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| Sunday, 21 July 2002 |
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| News Business Features Editorial
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The role of auditors The Securities and Exchange Commission (SEC) of Sri Lanka, in a press release last week invited representations from individuals and associations on The Role of Auditors'. This was an invitation triggered by the corporate scandals in the United States of America that became headline news of a global scale, beginning with Enron. When WorldCom and Xerox announced, within a space of four days, accounting irregularities of billions of US dollars, the capital markets, investors and regulators realized that the parade of corporate malfeasance had not ended. The SEC conducted a full day seminar and a consultation a week ago. Speaker after speaker, except for speakers who were themselves auditors, flayed the auditors, on occasion a bit too harshly. The auditors present, as expected, played their defensive strokes, but the SEC went ahead to launch a public debate on The Role of the Auditors'. The Committee appointed by the SEC to study the effectiveness and adequacy of the audit function had not challenged the competence of the local auditors, but invited representations on the continuing professional education and training of auditors. The fundamental feature of the audit function is independent and objective reporting by competent persons. Sri Lanka Company legislation enacted in 1982 and based on the U.K. Companies Act of 1967 requires revision in many areas. Yet it seems to provide an adequate framework for good corporate governance and effective auditing and reporting. The new Corporate Governance Code which includes the appointment of Audit Committees and adoption of Sri Lanka Accounting Standards and Auditing Standards on top of the Companies Act requirements to prepare truthful financial statements and disclose vital information; should be adequate to protect shareholder and creditor interests. But for those to work effectively, the auditor should be made to abide by certain professional ethics. Sri Lanka has blue chip companies winning awards for exemplary corporate reporting with profound statements made by their Audit Committees which award considerable financial advisory and management consultancy work to firms owned by Audit Committee members or Chairmen. In some instances, audits of subsidiaries of these Groups of Companies are referred to the very firms in which Board Audit Committee chairmen or members are partners or have financial interests as retired partners or consultants. A few speakers at the SEC seminar raised doubts on the integrity of financial statements of Banks. Some criticized the auditor as well as the Ceylon Chamber of Commerce for not doing enough to straighten out matters in areas of truthful financial reporting. The Chairman of the US SEC, Harvey Pitt has proposed that chief executives and chief financial officers (CFOs) be required to certify the accuracy of financial statements of their companies. The US SEC is also introducing a requirement for companies to explain in their financial statements the impact of alternative accounting treatment (often permitted by accounting standards) they have adopted as against the benchmark accounting treatment recommended in the Standards. Recommendations coming out of US Congress companies?]to preserve auditor independence include barring senior auditors taking up directorships for five years after retiring from their audit firms. Compare that with the auditors of leading firms in Sri Lanka who so proudly include among their credentials directorships they hold in public companies (of course not audited by their firms - the law does not allow it - but audited by a close buddy of another firm). Sri Lanka has had an audit duopoly for nearly 100 years. The two firms that led the pack, until other international firms found their way into the country in the early 1980s, have had a fine arrangement of one firm auditing a company and partners of the other firm sitting on the Board with an unwritten agreement - I scratch your back and you scratch mine ...! For quite some time, international firms were blocked from entering this market until one smart auditor found a hole to creep through. The audit dupoly has gone, but the practices remain. The SEC Committee probing The Role of Auditors should in the first instance, make sure that it comprises eminent persons who are totally independent of the very people it seeks to probe. The Committee should also have people with competence and understanding of complex issues on accounting and auditing. They should have before them for study the corporate failures both in Sri Lanka and elsewhere and the underlying reasons for such failure and the ineffectiveness of the audit function. The Committee should examine the extent to which the auditor sacrifices his professional obligations to safeguard commercial interests. As one speaker at the SEC seminar stated, the auditor has to first be a professional -and professional obligations should take precedence over his commercial interests. The auditor has a quasi-judicial role to play. When the very people on whom he reports, have power over his appointment. A conflict automatically arises between the auditor's role and his business interests. These need to be addressed in legislation and in Standards, but above all, the auditor needs to be a person with an independent mind, strong in his convictions, courageous in his reporting and taking pride in the independence and freedom that is given to him by Statute and Auditing Standards to report without fear on the financial statements he has examined. The Accountancy magazine of July 2002 features the chairman of the English Institute (ICAEW) Ethics' Group (and also risk management partner of KPMG in the UK). He quotes Mahatma Gandhi and in essence summarizes what corporate leaders and auditors should always remember and use as a guide in all their decisions on financial reporting: "Commerce without morality - or business without ethics - is one of the seven blunders of the world". |
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