A news item tucked away in some corner of the newspapers this week about a Sri Lankan auditor being sacked in a row over disclosure must have escaped the attention of many investors. It’s probably the first time such a thing has happened or a rare occurrence in recent times in a day and age when good governance is sacrosanct in the private sector or is perceived to be. On July 9, Ernst & Young Chartered Accountants and Auditors informed the Colombo Stock Exchange (CSE) that it was resigning as auditors for Hunter & Co in a row over disclosing details of the use of company bungalows in the 2007-2008 annual accounts.

In a letter to Hunter’s copied to the CSE, Ernst & Young said it was resigning at the request of the company which had objected to the disclosure about key management personnel using bungalows owned by subsidiary, Health and Company. Hunter’s said the disclosure was incorrect and unnecessary. Ernst & Young disputed this, saying under the Sri Lanka Accounting Standards such disclosure was necessary.

In another instance we are aware how a leading auditor pulled out of a company audit where an IPO was concerned because the latter didn’t want some ‘disclosures’ made in the prospectus. Is this the kind of corporate governance practised by companies? Do you fire auditors for disclosure of information which shareholders should rightly have access to? In the first place should companies have the right to fire the auditors/the gatekeepers responsible for proper and fair accounts? Shouldn’t that be a right of the shareholders?

In most cases, Sri Lanka’s listed companies are lacking in transparency and proper disclosure to give shareholders a true position of these companies. The regulators – Colombo Stock Exchange and the Securities & Exchange Commission – are lacking in such intervention to make the Colombo bourse a marketplace that is truly free, independent and transparent and that has the confidence of all investors. Insider trading is commonplace with the big guns blazing while the small fry are the ones that get netted just like the much-vaunted Bribery Commission where the ‘sprats’ are fried for taking bribes of between Rs 100 to Rs 1,000 while the ‘biggies’ escape the net!

Many are the times directors of companies artificially control share prices for personal gain.
Disclosure is a serious problem and many companies get away without full disclosure on various issues. A veteran stockmarket investor K. Vignarajah, constantly pushing for the rights of minority shareholders, cited the following as serious problems in listed companies --- no fair dividend; lack of full disclosure; undervaluing assets; need for revaluation once in five years; company directors involved in shady deals; knack of creating shareholder fatigue to curb questioning of accounts; conflict of interests of directors; siphoning out funds through associate or subsidiary companies and the need for independent directors to exercise independence.

Perhaps the last issue of independent directors raises some crucial questions. If they are independent, do they ‘truly’exercise their independence? While this is not an indictment on the many respected individuals who have been called to serve on the boards of companies under the SEC requirement of independent directors, have they exercised their independence in decision-making? In the first place, are they aware of their roles and responsibilities or is it laid out by the company that invites them on board and pays them a fee for attending meetings? Having said that we are well aware that most of the independent directors know their responsibilities but whether they have stuck to their role diligently, without fear or favour is a moot point.

There was a recent case where directors of a company were hauled up for insider trading and the case compounded. What were the independent directors in that company doing? The same organization had failed to list in its accounts a costly acquisition while reporting losses; again the independent directors failed to question this or resign in protest.

We have learnt of another case where a company run by a powerful personality currently clashing with his partners, has copied the audit committee report of another organisation, changed the numbers and shown shareholders the company has an audit committee when there isn’t one – another scam that has escaped the attention of the regulators.

Last year corporate governance ratings were introduced in some companies where the corporate governance report was audited by an international firm experienced in such work. However that practice is likely to end after officials of a popular annual reports competition said they were entertaining applications with corporate governance reports that made disclosures, not how it was practised or whether CG was practised.

The firing of auditors in the recent case is a sad reflection of the state of good governance and transparency in companies where these issues are assured just on paper; not in actual practice or as a way of life!