The national accounting and auditing standards watchdog says it needs more legal teeth, to avoid a repetition of the Golden Key type of mega-public scam in future. The regulator is now trying to amend its legal mandate to get more autonomy, to check into the accounts of companies.
“At this point we do not have the legal powers to contact a company and ask to see their accounts. We are looking at amending the Sri Lanka Accounting and Auditing Standards Act to be able to address this,” said the Director General of the Sri Lanka Accounting and Auditing Standards Monitoring Board (SLAASMB), Ajith Ratnayake.
The Accounting and Auditing Standards Monitoring Board is mandated by law to inspect accounts of companies that come under the category of ‘specified companies.’ These include both public quoted and private, limited liability companies.
Under the law, companies that fall into the category of ‘specified companies’ must submit their accounts to the regulator for inspection. However, the reverse is not possible. The regulator says it does not have power under the law to inquire into companies, under its own initiative.
For instance, Golden Key, the failed credit card company, is a ‘specified company’. However, the company did not, according to the regulator, submit accounts for inspection. The regulator in turn, did not have the authority to inquire into the company on its own either. As a result, the Sri Lankan public did not get the regulatory protection it is entitled to.
“We are hoping to amend the Act so that we can, on our own, call for information from any company, instead of waiting until a company decides to follow the law and submit their accounts to us,” said Mr Ratnayake.
Golden Key, a credit card company that took deposits from the public to the value of billions of rupees, is regarded as the biggest financial scam to date in Sri Lanka. CID investigations, after the collapse of the company in late 2008, estimated fraud at between Rs 15 billion - Rs 20 billion. The company was able to scam the public for years by maintaining false accounts and forging the signature of an auditor.
The Accounting Standards Monitoring Board is now investigating the Golden Key accounts, but this is too late for thousands of people that lost their life-savings.
Loopholes in the legal system
Inconsistencies in the plethora of financial sector regulations are another obstacle to protecting the public. For instance, the Central Bank as the overall financial sector regulator may have information relevant to other regulators in the financial sector. However, secrecy provisions in the Monetary Law Act can get into the way of free flow of information.
“The Monetary Law Act has a secrecy provision. This may also prevent the Central Bank from releasing information to other regulators,” said Mr Ratnayake.
The unabashed use of the law by businesses to avoid accountability is another very real problem despite all the talk of ‘corporate social responsibility.’
For instance, in 2000, the accounting watchdog found inconsistencies with the accounts of Ceylinco Insurance. The company had overstated its tax liability by Rs.62 million.
When the regulator started investigating, the company took the regulator to court.The case dragged on for three years and the company used this respite to adjust its accounting anomalies. The regulator had to drop its case.
In this case the regulator was able to prevent the company from continuing to cook its books, but the scary truth is, there are many more companies out there using existing legal loopholes to avoid regulatory oversight.
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