When auditors shield fraud company

Auditors are supposed to sniff out financial frauds.

But in the case of a shady group that is now embroiled in the scam of taking out cash incentives against fake exports in the region of hundreds of crores of taka, the auditors had allegedly simply looked the other way from the unmissable fraudulence.

The Bangladesh Bank holds three top auditing firms – Syful Shamsul Alam & Co, Aziz Halim Khair Choudhury (AHKC) and SF Ahmed & Co – responsible for certifying eligibility of scam-ridden Crescent for cash incentive although the group had Tk408 crore pending export bills and concealing forgeries in audit report.

The Bangladesh Bank rule does not allow cash incentives if any export bill remains overdue in two years from the application.

The regulatory authority also has charged that these auditors did not properly examine the exports documents and hid the forgeries. 

Crescent Group has loan scams of more than Tk3,000 crore with state-owned Janata Bank. It has been charged with garnering fake export bills and taking out loans from the bank in collusion with some officials of the bank.

Crescent is now facing criminal cases and its Chairman MA Kader was arrested by Customs Intelligence and Investigation Directorate (CIID) in January last year in connection with three separate cases filed over money laundering. He is now out on bail.

The Bangladesh Bank detected the lapses on the part of the three auditors last year and found that two of the audit firms had issued fake cash incentive certificates while the other one had concealed loan forgery of its client in its audit report, thereby helping the business group misappropriate government money in 2017 and 2018.

Based on its investigation report, the Bangladesh Bank has recently suspended Syful Shamsul Alam for three years from auditing cash incentive-related matters and for two years from general auditing. This firm was at the top of the Bangladesh Bank's list of auditors in 2017.

The other two firms were served show cause notices, according to sources at the Bangladesh Bank.

Syful Shamsul Alam alone is liable for issuing incentive certificates for Tk396.99 crore and SF Ahmed for Tk11.25 crore.

The charge against Aziz Halim Khair Chowdhury, appointed as the general auditor of Janata, is concealment of facts.

Despite having knowledge about the loan forgery of Crescent Group, it did not allegedly mention the irregularities in its audit report or inform the Bangladesh Bank about those, which goes against the Banking Company Act 1991.

When contacted, Muhammad Farooq FCA, president of the Institute of Chartered Accountants of Bangladesh (ICAB) said the Bangladesh Bank reported about Syful Shamsul Alam chartered accountant firm to the organisation.

The matter was placed to the disciplinary committee for taking action, he maintained.

However, the other two audit firms have not been reported to the ICAB yet, he said.

He also mentioned that the ICAB generally suspends the membership of any audit firm if they are found involved with manipulation of audit statements.

The ICAB has decided to review the audit reports, especially bank audit reports, and visit audit firms to monitor and improve the quality of audit reports, he added.

How cash incentive was embezzled

An investigation conducted by the Bangladesh Financial Intelligence Unit (BFIU) in 2018 found that Crescent Group, a client of the Imamganj corporate branch of Janata bank, was given Tk1,074 crore in cash incentive in the period between 2013 and 2018.

However, when it received the last cheque, Crescent still had 653 export bills pending from as far back as May 2017, which means export proceeds against those bills were not repatriated. It is now taken for granted that 71 of the bills can never be repatriated.

And more alarmingly, export proceeds against 117 bills were found to have been repatriated not from the country of destination but from third countries and exchange houses in the Middle East.

This raises the suspicion that the dollars that came in from the Arab countries were shady money, in all likelihood graft money, and not real export proceeds.

Role of Syful Shamsul Alam

Syful Shamsul Alam conducted an audit on the cash incentive of Imamganj branch in the year 2017 and issued a cash subsidy certificate against the exporter.

According to terms of reference of audit, an audit firm will ascertain eligibility of client for getting cash incentive by assessing documents of repatriated export proceeds and confirming accuracy of all relevant documents submitted by the client and respective bank branch.

However, in this case, the audit firm issued a cash incentive certificate based on documents supplied by the concerned bank without further verification.

What is more, the auditor did not verify the basic information like SWIFT message and export repatriation documents.

In this case, the audit firm is equally liable along with the bank and client concerned for plundering government money by providing fake documents, said the investigation report.

In response to a query of the investigation team, the audit firm said the cash incentive audit was done based on the bank's certified documents following the Bangladesh Bank's circular number 9 that was issued in 2000.

In its written reply to the Bangladesh Bank's investigation team, the firm claimed that the exporter in collusion with bank employees provided manipulated documents to the audit firm.

If the audit firm would verify the documents visiting the branch of the bank, forged documents could have been identified, it added.

In circular number 9, the Bangladesh Bank issued instructions for getting a cash incentive against the 100% export oriented tannery industries. That circular gave bank branches full authority to assess cash incentive applications certifying cash incentives, auditors had no role there.

However, in the amended circular issued in the year 2002, the Bangladesh Bank introduced the provision of appointing audit firms for auditing cash incentives before paying cash.

According to the amended circular, audit firms will verify all documents provided by banks and they will be completely responsible for issuing cash incentive certificates.

Audit firm Syful Shamsul Alam in its reply tried to avoid its responsibility by referring to the previous circular, said the investigation report.

When contacted, Md Syful Islam, managing partner of Syful Shamsul Alam chartered accountant firm, refrained from making any comments on this issue.

Profile of Syful Shamsul Alam & Co

Syful Shamsul Alam registered as a chartered accountant firm in 2003 and was included in the Bangladesh Bank's list of auditors in 2005 for auditing banks and financial institutions.

The firm has audited 21 banks and 11 financial institutions so far. It has also audited cash incentives of 19 banks apart from conducting general audits.

From January 2017 to September 2018, the audit firm issued cash incentive certificates worth Tk870.63 crore of seven banks.

Role of Aziz Halim Khair Choudhury

Syful Shamsul Alam and Aziz Halim Khair Choudhury were jointly appointed by Janata Bank as external auditors for 2017.

Aziz Halim Choudhury alone conducted a general audit in the Imamganj branch while Syful Shamsul Alam was responsible for cash incentive audits according to their work distribution.

Both firms are equally responsible for the annual audit report of the bank.

In the audit report for 2017, no incident of forgery, irregularities, administrative fault or anything harmful for the bank was mentioned. No information related to severe breach of rule, serious irregularities, cheating were included either.

During the audit in the Imamganj branch, Aziz Halim Khair could not find any irregularities. However, while reviewing the management report, Syful Shamsul Alam identified irregularities regarding overdue export bills of Crescent Group, against which the bank was asked to keep provision of Tk566.77 crore.

Despite being aware of the forgeries of Crescent Group, the auditors allegedly did not inform the Bangladesh Bank about it, which is a violation of Banking Company Act 1991.

Moreover, the audit firms did not make any mention of the loan forgery of Crescent Group in their audit report.

When the investigation team asked the audit firm Aziz Halim Khair Choudhury whether it had found any incidence of forgery during its audit, the firm said it had not observed any fraud or irregularities or administrative transgression being committed by any employee of the bank.

In its reply, the firm also said detection of fraud and irregularities and employees' involvement thereon is a matter of investigation.

"An audit is not an official investigation into any wrongdoing. The auditor is not given specific legal power, such as the power of search, interrogation etc. which may be necessary for such an investigation," it argued.  

The Bangladesh Bank investigation did not accept the auditor's reply saying according to the banking company act auditors must mention in their audit reports every instance of fraud, forgery, irregularity, administrative fault that they would detect during the audit.

Auditors will immediately inform the Bangladesh Bank if they find any serious breach of rules, irregularities or any criminal offence in any bank during audit, said the investigation report, adding, however the external auditors of Janata bank did not comply with this rule.

When contacted, Dr Jamshed SA Choudhury, senior partner of Aziz Halim Khair Choudhury, said the firm was served a show cause notice for 15 days over the issue. Mentioning that they were preparing the reply, he refused to make any comment at this stage.

Profile of Aziz Halim Khair Choudhury

The firm registered in 1979 as Aziz Halim and Co and later in 2005 it registered as Aziz Halim Khair Choudhury. In 2005, it first got listed with the Bangladesh Bank's list of auditors for auditing banks and financial institutions.

Since then, it has audited 15 banks and 12 non-bank financial institutions.

In 2017, the firm was 8th top auditor in the central bank's list.

In the last year, it conducted general audit in three banks and cash incentive audit in three banks.

The firm audited Janata bank in 2010, 2011, 2012, 2016, 2017 and 2018, according to the investigation report.

Role of SF Ahmed & Co

Of the embezzled amount of Tk408.23 crore, a cash incentive certificate worth Tk11.25 crore was issued by SF Ahmed in 2016.

The cash incentive certificate was issued against so-called export goods shipped between November 2015 and April 2016.

Examining documents, the investigation found that bills of lading issued by freight forwarders with the cash incentive application instead of bills of lading from shipping lines as the proof of goods shipment.

Moreover, the bills of lading documents were issued by locally registered freight forwarders, which indicate that the goods were received from a local exporter.

In case of issuing a cash incentive by Syful Shamsul Alam, the certificate was issued against bills issued by freight forwarders instead of shipping lines.

According to Bangladesh Bank circular, exporters will have to submit bills of lading as a proof of export with the cash incentive application.

Bills of lading issued by freight forwarders are not accepted because they do not confirm shipment of goods.

Customs prepare bills of export documents before export.

In the next step, shipping lines prepare bills of lading confirming the shipment of goods. Therefore, bills of export issued by the customs do not confirm final export of goods, said the investigation report.

Against this backdrop, the Bangladesh Bank made it mandatory to submit bills of lading issued by shipping lines with cash incentive applications.

This document is most vital for audit firms to be confirmed about export. However, SF Ahmed issued a cash incentive certificate violating the central bank's circular.

Audit firms received certain fees from the government against each cash incentive certificate. Moreover, the government pays value added tax on the fees.

Even after taking such facilities from the government, the audit firm issued a fake certificate breaching the Bangladesh Bank's regulation and audit term of reference, said the report.

A circular of the foreign exchange policy department of the Bangladesh Bank issued in June 2002 stated that audit firms appointed for cash incentive audit will be entirely liable for issuing cash incentive certificates.

Legal and administrative actions can be taken against an audit firm if they issue false or wrong certificates. Audit firms must return audit fees if respective banks are affected due to false certificates, said the circular.

In the conclusion, the investigation report said SF Ahmed failed to fulfill its stipulated responsibility by issuing fake cash incentive certificates.

The investigation report recommended suspending those three audit firms from auditing for two years according to the Banking Company Act 1991.

When contacted, Dr Abu Sayed Khan, senior director of the firm claimed that the cash incentive certificates they issued were not fakes.

"The Bangladesh Bank said the firm did not check bills of lading issued by shipping lines. Therefore, we sent a letter to the central bank requesting it to give details about LCs (Letter of Credit) against which the bills of lading documents were not checked," he said.