Pros and cons of whistle-blowing
View(s):“Other professionals like lawyers, doctors or architects are not asked to blow the whistle. So why only the accountants,” asked an irate accountant at a recent meeting.
Another colleague responded from the other side of the room: “That may be because we audit company reports that are publicly listed and shareholders go by our statement and comments.”
This discussion occurred at the auditorium of the Chartered Accountants Institute of Sri Lanka (CA Sri Lanka) when the institute’s practicing accountants who have their own forum raised the issue of whistle-blowing; the merits and de-merits.
The trigger for this was Securities and Exchange Commission (SEC) Chairman Thilak Karunatne’s recent observation that the SEC was examining the necessity of directing auditors to report any unusual activity in a company’s financial health and report it to the SEC, and reports and editorials on this issue in the Business Times.
In a May 17, editorial the Business Times commended the SEC proposal to hold auditors accountable for irregularities in companies and further suggested that the regulator should also encourage whistle-blowing by employees (and even shareholders) with suitable policy guidelines This newspaper has in the past also raised the conflicts of interest that could arise in audit firms when they offer other services – a widespread practice across the world – in addition to audits.
“Such services included consultancies and head-hunting for top positions. The question we raised was what happens when an individual head-hunted by an audit company for a client is found to be dipping his or her fingers in the company kitty (fiddling with the accounts)? Will the audit firm ring the alarm bells and alert the management; ‘protect’ the fraudster’ or report the matter resulting in the errant officer being sacked but persuade the management to continue the audit service despite a error in judgment vis-à-vis the selection of the officer concerned?”, the Business Times said in an earlier editorial.
At last week’s CA Sri Lanka members’ discussion, there were mixed views on whether auditors should blow the lid off a fraud or financial mismanagement in a company or leave it alone. Some members, who appeared in favour of whistle-blowing, were of the view that, in the context of good governance, this is inevitable; that the SEC was already going ahead with it and that accountants were getting a bad name for not disclosing information, they may have had access to. Another view expressed was that very rarely auditors qualify accounts of companies even if there is something wrong and gave a negative view of auditors to shareholders, the media and the public.
On the flip hand, others countered saying that auditors are appointed by shareholders and are answerable only to shareholders. “If we are to disclose everything, then we might as well go straight to the media,” one accountant argued, adding that “the auditor’s obligation was solely to the shareholder and no one else”. What was not said however is that it’s the big shareholders (the controlling interests) that often decide on auditors (their favourites, according to minority shareholders).
It is also a well-known fact that a few companies, listed or unlisted in the Colombo Stock Exchange, doctor the accounts , provide misleading information and present them in attractive annual reports that ‘impresses’ unsuspecting shareholders and would-be investors. As far as the accountancy profession is concerned – like it or not – auditors play a big role is providing legitimacy to the financial health of listed companies. New investors go by the auditor’s report and any due diligence, for instance, by a new investor preparing to buy a large stake in a company will take into consideration the auditor’s report and observations for many years.
CA Sri Lanka, set up by an Act of Parliament, has a far- reaching Code of Ethics under which members can be dis-enrolled or stripped of the right to practice if they violate any regulation. Some rules that may connect to the issue of whistle-blowing are in the confidentiality provisions which say that “accountants must respect the confidentiality of information acquired as a result of professional and business relationships and not disclose it to third parties unless there is a legal right or professional duty to do so”.
On the other hand the code says that integrity “imposes an obligation on all accountants to be straightforward and honest in all professional dealings”, and that a professional accountant should not be associated with information that contains “false and misleading statements, and information submitted recklessly and omits or obscures information required to be included where such omission or obscurity would be misleading”.
Given the concerns of auditors and in the context of democratic governance, it would be useful for the SEC to consult a large segment of the accountancy profession and also other stakeholders before finalising these rules.