INDEPENDENT AUDITOR'S REPORT
To the General Assembly of Türkiye Halk Bankası A.Ş.
- Report on the Audit of the Financial Statements
- Qualified Opinion
We have audited the financial statements of Türkiye Halk Bankası A.Ş. ("the Bank"), which comprise the unconsolidated balance sheet as at 31 December 2023, and the unconsolidated statement of profit or loss, unconsolidated statement of profit or loss and other comprehensive income, unconsolidated statement of changes in shareholders' equity and unconsolidated statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.
In our opinion, except for the effects of the matters on the unconsolidated financial statements described in the basis for the qualified opinion paragraphs, the accompanying financial statements present fairly, in all material respects, the financial position of the Bank as at 31 December 2023, and its financial performance and its cash flows for the year then ended in accordance with "the Banking Regulation and Supervision Agency ("BRSA") Accounting and Reporting Regulations" including the regulation on "The Procedures and Principles Regarding Banks' Accounting Practices and Maintaining Documents" published in the Official Gazette dated 1 November 2006 with No. 26333, and other regulations on accounting records of banks published by the Banking Regulation and Supervision Board and circulars and pronouncements published by the BRSA and provisions of Turkish Financial Reporting Standards (TFRS) for the matters not legislated by the aforementioned regulations.
- Basis for Qualified Opinion
The Bank reclassified the government bonds amounting to TRY 18.965.006 thousand, which were previously classified under financial assets at fair value through other comprehensive income according to the business model prepared in accordance with Turkish Financial Reporting Standard ("TFRS") 9, into financial assets measured at amortised cost and reversed the marketable securities revaluation fund accumulated under other comprehensive income or loss to be reclassified through profit or loss amounting to TRY 2.229.977 thousand on 23 May 2018. The reclassification constitutes a departure from TFRS 9. The government bonds reclassified into financial assets measured at amortised cost as at 31 December 2023 amounted to TRY 44.066.438 thousand. If such classification were not made, total assets and shareholders' equity, excluding tax effect, would be lower by TRY 6.117.199 thousand as at 31 December 2023.
We conducted our audit in accordance with the regulation on "Independent Auditing of Banks" published in the Official Gazette dated 2 April 2015 with No. 29314 and Standards on Independent Auditing ("SIA") which is a part of Turkish Auditing Standards published by the Public Oversight Accounting and Auditing Standards Authority ("POA"). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Bank in accordance with the Code of Ethics for Independent Auditors ("Code of Ethics") published by the POA, together with the ethical requirements that are relevant to our audit of the financial statements, and we have fulfilled our other ethical responsibilities
in accordance with these requirements and the Code of Ethics. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
- Emphasis of Matter
As detailed in Section Six Note One, we draw attention to the following:
On October 15, 2019, the US Department of Justice, United States Attorney Southern District of New York indicted the Bank in the Southern District of New York Court ("District Court") for the violations of Iranian sanctions. This criminal case is pending at the District Court. The proceedings are stayed as the Bank requests an appeal under the "Foreign Sovereign Immunity Act" ("FSIA"). The US Supreme Court has rejected the Bank's FSIA appeal and remanded the case to the US Court of Appeals for the Second Circuit to be reviewed on common law immunity grounds. The process is ongoing.
In addition, a group of plaintiffs filed a civil lawsuit (the Owens case) against the Bank with a claim for damages before the District Court for the Southern District of New York on March 27, 2020, "on the grounds that they (plaintiffs) could not collect their judgments from Iran due to the violations of sanctions." The case was dismissed by the District Court, the Second Circuit and the U.S. Supreme Court, respectively. Consequently, the Owens case was conclusively dismissed on January 8, 2024.
Finally, on July 26, 2023, a new civil case (the Hughes case) was filed against the Bank by a group of plaintiffs in a complaint filed with the District Court, seeking to satisfy judgements similar to the civil case dated March 27, 2020. The plaintiffs seek judgments by attempting to establish a connection between certain aggrievements they have suffered in various countries and the allegations in the current criminal case against the Bank, which was filed on October 15, 2019. The Bank filed its motion to dismiss the case with the District Court on December 22, 2023. The process is ongoing.
At this stage, the Bank's Management stated that there is no penalty, compensation, sanction or other measure arising from the pending criminal and civil cases against the Bank. There is an uncertainty if any decisions will be made by the US authorities that may adversely affect the financial position of the Bank. No provision has been made in the financial statements of the Bank related to these matters. However, the above mentioned matters do not affect the opinion provided by us.
- Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In addition to the matter explained in the Basis for Qualified Opinion section, the issues described below have been identified as key audit matters and are disclosed in our report.
Key Audit Matter | How the matter was addressed in the audit | |
Impairment of | loans in accordance with | |
TFRS 9 "Financial Instruments Standard" | ||
Impairment of | loans is a key area of | As part of our audit work, the following |
judgement for the management. The Bank has | procedures were performed: |
the total loans amounting to TRY | ||||||||||||
1.270.544.675 | thousand, | which | comprise | We | assessed | and | tested | the | design, | |||
58% of the Bank's total assets in its | implementation and operating effectiveness of key | |||||||||||
unconsolidated financial statements and the | controls applied by the Bank with respect to | |||||||||||
total provision for expected credit loss | classification of loans and determination and | |||||||||||
amounting to TRY 48.509.527 as at 31 | calculation of impairments. Our information | |||||||||||
December 2023. | system experts have also participated to perform | |||||||||||
these procedures. | ||||||||||||
The Bank recognizes provisions for | ||||||||||||
impairment in accordance with the TFRS 9 | We have read and analysed the relevant contract | |||||||||||
requirements according to the "Regulation on | terms to assess management's accounting policy | |||||||||||
the | Procedures | and | Principles | for | and classification of the instrument for selected | |||||||
Classification of Loans by Banks and | samples. | |||||||||||
Provisions to be set aside" published in the | ||||||||||||
Official Gazette dated 22 June 2016 | We have performed audit procedures on selected | |||||||||||
numbered 29750. | Applied | accounting | samples of loans and receivables with the | |||||||||
policies are explained in detail in the Section | objective of identifying whether the loss event had | |||||||||||
3 Note VIII. The expected credit loss | occurred and whether the provision for expected | |||||||||||
estimates are required to be unbiased, | credit loss has been recognized in a timely manner | |||||||||||
probability-weighted and should include | within the framework of the provisions of the | |||||||||||
supportable information about past events, | relevant regulation. | |||||||||||
current conditions, and forecasts of future | ||||||||||||
economic conditions. | We have tested relevant inputs and assumptions | |||||||||||
used by the management considering the expected | ||||||||||||
The Bank exercises significant decisions | credit loss calculation by considering | whether | ||||||||||
using | judgement, | interpretation | and | those appear reasonable, the relationship between | ||||||||
assumptions | over | calculating | loan | the assumptions and whether the assumptions are | ||||||||
impairments. | These | judgements, | interdependent and internally consistent, whether | |||||||||
interpretations and assumptions are key in the | the assumptions appropriately reflect current | |||||||||||
development of the financial models built to | market information and collections, and whether | |||||||||||
measure the expected credit losses on loans. | the assumptions appear reasonable when | |||||||||||
considered collectively with other assumptions, | ||||||||||||
There is a potential risk of impairment | including those for the same accounting estimates | |||||||||||
losses/provisions provided/will | be | provided | and those for other accounting estimates. | |||||||||
may not meet the requirements of the TFRS | ||||||||||||
9. Failure in determining the loans that are | We have tested historical loss data to validate the | |||||||||||
impaired and not recording the adequate | completeness and accuracy of key parameters. | |||||||||||
provision for these impaired loans is the | We tested the application of the model to the | |||||||||||
aforementioned | risk. | Accordingly, | relevant inputs and the mathematical integrity of | |||||||||
impairment of loans is considered as a key | each stage of the expected credit loss calculation. | |||||||||||
audit matter. | ||||||||||||
Based on our discussions with the Bank | ||||||||||||
Related explanations relating to the | management, we evaluated whether the key | |||||||||||
impairment of loans are presented in Section | assumptions and other judgements underlying the | |||||||||||
5 Note I.5. | estimations of impairments were reasonable. | |||||||||||
Our specialists are involved in all procedures | ||||||||||||
related to models and assumptions. |
We have reviewed disclosures made within the | ||||
TFRS 9 framework in the financial statements of | ||||
the Bank with respect to loans and related | ||||
impairment provisions. | ||||
Key Audit Matter | How the matter was addressed in the audit | |||
Valuation of Pension Fund Obligations | ||||
Defined benefit pension plan that the Bank | Our audit work included the following procedures: | |||
provides to its employees is managed by | ||||
Türkiye Halk Bankası AŞ Emekli Sandığı | We involved internal experts (actuary) in our audit | |||
Vakfı and T.C. Ziraat Bankası ve T. Halk | team to evaluate the assumptions used in the | |||
Bankası Çalışanları Emekli Sandığı Vakfı | calculation of the pension obligations and the | |||
("Plan") which were established by the 20th | appropriateness of the estimates. | |||
provisional article of the Social Security Law | ||||
numbered 506 (the "Law"). | It has been tested whether the plan assets meet | |||
plan obligations in accordance with the methods | ||||
As disclosed in the Section III Note XVII to | and assumptions used. | |||
the unconsolidated financial statements, the | ||||
Plan is composed of benefits which are | In addition, reconciliations and tests were carried | |||
subject to transfer to the Social Security | out through sampling of the accuracy of the data | |||
Foundation ("SSF") as per the Social Security | provided to the Bank's actuary. | |||
Law no.5510 provisional article 20, and other | ||||
social rights and pension benefits provided by | We have assessed whether there is a significant | |||
the Bank that are not transferable to the SSF. | change in the actuarial assumptions, methods, | |||
The Council of Ministers has been authorized | legal regulations and legislation used in the | |||
to determine the transfer date. Following the | calculations and whether the assumptions are | |||
transfer, the funds and the institutions that | reasonable. In addition, we have reviewed the | |||
employ the funds' members will cover the | sufficiency of disclosures prepared with this | |||
non-transferable social rights and pension | regard. | |||
benefits provided under the Plan even if it is | ||||
included in foundation deed. | ||||
As of 31 December 2023, the Bank's | ||||
transferrable liabilities are calculated by an | ||||
independent actuary using the actuarial | ||||
assumptions regulated by the Law, and in | ||||
accordance with the Decision of the Council | ||||
of Ministers announced in the Official | ||||
Gazette dated 15 December 2006 and | ||||
No.26377. The valuation of the Plan | ||||
liabilities requires judgment in determining | ||||
appropriate assumptions such as defining the | ||||
transferrable social benefits, discount rates, | ||||
salary | increases, | inflation | levels, | |
demographic assumptions, and the impact of |
changes in the Plan. Management uses expert | |||||
opinion of the independent actuary in | |||||
assessing uncertainties related to these | |||||
underlying assumptions and estimates. | |||||
As described in Section Five Note II.9.f | |||||
considering the subjectivity of key judgments | |||||
and assumptions, plus the uncertainty around | |||||
the transfer date and basis of the transfer | |||||
calculation given the fact that the technical | |||||
interest rate is prescribed under the Law, we | |||||
considered this as a key audit matter. | |||||
Key Audit Matter | How the matter was addressed in the audit | ||||
Information Technologies Audit | |||||
The Bank and its finance functions are | Procedures within the context of our information | ||||
dependent on the IT-infrastructure for the | technology audit work: | ||||
continuity of its operations, and the demand | |||||
for technology-enabled business services is | • We identified and tested the Banks' controls | ||||
rapidly growing in the Bank and its | over information systems as part of our audit | ||||
subsidiaries. Controls over reliability and | procedures. | ||||
continuity of the electronic data processing | |||||
are within the scope of the information | • Information generation comprise all layers of | ||||
systems internal controls audit. The reliance | information systems (including applications, | ||||
on information systems within the Bank | networks, | transmission | systems | and | |
means that the controls over access rights, | database). The information systems controls | ||||
continuity of systems, privacy and integrity of | tested are categorized in the following areas: | ||||
the electronic data are critical and found to be | |||||
key area of focus as part of our risk based | • | Security management | |||
scoping. | • | Change management | |||
• | Operations management | ||||
• We selected | high-risk areas as, database | ||||
logging and change management control | |||||
activities, to prevent and detect whether | |||||
accesses to financial data had been identified | |||||
in a timely manner. | |||||
• We tested the accesses and logging controls | |||||
underlying all applications that have direct or | |||||
indirect impacts on financial data generation. | |||||
• Automated controls and integration controls | |||||
are tested to underly and detect changes and | |||||
accesses in the process of financial data | |||||
generation. |
• We also tested the appropriateness and accuracy of the information produced by the entity and information used in controls reports as inputs to our controls and outputs generated by the IT components.
• Finally, we understood and tested the controls over database, network, application and operating system layers of applications.
- Responsibilities of Management and Those Charged with Governance for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with the BRSA Accounting and Reporting Regulations, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Bank's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Bank or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Bank's financial reporting process.
- Auditor's Responsibilities for the Audit of the Financial Statements
Responsibilities of independent auditors in an independent audit are as follows:
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the regulation on "Independent Auditing of Banks" published in the Official Gazette dated 2 April 2015 with No. 29314 and SIA will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
As part of an audit in accordance with the regulation on "Independent Auditing of Banks" published in the Official Gazette dated 2 April 2015 with No. 29314 and SIA, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:
- Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. (The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.)
- Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank's internal control.
- Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
-
Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report.
However, future events or conditions may cause the Bank to cease to continue as a going concern. - Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. - Report on Other Legal and Regulatory Requirements
In accordance with paragraph four of the Article 402 of the Turkish Commercial Code ("TCC"), nothing has come to our attention that may cause us to believe that the Bank's set of accounts for the period 1 January-31 December 2023 does not comply with the TCC and the provisions of the Bank's articles of association in relation to financial reporting.
In accordance with paragraph four of the Article 402 of the TCC, the Board of Directors provided us all the required information and documentation with respect to our audit.
The engagement partner on the audit resulting in this independent auditor's report is Erdem Taş.
Additional Paragraph for English Translation
The effect of the differences between the accounting principles summarized in Section III and the accounting principles generally accepted in countries in which the accompanying financial statements are to be distributed and International Financial Reporting Standards ("IFRS") have not been quantified and reflected in the accompanying financial statements. Accordingly, the accompanying financial statements are not intended to present the Bank's financial position and results of its operations in accordance with accounting principles generally accepted in such countries of users of the financial statements and IFRS.
DRT BAĞIMSIZ DENETİM VE SERBEST MUHASEBECİ MALİ MÜŞAVİRLİK A.Ş. Member of DELOITTE TOUCHE TOHMATSU LIMITED
Erdem Taş
Partner
Istanbul, 14 February 2024
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Türkiye Halk Bankasi AS published this content on 08 May 2024 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 08 May 2024 15:32:04 UTC.