The bankruptcy of ENRON and the admission of guilt by its auditor Anderson has brought into serious question the roles played by financial intermediaries such as investment banks, stock brokers and the roles played by auditors. Of these categories, investment bankers and stockbrokers have been blamed for stock market booms and busts from time immemorial and with each bursting of a stock market bubble, new laws have been introduced to control their operations. But the ENRON episode was unique because it also dealt a serious blow to the audit profession as well. Auditors were expected to steer clear of vested interests and be impartial guardians of shareholder interests. But it has never been the case. Even though admission of guilt by Anderson and subsequent criminal prosecution received wide publicity and created a bad reputation and a cynicism about the audit profession it was actually nothing new.

In the main business & financial centres, the rot really started when auditors wanted to upgrade the advice they routinely gave their clients into an industry or profession by itself and began setting up subsidiaries to handle the advisory function. The rates charged were exorbitant but were quite unsurprisingly never questioned by auditors and invariably hidden from shareholders as a restructuring charge.

Whenever the advice given by the subsidiary went wrong, the auditors, instead of pointing it out, did their best to cover up or give excuses for it, thus deceiving shareholders even more. During the last decade or so, leading audit firms have faced severe questioning and stiff penalties were imposed on them for acts of this nature but these were settled privately arousing little or no publicity.

In fact the number of leading accountancy firms which numbered over 20 at the turn of the 90’s has now come down to less than 5 mainly because of amalgamations and mergers brought about by the inability on the part of the auditors to pay the heavy fines imposed on them for their lapses and misdemeanours. ENRON was only the lowest ebb on that decline.

Even though it may be the lowest for the rest of the world, auditors in our country have still not learnt their lessons. They are quite prepared to certify anything that comes their way as a ‘true and fair view’ of the financial position and to provide excuses to cover up friendly directors. Otherwise, how can ‘reputed’ auditors in Sri Lanka certify the accounts of public quoted companies involved in well publicized acts of misconduct during the recent past without any comments. These range from banks which invested in competitor banks in violation of banking laws, purchasing shares in the names of employees to circumvent laws, reporting unaccrued profits to raise share price, ignoring un-funded pension liabilities, under-providing for loan defaults, private provident funds being used for illegal investments and so many such accounting fudges.

So it seems that the auditors in Sri Lanka, most of whom are branches of the international top 5 have not yet learnt a lesson from their own parent companies’ mistakes. It is strange that the Securities & Exchange Commission and The Institute of Chartered Accountants and other accountancy bodies are not taking any action to impose fines on errant auditors even at this late stage and give publicity to their misdeeds.

That will be one way of redressing the wrongs and losses suffered by small time investors who act purely on published accounting and financial reports. Other option would be for the aggrieved shareholders to resort to individual actions against auditors, which can be disastrous for both.
Malinga Senanayake