Financial Times

Auditors advised to keep distance from clients
By Duruthu Edirimuni
An auditing expert last week stressed the importance of audit companies distancing themselves from business relationships with clients. "Auditing companies must not obtain loans from their banking clients and should have certain limits on credit cards," Sujeewa Mudalige, Senior Partner PriceWaterhouseCoopers said at a workshop organised by the Securities and Exchange Commission (SEC) to introduce the guidelines which centre around audit of listed companies and audit committees of listed companies.

Speaking on 'Guidelines for audit of listed companies' he stressed on independence, objectivity and integrity as the three pillars that auditing guidelines stand on. "The most important element to be a good auditor is to have independence where the auditors are not under pressure from external groups and by no way can their independence be impaired," Mudalige said.

Listed companies are required to alternate their auditors every three years and the auditors will have to confirm their independence every year as per the new rules. It is also recommended that the audit committee meet at least four times a year. The guidelines prevent audit partners, managers and their direct family members from holding or trading in stocks of listed companies the auditor has as clients.

Mudalige stressed that the executive and non-executive director fees should be revealed in their entirety in the financial statement of a company, whereas currently less than 10 out of the 238 listed firms follow the rules.

Nihal Sri Ameresekere, Chairman, Public Enterprise Reform Commission (PERC) delivering the keynote address said there was no point in having guidelines without enforcement. "The concept of social accountability of an auditor to a general stakeholder goes beyond a public listed company," he said.

He said that an accountant should ingrain in himself a social and moral responsibility and added that, " with the socio-political background in Colombo no one will reveal a fraud because the old boys' network will gang up against anyone who comes forth with it."

Hayleys Deputy Chairman N. G. Wickremeratne said that further rules increase the cost of listing a firm and suggested that an attempt to implement the set of laws that are at hand will benefit corporates.

"Whilst it is good to bring in guidelines and laws the reality is that no amount of guidelines and rules can make a difference unless they are enforced and equally so," he said, adding that there is a limitation of what laws can do where there is pervasive corruption.

"In Sri Lanka we live in different planets of existence and one cannot make regulations to corner corporates where the rest of the country does not adhere to rules," Wickremeratne said.

Ajith Ratnayake, Director General, Accounting and Auditing Standards Monitoring Board said that whatever the systems that are implemented, frauds can happen. "That is the exact reason why the guidelines are introduced," he said, adding that it is essential to strike a balance between regulations and market development.

"It is important to note that one should arrive at a balance and not hamper the business, when introducing the laws," he said. The SEC is planning to introduce a composite corporate governance code by the end of October.

Palitha Silva Gunewardene, Director General SEC said that the regulator is working towards an amalgamated corporate governance code with the Institute of Chartered Accountants of Sri Lanka (ICASL).

The SEC has requested ICASL to revise the relevant ICASL codes and formulate one composite set of laws adding the proposals within the next three months so that the SEC could issue them to the quoted firms for voluntary adoption.

Gunewardene said that it is intended the listed companies will incorporate the main provisions of the said composite code in the listing rules of the CSE for mandatory compliance in the near future .

"The important components of this code will be made part of the listing rules and SEC needs to be dynamic and responsive to market changes," Gunewardene stressed. He said that as regulator, the SEC wants to take swift and equitable action, but highlighted the importance of greater self-regulation by companies in relation to audit.

"Companies and their auditors should operate greater self regulation, which in turn will act as a buffer against the fear of over regulation," he said. The participants at the workshop deliberated on the need to strengthen the external auditors, safeguard their independence and what the audit committees should comply with. There were discussions on the compliance with laws, the independence of the auditors and monitoring external audit functions.

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