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 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.
Composition of Audit
Committee
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)).
Roles and Responsibilities No clear statement of the duties of the
of Audit Committee 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
meeting.
The Audit Committee should
immediately report to the Board of
Directors on different findings like
conflicts of interests, suspected or
Reporting to the board of
presumed fraud or irregularity of
directors
material defect in the internal control
system, suspected infringement of laws,
including securities related laws, rules
and regulations; and any other matter
Provision in BRPD Circular
03 (three) members
Nothing is specified regarding
independent auditor in the audit
committee.
Members may be appointed for a
03 (three)-year term of office.
Company secretary of the bank
will be the secretary of the audit
committee
Nothing is specified regarding the
chairman of audit committee.
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.

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 which should be disclosed immediately
(Condition 3.3.1(ii)).
Report on activities carried out by the No such reporting requirements are
Audit Committee, including any report provided.
made to the Board of Directors under
Reporting to the
condition 3.3.1 (ii) above during the
shareholders and general
year, should be signed by the Chairman
investors
of the Audit Committee and disclosed in
the annual report of the issuer company
(Condition 3.4).
Voluntary compliance on part of all the Mandatory compliance on part of
listed companies in Bangladesh as the all the banks in Bangladesh.
Compliance
conditions are issued on a ‘comply or
explain’ basis.

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:

Figure 1: Collier (1992): Reasons of establishment of an audit committee

1. Good corporate practice;
2. Strengthen the role and effectiveness of non-executive directors;
3. Assists directors in discharging their statutory responsibilities as regards financial reporting;
4. Preserve and enhance the independence of internal auditors;
5. Assists the auditors in the reporting of serious deficiencies in the control environment or
management weaknesses;
6. Improves communications between the board and the internal auditors;
7. Improves communications between the board and external auditors;
8. Increase the confidence of the public in the credibility and objectivity of financial statements;
9. Assists management to discharge its responsibilities for the prevention of fraud, other
irregularities and errors;
10. Increase the confidence of investment analyst in the credibility and objectivity of financial
statements;
11. Provides a forum for arbitration between management and auditors;
12. 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 Associated with audit Examples of distinguishing Audit
committee formation committee purposes characteristics committee role
Control functions; Time lapse before main board
Conformation role of the meeting;
board; Clear terms of reference extending
Explicit Specific committee tasks. beyond Cadbury exemplar;
Active
Established relationships;
Clear lines of communication.
Assuring ‘legitimacy’ of Establishment around time of
organization; Cadbury;
‘Cosmetic’ e.g. response to Internal audit department established
Cadbury. at same time/later;
Implicit Meetings immediately prior to main
Passive
board meeting;
Terms of reference taken straight from
Cadbury.

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
Measurement
Variables Description
First Measurement Second Measurement
Disclosure 1 score, non-Disclosure 0 score. Dimension measurement
Total scores 15 scores
Date of Incorporation of The date on which the company established the Audit Committee. Disclosure 1 score, non-Disclosure 0 score
Audit Committee
Number of Audit Number of members that comprise the Audit Committee of a particular Disclosure 1 score, non-Disclosure 0 score Number
Committee members banking company.
Name of the Audit Disclosure regarding name of the audit committee members has been Disclosure 1 score, non-Disclosure 0 score
Committee members considered in this paper.
Duration as Audit Disclosure by the banking companies regarding the period of service as Disclosure 1 score, non-Disclosure 0 score Length of Duration
Committee audit committee members has been considered.
Status in the organization The position held by the Audit Committee members in the organization. Disclosure 1 score, non-Disclosure 0 score
Status in the Audit The position held by the Audit Committee members in the Audit Disclosure 1 score, non-Disclosure 0 score
Committee Committee.
Educational qualification The educational background of each and every members of the Audit Disclosure 1 score, non-Disclosure 0 score
Committee.
Company secretary’s The position held by the Company Secretary in the Audit Committee. Disclosure 1 score, non-Disclosure 0 score
position
Number of meetings Number of meetings held during the period covered by the annual report. Disclosure 1 score, non-Disclosure 0 score Number
Date of meetings The dates at which the audit committee meetings were held during the Disclosure 1 score, non-Disclosure 0 score
period under consideration.
Attendance in the The number of attendances in the Audit Committee meetings by the Disclosure 1 score, non-Disclosure 0 score %
meetings members of the committee.
Discussion topics Issues (e.g. topics on internal control, financial reporting, internal audit, Disclosure 1 score, non-Disclosure 0 score Length of Disclosure
external audit etc) that were discussed in the meetings.
Disclosure of suggestion The Audit Committee is supposed to make necessary suggestion, where Disclosure 1 score, non-Disclosure 0 score Length of Disclosure
necessary, for the betterment of the organization. Disclosure of such
suggestion is considered.
Compliance with legal Compliance with different legal requirements governing various aspects Disclosure 1 score, non-Disclosure 0 score
requirements of Audit Committee such as SEC notification (dated the 20th February,
2006), Bangladesh Bank Circular (Circular no. 12 dated 23rd December,
2002)
Reporting to the board Reporting frequency of the Audit Committee to the Board of Directors. Disclosure 1 score, non-Disclosure 0 score

8
company. An Audit Committee Disclosure Index (ACDI) was then computed by using the
following formula:

Total Score of Individual Company

ACDI= 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:

Total Score of Individual Company

ACDI= 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.

9
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.

10
 Table 3: Audit Committee Disclosure
Variables Number of Percentage Director’s Notes to Corporate Separate Director’s
Banks Disclosed Report Accounts Governance Report Statement Profile
Date of Incorporation of Audit Committee 16 64 2 16 ND ND ND
Number of Audit Committee members 25 100 8 25 1 1 8
Name of the Audit Committee members 24 96 4 24 ND 1 8
Duration as Audit Committee 17 68 1 17 ND ND ND
Status in the organization 23 92 1 23 ND ND ND
Status in the Audit Committee 24 96 4 24 ND 1 7
Educational qualification 21 84 ND 21 ND ND ND
Company secretary’s position 8 32 1 5 ND ND 2
Number of meetings 23 92 9 23 ND 1 ND
Date of meetings 4 16 ND 2 ND ND
Attendance in the meetings 2 8 1 2 ND 1 ND
Discussion topics 23 92 6 23 1 1 ND
Disclosure of suggestion 10 40 ND 10 ND 1 ND
Compliance with legal requirements 21 84 5 21 1 1 ND
Reporting to the board 7 28 1 7 1 ND ND
Overall 18 24 3 1 8
Source: Compiled and computed from the annual report of the individual banks; ND: No Disclosure

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 Table 4: The magnitude of audit committee disclosure, descriptive statistics
Measurement N Minimum Maximum Mean S.D.
Audit Committee members Number 25 3 4 3.04 0.2
Duration as Audit Committee Months 15 1 35 17.93 12.38
Number of meetings Number 21 2 25 7 5.87
Attendance in the meetings % 2 81.33 82.22 81.78 0.40
Discussion topics Number of words 23 18 267 64.96 49.76
Disclosure of suggestion Number of words 9 15 493 95.22 153.38

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.”

12
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 Percentage
Ph.D. 1 4
FCA 1 4
Chartered Secretary 1 4
MBA 2 8
M.Com. 2 8
BBA 2 8
B.Com 1 4
MA 3 12
BA (Hons.) 3 12
Graduation in Economics and International Relationship 1 4
Automobile Diploma 1 4
B. S.C. 2 8
Diploma (Arabic) 1 4
Not given 4 16
Total 25 100
Source: Compiled and computed from the annual report of individual listed bank

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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