

• Book-keeping or other services related to the accounting records or financial statements.

• Broker-dealer services.• Actuarial services.• Internal audit services.• Audit/ certification

services on compliance of corporategovernance guidelines as required under this CG Guidelines.

• Any other service that the Audit Committee determines.

In its latest CG Guidelines BB did not mention any clause regarding restriction on services provided by external/ statutory auditors.

For ensuring good governance, it would be better to have some clauses in the CG Guidelines regarding restriction on services provided by external/ statutory auditors.

15. Issues relating to Subsidiary Company

In its latest CG Guidelines BSEC provided guidelines regarding the composition of BoD of a subsidiary company, the representation of independent Director of a holding company on the BoD of a subsidiary company, placing of minutes of Board meeting of subsidiary company forreview at the following Board meeting of the holding company and review of financial statements of the subsidiary company by the audit committee of the holding company.

In its latest CG Guidelines BB did not mention any guidelineregarding formation of BoD of subsidiary company of a bank, the representation of independent Director of a bank company on the BoD of a subsidiary company, placing of minutes of Boardmeeting of subsidiary company forreview at the following Boardmeeting of the bank company and review of financial statements of the subsidiary company by the audit committee of the bank company.

For ensuring good governance, it would be better to have some clauses in the CG Guidelines regarding subsidiary companies.


banks in Bangladesh are listed in the stock exchange.

• Modification of CG Guidelines to bridge the gaps

In the dissimilarities section the writer has specifically highlighted major gaps between the CG Guidelines issued by BSEC and BB. Both authorities can include the additional clauses or issues of each other in their CG Guidelines to bridge the gaps and also align the contradictory clauses mentioned in their CG Guidelines.

Recommendations for Harmonization of CG Guidelines issued by BSEC and BB

From the similarities and dissimilarities sections it has been found that list of dissimilarities are more than those of similarities. From the dissimilarities section it has also been observed that to some extent the latest CG Guidelines issued by BB is more comprehensive than those of BSEC. However, both authorities should take necessary initiatives to make harmonization of their latest CG

Guidelines since most of the banks in Bangladesh are listed in the stock exchange. The following initiatives can be taken to bridge the gaps between the latest CG Guidelines issued by BSEC and BB:

• Dialogue between the officials of BSEC and BB

To make the harmonization or bridging the gaps, it is required to arrange dialogues between the officials of BSEC and BB. Jointly or any of them e.g. BSEC can take initiatives to make harmonization of the latest CG Guidelines since most of the


16. Provision regarding appointmentof Advisor and Consultant

In its latest CG Guidelines BSEC did not mention any clause regarding appointment of Advisor and Consultant in a listed company.

In its latest CG Guidelines BBmentioned detailed guidelines regarding contractual appointment of Advisor and Consultant in a bank company.

For ensuring good governance, it would be better to have some provisions in the CG Guidelines regarding appointment of Advisor and Consultant.

17. Certificationon compliance of conditions of CG Guidelines

In its latest CG Guidelines BSEC specifically mentioned that the listed companies shall have toobtain a certificate from a practicing Professional Accountant/ Secretary (Chartered Accountant/Cost and Management Accountant/ Chartered Secretary) regarding compliance of conditions of Corporate Governance Guidelines of the Commission and send the same to the shareholders along with the Annual Report on a yearly basis.

In its latest CG Guidelines BB did not mention any clause about obtaining a certificate from a practicing Professional Accountant/Secretary (Chartered Accountant/Cost and Management Accountant/Chartered Secretary) regarding compliance of conditions of Corporate Governance Guidelines of BB and send the same to the shareholders along with the Annual Report on a yearly basis.

For ensuring good governance, it would be better to have a clause in the CG Guidelines regarding obtaining of certificate on compliance of conditions of CG Guidelines from professional accountant/ secretary in practice and disclose the same to the shareholders along with the Annual Report on a yearly basis.


The Author is the Faculty &Associate Member of ICAB andSenior Manager, Finance Division, Eastern Bank Limited

• Formation of Joint Committee to make the harmonization of CG Guidelines

To make the said harmonization a joint committee can be formed with the representatives of BSEC and BB. The members of the committee will work together to identify the gaps and contradictory areas between the two CG Guidelines and make necessary recommendations for amending the CG Guidelines to bridge the gaps and contradictions between them.

• Including omnibus clause in the CG Guidelines issued by BSEC

As a regulatory authority of all listed companies in Bangladesh, BSEC may incorporate an omnibus clause in its CG Guidelines mentioning “in case of banks and non-bank financial institutions, insurance companies and statutory bodies for which separate primary regulators like Bangladesh Bank, Insurance Development and Regulatory Authority, etc. exist, those companies shall have to follow the CG Guidelines prescribed by such primary regulators in so far as those prescriptions are not inconsistent with the CG Guidelines issued by BSEC”.

• Including a clause regarding contradictory issues by BB

BB may include a clause regarding the contradictory clauses mentioned in the latest CG Guidelines issued by BSEC and BB. The clause may be “if there is any contradiction

between the CG Guidelines issued by BSEC and BB, the guideline or directive of BSEC/ BB (only BSEC/ BB is to be mentioned here) is to be followed”.

Concluding Remarks

From the dissimilarities section of the article it has been observed that both CG Guidelines have some strong clauses which not exist in other guidelines. BSEC provided guidelines on the format of Directors’ Report to the Shareholders, Chairman of the Audit committee shall be an independent Director, Certification of Financial Statements by CEO and CFO, restrictions on services provided by External/ Statutory Auditors, monitoring issues relating to Subsidiary Company, Certification on compliance of conditions of CG Guidelines by the listed companies etc. On the other hand, BB provided guidelines on the maximum number of Directors from the same family, roles and responsibilities of Board of Directors, provision regarding appointment, vacancy and removal of Directors, Chairman and CEO, Supportive Committees of the Board, guidelines on meetings of the Board and Supportive Committees, training of Directors, facilities and benefits can be taken by Chairman and other Directors, provisions regarding appointment of Advisor and Consultant etc.

If the harmonization is made by including the strong points/ clauses of each other, the CG Guidelines of BSEC and BB will be more

strong and comprehensive. Both authorities may consider the recommendations made by the writer to make such harmonization or any other options suitable for them.

References

• Bank Company Act 1991 (amended up to 2013)

• BRPD Circular No. 11 dated 27 October 2013.

• BRPD Circular Letter No. 18 dated 27 October 2013.

• BRPD Circular Letter No. 19 dated 27 October 2013.

• Mamun. A. Abdullah, (2013), Corporate Governance Mechanisms in Bangladesh: A Critical Analysis of BSEC’s latest Corporate Governance Guidelines, The Bangladesh Accountant, April - June 2013, 43-50.

• Mamun. A. Abdullah, (2013), The latest Corporate Governance Guidelines issued by Bangladesh Bank: Analyzing the changes made with some observations and recommendations, The Bangladesh Accountant, October - December 2013, 09-26.

• SEC Notification No. SEC/CMRRCD/2006-158/147/Admin/48 dated 21 July 2013.

• SEC Notification No. SEC/CMRRCD/2006-158/134/Admin/44 dated 07 August 2012.

• SEC Notification No. SEC/CMRRCD/2006-158/Admin/02-08 dated 20 February 2006.

Good governance is a much talked about issue for any country. We are no exception to that. With the economic prosperity, Corporate Governance seems to have caught more attraction them ever before. Therefore, the issue for a society is how we have addressed our corporate governance with its basic framework? The corporate scandal of Enron, Peregrine Systems, WorldCom, Tyco in 2001 and 2002 in USA. Sonali Bank loan scam by Hallmark Group has brought controversy as to the extent of true form of Corporate Governance. It is no more a matter of another day once the general mass is affected. That said, it is now a matter for us to re-think especially in the fallout of Destiny and who knows, how many are yet to be discovered!

A corporation or company, whatever term is used for a legal entity of business as per statutory law of any jurisdiction, generally has two principal governing codes (i) the Statutory incorporating law or the Companies Act and (ii) Constitution or Corporate Charter termed as Memorandum and Articles of Association of the company. These two codes are in general statutory Corporate Governance

Reforming Companies Act to CaterCorporate Governance Framework

Dipok Kumar Roy ACA

Code unless any additional code or guidelines are adopted considering the necessity (i) to stand Corporate Governance on four pillars- Accountability (answerable or reportable to someone), Fairness (impartial, equitable & justified), Transparency (openness to disclose) and Responsibilities (obligation to do) and (ii) to cater five elements thereof- Good Board Practices, Effective Control Process, Transparent Disclosure, Well-defined Shareholder’s Rights and Board Commitment. Corporate Governance would not be sound unless it stands on these four pillars and encompasses these five elements. Four pillars are the ethical & value aspects and five elements are the bases of responsibilities of the Board of Directors, the leader of the operation. The ethics and value of the Board of Directors are designed with high standard and integrity that leads them (directors) for operating the business with five guts elements of corporate governance to reach the ultimate goals of the Company. Considering these four pillars and five elements, the Corporate Governance Framework may be structured as follows:

The statutory law, the Companies Act, of a country should be standard and updated


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enough to entail the above framework covering the stakeholders, regulators and cross links or consistent provisions of other operational & influential laws, regulations and policies needed in corporate governance systems with a view to reaching the ultimate goal of the organization. Hence, we may review the definition of Organization for Economic Co-operation and Development (OECD) to grasp an idea of framework of Corporate Governance - “Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.” Each constitute should have a code of

corporate governance in line with the companies act, as standardized and contemporized, and other operating laws covering the above framework. Where the Companies Act and other operating laws are not updated enough to make the corporate governance fully standard best practice underlying the framework, Securities and Exchange Commission (SEC) may provide additional points, as empowered by law to do so, of code to be complied with by the companies. As such, this code is the rules of SEC as regulators formulated in accordance with laws & best practice catering corporate governance framework. Additionally, the Central Bank or any other regulators may issue any additional guideline(s) to be complied with by the corporations or companies, if necessary. The Companies act should state that the public listed company must have own principles in line with the national code where SEC and other

regulators would monitor the implementation separately. The Companies Act also should state all other companies other than listed may also have own principles of corporate governance so far applicable and those companies must comply with the code while applying for listing in stock exchange. However, based on own principles of Corporate Governance based on the national code, the company would focus on utmost ethic and value to implement for attaining the goals of the company.

In Bangladesh, the Companies Act 1994 and the regulations thereof, especially the regulation to include in Memorandum and Articles of Association and forms, contents and disclosures of different types of returns and of financial statements, for transparent disclosure, are general code of corporate governance for a specific company. The companies which


are regulated by separate regulators like Bangladesh Bank (BB), Securities and Exchange Commission (SEC), and Insurance Development & Regulatory Authority (IRDA) under any specific law like the Bank

Companies Act 1991, the Securities & Exchange Ordinance 1969, Insurance Act 2010 or any other act or laws or additional regulations of regulators have to be complied with in addition to the Companies Act 1994. SEC issued corporate government guidelines, being empowered by section 2cc of Securities and Exchange Ordinance 1969, on 09 January, 2006 for the first time for all listed companies covering some additional issues not covered in the said operating laws which have been updated lastly on 07 August 2012. Basically this code is additional and hence, complementary to the Companies Act 1994. The recent updates

thereof include some of important issues not covered by the companies act 1994, like qualifications of independent directors, some additional specifications of audit committee’s functions, control issues of subsidiary company and duties of Chief Executive Officer (CEO) and Chief Financial Officer (CFO), which are essentials to ensure sound corporate governance.

So, it is apparent that the code of corporate governance would be for Bangladesh (i) The related provisions of the Companies Act 1994 together with regulations thereof (ii) SEC guidelines for Corporate Governance, either covering all issues taking the contents of the companies act or any additional issues over and above that act essentially required to sustain and attract interest of investors ; and (iii) other operating laws for any specific type of companies like banks, financial

institutions, insurance companies, generation or supply of electric companies or any other company having separate law of operation along with separate regulations or rules of operation. The Companies Act 1994 is the basic code of corporate governance and applicable for all type of companies. In many respects the existing Companies Act 1994 has been outdated and obsolete and hence, it needs to be modernized. Now questions remains why is outdated, what is impact on governance and why modernization is important. Point to point discussion in line with framework is necessary to bring out the necessity of modernization and impact of modernization to enhance corporate governance.

Due to elapse of time technology, thoughts, concept & global corporate strategy has taken new shape inevitably and changing and updating continuingly based on


relentless research and practiced based findings. As such, provisions of Companies Act 1994 have been outdated and needs to be reformed & contemporized. If the Companies Act contents are deviated from contemporary & standard practice, the whole operations would be deviated from its goal and would register unexpected adverse operational results. The today’s age is the time of adopting new technology and thoughts to be a first mover in strategy to go ahead with first completive advantage.

In case of first component of framework, Board Good practice, our law is not strongly supportive in case of constitution of the board with minimum and maximum number of members and qualities of them, independent directors with qualifications and responsibilities, duties and responsibilities of Board, code of conduct of directors, managing conflict of interest, training and self-evaluation of performance, the role of Managing Director, appointment of senior management like Chief financial officer, Company secretary, Head of internal auditor, role of them and quorum of the meeting of the

Board on the percentage of total number instead of head counting for quorum. In the schedule-1, regulation 92 of the Companies Act 1994 has space to appoint any committee under Board that should be specific like audit committee, executive committee for conferring some issues of Board to be done temporarily but ratified by the board or any other committee for any specific purpose. A good structure and good performance in practice, both are essential. Hence, it has been urgent to include in the laws to constitute an impartial and effective Board, Board committee and senior management with full duties & responsibilities. The Board, the leader of the operation, must be well equipped as above with efficient senior management in performing duties to keep the company on a solid base and to go ahead in line with the target.

In the existing Companies Act there is no requirement words for introducing internal control systems encompassing risk management. Internal control is a system consisting of specific policies and procedures designed to provide management with reasonable assurance that the goals and objectives it believes

important to the entity will be met. It generally covers (i) the control environment (ii) risk assessment (iii) control activities (iv) information and communication and (v) monitoring. Internal control provides us that transactions are valid, timely and properly authorized recorded, value and classified. The Companies Act should state to ensure internal control by directors to authorize and record all transactions properly and to show the true & fair view of the profit & loss account and to safeguard the assets of the company. The existing provisions on role and responsibilities of external audit, tenor of appointment etc. are not adequate to act independently and hence, needs to bring grounds of being independent reasonably. The Companies Act must include for assessing and ensuring control systems in existence in addition to internal control systems (i) independent internal audit department & functions (ii) independent external audit (iii) use and analysis of Management Information System (MIS) and (iv) strict directions of compliance with oath and penalty provision with both fines and imprisonment based on the significance of


contents of BFRS in respect of income statement & financial position and nothing is stated about other components of financial statements- like a statement of Cash Flows and a statement of changes in equity. Disclosures about salary structure in the note as per the said act to identify the taxable employees has been outdated as minimum taxable salary of BDT 36,000 in a year and BDT 3,000 per month has gone far beyond ten years ago. These provisions need to be streamlined with BFRS. In order to be more conservative or to save national

interest, any contradictions may persist in presentation and accounting treatment with BFRS, where the contents of law should clarify for doing so. In this respect act should be restrict in compliance and we may refer the words of justice Honorable Alfred J.

Lechner Jr. (USA)- “In today’s climate of current disclosure and fairness, there's no room for executives to cut corners . . . executives must ‘certify that (the) information is correct’ when ‘they sign their company’s (SEC) filings . . . if their statements contain material misstatements or omissions, they can be exposed not only to civil penalties and lawsuits, but also to criminal prosecution and prison.”

Regarding shareholder‘s right, the Companies Act 1194 has no provision on control of related party & extraordinary transactions

non-compliance. The companies act should also address to accounting & administrative jobs with new technology and thoughts specially using software, dematerialized shares instead of certificate, dimension of outsourcing instead of abandoned provisions of managing agent in the act, meeting conducted using Video facility, resolution by circulation etc. For the protection of investors’ interest, the act should focus on standard control environment in principles as well as in practice by the leadership of the Board.

Does the Companies Act require disclosures? Yes, a lot of. But most of them are not updated and not in line with requirement of International Financial Reporting Standards (IFRSs) as adopted by Institute of Chartered Accountants of Bangladesh (ICAB) termed as BFRS. The framework of financial statements, disclosures thereof & all components of financial statements as required by the said BFRS should be categorized and cross referred to those standards in the act. At presents, requirements of the forms, disclosures and accounting treatments differ between the Companies Act 1994 and BFRS (i) Accounting of preference shares: as per BAS 39: Financial Instrument: Recognition and Measurement, preferred equity shares having definite date of redemption would be liability in

spite of dividend term and tax impact would be same as per tax law and only the perpetual preference shares would be equity and shown under capital. As per section 154 of the Companies Act 1994, preference share is equity capital irrespective of its type of redeemable or irredeemable and would be shown under company’s capital. Hence, as per the said section of the Companies Act 1994, when such capital is redeemed, a separate capital reserve redemption account is to be opened to avoid reduction of capital without permission of the

court. (ii) Accounting for preliminary expenses: as per BAS 38: Intangible Assets, preliminary expenses shall be charged as expense, but as per Part-1, Balance Sheet, of Schedule- XI of the Companies Act 1994, preliminary expenses may be deferred. (iii) Valuation of inventory: BAS 2: Inventory- inventory would be valued either First in First Out (FIFO) or weighted average method & Last in First Out (LIFO) is no more in use, but as per the above Part-1, Balance Sheet, LIFO method is in use. (iv) Forms & Disclosures in the Companies Act 1994: these are far away from the


that may unduly affect the operation causing business loss. In the act there should be a clear control and disclosure mechanism in line with IFRS/BFRS of these types of transactions to avoid any influential transaction engineering against the interest of minority shareholders. For non- compliance issues like not holding AGM within time frame, reduction of capital, allotment not done in time changing of object clause of memorandum, merger of without companies etc. obtaining court approval, due to lengthy court proceedings definitely to protect shareholders’ interest, which suffers a lot because of time consuming to get approval from court. The new act should provide any solution with safety measures of shareholders’ interest to resolve these matters without going to court or special tribunal may be formed only for company’s issues to settle any dispute shortly. Interest of minority shareholders as per section 233 is not adequate and needs to cover for more issues of taking decision. On dividend policy, payment procedures, time, unpaid dividend, dividend rights etc and penalty for non-compliance should be stated in the act clearly. Shareholders’ right to vote, appoint proxy, nominate directors, receive the copy of minutes, financial statements, dividends, purchase new shares, sell of shares and finally right to assets left after

liquidation need to be reviewed and presented in the act keeping shareholders’ right prominently .

The Board also should be ethically strong to bear value driven mind set up to perform duty and review the operation of management. In case of commitment of Board, yes, the Board is primarily committed to its own interest when the Companies Act is flexible on provisions on Corporate Governance principles in respect of constitution of Board and practice, control process, transparent disclosure,

well-defined shareholders right. In order to ensure good governance, the act should address to Corporate Governance Committee and codes, the appropriate policies, resources etc. to make the members of the Board liable and committed. If we go through the Annual Reports in Bangladesh, the style of corporate governance can be figure out. Most of the companies even those listed in the stock exchange under control of SEC have no transparency and similarity in disclosing information which represents Board’s inability or lack of commitment towards their duty. The forms, contents, accounting

treatment and disclosure in financial statements are widely varied from one company to others excepting bank and financial institutions. If the Companies Act is strong on policies & committed to implementation i.e strict compliance of corporate governance, surely the accounting treatment & presentation of financial statements would have uniformity and acceptability to all concerned.

The Companies Act 1994 has been reformed and in the draft stage under review of different

authorities. Before finalizing and going to parliament for its approval we should review carefully to cover all issues as stated above to cater the framework of corporate governance.

However, as discussed, the following

steps could be taken to enhance corporate governance: (i) Implementation of legislative reform is the first job specially the Companies Act to match with the standard framework of corporate governance (ii) Corporate Governance Council should be formed by the representative of different professional bodies like the Institute of Chartered Accountant of Bangladesh (ICAB), The Institute of Chartered Secretary of Bangladesh(ICSB) and The Institute of Cost and Management Accountant of Bangladesh (ICMAB) etc., different business associations Federation of Bangladesh


may be recalled “If a country does not have a reputation for strong corporate governance practices, capital will flow elsewhere. If investors are not confident with the level of disclosure, capital will flow elsewhere. If a country opts for lax accounting and reporting standards, capital will flow elsewhere.” If capital flow cannot be attracted either from inland investors or from aboard as Foreign Direct Investment (FDI), the industrialization will fall flat and that is not expected at all.

Chambers of Commerce and Industry (FBCCI), Metropolitan Chamber of Commerce and Industry (MCCI), Dhaka Chamber of Commerce & Industry( DCCI) etc., regulators like BB, IRDA, representatives of development agent/partner like Asian Development Bank (ADB), World Bank (WB) and other partners, government representatives etc. under close supervision of SEC to form national code of Corporate Governance in general depending on the Companies Act & other operating laws and regulations (iii) the respective regulatory authority like BB, and IRDA etc. may issue additional Corporate Governance Guidelines in line with regulating laws, rules & regulations (iv) each company must have Corporate

Governance Principles under the regulating guidelines (v) Continuous follow up and assessment of performance by regulator should be enhanced with the existing principles of corporate governance of the Company. (vi)A reporting framework may be designed more comprehensively with a focus on quality information.

Finally, we hope to start our Corporate Governance framework backed by the reformed Companies Act and other operating laws adequately; otherwise the confidence of investors on their interest will be poured away. The words of Arthur Levitt, former Chairperson of US Securities Exchange Commission,

The Author is Associate members ofInstitute of Chartered Accountantsof Bangladesh & Chief FinancialOfficer of Venture InvestmentPartners Bangladesh Ltd.

Introduction

As auditor what is our deliverable to the entity we audit? The answer is simple – audit report. The preparation of it may not be that simple, and can be embarrassing for the auditor if it is not perfect.

This is the only item in a financial report or annual report of a company that is produced and owned by the auditor. Everything else is prepared and owned by management and/or the governing board of the company/entity1.

Audit report is the only deliverable that is provided to shareholders by auditors, and is one of the few deliverables presented to the management, Audit Committees and the Boards. Importantly, this is the only externally available report produced by auditors for listed and public interest entities which can be subject to public scrutiny. Accordingly, we cannot emphasise enough the importance of audit report and producing the right version of it.

This article looks into various important considerations that auditors need to take into account when finalising audit

Audit Report – Fair Presentationvs Compliance Framework

Abu HM Kibria ACA

opinions and includes a sanitised real-life case study.

General purpose vs special purpose framework

The starting point in preparing an audit report is to establish whether the audit report is over a general purpose financial report or a special purpose financial report. The primary distinction between general purpose and special purpose framework is the range of users along with their information needs.

A general purpose financial reporting framework is designed to meet the common financial information needs of a wide range of users. A special purpose financial reporting framework is designed to meet the financial information needs of specific users.

An audit report/opinion2 over a general purpose financial report/statements3 is intended for use by a broad range of users and is expected to meet their common needs. Such audit reports are generally distributed widely, published in various formats including print/electronic media and likely to be made accessible to many users outside the addressee of the audit


1 Company and entity are used interchangeably in this article 2 Audit report and audit opinion are used interchangeably in this article3 Financial report and financial statements are used interchangeably in this article

COMPLIANCE FRAMEWORK GENERALLY DOES NOT PROVIDE SUCH FLEXIBILITY, RATHER MAY DICTATE HOW SPECIFIC ITEMS NEED TO BE REPORTED WHICH IN MANY CASES MAY BE DIFFERENT FROM IFRS OR OTHER FINANCIAL REPORTING FRAMEWORKS. FOR EXAMPLE, MANY CONTRACTS/AGREEMENTS WOULD SPECIFY CERTAIN ADJUSTMENTS TO BE MADE TO AN IFRS/OTHER LOCAL GAAP FINANCIALS FOR THAT TO COMPLY WITH CONTRACTUAL PROVISIONS, OR MIGHT EVEN SPECIFY THEIR OWN MEASUREMENT BASIS.


report. These considerations impact the audit strategy including materiality in auditing such financial reports. An example of a general purpose audit report would be a statutory audit report over a listed company’s financial statements.

On the other hand, an audit report over a special purpose financial statement is intended for specific users/group of users and is expected to meet their specific needs. Because such financial statements and associated audit report address the specific needs of niche users, the audit report cannot be distributed widely and cannot generally be published in electronic form. A restriction on distribution forms part of such audit reports specifying that distribution is restricted only to intended users. As a result, audit strategy for special purpose financial statements could be significantly different from that of general purpose financial statements. An example of a special purpose audit report would be an audit report over a set of financial statements prepared in compliance with specific provisions of a contract or a specific regulation.

Fair presentation vs compliance framework

An audit report over a general purpose or special purpose financial report may be prepared using either a fair presentation framework or a compliance framework.

A fair presentation framework for audit report is used when the underlying financial statements is prepared using such framework. As per ISA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing, the term “fair presentation framework” is used to refer to a financial reporting framework that requires compliance with the requirements of the framework and:

i. Acknowledges explicitly or implicitly that, to achieve fair presentation of the financial statements, it may be necessary for management to provide disclosures beyond those specifically required by the framework; or

ii. Acknowledges explicitly that it may


be necessary for management to depart from a requirement of the framework to achieve fair presentation of the financial statements. Such departures are expected to be necessary only in extremely rare circumstances.

A compliance framework for audit report is used when the underlying financial statements are prepared using such framework. The term “compliance framework” is used to refer to a financial reporting framework that requires compliance with the requirements of the framework, but does not contain the acknowledgements in (i) or (ii) above. It is important to note that a compliance framework does not require achieving fair presentation.

When the financial statements are prepared in accordance with fair presentation framework, the auditor is required to evaluate whether the financial statements achieve fair presentation. As per ISA 700 Forming an Opinion and Reporting on Financial Statements, the auditor’s evaluation as to whether the financial statements achieve fair presentation shall include consideration of:

(a) The overall presentation, structure and content of the financial statements; and

(b) Whether the financial statements, including the related notes, represent the underlying transactions and events in a manner that achieves fair presentation.

Some widely recognised and well established financial reporting frameworks, e.g. IFRS, are designed to allow preparers to achieve fair presentation.

Evaluation as to whether the financial statements achieve fair

presentation can involve considerable judgement and may not always be straightforward.

As stated earlier, an audit report over a general purpose as well as a special purpose financial report may be prepared using either fair presentation or compliance framework. However, in practice, it is common for audit reports over general purpose financials to be based on fair presentation framework and audit reports over special purpose financials to be based on compliance framework.

Key reporting difference in fair presentation and compliance framework

The fundamental difference in preparation of financial statements using fair presentation framework as opposed to using compliance framework is the flexibility around basis of preparation as well as the reporting framework itself. For example, financial statements prepared using International Financial Reporting Standards (IFRSs) will generally be on a fair

presentation framework. Financial statements prepared using specific provisions of a contract or a regulation will generally be on compliance framework.

Furthermore, fair presentation framework may offer some flexibility as to the choice of measurement basis or disclosure provided in the reporting framework. For example, financial statements based on IFRSs framework may choose to report certain items using fair value basis as opposed to cost basis.

Compliance framework generally does not provide such flexibility, rather may dictate how specific items need to be reported which in many cases may be different from IFRS or other financial reporting frameworks. For example, many contracts/agreements would specify certain adjustments to be made to an IFRS/other local GAAP financials for that to comply with contractual provisions, or might even specify their own measurement basis.


Use of appropriate phrase – ‘true and fair’, ‘present fairly’, ‘are prepared’

From an audit report perspective, the key difference between fair presentation and compliance framework is the application of appropriate ‘opinion phrase’.

An audit report prepared using a fair presentation framework (e.g. IFRS) would use either of the following two phrases in the “opinion”:

a) The financial statements ‘present fairly, in all material respects’, … in accordance with [the applicable financial reporting framework]; or

b) The financial statements ‘give a true and fair view’ of … in accordance with [the applicable financial reporting framework].

Both ‘present fairly’ and ‘true and fair view’ are regarded as equivalent, per ISA 700.

An audit report prepared using a compliance framework (e.g. contract/agreement) would use the following phrase in the “opinion”:

a) the financial statements ‘are prepared, in all material respects’, ... in accordance with [the applicable financial reporting framework].

Use of inappropriate ‘opinion phrase’, e.g. the financial statements ‘present fairly, in all material respects’ when the financials are prepared using a compliance framework may have many ramifications including regulatory implications.

When to use ‘present fairly’ and when to use ‘true and fair view’ in a fair presentation framework?

While there is no difference between “true and fair” and “present fairly” in theoretical terms, there remain some application differences in practice. “True and fair view” is generally championed by national legislations governing companies and corporations, and accordingly this features most in audit reports of statutory financial statements.

For non-statutory financial statements, the overwhelming choice of auditors is “present fairly”. The primary reason for this is the use of the term “in all material respects” immediately after “present fairly”. Because of the use of “in all material respects”, the “present fairly” phrase is considered more appropriate as we can bring-in the concept of

materiality into the audit report. Many auditors consider “true and fair” to be more open-ended, regulation driven and thus should only be used when specifically required by law.

Other key differences in fair presentation and compliance framework in the audit report

The other key difference between fair presentation and compliance framework, other than that of the use of different opinion phrase, is that the ‘Management’s responsibility’ and ‘Scoping/ Auditor’s responsibility’ paragraph in a fair presentation framework requires explicit reference to “fair presentation” of the financial statements. This underlines the importance of scoping/planning an audit in such a manner so that sufficient appropriate audit evidence is obtained over fair presentation requirements which would enable us to make the fair presentation statement in the opinion.

Excerpts from example fair presentation audit report of ISA 700 is presented below highlighting the use of “fair presentation”.


Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation4 of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control5. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting the estimates made by management, as well as evaluating the overall presentation of the financial statements.

Management’s responisibility paragraph

Auditor’s responsibility paragraph

In case of a ‘true and fair’ opinion, the ‘fair presentation’ wording highlighted in above boxes are amendedappropriately to reflect true and fair view.

Mini case study

Case study

P acquires 100% of S on 31 December 20xx. S prepares its financial statements in accordance with IFRSs. P has significant financing and its financiers require regular reporting to them in a specific format in accordance with financing agreements.

Upon finalisation of the acquisition, P requires S to submit audited “completion accounts” per the Sale and Purchase Agreement (SPA). The completion accounts is needed primarily to meet P’s financing obligations and requires significant adjustments to reported IFRS financials as at 31 December 20xx. The adjustments include, amongst other specified amendments, adjustments to be made to working capital including 100% provisions to be applied to receivables over 120 days, land & buildings to be valued at certain agreed value as opposed to the

book value, all debt to be measured using a certain measurement basis, etc.

An audit opinion is required for the completion accounts. Let us look at the relevant points from the above case study to conclude on the appropriate audit report in this circumstance.

Audit report considerations

a) Whether the financial statements/completion accounts is a general purpose or a special purpose financial statements: Given that the completion accounts is specifically prepared for the transaction and is in accordance with specific requirements tailored to meet P’s specific needs, user group is limited to P’s management, Board and financiers, plus the absence of any information suggesting wide ranging users, it can be concluded that the completion accounts is a special purpose financial statement.

b) Now we need to establish whether the financial statement/completion accounts is prepared using a fair presentation framework or a compliance framework. As the completion accounts is prepared with significant user-specific and SPA induced adjustments to IFRS numbers, it cannot be claimed to be an IFRS/fair presentation financials. The compliance requirements of the SPA make it a financial report prepared in accordance with a compliance framework.

c) Now that we have established the framework of financial statements, we need to establish the Audit report framework. Generally, Audit report framework is consistent with the financial statements framework. In this case, the audit report will be a special purpose audit report prepared in accordance with compliance framework.


The Author is Manager, KPMG, 10 Shelly St, Sydney, NSW 2000 Australia

Audit report flow-chart

The following audit report flow-chart summarises the discussion in this article and may be useful in determiningthe appropriate opinion framework in your client circumstances.

Sources

• IAS 1 Presentation of Financial Statements• ISA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing• ISA 700 Forming an Opinion and Reporting on Financial Statements• ISA 800 Special Considerations – Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks

Audit report

General purposeframework

Special purpose framework

Fair presentation framework

Compliance framework

True and fairview

Presentf airly, in all material

respects

Are prepared, in all material

respects

Audit report framework-user range

Audit reportframework-preparation perspective

Auditopinion–applicablephrase

Audit report- distribution

Audit report is generallydistributed widely

Distribution of auditreport is generallyrestricted only to

intended users

If CEOs are visionary than CFOs are realist and often the relationship between the two could be an adversarial. The relationships can be a healthy and positive provided each understand other better. While CFOs must first and foremost lead the charge in providing timely, accurate financial statements, CEOs increasingly rely upon their finance chiefs to be good communicators, capable of not only accurately representing the company’s finances, but also painting a picture of where it has been and where it is going from financial perspective. The current recessions, the uncertainties again put CFOs on the spotlight. CFOs have realized that now their voices are being heard on ideas beyond compliance and controls matters. They have earned a solid seat at the strategy tables as CEOs and investors have demanded they find ways to make significant cost cuts spur efficiencies and reexamine existing business models. Now a days many CEOs unable to count on their business head’s results have had to turn to operations and finance, cutting costs and reengineering supply chain to increase profitability.

The real challenge facing today’s financial executives is not improving their business expertise but acquiring the professional and personal skills to manage their complex relations with CEO. In fact

CEO CFO Partnershipin Economic Crisis

Muallem A Choudhury

today’s CFO collaborates with the CEO on a broad range of issues from business strategy, organizational issues, investors relations, capital and investment management and competition, to financial reporting , planning and analysis , compliance and regulatory matters. The CEOs of leading companies will agree that they want a CFO who can help them manage the business, complement their skills, think strategically and offer leadership, while still providing requisite financial skills. In the case of CFO there is no other professional business relationship that is closer to the CEO than that of the financial executive. The CFO is typically an adviser, counselor and sometime mentor to the CEO concerning the most sensitive issues of the enterprise.

On the one hand the best CFOs are an integral part of the executive team being accepted as coach, mentor and change agent. On the other hand, he or she is a champion of realism on behalf of the shareholders. For it is the CFO who has the burden to identify trouble ahead, regardless of how hard the team is working or the optimism expressed by the CEO to stay on the course. Fudging the numbers short term is not the answer. The CFOs first responsibility is to advise the CEO of where performance problem exist and provide time sensitive advice and



decision tradeoffs of potential remedies. It is at this point that the shareholders need to be appraised of the situation.

In the event that the CEO is an excellent strategic thinker the CFO should bring complementary operational skills to the relationship. Similarly if the CEO’s leadership style is to empower people by seeking broad input, sometime at the expense of reaching a decision, the CFO can provide the requisite degree of decisiveness to keep the organization moving forward.

It is important that the organization understands the broader nature of the CFO’s role. The entire organization should view the CFO as a business partner, not as an accountant. A CFO who is well connected and influential throughout the organization can not only provide the CEO with broader general business advice but also use that organization influence to help execute the CEOs plans.

Rooted in the CFO’s traditional fiduciary responsibilities and reinforced by so many regulations , independence is the core value for the CFO, who are perhaps best

positioned to know when the interest of shareholders are not being well served. A CFO has to be utterly clear about standards and unwavering in setting the right culture for the organization in terms of controls and business practices.

Further, it is often the CFO must act as a hard-nosed realist in the financially unwise or even reckless corporate strategies or behaviour. The issue is more important in a public limited company. In a public limited company a CFO needs to be tough, sometime he needs to be extremely difficult insisting on performance and therefore needs to draw line. There has to be someone inside the company who has the ability to say “no”. However, there is an art of saying no in a way that strengthens rather than destabilizes the relationship with CEO. Further, a CFO who is not genuinely independent ultimately does a disservice to the boss by acting as an echo chamber instead of sounding board – telling him what he wants to hear rather than what he should hear. However, like strategic orientation, skill at balancing independence and collaboration does not come

IN THE EVENT

THAT THE CEO IS AN

EXCELLENT STRATEGIC

THINKER THE CFO

SHOULD BRING

COMPLEMENTARY

OPERATIONAL SKILLS TO

THE RELATIONSHIP.

SIMILARLY IF THE CEO’S

LEADERSHIP STYLE IS TO

EMPOWER PEOPLE BY

SEEKING BROAD INPUT,

SOMETIME AT THE

EXPENSE OF REACHING

A DECISION, THE CFO

CAN PROVIDE THE

REQUISITE DEGREE OF

DECISIVENESS TO KEEP

THE ORGANIZATION

MOVING FORWARD.


The Author is Principal Adviser andDirector, Brummer & Partners

influencers, maintaining their independence and acting as valuable business partners. In doing so they eventually become genuine change leaders, driving people to work smarter not just harder, and creating better ways of doing things so that higher level of performance and better results are possible throughout the organization.

naturally to many people. That’s why the best CFO has had a combination of experiences in both line and staff roles. It is where CFO needs to hone both collaborative skills and the ability to remain independent.

Ultimately, the simultaneous application of collaboration and independence in the relationship with the CEO should produce real business results. If it produces only a kind of alternation between friendly advices on the one hand and the raising of objections to risky business plans on the other,

then the CFO likely is not truly fulfilling the role. Say for example when a question of risk is put on the table, instead of simply saying yes or no, if you say no but offer a way to get to yes. In other words, a good CFO has, in addition to prudence, some appetite for risk in positive sense of the word, looking at the world outside with an entrepreneurial interest.

The ability to move the organization – to drive performance- is ultimately the key to delivering results. Outstanding CFOs begin as collaborators and


The process of Alternative Dispute Resolution (ADR) has been introduced in the fiscal year 2011-2012 effective from 1st July 2011 vide insertion of a new Chapter XVIII B in the Income Tax Ordinance 1984 and adding Sections 152F to 152S thereto.

The objectives of the ADR is to settle the pending disputes on tax matters by an agreement through the mediation of Facilitator appointed by the Board with a view to lessening expenses and shortening the time normally taken in the settlement of the cases.

The idea was thought of by the relevant authority in the back ground of huge accumulation of pending cases lying under different Income tax Appellate authorities, Income Tax Tribunal and with the "High Court Division" and "Appeal Division" of the Supreme court of Bangladesh. It is emphasized that the dispute shall be resolved within 2 months from the end of the month of application made for ADR.

For implementation of the process ways and means have been drawn up as per Alternative Dispute Resolution Rules 2012 effective from 5th March 2012 along with Schedules marked as Schedule to Schedule 14 under the Rules. As per notification of the NBR the process is

ADR (Alternative Dispute Resolution)Under the Income tax Ordinance 1984

Chapter XVIII B Sections 152F-152SA. Wahab FCA

applicable to all categories of assessees throughout the whole of Bangladesh.

The scope of the ADR process

An assessee can avail the facilities offered by ADR in respect of disputes as defined by section 152 H sub-section (e) regarding assessment of income by DCT or other assessing officer over income declared by the assessee in his return for the relevant year or regarding order of an appellate authority like Appellate Joint Commissioner of Taxes or Appellate Additional Commissioner of Taxes or Commissioner of Taxes (Appeals), or Taxes Appellate Tribunal, or in cases referred to the High Court Division as well as Appellate Division of the Supreme Court of Bangladesh.

Mode of Application for ADR

Notwithstanding the right of filing appeal against the assessment orders and appeal orders an aggrieved assessee may, pending the option of filing the appeal and subject to stay of the proceeding in case of pending appeals at an appellate authority or Taxes Appellate Tribunal or reference at High Court Division/Appellate Division, apply for resolution of dispute through ADR process.


THE PROCESS OF ADR HAS NOW-A-DAYS ACHIEVED POPULARITY AND IS GAINING SUCCESS IN RESOLVING LONG OUTSTANDING TAX MATTERS THROUGH THE INITIATIVE OF A FACILITATOR APPOINTED BY NBR. THE PROCESS HAS BEEN APPRECIATED BY FOREIGN INVESTORS WHO OFTEN COMPLAIN ABOUT THE COMPLEX TAX LAWS OF BANGLADESH AND THE SAID PROCESS IS BUILDING CONFIDENCE IN SUCH FOREIGN INVESTORS WHOSE ACTIVE PARTICIPATION IN THE ECONOMIC ACTIVITIES OF THE COUNTRY IS VERY MUCH NEEDED IN THE LIGHT OF COUNTRY'S ASPIRATION TO BECOME A NATION OF MIDDLE INCOME STATUS BY 2021.

The application for ADR shall have to be made to Board on prescribed form as per Alternative Dispute Resolution Rules 2012 and schedules marked as schedule 1, 6 and 7 there/under accompanied by such fees and verified by the assessee in such manner as may be prescribed.

For filing the application for ADR to the Board, permission from the concerned Tax Authority where the disputes are lying, shall have to be obtained on application to the respective Appellate Joint Commissioner of Taxes, or Appellate Additional Commissioner of Taxes, or Commissioner of Taxes (Appeals) or Taxes Appellate Tribunal, as the case may be.

In case of pending reference case of Tax matters with either division of the Supreme Court like High Court Division and Appellate Division, the assessee shall have to obtain the permission of the relevant authority of the court prior to filing the application to the Board for resolution of the dispute through the ADR process.

In respect of pending appeals of DCT with Income tax Appellate Tribunal

and reference case by Commissioner of Taxes Pending with High Court Division, the proceeding of such appeal or reference shall remain stayed till disposal of the application for ADR.

Appointment of the Mediator titled Facilitator

After receiving the application of assessee duly verified as per rules and granting the same for resolution under the ADR process, the Board may select or appoint Facilitator and determine his fees, duties and responsibilities by rules and as per schedule 8. The Facilitator shall be appointed by the Board from among the persons as listed on rule 10 of the ADR Rules 2012.

Eligibility, Rights & Duties of the Assessee for ADR

An assessee shall not be eligible for application to ADR, if he fails to-

i) Submit the return of income for the relevant year or years; or

ii) Fails to pay tax payable under section 74. In the eligible cases the assessee applying for ADR shall be allowed to negotiate


himself personally or along with an Authorized representative with the representative of the Commissioner for the concerned dispute under the facilitation and supervision of the Facilitator appointed by the Board. However, the Facilitator may exempt the applicant assessee from personally attending the negotiation process and in that case the assessee may be allowed to represent himself by an authorized representative, if he has sufficient reasons for his absence.

While submitting application for ADR the applicant assessee shall submit all related papers and

documents and shall disclose all issues of law and matters of facts.

The applicant assessee shall be co-operative, fair and bona-fide while negotiating for the resolution. If the applicant assessee makes any untrue declaration, submits any false documents and obtains order or assessment on that basis such order or assessment shall be set aside and in that connection appropriate legal action shall be initiated against him. In the course of the negotiation whatever tax is determined to pay, shall be paid within the frame work of time as decided in the ADR.

Nomination and responsibilities of the Commissioner's Representative

The Commissioner of the concerned dispute shall nominate his representative from among the officials subordinate to him but not below the rank of DCT, to represent him in the negotiation process of the ADR.

The representative so nominated by the respective Commissioner shall attend the meetings of the ADR negotiation process and sign the agreement resulting from such negotiation.

Procedures of disposal of disputes by ADR

Upon receiving the application of ADR from an assessee, the Facilitator shall forward a copy of such application to the respective DCT for his comments and opinion on the grounds of the applicant and also as to the fulfillment and compliance of the conditions referred in sections 152F and 152J relating to the filing of application for ADR and regarding the eligibility of the assessee in the matter. If the DCT fails to give his opinion sought on the matter within 5 days from the date of receiving the copy of the said application as sent to him, the Facilitator may deem that the required conditions have been fulfilled.

Thereafter the Facilitator shall notify the applicant assessee and the concerned Commissioner or the Commissioner's representative to attend the meetings for settlement of disputes on a date mentioned in the notice and he can adjourn such meeting from time to time. The Facilitator shall call for records of evidences from


DCT or from the applicant assessee before or at the meeting, with a view to settling the dispute, Before disposing the dispute the Facilitator may cause such an enquiry on the matter concerned by any income tax authority as he thinks fit. In the course of the ADR process the Facilitator will assist the applicant assessee and the Commissioner's representative so they may agree on resolving the dispute or disputes through consultations and meetings. The whole procedures of disposal of disputes are done under Rule 11 and the supporting schedules marked as Schedule 9, 10 & 11.

Decision of the ADR

A dispute under the ADR process is finally resolved by both the disputant parties under the

initiative of Facilitator by an agreement wholly or in part after taking into account the question of law and facts involved in the dispute.

Once the parties reach to a point of agreement either wholly or in part, the subject matter of the agreement is recorded by the Facilitator. In the said agreement the details of the sum due for tax payable or refund, shall be recorded and the manner in which it will be effective shall also be mentioned. The said agreement shall be signed by tripartite namely, the applicant assessee, the Commissioner's representative and the Facilitator. However, if it is detected that the whole resolution was concluded by fraud or misrepresentation of facts, it will be void and unenforceable.

Where no agreement whether wholly or in part has been reached or the whole process of the dispute resolution has ended in disagreement between the applicant assessee and the concerned Commissioner's representative for non-co-operation of either of the parties, the Facilitator shall communicate in writing with the reasons for disagreement within 15 days from the date of disagreement to the applicant assessee, to the Board, the concerned court, Appellate Tribunal, concerned Appellate authority, income tax authority, as the case may be, about such unsuccessful dispute resolution.

When the Facilitator fails to reach to an agreement on exhaustion of the whole procedures of the ADR within 2 months from the end of

Decisio

n of th

e ADR


the month in which the application was filed, it will be deemed to have reached to no agreement.

On compliance of the whole formalities when there is a successful agreement, the Facilitator shall communicate a copy of the agreement to all the parties involved in the dispute, within 15 days from the date on which the Facilitator and the parties involved have signed the agreement. In such a situation when there is a successful conclusion of the resolution of the dispute, the Facilitator shall communicate the matter to the applicant assessee, and to the concerned Deputy Commissioner of Taxes, to comply with the terms of the agreement as to the payment of tax dues and refund of, if any, in compliance of the provisions of the Income tax ordinance 1984. In the conclusion of the decision of the ADR, the provision as per Rule 11 supported by Schedule 12, 13, & 14 shall be followed.

Effect of Agreement

When there is an agreement on successful completion of the whole process of ADR, it is binding on both the parties of the concerned dispute and it is unchallengeable in any authority, Tribunal or court either by the applicant assessee or any other income tax authority involved in the dispute. Since the matter concerned under the agreement is conclusive and unchallengeable it will not be re-opened in any proceeding except otherwise as per provisions of Income tax Ordinance 1984.

Limitations for appeal where agreement is not concluded

Where no agreement on ADR has been reached either wholly or in part as per provisions of the

chapter XVIII B, the matter of dispute shall be eligible for appeal and reference as per chapter XIX. Under such a situation the time elapsed in the process of ADR on the dispute, shall be excluded from the total period allowable for filing an appeal with the relevant authority.

For filing an appeal within the rest of the allowable period as noted above it is prescribed as follows:

a) The assessee may prefer an appeal to the appellate Joint commissioner of Taxes, or Appellate Additional Commissioner of Taxes or Commissioner of Taxes (Appeals), as the case may be, where the dispute arises out of an order of a DCT;

b) The assessee may prefer an appeal to the Taxes Appellate Tribunal where the dispute in question arises out of an appeal

reached in good faith, in that connection.

Conclusion

The process of ADR has now-a-days achieved popularity and is gaining success in resolving long outstanding tax matters through the initiative of a Facilitator appointed by NBR. The process has been appreciated by Foreign Investors who often complain about the Complex tax laws of Bangladesh and the said process is building confidence in such foreign investors whose active participation in the economic activities of the country is very much needed in the light of country's aspiration to become a nation of middle income status by 2021.

The Author is a Fellow Member ofICAB and Senior PartnerA. Wahab & Co.


order of the Appellate Joint Commissioner of Taxes, or Appellate Additional Commissioner of Taxes or Commissioner of Taxes (Appeals) as the case may be;

c) The assessee may prefer an appeal to the respective appellate authority or court from where the assessee applicant got permission to apply for ADR.

Post verification of the agreement

The Board may monitor the progress of disposal of the application for ADR in the manner as may be prescribed and ensure necessary support and co-ordination services on closing of all procedures of ADR, copies of all agreement, if any or matter of disagreement in the case of failure to come to an agreement by the disputant parties, shall be sent by

the Facilitator to the respective Commissioner and Board for their verification and ascertainment of whether the agreement is legally and factually correct. After receiving the copy of such agreement or matter of disagreement, if it appears to the Board that alleged agreement is obtained by fraud misrepresentation or concealment of fact and thereby causing loss of revenue, then such agreement shall be treated as void and the matter shall be communicated to the concerned authorities, Tribunal or court for taking necessary action against the person proved guilty for such irregularities.

Bar on suit or prosecution

No civil or criminal action shall lie against any person involved in the ADR process before any court, tribunal or authority for any action taken in the Course of proceeding of ADR or for any agreement

Successful investors don’t get there incidentally. As in any endeavor in life, be it business, sport, investing or any other activity, natural “talent” will obviously achieve results. At some point it becomes necessary to commit to the task and to develop and stick to a plan to achieve success. Successful people have a strong, focused and enduring commitment. This allows them to persevere through setbacks and tough times and to make the sacrifices needed to continue along their journey.Commitment to this journey, generally develops through 4 main stages. We can look at these in the context of an investor making the transition from “punter” – relying on the advice of others, listening to tips and advice from their broker or other 3rd party, and so on – to one with a disciplined plan for engaging the market, and who knows and understands the processes involved in achieving investing success.

Understanding

This stage generally involves agreeing with the idea or concepts involved. Having had the realization that their current actions aren’t working, they embark on a fact finding mission of discovery to uncover other ways of investing. This brings them to the use of

Investment Journeyto Share Market

Nasim Anwar FCA

technical analysis, fundamental analysis, a system or methodology for engaging the market on a consistent basis. At this stage, they begin to become convinced that this must be a better way, but they are not yet committed to the idea.

Involvement

After a period of research and ‘checking it out’, they make a decision to invest their time and money into their vision. In doing so, they now become more involved in their education process – attending information evenings or courses, maybe even trialing or buying different trading and investing strategies or systems. At this stage, some begin “dabbling” in the markets or cautiously trying their hand by ‘dipping their toe in the water’ with small amounts of money, and/or small trade sizes to see how they feel about this new idea. At this stage, they are still not completely committed, but they are becoming more and more involved.

Ownership

This is the stage at which a decision is made to step-up and commit to the success plan. It is now that people have become invested in the success of their vision and begin to take responsibility for their decisions and actions. They have


KNOW

YOURSELF, YOUR

FRIENDS AND

ENEMIES. ARE YOU

THE ADVENTUROUS

RISK ADVERSE OR YOU

BELONG TO A CAREFUL

INVESTOR WHO

PREFERS TO KEEP RISK

TO A MINIMAL.

NOBODY KNOWS YOU

BETTER THEN

YOURSELF. START

WITH A STRATEGY

THAT YOU FEEL

COMFORTABLE WITH.

BE AWARE THAT

THERE ARE MANY

'NEWS' MAKING ITS

ROUND IN THE

MARKET. DO NOT BE

BLINDLY LED INTO THE

'NEWS' OR SOME CALL

IT GOSSIP. DO YOUR

FUNDAMENTAL AND

TECHNICAL ANALYSES

BEFORE YOU JUMP

INTO A DECISION.


given over some time, effort and energy (blood, sweat and tears if you like) to get to this point and can see the benefits of sticking to a proven formula with a long term plan for their success. They have developed an understanding of what is involved and begin to follow the plan unconditionally. Even at this stage though, they may still not be 100% committed.

Passionate Enthusiasm

This is the point when 100% commitment is reached. The benefits of having a strategy, a plan and a vision all come together to create a level of passion and understanding that was previously lacking. With a true understanding of what can be achieved the investor now has a lasting enthusiasm for the journey, rather than a momentary explosion of hype. Their vision and commitment to the journey now matters to them and has become a significant part of their life and what they do. They now genuinely believe in what they can achieve and what this means to them at a number of different levels.

Now, can you identify where you are at in terms of your level of commitment to your investing journey? If so, what do you need to do to get to the next stage and how will all this make you a smarter investor?

By now you probably understand that it takes a lot of learning and experience to be a successful investor. For many this would probably also mean learning the hard way i.e. losing money in the share market. There are some fundamentals in your learning journey that you need to be aware of. In order to make your share market investment more successful, you need to know -

What is your end goal?

What do you wish to achieve?

How much do you need to set aside for rainy day?

How much can you set aside to invest in share?

What is your risk appetite?


Investment in Share Market is a fine combination of science (the investment fundamentals) and art (qualitative analysis). There are many resources available for you to pick up on learning the fundamentals of share investment. However, the science of investing itself is not a simple subject to pick up let alone be an expert at it. The market’s erratic behavior is also something that you cannot pick up from the text book. This leads to the second piece of the jigsaw puzzle, the art piece. It is how you combine the skill of share market science with the art of qualitative analysis.

Know yourself, your friends and enemies. Are you the adventurous risk adverse or you belong to a careful investor who prefers to keep risk to a minimal. Nobody knows you better then yourself. Start with a strategy that you feel comfortable with. Be aware that there are many 'news' making its round in the market. Do not be blindly led into the 'news' or some call it gossip. Do your fundamental and technical analyses before you jump into a decision.

Technical Analysis is a method where one studies the market statistics to evaluate the worth of a company. Instead of assessing the health of the company by relying on its financial statements, it relies upon market trends to predict how a security will perform. It is a method of evaluating shares by analyzing share market related activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts to identify patterns that can

suggest future activity. They believe in the momentum that the scripts/markets gather over a period of time and cashing in on the same. Technical analysts believe that the historical performance of shares and markets are indications of future performance. This method enables 'short-term' investors to gauge companies who have very good potential to gather increased earnings in the near future.

Fundamental analysis is method of evaluating a share by attempting to measure its intrinsic value. Fundamental analysts study everything from the overall economy and industry conditions, to the financial condition and management of companies. A fundamental analyst would most definitely look into the details regarding the balance sheets, profit loss statements, ratios and other data that could be used to predict the future of a company. In other words, fundamental analysis is about using real data to evaluate a share's value. The method uses revenues, earnings, future growth, return on equity, profit margins and other data to determine a company's underlying value and potential for future growth.

Value investing is an investment style, which favors good shares at great prices over great shares at good prices. Hence it is often referred to as "price driven investing". A value investor will buy shares he believes the market is undervaluing, and avoid shares that he believes the market is overvaluing.

Value investors see the potential in the shares of companies with sound financial statements that they believe the market has undervalued; as they believe the market always overreacts to good and bad news, causing share price movements that do not correspond with their long-term fundamentals. Value investors profit by taking a position on an undervalued share (at a deflated price) and then profit by selling the share when the market corrects its price later.

A simple example of this Contrarian Philosophy would be buying umbrellas in winter season at a cheap rate and selling them during rainy days.Reviewing your investments, particularly when you may have made mistakes, also offers a crucial opportunity to learn from your mistakes. Everyone makes errors now and then, but most successful investors avoid making the same goofs twice.

The market is uncertain and changing all the time. Invest both time and money to upgrade your skill. Education will certainly pay off, however, remember you must learn to take action after upgrading your skill, so that you can see improvement to your life. Adhering to above strategy requires a lot of self discipline and a strong will. You are more certain to reap the benefits in your share market investment journey if you can do that.

The Author is a Fellow Member &Vice President (Finance & Accounts),ICAB

Bangladesh economy passed the most turbulent year in 2013 since country’s independence in 1971.

The state of the Bangladesh economy in 2013 was singularly rued by the state of the country's violent politics.

Political violence has cost Bangladesh over Tk 490 billion in lost earnings – or 4.7 percent of the Gross National Income – in the first half of the current fiscal year, according to Centre for Policy Dialogue (CPD).

“As the curtain falls on 2013, economists, businessmen, and industrialists would all agree on how bad this past year has been for the economy as a whole,” Zaidi Sattar, chairman of PRI (Policy Research Institute of Bangladesh) said.

Besides the political crisis, the one major economic event was the Rana Plaza tragedy that killed some 1100 RMG workers and raised significant concerns among European and North American buyers about the poor state of compliance in Bangladeshi garment factories. The positive outcome of this tragedy was the coming together of leading buyers of Bangladeshi garments in Europe and North America, international agencies like

Turbulence Hits Bangladesh Economyin 2013 But Resilience Keeps Alive

Raihan M Chowdhury

the ILO and UNCTAD, Bangladeshi garment manufacturers, government policymakers, and worker representatives. For the first time, there is a common understanding about the urgency of the need to ensure compliance in Bangladesh's 5000 garment factories and improve workers' pay and working conditions. To give teeth to this initiative, resources have been mobilised and more is forthcoming, to make sure that the problem is addressed and a crisis of the Rana Plaza type does not get repeated.

According to one PRI study, accounting of losses to production and from damage to assets and property (not to mention lives lost) could easily run upwards of US$10 billion, or nearly 8% of GDP. 7-8% GDP growth, once considered eminently plausible, now look like a fading dream. What the country gained from a whole decade of remarkable economic and social progress is being sacrificed at the altar of endless rounds of political bickering with no end in sight.

A related event that rattled the economy and could have dire consequences in the future was the suspension of GSP privileges for Bangladeshi exporters in the US market. The Rana Plaza episode was arguably the key cause that prompted the US decision, but protectionist



undercurrents spearheaded by the AFL-CIO (American Federation of Labour and Congress of Industrial Organisations) were no less responsible for this measure which, though not immediately consequential for our garment exports to the US (as these were not covered by GSP facility), could have important ramifications for our exports to the European Union (importer of 60% of all our RMG exports) which could consider suspension of its own Everything But Arms (EBA) facility that is so critical to our exports. Thankfully, that has not happened yet, and it appears that EU and European buyers have taken -- for the time being at least -- a more constructive approach to address the crisis of compliance in Bangladesh's RMG sector. Fortunately, there are good indications that the Rana Plaza episode coupled with the GSP suspension has been taken by all stakeholders as a wake- up call for Bangladesh's garment sector to become compliant by international standards.

Finally, 2013 saw the economy's macroeconomic management pretty much on track with most macro indicators related to internal and external balance conforming to developments related to the economic slowdown. Though revenue growth was modest (9.4%) in FY13, fiscal deficit was contained within the prudent limit of 4.4% of GDP with bank financing capped under 3%. Likewise, slower import growth alongside strong export and remittance growth with favourable trend in aid disbursements kept the balance of payments in positive territory resulting in accumulation of foreign exchange reserves. Thus the macroeconomic scenario in 2013 remained stable and sustainable though in the context of subdued overall economic performance.

With the economy in doldrums for much of 2013, GDP growth remained subdued at 6% for fiscal year FY13, by BBS provisional estimates, but projections for fiscal

FINALLY, 2013 SAW THE ECONOMY'S MACROECONOMIC MANAGEMENT PRETTY MUCH ON TRACK WITH MOST MACRO INDICATORS RELATED TO INTERNAL AND EXTERNAL BALANCE CONFORMING TO DEVELOPMENTS RELATED TO THE ECONOMIC SLOWDOWN. THOUGH REVENUE GROWTH WAS MODEST (9.4%) IN FY13, FISCAL DEFICIT WAS CONTAINED WITHIN THE PRUDENT LIMIT OF 4.4% OF GDP WITH BANK FINANCING CAPPED UNDER 3%. LIKEWISE, SLOWER IMPORT GROWTH ALONGSIDE STRONG EXPORT AND REMITTANCE GROWTH WITH FAVOURABLE TREND IN AID DISBURSEMENTS KEPT THE BALANCE OF PAYMENTS IN POSITIVE TERRITORY RESULTING IN ACCUMULATION OF FOREIGN EXCHANGE RESERVES.

Source: Bangladesh Bank


well as in terms of import coverage of reserves (at almost six months). At this level, Bangladesh’s reserve in dollar terms is the second highest in South Asia.

year FY14 growth will have to be far less optimistic. It is understandable why policymakers would like to put a good face on a bad situation and set a 72% ambitious target for GDP growth in FY14. Partly, that is because economic performance is slipping well behind the goal of the Sixth Five Year Plan to reach 8% annual growth by FY15, with an average GDP growth of 7.3% for the five-year period. But the SFYP could hardly predict the political turn of events. That is hardly the case with authorities that prepared the budget for FY14, who, by setting an implausible GDP and growth target ignoring dire political circumstances, have also upset most of the fiscal, monetary, and trade indicators that are typically set against the targeted GDP for the economy.

Foreign exchange reserves of Bangladesh Bank (BB) crossed the $18 billion-mark in the outgoing year. This is an all time high level both in absolute dollar terms as

GDP growth and investment

Stock market

Three years have passed since the equity market peaked in December 2010, after leading most global stock indices for almost three years. During 2013, the Bangladesh stock market appears to have largely proved resilient to the political turmoil. Is now a good time to buy? According to Asian Tiger Capital (ATC), one of Bangladesh's leading capital market analysts, "….depends on one's time horizon and tolerance for volatility". ATC analysts remain highly confident that on a 9-12 month outlook, the DSEX will be significantly higher than currently, and most likely above 5000.

On the governance front, a significant development has been the demutualisation of both the Dhaka and Chittagong stock exchanges, with a view to minimising conflicts of interest by separating ownership and management of these bourses and placing a majority of independent qualified directors on the two

boards. Demutualisation separates trading and ownership rights diversifying the exchange's shareholder base.

Some success stories

According to Legatum, a London-based think tank, Bangladesh surpassed India in many economic parameters including asset, growth, standard of living, life expectancy,

malnutrition, sanitation, secondary education, security etc placing in 103rd position while India is ranked in 106th.

Bangladesh is among the next eleven economies (NEE) identified for having great opportunities for investment in foods and beverages, technology, textiles, leather tanning and real estate.

These countries have respective big consumer markets and maintain single-digit inflation rates, according to economic analysts.Investment bank Goldman Sachs has already classified Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, Turkey, South Korea and Vietnam as the NEE of the 21st Century.

Healthcare in Bangladesh also soars despite widespread poverty, study shows. Bangladeshi women hold key to success as infant mortality plunges and life expectancy climbs to 68.3 years, says Lancet, British medical journal.

The empowerment of women and the reach of NGOs have contributed to Bangladesh’s remarkable success in healthcare, which has included significant improvements in the survival of under-fives, immunisation coverage and tuberculosis control,

according to the Lancet.

Mobile-based IT penetration has become common in the economic pursuit of progress in Bangladesh. An almost cult-like devotion to IT has been among the driving forces behind the country’s growing economic development in recent years. Mobile-based IT

is now the mirror of development in Bangladesh with 11.5 million subscribers in Mobile Financial Services (MFS).


The Author is Business Editor ofThe Financial Express

Savings -investment and Investment -growth nexus(In percent of GDP) FY11 FY12 FY13(p)Gross Domestic Investment 25.2 26.5 26.8of which:

Public Investment 5.6 6.5 7.8Private Investment 19.5 20.0 18.9

Incremental capital out put ratio (ICOR) 3.7 4.2 4.4Gross National Savings 28.7 29.1 29.5Savings -investment gap 3.6 3.9 2.7Current account balance 0.8 1.4 1.9Source: BBS, PRI

Abstract

The people are a valuable organizational resources measurement the value of their own to form a human resource value accounting. We have witnessed a significant transformation in the world economy and the organizations that comprise it. The economy of old was manufacturing based and relied heavily on tangible assets as determinants of value. In contrast, the present day economy is based on knowledge and information, intangible assets that are embodied in people. This shift has triggered the development of tools with which to measure these intangible assets. One accounting tool that is directly relevant to the measurement and, in turn, the management of human capital is human resource accounting. The purpose of this article is to discuss some current issues, recent advancements and possible future directions for further development.

Key words: Human resources (HR), Human Resources Accounting (HRA), Tangible Assets, Intangible Assets.

Prelude

A business concern holds two types of resources or assets – a group of human

Human Resource Accounting:Current Issues, Recent Advancements

and Future Directions1Mohammad Ahsan Uddin | 2Md. Nahid Ullah ACA

resources and a group of physical resources such as plant and machinery, and land and building, furniture etc. How to account for the “most important asset” as claimed by most companies has become a big challenge for both accountants and human resource professionals since the term human resource was introduced in the field of accounting. Many organizations, big and small, acknowledge that “our biggest asset is our staff.” However, no organization knows how to account for its employees on their financial statements. Among Accountants, opinion is divided with regard to the evaluation, costing, and reporting the value of employees of an organization, and there have been various suggestions on these issues.

Acceptance of the term human resource and its meaning has given rise to human resource managers’ involvement in organizational decision making beyond hiring the right person. To meet the challenges brought about by the rapid change in the corporate world, managers have come to realize the importance of effective human management. Corporate success no longer rests on the mass production, but rather on the ability and knowledge of people (employees) who can easily adapt to technological changes and drive the organization to attain its


THE DECISION

MAKERS OF A

BUSINESS CONCERN

WILL BE IN A BETTER

POSITION TO

UNDERSTAND AND

PREDICT THE RELATED

MATTERS TO THE

MANAGEMENT OF

HUMAN ASSETS, IF

SYSTEM OF HRA IS

DESIGNED SUITABLY

AND IMPLEMENTED

CAREFULLY.


goals and objectives. With this in mind, acquisition, development, and management of human capital by companies of all sizes have become critical (Vakhaira, 1995).

The function of human resource accounting (HRA) is to provide information with which management can analyze its decisions in relation to human services. It also affords investors the opportunity to truly evaluate and understand the complete picture of an organization. It is beyond the scope of this paper to narrate how HCA would work. For one thing, HRA involves sophisticated calculations requiring all sorts of estimations, assumptions and variables that need to be factored in. HRA mainly focuses on the accounting of costs of acquiring personnel along with the programs adopted to enhance personnel efficiency. In doing so, efforts are made to stress the costs and benefits of personnel programs and contributions to the success of the organization (Rogow, & Edmonds, 1988).

Historical development of HRA

The traces of a rudimentary HRA can be found in the Medieval European practice of calculating the cost of keeping a prisoner versus the expected future earnings from him. The prisoners in those days were seen to be the general property of the capturing side. Consequently, after the victory a quick decision regarding whether to capture a prisoner or to kill him had to be taken based on the costs involved in keeping him and the benefits accruing from killing him. However, these represented very rough measurements with limited use. The development of HRA as a systematic and detailed academic activity, according to Eric G Falmholtz (1999) began in sixties. He divides the development into five stages. These are:

First stage (1960-66): This marks the beginning of academic interest in the area of HRA. However, the focus was primarily on deriving HRA concepts

from other studies like the economic theory of capital, psychological theories of leadership- effectiveness, the emerging concepts of human resource as different from personnel or human relations; as well as the measurement of corporate goodwill.

Second stage (1966-71): The focus here was more on developing and validating different models for HRA. These models covered both costs and the monetary and non-monetary value of HR. The aim was to develop some tools that would help the organisations in assessing and managing their human resource/asset in a more realistic manner. One of the earliest studies here was that of Roger Hermanson, who as part of

his Ph.D. studied the problem of measuring the value of human assets as an element of goodwill. Inspired by his work, a number of research projects were undertaken by the researchers to develop the concepts and methods of accounting for human resource.

Third Stage (1971-76): This period was marked by a widespread interest in the field of HRA leading to a rapid growth of research in the area. The focus in most cases was on the issues of application of HRA in business organisations. R.G. Barry experiments contributed substantially during this stage. (R.G.Barry Corporation:1971)

Fourth Stage (1976-1980): This was a period of decline in the area of HRA primarily because the

complex issues that needed to be explored required much deeper empirical research than was needed for the earlier simple models. The organisations, however, were not prepared to sponsor such research. They found the idea of HRA interesting but did not find much use in pumping in large sums or investing lot of time and energy in supporting the research.

Fifth Stage (1980 onwards): There was a sudden renewal of interest in the field of HRA partly because most of the developed economies had shifted from manufacturing to service economies and realized the criticality of human asset for their organisations. Since the survival, growth and profits of the organisations were perceived to be


dependent more on the intellectual assets of the companies than on the physical assets, the need was felt to have more accurate measures for HR costs, investments and value. An important outcome of this renewed interest was that unlike the previous decades, when the interests were mainly academic with some practical applications, from mid 90s the focus has been on greater application of HRA to business management. Different types of models to suit the specific requirements of the organisations have been developed incorporating both the tangible and the intangible aspects. Also, larger number of organisations actually began to use HRA as part of their managerial and financial accounting practice. Today, human and intellectual capitals are perceived to be the strategic resources and therefore, clear estimation of their value has gained significant importance. The increased pressures for corporate governance and the corporate code of conduct demanding transparency in accounting have further supported the need for developing methods of measuring human value. In India, human resource valuation has not yet been institutionalized though, as mentioned above, many public as well as private have adopted HRA.

Objective of the study

HRA is basically adopted to treat human resources as assets, to generate human data about human resources, to assign value to human resources and to present human assets in the balance sheet. The following are the main objectives of an HRA system.

1. To furnish cost value information for making management decisions about acquiring, allocating, developing and maintaining

human resources in order to attain cost effective organisation objectives.

2. To allow management personnel to monitor effectively the use of human resources.

3. To provide a determination of asset control i.e., whether human assets are conserved, depleted or appreciated.

4. To aid in the development of management principles by classifying the financial consequences of various practices.

5. To recognize the nature of all resources used or cultivated by a firm and improvement of the management of human resources so that the quality and quantity of goods and services are increased.

6. To evaluate the return on investment in human resources.

From the above, it is clear that there are three important aspects of HRA as given below:

1. Valuation of human resources.

2. Recording the value of human resources in the books of accounts.

3. Disclosure of the information in the financial statements of the business.

Significance of HRA

The concept of human resources accounting cover the people who constitute a valuable resource of an enterprise and information on the investment and value of such resources is useful for internal and


external decision making. It provides the most scientific and realistic basis for short and long term, manpower planning and utilization which includes acquisition, development, development, retention, utilization and evaluation of human resources and also a structure of rewards and compensation on such evaluation. The decision makers of a business concern will be in a better position to understand and predict the related matters to the management of human assets, if system of HRA is designed suitably and implemented carefully.

The efficiency of production of the concern can be increased by winning the employees’ devotion, loyalty and initiative. This initiative and loyalty cannot be bought by consideration in monetary terms; and ‘Human Resource Accounting’ paves the way to win employees’ loyalty and initiative, and thereby increases the productivity of business enterprises. William Pyle described the use of HRA as ‘an improved managerial artisanship in the sense that the system would unfold many hidden facts

concerning the development or otherwise of human capabilities and their utilisation’.

Human Resource Accounting also helps individual employees in improving their performance and bargaining power. It makes each of them conscious about his/her contributions towards the betterment of the firm, vis a vis the expenditure incurred by the firm on each of them. So, it can help in relating the ‘key to prosperity of any society or nation’.

Such accounting is of permanent importance to the nation and also to individual organisations. The following are the main benefits of Human Resources Accounting:

• Helpful in proper interpretation of Return on Capital Employed: The Human resource accounting will disclose the value of human resources. This will help in proper interpretation of return on capital employed. Such information will give long-term perspective of the business performance which could be more reliable than the return on

capital employed based on net profit only.

• HRA helps management in measuring the value of human resources of the organization. It is one of the indicators of health and profit making potential of the business concern.

• Improves managerial decision making: The maintenance of detailed records relating to internal human resources (i.e. employees), will improve managerial decision making specially in situations like direct recruitment versus promotions, transfer versus retention, retrenchment or relieving versus retention, retrenchment or relieving versus retention, utility of cost reduction programmed in view of its possible impact on human relations and impact of budgetary control on human relations and organisational behavior and decision on relocating plants, closing down existing units, developing overseas subsidiaries etc. Thus, the use of HRA will definitely improve the quality of management.

• Serves social purpose: It will serve social purpose by identification of human resource as a valuable asset which will help in prevention of misuse and under use due to thoughtless or rather reckless transfers, demotions, layoffs and day to day maltreatment by supervisors and other superiors in the administrative hierarchy; efficient allocation of resources in the economy effecting economy and efficiency in the use of human resources and proper understanding of the evil effects of avoidable labour unrest/disputes on the quality of the internal human resources.



institution etc.

• Helps in investment decision: The value of a firm’s human resources is helpful in potential investors and other users in making long term investment decisions.

• By a proper system of HRA, the human resources are disclosed in the financial statements, satisfying the ‘Principle of Full Disclosure’ of the state of affairs of the undertakings in the financial statements.

• Aids the development of management principles by classifying the financial consequences of various practices.

• Completes MIS: Human resource data would create a more complete management information system as it can provide information of vital

• Increases productivity. It will have the way for increasing productivity the human resources because, the fact that a monetary value is attached to human resources, and that human talent, devotion and skill are considered as valuable assets and allotted a place in the financial statements of the organisation, would boost the morale, loyalty and initiative of the employees, creating in their mind a sense of belonging towards the organisation and would act as a great incentive, giving rise to increased productivity.

• Provides a sound and effective basis for asset control i.e, whether assets are conserved, depleted or appropriated.

• Invaluable contribution to humanity: HRA will be an invaluable contribution for accounting to humanity and it

will lead to improve human efficiency while preserving human dignity and honour. For this, a basic change in individual behavior, attitude and thinking is required HRA will help in realising the value of human resources and thus, will influence the individual behavior, attitude and thinking in the desired direction.

• It improves the ‘morale’ of the employees.

• A good system of human resource accounting creates a ‘sense of belonging’ among the employees of the firm.

• Essential where the human element is the prime factor: HRA is absolutely essential in such organisation where human element is the prime factor. e.g. a professional accounting firm a drama company, a solicitor and attorney firm, an educational

importance for short term and long term decision making as well as performance measurement. It will provide adequate basis for decision on allocation of resource e.g. budgeting, capital expenditure decisions and better measurement of resources of an organisation. Performance measurement helps in assessing the strengths and shortcoming of an organisation and help in making better promotion policies.

• For successful operation of an organisation: The success of an organisation very much depends on the buildup of quality work force at all levels. The success stories of BHEL. ITC, Hindustan Lever, Larson & Toubro and several other enterprises are largely due to the emphasis on human resource development. If this vital asset is not shown in the balance sheet, to that extent the public and investors are handicapped.

• Finally, by adoption of a good system of human resource accounting, the value of human resources in the organization is disclosed properly and it will facilitate proper interpretation on ‘return on investment’ (ROI).

Cost or value determination of human resource:

There are various models or methods of cost of value determination of human resources. In this paper, the following are discussed:

Historical Cost Approach

This approach was first developed by William C Pyle (and assisted by

R. Lee Brummet and Eric G. Flamholtz) and R.G. Bary Corporation, a leisure footwear manufacturer based in Columbia, Ohio (USA) in 1967. In this approach, actual cost incurred on recruiting, hiring, training and developing the human resources of the organisation are capitalised and amortised over the expected useful life of the human resources. Thus, a proper recording of the expenditure made on hiring, selecting, training and developing the employees is maintained and a proportion of it is written off to the income of the next few years during which human resources will provide service. If the human assets are liquidated prematurely, the whole of the amount not written off is charged to the income of the year in which such liquidation takes place. If the useful life is recognised to be longer than originally expected, revisions are effected in the amortisation schedule. The historical cost of human resources is very much similar to the book value of the other physical assets. When an employee is recruited by a firm, he is employed with the obvious expectation that the returns from him will far exceed the cost involved in selecting, developing and training in the same manner as the value of fixed assets is increased by making additions in them. Such additional costs incurred in training and developing are also capitalised and are amortised over the remaining life. The unexpired value developing are also capitalised and amortised over the remaining life. The unexpired value is investment in human assets.

This method is simple to understand and easy to work out. It meets the traditional accounting

concept of matching cost with revenue. It can provide a basis of evaluating a company’s return on its investments in human resources. But it suffers from the following limitations:

i. It takes into account a part of the employees’ acquisition costs and thus ignores the aggregate value of their potential services.

ii. It is difficult to estimate the

number of years over which the capitalised expenditure is to be amortised.

iii. It is difficult to determine the rate of amortisation, Should it be increasing, constant or a decreasing one?

iv. The economic value of human resources increases over time as the people gain experience. But in this approach, the capital cost decreases through amortisation. How to reconcile the above difference?

Replacement Cost Approach

This approach first suggested by Rensis Likert, was developed by Eric G. Flamholtz on the basis of concept of replacement cost. Human resources of an organisation are to be valued on the assumption that new similar organisation has to be created from scratch and what would be the cost to the firm of the existing resources are required to be replaced with other persons of equivalent talents and experience. It takes into consideration all costs involved in recruiting, hiring, training and developing the replacement to the present level of proficiency and familiarity with the organisation.



ii. The total valuation of human resources on the competitive bid price may be misleading and inaccurate. It may be due to the reason that a person may be an expert for one department and not so for the other department. He may be valuable person for the department in which he is working and thus, commands a high value but may have a lower price in the bid by the other department.

iii. Under this method, valuation on the basis of the opportunity cost is restricted to alternative use within the organization in real such alternative use may not be identifiable on account of the constraints in an organisational environment.

Standard Cost Approach

This approach envisages establishment of a standard cost per grade of employee updated every year. Replacement costs can be used to develop standard costs

This approach is more realistic as it incorporates the current value of company’s human resources in its financial statements prepared at the end of the year. It is more representative and logical. But it suffers from the following limitations:TTTTi) This method is at variance

with the conventional accounting practice of valuing assets.

ii) There may be no similar replacement for a similar certain existing asset. It is really difficult to find identical replacement of the existing human resource in actual practice.

iii) The determination of a replacement value is affected by the subjective consideration to a marked extent and, therefore, the value is likely to differ from man to man.

Opportunity Cost

Opportunity cost is the value of an asset when there is an alternative

use of it. There is no opportunity cost for those employees that are not scarce and also those at the top will not be an available for auction. As such only scarce people should comprise the value of human resources.

This method can work for some of the people at shop floor and middle order management. Moreover, the authors of this approach believe that a bidding process such as this is promising approach towards more optional allocation of personnel and a quantitative base for planning, evaluating and developing human assets of the firm. But this approach suffers from the following limitations:

i. It has specifically excluded from its preview the employees who are not scarce or are not being bid by the other departments. This is likely to result in lowering the morale and productivity of the employees who are not covered by the competitive process.

of recruitment, training and developing individuals. Such standards can be used to compare results with those planned. Variances produced should be analyzed and would form a useful basis for control. But under this approach determination of the standard cost for each grade of employee is a ticklish process.

Capitalization of Salary method

It categorizes the firms’ personnel into homogenous groups. Under this method, the present value of future earnings of the employees to the age of their retirement is determined by discounting those at the rate of cost of capital. The following steps are involved in this method: (i) all the employees of the firm are to be analyzed on the basis of their age and skill; (ii) the annual ‘Average Earnings’ of each employee in each group are determined for various range of age; (iii) the total earnings of each group of employees up to the date of retirement are to be calculated, (iv) the total earnings are to be discounted at the rate of cost of capital. The discounted value thus arrived is to be considered as the value of Human Assets.

Present Value Approach

Under this approach, the value of human resources of an organisation is determined according to their present value to the organization. A number of valuation models have been developed to determine the present value.

I. Present Value of Future Earnings Model. This model has been developed by Brauch Lev and Aba Schwartz in 1971. They are of the opinion that determination of the

total value of a firm’s labour force is a straight forward extension of the measurement procedure of an individual’s value to the organisation. They have divided the whole labour force into certain homogeneous group such as unskilled, semi-skilled, technical staff, managerial staff etc. and in accordance with different classes and age groups. Average earnings stream for different classes and age groups are prepared for each group separately and the present value for the human capital is calculated. The aggregate present value of different groups represents the capitalised future earnings of the firms as a whole. They have advocated the use of cost of capital rate for the purpose of capitalising the present value of the future earning of the employees. According to them, the value of human capital represented by a person of age is the present value of his remaining future earnings from his employment. They have given the following formula for calculating the value of individual:

Where Vr= the value of an individual r years old

I (t)= the individual’s annual earnings upto the retirement

t= retirement age R= a discount rate

However, the model suffers from the following limitations:

i) A person’s value to an organisation is not determined entirely by the person’s inherent qualities, traits and skills but also by the organisational role in which the individual is placed.

Moreover, the individual’s skill and knowledge are not valuable to an organisation in an abstract form. They are valuable only when such qualities serve as a means to achieve the organisational goals.

ii) The model ignores the possibility and probability of an individual leaving the organisation for reasons other than death or retirement. People may leave the organisations for a variety of reasons.

iii) The assumption of the model that people will not make role changes during their career with the organisation also seems to be unrealistic. Employees are quite often transferred to other departments within the organisation. Their role also changes when they are transferred on promotion.

iv) It fails to correctly evaluate the team work involved. Team work is something more than the sum of the values of individuals. The valuation does not reflect the contribution of the team as a whole.

II. Rewards Valuation Model. This model has been suggested by Flamholtz. It identifies the major variables that determine an individual’s value to an organisation, i.e. his/her expected realizable value is the present worth of future services expected to be provided during the period he/she is expected to remain in the organisation. The model is based on the presumption that a person’s value to an organisation depends upon the positions to be occupied


Vr = ∑ −+ rtRItI)(

)(

by him in the organisation. The movement of people from one organisational role to another is a stochastic process with rewards. As people move and occupy different organisational roles, they render services (i.e. rewards) to the organisation. However the roles they will occupy in future will have to be determined probabilistically for each individual. The model suggests a five steps approach for assessing the value of an individual to the organisation:

1. Forecasting the period a person will remain in the organisation i.e. his expected service life.

2. Identifying the services states, i.e. the roles that he might occupy including ofcourse the time at which he will leave organisation.

3. Estimating the value derived by the organisation when a person occupies a particular position for a specified time period.

4. Estimation of the probability of occupying each possible mutually exclusive state at specified future times.

5. Discounting the value at a predetermined rate to get the present value of human resources.

This model is certainly an improvement over the Lev and Schwartz model. But this model when examined on operational capacity falls short of a practical value in as much as those probabilities will have to be determined for each individual occupying various service states, and these probabilities will have to

be determined for all employees for periods on an individual basis. Further, it will be tremendously expensive way to predict career movements or exit probabilities on an individual basis. Moreover, data developed on this basis will involve large variance which will reduce usefulness of the model.

III. Net Benefit Model. Morse (1972) suggested this approach. Under it the value of human resources is equivalent to the present value of the net benefits derived by the enterprise from the service of its employees. The following steps are involved under this approach:

a) The gross value of the services to be rendered in future by the employees in their individual and collective capacity.

b) The value of direct and indirect future payments to the employees is determined.

c) The excess of the value of future human resources (as per (a) above) over the value of future payments (as per (b)

above) is ascertained. This represents the net benefit to the enterprise because of human resources.

d) By applying a predetermined discount rate (usually the cost of capital) to the net benefit, the present value is determined. This amount represents the value of human resources to the enterprise.

IV. Certainty Equivalent Net Benefit Model. This approach has been suggested by Pekin Ogan (1976) is, in fact, an extension of net benefit approach of Morse. Under it, the value of human resources is determined by taking into consideration the certainty with which the net benefits in future will accrue to the enterprise. The method involves the following stops:

a. Net benefit from each employee (as determined under the previous approach).

b. Certainty factor at which the benefits will be available in future.


c. The certainty equivalent benefits will be calculated by multiplying the certainty factor with the net benefits from all employees. This will be the value of human resources of the enterprise.

V. Aggregate Payment Approach: This approach has been suggested by Prof. S.K. Chakraborty (1976) the first Indian to suggest a model on human resources of an enterprise. In his model, he has valued the human resources in aggregate and not on an individual basis. However, managerial and non-managerial manpower can be evaluated separately. The value of HR on a group basis can be found out by multiplying the average salary of the group with the average tenure of employment in that group. The average annual salary payments for next few years could be found out by salary structure and promotion schemes of the organisation.

He has further suggested that the recruitment, hiring, selection, development and training cost of each employee can be recorded separately. These could be treated as deferred revenue expenditure to

be written off over the expected average stay of the employee in the organisation. The deferred portion should be shown in the position statement of the organisation. If there is a permanent exit on account of death retrenchment etc. then the balance on deferred revenue expenditure for that year attributable to that person should be written off against the income in the year of exists itself.

The discount rate for the purpose of ascertaining the present value of estimated payments in the future should be taken as the expected average after tax return on capital employed over the average tenure period. He suggests the adoption of such a long term rate to avoid fluctuations in human asset valuation from year to year simply due to changing rates return. For in a year of low rate of return the valuation will have an upward bias, and conversely in a year of high return.

Regarding disclosure of accounting information relating to human resource he suggested that it was most appropriate to include human assets under the head investments in the position statement of an

organisation prepared at the year end. He has not favoured its inclusion under the head ‘Fixed Assets’ as it would cause problems of depreciation capital gains or losses upon exit etc. He also in favour of including them in ‘Current Assets’ on the ground that this will not be in conformity with the general meaning of the term.

VI. Total Cost Concept: Prof N. Dagupta (1978) suggested this approach. The various approaches (discussed in the previous pages) take into account only those persons who are employed and ignore those who are unemployed. According to him both employed and unemployed persons should be brought in its purview for determination of the value of human resources of the nation. Thus for the preparation of the balance sheet of the nation the system should be such so that fits and shows the human resources not only a firm but also of the whole nation. According to him, the total cost incurred by an individual, the state and the organisation to bring that individual upto the present position should be taken as the value of a person on the day when


he starts serving the organisation or becomes fit for appropriate employment. It will include not only all expenses incurred by the individual for his education and training but also by the organisation on recruitment, training, familiarising and development of human beings employed in the organisation. The valuation can be done Group Wise, if the number of employees is large. The value thus, determined should be further adjusted at the end of each year by organisation on the basis of his age, seniority, status performance, experience, leadership, managerial capabilities etc. The psychologists and other concerned experts will be helpful for such measurement. The revised value would be the value of the employee at the end of the year.

Theoretically this model may be sound but its practical application may be difficult as it will involve a number of factors which may not be capable of being expressed precisely and objectively in monetary terms.

Human resources valued according to this model should be shown both on the assets and liabilities sides of the balance sheet. On the assets side it should be shown after the fixed assets as Human Assets classified into two parts: (i) value of individual (ii) value of firm’s investment. On the liabilities side, it should be shown after the capital as Human Assets by the amount at which it has been shown on the assets side against the value of individuals.

VII. Input / Output Control Mechanism.

This approach was suggested by Dr. Rao in 1983. Under this

approach, a system of human resource accounting was developed and illustrated its application in a transport equipment manufacturing concern. He has designed the system based on Input/output Control Mechanism. The output variables of the system are described to be the indicators of human resource development and utilization. The human resource investments are measured through human resource investments, a distinction is made between human resource current costs and human resource investments. All the human resource costs, whose benefits are expected to affect in future periods are treated as investments. Then the annual human resource investments are adjusted to the tune of changes due to intake or separation or natural deterioration. The intake of people results in the

addition of human resource investments while separation necessitates writing off, of human resource investments. The human resource deterioration is measured and adjusted with the help of amortization rate as in each year.

Human Asset Multiplier Method (HAMM)

This is another method for calculating the value of human resources. This method is suggested to avoid the complicated calculation of present value method and to overcome the drawbacks of either method. In this method, ‘present salary’ of each employee is directly multiplied by a factor called ‘Human Asset Multiplier’ and the total amount so calculated is considered as the value of human resources for the balance sheet.


HRA Practice and disclosure

In India Human Resource Accounting has not been included so far as a system. Indian Companies Act. 1956 does not provide any scope for furnishing any significant information about human resources in financial statement. Beyond it, there is no rigid instruction on behalf of the Companies Act, 1956 to attach information about the value of human resources and the results of their performance during the accounting year in notes and schedules. In India a growing trend towards the measurement and reporting of human assets, particularly in the public sector, is noticeable during the past few years. There are about twelve companies in India which have adopted the concept of human resource accounting so for. The data of only four companies is compatible for comparison. The companies are:

i) Bharat Heavy Electrical Limited (BHEL), which is the first Indian company to publish

human resource accounts from 1974-75 onwards and is one of the FORTUNE 500 companies listed outside U.S.A.

ii) Steel Authority of India Ltd, (SAL) which is a holding company consisting of five integrated steel plants and two alloy steel units in the public sector.

iii) Minerals and Metals Trading Corporation (MMTC) which is the biggest trading organization in India.

iv) Southern Petrochemical Industries Corporation Ltd (SPIC) which is one of the biggest diversified organizations in the Joint Sector, producing fertilizers chemical electronic etc.

Most of the India in enterprises observed Lev ad Schwartz model in the sense that they have computed the present value of future direct and indirect payment to their employees as the basic frame work of human resource

valuation, MMTC has considered twelve per cent, SPIC has considered the rate of return which is used for evaluating the company’s capital expenditure proposals while SAIL has applied fourteen per cent to arrive at the present value of human capital.

BHEL also reported human resource value with similar model using twelve per cent discount factor on the future earnings of its employees. The human accounting information is mostly given in the form of supplementary information attached to the financial statements in annual reports, which are primarily meant for external reporting.

Upon The current Accounting Principles and Practices, costs associated with human resources, i.e cost of hiring, recruitment, selection, training and development of employees are treated as the expenses of the period in which they are incurred.


General balance sheet of any business does not disclose human assets directly. The fact that the benefits accruing from such expenses relate to several accounting periods. The expense of human resources cost violates the ‘accrual principle’. The violation of ‘accrual principle’ is justified by the accountants on the grounds of the adherence to the ‘Principle of Conservatism’. The argument is that, one is never sure about the realization of future benefits from such expenses due to uncertainty of the tenure of an employee. So, it is proper to treat such expenses as revenue expense. Due to the current accounting practices, the income statement reflects less profit or excess loss in the period in which successful training programmes take place; and, on the other hand, the future improvement in earnings resulting from such programmes are reflected in the future income statement as ‘cost free’. The balance sheet also does not reflect any portion of the above costs as unexpired, i.e. as assets possessing service potential. Clearly, expensing of the human resource costs which have future service potential, results in understatement or concealment of assets and mismatching of costs and revenues. Accountants do fully record and disclose physical assets but they largely ignore human assets in their internal as well as external reports. This leads to faulty evaluations and

decisions. Moreover, the immediate expensing of human resource costs also hides the cost of employee turnover to the organization since there is no ‘balance’ that could be written off as a ‘turnover loss’ when a costly employee leaves the organization.

Problems and limitation of HRA

No. doubt HRA can provide valuable information both for management and outsiders, yet its development and application in different industries and organisations has not been very encouraging. This accounting concept is not popular like social accounting because it may not result in providing immediate and tangible benefits and on account of the fact of lack of consensus

among accountants and other concerned about the basis of measurement of the value of human resources. The reluctance on the part of the organisation to introduce the HRA system can be attributed to the following:

• There are no specific and clear cut guidelines for finding cost and value of human resources of an organisation. The existing valuation system suffers from many drawbacks.

• The life of human resources is uncertain and therefore valuing them under uncertainty seems unrealistic.

• There is a possibility that HRA may lead to dehumanizing and manipulations in employees. For example a person having a low value may feel discouraged and


thus in itself, may affect his competency in work.

• The much needed empirical evidence is yet to be found to support the hypothesis that HRA as a managerial tool facilitates better and effective management of human resources.

• There is a constant fear of opposition from the trade unions. Placing the value on employees would prompt them to seek rewords and compensation based on such valuation.

• If a valuation has to be placed on human resources how it should be amortised?

• Tax laws do not recognize human beings as assets. So human resource accounting has been reduced to a merely theoretical concept.

• Element of risk, which is higher in case of human resources,

because of their turnover habits, is another obstacle in this regard.

Mare Levine (1980) has expressed that human resource accounting may lead to alienation as the ‘people’ might feel that they have been reduced to an industrial input commodity. Rhode et al (1976) are of the opinion that publicizing of human resource data could have disastrous effect on the attitude of employees whose values are declining over time as people evaluate themselves based on how they perform in comparison to others. It is possible that a low rating in value front could be seen by someone as a negative feedback and have an unfavorable impact on their ‘self-esteem’ and ‘desire’ to remain in the organization.

A committee of Accounting for Human Resource of the American Accounting Association has found that most important obstacle to acceptance of Human Resource

Accounting are:

• Human Resource Accounting has to some managers seemed a hastily constructed discipline made up of ‘recycled parts’ from other disciplines. The result is not always pleasant and often the parts have not functioned satisfactorily in their original habit;

• The field of human resource accounting unfortunately has an exploitative connotation to some people. A resource is usually something that is used up; and accounting imply using a tool that will make the exploitation process as efficient as possible;

• It is difficult to change managements’ view of people from being an expense rather than a resource.

Lastly, it can be stated that major difficulty in the implementation of this system is the ‘constant fear’


from trade unions regarding their reaction of the valuation of human resources.Human resource is an important resource in today’s world. Manpower development or human resource development is strongly emphasized by the World Bank and other United Nation bodies. Quality or expertise of human resources accelerates the success and prosperity of any organization. Unluckily, simple and insignificant assets are recorded, accounted, and reported, but an important asset like human resource is not recorded and reported. There is no unanimous principle or proposition for recording and reporting of human resources. It is a matter of regret that development in this respect is not inadequate. Now, if the scholars, the thinkers and the concerned authorities take initiative in this respect to formulate a general principle about ‘Human Resource Accounting’ and make attempts to materialize the recommendations, then the proper

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The Authors are:

1Lecturer (Accounting)BGC Trust University Bangladesh

2Head of Accounts, Costing,Tax & VAT, S.A. Group of Industries


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REACH AN EXCLUSIVE GROUP OF PROFESSIONALS, DECISION MAKERS AND THOUGHT LEADERS - ADVERTISE IN“THE BANGLADESH ACCOUNTANT”!


The Institute of Chartered Accountants of Bangladesh (ICAB) is the premier accounting body of Bangladesh. The professional qualification it offers is highly prized. Membership of ICAB is recognition of high standards and exceptional skills. Under a twinning project, the syllabus of ICAB has been revised and is equivalent to that of the Institute of Chartered Accountants in England and Wales (ICAEW), the premier global accounting body.

ICAB publishes a quarterly Journal, The Bangladesh Accountant, to keep its members up to date on technical issues and global developments in the profession. It is regularly read by all the members of ICAB both in Bangladesh and across the world. Circulation includes many major companies and financial institutions, governmental and semi-governmental organisations, NGOs and international accounting and professional bodies.

The journal is also read by other professionals related to the accounting profession, those in businesses and other organisations, students of Chartered Accountancy and all those who wish to keep abreast of developments in the accounting profession.

To paraphrase Mark Twain “Those who do not read a good publication have no advantage over those who do not know how to read”! Don’t be left out. Become a subscriber to this exclusive professional publication.

Annual Subscription (4 issues) (including postage)Tk 2,000 (Bangladesh)Tk 2,500 (Overseas)

Special Rate of Annual Subscription (4 Issues) for Students of Chartered Accountancy in Bangladesh - Tk 1,000 (including postage)

Contact us today and subscribe to ‘The Bangladesh Accountant’.

Abu Nayem Ahmed, pscSquadron Leader (retd.)Senior Deputy Secretary - ICABThe Bangladesh AccountantThe Institute of Chartered Accountants of BangladeshChartered Accountant Bhaban100 Kazi Nazrul Islam AvenueKawran Bazar, Dhaka 1000Tel: 9115340, 9117521, 9137847Fax: 8119399Email: [email protected]

BE BETTER INFORMED! SUBSCRIBE TO THE PREMIER ACCOUNTING JOURNAL IN BANGLADESH

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