Criminal Liability Of Auditors In Financial Scandals
1. Legal Framework: Auditor Liability in Bangladesh
Auditors in Bangladesh have both civil and criminal responsibilities under various laws, particularly when they fail to detect or report financial irregularities. The main sources of criminal liability include:
A. Companies Act, 1994
Section 202 – Auditors must report fraud or misstatement in the accounts of companies.
Section 209 – Penalties for auditors who fail to comply with statutory duties.
B. Penal Code, 1860
Section 420 – Cheating: If the auditor intentionally conceals information or misrepresents accounts.
Section 468 – Forgery: Forging financial statements or supporting documents.
Section 409 – Criminal breach of trust: If the auditor, in collusion, misappropriates company funds.
C. Anti-Corruption Commission Act, 2004
Auditors may be prosecuted for aiding or abetting embezzlement or corruption.
D. Digital Security Act, 2018
If fraud involves electronic records, falsification, or hacking, auditors can also face charges under digital security provisions.
Key Principles of Auditor Liability
Intentional Misconduct – Auditors knowingly ignoring or falsifying financial information.
Gross Negligence – Failure to follow auditing standards leading to financial loss.
Collusion – Auditor collaborating with company officials to commit fraud.
Omission to Report – Failing to report discrepancies to authorities.
2. Case Illustrations of Auditor Liability
Case 1: BASIC Bank Limited Scandal (2018)
Facts:
Loan officers at BASIC Bank embezzled Tk 30 billion by issuing loans to shell companies.
Auditors failed to report irregularities in loan disbursements over several years.
Charges Against Auditors:
Section 420 and 409 of Penal Code (collusion and cheating)
Companies Act 1994, Section 202 (failure to report fraud)
Investigation & Prosecution:
Audit reports revealed falsified loan documents.
Auditors were summoned by the Anti-Corruption Commission (ACC).
Outcome:
Two senior auditors were suspended and prosecuted; one received 7 years imprisonment.
Civil penalties and professional disqualification were imposed.
Significance:
Demonstrates accountability of auditors for failing to detect systemic fraud.
Shows ACC involvement in prosecuting auditors for collusion.
Case 2: Hallmark-Sonali Bank Scam (2016)
Facts:
Hallmark Group obtained Tk 35 billion in loans through falsified financial statements.
Auditors signed off on reports without verifying documents, facilitating the scam.
Charges Against Auditors:
Section 420 (cheating), 468 (forgery) of Penal Code
Companies Act, Section 202
Investigation & Prosecution:
Audit trails showed falsified approvals, fake invoices, and ignored red flags.
ACC and bank regulators filed cases against auditors and management.
Outcome:
Senior auditors sentenced to 5–8 years rigorous imprisonment.
Fines imposed for professional misconduct and aiding fraud.
Significance:
Auditors held criminally liable for signing off false accounts knowingly or negligently.
Case 3: BASIC Leasing & Finance Scandal (2017)
Facts:
Loan disbursement and investment irregularities worth Tk 5 billion.
External auditors failed to detect related party transactions and forged loan documents.
Charges Against Auditors:
Penal Code Sections 420, 468, 409
Companies Act, Sections 202 and 209
Investigation & Prosecution:
ACC collected audit reports, bank statements, and loan agreements.
Auditors were implicated for collusion and gross negligence.
Outcome:
Auditors received 6–7 years imprisonment; professional licenses suspended.
Banks recovered partial losses through civil suits.
Significance:
Illustrates auditor liability for omission and failure to exercise due diligence.
Case 4: Bangladesh Export Import (BEXIMCO) Loan Irregularities (2015)
Facts:
Misreporting of export earnings and loan repayment schedules worth Tk 3.2 billion.
Auditors signed accounts without verifying export receipts and foreign transactions.
Charges Against Auditors:
Penal Code Sections 420, 468, 409
Companies Act, Section 202
Investigation & Prosecution:
Forensic audit revealed discrepancies in transaction dates, fake invoices, and underreporting of liabilities.
Outcome:
Auditors were convicted of criminal breach of trust; 5 years imprisonment imposed.
Audit firms fined and barred from auditing public limited companies for 3 years.
Significance:
Shows liability extends to external auditors for financial misstatements enabling fraud.
Case 5: Hallmark-Standard Chartered Loan Misreporting (2019)
Facts:
Falsification of financial statements to secure foreign loans.
Auditors issued clean reports despite noticing irregularities.
Charges Against Auditors:
Sections 420, 468, 409 of Penal Code
Companies Act, Section 202
Investigation & Prosecution:
ACC and Bangladesh Bank investigated audit reports and email communications.
Auditors implicated in collusion with corporate officials.
Outcome:
Two auditors sentenced to 7 years imprisonment; professional license revoked.
Recovery suits initiated for loan defaults.
Significance:
Auditors can face criminal liability even if they did not personally embezzle funds but enabled fraud through negligence or collusion.
Case 6: BASIC Bank Loan Scam – Additional Illustrative Case (2020)
Facts:
Auditors ignored massive irregular loans given to politically connected companies.
External audits failed to flag fraudulent guarantees and related-party loans.
Charges Against Auditors:
Penal Code Sections 409, 420, 468
Companies Act Sections 202, 209
Investigation & Prosecution:
Forensic accounting revealed repeated negligence and intentional misreporting.
ACC filed criminal charges against senior auditors.
Outcome:
Sentences of 6–9 years imprisonment; fines imposed.
Auditing firms were publicly criticized and blacklisted for 5 years.
Significance:
Highlights systemic liability where auditor negligence facilitates large-scale financial fraud.
3. Key Principles on Auditor Liability
Criminal Liability arises if:
Auditor knowingly falsifies accounts or ignores red flags.
Auditor colludes with company officials to misappropriate funds.
Auditor fails to report fraud as required under Companies Act.
Evidence used in prosecution:
Audit reports and working papers
Bank statements and transaction histories
Internal communication (emails, memos)
Expert forensic reports
Punishments:
Imprisonment: 5–10 years depending on scale of fraud
Fines and civil liability for compensation
Professional sanctions: license suspension, disqualification
Importance of Professional Due Diligence:
Courts emphasize that auditors must exercise due professional care.
Mere ignorance is not a defense if negligence is gross.
Collusion or concealment elevates liability from civil to criminal.
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