Audit Committee In Banks Current Regulatory Framework And Disclosure Practices In Bangladesh

Audit Committee in Banks: Current Regulatory Framework and Disclosure Practices in Bangladesh Md. Hamid Ullah Bhuiyan Dewan Mahboob Hossain Pallab Kumar Biswas

Abstract: This paper has critically analyzed the current regulatory framework of audit committee in public limited banks in Bangladesh and highlighted the Audit Committee disclosure practices by surveying all the listed banks (25) as on 30 November, 2006. After analyzing the Securities and Exchange Commission (SEC) notification and BRPD Circular, 15 disclosure variables have been identified and Audit Committee Disclosure Index (ACDI) has been computed for all the listed banks. It has been found some inconsistencies in the regulatory frameworks. Moreover, the survey findings show that the listed banks are disclosing audit committee information in varying degree (26.67 to 86.67) and in different locations of the annual report. The study also expresses its cautionary note on using chairman, vice-chairman, managing director in the audit committee, lack of existence of independent director in the committee, educational qualification of the members. Keywords: Audit Committee, disclosure, independent director, SEC, BRPD Circular.

Introduction One of the key features of modern corporations is the separation of ownership and control (Berle and Means, 1932). While this feature facilitates the acquisition of capital, it also results in agency problem (conflicts of interest between agents and principals). Corporate governance systems are developed, in part, to help reduce agency problems. Cadbury Report (1992) says that corporate governance is the system by which companies are directed and controlled. Actually it is the system within which directors and managers operate the organization with an objective of enhancing the shareholders’ value. This involves the development of monitoring mechanisms and evaluation procedures to help control the organization’s agents and ensure that they behave in the best interests of shareholders (Firth and Rui, 2006). It is said that to ensure appropriate corporate governance, the effectiveness of the Board and particularly of the non-executive Directors is to be improved by creation of apposite board sub-committees like nomination committees, remuneration committees and audit committees (Kamal and Ferdousi, 2006). The audit committee (AC) is an important board committee that assists the board of directors in overseeing and ensuring adequate functioning of internal control mechanisms, monitoring and focusing on reviewing financial risk and risk management. By doing so, audit committee helps determine indicators of problems and address these problems, mitigate possible damage and enhance shareholder value (Haron et al., 2005). Collier (1997) finds the presence of the following characteristics in most of the definitions of audit committee: (1) it is a subcommittee of the main board (Porter et al., 2003; Turpin and DeZoort, 1998); (2) it is comprised of a majority of nonexecutive directors (Abbott et al., 2003; BRC, 1999); (3) it plays a role in the review of 

Md. Hamid Ullah Bhuiyan and Dewan Mahboob Hossain are Assistant Professors, Department of Accounting & Information Systems; Pallab Kumar Biswas is a Lecturer, Faculty of Business Administration, Eastern University.

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Electronic copy available at: http://ssrn.com/abstract=1250582

financial reporting process, communicates with the auditors, and reviews internal controls (FCCG, 1999; NACD, 2000; Walker, 2004). Today, the rapid emergence of ACs is a response to the dissatisfaction of stakeholders in the way companies are managed. As a result, the Stock Exchange listing requirements in several countries, such as the United States, Canada, the UK, Australia, Singapore, Netherlands, France, Germany, Hong Kong, Japan, New Zealand, South Africa, Thailand and India PriceWaterhouseCoopers, 1999) have given ACs predominance in managing the corporate governance. Since 1990, attention has been given to the composition of ACs, the independence of ACs (ISB, 1999), the knowledge and experience of ACs’ members (Blue Ribbon Committee, 1999), the financial disclosure (SEC, 1999), the interaction and the relationship with the external auditors by ACs (ASB, 1999). In Bangladesh, the Securities and Exchange Commission (SEC) and Bangladesh Bank have issued notification and circular respectively specifying different provisions regarding audit committee in listed companies in Bangladesh. Reporting requirements and compliance matters form essential parts of the corporate governance process. Without adequate reporting mechanisms, shareholders and others cannot be confident that the affairs of the company are being run in a prudent manner for their benefit. Also, there is inadequate assurance that the checks and balances in place are effective. The importance of a compliance process to reduce liability and risk exposure in securities fraud should not be underestimated (vide Haron et al., 2005). As cited in Haron et al. (2005) study, Tate (2002) observed that appropriate compliance work by the audit committee helps spot and address red flags, mitigates possible damage and enhances shareholders’ value. Thus companies’ emphasis on compliance with rules and regulations is expected to improve the effectiveness of the audit committee. This study investigates Bangladeshi banking companies’ reporting behaviour, using compliance that can be identified through disclosures as a measure of potential AC effectiveness. The primary objectives of the research are therefore: 1. To give an overview of audit committee and audit committee disclosure in the annual reports of listed banking companies. 2. To highlight the regulatory framework of audit committee issues in the banking companies. 3. To analyze the scenario of audit committee disclosure in the annual reports of banking companies. 4. To develop an Audit Committee Disclosure Index (ACDI) and to examine if such disclosure is associated with any corporate attribute as age of the company, Earning per Share (EPS) and total assets of the banks. The paper is organized into six sections. The following section offers a discussion on the regulatory framework of AC in Bangladesh. Section three provides prior studies on audit committee. The fourth sections present the data collection and research methodology. The fifth section discusses data analysis and research findings. The final section concludes the paper with the scope of future research.

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Electronic copy available at: http://ssrn.com/abstract=1250582

Audit Committee in Bangladesh: Regulatory Framework Like other countries in the world, audit committee is of utmost importance in Bangladesh as well for independent measurement of management performance. But unfortunately there was virtually no audit committee in the banking sector up to the date when the central bank of Bangladesh (Bangladesh Bank) came up with specific regulation (Kamal and Ferdousi, 2006). Moreover, in recent past, the Securities and Exchange Commission (SEC) issued several conditions relating to audit committee through SEC Notification No. SEC/CMRRCD/2006-158/Admin/02-08, Dated the 20th February, 2006. In this notification, several conditions on Constitution of audit committee, chairman of the audit committee and reporting of the audit committee (to the board of directors, to the authorities and to the shareholders and general investors) have been issued. On the other hand, Bangladesh Bank Circular (BRPD Circular No. 12 Dated December 23, 2002) has covered different issues on overall Purpose/Objectives, roles and responsibilities of the audit committee (subcategorized into roles and responsibilities regarding internal control, financial reporting, internal audit, external audit, compliance with existing laws and regulations, and other responsibilities); the structure and composition of audit committee; Qualification of the member; and meeting. A comparative analysis SEC notification and BRPD circular is given in the following table: Table 4: Comparative analysis between SEC Notification and BRPD circular Issue

Composition of Audit Committee

Roles and Responsibilities of Audit Committee

Meeting

Reporting to the board of directors

Condition in SEC Notification At least 3 (three) members (Condition 3.1 (i)). At least one of the members of the audit committee will be independent director (Condition 3.1 (ii)). Nothing is specified regarding the term of office.

Provision in BRPD Circular 03 (three) members

Nothing is specified regarding the existence of audit committee secretary or the appropriate person for the post The Board of Directors should select 1 (one) member of the Audit Committee to be Chairman of the Audit Committee (Condition 3.2(i)). No clear statement of the duties of the audit committee is provided. Emphasis is given on the written requirement of the duties. No condition is imposed regarding the frequency of audit committee meeting.

Company secretary of the bank will be the secretary of the audit committee Nothing is specified regarding the chairman of audit committee.

The Audit Committee should immediately report to the Board of Directors on different findings like conflicts of interests, suspected or presumed fraud or irregularity of material defect in the internal control system, suspected infringement of laws, including securities related laws, rules and regulations; and any other matter

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Nothing is specified regarding independent auditor in the audit committee. Members may be appointed for a 03 (three)-year term of office.

Roles and responsibilities of audit committee are clearly stated.

The audit committee should hold at least 3/4 meetings in a year and it can seat any time as it may deem fit The Audit Committee should place compliance report before the board on quarterly basis regarding regularization of the errors & omissions, fraud and forgeries and other irregularities as detected by the internal and external auditors and inspectors of regulatory authorities.

Reporting to the shareholders and general investors

Compliance

which should be disclosed immediately (Condition 3.3.1(ii)). Report on activities carried out by the Audit Committee, including any report made to the Board of Directors under condition 3.3.1 (ii) above during the year, should be signed by the Chairman of the Audit Committee and disclosed in the annual report of the issuer company (Condition 3.4). Voluntary compliance on part of all the listed companies in Bangladesh as the conditions are issued on a ‘comply or explain’ basis.

No such reporting requirements are provided.

Mandatory compliance on part of all the banks in Bangladesh.

In the above analysis, some inconsistency can be noticed regarding the number of audit committee members, inclusion of independent director, reporting to the board of directors and reporting to the shareholders and general investors. By analyzing the legal framework of audit committee in Bangladesh, it has been found that no one is conclusive i.e. all aspects of audit committee have not been covered in any of these two legal papers. For example, regarding reporting, BRPD circular can’t be taken as a conclusive document as it only includes the reporting of the audit committee to the board of the directors. On the other hand, in SEC notification, ‘reporting of the audit committee’ part is much clearer where audit committee is made responsible for reporting to not only to the board of directors on a regular basis but also to the shareholders and investors in the annual report and to the Securities and Exchange Commission (SEC) in case of unreasonable ignorance on part of the board of directors regarding anything which has material impact on the financial condition and results of operation by the audit committee (SEC Notification 2006, Condition 3.3). Regarding roles and responsibilities of the audit committee, BRPD circular is much more specific than SEC notification. With respect to audit committee meeting, SEC notification has not provided any condition. Regarding all other issues, like constitution of audit committee, qualification of members, chairman of the audit committee, one has to consult both the document in order to have necessary information. In this article, attempts have been made to find out the extent to which banking companies of Bangladesh are disclosing information regarding audit committee in the annual report.

Literature Review Though the concept of audit committee is prevailing in the corporate world for a long time1, the appearance of ‘theoretically more activist’ audit committees can be traced to the mid-1960s (Pomeranz, 1997). In 1940, the Securities and Exchange Commission of USA proposed about this kind of committee. Afterwards, an array of well-known cases of corporate accounting scandals at Enron, WorldCom, Rite-Aid, Informix, Waste Management Inc., Sunbeam Corp., etc. has attracted the attention of various parties on the urgent need of effective monitoring mechanism like audit committee and has provided at least anecdotal evidence to support concerns about the adequacy of the monitoring provided by audit committees (Turley and Zaman, 2004). In the U.S., the 1

There is evidence provided by Tricker (1978) that the Great Western Railway Company had an AC in the early nineteenth century (vide Al-Mudhaki and Joshi, 2004)

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Securities and Exchange Commission (SEC) reasserted its interest in the audit committee by: (a) urging registrants to form audit committees comprised of outside directors (SEC, 1972); (b) requiring all publicly held companies’ proxies to disclose information about the existence and composition of their audit committees (SEC, 1974); and (c) requiring publicly held companies to state the number of audit committee meetings held annually and to describe their audit committees’ function (SEC, 1978). Accordingly, the structure and characteristics of effective audit committee are currently under spotlight to ensure reliable and high quality financial reporting. The U.S. Securities and Exchange Commission (SEC) has stated that an effective audit committee affords the “greatest possible protection to investors” (PriceWaterhouse, 1993). In similar vein, Simnet et al. (1993) found that audit committees do improve or maintain the quality of financial reporting process, aid the actual and perceived the independence of the internal and external auditor and improve the confidence of financial statement user in the quality of financial reports. In an influential paper of 1983, Fama and Jensen, citing Horngren (1982), describes audit committee of the board as a collector and conduit of information from the internal mutual monitoring system. Fama and Jensen (1983) argue that the objective of the audit committee is to oversee the accounting controls, financial statements, and financial affairs of the corporation. The primary function of the audit committee is to review management information and to meet regularly with internal and external auditors to review the financial statements and external reporting process, to review the audit process (both external and internal) and internal controls (Bosch, 1995; Klein, 1998). Audit committee also maintains personal contact and communication with the board, the financial executives and the operating executives. Many large firms have used the audit committee to protect themselves from fraud, mismanagement and financial liability (Reinstein and Weirich, 1996). But audit committee has no decision-making powers and does not report directly to company shareholders. Its “outputs” consist of reports and recommendations to the main board, offering assurance by providing formal evidence of its oversight activities. Its role is advisory and largely reactive: its work is often described using words such as “monitor”, “review” and “consider” (Spira, 2003). As cited in Spira’s (1998) study, Collier (1992) found the following reasons (ranked in order: most frequently cited first) for establishment of an audit committee in a survey of state of the UK audit committee:

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

Figure 1: Collier (1992): Reasons of establishment of an audit committee Good corporate practice; Strengthen the role and effectiveness of non-executive directors; Assists directors in discharging their statutory responsibilities as regards financial reporting; Preserve and enhance the independence of internal auditors; Assists the auditors in the reporting of serious deficiencies in the control environment or management weaknesses; Improves communications between the board and the internal auditors; Improves communications between the board and external auditors; Increase the confidence of the public in the credibility and objectivity of financial statements; Assists management to discharge its responsibilities for the prevention of fraud, other irregularities and errors; Increase the confidence of investment analyst in the credibility and objectivity of financial statements; Provides a forum for arbitration between management and auditors; Possibility of legislative pressure.

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On the other hand, Spira (1998) identified the following explicit and implicit reasons behind formation of audit committee:

Figure 2: Explicit and Implicit reasons behind audit committee formation Reasons for audit committee formation

Explicit

Implicit

Associated with audit committee purposes Control functions; Conformation role of the board; Specific committee tasks.

Assuring ‘legitimacy’ of organization; ‘Cosmetic’ e.g. response to Cadbury.

Examples of distinguishing characteristics Time lapse before main board meeting; Clear terms of reference extending beyond Cadbury exemplar; Established relationships; Clear lines of communication. Establishment around time of Cadbury; Internal audit department established at same time/later; Meetings immediately prior to main board meeting; Terms of reference taken straight from Cadbury.

Audit committee role

Active

Passive

The publication of the Cadbury Report (in December, 1992) gave the matter of audit committee a genuine lift in the UK. The Cadbury Code states that the board should launch an audit committee of at least three non-executive directors with written terms of reference which deal clearly with its authorities and duties. The Cadbury Committee advocated that the audit committee should meet privately with the external auditors at least annually without the attendance of members of management. In the United States of America, the Blue Ribbon Committee (BRC) (1999) report on audit committee recommended that that audit committees are likely to be more effective in protecting the credibility of the firm’s financial reporting if committee members are independent of management. Some of the other important recommendations of BRC were: audit committee should have at least three members and the members should be independent of the directors, and at least one of members of the audit committee should be expert in accounting or financial management i.e., to carry out its functions effectively, audit committee members must have relevant experience and qualifications. Braiotta (2000) states that, in general, the audit committee should be large enough to have members with a good mix of business judgment and experience, but not so large as to be unwieldy. The BRC’s recommendation with respect to expertise is consistent with the Public Oversight Board’s (POB) (1993) position that the “effectiveness of the audit committee is affected, first and foremost, by the expertise of members of audit committees in the areas of accounting and financial reporting, internal controls and auditing”. Song and Windram (2000) also find that financial literacy is an important determinant of audit committee effectiveness in UK. Lee and Stone (1997) observe that the majority of AC members in the US have no related background in auditing or accounting. This lack of qualifications helps to explain the apparent reliance placed on external auditors by audit committees in a survey carried out by Windram (1997). The NYSE and NASDAQ adopted these recommendations in late 1999. Later in 2002, The Sarbanes-Oxley Act also supported these points. The Sarbanes-Oxley Act of 2002 was an attempt to regain confidence and trust in corporate America and the accounting profession. This Act addressed the corporate scandals and the disaster in audit profession. Some of the provisions of this Act suggests about the audit committee oversight function over corporate governance, financial reporting, internal control structure, internal audit functions, and external audit services (Rezaee et al., 2003).

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In order to carry out its intended functions, frequent meeting of the Audit Committee and communication among the committee members is a must. As suggested by Menon and William (1994), Board and audit committee meetings are important vehicles for directors to monitor financial reporting. Vafeas (1999), Collier and Gregory (1999) find a correlation between AC meeting frequency and share price movement. Since the primary role of the audit committee is to monitor financial reporting and internal controls on behalf of the shareholders and one would expect that effective monitoring necessarily requires regular meetings. Song and Windram (2000) also find that higher meeting frequency reduces the occurrence of financial reporting problems in UK. Among Asian countries, in order to enhance the corporate governance situation Indian Companies (Amendment) Act, 2000 has introduced a new section 292A with the concept of ‘Audit Committee’ (Kuchhal, 2001). Following this, the Bombay Stock Exchange (BSE) and the Securities and Exchange Board of India (SEBI) have formed regulations on corporate governance and included it under clause 49 of the listing requirements. This is done on the recommendations of the Kumar Mangalam Birla Committee on Corporate Governance (SEBI, 1999) (Al-Mudhaki and Joshi, 2004). In the international arena, previous research has examined the relationship between the presence of an AC and the quality of financial statements (Beasley, 1996; DeFond and Jiambalvo, 1991; McMullen, 1996). Other researchers have examined issues relating to the voluntary formation of ACs (Bradbury, 1990; Pincus et al., 1989). Most of the studies supported the view that the presence of an AC will reduce financial reporting problems and improve the transparency and disclosure of financial reports. In Bangladesh, Kamal and Ferdousi (2006) conducted one study regarding the presence of audit committee in the banking sector of Bangladesh. In the sample, the authors considered both banking and non-banking financial companies and tried to find out whether there is any disclosure regarding the existence of audit committee in the annual report. But the study failed to provide information regarding the magnitude of audit committee disclosure in the annual reports. The current study has been conducted to take all the Dhaka Stock Exchange (DSE) listed banking companies who published annual report.

Methodology of the Study The study has tested the extent to which Banking Companies in Bangladesh are making Audit Committee disclosure. As on 30 November, 2006 there are 25 listed banking companies listed with Dhaka Stock Exchange (DSE). All these listed banks have been considered for this study. The most recently published annual reports have been taken. By using the annual reports of these sample companies, a disclosure index was developed for the companies under study. After reviewing the regulatory provisions for disclosure by listed Banking Companies and considering the disclosures in the annual report, an attempt has been made to enumerate 15 items regarding Audit Committee disclosures is given table 3. In examining each of these disclosures, a dichotomous procedure was followed where each company was awarded a score of ‘1’ if the company appears to have disclosed the concerned disclosure and ‘0’ otherwise. The score of each company was totaled to find the net score of the

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Table 1: Measurement of Variables Variables

Date of Incorporation of Audit Committee Number of Audit Committee members Name of the Audit Committee members Duration as Audit Committee Status in the organization Status in the Audit Committee Educational qualification Company secretary’s position Number of meetings Date of meetings Attendance in the meetings Discussion topics Disclosure of suggestion Compliance with legal requirements Reporting to the board

Measurement First Measurement Disclosure 1 score, non-Disclosure 0 score. Total scores 15 scores

Description

Second Measurement Dimension measurement

The date on which the company established the Audit Committee.

Disclosure 1 score, non-Disclosure 0 score

Number of members that comprise the Audit Committee of a particular banking company. Disclosure regarding name of the audit committee members has been considered in this paper. Disclosure by the banking companies regarding the period of service as audit committee members has been considered. The position held by the Audit Committee members in the organization. The position held by the Audit Committee members in the Audit Committee. The educational background of each and every members of the Audit Committee. The position held by the Company Secretary in the Audit Committee.

Disclosure 1 score, non-Disclosure 0 score

Number of meetings held during the period covered by the annual report. The dates at which the audit committee meetings were held during the period under consideration. The number of attendances in the Audit Committee meetings by the members of the committee. Issues (e.g. topics on internal control, financial reporting, internal audit, external audit etc) that were discussed in the meetings. The Audit Committee is supposed to make necessary suggestion, where necessary, for the betterment of the organization. Disclosure of such suggestion is considered. Compliance with different legal requirements governing various aspects of Audit Committee such as SEC notification (dated the 20th February, 2006), Bangladesh Bank Circular (Circular no. 12 dated 23rd December, 2002) Reporting frequency of the Audit Committee to the Board of Directors.

Disclosure 1 score, non-Disclosure 0 score Disclosure 1 score, non-Disclosure 0 score

Number

Disclosure 1 score, non-Disclosure 0 score

%

Disclosure 1 score, non-Disclosure 0 score

Length of Disclosure

Disclosure 1 score, non-Disclosure 0 score

Length of Disclosure

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Number

Disclosure 1 score, non-Disclosure 0 score Disclosure 1 score, non-Disclosure 0 score

Length of Duration

Disclosure 1 score, non-Disclosure 0 score Disclosure 1 score, non-Disclosure 0 score Disclosure 1 score, non-Disclosure 0 score Disclosure 1 score, non-Disclosure 0 score

Disclosure 1 score, non-Disclosure 0 score

Disclosure 1 score, non-Disclosure 0 score

company. An Audit Committee Disclosure Index (ACDI) was then computed by using the following formula:

ACDI=

Total Score of Individual Company Maximum Possible Score Obtainable

× 100

In this study, the maximum possible score obtainable by a banking company is 15. So in particular, ACDI for this study becomes:

ACDI=

Total Score of Individual Company 15

× 100

Findings of the Study Compliance Level: In this study, Audit Committee Disclosure Index (ACDI) has been computed for all the listed banks in the Dhaka Stock Exchange (DSE) from the scrutiny of annual reports. Every item disclosed with by a firm is given a score of 1, and since there are15 disclosure items, a score of 15 would mean that the company has fully disclosed all required items. The frequency distribution of total score and ACDI is given in table 2: Table 2: Frequency Distribution of Total Score and ACDI Score ACDI N Cumulative N % Cumulative % 4.00 26.67 2 2 8 8 7.00 46.67 1 3 4 12 9.00 60.00 5 8 20 32 10.00 66.67 5 13 20 52 11.00 73.33 8 21 32 84 12.00 80.00 2 23 8 92 13.00 86.67 2 25 8 100 Source: Compiled and Computed from Exhibit –A2 and A3 in the Annexure. The average audit committee disclosure index (ACDI) is 66.13 (ranging from 26.67 to 86.67). The table also shows that only 8% of the banks have achieved score of 8.00 (ACDI 86.67) followed by 8% for score of 12.00 (ACDI 80.00). The mode ACDI is 73.33 which are obtained by maximum 8 banks. 52% banks fall within the ACDI score of 10. Above ACDI 66.67, there are 12 banks. The minimum disclosure score is 4.00 (ACDI 26.67). No company achieved the full disclosure score of 15.00 (ACDI 100.00). Variable wise disclosure is given in table 3. The table also identifies various locations in the annual report to disclose the audit committee information. As can be seen from table 3, the variable wise disclosure ranges from 8% (attendance in the audit committee meetings) to 100% (Disclosure regarding number of audit committee members). Besides, 96% banks disclosed information regarding names of audit committee members 92% banks disclosed information with respect to status of the audit committee members in the organization and number of audit committee meeting in the last financial year. Regarding 10 variables, more than 50% banks disclosed information. For the remaining 5 items, less than 50% banks disclosed in the annual report.

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Table 3 also specifies the preference of the banks to make audit committee related disclosure in the annual report. It has been found that 24 banks (96%) disclose audit committee information in the notes to the financial statements. After notes to the financial statements, director’s report is also preferred by a large number of banks (72%) for disclosing information. Besides, the board of director’s profile (32%) as well as corporate governance report (16%) have also been chosen by some banks for this purpose. In the board of director’s profile, information has been provided regarding name of the audit committee members, position in the audit committee etc. Only one bank has been found to disclose audit committee information in separate audit committee report signed by the chairman of the audit committee in compliance with the condition provided in the SEC notification (condition 3.4).

The Magnitude of Compliance: Results of the descriptive analysis are shown in Table 4. All the listed banks disclosed information regarding the number of audit committee members in the annual report. The number of audit committee members ranges from 3 to 4. So all the banks follow the regulatory requirement of at least 3 audit committee members. Besides, 15 banks disclosed the duration of current audit committee (in months) which range from 1 month to maximum 35 months. Again, regarding the number of meetings in the last financial year, 21 banks disclosed information.

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Table 3: Audit Committee Disclosure Variables

Number of Banks Disclosed

Percentage

Director’s Report

Notes to Accounts

Date of Incorporation of Audit Committee 16 64 2 16 Number of Audit Committee members 25 100 8 25 Name of the Audit Committee members 24 96 4 24 Duration as Audit Committee 17 68 1 17 Status in the organization 23 92 1 23 Status in the Audit Committee 24 96 4 24 Educational qualification 21 84 ND 21 Company secretary’s position 8 32 1 5 Number of meetings 23 92 9 23 Date of meetings 4 16 ND 2 Attendance in the meetings 2 8 1 2 Discussion topics 23 92 6 23 Disclosure of suggestion 10 40 ND 10 Compliance with legal requirements 21 84 5 21 Reporting to the board 7 28 1 7 Overall 18 24 Source: Compiled and computed from the annual report of the individual banks; ND: No Disclosure

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Corporate Governance Report

Separate Statement

Director’s Profile

ND 1 ND ND ND ND ND ND ND ND ND 1 ND 1 1 3

ND 1 1 ND ND 1 ND ND 1

ND 8 8 ND ND 7 ND 2 ND ND ND ND ND ND ND 8

1 1 1 1 ND 1

Table 4: The magnitude of audit committee disclosure, descriptive statistics Audit Committee members Duration as Audit Committee Number of meetings Attendance in the meetings Discussion topics Disclosure of suggestion

Measurement Number Months Number % Number of words Number of words

N 25 15 21 2 23 9

Minimum 3 1 2 81.33 18 15

Maximum 4 35 25 82.22 267 493

Mean 3.04 17.93 7 81.78 64.96 95.22

S.D. 0.2 12.38 5.87 0.40 49.76 153.38

All the listed banks disclosed information regarding the number of audit committee members in the annual report. The number of audit committee members ranges from 3 to 4. So all the banks follow the regulatory requirement of at least 3 audit committee members. Besides, 15 banks disclosed the duration of current audit committee (in months) which range from 1 month to maximum 35 months. Again, regarding the number of meetings in the last financial year, 21 banks disclosed information. With respect to attendance in the audit committee meetings, only 2 banks supplied information in the annual report. The attendance percentage for the banks has been found to be 81.33% and 82.22% respectively. Moreover, 23 banks disclosed information about discussion topics in the audit committee meetings and 9 banks disclosed the audit committee’s suggestion in the annual report. On average 64.96 words and 95.22 words have been used respectively to describe the above two items. Standard deviation (S.D.) is the highest in case of disclosure of suggestion and is the lowest in case audit committee members (0.2). In the survey 5 banks (20%) have been found with chairman of the board of directors also acting as the chairman or convener of the audit committee and in another one case, chairman has been found to act as the member of the audit committee. Besides, vice-chairman has been found to act as the chairman and member of the audit committee in 2 and 3 cases respectively. Moreover, chairman and vice-chairman, and chairman and managing director have been found to be the members (with chairman being the chairman of the audit committee) of the audit committee in 1 circumstance each. But best practice guidelines in different countries restrict the acting of company chairman as the member of the audit committee (see Smith Committee Report, 2003; AARF et al. 2001). As in Bangladesh, chairman of the board of directors is selected from among the directors and the only condition for being the member of audit committee is the directorship of the company, the banks are taking this option. But this can easily hamper the independence of the audit committee. Moreover, only one bank (4%) has been found to incorporate independent director in the audit committee according to the requirements of the SEC notification. Another important issue is the qualification of the chairman of the audit committee. Regarding the qualification the following condition is imposed in the SEC notification (Condition 3.2(ii)): “The Chairman of the audit committee should have a professional qualification or knowledge, understanding and experience in accounting or finance.” On the other hand, BRPD circular contains the following paragraph for the qualification of audit committee members: “To perform his or her role effectively each committee member should have adequate understanding of the detailed responsibilities of the committee membership as well as the bank's business, operations and its risks.”

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Attempts have been made in this study to find out the level of educational qualification of the chairman of the audit committee. The result can be shown in the following table: Table 6 :Qualification of the chairman of audit committee Qualification Number of banks Ph.D. 1 FCA 1 Chartered Secretary 1 MBA 2 M.Com. 2 BBA 2 B.Com 1 MA 3 BA (Hons.) 3 Graduation in Economics and International Relationship 1 Automobile Diploma 1 B. S.C. 2 Diploma (Arabic) 1 Not given 4 Total 25 Source: Compiled and computed from the annual report of individual listed bank

Percentage 4 4 4 8 8 8 4 12 12 4 4 8 4 16 100

By using the educational qualification information, it can be said that only 36% banks’ audit committee chairmen have some backhand knowledge in accounting or finance or could reasonably be expected to have knowledge to contribute effectively in the functioning of the committee. It is not possible to make such comment on those coming from non-commerce background or Ph.D. or not given information.

Concluding Remarks and Scope of Future Research The main purpose of this study was to explain the regulatory framework of the audit committee in Banks and to find out the nature and extent of audit committee disclosure in the banks’ annual report. It can be said that though the mandatory requirements on this issue from different authorities are relatively new in Bangladesh, listed banks are trying to disclose this issue in the annual reports in varying degrees. But in the regulations, few inconstancies have been found. As almost all of the banking companies in the sample somehow reported on audit committee issues in their annual reports, it can be said that these companies in Bangladesh are feeling the importance of disclosing this issue. The efforts of these organizations can be considered praiseworthy. This sort of reporting by these organizations might encourage the other kind of business organizations to do the same thing that would ameliorate their reporting standards. But issues like chairman or vice-chairman of the bank acting as the chairman or member of the audit committee, incorporation of managing director as the audit committee member, educational qualification of the chairman as well as the members of the committee, inclusion of independent director in the audit committee etc. should be considered more carefully than current state in order to comply with the existing rules and to gain more confidence of the stakeholders. Again, only disclosure in the annual reports shall not be enough. Honest practice of audit committee and its appropriate disclosure can facilitate and stimulates the performance of companies, limits the

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insiders’ abuse of power over corporate resources and provides a means to monitor mangers’ opportunistic behaviour. This study undertakes content analysis studies. Within the current type of analysis, scope may be widened by covering the corporate governance disclosure practice by Bangladeshi listed banks companies over a number of years to find out the extent of importance the organizations are emphasizing on this issue. Moreover, in this article, all the disclosure items are given same weight. Although this helps to reduce subjectivity, the market may place higher emphasis on certain elements of governance. Also, some aspect of audit committee may be considered to be a basic component or prerequisite to implementing others and thus should be given more weight. Further analysis may include managerial perceptions studies (Predominantly qualitative studies which directly explore corporate motivations behind audit committee disclosure via in-depth interviews with relevant corporate managers) and stakeholders’ perceptions studies (Predominantly qualitative studies which explore audit committee disclosure from stakeholder perspective mainly via in-depth interviews with relevant stakeholder groups).

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