The Sundaytimes Sri Lanka

Rush Hour AGMs and credibility of audits


Our lead story (on the previous page) refers to new rules governing the use of external auditors for non-banking financial institutions (finance and leasing companies). The Central Bank (CB) is setting up a panel of auditors, guided by CB rules, from which these institutions must pick a company for their external audit. Gone will be the days when auditors were chosen by the directors themselves, some of whom were inexperienced and often at the bidding of the top management – a case in point being Golden Key and other related companies that collapsed.

The CB move is laudable coming on the back of existing regulations where banks use external auditors from a CB panel of 8-10 auditors, and would ensure proper governance and transparency in the accounts for the benefit of all stakeholders including depositors.
Officials from finance companies have welcomed the move but unofficially there must a lot of squirming amongst directors and top management who often ‘guide’ external auditors to suit their own purpose, and to the detriment of depositors. The whole Golden Key/Sakvithi/Ceylinco saga is well known and essentially was a case of doctored accounts.

External auditors are an issue in many listed companies too. Minority shareholders have raised concerns about external auditors, chosen by the board of directors and often do as they are told. Maybe the Securities and Exchange Commission (SEC) should consider following the CB practice which could ensure properly audited accounts and also alleviate, to some extent, the concerns of all shareholders.

The appointment of independent directors is another sore point, another issue raised repeatedly by shareholders because these individuals are appointed by the companies themselves and are (well) paid. How independent are they — given that they are known or friendly with others on the board and get a ‘fat’ paycheck for their services — remains to be seen.

While it would be a cumbersome process for the SEC to be involved in the selection of independent directors, maybe the guidelines for such appointments need to be strengthened to ensure they maintain a strong degree of independence and protect the rights of all shareholders, not just a few.

In the meantime, the proposed formation of an association to represent minority shareholders facilitated by the Business Times (BT) drew a tremendous response. Investors came from far and wide keen to express their views and concerns and be part of such a grouping.Many of the issues they raised have been in the public domain for many years without sufficient redress.

One big problem is the rush to hold annual general meetings (AGMs) at the same time. For example this week (June 25-29), at least 60 AGMs were held with Friday alone having 27 meetings and 14 meetings on Thursday.As stated at the BT-facilitated forum on Wednesday (details of the meeting are reported elsewhere in this section), shareholders say they have brought this to the notice of the authorities to ensure meetings don’t clash because they need to attend all these meetings.

The woes of shareholders came out clearly at the BT forum leading to the appointment of a core group to draft a working proposal on the formation of this association.There have been many associations like this in the past, all of which have lacked legal teeth and clout to make the authorities wake up to their needs.

Thus the backing of the SEC is paramount in ensuring the success of such a grouping, and also the support of the entire media – print and electronic. The BT is acting as a facilitator, based on requests by readers and others to initiate such a forum, and would move out once a properly-elected association is formed and is able to operate independently.

2011 was a disastrous year when manipulation, insider dealing and ‘pump and dump’ figured prominently taking the market to unbelievable heights before collapsing. Efforts by the SEC to rein in the culprits were stymied by powerful interest groups resulting in the resignation of the SEC Chairperson Indranee Sugathadasa, a public officer with a lot of integrity.

The regulator was thus kept at bay until Thilak Karunaratne took over as SEC chief and is getting tough. But he too is confronted with huge challenges with many obstacles in the way.Many years ago, Prof. G.L. Peiris, as deputy Finance Minister, proclaimed that the government wants to promote a share-owning democracy with as many investors -big or small – investing in the share market.

Sri Lanka is far from reaching that goal especially due to the machinations and manipulations of powerful interest groups with billions of rupees to throw. According to one small investor, “The Golden Key fraud and activities of Lalith Kotelawala is peanuts compared to these playmakers in the stock market.”

Given the highly-politicised environment which also affects the SEC and other independent institutions, the SEC needs a lot of strength and bodies like investor associations – designed to ensure a level-playing field for all – can help a lot in ensuring dignity, decorum and governance in the market place.

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