Firms asked to remove anomalies in accounting of forfeited provident funds

The Financial Reporting Council (FRC) has unearthed gross irregularities in the accounting of the forfeited amount of provident funds of public interest entities.

An employee may leave a company before being entitled to the portion of the provident fund from the employer. But if the fund is not returned to the company after they depart, it is considered as a forfeited fund.

"This money is normally distributed among the present employees but it is not legal," the FRC said.

The situation prompted the independent government regulatory body under the finance ministry to issue a circular on Tuesday for every public interest entity.

It directed the companies either to give the money to the outgoing employees or return it to the profit and loss accounts of the firms and pay tax on it.

Any government or non-government entity is considered a public interest entity when its annual revenue crosses Tk 5 crore, assets reach Tk 3 crore, or liability goes up to Tk 1 crore.

The entities treat their contribution to the provident funds as expenses and thus get tax benefit against the expenditure.

The forfeited amount should either be paid to the employee who left or reverted back to the accounts of the company and the company must pay tax on it, said Sayeed Ahmed, an executive director of the FRC.

"Giving one's money to others is a forgery," he said, adding that the auditors were also not addressing the issues in their reports.

If an audit firm fails to address and inform such issues, it will be accountable for allowing the irregularities to take place, he added.

Companies with forfeited fund must revert it to the employer's accounts in the same financial year, the circular said.

The organisation must recognise the fund as income from other sources and subsequently would be charged corporate tax against the amount.

Employees of public interest entities who enjoyed additional benefit because of the forfeited funds must deduct the extra sum by December 31, 2020.

Every entity must try to recover the additional benefits that have already been realised by other employees, the notice said.

If an employee receives any excess amount from a provident fund, it must be discussed in the meetings of trustee board or committee of the provident fund, in the audit and risk management committees of the organisation. The trustee board or committee must be accountable for that.

An audited financial report on the employee provident funds must be submitted to the FRC and other regulatory bodies within 120 days after the end of an accounting year, according to the circular.

If anyone breaches the circular, they would face up to Tk 5 lakh in fines, or five years in imprisonment, or both, said the FRC.