Financial Times

The Securities and Exchange Commission of Sri Lanka (SEC) proposes to introduce mandatory rules on corporate Governance to listed companies. The draft rules are posted on the website of SEC. The website declares that the Institute of Chartered accountans (ICSL) and the SEC in consultation with the Colombo Stock Exchange (CSE) have spearheaded an initiative to formulate standards on corporate governance for mandatory compliance by companies listed on the CSE.

Among the many salutary provisions contained in these proposed rules one cannot help but notice a cheap attempt by the accounting profession (or to be more correct those of that profession involved in drafting these rules) to serve their interests. Rule 5 (as given in the website) which deals with the Audit Committee has a provision that states that the Chairman or at least one member of the committee should be a member of a recognised professional accounting body. Now these are rules that every listed company and every company applying for a listing must follow.

The effect of this rule is that every listed company irrespective of what business they are in will have to have a member of a recognised professional accounting body as a Director – a serious challenge to shareholder autonomy in the pretext of safeguarding shareholder interests.

This perhaps is the first time that any profession has made an attempt to impose itself on all listed companies in the country.

The explanation given for the rule states that “it was decided that at least one member should have the requisite financial acumen to carry out the functions of this committee…” Is the SEC, for whoever was involved in drafting the SEC must take the final responsibility for the rules, making a statement that only those who are members of recognised accounting bodies have “financial acumen”? I can think of many a professional (including accountants who have opted not to continuously pay membership fees after qualifying) who may want to challenge this in courts for violation of their right to be treated equally.

Does this also mean that a person who qualifies and becomes a member of a professional accounting body and thereafter gives up being a member for personal reasons or because s/he does not want to pay membership fees loses the “financial acumen that s/he acquired?.

The meek justification given by the IASL and the SEC for their attempt to force such a rule down the throats of listed companies is that it was difficult to “quantify financial acumen”.

However in the same rules you find a provision that a certain number of Directors should be “independent”. Rules give the criteria to be satisfied in order for a Director to be accepted as independent. Even if a Director does not satisfy the test of independency the Board can consider such a Director as independent if the Board publishes the basis on which such director was considered independent.

Why could the SEC and IASL not adopt the same “disclosure” based approach when it came to the audit committee is the question we find hard to answer.

It is indeed rather high handed to state that only members of professional accounting bodies have “financial acumen”. Is it the position of the SEC that a person with a Masters Degree in Business Management (MBA) does not possess the financial acumen required to carry out the functions of an audit committee.

The audit committee is assisted by a qualified internal auditor and external auditors. What about a person who has obtained a degree in financial management or in accountancy itself. Is this an attempt to discredit and marginalise education obtained through the formal university system?

One of the stated tasks of the audit committee is to assess the independence and performance of the company’s external auditors.

External audit function is generally carried out by firms or accountants who are members of accounting bodies. Could there be a possibility of a conflict of interest when a member of a recognised accounting body has to make a significant contribution when deciding on the performance of an external audit firm consisting of fellow members of a professional accounting body. As the saying goes justice and fair play must not only be done but should also be seen to be done.

There are many a member of such recognised accounting bodies who serve on audit committees of listed companies. Their contribution has been immense just as the contribution of non accountant members of such committees.

Most of the listed companies would continue to have accountants on their audit committees. However it is certainly not done to try to sneak in a rule that will make it mandatory for all companies to have a “member of a recognised professional accounting body” on their Board of Directors.

It is also certainly not acceptable for a statutorily set up regulator to impose such a rule disregarding all notions of equality and fair play and denouncing the degrees and diplomas awarded by other institutions such as the postgraduate institutions and universities, granting qualifications in finance, accountancy and management.

Inclusion of Accountants in the Boards of companies will come, as it has in numerous cases, by voluntary recognition by companies and should not require mandatory rules. It would be the duty of all professionals including the right thinking accountants to ensure that this draft rule does not become part of the finally adopted set of rules.

(The writer started his career teaching law at the Faculty of Law of the University of Colombo and is currently the Head of Legal and Company Secretary of Nations Trust Bank Limited.The views expressed are however that of the writer and does not reflect the views of the institutions he represents.)