Introduction:
The report is prepared for evaluating the financial statements of company for analyzing its compliance with the accounting standard and the guidelines that it follows while preparing the financial statements. Punjab national bank is a financial service and multinational banking institution of India that was established in year 1984. The brand image of organization is its core image having more than 10 crore customers, consistent growing profit, and strong CASA base, increased pace of digitalization, stable assets quality and low cost of deposits (Hambrick et al. 2015).
The main purpose of preparing report is to critically evaluate the effectiveness of the corporation for meeting the conceptual reporting framework of accounting. Purpose of accurate and fair disclosure of financial information is served by the financial statements complying with the accounting standards (Aryee et al. 2015). In this particular study, analysis of financial statements is done by comparing the two areas of financial statements that is contingent liabilities and employee benefits. Moreover, the report also intends to analyze the existing loopholes in the financial report of Punjab National bank. Later part of report demonstrates any legal or accounting issues faced by organization and the way it should be disclosed in the financial statements.
Discussion: Accounting standard guidelines and its compliance:
The financial statements of Punjab national bank is prepared according to the Generally accepted accounting Principles in India and the regulatory norms and statutory provisions prescribed by Reserve bank of India, accounting standard and Banking regulation Act, 1949 (Power and Gendron 2015). Preparation of financial statements has been done using the accrual concept on an ongoing concern basis and according to accounting practices and policies that is followed consistently. The two areas that have been selected from the financial report for comparison are employee benefits and contingent liabilities.
Elements of employee benefits and their conformance:
The particulars that are involved in the determination of employee benefits are discount rate, attrition rate, expected return rate on plan assets and escalation rate in salary. Determination of discount rate is done in accordance with obligations as per para 78 of AS15R by lining to market yield and date of government bonds. On other hand, at the beginning period expectations of market form the basis of determining the expected rate of return on planned assets. This helps in generating return over the entire life for related obligation. Furthermore, as mentioned in the paragraph 83-91 of AS15R, any estimates of increasing the future salary is taken into consideration by considering actual variations such as seniority, promotion, inflation and other important factors. Attrition rate is determined by making reference to expected and past future experiences and it comprise of all types of withdrawal due to disability and other than death (Pnbindia.in 2018).
Any changes in plan assets fair value are done by referring to AS-15 that ICAI issues during the year. This particular standard takes into account the fair value of plan assets in relation to gratuity funds and pensions being interest that is accrued on investments, long term benefits of employees that should be accounted for against the principal amount. Any changes in contribution of employer to gratuity funds and pensions that represents present value of obligation lower than plan assets fair valuation is credit to provision for employees or payment to employees (Pnbindia.in 2018).
The table below depicts the summarized position of employee benefits in accordance with the accounting standard and in line with the accounting policy.
Employee benefits disclosure:
(Source: Pnbindia.in 2018)Long term employee benefits:
(Source: Pnbindia.in 2018)
The provision for employee benefits such as gratuity, encashment of leave, pension and any other necessary provisions such as income tax and unhedged exposure to foreign currency have been done using a basis of estimation.
Elements of contingent liabilities and their conformance:
The Punjab national bank recognizes the contingent liabilities and provisions in compliance with the accounting standard 29 “ Provisions, Contingent liabilities and contingent assets” that the Institute of chartered accountants of India issues (Pnbindia.in 2018). Recognition of such provision and contingent liabilities are done when the organization as a result of past events has present obligations and this would have the consequence of probable outflow of resources that embodies economic benefits. Such benefits are required by organization for settling the obligations and when the stated amount of obligations can be reliably estimated. Contingent assets on other hand are not recognized in the financial statements.Contingent liabilities:
(Source: Pnbindia.in 2018)
The liabilities that is stated under serial number i), ii), (III), (IV), (V) and (VI) are dependent upon the court outcome, out of court settlement, disposal of appeals, raising and development of demand by concerned parties and terms of contractual obligations.
The movement of provision for liabilities is stated in the following table.Movement in liabilities provision:
(Source: Pnbindia.in 2018)
The movement of liabilities provision is depicted in the table that shows the legal case contingencies and arrears in salary. It can be seen that the balance of provisions for liabilities in relation to arrears in salary and legal contingencies case for financial year 2017 stood at 7.10 crore and 24.36 crore respectively. The total amount of contingent liabilities for financial year 2017 stood at 338851.04 crore.Disclosure of liabilities provision movement:
(Source: Pnbindia.in 2018)
The above table shows the movement in the provision for liabilities. In case of contingent liabilities, organization should not expect any amount of reimbursement.
The auditors of the Punjab national bank have observed that the financial information and the several statements of organization have been prepared according to requirements of Accounting Standard (23) that is related to accounting for investment in associates in consolidated financial statements and Accounting Standard (21) that is related to consolidated financial statements. All such accounting standards are issued while meeting the requirements of Reserve bank of India and by the Institute of chartered accountants of India.
The accounting standards that are issued by ICAI form the basis of preparation of financial statements. Moreover, they are prepared based on separate financial statements regarding the components according to section 29 provisions of the Banking regulation act, 1949. It has been mentioned by the auditors that the audit evidence that have been obtained by them are appropriate and sufficient that would help in providing basis for audit opinion.
Moreover, it has been identified from the annual report that for certain employee benefits, the associates of Regional rural banks have not complied with the revised accounting standard 15. Such employee benefits have been accounted on adhoc as you go basis. In like manner, there has not been any elimination of unrealized loss and profits that has resulted from transactions between subsidiaries and parents to the extent of interest of parents in subsidiaries and associates (Henderson et al. 2015). Therefore, it is not possible to ascertain the consequential effects and impact on profits.
Hence, from the analysis of financial report of Punjab national bank, it can be inferred that the organization complies with all the applicable accounting standards and requirements of Reserve bank of India and Institute of Chartered accountant of India. Due to differences in the accounting policies and unavailability of complete information’s, no adjustments have been made by organization (Reisel 2014).
Legal and accounting issues:
The Punjab national bank was caught in scandal where SWIFT code was misused that has shaken the banking sector confidence as the fraud case accounted for 70% of banking assets of India. Apparently, it was the largest fraud in the history of banking industry of India. A fraudulent transaction of amount totaling $ 1.8 billion was involved in the case. The reason attributable to fraud case was due to alleged misuse of incomplete ledger entries and SWIFT interbank messaging system.
This scam of 11000 crore was facilitated by failure of compliance as the SWIFT financial messaging system was not monitored (economictimes.indiatimes.com 2018). The bank have been swindled by companies that were owned by two diamond merchants that began with issuing letter of credit of smaller amount of 800 crore. Bank issued more letter of credit for offsetting the payment when the due credit was not paid in time. This letter of credit was allegedly issued by two employees of bank for issuing fresh loans. It was perceived that this discrepancy could have been immediately detected by integration on core banking system. Core banking system of the bank had some drawback and employees of organization did not have good morale (Gray et al. 2014).
During the financial year 2016-2017, any incident of fraud is not reported by statutory auditor of company. The completeness and accuracy of financial statements should be maintained by the maintenance and implementation of adequate internal controls. They are required to ensure that such controls are effective enough for evaluating that the financial statements are free from material misstatement and provides a true and fair view.
Auditors provided the view that they have not come across any fraud incidence based on the information and explanations that have been provided in the financial statements (Eisenschmidt and Schmidt 2018). Such fraud occurrence is indicative of the fact that forensic audit was not undertaken by management of organization and have not enquired into the loan approval process. Moreover, such fraud has the consequence of loss of faith on part of public and posing biggest risk to the state owned bank.
In order to address or to avoid occurrence of such scandals, it is required to develop high quality and globally accepted framework of financial reporting. Organization should pursue a dual objective of upholding the financial reporting quality both at domestic and at international level and thereby providing investors with information that is transparent, comparable and reliable. Development of framework of global financial reporting is guided by the cornerstone principle underlying regulation system and thereby pursuing mandate of protecting investors by promoting informed decision making through fair and full disclosure (Gimbar et al. 2016).
It is not only the body of accounting standards that helps in ensuring that financial information that are relevant provided to capital market. The structure of financial reporting that is effective initiates with a reporting made to company’s management that is responsible for proper application and implementation of GAAP (indianexpress.com 2018). Moreover, it is the responsibility of auditors to test and form an opinion on whether the financial statements have been presented according to accounting standards. It is essential to meet some of the listed responsibilities because there might not be proper application of accounting standard irrespective of their quality if they are not met (Cheng et al. 2014). This would result in lacking of comparable, transparent and producing financial information that are consistent.
Conclusion:
From the analysis of annual report of Punjab National bank, it can be inferred that organization has complied with all the applicable accounting standards while preparing their financial statements. The area of employee benefits and that of contingent liabilities have been explained in reference to the standard they comply. However, certain employee benefits of the banking subsidiaries have not been accounted for using the relevant accounting standard. Furthermore, bank also indulged in the corporate scandal of amount $ 1.8 billion due to the failure to comply with the financial messaging system and unethical practices on part of employees. Therefore, it can be concluded from the evaluation of the financial report that although the organization complied with all the relevant accounting standards, the lacked in terms of following it stringently.
In addition to this, organization did not comply with the standards on ethical fronts because of involvement of employees in issuing letter of credit of excess amount and offsetting the credit payment whenever they fell due. For detecting the fraud and occurrence of such fraud, sufficient and proper steps should be undertaken for maintaining adequate accounting records according to the provisions of Act. The monetary loss related to such scams can be prevented by having a pro active follow up with the concerned intermediary bank.
Reference list:
Aryee, S., Walumbwa, F.O., Mondejar, R. and Chu, C.W., 2015. Accounting for the influence of overall justice on job performance: Integrating self?determination and social exchange theories. Journal of Management Studies, 52(2), pp.231-252.
Cheng, M., Green, W., Conradie, P., Konishi, N. and Romi, A., 2014. The international integrated reporting framework: key issues and future research opportunities. Journal of International Financial Management & Accounting, 25(1), pp.90-119.
Christensen, H.B., Lee, E., Walker, M. and Zeng, C., 2015. Incentives or standards: What determines accounting quality changes around IFRS adoption?. European Accounting Review, 24(1), pp.31-61.
Eisenschmidt, K. and Schmidt, M., 2018. Integrating prediction markets into the due process of international accounting standard setting: A possible path to achieving legitimate accounting standards?. The Journal of Prediction Markets, 11(2), pp.77-102.
Gimbar, C., Hansen, B. and Ozlanski, M.E., 2016. The effects of critical audit matter paragraphs and accounting standard precision on auditor liability. The Accounting Review, 91(6), pp.1629-1646.
Gray, R., Adams, C. and Owen, D., 2014. Accountability, social responsibility and sustainability: accounting for society and the environment. Pearson Higher Ed.
Guthrie, J. and D. Parker, L., 2014. The global accounting academic: what counts!. Accounting, Auditing & Accountability Journal, 27(1), pp.2-14.
Hale, T. and Held, D. eds., 2018. The handbook of transnational governance: Institutions and innovations. John Wiley & Sons.
Hambrick, D.C., Misangyi, V.F. and Park, C.A., 2015. The quad model for identifying a corporate director’s potential for effective monitoring: Toward a new theory of board sufficiency. Academy of Management Review, 40(3), pp.323-344.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.
Power, M.K. and Gendron, Y., 2015. Qualitative research in auditing: A methodological roadmap. Auditing: A Journal of Practice & Theory, 34(2), pp.147-165.
Reisel, N., 2014. On the value of restrictive covenants: Empirical investigation of public bond issues. Journal of Corporate Finance, 27, pp.251-268.
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