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| Sunday, 25 August 2002 |
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Business |  |
| News Business Features Editorial
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Corporate collapses Biz buzz by Iris & Aved The collapse of corporate giants in the United States has caused stupefaction in the business community throughout the world as well as ordinary people. This situation has arisen out of the fact that many giant corporates who resorted to preparing misleading financial statements have filed forbankruptcy. Those who survived have wiped out the value of shares by billions of dollars. The spate of corporate mismanagement and accounting scandals have hurt pension funds, share owning public and eroded public confidence in the regulatory system and the integrity of audited financial statements. The BOI Director-General, addressing the members of the Colombo Club last week announced that six large commercial banks would end up with negative net worth balance sheets if full provision is made for non-performing loans (loans doubtful of recovery due to repayment defaults). He pointed out that the properties offered as security for these loans have in fact a much lower value than their stated market value. He asked how much those properties would realize if most of the banks were to release them to the market for sale. Can there be a banking crisis in Sri Lanka? Can there be corporate failures of a scale to precipitate a financial crisis? Optimists contend that banks are not likely to suffer the fate of their South East Asian counterparts or the Argentinian banks because exchange controls on capital account transactions are still in place. But they would be at high risk if the prudential limits on bank reserves and liquidity were not maintained. What then is the position of the six banks identified by the BOI Chairman as having a deficiency of assets in their balance sheets? If that is the case, they truly cannot be in the banking business any more. In the US, the Sarbanese_Oxley legislation imposed a statutory obligation on CEOs and CFOs to make a statement under oath that the financial statements were true and fair and that they could be relied upon. It banned the grant of loans on special terms to directors and senior executives. Will these measures be adequate? The existing Company Law in Sri Lanka and other countries which have adopted the UK model, very specifically make it the statutory duty of Directors to ensure that the financial statements give a true and fair view of the financial position as well as the financial results, prohibits loans (under whatever terms) to directors unless approved by the shareholders at the Annual General Meeting, requires disclosure of all loans to directors and officers of the company and requires two directors to sign on behalf of the Board of Directors, every balance sheet prepared for audit. If these statutory requirements were not adequate, will the quickly enacted Sarbanese_Oxley legislation improve financial reporting? The Economist of August 17th reported that auditors had challenged practices at 38% of respondents in the past year but in more than half (57%) the cases, the company management (directors) had persuaded the auditors to accept the questionable practice. The position in Sri Lanka is much worse, according to audit circles. Legislation, regulatory systems and the audits will deliver what the financial markets including in particular the investing public expect only in a perfect world where the auditor (and his reporting) is independent and objective. The world has seen that the auditor appointed and remunerated by the shareholder is not adequately independent and objective when the directors and executives on whom they report, control the majority of the shareholders who care to (or are adequately informed to) exercise their voting rights. A radical reform, worthy of consideration is independent regulatory reviews of the work of auditors as a pre-requisite to the grant of a certificate to practice, say for one to three years. Another is to empower the regulator to appoint the auditor (from a pool that meets laid down criteria in skills, competence and resources) of listed companies and Specified Business Enterprises after taking into account the interests (and wishes) of the non-executive shareholders. It will be equally important to ensure the independence of the regulator. The proposal to have a single regulator in place of the Securities and Exchange Commission, the Insurance Board, the Accounting and Auditing Standards Monitoring Board and the Registrar of Companies offer an opportunity to appoint people with an independent mind and adequate competence to the regulatory body. Till these proposals are implemented, the regulators should strictly enforce on corporate executives and auditors, the existing rules and regulations and take swift action to punish those who have betrayed the trust imposed on them. A few bankruptcies and a few men behind bars might be needed to awaken the complacent corporate community and their auditors. |
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