17th February 2002

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Enron saga raises accounting issues

By Feizal Samath
The collapse of US energy giant Enron that shocked accountants and the public alike across the world has drawn attention to standards of book-keeping in Sri Lankan companies where "dodgy accounting" is known not to be uncommon.

Although accountancy professionals and the corporate sector maintain that accounting standards are generally high, many companies are known to have a penchant for covering up losses. However, hard evidence is difficult to find. "It is just a matter of time before we have an Enron-type drama in Sri Lanka," one stockbroker said.

In a quick poll by The Sunday Times of accountants, businessmen, management specialists and shareholders on how local firms square up against the likes of Enron, a host of issues and concerns were raised over corporate governance and ways in which companies hide costs.

A management specialist, who declined to be identified, spoke of how a top local conglomerate lost millions in a fraud by an accountant but hid the losses from shareholders through dexterous accounting to avoid exposure. Shareholders often complain of dodgy accounting and various ruses used to hide exorbitant costs and keep profits up. One businessman said that doctoring accounts is common practice and has led to company crashes here.

There are many ways of fudging the accounts and hiding costs, according to analysts. These include directors renting their houses to company colleagues and collecting a fat fee or transferring profits to loss-making companies in large groups of companies. Another tactic is in the use of emoluments paid to directors.

Dr. Dayanath Jayasuriya, director-general of the Securities and Exchange Commission (SEC) said they were looking at possible implications of the Enron issue. "We have checks and balances in place but we need to study this issue."

He said another issue being looked at is whether audit firms should be allowed to audit accounts and handle consultancies at the same place and at the same time.

Other SEC officials said that though there are audit committees in 20 listed companies their effectiveness is a problem. "We don't know how effective they are as they are still internal committees," one official said adding that under the Companies Act directors can report total emoluments and not provide details.

Asitha Talwatte, president of the Institute of Chartered Accountants of Sri Lanka (ICASL), said that under the principles followed here, the issue where Enron faulted would have been "trapped and reported in the accounts." He added: "I don't think there is a lacuna in our standards."

Most accountants tend to agree. Reyaz Mihular, a former ICASL president and now chief of the institute's Accounting Standards Committee, says that Sri Lanka has world class accounting standards and a high level of professionalism. He said the Enron issue in the US reflected a breakdown in ethics. "We are professionals and the society respects us for that. One would be morally bankrupt to attempt what happened in the Enron case," he said. However, he added, having high standards does not mean the system is foolproof.

ICASL has been campaigning for the need of an audit review of quarterly results now issued by public quoted companies under statutory rules to ensure transparency.

Enron, one of the world's largest energy companies, crashed late last year after hiding losses with the help of Arthur Anderson accountants. According to British news magazine, the Economist, a growing body of evidence suggests Enron was a case of bad management, misleading accounts, shoddy auditing and probably, fraud. It called for radical changes in the entire auditing regime.

Dr. Cyril Lim, an Asian Development Bank expert on corporate governance in Sri Lanka on a project mission, says the Enron case is full of implications for corporate governance. Asked whether Sri Lanka's SEC should appoint auditors to listed com panies, Lim said the appointment of auditors should - as it is now - continue to be the prerogative of shareholders.

"But auditors should be changed every two or three years. They should also not provide other services or consultancy work (like Arthur Anderson in Enron) at the same time apart from audit work to ensure there is no conflict of interest." Based on a very preliminary assessment of the Sri Lankan situation, Lim said that standards of disclosure need to be strengthened and the boards of directors should also have an "oversight" responsibility.

He said directors provide leadership, strategies and objectives but leave the implementation to others and often it is senior executives who run the firm. Lim also stressed the need for balanced boards. 

The ADB specialist said he was meeting stakeholders from the government and the private sector and trying to prepare a general code on corporate governance, which could then be made sector specific.

Ajith Ratnayake, director general of the Sri Lanka Accounting Standards Monitoring Board, said that the management of some firms may sometimes want to show a financial position different to the true and fair view. This could be due to an attempt to increase the firm's share value, show a picture of good stewardship, obtain favourable terms from banks or reduce incidence of tax.

The adoption of accounting standards and auditing of enterprises by professionally qualified independent auditors is a means of controlling such creative accounting practices, he said. However, auditors may sometimes come under pressure from management to permit creative accounting practices, he said. 

Even where the auditors dutifully perform their role and report deviations from accepted practices, managements may keep the uncorrected accounts and carry the qualified audit report with it.

Doctoring the media

The first stage of a plot contrived by an importer of pharmaceuticals was providing a group of docs a jaunt to a foreign land, ostensibly to attend a seminar. The docs may now reciprocate by prescribing the costly drugs imported by the drug barons under their trade names to hapless patients.

Now cocktails are being served to scribes. Will it make them crow over the 'curative powers' of branded drugs?

DC prices fall after surcharge is lifted

Exporters of Sri Lankan desiccated coconut (DC) have managed to bring down prices after the government eased restrictions on edible oil imports. But prices have to come down much more for Sri Lankan DC exports to be competitive, said Murtaza Lukmanjee, chairman of the Coconut Product Traders' Association.

The government removed the surcharge of Rs. 20,000 per metric tonne on imports of consumer packs and containers with effect from January 29. This was applicable to the import of up to 20,000 tonnes of edible oil. The move was meant to make available quality vegetable oil to consumers at a more reasonable price and to divert part of the supply of coconuts to DC millers in order to allow them to maintain production.

Edible oil importers who ship in bulk would still have to pay the surcharge, which was imposed last February to protect the domestic industry. The surcharge had earlier been extended till March 31. Prices of coconuts and coconut oil rocketed to unprecedented levels as a result of the protectionist surcharge and the shortage of coconut caused by drought.

The worst affected were DC millers who found that they could not source enough raw material while export prices rose to uncompetitive levels. Lukmanjee said DC prices had come down marginally, by about $50 per tonne but needed to come down by $150 more for exports to be competitive.

Sri Lanka had lost its market share to DC exports from competitors from other origins such as East Asia whose prices were cheaper, he said. "We're thankful the government has taken some action but unfortunately this is not a long term solution," he said. "We made very clear we don't want ad hoc solutions. We want the government to send a signal that Sri Lanka remains an exporter of coconut products."

A more clear-cut policy statement is expected in the budget next month, he said.

Brokers said the demand for coconut oil had dropped with the removal of the surcharge on edible oil imports and that there was a corresponding fall in local prices which had hit a high of Rs 95,000 - about three times the world market price for coconut oil.

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