There is no denying the fact that Bank Reconciliation may be distinct as that process which reconciles the independently prepared accounting records of an entity with the bank statements and other bank generated documentation for the corresponding period. In normal circumstances, this procedure involves a series of individual calculations whereby consistency is ensured between two different sets of records, each prepared in isolation from the other. In the case of Government of Bangladesh transactions, this ideal situation does not exist, largely because of the Government of Bangladesh’s over-reliance on the Banking network which actually operates as an agent of the Government in terms of cash collection and disbursement.
The process of bank reconciliation is essentially a procedure for substantiating the value and timing of cash movements for an entity, a procedure which in itself adds and a strong level of assurance about the accuracy and completeness of the accounting records and which consequently adds credibility to the whole accounting system itself. Differences between an entity’s records for a particular period and the bank’s records for the corresponding period can arise for a variety of reasons, which fall into the following main categories :-
1. Timing differences
- different period close off dates
- time taken for payments issued to reach banking system
- receipts in bank not notified to accounting office in same period
- cut off differences at separate stages in the bank reporting chain
2. Errors in the accounts of Government of Bangladesh offices
- errors of addition of totals
- errors of omission i.e. some transactions not recorded
- errors of commission i.e. some transactions recorded which should not be included
3. Errors in accounting statements from the banks
- errors of addition of totals
- errors of omission i.e. some transactions not recorded
- errors of commission i.e. some transactions recorded which should not be included
4. Deliberate misstatement
- entries have been falsified to conceal fraud
- collusion to misrepresent transactions
The whole issue of Bank Reconciliation, in the context of the Government of Bangladesh accounting system, is a complex one involving various interfaces between the banks and their branch networks, the local accounting offices, the numerous departmental offices operating under the CHIEF ACCOUNTS Officers, the CHIEF ACCOUNTS Officers themselves and the CGA. In addition, there are a range of commercial bank accounts which also exchange funds with the mainstream Government bank account held at the Bangladesh Bank. Most of these interfaces involve data flows if not the actual movement of funds, flows in both directions as well as with members of the public and other third parties.
. The main interfaces which should concern us in any preliminary attempt to rationalise the problem are as follows. Any failure to reconcile at each of these levels will create differences in the overall balancing process:-
1. Between local accounting offices and the local branches of the SB or BB
2. Between the local branches of the SB or BB and their Regional offices
3. Between the Regional offices of the SB or BB and their Head offices in Dhaka
4. Between the Head office of the SB in Dhaka and the Head office of the BB in Dhaka
5. Between the Head office of the BB and the CGA
Major Elements of the Bank Reconciliation Problem
· The overall issue of complete bank reconciliation is composed of numerous individual data inter-relationships between the various banks, the local accounting offices and the various departmental offices operating under the CHIEF ACCOUNTS Officers. Differences in cash movements reported can and do occur in all of these individual areas.
· Traditionally, within certain sections of the Government of Bangladesh, there exists (often for understandable reasons) an over-reliance on the data being furnished by the various banks, which is often manifested in the imprudent assumption that data supplied to the Government of Bangladesh by the banks is accurate and complete. Evidence suggests that this is far from the truth and that there are regular errors, omissions and mis-statements from data transferred within both the Sonali and Bangladesh Bank networks and from transfers between the two.
· Control & Suspense accounts are misused and not cleared on any regular basis. The lack of a systematic approach to the maintenance and regular clearing of these accounts contributes significantly to the differences recorded between bank and Government of Bangladesh figures, and this whole area is a major part of the problems being faced.
· Widespread confusion still persists about the number of Government of Bangladesh bank accounts and their operation in the overall process.
· A number of Government of Bangladesh departments and other agencies have access to commercial bank accounts and their impact on the reconciliation process is difficult to evaluate
· The banks within the Government of Bangladesh processing cycle are currently obliged to sort and classify individual transactions by Ministry and to assign a ministry classification code to the appropriate bank posting. This creates an additional workload which inevitably contributes to misclassifications and mispostings of cash amounts.
· The impact on the reconciliation process of commercial and quasi-commercial Government organisations (e.g. Postal, T & T, Railways) who operate accrual accounting systems in the generation of their accounts
· The Bangladesh Bank maintains the one Government of Bangladesh account by stating a split between ‘No 1 Account and Railway’ on the one hand and ‘No 2 Account (Food)’ on the other. This distinction is not observed or recognised in the monthly CGA accounts.
· Opening & closing bank balances at the year-end have not been reconciled since Bangladesh achieved independence in 1971. Both the Bangladesh bank and the Government of Bangladesh submit balances to the respective authority which are at significant variance with each other. This totally obscures the scale of the bank reconciliation problem on a year-on-year basis, since the balances brought forward are included in the respective balances of each as they are stated in the Monthly accounts.
· ‘Ways and Means Advances’ i.e. loans, usually on a short-term basis, from the Bangladesh Bank to the Government of Bangladesh account to cover ‘temporary’ shortfalls are not reflected in the Government of Bangladesh accounts. Consequently, negative cash balances are frequently reported in closing and opening figures.
In view of the above, it is evident that in addressing the area of bank reconciliation then, it is necessary to look at all these individual interfaces and to construct, in a systematic and methodical way, some usable formula whereby all the transactions in these flows can be balanced and reconciled. In a double-entry accounting sense, the end result must be that all the entries, of the entire parties total to zero – that is to say, that the total receipts and the total payments reported by the banks in any given period are exactly equal to the total payments and total receipts reported in the Government of Bangladesh’s book-keeping records. Any distinction from this practical reality implies that full and complete reconciliation has not been achieved and consequently the accounts, of either or both parties, contain errors
There are no clearly prescribed procedures on Bank reconciliation which have evolved since the 1947 British structure.
Timing differences
Differences between amounts shown in Government of Bangladesh accounts and the amounts derived from the statements of the BB
-
From Minutes of Task Force Meeting 6/10/99
everyone was aware of the scale of the differences in reported cash balances
There were timing differences at all these levels .,He emphasised that it was important to remember that the banks were also responsible for a significant amount of errors and mis -statements within the system and that it was imprudent to expect total reconciliation by examining the returns of Government of Bangladesh offices in isolation. He informed the meeting that at the admission of the Deputy General Manager of the Sonali Bank Head Office in Dhaka, at least 15 of his 62 regional branches regularly furnished the head office with erroneous figures.
FROM RAY MORRIS FILES :-
AUDIT OF BANK RECONCILIATIONS
INTRODUCTION
A cash book/ cash account is the central pillar of any organisations accounting system. When linked to an equivalent bank account, together these can provide a fundamental check of the financial transactions of the organisation. For this reason it is essential that the accounting cash book/account is reconciled regularly with the related bank account.
Similarly it is important for these two records are balanced with the overall accounting system. This provides assurance that all cash/bank transactions have been accounted for, and all the entries in the accounting system have a basis in cash.
Cash/bank/accounting reconciliations have fraud prevention aspect also. Frauds committed through the amendment of cheques are becoming increasingly sophisticated. Some have successfully avoided detection by the banks’ own detection arrangements, resulting in substantial losses to the organisations concerned. Often these losses have not been noticed until bank statement and cashbooks have been reconciled, sometimes months later. Some organisations have introduced daily bank reconciliations to counter such frauds.
At the end of the financial year, at least, a statement should be prepared collating all the balances on all the Government’s cash/bank accounts to prove the total cash balance in the accounts, and to prove the validity of the overall accounting position.
AUDIT OBJECTIVES
The main audit objectives are to:
· Confirm that regular, and up-to-date cash book/bank reconciliations are undertaken.
· Check that a senior person reviews these reconciliations, and signs them
· Check that all items in the reconciliations are cleared promptly in the next accounting period
· Confirm that further reconciliations are undertaken to balance the overall accounting system with the cash book/bank statement reconciliations.
MAIN AUDIT RISKS
The main risks which arise if regular, up-to-date reconciliations are not in place are:
· Errors, omissions or frauds involving cash will not be identified promptly, and so will be more difficult to prevent or follow-up
· Errors by the bank will go undetected, leading to possible loss of Government funds
· Errors in the accounting system will go undetected, leading to inaccurate Government accounts.
AUDIT OF CASH AND BANK RECONCILIATIONS
INTRODUCTION
Cash books/accounts are central to any system of accounting, and there completeness and accuracy are vital. Where a bank account is operated in conjunction with the cash book/account, as is often the case, the bank statement serves as an independent record against which the cash account can be verified. So up-to-date reconciliations between the cash book/account and the corresponding bank balance are essential. These act as a powerful safeguard against error, omission and fraud.
The balance on each cash book/account should be reconciled regularly with the balance on the equivalent
FROM JOHN WHITE DRAFT REPORT :-
Within the Government’s bank accounts there is no differentiation between Consolidated Fund balances and Public Account balances. The entire cash balance with the Bangladesh Bank is treated as one
However, outside this system are a number of commercial bank accounts, maintained for a variety of purposes, as follows :-
· Accounts of Development project implementing agencies, e.g. SAFE (Special Account in Foreign Exchange) and CONTASA ( Convertible Taka Special Account) that the Government has been encouraged to open by aid donors to speed up the use of funds.
· bank accounts held in Districts for such purposes as land acquisition
· accounts operated by Chief Accounts Officers through which project aid monies are passed to project bank accounts
· the USAID deposit account with the American Express Bank
· and more recently, imprest and revolving fund accounts set up by certain aid donors with the Bangladesh Bank but outside of the Government of Bangladesh’s main account
DAO & TAO transactions should flow to only one non-food bank account as opposed to the present practice of being debited or credited to the respective account for each ministry.
To ensure the accuracy of the Government’s accounts, it is essential that bank reconciliation is completed on a regular basis.
The current ‘system’ for bank reconciliation is effectively non-existent in that there are no clearly prescribed and defined procedures which are in operation across the accounting structure. The current reality is that any attempts at bank reconciliation are the result of a hotchpotch of verbal understandings which have evolved piecemeal over several years and through various administrations. Since 1947 there has been no meaningful attempt to quantify the problem, to devise a coherent strategy for the implementation of procedures nor to introduce operational controls which would make proper reconciliation more readily achievable.
The latest edition of the Government of Bangladesh Account Code (issued by the C & AG in Sept 1996) makes only a passing reference to this important issue. Even then, it only includes a re-statement of existing procedures operated by the BB and SB in terms of what statements are issued to the local accounting offices. It offers no suggestions for actual operating procedures at the offices themselves.
The bank reconciliation statement reconciles the balance shown on the bank statement to the balance shown in the Government’s books of account. The difference between the 2 sets of records will be caused by a combination of the following factors :-
· The Government’s books of account contain errors and/or are incomplete
· The Bank statements contain errors and/or are incomplete
· Timing differences in the transmission of data between the two
· There has been fraud and misappropriation
In the accounts of May 97 there is an unexplained difference between the bank and the books of account of Taka 1,230 Crore (£154m). This represents approx 5% of revenue expenditure.
Bank reconciliation helps to ensure the accuracy of the Government’s accounts. A partial improvement to bank reconciliation will provide only limited improvements which means the accounts could well contain significant errors.
Extract from ‘Account Code’ (issued by the C & AG in Sept 1996)
Account of the Government with the Bank
Government has an Agreement with Bangladesh Bank by virtue of which the general banking business of the Government (in which business is included the receipt, collection, payment and remittance of moneys on behalf of the Government) is carried on and transacted by the Bank in accordance with and subject to such Orders as may from time to time be given to the Bank by the Government. Government business is transacted in every office and branch of Bangladesh Bank and in designated branches of Sonali Bank acting as the agent of Bangladesh Bank. Article 20 of the Bangladesh Bank Order 1972 requires the Government to deposit free of interest all its cash balances with Bangladesh Bank and directs the Bank to accept moneys for account of the Government and to make payments and carry out Government’s exchange, remittance and other banking operations including management of the public debt.
Statement of cash transactions undertaken by Bangladesh Bank on behalf of the Government together with all supporting vouchers etc. are transmitted by each office and branch of the Bangladesh Bank to the Thana Accounts office, the District Accounts Office, the Chief Accounts Office and the Controller General of Accounts office, as the case may be.
Each branch of Sonali Bank transacting Government business as agent of Bangladesh Bank forwards daily a statement of transactions to the local Thana or District Accounts office along with all supporting vouchers. The totals of such transactions are also reported by Sonali Bank at the close of each day to the Public Accounts Department of Bangladesh Bank through the head office of Sonali Bank at Dhaka.
All transactions regarding Public Accounts taking place in the offices and branches of Bangladesh Bank and designated branches of Sonali Bank are consolidated in the Government Accounts Department of Bangladesh Bank. At the close of the accounts of each month, a statement of closing balance of the Government on the books of the Bank after taking into account all cash transactions in all of the offices, branches and agencies of the Bank and the adjusting transactions in its own books is forwarded by the Head Office of Bangladesh Bank to the Controller General of Accounts.
FROM MY REPORT – QUALITY & FLOW:-
Page 4
Full and effective bank reconciliation is a critical element of the above objective. Wherever possible, this process must always involve a reconciliation of banking records with independently prepared Government records. The automatic acceptance of bank information does not constitute proper reconciliation.
Page 6
The critical functions of bank reconciliation and maintenance of full double-entry will be centralised with the creation of two the new bodies, the ‘Central Data Processing Unit’ and the ‘Central Reconciliation Unit’.
Page 9
Under the existing structure, the CHIEF ACCOUNTS OFFICER’s play a limited role in the processing of individual transactions in that they only operate on the payments side of the cash reporting account, with all receipts transactions being handled by the TAO’s and the DAO’s in tandem with the banks. Consequently, the CHIEF ACCOUNTS OFFICER’s are never in a position to report the complete picture as regards cash balances at any point in time. On the other hand, outside Dhaka, the DAO’s and the TAO’s operate as Pay and Accounts Officers on behalf of all the departments of the Government and process transactions on both sides of the cash accounts, handling payments as well as receipts. In this way, they should theoretically be in a position to fully reflect the transactions themselves as well as the consequent balances at any particular time on the Consolidated Fund and the Public Account
Page 13
The current extent of bank reconciliation actually being carried out at the local level is unclear. Bank reconciliations of a sort are being performed regularly but the general consensus is that these contain a major ‘fudge’ element. There needs to be significant improvement at this level.
The current localised problems of reporting caused by a slow response time by the Bangladesh Bank to the DAO-Dhaka need to be resolved and the reasons for this particular problem identified
Page 14
Other factors result from the role played by third parties and are outside the direct control of the Government bodies involved. Nevertheless, they can and do have an impact on the overall quality of data which is just as critical to the system as the factors under direct control. Under this heading should be considered: -
· The crucial role currently played by the banks in the collection of receipts, the processing of payments and the accounting information flow process.
· In particular, the interaction between the Bangladesh Bank and the Sonali Bank and any potential ‘bottlenecks’ in this area.
A particular area for concern is the detailed role played by the banks in the crucial area of the actual coding of Government receipts and payments. While this is the only feasible approach at present, the bank’s involvement is currently at a level which is totally inappropriate in any well-controlled system. The Government accounting function should not be dependent on the banks for this aspect of financial processing.
Page 15
The banking system in Bangladesh does not operate a consistent clearing system
Pages 16 – 19
1. BANK RECONCILIATIONS
(1) The issue of the proper reconciliation of all bank balances and bank receipts and payments is absolutely fundamental to the integrity of the resulting accounting data, and monthly accounts from the CGA system cannot be considered as meaningful until this issue has been fully addressed.
(2) This subject has already been identified as a high priority by the Government of Bangladesh and under paragraph 9 of the terms of reference of the RIBEC 2B phase a separate study has been commissioned to consider the scope for improvements in data quality in the area of bank reconciliations. The aim of the study will be “to identify significant improvements which can be made alongside the classification work, with only minor additional resource investment”.
(3) Bank reconciliation, in the accepted sense, can be defined as a process which fully reconciles the balance shown on a bank statement at any one time with the balance reported in the entity’s own books of accounts at that same point in time.
(4) Currently in the Government of Bangladesh, there exists a documented system for bank reconciliation but the procedures and processes detailed therein are not generating a satisfactory result. The system is clearly not working and urgent measures are required to install a policy on regular reconciliation, which is enforceable and workable.
(5) The following points have emerged from an investigation of this area :-
· The monthly accounts produced to date have all reported substantial unaccounted for differences in the Government bank account – the accounts for May 1997 show a variance of TK 1,229 Crore (£175 Million)
· There are up to 5,000 individuals in the system who have access to cheque books for the Government account, and the main Government account is sub-divided into 30 different user codes, which effectively operate like sub-accounts. It would seem unlikely that all payments generated in this way are being properly accounted for and in the absence of an effective system of Internal Control it is a dangerous situation to maintain so many sub-accounts and to permit so many people to have direct access to these accounts.
· Currently, TAO’s do not hold cheque books (although there are plans for them to do so) and all Government payments at the TAO level are made directly by the Sonali Bank. Conversely, all the DAO’s, with the notable exception of DAO-Dhaka, do maintain their own cheque books and are able to make payments directly. In addition, all CHIEF ACCOUNTS OFFICER’s and some other Government departments issue cheque payments directly.
·
(6) The permanent differences between the balances reported by the Bangladesh Bank and the figures reported in the Government of Bangladesh monthly accounts are likely to be caused by a combination of the following factors: -
· The Government books of accounts contain erroneous entries
· The Government books of accounts are incomplete, i.e. for some reason certain transactions have not been processed or entered at all.
· The Bank statements contain erroneous entries.
· The Bank statements are incomplete.
· There are significant timing differences in the transmission of data between the Government reporting chain and the banks’ reporting chain.
· There is fraud, misappropriation and misrepresentation of the accounting records.
2. THE ROLE OF THE BANKS IN THE ACCOUNTING FLOWS
2.1 Introduction
(7) The Bangladesh Bank is the central bank of Bangladesh. In common with the system in many other countries, it is the banker of the Government and as such, the custodian and chief cashier of all Government funds.
(8) Within the overall structure of the Governmental bank accounts there is no distinction made between balances on the Consolidated Fund and those on the Public Account. For banking purposes the entire cash balance is treated as one and the same.
(9) Throughout the country the Bangladesh Bank has branches in only 7 places. In areas where there is no branch, a more comprehensive service is provided by the largest commercial bank in Bangladesh, the Sonali Bank, which has more than 1000 branches, 457 of which deal with government accounts. The Sonali acts as the agent for the Bangladesh Bank in all its transactions with the Government account in these areas.
(10) In addition to the above central structure, there are other smaller commercial bank accounts maintained throughout the country, which handle Government funds. The majority of these relate to development projects where the appropriate Government agencies have been encouraged by aid donors to operate separate bank accounts in order to improve the ‘transparency’ of development transactions and speed up the funds appropriation process.
2.2 Banking Returns and Reports
(11) At the District and Thana level, all transactions are handled by the Sonali Bank in its agency capacity. The bank issues a daily listing of all payments and receipts, known as a ‘scroll’, to the Accounts officer, together with a summary statement.
(12) Each of the 457 branches of the Sonali Bank also makes a daily return to the Sonali Bank head office in Dhaka via the regional bank network. It takes 2-7 days (depending on area) for these daily returns to reach Head Office. This includes copies of the scrolls issued as well as the summaries of the transactions analysed by each Government account head. The individual returns are reconciled and consolidated in the head office computer system.
(13) Head Office then generates a daily summary statement recording the receipts and payments, analysed by ‘Head of Account’, for each of the branches. It is important to appreciate that this daily summary does not represent the movements for all the branches for that particular day – it represents the totals of the returns received on that day. There is an inherent time lag in this process, varying according to regional location.
(14) At the end of each month the bank branch also issues the local accounting officer with a statement showing total debits and credits for the month, analysed by ‘user code’, along with the closing balance. This document is what is usually termed the ‘bank statement’. Again this goes directly to the TAO or DAO as well as being copied to bank head office.
(15) The Bangladesh Bank receives from the head office of the Sonali bank a compiled daily statement of the total returns from the branches, showing all receipts and payments, analysed both by bank branch and account head. There is also a summary statement showing the totals of debits and credits and net resulting balances against each of the 30 individual Government account ‘user codes’.
(16) The above is accompanied by a daily debit or credit advice for effecting immediate cash settlement in the Sonali Bank’s account with the Bangladesh Bank. In most cases, the SB will have made payments in excess of receipts so an amount will be due to SB from BB. This settlement transfer is performed on a ‘same-day’ basis.
(17) The BB relies on this summary from SB to make its daily funds transfer. It cannot substantiate the total amount billed by verifying individual balances and must accept the statement. A follow-up audit is performed by BB to confirm the figure.
(18) The Bangladesh Bank, on the basis of the information collected from the Sonali Bank and from its own 7 branches and headquarters’ central accounts section, prepares a daily cash balance report for each of the 30 Government user codes, indicating the net cash position of the Government account. This report is issued to the CGA and the Ministry of Finance. Any inter-account adjustments are also incorporated in this statement.
(19) Within 15 days of the end of each month, the BB stipulates that the SB must produce a monthly summary. This should finalise the full returns from the branches for the previous calendar month and include all amounts not yet listed on the daily returns.
2.3 Current Problems in the Banking Returns Process
(20) In general, the banking returns process works in the manner prescribed and the daily summaries of receipts and payments (scrolls) are indeed supplied daily and act as an important control tool.
(21) The major problem, which has become apparent in this area, is in the relationship between the DAO-Dhaka and the branch of the Bangladesh Bank, which handles all government transactions with this DAO (Motijheel). The issues can be summarised as follows: -
· The Motijheel branch handles the following number of Government transactions, on average :-
Payments
1st Week of month :
Cheque payments - 8/9000 per day
Other payments - 500 per day
Cheque payments - 4/5000 per day
Other payments - 500 per day
Receipts
· The BB recognises that they have an obligation to provide a daily statement of receipts and payments and indeed this used to be the case with Dhaka-DAO
· The volume of clearing house transactions has however increased dramatically in the last few years and the BB concedes that the daily service has ‘slackened’ somewhat, although the manager of the Motijheel branch does recognise that there is currently a problem and maintains that he is taking steps to rectify the situation. He maintains that there has been some improvement recently.
· Currently 15 large ledger books are used for each set of daily transactions. The first week of the month sees the greatest amount of activity with all monthly payments (salaries etc), being processed.
· The BB maintains that Government receipts are being reported the next day but that Government payments are being delayed by an average of 2/3 days
· Manpower shortages and the number of transactions are being put forward as the main reasons for this delay and ‘over-the counter’ pay-ins have been stopped to help alleviate the problem. The bank concedes that the main issue is with the preparation and the summarising of the receipts by Head of Account; this appears to be a very time consuming matter and bank staff are having problems with the workload implicit in this operation.
· The process of actually balancing the daily account is not an issue; it is the coded classification, which causes the delay.
· A FoxPro computer system is being introduced by the BB, which should be fully operational in the near future. This can be expected to reduce or eradicate some of the current delays in daily processing.
· A further complication for the flow process is that from October 1997 transactions from 20 Sonali Bank branches in Dhaka will also be received by this branch of the BB.
Page 49
Although, as stated above, all Government transactions are processed through one Government bank account, under the current procedural system of data collection there is a requirement for transactions to be identified by bank user code. This distinguishes the transactions of one CHIEF ACCOUNTS OFFICER for example, against those of another CHIEF ACCOUNTS OFFICER. There should however be a serious review of the reasons for the existence of this requirement since essentially, it is an unnecessary duplication in a consolidation system, which will be able to distinguish between individual CHIEF ACCOUNTS OFFICER transactions via the code structure.
Despite the vast number of transactions which the banking network reports on a daily basis via the scrolls sent to local accounting offices, in general the banks meet their obligations well. The only significant problem area, and the source of the particular problem with Dhaka-DAO, concerns the requirement to classify receipts and payments by bank user code. The sole purpose of this process is to permit the classification of transactions by CHIEF ACCOUNTS OFFICER head prior to input into the computer system. If this situation could be resolved or the requirement itself removed, dramatic improvement in the speed of data flows should follow
Page 50
The two most critical issues which currently affect the quality of accounting data from the Consolidated accounting system are: -
· failure to maintain proper and complete double entry at all steps in the flow
· failure to effect proper bank reconciliation at all stages in the recording process
Under the existing structural arrangements, it is unrealistic to expect the TAO’s and/or DAO’s to carry the full responsibility for the satisfactory attainment of the above two objectives. It is essential to consider that: -
· there is effectively no further checking of double-entry or reconciliation of bank reports once data has left these offices.
· there are a total of 464 DAO and TAO offices. Transactions at these cover varying degrees of complexity
· staff at these local offices are generally not well trained in accounting
· there are few or non-existent controls in place in these local offices
In view of the above, it is evident that due to bank reconciliation, it is possible to prepare a correct accounts in each month for which value for money audit can be ensured systematically. The economy, efficiency and effectiveness lies in the financial consistent in between the bank the cash book virtually.
