By Chandra Jayaratne –

Chandra Jayaratne

Chairman,
Sri Lanka Accounting and Auditing Standards Monitoring Board,
3rd floor, Bible House Building,
293 Galle Road,
Colombo 3.

President,
Institute of Chartered Accountants of Sri Lanka
30A, Malalasekera Mawatha,
Colombo 7.

Dear Sirs,

Regulatory Reforms to Assure Due Compliance with Laws, Transparency & Good Governance

It is reported by professional analysts and also commonly believed by intellectuals, that;

1. the significant fall in tax revenues to gross domestic product ,from around twenty percent to around ten percent, may be due to a high level of tax, customs duty and excise evasion / avoidance, grant of excessive and unjustified tax holidays and specific exemptions; and
2. the share of the informal black economy has increased significantly over the last several decades; and
3. a significant extent of money laundering has taken place over the last decade, mainly using proceeds of crime, bribery and corruption; and
4. leading bankers believe, that a majority of financial statements and valuation reports presented in securing loans and other facilities, as well as financial facilities supported by project linked estimates submitted to lending agencies, are inaccurate, contain gross misrepresentations and are prepared violating accepted principles and standards; and
5. a significant minority of professional practitioners have aided and abetted in the carrying out and concealment of above; and
6. a regrettable failure of due enforcement of laws and regulations are visible throughout the economy;

and these issues need addressing with essential regulatory reforms.

Good governance champions and investigators have reported significant deficiencies at individual entity level regard management action and regards external audit review effectiveness;

1. not having in place strong chains of control and compliance processes;and
2. low effectiveness of professional due diligence, upholding of ethical standards and conduct and application of professional best practices;
3. ineffectiveness of the operation of audit committees eg. Audit committee Chairman persuading a highlight on ‘going concern status’ to be removed by the auditors;
4. use of inappropriate accounting policies eg. Small business standards adopted in entities with billions of rupees of turnover, profits, assets etc and these accounts not being submitted for review by the SLAAMB;
5. audited accounts issued without effective disclosure of related party details eg. By noting that related party details are to be filled in by the management;
6. secretarial companies with related party networks to auditors operating as the Company Secretary of audited companies;
7. misleading tagging of assets to avoid impairment provisions eg. Uncollateralized REPO’s;
8. auditors and professionals providing regulatory agencies and investigators with incorrect information eg. Auditors misrepresenting facts to COPE;
9. classification of taxable revenues and taxable profits as exempt income and exempt profits;
10. bankers, professionals and othersentities, required to exercise caution in terms of FATF 40 guidelines for control of money laundering and terrorism financing, failing to do so; and not obtaining ‘know Your Customer” declaration; and not exercising due diligence in crediting proceed of large cash deposits/inward remittances as well as outward remittances and withdrawal of large amounts in cash;

In the above context, the recently reported market issues and professional challenges, it is essential that the Sri Lanka Accounting and Auditing Standards Monitoring Board (SLAASMB) and the Institute of Chartered Accountants of Sri Lanka (ICASL), duly consider and introduce necessary regulatory reforms and oversight mechanisms, to assure upholding of professional standards, best practices, ethics and conduct by professional accountants and business undertakings. Such reforms are urgently needed to assure due compliance with laws and regulations, and in upholding transparency, good governance and anti corruption by the business undertaking and professional accountants.

The following submissions are placed before you, for your due consideration and early reform action, following stakeholder consultation;

1. Take early steps to locally adopt appropriate Auditing Standards mirroring International Auditing and Assurance Standards Board (IAASB) issued new revised

• International Standard on Auditing (ISA 700) dealing with the auditor’s responsibility to form an opinion on the financial statements as well as the form and content of the auditor’s report issued as a result of an audit of financial statements, and
• International Standard on Auditing (ISA701) dealing with the auditor’s responsibility to communicate key audit matters (KAM) in the auditor’s report, and
• With such new local Standards being adopted incorporating any essential local application amendments; and
• Be made applicable to all audits of complete sets of general purpose financial statements conducted by members of the Institute of Chartered Accountants ( ie. not limited to audits of listed entities and specified business undertakings only)

2. Take early steps to locally adopt International Ethics Standards Board for Accountants (IESB) designated, international ethics standard for auditors and other professional accountants (PA’s) ( including as appropriate Auditors, Other PAs in public practice, PAs in business who are in senior-level roles—directors, officers, or senior employees in their employing organizations and Other PAs in business ), in responding to Non Compliance with Laws and Regulations (NOCLAR), a framework adopted to guide PAs actions to take in the public interest to disclose to appropriate public authorities, when they become aware of a potential illegal acts, known as non-compliance with laws and regulations, or NOCLAR, committed by a client or employer, (should be adopted in Sri Lanka with any essential local application amendments)

3. Take early steps to expand the scope and terms of reference of the SLAASMB as set out in the statute, enabling it to be empowered to exercise oversight over SLSQC 1 (Sri Lanka Standard on Quality Control) https://www.casrilanka.com/casl/images/stories/content/business/mba/slsqc_1.pdf and the Code of Professional Practice, Ethics and Conduct of the ICASL.

4. Require the auditors as a part of the audit report to specify that ;

• They have duly complied with the provisions of the Company Law and have no direct or indirect connections or relationships with the duly appointed Company Secretary of the entity; and
• They have no conflicts of interests or related party connections what so ever with the entity and its directors and officers; and
• They have declared in their report all material non compliances with laws and regulations, that have come to their attention during the course of the audit, including any suspicious transactions connected with purported acts of bribery, corruption, money laundering, terrorism financing, tax, customs duty and excise evasion, fraud, corruption and use of proceeds of crime; as well as any assets held by nominees; assets held as bearer instruments; or investments or financial instruments registered in tax havens and or in orbit or in the cloud; and
• To the best of their knowledge and belief affirm that the statements of account makes an accurate disclosure of conflicts of interests, related party transactions, ultimate parent company and going concern status; and
• To the best of their knowledge and belief affirm that the statements of account have adopted appropriate and applicable accounting policies and accounting standards and where appropriate specifically adopt standards relating to consolidation of accounts, impairment of assets and valuation of liabilities including due disclosure of contingent liabilities; and
• To the best of their knowledge and belief affirm that the statements of account discloses the composition of the largest shareholders and confirm that there are no undisclosed nominee holdings and or shares of the entity held in trust offshore.

5. Expand the list of specified business undertaking under the Sri Lanka Accounting and Auditing Standards Monitoring Board Act to include, licensed Primary Dealers; licensed pawning business; any business undertaking or Trust accepting public funds by way of deposits, premiums, contributions for savings, thrift, or other designated purposes; accepting public funds locally and international fund transfers by way of charitable donations, grants and endowments; and further clarify that any Other Company satisfying any one or more of the under noted classifications will be deemed to be a specified business undertaking;

• Which has a turnover in excess of Rupees 500 Million;
• Which at the end of the previous financial year, had shareholders equity in excess of Rupees 100 Million;
• Which at the end of the previous financial year, had gross assets in excess of Rupees 300 Million;
• Which at the end of the previous year had liabilities to banks and other financial institutions in excess of Rupees 100 Million;
• Which have a staff in excess of 1000 employees:

6. It is recommended that SLAASMB and the ICASL respectively

• Makes enhanced disclosure on effectiveness of enforcement of Sri Lanka Accounting and Auditing Standards and due compliance thereof by specified business undertaking and Auditors and Professional Accountants; with specific emphasis on public disclosure duly empowered by statute of any significant non-compliance detected ; and
• Make provision in their web sites for any person or persons to submit complaints, in confidence, against any business entity or professional practitioner/accountant who may have failed in their accountability / responsibility in terms of Sri Lanka Accounting and Auditing Standards Monitoring Board Act and or the Code of Professional Practice, Ethics and Conduct of the ICASL.

7. It is recommended that the ICASL in its web site respond to the specific observations disclosed in the web site of SLAASMB under significant cases detected, observations following review of financial statements and audit reviews, setting out follow up action taken

8. It is essential that SLAASMB and ICASL approach enforcement and oversight of accounting and auditing standards, as well as the upholding and due enforcement of codes of professional conduct and ethics from a stand point, that they must consider and place emphasis on the collective interests of all connected stakeholders including the State, the creditors, lenders and analysts as well as the wider society and not be restricted by a narrow definition that they owe a duty and obligations only to shareholders, being the primary party to whom the audit report addressed.

It is further stressed that the ICASL should take the leadership along with other professional groups to enhance awareness of all connected stakeholders in regard to the issues as highlighted herein.

Please note that copies of this letter will be released to the media for publication and circulated to several of the connected stakeholders.

It is the fervent hope of the undersigned that this submission will receive the priority attention of the leadership teams of SLAAMB and ICASL

Best Regards
Yours Sincerely,