The recent disclosure that some of the twenty-five commercial banks have shown a gap in their losses and profits should provide a warning signal to those who have taken for granted the presence of transparency and accountability in financial institutions. According to a report compiled by the Securities Research Centre and Services (SRCS), there have been wide discrepancies between the net annual results of the financial operations as shown in the unaudited financial statements and the audited ones. The unaudited figures are published quarterly under a Rastra Bank regulation and the consolidated reports come out immediately after the end of the fourth quarter, just ahead of the shareholders’ annual general meeting. Though it may not be said that each case of such a discrepancy is due to bad motive, yet cases are likely to have been the result of the management’s desire to paint a much rosier picture of the institution concerned than it really is.

By giving the market a false impression of their financial performance and condition, financial institutions may expect to lull the shareholders into a false sense of security, to set the prospective buyers of the company’s shares on the wrong

path so that there may not be a decline in the market value of its shares, and to keep the depositors from panicking into reconsidering their dealings with it or the would-be depositors from establishing a relationship with it. Significant profit or loss figures that are wrongly reported may put other companies in the same or different lines of business on the wrong scent, too. Moreover, the investors in shares have tended to decide to buy or sell mainly on the basis of the picture provided by the unaudited annual financial reports, because the audited ones are, naturally, slower in coming. Wrong reports may therefore lead them into unwise decisions.

The unaudited and audited financial statements of 19 commercial banks have been compared. Those in the financial circles reckon that the state of affairs of the more numerous development banks and finance companies is of greater concern. In one bank case, the audited figure of loss is double that of the unaudited one. In another case, the unaudited accounts have inflated profit by as much as 50 per cent. There are also examples of a few reputed banks having seen their profits go up after the audited reports came. According to bankers the discrepancy is mainly due to the ways banks classify their loans and do loan loss provisioning. Loans considered unrecoverable decrease profits. This shows that the criteria for judging loans bad or doubtful are elastic, enabling malafide practitioners to play with the balance sheets. Greater control needs to be exercised in order to minimise the difference between the pre-audit and post-audit figures. The banking system is one of the few sectors in Nepal that is still robust and has potential to grow. There is a need for greater supervision and monitoring of financial institutions, especially finance companies and development banks. The central bank needs to play a more effective role to help grow financial markets as well as nurture people’s confidence. So much is at stake — the financial system and the economy itself.