| Auditors:
Watchdogs or lapdogs?
Ravi Mahendra is a member of the
Chartered Institute of Management Accountants and the Association
of Chartered Certified Accountants, UK. Last year, he won a special
CIMA award - the Young CIMA Star of the year - meant to recognise
outstanding achievements in the accountancy profession by young
people. He is currently CEO of ICBS Business School.
By
Ravi Mahendra
A committee comprising the Securities and Exchange Commission, the
Sri Lanka Accounting and Auditing Standards Monitoring Board, the
Central Bank, the Auditor General's Department, bankers as well
as professional auditors, has been formed to put forward proposals
to strengthen the auditing process in Sri Lanka, in particular,
those of listed companies.
The audit industry
in Sri Lanka is dominated by a few firms such as KPMG, Price Waterhouse
Coopers, Ernst and Young, Someswaran Jayawickrema, BR de Silva,
etc which are sought by the larger and listed companies, while many
small firms compete for smaller clients. This is a trend which is
similar to what exists in the UK or the US. The industry can therefore
be defined as one similar to an oligopoly, though open competition
is avoided due to the professional ethics of the profession
What are the weaknesses that exist in the auditing process in Sri
Lanka?
The objective
of audit is to form an independent opinion on whether the Financial
Statements of the organisation reflect a true and fair view of its
affairs. This is necessary because there is a divorce of ownership
and control in modern organisations. However, the following practices
could act as a barrier:
1 Audit firms
providing a number of services on their own or through other associate
firms.
In Sri Lanka, audit firms provide a variety of services such as
tax planning, recruitment consulting, management consulting, accounts
preparation, etc. The problem with this sort of approach is that
the audit firm increases its business relationships with the client
to whom it provides audit services. Since some of these services
are lucrative, the dependence of the firm on the client may increase.
A further problem would be, 'Could an audit firm maintain objectivity?'
This may be threatened when the firm plays dual roles. In tax planning,
there may be a need to advise clients on how the accounts could
be presented in order to minimise tax. The concern should be, 'how
could an impartial audit be done on those accounts?'
2 The calibre
of the staff offering audit services:
Trainees do the majority of audit work in Sri Lanka. They are young,
and most often, students following exams relating to the Institute
of Chartered Accountants of Sri Lanka (ICASL). Their monthly remuneration
can be anything between Rs. 750 to Rs. 2,000 and working hours long,
depending on the nature of the audits. In the case of deadline audits,
a trainee could work from 8.00 am to as late as 9.00 pm.
Many
of them:
Do not have the technical skills to complete most of the work
they are supposed to carry out.
Do not have the stature, maturity or charisma to communicate effectively
with the senior management of the organisation.
Lack
of motivation due to poor remuneration.
In general,
possess low communication skills, due to the age factor.
3) Audit firm
staff becoming employees of client companies later on.
A common trend is the audit firms' ex staff, later becoming employees
in the client company. This leads to a situation where a team, which
comprises the former colleagues of the person concerned, carries
out the next audit of the company. The relationship between the
audit firm and the client company becomes very cosy in this process.
4) Firms continuously
handling the same audit, with the same partner, and the same team
being used for it.
Usually, the same firm audits the accounts of a company continuously.
When this occurs, the same partner handles the audit and the same
team is sent to do the audit year after year. Once again, this leads
to cosy relationships being developed. Some companies entertain
audit teams over a dinner at the end of the audit. In some cases,
gifts are given to audit staff, as well as managers.
5) Audit partners
sitting on the boards of companies.
There is a tendency for partners of audit firms to sit in the boards
of companies. The general practice is that partners do not sit in
the boards of the company that their firms audit. The possibilities
however exist for these partners to sit on the boards of subsidiaries
of a group, where they are auditing other companies! There is also
a further conflict as to whether there is a mix up of roles as auditors
as well as directors.
6) Regulation
of the auditors.
The Accounting and Auditing Standards Board is the regulator of
the Financial Statements in Sri Lanka. This board is also a part
of our Chartered Institute, whose members are the auditors. It may
be desirable for the regulation of auditors to be handled through
an independent body.
The way forward:
There is a
danger of Enron style events occurring in Sri Lanka. To prevent
them, the following reforms are essential:
a) Prevent audit firms from providing other services. Existing audit
firms may have to spin off such services they provide and only focus
on audits.
b) There should be minimum standards for the calibre of staff being
used for audits. An audit team should predominantly comprise of
staff that are qualified, as well as remunerated adequately.
c) There should
be a limit on the number of audits individual partners handle. The
focus an individual is able to provide is limited, so a partner
should not handle more than 5-6 large audits.
d) There should
be an annual rotation of firms on a random basis.
Since all firms cannot handle audits of various sizes, the firms
which can bid for a particular type of audit, can be specified.
This move would remove all obligations audit firms would have towards
clients.
e) The regulation
of the audit process should be independent, and there should be
reforms which enable members of all accounting firms, not only members
of the ICASL, to be involved in the audit process on an equal footing.
f) There should
be restrictions on auditors becoming employees of their former clients.
This was the problem at Enron where nearly half of their accounting
staff were former members of Anderson, its auditor.
g) There should
be legal changes, whereby individual partners could be held liable
for audits, which are subsequently identified as being held negligently.
These are bold reforms but they would help to put Sri Lanka ahead
of many countries. There was a case in which it was quoted, "The
auditor is a watchdog not a blood hound". I feel these reforms
are essential to keep them as watchdogs, and not lap dogs. |
