Chandra J calls on auditors and regulators to step up

2 April 2018

President and Members of the Council, Institute of Chartered Accountants of Sri Lanka, Chairman and Board, Sri Lanka Accounting and Auditing Standards Monitoring Board,

Dear Sirs/Mesdames,

Urgent action steps required by auditors and regulators to prevent window dressing and noncompliance with laws and regulations by errant directors of specified business enterprises

It is regrettably noted that errant directors and officers of some of the specified business enterprises resort to window dressing; making misrepresented disclosures and also resort to noncompliance with laws and regulations, in order to gain advantages they are not entitled to. 

They also misrepresent factual and financial state of affairs of entities targeting submissions made to the stakeholders, revenue authorities, the authorities granting concessions and tax holidays. They do so, at times, to cover up frauds, acts of corruption, serious offenses and violation of statutory requirements, including money laundering to avoid statutory dues to the revenue authorities.

It appears that restatement of accounts is one of the key strategies adopted by these errant directors referred to above. Some of these identified institutions have over 10-12 year periods, repeatedly and for multiple reasons, resorted to restatement of accounts. In-depth analyses of the adduced reasons given for restatement of the accounts in these instances appear to point to ulterior motives on the part of the errant directors. 

More regrettable is the fact that in every such instance, a qualified auditor had been associated with the acceptance and endorsement of the justification for such restatement; and had possibly even been a party to designing and implementing the restatement of accounts to achieve the desired objectives of the errant directors.

It is further noted that errant directors have resorted to preparing accounts and financial statements; 

1. Merely to conform to the requirements and conditionality stipulations of the relevant Ministries, Board of Investments, Departments of Inland Revenue and Customs in the grant of general or special concessions, tax holidays, duty and tax exemptions;

2. Violating key provisions of the Company Law relating to solvency, going concern status, serious loss of capital, major transactions, consolidation of accounts, granting loans and financial assistance to directors and channelling personal transactions of directors and key shareholders through the books of account of the company, in violation of the rights of minority shareholders; 

3. Violating the key provisions of the Inland Revenue Act and Customs Ordinance, especially those relating to transfer pricing, provisions relating to stamp duty, especially by under valuing real transaction values and also over and under invoicing of major trading and asset acquisition/disposal transactions;

4. Over valuation and under valuation of trading transactions and thereby arrange the channelling of legitimate business turnover of the entities to related parties; and channelling of funds to non-transparent entities with beneficial interests favouring key shareholders, related parties and directors;

5. Entity accounting of bribes, facilitation fees, gratuities, corruption linked payments, especially those violating bribery, corruption and anti-money laundering provisions, and accounting them as a part of normal expenses or as a part of the capitalised values of assets. These asset values are carried in the books of account without requisite provisions for impairment.

6. Misuse and wrongful application of applicable accounting standards e.g. use of SME standard

In the instances noted above, it is again regrettable that in every such instance, a qualified auditor had been associated with the acceptance and endorsement justification and possibly even been a party to designing and implementing the restatement to achieve the desired objectives of the errant directors.

I request the President and Members Council of the Institute of Chartered Accountants of Sri Lanka, to establish a Compliance Unit within the Technical Division of the Institute, to review on an ongoing basis and advise the Council on essential regulatory reforms to assure professional good governance.

I appeal to the President and Members Council Institute of Chartered Accountants of Sri Lanka and Chairman and Directors of the Sri Lanka Accounting and Auditing Standards Monitoring Board, in due consultation with the Commissioner General of Inland Revenue, to take the undernoted immediate strategic action steps and require all auditors of specified business enterprises:

1. To file with the Compliance Unit of the Technical Division, the justification for any restatement of accounts and also for applying the small and medium size business entity standards

2. To independently forward to the Sri Lanka Accounting and Auditing Standards Monitoring Board, a full set of the annual audited financial statements, based on the accurate interpretation of an” unlisted specified business enterprise”, very specifically interpreting correctly that an undertaking falling within any one of the limbs of (i.e. not all the limbs)the stipulations in gazette No. 1074/7 of 7 April 1999 is required to file its financial statements

3. Where there is any evidence of likelihood or some doubt or uncertainly in the determination that the entity may have engaged in 

a. transfer pricing in international and local associates linked transactions 

b. non-disclosure of related party interests or conflicts of interests or violation of any provisions of the Company Law 

c. Violating any provisions of the Inland Revenue Act or Customs regulations

d. Violation of any provisions of the anti-money laundering a and terrorism financing regulations

e. the under invoicing or over invoicing business transactions

f. Engaging in any corrupt practice, fraud and or bribery 

g. In window dressing , non-disclosure or misrepresentation of financial statements 

i. To distort the true nature of the operational results and statements of assets and liabilities and notes thereon

ii. Of disclosed transactions with entities not covered by Related Party disclosures 

iii. Re. transactions with shareholders, directors and beneficial interest holders 

iv. ultimate parent company, related parties and associates

to bring up such suspicions to the notice of directors and officers of the company in the first instance and take such further steps in due compliance with the provisions of the Code of Ethics of the Institute, specifically relating to Non Compliance with Laws and Regulations (NOCLAR).

I appeal to the President and Members Council of the Institute of Chartered Accountants of Sri Lanka, in cognisance of the submissions made above, and in due consultation with the Commissioner General of Inland Revenue, to take immediate steps to comprehensively have updated, expanded and widened the scope and coverage of the regulations to be gazette under the Inland Revenue Act No. 24 of 2017 relating to the following: 

1. Regulations Under Section 194 applicable to Certificates of Approved Accountants similar to the regulations made under Section 107 (2)(a) of the Inland Revenue Act No. 10 of 2006

2. Regulations to be made Under Sections 76 and 77 covering Certificates to be Issued by the Principal Director and Auditors regards transfer pricing 

I trust that in the national interests and in preservation of the public recognition and professional commitments of members of the institute, that you will collectively take urgent corrective measures as suggested herein, amended as most appropriate in meeting the said objectives.

Yours sincerely,

Chandra Jayaratne

cc. Minister of Finance, Director General, Customs, Secretary to the President, Chairman, Board of Investments, Secretary to the Treasury, Registrar of Companies, Governor, Central Bank of Sri Lanka, Chairman, Ceylon Chamber of Commerce, Secretary, START, media, heads of law enforcement agencies, Commissioner General of Inland Revenue.