The Financial Reporting Council has come up with strict directives on Wednesday to stop accounting malpractices in provident funds.
The Financial Reporting Council (FRC) has found gross irregularities in accounting with provident funds' forfeited money in a wide range of public interest entities.
It has come up with strict directives on Wednesday to stop accounting malpractices in provident funds.
It also instructed auditors to address the anomalies when they submit the auditor's opinion so that users of the report can learn about the non-compliances right away.
Commercial enterprises treat their contribution in employees' provident funds as expenses and gets tax benefit against the expense.
The FRC found that many employers forfeit their contributed amount when some employees leave the job.
The fund should be paid to the leaving employee or it must be sent back to the employer's accounts as income, said the FRC.
But a large number of employers do not do it and keeps the forfeited fund within the employees' provident fund.
That benefits the existing employees at the cost of employees who left, the organisation itself and of course the government as the illegal retention of the forfeited fund allows the company to show less income in accounts and pay less tax.
FRC Executive Director Sayeed Ahmed told The Business Standard, "This is forgery. This amount should either be paid to the employee who left or reverted back to the accounts of the company, which must pay tax on it."
"Auditors were also not qualifying this issue, but they have to from now on." said the regulator who himself is a prominent chartered accountant.
The FRC in its council meeting on June 30 took a resolution on this issue and came up with the notification regarding forfeited employer's contribution accounting.
The notification said if any provident fund has any such forfeited fund, its trustee must revert the fund to the employer organisation's accounts in the same fiscal year.
The organisation must treat the reverted fund as income form other sources and charge corporate taxes against that.
Employees of public interest entities who are there since 2015 and enjoyed additional benefit because of the forfeited funds must face deduction the additional amount from provident fund within December 31, 2020.
An organisation must try to reach and recover the additional benefits already realised by any separated employee. If it fails to recover the amount, then it must be treated as its operational loss for the accounting year.
If any employee receives excess amount from provident fund, the matter must be discussed in the meetings of trustee board or committee of the provident fund, and also in the audit committee and risk management committee of the employer organisation. The trustee board or committee must be accountable for that.
If an auditor firm fails to address and inform such issues it also will be accountable for allowing the irregularities.
Employee provident funds must submit their audited financial report to the FRC and other regulators and government offices within 120 days after the accounting year ends.
Any person failing to comply with any of the above instructions would face up to Tk5 lakh in fines, or 5 years in imprisonment or both, said the FRC.
FRC was created under Financial Reporting Act, 2015 to set and enforce modern accounting and auditing standards.
The government is gradually equipping the body with different tools and it is also coming up with regulatory drives to make financial statement useful and reliable to users.