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The Institute of Chartered Accountants of Sri Lanka (ICASL) has taken the initiatives by introducing new accounting and auditing practices and conducting workshops to prevent corporate failures such as Enron.

The ICASL strongly believes that corporate failures such as Enron are not only an issue for the accounting industry but also for the entire business community requiring several other regulatory and disclosure considerations. The role of the non executive directors should be better defined and strengthened through a code of corporate governance as a matter of urgency.

In early December 2001, within a month after admitting accounting errors that inflated earnings by almost US$ 600 million since 1994, the Houston-based Enron Corporation filed for bankruptcy protection. With US$ 62.8 billion in assts, it became the largest bankruptcy case in US history in a capital market which is not only the largest in the world but also which considers itself to be among the best regulated.

The day Enron filed for bankruptcy it closed at 72 cents, down from more that US$ 75 less than a year earlier. Many employess lost their life savings and tens of thousands of investors lost billions of money.

Enron's investments were financed by large amounts of debt. Many of the investments and related financing were off-balance sheet, through special purpose entities (SPEs) in the form of partnerships, limited liability companies and corporate joint ventures with guarantees and collateral provided by Enron.

In this context, the Institute conducted a workshop on Business Failures with special attention to the Enron issue. Through such workshops, the ICASL aims to encourage the business community to adhere to good audit practices.

Some of the measures taken by the Institute so far include publishing a code of recommended practice on audit committees, formation of a committee to review the regulations relating to auditor independence, adoption of Sri Lanka Accounting Standards in line with International Accounting Standards and conducting lectures and seminars, adoption of Sri Lanka Auditing Standards in line with International Auditing Standards, publication of Guidelines for Presentation of Annual Reports, introduction of a code of conduct and disciplinary procedures to self regulate members, issue of an audit manual which contains recommended audit procedures in addition to the SL Auditing Standards and requiring auditors to disclose non-audit fees earned from audit clients in the published financial statements.

The ICASL plans to launch an institute lead professional practice review of auditors who conduct audits of listed companies and specified business enterprise using the ICASL audit manual as a benchmark.

The widely accepted practice of linking pay of executive directors to corporate performance, through share options and similar arrangements may do more that simply encourage good performance. It may also promote short-term and self motivated decisions which are not in the long-term interests of investors. This risk has hitherto not being acknowledged.

Fund managers and stockbrokers themselves are concerned with their own performance relating to the market. Hence a review of the oversight regulation on their activity is also required. (ICASL press release) 

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Copyright 2001 The Associated Newspapers of Ceylon Ltd.
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