|
Spotlight on
accounting standards after report
The Sri Lanka Accounting and Auditing Standards Monitoring Board
has come in for high praise from various financial quarters following
their tough stance taken against top companies, which failed to
maintain proper accounting procedures for the year 2000 and 2001.
However, investors
have been cautioned not to be hasty in choosing investment opportunities
on the basis of company profits that are disclosed in annual reports.
Dr. Dayanath Jayasuriya, Director General of the Securities and
Exchange Commission (SEC) said that investors must make informed
investments and not base their decision solely on figures that are
stated in annual reports.
"A shareholder
must also consider corporate governance, business strategies and
the companies' past performance." He says that companies do
sometimes make unusually large profits within a short period of
time, and it's important for investors to find out the reason. "It
could be a generator company that earns profits during a power crisis."
Dr. Jayasuriya said that shareholders should attend the company
annual general meeting in order to assess for themselves the true
situation of the company.
Statements
reliable
Head of Research for Asia Capital, Dushyanth Wijayasingha said that
in comparison to foreign firms, financial statements presented by
Sri Lankan companies are much more reliable. He said that the introduction
of the SLAASMB has strengthened equity markets and their recent
findings have brought about a positive effect. "It will certainly
prove to be a strong deterrent to other companies."
The share market
has always attached a discount on companies that did not maintain
proper accounts. In such conditions, Wijayasingha points out the
value of stockbrokers, who provide investors with timely warning
and information on the actual position of a company. Since the stockbrokers
have a strong interaction with the companies, they are in a better
position to enlighten investors about a company's financial position.
Naren Godamune,
Vice President of DFCC Stock Brokers said that these companies could
begin to lose market confidence. "It's a bit too early to predict,
but people will be a bit reluctant to invest in these companies."
Even banks might begin to have reservations about granting loans
to such companies.
Investment advisors
should be adequately qualified and informed in order to educate
shareholders on investment decisions, he said. The Institute of
Chartered Accountants of Sri Lanka (ICASL) and the Sri Lanka Accounting
and Auditing Standards Monitoring Board should exert more pressure
on companies to disclose the true position of the companies. The
legal process has a role to play in safeguarding the interests of
investors, Godamune said.
Public concern
has also mounted as to why the auditors had not qualified certain
irregularities in their reports. An official from a leading audit
firm said that the role of the audit firm was to examine the financial
records of a company and express an opinion on its true and fair
view. "Fair, does not mean one hundred percent accurate. It
means that the economic value of such shortcomings, would not hugely
affect the financial position of the company."
Before the accounting
standards were gazetted in the year 2000, most Sri Lankan companies
adopted the practice of presenting financial reports based on the
Sri Lanka Accounting Standards (SLAS) and the industry practice.
"Since we are in a transition period, where strict adherence
to the SLAS is mandatory, I think it's a bit harsh on both the companies
and the auditors who may have adopted the industry practice, in
reporting their financial statements."
Depreciation
In connection with a common problem cited in the SLAASMB report,
of not providing for depreciation of furniture and fittings, he
said that hoteliers argue that no depreciation takes place since
they incur large maintenance costs in preserving such assets. Thus
deducting an additional amount in terms of depreciation would be
understating the hotels profits, which could detract investors.
"It's been the industry practice of some hotels, not to do
so."
He added: "We
function in a competitive market, where companies may try to overstate
profits. But it's unfair to blame the auditor for it." Different
persons can interpret the SLAS differently, which could also result
in such errors. "It is also important for the public to remember
that we are not detectives and we may not be in a position to detect
conspiracies which are carefully planned," he said.
Riyaz Mihular,
a partner at KPMG Ford Rhodes Thornton and Co., welcomed the SLAASMB's
moves to encourage companies to use the SLAS to enhance its financial
statements. Before the board was set up, audit firms could only
make recommendations to companies to prepare their accounts in line
with the SLAS.
With regards
to the auditors' credibility being questioned, Mihular said that
it is important to find out whether the impact of such non compliance
with SLAS had a material impact on the truth and fairness of the
company's financial statements, as materiality governs the application
of SLAS.
If the auditor
had deliberately overlooked the application of SLAS and this has
a material impact on the financial statements, then obviously he
has to explain this to the Board.
Auditors have
to exercise professional judgement when expressing a company's true
and fair view opinion, Mihular said. "In Sri Lanka we don't
just blindly follow the rules. In the extremely rare circumstance,
if an auditor feels that by following an accounting standard, the
financial statements will not give a true and fair view, he has
the option of using the true and fair view over-ride to accept a
different method, with full disclosure of the use of the over-ride."
Mihular said
that in the USA, accounting standards are rule based, which has
made it possible for individuals to "groom transactions"
to fall within the rules and thus deceive the investing public.
To interpret a standard, the ICASL has set up an "Urgent Issues
Task Force" which consists of a panel of leading accounting
professionals, who would give an interpretation to a standard that
is ambiguous.
In response
to another common problem that was highlighted by the SLAASMB, with
respect to the diminution in value of shares, Mihular said that
Sri Lanka's Accounting Standard on Investments is weak and will
be replaced when IAS 39 is adopted shortly. Mihular said that the
basic idea of SLAS is to improve financial reporting. "There
must, however, be a balance between enhancing high quality financial
reporting and regulation thereof, which will make the stock market
more attractive for companies to list in."
The SEC has
appointed a committee to examine the role of the auditor. It remains
to be seen as to what additional safeguards can be provided to safeguard
the interest of the individual investor.
|
More power
for audit committees - ACCA
The responsibilities of audit committees in companies should
be greatly enhanced, the Sri Lanka branch of the Association
of Chartered Certified Accountants (ACCA), the global professional
accountancy body, said.
"They
should be mandatory for all listed companies and should be
required to report publicly on auditor independence,"
the ACCA said in a statement.
The audit committees should publish annual reviews on the
independence of the external auditors' review and justify
publicly the provision by auditors of any permitted non-audit
services, it said.
Auditors
should also provide more detailed information about the fees
earned by auditors for non-audit services and publish annual
reports of the audit committee's work including risk management
and internal control reviews, it said.
The statement was in response to the findings of the Sri Lanka
Accounting Standards Monitoring Board in the years 2000 and
2001 that certain firms had not complied with the standards.
"It
appears that there is no hint of fraud or even an attempt
to mislead in any of the nine "significant" cases
found by the SLAASMB," it said. "Audit committee
members should be paid adequately but their pay should not
be dependent on the company's share price or short term performance,"
the statement said.
"With
regard to corporate governance in Sri Lanka, ACCA believes
that the compensation packages of senior management need to
be aligned, not to short-term profits, but to the creation
of long-term shareholder value."
The ACCA
also said that non-executive director's need to be able to
demonstrate that they are independent of the companies on
whose boards they serve and under no circumstances should
be paid in stock options, since this would link their remuneration
to the company's market performance in the short term.
"Attention
has tended to focus on the tension inherent in the relationship
between the Chief Financial Officer [CFO], and the Chief Executive
Officer (CEO) on the one hand and between the CFO and the
Audit Committee on the other.
"It
has been suggested that by improving the financial expertise
of the audit committee and by enhancing or upgrading its responsibility
for issues such as management of the audit relationship, one
can somehow defuse or neutralise the possibility of an errant
CFO embarking on aggressive earnings management schemes in
order to satisfy the demands of his/her CEO."
The companies
and the board
The companies that were detected by the SLAASMB to be non-compliant
with the SLAS were Seylan Merchant Bank, Seylan Bank Ltd and
Merchant Bank of Sri Lanka Ltd for the year 2000. In the year
2001, the board found Asian Hotels Corporation Ltd, Trans
Asia Hotels Ltd, Alliance Finance Co. Ltd, Central Finance
Co. Ltd, Blue Diamond Jewellery Worldwide Ltd and Kandy Hotels
Co. Ltd as those that did not adhere to the SLAS.
The Sri
Lanka Accounting and Auditing Standards Monitoring Board has
been established by the Act No.15 of 1995. All members of
the Board are either ex-officio members by virtue of holding
a specified public office, or, are members appointed out of
persons nominated by specified institutions such as the ICASL,
CIMA and the Bar Association of Sri Lanka.
ICASL
says …
President of the Institute of Chartered Accountants of Sri
Lanka, Asite Talwatte said the financial services sector has
a higher risk involved in terms of the inherent nature of
their business, and called for closer regulation by the Central
Bank.
Though
commercial banks are strictly monitored, non-commercial banks
such as merchant banks need to be watched a bit more closely.
"Considering the amount of business failures across the
world, such financial services must be regulated, because
of possible implications on the economy stake."
In the
wake of the Sri Lanka Accounting and Auditing Standards Monitoring
Board (SLAASMB) highlighting that in some cases the auditors
had not qualified certain incidents in their reports, Talwatte
said, "The role of auditors is often misunderstood."
Auditors only give an opinion of the true and fair view of
the financial statements taken as a whole, in terms of materiality,
which is termed as a reasonable assurance and not an absolute
assurance, in accordance with the international accounting
standards, he said.
Auditors
only conduct forensic auditing or investigative auditing,
only when a company suspects that there is a fraud in its
accounts. An audit is not a 100 percent stamp check of accuracy.
It could be likened to a routine medical check up rather than
a full-scale medical investigation.
Talwatte
also said that an auditor's report on a company's financial
statement is aimed at providing investors and financial analysts
with a reliable picture of the company's true position. "The
question you have to ask yourself is, whether the auditor's
decision not to qualify certain aspects in his report, would
have really affected an investor's decision."
Commenting
on the professional judgement taken by auditors in selecting
an alternate treatment in respect of financial reporting,
Talwatte said that out of the 37 standards that have been
gazetted, only five or six standards have been allowed such
options. "The fact that anyone can interpret the SLAS
differently is unacceptable." He says that the 'Urgent
Issues Task Force' coming under the ICASL, has, since its
inception in 1999, made itself available to professionals,
who require interpretation of the SLAS.
Companies
that used industry practice in their financial reporting must
be given at least two years in reverting to the SLAS, Talwatte
said. Such companies must however inform shareholders and
investors before making such a change.
As an
institute that plays an active role in developing and setting
accounting standards, industries such as hotels, if they deem
necessary, can make a special appeal to the SLAASMB and the
ICASL, to set up a special set of accounting standards for
their industry. So far only the plantations, banks and finance
companies have such special accounting standards. Talwatte
said that permitting such requests would be on their justification,
and in line with the framework of accounting standards.
Talwatte,
though still not informed by the SLAASMB on the true facts
of each case, said he is doubtful as to whether there was
negligence on the part of the auditors, due to the training
and skills that auditors possess.
"The
role of the ICASL is to induce professionalism in auditors
and accountants." The ICASL has been instrumental in
updating its members on the current developments in financial
reporting, by issuing standards and procedural manuals to
its members. The institute also conducts regular seminars
and workshops for its members.
When asked
as to what type of action the institute plans to take in connection
with the SLAASMB's report, Talwatte said that the ICASL has
the power only to regulate its members. If a complaint is
made against a member, and he is found to be guilty following
an inquiry, he can be reprimanded, fined or suspended from
the Institute, under the Chartered Accountants Act.
Talwatte
however believes that it would be unwise for the ICASL to
overreact under the present circumstances. He said: "Our
role is to improve the standard and the objectives of the
accounting profession as a whole."
|
|
