The Securities and Exchange Commission (SEC) is contemplating on bringing fresh laws on audit firms, mandating them to bring any financial irregularities or otherwise of the listed entities to the capital market regulator’s notice.
This objective of imposing additional responsibility on the auditors is to assist the regulator to become more vigilant and to enable taking pre-emptive actions to protect investor interests.
“We are exploring the possibility of placing a legal duty on audit firms carrying out audits of listed companies to report any irregularities or improper conduct they find in the financial statements of the company to SEC,” said SEC Chairman, Thilak Karunaratne.
Currently there are no such laws on audit firms to have a separate reporting line to the capital market regulator on corporate skull duggeries. Speaking at the certificate awarding ceremony of the Corporate Directors Program jointly conducted by the Institute of Chartered Accountants of Sri Lanka and the SEC, Karunaratne said such laws are currently available in jurisdictions in countries such as Malaysia.
“This would lead to increased credibility and greater transparency of both listed companies and audited reports particularly in the mind of potential investors,” he remarked.
Past incidences demonstrate that many corporate scandals in the past - both local and international- could have well been averted without leading to calamity, had the auditors brought the suspecting incidences into the notice of the regulators and relevant parties concerned. Instead, audit firms were alleged to have covered all forms of window dressings by those companies for many years.
The collapse of American energy firm, Enron Corporation and the de facto dissolution of Arthur Andersen, one of the five largest audit and accountancy partnerships in the world is just a case in point. Enron was cited as the biggest audit failure.
The near collapse of Seylan Bank in the height of the global financial crisis for alleged financial irregularities in 2008/09 could also be attributed to audit failures. Meanwhile, drawing parallels between the strong call for good governance in the political sphere world over with that of corporate governance, Karunaratne urged the boards to strike a balance between board leadership and governance.
“If you have leadership without governance you risk tyranny and fraud. If you have governance without leadership you risk atrophy, bureaucracy and indifference. Hence I urge directors to utilize the skills you acquire to become pragmatic leaders who would encompass the current changes in the corporate world when formulating and implementing strategies and business processes,” he added.
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