Financial Times

Of old boys and audit rules
Two high profile events on new audit rules for listed companies and corporate social responsibility were held last week attended by senior private sector executives and regulators. The events demonstrate the seriousness with which the corporate sector and the regulators who oversee its activities regard these issues. This should be considered in the light of the spate of corporate scandals, such as Enron, that have shocked investors and regulators in more developed markets.

It was these scandals and the consequent calls for tougher rules from investors that prompted much soul searching among corporate leaders and led to the introduction of new regulations meant to prevent such malpractices or make it easier to detect them.

However, this heightened concern with better rules and guidelines and in improving company financial reporting and auditing standards does not seem to match the perceptions of at least some sections of investors, especially small investors and minority shareholders.

From time to time such investors complain about unfair treatment at the hands of corporate managements and brokers and also that the regulators were not doing enough to look after their interests and are sometimes too lenient on companies that break the rules.

Two such complaints we publish this week relate to auditing standards and the seeming reluctance of regulators to take more stringent action against firms that do not comply with the rules. An example is the Default Board of the Colombo Stock Exchange. We pointed out earlier this year that some 10 percent of listed companies were on the default board mainly because they have broken listing requirements on non-submission of financial statements.

We called this is a startling figure and wondered why the regulators had not fined the firms as provided for in the rules. Some top names in the corporate world are consistent violators of listing rules. The letter about companies on the default board makes interesting reading and offers some suggestions on what the regulators could do to make corporate managements comply with the rules. A 'name and shame' policy is suggested to make directors of companies adopt a more responsible attitude.

These complaints seem to indicate that there is some difference between the efforts of the corporate world and regulators to tighten the rules and improve governance and the perception of investors about the way errant managements are treated. Of course, the regulators have pointed out that investors often complain for flimsy reasons and that they ignore the fact that investing in stocks is a risky business. Very often the problem seems to be poor evaluation of investment risk by the investors themselves.

But the fact that such perceptions exist indicate that sections of the public do not have a favourable impression of the markets and the way they are regulated.

And it is not just small investors who have such perceptions. A remark by PERC chairman Nihal Sri Ameresekere at the SEC seminar on audit guidelines is very revealing. He spoke about how old boy networks in Colombo's incestuous corporate world could serve to cover up fraud.

Hayleys deputy chairman N. G. Wickremeratne told the same seminar that there is no point in having rules if they are not implemented properly and that companies cannot be expected to play strictly by rules if the rest of the country does not do so.

There seems to be a gap between the perceptions of some sections of the investing community, especially small investors, and the big wigs of the corporate world. Unless this gap is closed and misconceptions eliminated the aim of broad basing share ownership is unlikely to be achieved despite all the efforts of the regulators and business leaders.

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