Secret reserve accounting: a critical review of Bangladesh

Abstract

The practice of secret reserve accounting can be traced back to the 20th century, when secret reserves were created to conceal high profits earned from wars. This accounting system is mainly applied to promote a company's financial stability, through undervaluation of assets or overvaluation of liabilities. Such reserves are not disclosed to shareholders or employees through deliberate non-disclosure by management in the company's financial statements. It, therefore, creates a conflict between the company's management and shareholders and employees. This study recognises the concept of secret reserve accounting, citing examples of its application across countries and then researching cases of creative accounting practices in Bangladesh. The paper reasons that practice of secret reserve accounting should be acknowledged in special cases if it concerns company's benefit - thereby, setting aside the conflicts between company's stakeholders. However, it also recommends bridging the gap and loopholes in accounting standards to curb the use of secret reserves.