Why is auditor corruption ignored?

By Amrit Muttukumaru

In recent times you have written ‘open letters’ almost on a weekly basis also to the president and prime minister of Sri Lanka urging a credible investigation of the alleged Central Bank Treasury Bond scams and the need for accountability for any wrongdoing. Your focus has been on the role of then CB Governor Arjuna Mahendran despite other parties such as the Bank of Ceylon also said to be involved. 

The mere replacement of Mahendran with a new governor by no means closes the chapter on this saga. One would have thought the first order of priority of the new governor, Dr. Indrajit Coomaraswamy, said to be a “respected economist” with “integrity” would have been the restoration of the battered credibility of the CB by initiating a credible in-house investigation to determine whether due process on bond issues was breached and by whom and if the public was duly informed. Maybe he has done so except for the fact that the public is unaware. I trust he will set the record straight in the interest of the public and for his own credibility.

However, the focus of this ‘open letter’ is a much larger issue - the systemic corruption in this country primarily due to the complicity or negligence of professionals – particularly chartered accountants, auditors and lawyers. After all, chartered accountants and auditors are the first line of defence against corruption within all entities dealing with financial resources. Unless this is meaningfully addressed, there will be scams galore as is witnessed on a regular basis. 

Current examples of credible allegations of wrongdoing apart from the bond issues relate to the purchase of coal, road construction contracts, the import of luxury vehicles and the construction of 65,000 houses in the north and east.

One could even question whether abuse of power relating to nepotism and cronyism in key appointments to state institutions could have occurred if professionals stood their ground on principle.

An example is the senior chartered accountant with impressive management experience as Executive Chairman of a leading state institution tolerating two Joint Managing Directors, one of whom is said to be closely related to a key Cabinet minister. Other glaring examples of nepotism and cronyism relate to Sri Lanka Telecom and SriLankan Airlines.

In a similar vein, could the alleged terrible corruption and abuse of power under the Rajapaksa administration have taken place without the complicity or negligence of professionals? 

Let me emphasise – this by no means exonerates wrongdoing by politicians. They must be held accountable for their command responsibility.

Baffling

It is baffling why you, Friday Forum, Transparency International Sri Lanka and others purportedly battling corruption steer clear of naming and shaming and demanding accountability from chartered accountants faulted for grave professional misconduct by the Supreme Court, Parliament’s watchdog COPE, the Attorney-General and CA Sri Lanka’s Ethics Committee itself in the scandalous privatisation of the Sri Lanka Insurance Corporation causing huge losses to the people of this country. It is in this context that unbridled corruption flourishes with impunity.

This is amazing since you are a senior chartered accountant yourself. What is holding you back? Although activists talk the hind legs off a donkey about the evils of corruption and some get paid for doing so, they fail to bite the bullet by naming and shaming errant professionals and bigwigs in the corporate sector complicit in the corruption of politicians. Of course all allegations must be substantiated.  

CA Sri Lanka

The integrity of the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) is heavily compromised due to its shameful conduct after my complaint made as far back as 8 August 2005 of the Professional Misconduct by the Sri Lankan affiliates of PwC and Ernst & Young (EY) in the fraudulent SLIC privatisation. 

To date it has not concluded its investigation, has reneged on its undertakings given to me and kept me the complainant in the dark. This is notwithstanding several written reminders. The undertaking includes “to complete the investigation early and transparently”. (Ref. CA Sri Lanka e-mail of 13 March 2006).

While PwC (Indonesia & Sri Lanka) functioned as Consultant, Investment Banking and Legal Advisory Services to the Government of Sri Lanka, EY (Sri Lanka) were the Auditors to SLIC. 

Professional misconduct

1) Supreme Court

The professional misconduct of PwC and EY even confirmed by the Supreme Court has not prodded CA Sri Lanka to fulfil its statutory obligation! The Supreme Court (SC FR Application No: 158/2007), in its landmark judgment delivered on 4 June 2009, held the SLIC privatisation to be “illegal and invalid ab initio” and had ordered the removal “forthwith” of the auditors, EY. The judgment is also signed by incumbent Chief Justice K. Sripavan.

2) COPE

Parliament’s watchdog COPE, under its then Chairman and incumbent Minister of Justice Wijeyadasa Rajapakshe, in its report dated 12 January 2007 inter alia stated: (emphasis mine)

(i)”Ernst & Young auditors and PWC consultants were directly involved in the said fraudulent conduct.”

(ii)“The said sale has taken place on unaudited accounts and thereby it was not possible to enter into any kind of share transaction. It also appeared the accounts have been surreptitiously and intentionally adjusted.”

(iii)”Deva Rodrigo, Senior partner of PWC has been a member of the steering committee selecting PWC as consultants to the Government, and continuing thereafter as a steering committee member supervising the work of PWC and approving payments to PWC.”

(iv)“Chairman, PERC who handled this SLIC transaction and later Secretary to the Treasury, Dr. P.B. Jayasundara has been a Senior Policy Advisor to Ernst & Young, and had failed and neglected to act in the interest of the Government in this matter.”

3) Attorney-General

The Attorney General through his letters dated 11 April 2005 to PwC (Sri Lanka & Indonesia) and EY (Sri Lanka) served notice of instituting legal action for professional negligence in relation to the SLIC divestiture.

4) Ethics Committee

The CA Sri Lanka Ethics Committee more than nine years ago endorsed the findings of its Investigating Panel of a prima facie case of ‘Professional Misconduct’ by PwC and EY and all their partners. 

The act of incorporation of CA Sri Lanka as per Section 17 (2) (b) clearly stipulates that when an Investigating Committee appointed by the Council ''reports to the Council that a prima facie case of professional misconduct has been made out against a member, the Council shall appoint a disciplinary committee for the purpose of inquiring into the conduct of such member.''(Emphasis mine). 

CA Sri Lanka must disclose whether the said "disciplinary committee" was appointed and if not why? If appointed it must forthwith disclose its findings.

It is appalling that CA Sri Lanka has been dragging its feet on this issue for more than nine years after its Ethics Committee endorsed a prima facie case of ‘Professional Misconduct’ by PwC and EY and all their partners. 

What rational reason could there be for inaction by CA Sri Lanka other than a blatant ‘cover-up’? Why are you tolerating this?

Conclusion

Under the partnership law in Sri Lanka, all partners are jointly and severally liable for any wrongdoing. All partners are aware of every audit and assignment. It is unethical for any partner to plead ignorance. In the context of the fraudulent SLIC privatisation taking place on 11 April 2003, are not all those who were partners of PwC and EY, at least for five years prior to 11 April 2003, liable? 

It is outrageous that some partners falling under this period are appointed directors of quoted companies and banks. Some have even been appointed to the Quality Assurance Board of CA Sri Lanka! 

As a senior chartered accountant and good governance activist should you not in the public interest:

1) In the context of CA Sri Lanka being a statutory body established by Parliament by Act No.23 of 1959, write an open letter to the Speaker of Parliament Karu Jayasuriya urging him to demand that CA Sri Lanka forthwith credibly conclude its investigation of my complaint of professional misconduct by the Sri Lanka affiliates of PwC and Ernst & Young in the fraudulent SLIC privatisation confirmed by the Supreme Court, Parliament’s COPE, the Attorney-General and CA Sri Lanka’s Ethics Committee and report to Parliament through the Speaker?

2) Write an open letter to CA Sri Lanka President Lasantha Wickremasinghe demanding that CA Sri Lanka forthwith disclose the identity of those who were partners of PwC and EY at least for five years prior to 11 April 2003 which is the date on which the scandalous SLIC privatisation took place?

Those reluctant to responsibly name and shame professionals, corporate and NGO bigwigs for wrongdoing and demand accountability have clearly lost the moral authority to speak of good governance along with any pretence of combating corruption. 

(The writer is a public interest activist).