Audit Committee Disclosure Of Listed Companies In Bangladesh An Empirical Study
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ISSN 1817-5090 The Cost and Management Vol. 35 No. 6 November-December, 2007 pp. 52-64
Audit Committee Disclosure of Listed Companies in Bangladesh: An Empirical Study Shilpi Das Sumon Das Abstract: This study first has identified the importance of audit committee for an
organization and then tried to find out the quality of audit committee of the listed Public Limited Companies (PLCs) in Bangladesh. The twelve criteria were identified from the guidelines suggested by Securities and Exchange Commission (SEC) in 2006 was taken as benchmark for this study. The annual reports of a sample of 81 PLCs have been surveyed to determine the nature and extent of disclosure by computing total score and an Audit Committee Disclosure Index (ACDI). The study results show that 59 companies (72.84%) are disclosing audit committee with a mean score of 7.12 (ACDI 59.32). The results also showed that the companies are focusing more on composition of audit committee and chairman of audit committee and little focus is placed on suspected infringement of laws, reporting to the authorities and report of conflict of interest. As the average score of the companies are 7.12 (Out of the total scores possible 12), conclusion has been drawn that the audit committee fails to bring transparency in the management and protection of shareholders interest up to their desired level. Keywords: Audit Committee, Internal Control, Independent Auditor. Introduction
An audit committee is a selected number of members of a company’s board of directors whose responsibilities include helping auditors, remain independent of management (Arens et al., 2000). An audit committee can be defined as a sub-committee in the Governing Body (Board of Directors) that makes arrangements for the audit and also as a subcommittee of the Board, this committee tries to enhance the ability of the Board to fulfill its legal responsibilities and ensure the credibility and objectivity of the financial reports (Hossain, 2006 ). Companies establish an audit committee within the Board of Directors to take active role in overseeing the company’s accounting and financial reporting policies and practices (Whittington and Pany, 2001). Most audit committees are made up of three to five or sometimes as many as seven directors who are not a part of company management. The committee should represent the owners and not the management. Actually, most of the directors who are the parts of the audit committee should be outside directors who have no other relationship that may impair their independence (Whittington and Pany, 2001). Independent audit committee members, as outside Ms. Shilpi Das and Mr. Sumon Das are Lecturers, Faculty of Business Administration, Stamford University, Bangladesh.
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Audit Committee Disclosure of Listed Companies in Bangladesh: An Empirical Study
directors, may view the directorate as a means of enhancing their reputation as experts in decision control (Fama and Jensen, 1983). Among other functions, it is usually assigned the duty of oversight of the financial reporting and auditing process. The auditor’s major dealing with the governing body will be through audit committee, although the auditor will usually meet with the full governing body at least once per year. The key to effective financial reporting oversight is the competency, strength and independence of audit committee. A typical audit committee decides such things as which audit firm to retain and the scope of services the audit firm is to perform. It meets periodically with the audit firm to discuss audit progress and findings and helps resolve conflicts between the audit firm and management. Audit committees for larger companies are looked upon with favor by most auditors, users, and management. The requirement of an audit committee would be costly for smaller companies. There are two predominant schools of thoughts relating to audit committee :( i) the first school maintains that the audit committee should be entirely composed of non-executive directors who have no management responsibilities or affiliations. It is claimed that this is the only way to ensure the complete independence of the committee in its evaluation of management and audit representation. (ii) The second school claims that at the very least there should be one management representative on the committee. It would provide a more balanced perspective to the problems under committee investigation. The problem with this kind of structures is the potentially adverse effect that the management representative may have on the committee’s independence. The audit committee will assist the board in fulfilling its oversight responsibilities including implementation of the objectives, strategies and overall business plans set by the board for effective functioning of the organization. Role of the audit committee is also important in evolving an effective procedure for financial reporting disclosure, developing a suitable internal control system and maintaining liaison with internal and external auditors to minimize various business risks. Moreover, new business opportunities and increased competition due to globalization of markets, increased use of electronics and information technology, increased complexity of transactions, accounting standards and regulatory requirements are contributing to essentiality and expansion of the role of audit committee. Responsibilities of the audit committee typically include: 1. To enhance the ability of governing body to fulfill its legal responsibilities. 2. To add to the credibility and objectivity of financial reports; 3. To oversee the application of appropriate accounting policies and procedures including appropriate disclosures. 4. To establish and monitor corporate policies to prohibit unethical, questionable or illegal activities. 5. To establish and monitor effective internal and management control. 6. To provide a communication link between management, auditors and governing body. 7. To approve the annual accounts and approving the annual budget and major capital expenditures of the company. The Cost and Management, November-December, 2007
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Components of an Audit Committee Audit committee of the board of an organization can play an effective role in providing a bridge between the board and management, shareholders, depositors and stakeholders. The committee will review the financial reporting process, the system of internal control and management of financial risks, the audit process for monitoring compliance with laws and regulations and its own code of business conduct. According to Gay (2001) characteristics of an effective audit committee should include: a) Audit committees are perceived to be independent and actually exercise independence in their dealings with management and auditors. b) These committees are composed of experienced and competent non-executive directors. c) Audit committees should be established by a resolution of the full board of the governing body. d) Audit committees should have limited number of members. e) Audit committees are given explicit objectives and terms or references that are subject to regular review. f) Audit committee members should meet regularly prior to board meetings and make provisions for adhoc meetings at the request of the auditors and management. g) Audit committees should circulate agendas and minutes to relevant parties. In Bangladesh, the existence of audit committee was not mandatory in the earlier/previous years. But in the year 2006 Securities & Exchange Commission (SEC) provide some conditions relating to audit committee. SEC Notification No. SEC/CMRRCD/2006-158/Admin/02-08, Dated the 20th February, 2006 discussed several guidelines related to audit committees in several ways. This notification suggested that a company should have an Audit Committee as a subcommittee of the Board of Directors. The Audit Committee should assist the Board of Directors in ensuring that the financial statements reflect true and fair view of the state of affairs of the company and in ensuring a good monitoring system within the business. The Audit Committee shall be responsible to the Board of Directors. The duties of the Audit Committee should be clearly set forth in writing. The company wants to listed with any stock exchange in Bangladesh should comply with the following conditions or shall explain the reasons for non compliance: Constitution of Audit Committee According to constitution, the SEC suggested the followings: (i) The Audit Committee should be composed of at least 3 (three) members. (ii) The Board of Directors should appoint members of the Audit Committee who should be directors of the company and should include at least one independent director. (iii) When the term of service of the Committee members expires or there is any circumstance causing any Committee member to be unable to hold office until expiration of the term of service, thus making the number of the Committee members to be lower than the prescribed number of 3 (three) persons, the Board of Directors should appoint the new Committee member(s) to fill up the vacancy(ies) immediately or not later than 1 (one) month from the date of vacancy(ies) in the Committee to ensure continuity of the performance of work of the Audit Committee. 54
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Audit Committee Disclosure of Listed Companies in Bangladesh: An Empirical Study
Chairman of the Audit Committee The SEC suggested the followings in relation to the chairman of the audit committee: (i) The Board of Directors should select 1 (one) member of the Audit Committee to be Chairman of the Audit Committee. (ii) The Chairman of the audit committee should have a professional qualification or knowledge, understanding and experience in accounting or finance. Reporting of the Audit Committee The reporting on audit committee matters is suggested in the following threefold ways: A. Reporting to the Board of Directors: The Audit Committee should report on its activities to the Board of Directors. The Audit Committee should immediately report to the Board of Directors on the following findings, if any: 1. Report on conflicts of interests; 2. Suspected or presumed fraud or irregularity or material defect in the internal control system; 3. Suspected infringement of laws, including securities related laws, rules and regulations; 4. Any other matter which should be disclosed to the Board of Directors immediately. B. Reporting to the Authorities: If the Audit Committee has reported to the Board of Directors about anything which has material impact on the financial condition and results of operation and has discussed with the Board of Directors and the management that any rectification is necessary and if the Audit Committee finds that such rectification has been unreasonably ignored, the Audit Committee should report such finding to the Commission, upon reporting of such matters to the Board of Directors for three times or completion of a period of 9 (nine) months from the date of first reporting to the Board of Directors, whichever is earlier. C. Reporting to the Shareholders and General Investors: Report on activities carried out by the Audit Committee, including any report made to the Board of Directors during the year, should be signed by the Chairman of the Audit Committee and disclosed in the annual report of the issuer company.
Objectives and Methodology of the Study The main objectives of this study are: 1. To give an overview of audit committee including its importance in different organization; 2. To analyze the scenario of audit committee disclosure practice in Bangladesh; 3. To compare the current audit committee disclosure practice with the standard suggested by SEC. 4. To highlight the area of regulatory framework regarding audit committee and reporting aspects in Bangladesh. 5. To study the real picture of reporting followed by the audit committee in Bangladesh.
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For this study, the population was the total number of annual reports of the listed public limited companies up to November 2006, which was found to be 251(as we consider the annual reports of 2006). Out of these PLCs, a sample of 81 (32.27 percent) has been selected under simple random basis. The sample companies’ annual reports have been surveyed extensively for audit committee since their listing in the Dhaka Stock Exchange (DSE). The relevant reports were surveyed from the library of the Dhaka Stock Exchange. The population and sample have been shown below in Table 1 on the basis of various industrial sectors: Table -1: The population of the study under different industrial sectors Sector Banks & Financial Institutions Insurance Engineering Food & Allied Service Textile Paper & Packing Pharmaceuticals & chemical Miscellaneous Total
Population
Sample
Percentage
34 31 22 35 5 38 8 24 44
28 12 5 9 2 9 1 7 8 81
82.35% 38.71% 22.73% 25.71% 40.00% 23.68% 12.50% 29.71% 18.18%
In this study, an attempt has been made to find out the nature and extent of information disclosed in the audit committee of disclosing companies by comparing with the components suggested by SEC (2006). We identified the following twelve guidelines as a criterion: 1. Composition of Audit Committee; 2. Audit Committee members appointment; 3. Term of service of Audit Committee; 4. Chairman of Audit Committee; 5. Chairman’s Qualification; 6. Reporting to the Board of Directors; 7. Report of Conflict of Interest; 8. Defect in the internal Control System; 9. Suspected infringement of laws; 10. Reporting to the Authorities; 11. Reporting to the Shareholders; and 12. Any other matter. In examining each of these components, a dichotomous procedure is followed where each company was awarded a score of ‘1’ if the company appears to have disclosed the concerned component and ‘0’ otherwise. The score of each company was totaled to find the net score of the company. An Audit Committee Disclosure Index (ACDI) was then computed by using the following formula: Total Score of the Individual Company ACDI= × 100 Max. Possible Score 56
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Audit Committee Disclosure of Listed Companies in Bangladesh: An Empirical Study
In this study, the maximum possible score obtainable by a company is 12. So in particular, ACDI for this study becomes: Total Score of the Individual Company ACDI=
× 100
12
Findings of the Study The study has attempted to examine the state of audit committee disclosure in public limited companies enlisted with DSE in Bangladesh. Total Score and Audit Committee Disclosure Index of Listed Public Limited Companies: The Audit Committee Disclosure Index (ACDI) has been computed by calculating total score for each disclosing companies. Individual ACDI of each company has been shown in ExhibitA1 in the Annexure. Descriptive statistics of Total Score is shown in Table 2: Table-2: Descriptive Statistics of Total Score Sector
N
Minimum
Maximum
Mean
SD
Banks & Financial Institutions
25
2
12
6.96
3.1
Insurance
10
1
11
6.4
3.34
Engineering
3
1
12
8
6.08
Food & Allied
3
1
6
4
2.65
Service
2
1
12
6.5
7.78
Textile
7
1
12
7.29
4.35
Pharmaceuticals & chemical
4
5
12
10
3.37
Miscellaneous
5
1
12
8.4
5.13
Total
59
1
12
7.193
1.746
Source: Compiled and Computed from Exhibit- A1; N: Number of Companies.
According to SEC (2006) guidelines, we identified twelve criteria about audit committee of a company. In this survey, a total of 59 companies (72.84% of the sample size 81) have found to disclose audit committee in their respective annual reports. Moreover, eleven companies have been found to disclose maximum twelve criteria (Uttra Finance and Investments Limited, Singer Bangladesh Limited, Renata Limited, Niloy Cement Industries Limited, Lafarge Surma Cement Limited, Eastern Housing Ltd, Eastern Bank Limited, Delta Spinners Limited, BEXTEX Ltd, Beximco Pharma, Apex Tannery Limited ) and another six company to disclose minimum one criterion (Shinepukur Holdings Ltd, Pragati Insurance Limited, Meghna Cement Mills Limited, Jute Spinners Limited, Eastern Cables limited, Beximco Fisheries Limited ) in their respective audit committee. The average score is found to be 7.12 (average ACDI 59.32) with average standard deviation of 1.7466 (maximum standard deviation is in service sector and minimum in Food & Allied Sector). Following table shows frequency distribution of total score and ACDI:
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Table-3: Frequency Distribution of Total Score and ACDI Score
ACDI
N
Cumulative N
%
Cumulative %
1.00
8.33%
6
6
10.17%
10.17%
2.00
16.67%
2
8
3.39%
13.56%
3.00 4.00
25.00% 33.33%
2 3
10 13
3.39% 5.08%
16.95% 22.03%
5.00
41.67%
12
25
20.34%
42.37%
6.00 7.00
50.00% 58.33%
6 3
31 34
10.17% 5.08%
52.54% 57.63%
8.00 9.00
66.67% 75.00%
2 0
36 36
3.39% 0.00%
61.02% 61.02%
10.00
83.33%
5
41
8.47%
69.49%
11.00 12.00
91.67% 100.00%
7 11
48 59
11.86% 18.64%
81.36% 100.00%
As shown in the above table, the highest number of companies (12) falls in the ACDI score of 41.67% and in the upper extreme (ACDI 100.00%) as well in the lower extreme (ACDI 8.33%) there exists eleven and six company respectively. The results shows that the state of audit committee disclosure in the annual reports of PLCs is not so poor as the average score (7.12) is above 6 (half of maximum score of 12). But, it is apparent that the listed PLCs do not seem to be much interested in following SEC guidelines and do not give a proper thought in the audit committee disclosure. Extent of Sector-wise and Item-wise Audit Committee Disclosure by the Listed PLCs: The audit committee disclosure practices of different industrial sectors of Bangladesh with reference to the selected twelve components are shown in Exhibit-A2 in the Annexure. Based on the sectors of the companies, the exhibit shows that Pharmaceuticals sector scored the maximum average of ACDI (83.33) followed by miscellaneous sector (70.00) and then Engineering Sector (66.67). The lowest average score of ACDI was obtained by Food & Allied Sector (33.33). This is an indication of the fact that the Pharmaceuticals sector is showing great commitment towards disclosing their audit committee. Among the twelve criteria, the survey found that maximum companies (56 companies out of 59) focused on composition of audit committee and focus on suspected infringement of laws (only 38.98% companies, 23 in numbers) was the minimum. According to the guidelines suggested by SEC the following are the findings: 1. Composition of Audit Committee: According to the survey, 56 companies out of 59 companies (94.92%) mentioned about their Composition of Audit Committee in the audit committee disclosure. From the total number of companies Insurance Sector (9 company out of 10 companies, 90.00%), Pharmaceuticals & Chemical Sector (4 companies out of 4 companies, 100.00%), Miscellaneous Sector (4 companies out of 5 companies, 80%), Textile Sector (7 companies out of companies, 100.00%), Banks & Financial Institutions Sector (25 companies out of 25 companies, 100.00%), Engineering Sector (2 companies out of 4 companies, 66.67%) , Food & Allied Sector (3 company out of 3 companies, 100.00%) and Service sector (2 company out of 2 companies, 100.00%) mentioned about 58
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Audit Committee Disclosure of Listed Companies in Bangladesh: An Empirical Study
2.
3.
4.
5.
6.
their composition of the audit committee. As example, the Audit Committee of Apex Tannery Limited is, “.......During the year the Board Audit Committee was set up to review the financial results audit and compliance with the statutory and regulatory requirements....”. Audit Committee members appointment: According to the survey, 34 companies (57.63%) mentioned about Audit Committee members appointment in their audit committee. Banks & Financial institutions (12 companies, 48.00%), Insurance (3 company, 30.00%), Pharmaceuticals & chemical (4 companies, 100%), Textile (6 companies, 85.71%), Engineering (2 companies, 66.67%), Food & Allied (2 companies, 66.67%), Miscellaneous (4 companies, 80%) and Service (1 company, 50.00%) sectors mentioned about their audit committee members appointment in the disclosure of audit committee. As example, the audit committee of Pubali Bank Limited is, “The Board reconstituted the audit committee in its 553rd meeting held on 30.03.2006 comprising following members of the Board of Director———.” Term of service of Audit Committee: A total of 27 companies (45.76%) mentioned about Term of service of Audit Committee in the disclosure. Mention about term of service was found in 10 banking companies, 3 pharmaceuticals companies, 3 textile companies, 6 insurance companies and 3 miscellaneous companies. One engineering and one service Sector Company also mentioned about the term of service. But, Food & Allied sector companies did not mention anything about their term of service in the disclosure of audit committee. As example, the audit committee of NCC Bank Limited states: “….The audit committee of the Board of Directors of the Bank re-constituted earlier in accordance with Bangladesh Bank’s BPRD circular No. 12 dated 23 December2002, continued up to 30th may 2006,…..subsequently, the audit committee was re-constituted with its member ...” Chairman of Audit Committee: A total of 50 companies (84.75%) mentioned about their existence of chairman of audit committee in the disclosure. For example, Abtab Automobiles Limited is “………..The audit committee has been formed ..... 12, November, 2006 comprising of the following member: Chairman: Mr. Syed Masud Hasan, Independent Director………….” Chairman’s Qualification: According to the survey, 41 companies (69.49%) mentioned about their chairman’s qualification in the disclosure of audit committee. Banks & Financial institutions (11 companies), Insurance (2 company), Service (1 company) Textile (1 company), Engineering (1 company), Food & Allied (1 company), and Miscellaneous (1 company), sectors do not mentioned anything about their chairman’s qualification. As example the audit committee of IDLC discloses that “……..The committee is headed by a director who has professional background in accounting and finance…………..” Reporting to the Board of Directors: According to the survey, 45 companies (76.27%) mentioned about their Reporting to the Board of Directors in their audit committee. Banks & Financial institutions (20 companies, 80.00%), Insurance (7 companies, 70.00%), Pharmaceuticals & chemical (4 companies, 100%), Textile (6 companies, 85.71%), Engineering (2 companies, 66.67%), Food & Allied (companies, 33.33%), Miscellaneous (4 companies, 80%) and Service (1 company, 50.00%)
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7.
8.
9.
10.
11.
12.
60
sectors mentioned about their Reporting to the Board of Directors in the disclosure of audit committee. As example, the audit committee of Brac Bank. is, “….The audit committee reports directly to the Board of Directors and assists the Board in meeting its responsibilities……...” Report of Conflict of Interest: About 44.07% companies (26 in number) mentioned about their reporting on conflict of interest in their disclosure of audit committee. Banks & Financial institutions (11 companies, 44.00%), Engineering (2 companies, 66.67%), Food & Allied (0 company, 0%), Insurance (3 companies, 30.00%), Pharmaceuticals & chemical (3 companies, 75.00%), Textile (3 companies, 42.86%) and Miscellaneous (3 companies, 60%) and service (1 company, 50.00%) sectors mentioned about their reporting on conflict of interest in their disclosure of audit committee. For example, Purabi General Insurance Ltd mentioned about their report of Conflict of Interest by saying “.... will report to the board....” Defect in the internal Control System: A total of 29 companies (49.15%) mentioned about their defect in the internal Control System in their disclosure of audit committee. For example, defect in the internal control system of Renata Limited state that “….Does not arise....” Suspected infringement of laws: Out of 59 companies, 23 companies (49.15%) mentioned about their suspected infringement of laws in their disclosure of audit committee. No company in the Food & Allied sector mentioned anything about this in the disclosure. As for example, the audit committee of Munno Jutex Industries Ltd states about suspected infringement of laws that, “….No such incidence....” Reporting to the Authorities: A total of 26 companies (44.07%) mentioned about their reporting to the authorities in the disclosure of audit committee. Mention about reporting to the authorities was found in 9 banking , 3 pharmaceuticals , 3 engineering , 3 insurance, , 3 textile and 3 miscellaneous companies. One food & allied and one service sector company also mentioned about the technology. As example, the audit committee of IDLC states:”…………..the audit committee clearly lay down its authority, responsibility and specific duties” Reporting to the Shareholders: A total of 34 companies (57.63%) mentioned about their reporting to the shareholders in the disclosure of audit committee. Mention about reporting to the shareholder was found in 16 banking, 3 pharmaceuticals, 2 engineering, 5 insurance, 3 textile and 3 miscellaneous companies. One food & allied and one service sector company also mentioned about the technology. As for example, the audit committee of Shahjalal Islami Bank reporting to the shareholders states that, “…. The condition is under review....”. Any other matter: A total of 29 companies (49.15%) mentioned about any other matter in the disclosure of audit committee. Only food and allied did not mentioned any thing about this. For example, reporting of any other matter to the Board of Director, Apex Food Limited disclose-”…..Not applicable, there was no such event to report…….”. The Cost and Management, November-December, 2007
Audit Committee Disclosure of Listed Companies in Bangladesh: An Empirical Study
Concluding Remarks and Scope of Future Research There is no doubt , as a monitoring committee consisting of majority of independent directors, an audit committee ensures better governance in an organization and thus safeguards the shareholders’ interest. The concept is getting importance in the business world. Now the information of audit committee becomes mandatory in Bangladesh (by SEC). Though it was thought that this will bring more transparency in the management and protection of shareholders, interest, but it fails because many organizations just fill up the SEC status by giving a tick mark in the complied column. In some cases, the information which is disclosed under the head audit committee is different from their complied status column. For example – Dutch Bangla Bank Limited disclosed their chairman’s qualification a by marking tick in the complied column, but the chairman’s qualification under the head ‘ Disclosure on Audit Committee of The Board’ is – B.S.C. Engineer (chemical). On the other hand most of the organization (except Banking and Financial sector) only fill up the format but didn’t provide any explanation of it. Again Beximco Fisheries Limited and Shinepukur Holdings Ltd only disclose ‘Audit Committee’ but the subheadings of the audit committee are not disclosed in their report. The survey findings also show that in Bangladesh, 72.84 % of the sampled companies are disclosing audit committee in the annual reports. It means that about 27.16% companies are not disclosing audit committee at all. Many organizations misapprehend the nature and importance of audit committee, while others fail to consider it at all. In case of Bangladesh, unfortunately it can’t be ignored as it is mandatory from 2006. Bangladeshi companies are still not successful in using the audit committee as a strategic tool. As a result, the audit committee is somewhat becoming a tool to make the annual report attractive to the users. Future study can be undertaken in this area by relating the quality of audit committee with the performance of the company i.e., role of audit committee in improving corporate governance & quality of reporting. Besides, study can also be undertaken in case of non-profit organizations as well to find out its relationship with the performance of the entity. References Abbott, L. J. and S.Parker (2000), “Auditor Selection and Audit Committee Characteristics, Auditing”, A Journal of Practice and Theory, 19(2): 47-66. Abbott, L.J., S. Parker and G.F. Peters (2002), “Audit Committee Characteristics and Financial Misstatement: A Study of the efficacy of certain Blue Ribbon Committee Recommendations,” Working Paper. Abdullah, A. S. M and M. N. U. Bhuiyan (1995), “Accounting and Reporting Practices of Islamic Bank in Bangladesh,” Dhaka University Journal of Business Studies, 16(2): 21-42. American Institute of Certified Public Accountants (AICPA) (1979), Report on Special Committee on Audit Committees (New York: AICPA). Akter, M. and M. Hoque (1993), “Disclosure Practices in Bangladesh: A Case study of the Banking Sector,” Dhaka University Journal of Business Studies, 14(2): 29-42. Arens, A. A., Loebbecke, K.J. and Elder, J.R. (2000), Auditing An Integrated Approach, Prentice-Hall. Inc, 8Th Edi. Bhuiyan, M. M. H. (1995), “Managerial effectiveness of private commercial banks: A Comparative Study,” Dhaka University Journal of Business Studies, 16(1): 147- 158. Blue Ribbon Committee (1999), Report and the Recommendation of the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees, New York Stock Exchange and National Association of Securities Dealers, found at www.nyse.com. Braiotta, L. (1999), The Audit Committee Handbook; (New York: John Willey and Sons). Buiya, M.A. B.(1996), Bangladesh laws on Banks and Banking, 2nd Edit.
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Audit Committee Disclosure of Listed Companies in Bangladesh: An Empirical Study
Annexure Exhibit-A1 Audit Committee Disclosure Index (ACDI) of listed public limited companies. S.L Name of the Company 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59
Uttra Finance and Investments Limited Singer Bangladesh Limited Renata Limited Niloy Cement Industries Limited Lafarge Surma Cement Limited Eastern Housing Ltd Eastern Bank Limited Delta Spinners Limited BEXTEX Ltd Beximco Pharma Apex Tannery Limited The City Bank Limited Progressive Life Insurance Company limited NCC Bank Limited Green Delta Insurance Company Ltd Beximco Synthetics Limited Aftab Automobilies limited ACI Pubali Bank Limited Popular Life Insurance Company Limited Mercantile Bank Limited Dhaka Bank Bangladesh Industrial Finance Company Ltd. Prime Bank Limited Brac Bank Uttra Bank Ltd Pragati Life Insurance Limited IDLC United Leasing company Limited Southeast Bank Limited Nitol Insurance Company Limited National Tea Co. Ltd. Jamuna Bank Limited EXIM Bank The IBN SINA Pharmaceutical Industry Ltd Social Investment Bank Limited Shahjal Islami BanK Peoples Insurance company Limited Monno Jutex Industries ltd. Monno fabrics Ltd Monno Ceramic Industries Ltd. Islamic Finance & Investment Limited Eastland Insurance Company Limited Dutch Bangla Bank Limited Apex Spinning & Knitting Mills Limited Apex Foods Limited The Premier bank Limited Purabi General Insurance Company limited Central Insurance Company Limited Trust Bank Islami Bank Bangladesh Limited One Bank Limited Investment Corporation of Bangladesh Shinepukur Holdings Ltd Pragati Insurance Limited Meghna Cement Mills Limited Jute Spinners Limited Eastern Cables limited Beximco Fisheries Limited
The Cost and Management, November-December, 2007
Total 12 12 12 12 12 12 12 12 12 12 12 11 11 11 11 11 11 11 10 10 10 10 10 8 8 7 7 7 6 6 6 6 6 6 5 5 5 5 5 5 5 5 5 5 5 5 4 4 4 3 3 2 2 1 1 1 1 1 1
ACDI 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 91.67% 91.67% 91.67% 91.67% 91.67% 91.67% 91.67% 83.33% 83.33% 83.33% 83.33% 83.33% 66.67% 66.67% 58.33% 58.33% 58.33% 50.00% 50.00% 50.00% 50.00% 50.00% 50.00% 41.67% 41.67% 41.67% 41.67% 41.67% 41.67% 41.67% 41.67% 41.67% 41.67% 41.67% 41.67% 33.33% 33.33% 33.33% 25.00% 25.00% 16.67% 16.67% 8.33% 8.33% 8.33% 8.33% 8.33% 8.33%
63
64
Total
Miscellaneous
Pharmaceuticals & chemical
Textile
Service
Food & Allied
Engineering
Insurance
Banks & Financial Institutions
Sector
2
34 100.00%
100.00%
11.76%
7.14% 56
4
11.76%
7.14% 4
4
17.65%
12.50% 4
6
7
1 2.94%
2
5.88%
5.36% 3.57%
2
5.88%
3.57% 3
2
8.82%
16.07% 2
3
9
12 35.29%
25 44.64%
Composition Audit of Audit Comm. Comm. Members Appoint.
1
100.00%
27
11.11%
3
11.11%
3
11.11%
3
3.70%
1
0.00%
0
3.70%
1
22.22%
6
37.04%
10
Term of Service of Audit Comm.
3
5
6
100.00%
50
8.00%
4
8.00%
4
12.00%
6
2.00%
1
4.00%
2
4.00%
2
16.00%
8
46.00%
23
100.00%
41
9.76%
4
9.76%
4
14.63%
6
2.44%
1
4.88%
2
4.88%
2
19.51%
8
34.15%
14
100.00%
45
8.89%
4
8.89%
4
13.33%
6
2.22%
1
2.22%
1
4.44%
2
15.56%
7
44.44%
20
Chairman Chairman’s Reporting Of Audit Qualification To the Comm. BOD
4
100.00%
26
11.54%
3
11.54%
3
11.54%
3
3.85%
1
0.00%
0
7.69%
2
11.54%
3
42.31%
11
Report of Conflict of Interest
7
100.00%
29
10.34%
3
10.34%
3
10.34%
3
3.45%
1
0.00%
0
6.90%
2
13.79%
4
44.83%
13
Defect In the Internal Control System
8
Exhibit-A3: Disclosure practice of various sectors under different components of Audit committee 9
10
100.00%
23
13.04%
3
8.70%
2
13.04%
3
4.35%
1
0.00%
0
8.70%
2
17.39%
4
34.78%
8
100.00%
26
11.54%
3
11.54%
3
11.54%
3
3.85%
1
3.85%
1
11.54%
3
11.54%
3
34.62%
9
Suspected Reporting Infringement to the of laws Author
11
100.00%
34
8.82%
3
8.82%
3
8.82%
3
2.94%
1
2.94%
1
5.88%
2
14.71%
5
47.06%
16
Reporting to the Share holders
12
100.00%
29
13.79%
4
10.34%
3
6.90%
2
3.45%
1
0.00%
0
6.90%
2
13.79%
4
44.83%
13
Any Other Matter
13
70.00%
83.33%
60.71%
54.20%
33.33%
66.67%
53.33%
58.00%
Average ACDI
Das & Das
The Cost and Management, November-December, 2007
Audit Committee Disclosure of Listed Companies in Bangladesh: An Empirical Study Shilpi Das Sumon Das Abstract: This study first has identified the importance of audit committee for an
organization and then tried to find out the quality of audit committee of the listed Public Limited Companies (PLCs) in Bangladesh. The twelve criteria were identified from the guidelines suggested by Securities and Exchange Commission (SEC) in 2006 was taken as benchmark for this study. The annual reports of a sample of 81 PLCs have been surveyed to determine the nature and extent of disclosure by computing total score and an Audit Committee Disclosure Index (ACDI). The study results show that 59 companies (72.84%) are disclosing audit committee with a mean score of 7.12 (ACDI 59.32). The results also showed that the companies are focusing more on composition of audit committee and chairman of audit committee and little focus is placed on suspected infringement of laws, reporting to the authorities and report of conflict of interest. As the average score of the companies are 7.12 (Out of the total scores possible 12), conclusion has been drawn that the audit committee fails to bring transparency in the management and protection of shareholders interest up to their desired level. Keywords: Audit Committee, Internal Control, Independent Auditor. Introduction
An audit committee is a selected number of members of a company’s board of directors whose responsibilities include helping auditors, remain independent of management (Arens et al., 2000). An audit committee can be defined as a sub-committee in the Governing Body (Board of Directors) that makes arrangements for the audit and also as a subcommittee of the Board, this committee tries to enhance the ability of the Board to fulfill its legal responsibilities and ensure the credibility and objectivity of the financial reports (Hossain, 2006 ). Companies establish an audit committee within the Board of Directors to take active role in overseeing the company’s accounting and financial reporting policies and practices (Whittington and Pany, 2001). Most audit committees are made up of three to five or sometimes as many as seven directors who are not a part of company management. The committee should represent the owners and not the management. Actually, most of the directors who are the parts of the audit committee should be outside directors who have no other relationship that may impair their independence (Whittington and Pany, 2001). Independent audit committee members, as outside Ms. Shilpi Das and Mr. Sumon Das are Lecturers, Faculty of Business Administration, Stamford University, Bangladesh.
52
Audit Committee Disclosure of Listed Companies in Bangladesh: An Empirical Study
directors, may view the directorate as a means of enhancing their reputation as experts in decision control (Fama and Jensen, 1983). Among other functions, it is usually assigned the duty of oversight of the financial reporting and auditing process. The auditor’s major dealing with the governing body will be through audit committee, although the auditor will usually meet with the full governing body at least once per year. The key to effective financial reporting oversight is the competency, strength and independence of audit committee. A typical audit committee decides such things as which audit firm to retain and the scope of services the audit firm is to perform. It meets periodically with the audit firm to discuss audit progress and findings and helps resolve conflicts between the audit firm and management. Audit committees for larger companies are looked upon with favor by most auditors, users, and management. The requirement of an audit committee would be costly for smaller companies. There are two predominant schools of thoughts relating to audit committee :( i) the first school maintains that the audit committee should be entirely composed of non-executive directors who have no management responsibilities or affiliations. It is claimed that this is the only way to ensure the complete independence of the committee in its evaluation of management and audit representation. (ii) The second school claims that at the very least there should be one management representative on the committee. It would provide a more balanced perspective to the problems under committee investigation. The problem with this kind of structures is the potentially adverse effect that the management representative may have on the committee’s independence. The audit committee will assist the board in fulfilling its oversight responsibilities including implementation of the objectives, strategies and overall business plans set by the board for effective functioning of the organization. Role of the audit committee is also important in evolving an effective procedure for financial reporting disclosure, developing a suitable internal control system and maintaining liaison with internal and external auditors to minimize various business risks. Moreover, new business opportunities and increased competition due to globalization of markets, increased use of electronics and information technology, increased complexity of transactions, accounting standards and regulatory requirements are contributing to essentiality and expansion of the role of audit committee. Responsibilities of the audit committee typically include: 1. To enhance the ability of governing body to fulfill its legal responsibilities. 2. To add to the credibility and objectivity of financial reports; 3. To oversee the application of appropriate accounting policies and procedures including appropriate disclosures. 4. To establish and monitor corporate policies to prohibit unethical, questionable or illegal activities. 5. To establish and monitor effective internal and management control. 6. To provide a communication link between management, auditors and governing body. 7. To approve the annual accounts and approving the annual budget and major capital expenditures of the company. The Cost and Management, November-December, 2007
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Das & Das
Components of an Audit Committee Audit committee of the board of an organization can play an effective role in providing a bridge between the board and management, shareholders, depositors and stakeholders. The committee will review the financial reporting process, the system of internal control and management of financial risks, the audit process for monitoring compliance with laws and regulations and its own code of business conduct. According to Gay (2001) characteristics of an effective audit committee should include: a) Audit committees are perceived to be independent and actually exercise independence in their dealings with management and auditors. b) These committees are composed of experienced and competent non-executive directors. c) Audit committees should be established by a resolution of the full board of the governing body. d) Audit committees should have limited number of members. e) Audit committees are given explicit objectives and terms or references that are subject to regular review. f) Audit committee members should meet regularly prior to board meetings and make provisions for adhoc meetings at the request of the auditors and management. g) Audit committees should circulate agendas and minutes to relevant parties. In Bangladesh, the existence of audit committee was not mandatory in the earlier/previous years. But in the year 2006 Securities & Exchange Commission (SEC) provide some conditions relating to audit committee. SEC Notification No. SEC/CMRRCD/2006-158/Admin/02-08, Dated the 20th February, 2006 discussed several guidelines related to audit committees in several ways. This notification suggested that a company should have an Audit Committee as a subcommittee of the Board of Directors. The Audit Committee should assist the Board of Directors in ensuring that the financial statements reflect true and fair view of the state of affairs of the company and in ensuring a good monitoring system within the business. The Audit Committee shall be responsible to the Board of Directors. The duties of the Audit Committee should be clearly set forth in writing. The company wants to listed with any stock exchange in Bangladesh should comply with the following conditions or shall explain the reasons for non compliance: Constitution of Audit Committee According to constitution, the SEC suggested the followings: (i) The Audit Committee should be composed of at least 3 (three) members. (ii) The Board of Directors should appoint members of the Audit Committee who should be directors of the company and should include at least one independent director. (iii) When the term of service of the Committee members expires or there is any circumstance causing any Committee member to be unable to hold office until expiration of the term of service, thus making the number of the Committee members to be lower than the prescribed number of 3 (three) persons, the Board of Directors should appoint the new Committee member(s) to fill up the vacancy(ies) immediately or not later than 1 (one) month from the date of vacancy(ies) in the Committee to ensure continuity of the performance of work of the Audit Committee. 54
The Cost and Management, November-December, 2007
Audit Committee Disclosure of Listed Companies in Bangladesh: An Empirical Study
Chairman of the Audit Committee The SEC suggested the followings in relation to the chairman of the audit committee: (i) The Board of Directors should select 1 (one) member of the Audit Committee to be Chairman of the Audit Committee. (ii) The Chairman of the audit committee should have a professional qualification or knowledge, understanding and experience in accounting or finance. Reporting of the Audit Committee The reporting on audit committee matters is suggested in the following threefold ways: A. Reporting to the Board of Directors: The Audit Committee should report on its activities to the Board of Directors. The Audit Committee should immediately report to the Board of Directors on the following findings, if any: 1. Report on conflicts of interests; 2. Suspected or presumed fraud or irregularity or material defect in the internal control system; 3. Suspected infringement of laws, including securities related laws, rules and regulations; 4. Any other matter which should be disclosed to the Board of Directors immediately. B. Reporting to the Authorities: If the Audit Committee has reported to the Board of Directors about anything which has material impact on the financial condition and results of operation and has discussed with the Board of Directors and the management that any rectification is necessary and if the Audit Committee finds that such rectification has been unreasonably ignored, the Audit Committee should report such finding to the Commission, upon reporting of such matters to the Board of Directors for three times or completion of a period of 9 (nine) months from the date of first reporting to the Board of Directors, whichever is earlier. C. Reporting to the Shareholders and General Investors: Report on activities carried out by the Audit Committee, including any report made to the Board of Directors during the year, should be signed by the Chairman of the Audit Committee and disclosed in the annual report of the issuer company.
Objectives and Methodology of the Study The main objectives of this study are: 1. To give an overview of audit committee including its importance in different organization; 2. To analyze the scenario of audit committee disclosure practice in Bangladesh; 3. To compare the current audit committee disclosure practice with the standard suggested by SEC. 4. To highlight the area of regulatory framework regarding audit committee and reporting aspects in Bangladesh. 5. To study the real picture of reporting followed by the audit committee in Bangladesh.
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For this study, the population was the total number of annual reports of the listed public limited companies up to November 2006, which was found to be 251(as we consider the annual reports of 2006). Out of these PLCs, a sample of 81 (32.27 percent) has been selected under simple random basis. The sample companies’ annual reports have been surveyed extensively for audit committee since their listing in the Dhaka Stock Exchange (DSE). The relevant reports were surveyed from the library of the Dhaka Stock Exchange. The population and sample have been shown below in Table 1 on the basis of various industrial sectors: Table -1: The population of the study under different industrial sectors Sector Banks & Financial Institutions Insurance Engineering Food & Allied Service Textile Paper & Packing Pharmaceuticals & chemical Miscellaneous Total
Population
Sample
Percentage
34 31 22 35 5 38 8 24 44
28 12 5 9 2 9 1 7 8 81
82.35% 38.71% 22.73% 25.71% 40.00% 23.68% 12.50% 29.71% 18.18%
In this study, an attempt has been made to find out the nature and extent of information disclosed in the audit committee of disclosing companies by comparing with the components suggested by SEC (2006). We identified the following twelve guidelines as a criterion: 1. Composition of Audit Committee; 2. Audit Committee members appointment; 3. Term of service of Audit Committee; 4. Chairman of Audit Committee; 5. Chairman’s Qualification; 6. Reporting to the Board of Directors; 7. Report of Conflict of Interest; 8. Defect in the internal Control System; 9. Suspected infringement of laws; 10. Reporting to the Authorities; 11. Reporting to the Shareholders; and 12. Any other matter. In examining each of these components, a dichotomous procedure is followed where each company was awarded a score of ‘1’ if the company appears to have disclosed the concerned component and ‘0’ otherwise. The score of each company was totaled to find the net score of the company. An Audit Committee Disclosure Index (ACDI) was then computed by using the following formula: Total Score of the Individual Company ACDI= × 100 Max. Possible Score 56
The Cost and Management, November-December, 2007
Audit Committee Disclosure of Listed Companies in Bangladesh: An Empirical Study
In this study, the maximum possible score obtainable by a company is 12. So in particular, ACDI for this study becomes: Total Score of the Individual Company ACDI=
× 100
12
Findings of the Study The study has attempted to examine the state of audit committee disclosure in public limited companies enlisted with DSE in Bangladesh. Total Score and Audit Committee Disclosure Index of Listed Public Limited Companies: The Audit Committee Disclosure Index (ACDI) has been computed by calculating total score for each disclosing companies. Individual ACDI of each company has been shown in ExhibitA1 in the Annexure. Descriptive statistics of Total Score is shown in Table 2: Table-2: Descriptive Statistics of Total Score Sector
N
Minimum
Maximum
Mean
SD
Banks & Financial Institutions
25
2
12
6.96
3.1
Insurance
10
1
11
6.4
3.34
Engineering
3
1
12
8
6.08
Food & Allied
3
1
6
4
2.65
Service
2
1
12
6.5
7.78
Textile
7
1
12
7.29
4.35
Pharmaceuticals & chemical
4
5
12
10
3.37
Miscellaneous
5
1
12
8.4
5.13
Total
59
1
12
7.193
1.746
Source: Compiled and Computed from Exhibit- A1; N: Number of Companies.
According to SEC (2006) guidelines, we identified twelve criteria about audit committee of a company. In this survey, a total of 59 companies (72.84% of the sample size 81) have found to disclose audit committee in their respective annual reports. Moreover, eleven companies have been found to disclose maximum twelve criteria (Uttra Finance and Investments Limited, Singer Bangladesh Limited, Renata Limited, Niloy Cement Industries Limited, Lafarge Surma Cement Limited, Eastern Housing Ltd, Eastern Bank Limited, Delta Spinners Limited, BEXTEX Ltd, Beximco Pharma, Apex Tannery Limited ) and another six company to disclose minimum one criterion (Shinepukur Holdings Ltd, Pragati Insurance Limited, Meghna Cement Mills Limited, Jute Spinners Limited, Eastern Cables limited, Beximco Fisheries Limited ) in their respective audit committee. The average score is found to be 7.12 (average ACDI 59.32) with average standard deviation of 1.7466 (maximum standard deviation is in service sector and minimum in Food & Allied Sector). Following table shows frequency distribution of total score and ACDI:
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Das & Das
Table-3: Frequency Distribution of Total Score and ACDI Score
ACDI
N
Cumulative N
%
Cumulative %
1.00
8.33%
6
6
10.17%
10.17%
2.00
16.67%
2
8
3.39%
13.56%
3.00 4.00
25.00% 33.33%
2 3
10 13
3.39% 5.08%
16.95% 22.03%
5.00
41.67%
12
25
20.34%
42.37%
6.00 7.00
50.00% 58.33%
6 3
31 34
10.17% 5.08%
52.54% 57.63%
8.00 9.00
66.67% 75.00%
2 0
36 36
3.39% 0.00%
61.02% 61.02%
10.00
83.33%
5
41
8.47%
69.49%
11.00 12.00
91.67% 100.00%
7 11
48 59
11.86% 18.64%
81.36% 100.00%
As shown in the above table, the highest number of companies (12) falls in the ACDI score of 41.67% and in the upper extreme (ACDI 100.00%) as well in the lower extreme (ACDI 8.33%) there exists eleven and six company respectively. The results shows that the state of audit committee disclosure in the annual reports of PLCs is not so poor as the average score (7.12) is above 6 (half of maximum score of 12). But, it is apparent that the listed PLCs do not seem to be much interested in following SEC guidelines and do not give a proper thought in the audit committee disclosure. Extent of Sector-wise and Item-wise Audit Committee Disclosure by the Listed PLCs: The audit committee disclosure practices of different industrial sectors of Bangladesh with reference to the selected twelve components are shown in Exhibit-A2 in the Annexure. Based on the sectors of the companies, the exhibit shows that Pharmaceuticals sector scored the maximum average of ACDI (83.33) followed by miscellaneous sector (70.00) and then Engineering Sector (66.67). The lowest average score of ACDI was obtained by Food & Allied Sector (33.33). This is an indication of the fact that the Pharmaceuticals sector is showing great commitment towards disclosing their audit committee. Among the twelve criteria, the survey found that maximum companies (56 companies out of 59) focused on composition of audit committee and focus on suspected infringement of laws (only 38.98% companies, 23 in numbers) was the minimum. According to the guidelines suggested by SEC the following are the findings: 1. Composition of Audit Committee: According to the survey, 56 companies out of 59 companies (94.92%) mentioned about their Composition of Audit Committee in the audit committee disclosure. From the total number of companies Insurance Sector (9 company out of 10 companies, 90.00%), Pharmaceuticals & Chemical Sector (4 companies out of 4 companies, 100.00%), Miscellaneous Sector (4 companies out of 5 companies, 80%), Textile Sector (7 companies out of companies, 100.00%), Banks & Financial Institutions Sector (25 companies out of 25 companies, 100.00%), Engineering Sector (2 companies out of 4 companies, 66.67%) , Food & Allied Sector (3 company out of 3 companies, 100.00%) and Service sector (2 company out of 2 companies, 100.00%) mentioned about 58
The Cost and Management, November-December, 2007
Audit Committee Disclosure of Listed Companies in Bangladesh: An Empirical Study
2.
3.
4.
5.
6.
their composition of the audit committee. As example, the Audit Committee of Apex Tannery Limited is, “.......During the year the Board Audit Committee was set up to review the financial results audit and compliance with the statutory and regulatory requirements....”. Audit Committee members appointment: According to the survey, 34 companies (57.63%) mentioned about Audit Committee members appointment in their audit committee. Banks & Financial institutions (12 companies, 48.00%), Insurance (3 company, 30.00%), Pharmaceuticals & chemical (4 companies, 100%), Textile (6 companies, 85.71%), Engineering (2 companies, 66.67%), Food & Allied (2 companies, 66.67%), Miscellaneous (4 companies, 80%) and Service (1 company, 50.00%) sectors mentioned about their audit committee members appointment in the disclosure of audit committee. As example, the audit committee of Pubali Bank Limited is, “The Board reconstituted the audit committee in its 553rd meeting held on 30.03.2006 comprising following members of the Board of Director———.” Term of service of Audit Committee: A total of 27 companies (45.76%) mentioned about Term of service of Audit Committee in the disclosure. Mention about term of service was found in 10 banking companies, 3 pharmaceuticals companies, 3 textile companies, 6 insurance companies and 3 miscellaneous companies. One engineering and one service Sector Company also mentioned about the term of service. But, Food & Allied sector companies did not mention anything about their term of service in the disclosure of audit committee. As example, the audit committee of NCC Bank Limited states: “….The audit committee of the Board of Directors of the Bank re-constituted earlier in accordance with Bangladesh Bank’s BPRD circular No. 12 dated 23 December2002, continued up to 30th may 2006,…..subsequently, the audit committee was re-constituted with its member ...” Chairman of Audit Committee: A total of 50 companies (84.75%) mentioned about their existence of chairman of audit committee in the disclosure. For example, Abtab Automobiles Limited is “………..The audit committee has been formed ..... 12, November, 2006 comprising of the following member: Chairman: Mr. Syed Masud Hasan, Independent Director………….” Chairman’s Qualification: According to the survey, 41 companies (69.49%) mentioned about their chairman’s qualification in the disclosure of audit committee. Banks & Financial institutions (11 companies), Insurance (2 company), Service (1 company) Textile (1 company), Engineering (1 company), Food & Allied (1 company), and Miscellaneous (1 company), sectors do not mentioned anything about their chairman’s qualification. As example the audit committee of IDLC discloses that “……..The committee is headed by a director who has professional background in accounting and finance…………..” Reporting to the Board of Directors: According to the survey, 45 companies (76.27%) mentioned about their Reporting to the Board of Directors in their audit committee. Banks & Financial institutions (20 companies, 80.00%), Insurance (7 companies, 70.00%), Pharmaceuticals & chemical (4 companies, 100%), Textile (6 companies, 85.71%), Engineering (2 companies, 66.67%), Food & Allied (companies, 33.33%), Miscellaneous (4 companies, 80%) and Service (1 company, 50.00%)
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Das & Das
7.
8.
9.
10.
11.
12.
60
sectors mentioned about their Reporting to the Board of Directors in the disclosure of audit committee. As example, the audit committee of Brac Bank. is, “….The audit committee reports directly to the Board of Directors and assists the Board in meeting its responsibilities……...” Report of Conflict of Interest: About 44.07% companies (26 in number) mentioned about their reporting on conflict of interest in their disclosure of audit committee. Banks & Financial institutions (11 companies, 44.00%), Engineering (2 companies, 66.67%), Food & Allied (0 company, 0%), Insurance (3 companies, 30.00%), Pharmaceuticals & chemical (3 companies, 75.00%), Textile (3 companies, 42.86%) and Miscellaneous (3 companies, 60%) and service (1 company, 50.00%) sectors mentioned about their reporting on conflict of interest in their disclosure of audit committee. For example, Purabi General Insurance Ltd mentioned about their report of Conflict of Interest by saying “.... will report to the board....” Defect in the internal Control System: A total of 29 companies (49.15%) mentioned about their defect in the internal Control System in their disclosure of audit committee. For example, defect in the internal control system of Renata Limited state that “….Does not arise....” Suspected infringement of laws: Out of 59 companies, 23 companies (49.15%) mentioned about their suspected infringement of laws in their disclosure of audit committee. No company in the Food & Allied sector mentioned anything about this in the disclosure. As for example, the audit committee of Munno Jutex Industries Ltd states about suspected infringement of laws that, “….No such incidence....” Reporting to the Authorities: A total of 26 companies (44.07%) mentioned about their reporting to the authorities in the disclosure of audit committee. Mention about reporting to the authorities was found in 9 banking , 3 pharmaceuticals , 3 engineering , 3 insurance, , 3 textile and 3 miscellaneous companies. One food & allied and one service sector company also mentioned about the technology. As example, the audit committee of IDLC states:”…………..the audit committee clearly lay down its authority, responsibility and specific duties” Reporting to the Shareholders: A total of 34 companies (57.63%) mentioned about their reporting to the shareholders in the disclosure of audit committee. Mention about reporting to the shareholder was found in 16 banking, 3 pharmaceuticals, 2 engineering, 5 insurance, 3 textile and 3 miscellaneous companies. One food & allied and one service sector company also mentioned about the technology. As for example, the audit committee of Shahjalal Islami Bank reporting to the shareholders states that, “…. The condition is under review....”. Any other matter: A total of 29 companies (49.15%) mentioned about any other matter in the disclosure of audit committee. Only food and allied did not mentioned any thing about this. For example, reporting of any other matter to the Board of Director, Apex Food Limited disclose-”…..Not applicable, there was no such event to report…….”. The Cost and Management, November-December, 2007
Audit Committee Disclosure of Listed Companies in Bangladesh: An Empirical Study
Concluding Remarks and Scope of Future Research There is no doubt , as a monitoring committee consisting of majority of independent directors, an audit committee ensures better governance in an organization and thus safeguards the shareholders’ interest. The concept is getting importance in the business world. Now the information of audit committee becomes mandatory in Bangladesh (by SEC). Though it was thought that this will bring more transparency in the management and protection of shareholders, interest, but it fails because many organizations just fill up the SEC status by giving a tick mark in the complied column. In some cases, the information which is disclosed under the head audit committee is different from their complied status column. For example – Dutch Bangla Bank Limited disclosed their chairman’s qualification a by marking tick in the complied column, but the chairman’s qualification under the head ‘ Disclosure on Audit Committee of The Board’ is – B.S.C. Engineer (chemical). On the other hand most of the organization (except Banking and Financial sector) only fill up the format but didn’t provide any explanation of it. Again Beximco Fisheries Limited and Shinepukur Holdings Ltd only disclose ‘Audit Committee’ but the subheadings of the audit committee are not disclosed in their report. The survey findings also show that in Bangladesh, 72.84 % of the sampled companies are disclosing audit committee in the annual reports. It means that about 27.16% companies are not disclosing audit committee at all. Many organizations misapprehend the nature and importance of audit committee, while others fail to consider it at all. In case of Bangladesh, unfortunately it can’t be ignored as it is mandatory from 2006. Bangladeshi companies are still not successful in using the audit committee as a strategic tool. As a result, the audit committee is somewhat becoming a tool to make the annual report attractive to the users. Future study can be undertaken in this area by relating the quality of audit committee with the performance of the company i.e., role of audit committee in improving corporate governance & quality of reporting. Besides, study can also be undertaken in case of non-profit organizations as well to find out its relationship with the performance of the entity. References Abbott, L. J. and S.Parker (2000), “Auditor Selection and Audit Committee Characteristics, Auditing”, A Journal of Practice and Theory, 19(2): 47-66. Abbott, L.J., S. Parker and G.F. Peters (2002), “Audit Committee Characteristics and Financial Misstatement: A Study of the efficacy of certain Blue Ribbon Committee Recommendations,” Working Paper. Abdullah, A. S. M and M. N. U. Bhuiyan (1995), “Accounting and Reporting Practices of Islamic Bank in Bangladesh,” Dhaka University Journal of Business Studies, 16(2): 21-42. American Institute of Certified Public Accountants (AICPA) (1979), Report on Special Committee on Audit Committees (New York: AICPA). Akter, M. and M. Hoque (1993), “Disclosure Practices in Bangladesh: A Case study of the Banking Sector,” Dhaka University Journal of Business Studies, 14(2): 29-42. Arens, A. A., Loebbecke, K.J. and Elder, J.R. (2000), Auditing An Integrated Approach, Prentice-Hall. Inc, 8Th Edi. Bhuiyan, M. M. H. (1995), “Managerial effectiveness of private commercial banks: A Comparative Study,” Dhaka University Journal of Business Studies, 16(1): 147- 158. Blue Ribbon Committee (1999), Report and the Recommendation of the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees, New York Stock Exchange and National Association of Securities Dealers, found at www.nyse.com. Braiotta, L. (1999), The Audit Committee Handbook; (New York: John Willey and Sons). Buiya, M.A. B.(1996), Bangladesh laws on Banks and Banking, 2nd Edit.
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Das & Das Cadbury, A. (Chairman) (1992), Report of the Committee of the Financial Aspects of Corporate Governance (London: Financial Reporting Council, London Stock Exchange). Carcello, J. V. and Neal, T.L. (2000), “Audit Committee Composition and Auditor Reporting,” The Accounting Review, 75(4): 453-457 Chakma, P. B., M. S. Islam and S. S. Karmarker (1995), “Managerial Performance of Islamic Banking: A Critical Review,” Dhaka University Journal of Business Studies, 16(2): 85-102. Cobb, L.J. (1993), “An Investigation into the Effect of Selected Audit Committee Characteristics on Fraudulent Financial Reporting,” Doctoral Dissertation, University of South Florida, USA. DeZoort, F.T., D.R. Hermanson and W.R. Houston (2003), “Audit Committee Support for Auditors: The Effects of Materiality Justification and Accounting Precision,” Journal of Accounting and Public Policy, 22:175-199. DeZoort, F.T. and S. Salterio (2001), “The Effects of Corporate Governance Experience and Financial Reporting and Audit Knowledge on Audit Committee Members’ Judgement,” Auditing: A Journal of Practice & Theory, 20(2): 31-47. Dockweiler, R.C., L.A. Nikolai and J.E. Holstein (1986), “The Effect of Audit Committees and Changes in the Code of Ethics on Public Accounting,” Proceedings, 1986 Midwest Annual Meeting (Sarasota, Florida: American Accounting Association):45-60. Fama, E.F. and M.C. Jensen (1983), “Separation of Ownership and Control,” Journal of Law and Economics, 26(2): 301-326. Gay, G. (2001), Corporate Governance, ASCPA Study Guide, Module 3. Goddard, A.R. and C. Masters (2000), “Audit Committees, Cadbury Code and Audit Fees: An Empirical Analysis of UK Companies,” Managerial Auditing Journal, 15(7): 358-371. George, N. (2003), “Audit Committees: The Solution to the Quality of Financial Reporting,” The CPA Journal, found at www.nysscpa.org/cpajournal/2003/1203. Hossain, D.M. and A. R. Khan (2006), “Audit Committee: A summary of the Findings of Some Existing Literature,” The Cost and Management, 34(5): 40-57. Huang, H and L. Liu (2005), “The Effects of Audit Committee Characteristics on Investors’ Perception of Financial Reporting,” SSRN Working paper series found in www.ssrn.com. Institute of Chartered Accountants of Bangladesh (ICAB) (1999), Bangladesh Standards on Auditing (BSA), (Dhaka: ICAB) Kalbers, L. and T. Fogarty (1993), “Audit Committee Effectiveness: An Empirical Investigation of the Contribution of the Power,” Auditing: A Journal of Practice and Theory, 12(1): 24-29. Kinzelle, M.R. (1991), “The Use of Audit Committee Reports in Financial Reporting,” Internal Auditing, 6(spring): 15-24. Knapp, M.C. (1987), “An Empirical Study of Audit Committee Support for Auditors Involved in Technical Disputes with Client Management,” The Accounting Review, 62(3): 578-588. Klein, A. (2002), “Economic Determinants behind Variations in Audit Committee Independence,” The Accounting Review, 77: 435–452. Klein, A. (2002), “Audit Committee, Board of Director Characteristics, and Earnings Management,” Journal of Accounting and Economics, 33(3): 375-400. Mangena, M. and R. Pike (2004), “ Shareholding of Audit Committee Members, Audit Committee Size and Expertise and the Quality of Interim Financial Reporting,” Working Paper No. 04/25 , Bradford University of School of Management. Mennon, K. and J. William (1994), “The Use of Audit Committees for Monitoring,” Journal of Accounting and Public Policy, 13: 121-139. McMullel, D.A. (1996), “Audit Committee Performance: An investigation of the Consequences Associated with Audit Committees,” Auditing: A journal of Practice and Theory, 15(1): 87-103 Monroe, G.S., P. Robinson and S.T. Teh (1994), “The Effect of Audit Committees on the Likelihood of Receiving a Qualified Audit Opinion,” Paper presented in BAA Conference, Winchester, March. Park, Y. (1999), “Corporate Governance, Audit Committees and Auditor Litigation,” Working Paper, University of Illinois, USA Pomeranz, F. (1997), “Audit Committees: Where do we go from here?” Managerial Auditing Journal, 12(6): 281-284. Pound, J. (1995), “The Promise of the Governed Corporation,” Harvard Business Review. March. Raghunadan, K., Read, W. J. and Rama, D.V. (2001), “ Audit Committee Composition, “Gray Director”, and Interaction with internal Auditing,” Accounting Horizons, 15(2): 105-118 Rezaee, Z., K.O. O. and G. Minmier (2003), “Improving Corporate Governance: The Role of Audit Committee Disclosures,” Managerial Auditing Journal, 18(6)(7): 530-537. Shah, A. K. F. H. and M. S. H. Khan. (2000), “Efficiency of Some Selected Commercial Banks in Bangladesh,” Dhaka University Journal of Business Studies, 21(1): 15-29. Whittington, O. R. and Pany, K. (2000), Principles of Auditing and Other Assurance Services, (Boston: McGraw-Hill), 13 th edition.
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The Cost and Management, November-December, 2007
Audit Committee Disclosure of Listed Companies in Bangladesh: An Empirical Study
Annexure Exhibit-A1 Audit Committee Disclosure Index (ACDI) of listed public limited companies. S.L Name of the Company 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59
Uttra Finance and Investments Limited Singer Bangladesh Limited Renata Limited Niloy Cement Industries Limited Lafarge Surma Cement Limited Eastern Housing Ltd Eastern Bank Limited Delta Spinners Limited BEXTEX Ltd Beximco Pharma Apex Tannery Limited The City Bank Limited Progressive Life Insurance Company limited NCC Bank Limited Green Delta Insurance Company Ltd Beximco Synthetics Limited Aftab Automobilies limited ACI Pubali Bank Limited Popular Life Insurance Company Limited Mercantile Bank Limited Dhaka Bank Bangladesh Industrial Finance Company Ltd. Prime Bank Limited Brac Bank Uttra Bank Ltd Pragati Life Insurance Limited IDLC United Leasing company Limited Southeast Bank Limited Nitol Insurance Company Limited National Tea Co. Ltd. Jamuna Bank Limited EXIM Bank The IBN SINA Pharmaceutical Industry Ltd Social Investment Bank Limited Shahjal Islami BanK Peoples Insurance company Limited Monno Jutex Industries ltd. Monno fabrics Ltd Monno Ceramic Industries Ltd. Islamic Finance & Investment Limited Eastland Insurance Company Limited Dutch Bangla Bank Limited Apex Spinning & Knitting Mills Limited Apex Foods Limited The Premier bank Limited Purabi General Insurance Company limited Central Insurance Company Limited Trust Bank Islami Bank Bangladesh Limited One Bank Limited Investment Corporation of Bangladesh Shinepukur Holdings Ltd Pragati Insurance Limited Meghna Cement Mills Limited Jute Spinners Limited Eastern Cables limited Beximco Fisheries Limited
The Cost and Management, November-December, 2007
Total 12 12 12 12 12 12 12 12 12 12 12 11 11 11 11 11 11 11 10 10 10 10 10 8 8 7 7 7 6 6 6 6 6 6 5 5 5 5 5 5 5 5 5 5 5 5 4 4 4 3 3 2 2 1 1 1 1 1 1
ACDI 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 91.67% 91.67% 91.67% 91.67% 91.67% 91.67% 91.67% 83.33% 83.33% 83.33% 83.33% 83.33% 66.67% 66.67% 58.33% 58.33% 58.33% 50.00% 50.00% 50.00% 50.00% 50.00% 50.00% 41.67% 41.67% 41.67% 41.67% 41.67% 41.67% 41.67% 41.67% 41.67% 41.67% 41.67% 41.67% 33.33% 33.33% 33.33% 25.00% 25.00% 16.67% 16.67% 8.33% 8.33% 8.33% 8.33% 8.33% 8.33%
63
64
Total
Miscellaneous
Pharmaceuticals & chemical
Textile
Service
Food & Allied
Engineering
Insurance
Banks & Financial Institutions
Sector
2
34 100.00%
100.00%
11.76%
7.14% 56
4
11.76%
7.14% 4
4
17.65%
12.50% 4
6
7
1 2.94%
2
5.88%
5.36% 3.57%
2
5.88%
3.57% 3
2
8.82%
16.07% 2
3
9
12 35.29%
25 44.64%
Composition Audit of Audit Comm. Comm. Members Appoint.
1
100.00%
27
11.11%
3
11.11%
3
11.11%
3
3.70%
1
0.00%
0
3.70%
1
22.22%
6
37.04%
10
Term of Service of Audit Comm.
3
5
6
100.00%
50
8.00%
4
8.00%
4
12.00%
6
2.00%
1
4.00%
2
4.00%
2
16.00%
8
46.00%
23
100.00%
41
9.76%
4
9.76%
4
14.63%
6
2.44%
1
4.88%
2
4.88%
2
19.51%
8
34.15%
14
100.00%
45
8.89%
4
8.89%
4
13.33%
6
2.22%
1
2.22%
1
4.44%
2
15.56%
7
44.44%
20
Chairman Chairman’s Reporting Of Audit Qualification To the Comm. BOD
4
100.00%
26
11.54%
3
11.54%
3
11.54%
3
3.85%
1
0.00%
0
7.69%
2
11.54%
3
42.31%
11
Report of Conflict of Interest
7
100.00%
29
10.34%
3
10.34%
3
10.34%
3
3.45%
1
0.00%
0
6.90%
2
13.79%
4
44.83%
13
Defect In the Internal Control System
8
Exhibit-A3: Disclosure practice of various sectors under different components of Audit committee 9
10
100.00%
23
13.04%
3
8.70%
2
13.04%
3
4.35%
1
0.00%
0
8.70%
2
17.39%
4
34.78%
8
100.00%
26
11.54%
3
11.54%
3
11.54%
3
3.85%
1
3.85%
1
11.54%
3
11.54%
3
34.62%
9
Suspected Reporting Infringement to the of laws Author
11
100.00%
34
8.82%
3
8.82%
3
8.82%
3
2.94%
1
2.94%
1
5.88%
2
14.71%
5
47.06%
16
Reporting to the Share holders
12
100.00%
29
13.79%
4
10.34%
3
6.90%
2
3.45%
1
0.00%
0
6.90%
2
13.79%
4
44.83%
13
Any Other Matter
13
70.00%
83.33%
60.71%
54.20%
33.33%
66.67%
53.33%
58.00%
Average ACDI
Das & Das
The Cost and Management, November-December, 2007
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