Financial Times

Auditing Standards
Orientation course requirement for directors of listed firms
By Sunil Karunanayake
The regulators are considering introducing an orientation course for would-be directors of listed companies in an effort to improve corporate accounting and governance standards, Securities and Exchange Commission chairman Dr Dayanath Jayasuriya said.

Quoting a World Bank survey on observance of accounting and auditing standards in Sri Lanka, Dr Jayasuriya said the findings revealed poor understanding on purpose and value of audit among some of the directors of leading companies.

In countries like Malaysia and Thailand successful completion of an orientation course is a requirement to be a director in a listed company and this requirement is under consideration in Sri Lanka as well, he told a recent seminar on corporate reporting organised by the Institute of Chartered Accountants Sri Lanka (ICASL).

The best annual report competition inaugurated by the ICASL over 42 years ago has contributed significantly to the high standard of reports produced by the leading corporates.

The seminar was conducted to explain new developments and the competition expectations to the profession as well as to the general public given the increasing awareness of the competition, disclosure requirements, stakeholder demands and the new challenges faced by the companies as well as auditors.

The SEC head brought to the notice of the ICASL existing disclosure deficiencies in non-payment of dividends with an abundance of profits, management fees not linked to performance, transfer to reserves and remuneration of directors and senior management.

He made a passionate plea to the company chairmen to conduct meetings with dignity and decorum with high ethical standards. Delivering the keynote address at the seminar, Dr Jayasuriya emphasized that Adam Smith's assertion in 1776 on accountability for management of other people's funds is very much valid today but the development and evolution of concepts of care, due diligence, accountability, full and timely disclosure, transparency, and need for good governance have changed the expected legal, ethical and moral responsibilities of public company directors.

Unfortunately, the Companies Act is nearly 40 years behind time taking Sri Lanka to the top of the list of most outdated regulatory frameworks in the world. A more comprehensive regime of requirements and scope of the corporate reports is an acute need.

Dr Jayasuriya stressed that the rules and requirements of the SEC, Colombo Stock Exchange Accounting and Auditing Standards Monitoring Board and the Institute of Chartered Accountants, Sri Lanka need to be complemented by specific provisions in the proposed new Companies Act.

Information dissemination is crucial to the functioning of effective capital markets and full and fair disclosures are the expectations of investors. Dr Jayasuriya stated that in Sri Lanka certain required disclosure areas do not receive the required attention. Giving an example, he explained how in an annual report auditors had disclosed a company's adverse going concern status in the background of substantial losses, but no mention whatsoever had been made in the Directors' review.

It is from the corporate report that shareholders get a good sense of the accountability of the directors for the activities and the performance of the company. The Corporate Report is a vital instrument of communication and such information is used by foreign institutional investors who often are not present at AGMs.

ICASL, which pioneered the concept of a competition within the region to improve the visibility of accountability to stakeholders, has now stimulated interest among the neighbouring countries like India and Pakistan and the regional South Asian Federation of Accountants (SAFA).

The annual competition was given further impetus last year with awards being made for Corporate Governance disclosures and Social Responsibility Reporting. In principle all investors and stakeholders need assurance and comfort that their investments are in good hands.

Richard Ebell, Director, Hayleys amply demonstrated the evolution of the annual reports by displaying a copy of the Hayleys annual report of 1955 containing only two pages in comparison to the present day report which goes over 150 pages.

Ebell emphasized good reports need heavy resource commitments but said they project the personality of the company and also could be used as an instrument for lobbying for policy and regulatory changes.

Ajith Nivard Cabral, past president, ICASL, explaining the development of corporate governance reporting, elaborated on the evolution of this concept in Sri Lanka which began in 1997. He made the point that governance practices should not stifle but stimulate business activity and shared the sentiments of the keynote speaker and cautioned against over regulation.

Other presenters were Asite Talwatte, past president, ICASL on Risk Management Strategy, Shamura Hadgie on mandatory requirements in annual reports and Suren Thisarachchi on Corporate Social Responsibility Reporting.
(The writer is a member of the ICASL)

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