ONE Bank has cooked up all its key figures to jack up its profit so that its directors, who

hold over 30% of the bank's shares, can take out more money in the form of cash dividends.

For banks, financial numbers are safeguards not only for its clients but also for the investors

who put money into its shares. But ONE Bank has cooked up all its key figures to jack up

its profit so that its directors, who hold over 30% of the bank's shares, can take out more

money in the form of cash dividends. In reality, ONE Bank's net profit was not as high as

it showed because it did not adjust its provision shortfall the money it has to keep aside

against its bad debts before declaring net profit. So, instead of putting money aside to offset

its bad loans, the bank showed that amount as its profit as well. The result? As it declared

a cash dividend the maximum 6% as allowed by the central bank its directors holding

majority shares could take more money out of the bank. In the process, the bank has violated

all the basic norms of the Bank Company Act 1991, the Bangladesh Bank has found out.

The listed bank published its balance sheet for 2020 hiding its real financial condition by

manipulating key financial numbers such as net profit, retained earnings, capital adequacy

ratio, earning per share, net asset value and other indicators. After identifying the false

financial numbers, the central bank served a show-cause notice to the bank. On 15 July, the

Bangladesh Bank served the notice, asking it to correct the balance sheet by adjusting the

provision shortfall and republish it in at least two national dailies within 45 days of

receiving the letter. The bank will be required to hold an extraordinary general meeting to

change the balance sheet. If the bank fails to change the balance sheet, its managing director

will face a financial penalty according to law. If any managing director faces a financial

penalty, he or she will be removed from the post and will be restricted from holding such a

post in any other banks as per banking law. In the show-cause letter, the bank was also

asked to explain within three days of receiving the letter as to why a punitive action would

not be taken against it for violating the bank company act. According to the section 109 of

banking law, the bank will face a financial penalty of Tk50,000 at a minimum and a

maximum of Tk10 lakh for such a violation. In response to the show-cause notice, the bank

had already sent an explanation that was not accepted to the central bank. The Bangladesh

Bank is now in the process of taking action. The bank misrepresented financial numbers in

its balance sheet even keeping the Bangladesh Bank in the dark, ignoring its instructions in

every step. For instance, the bank did not take consent from the Bangladesh Bank before

announcing a dividend for the last year, in defiance of the dividend policy. Secondly, the

bank was instructed to adjust the provision shortfall of Tk80 crore from retained earnings

as the bank company act does not allow it to declare a cash dividend with a specific

provision shortfall. But the bank did not follow the instruction in its balance sheet, which

was a violation of banking law. If the instruction had been followed, the net profit and

retained earnings of the bank would have come down and at the same time other financial

indicators would have changed. Specific provisions are made against losses that the bank

has already incurred against default loans, while general provisions are made against expected losses. The Bangladesh Bank has authority to give forbearance for maintaining a

general provision, but maintaining a specific provision is mandatory for declaring a cash

dividend, according to the bank company act. The central bank observed that the only

objective of the bank behind such misrepresentation of financial numbers in the balance

sheet seemed to be enabling bank directors to take out money through declaring a cash

dividend despite not having the capacity. The Bangladesh Bank discovered the

manipulation three months after the balance sheet was published. However, the central

bank had issued the dividend policy in February this year before the bank declared the

dividend in March. The central bank sent a letter to the bank on 12 April this year, asking

it to adjust the shortfall from retained earnings. The inspection department of the

Bangladesh Bank on 10 March this year sent a letter to ONE Bank, allowing the provision

forbearance of Tk80 crore against loan losses. However, it instructed the bank to follow the

dividend policy in case of declaring a dividend and take consent from the off-site

supervision department in this regard. On 29 March, the bank declared 11.5% dividend,

including 6% cash and 5.5% stock, without taking permission from the central bank.

Moreover, the bank declared a higher dividend than in the previous year despite a 21% fall

in its profit. In 2019, the bank declared a 10% dividend, including 5% cash and 5% stock.

According to the bank company act, a bank cannot give a cash dividend if it has a provision

shortfall against loan losses. In this perspective, the Bangladesh Bank in its letter said the

declared dividend is not consistent with the bank's financial health. Moreover, the bank did

not take consent from the central bank. Considering the price sensitive information, the

bank can keep its dividend unchanged subject to adjusting a specific provision shortfall

from retained earnings. At the same time, the bank was instructed to make a correction in

the financial statement. In the letter, the bank was also advised to be cautious about

complying with Bangladesh Bank's instructions. But the bank published the balance sheet

without making any change in its financial indicators. Provision is kept aside from the gross

profit before tax. If ONE Bank has to adjust the loan loss provision amount, it will impact

its net profit and consequently, other indicators will change. Earlier, in July last year, the

Bangladesh Bank removed Sayeed Hossain Chowdhury from the bank's chairmanship for

his loan defaulter status. After his removal, ASM Shahidullah Khan was appointed as

chairman on behalf of a company named KSC Securities Limited. He does not hold a share

of this bank. The head office of the bank is located in the building owned by Sayeed. The

Bangladesh Bank also came to know about the interference of Sayeed in the bank board

and following that it appointed an observer in the bank in November last year. When the

financial health of the bank has been deteriorating and employees have been suffering pay

cuts ranging from 10% to 20% during the pandemic, directors seemed aggressive in taking

a higher cash dividend. When asked about the issue, the managing director of ONE Bank

said a proposal was placed before the board to restore salaries of employees. When the

bank awarded its owners higher dividends, it kept the employees' incentive bonus as well

as promotions suspended during the pandemic year, say bank insiders. As a result, many

high-ranking officials left the bank, causing a severe manpower crisis, they say. The bank's

default loan, a vital indicator of a bank's financial health, increased by 9% in March this

year, the fifth highest among private commercial banks. Moreover, the financial indicators

of the bank are deteriorating due to a lack of good governance in the board. The deterioration of the bank's financial health was also reflected in its stock prices at the Dhaka

Stock Exchange (DSE). Despite declaring a higher dividend, each share of the bank is

currently trading nearly at the face value of Tk10. In the last one year, the bank's shares had

been traded between Tk8 and Tk15 each, according to the DSE (Alo, J. N., 2021). How can

a bank cook the books? Illustrate with suitable examples from the above passage.