Financial Times

SEC study reveals
Few audit committees, whistle blowers wanted
A survey by the Securities and Exchange Commission (SEC) to ascertain the levels of good governance being observed in Sri Lankan firms found that many companies don’t have an audit committee and the “whistle blower” provision existed in just a few companies.

“Much to our surprise, we discovered that out of 132 listed companies that responded to the (SEC survey) questionnaire, fifty companies (38 percent) did not even have an audit committee,” the report said, adding that the study was undertaken late last year to ascertain how many companies had audit committees.

Although audit committees are not mandatory in Sri Lanka, the SEC has issued guidelines on audit committees based on voluntary implementation.
The survey found that most companies don’t have an independent/non-executive director as the chairman of the board of directors except for 44 percent or 52 of the listed companies surveyed. More than 70 percent of the companies had their CEO on the board while in some cases the CEO was also a member of the audit committee. Only 40 percent of the chairmen of the audit committee had a formal accounting related qualification.

One of the most significant findings was that most committee meeting were a formal occasion as some 95 percent of the companies surveyed prepared the agenda for such meetings. The report said that only 56 companies or 68 percent had the whistle blower provision in their companies. “In other words, audit committees of 56 companies were able to act on anonymous information.”

It said the whistle blowing provision must be a mandatory requirement in implementing audit committees in listing companies with procedures to entertain anonymous complaints.

In its conclusions and recommendations, the SEC report said some directors and officers didn’t properly understand the concept of an audit committee as an independent unit and had appointed current employees and outsiders to these committees.

Some companies didn’t separate the roles of the chairman and CEO which is “increasingly considered as a characteristic of good governance.”
On the CEO being on the board, the report said that good governance principles implemented in some countries suggest that the CEO should not occupy a board position as “it helps a clear distinction between the strategic and operational decision-making processes.”

The SEC suggested that there should be a mandatory requirement that all listed companies should disclose details of their audit committees in annual reports.

The SEC said it was surprised by the findings since even though there is no binding code prescribing best governance practices, it was assumed that most or all listed companies would have these best practices and mechanisms in place.

The report said that the minimum number of listed companies in Sri Lanka is three (statutory minimum is two directors) and the maximum is 14. The average number of directors of a listed company was seven for the 120 companies that were surveyed. Sixty-five of these companies had an even number of directors while 55 had an odd number of directors. “Therefore it can be concluded that the majority of listed companies do have boards of directors with an even number of directors.”

The survey found that 42 companies pay an additional allowance other than the directors’ fees, to the members of the audit committee for serving in the audit committee.

The audit committee of 69 companies had the powers to hire either accounting or legal specialists independently. That shows that 84 percent of the listed companies could hire such external specialists in order to assist the functions of the audit committee, the report added.

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