Investors alerted on the Default Board

Surana Fernando Director Corporate Affairs, SEC

Investors in the Colombo Stock Exchange (CSE) should focus on the following:

In the event of any violation and or non-compliance with any of the listing rules of the CSE by any entity whose securities are listed, the CSE shall transfer the securities of such entity to the Default Board.

Presently, if you refer the daily publication of the CSE in our newspapers, you will find that most of the companies are transferred to the Default Board due to non-submission of accounts. On a review done few years back by the Securities and Exchange Commission of Sri Lanka (SEC), it was noted that 22 companies were on the Default Board.

The SEC strengthened the procedure to deal with companies on the Default Board in April 2007. Due to this enforcement action, the number of long standing companies on the Default Board has been reduced to seven at present.

As per Section 10.2 of the CSE Listing Rules, prior to transferring the securities of the company to the Default Board, the CSE will inform the company in writing of the default and that the securities of the company would be transferred to the Default Board.

The securities shall be transferred out of the Default Board upon the company complying with the relevant Listing Rules.

In the event the security continues to be on the Default Board for a period in excess of one month, the CSE, in consultation with the SEC, shall have the right to issue a press notice informing the public of the nature of the violation.

If the company continues to be on the Default Board for a period in excess of three months from the date of transferring the securities of the company to the Default Board, the CSE, at its discretion, may refer the matter to the SEC for necessary action.

Audit reports of listed companies

As per the Sri Lanka Auditing Standards, Auditors of Companies issue following types of audit reports.

1. Unqualified opinion

Unqualified Audit Reports state that Financial Statements of the Company give a true and fair view in accordance with the Sri Lanka Accounting Standards and applicable statutory requirements.

2. Modified auditor’s reports

(i) Opinion with emphasis of a matter

Auditors use these types of reports to highlight the matters affecting the financial statements such as going concern problem, significant uncertainties faced by the company and material inconsistencies with other information in the Annual Report where financial statements have been contained.

(ii) Qualified opinion

Auditors express qualified Audit Reports when there is a disagreement with Company management over application of Accounting Standards or limitation of audit procedures and scope, that is not so material and pervasive to the financial statements.

(iii) Adverse opinion

Auditors give an adverse opinion when there is a disagreement with the Company management over application of Accounting Standards, which is so material and pervasive to the financial statements

(iv) Disclaimer of opinion

Auditors use these types of Reports when the limitation of scope and audit procedures is so material and pervasive to the Financial Statements, that the auditor has not been able to obtain sufficient appropriate audit evidence.

The investor should inquire from the broker whether the auditors’ report on the financial statements is an unqualified opinion prior to investment. If the report is modified the investor should inquire into the reasons for the modification. According to a survey done by the SEC based on 2006/07 Annual Reports, it has been revealed that audit reports of 48 listed companies out of 234 had been modified, which approximates to 20% of the companies. Therefore, you have a chance of one in every five companies to contain a modified report.

The analysis further reveals that the percentage of modified audit reports based on the sectors are as follows:

Construction and Engineering, Health Care, Information Technology, Investment Trust, Power and Energy and Telecommunication sectors have unmodified audit opinions, according to this survey.

Directors’ database

The Securities and Exchange Commission of Sri Lanka has compiled a database of directors of listed companies as at May 23, 2008. This database enables investors to check the number of directorates held by a director of a listed company in other listed companies.

The database indicates that there are 1845 directorates in all listed companies in Sri Lanka. A director of a listed company may hold 1 to 15 directorates in other listed companies.

The SEC will monitor number of directorates held by each director in order to determine the optimum number of directorates to be held by each director to ensure efficient and effective management of companies.

Stores and Supplies 67
Chemicals and Pharmaceuticals 44
Oil Palms 40
Trading 36
Manufacturing 29
Land and Property 25
Footwear and Textiles 25
Plantations 22
Hotels and Travels 18
Services 14
Motors 14
Beverage Food and Tobacco 11
Diversified Holdings 10
Banks Finance and Insurance 9