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. |
