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Business


Auditors’ role vis-a-vis corporate collapses?

By Azhar Razak
A senior Partner at Price Waterhouse Coopers (PWC), Sri Lanka, confesses that, their reputation has been tarnished and the Audit profession put into question, after the Satyam saga. PWC, India, who were the Auditors of Satyam Computers, headed by its Chairman Ramalinga Raju, failed to spot the Accounting irregularities.

“Being one of the Big Four, we have had a number of calls from our Sri Lankan clients, wanting to know what happened with Satyam, and it is embarrassing and sad, that we have been involved in this,” a senior Technical Partner at PWC, Shamura Hadgie said.

Of late, the role of Auditors has come under the scanner, after a series of accusations of manipulation of Accounts and debacles in some of the largest conglomerates around the world. The Industry is now under scrutiny, following a string of corporate collapses, and has seen a wake up call for extra checks to be made, before an Audit Report is given.

The good thing is, Sri Lanka has not yet experienced a collapse of a listed company, unlike India, whose Satyam is under investigation for malpractice. However, there is still a sense of nervousness that prevails within the Sri Lankan Audit Industry.

“Auditors, typically, will look at a wide range of data, and then analyse it for items that look out of place. If everything appears to look like a genuine transaction, then, I guess, it will be hard to spot it, even at an Accounting level. For example, if your baseline for normal is corrupt in the first place, it’s obviously hard to spot those events that are out of the ordinary,” another Partner of the ‘Big Four’, who wished to remain anonymous, remarked.

He said that, an Audit also places a certain amount of trust in the information furnished by a client under normal circumstances, which differentiates it from an investigation.

There are three ways of Auditing: Verification, Confirmation and Certification (declaration by the company being audited), depending on the extent of Audit and the information to be verified.

Users of Audited Financial Statements

A number of separate groups, generally called Stakeholders, have an interest in a company’s Accounts: Management, Shareholders, Lenders, Stakeholders and, where relevant, Regulators. While all of them have a genuine interest in understanding the Business and its prospects, the motivation may not be the same in every case. Management has an incentive to paint a positive picture to the other groups, while Shareholders and Creditors need an objective view. Therefore, it is the moral responsibility of the Auditors, to ensure transparency in Financial reporting, and to ensure that, Financial Statements, in fact, represent a ‘true and fair view’.

“Audit Reports are prepared in convergence with a set of Accounting Standards However, certain crooks within the Management hierarchy, cramming to boost profit margins, sometimes try to find loopholes in Accounting Standards. Therefore, rules governing certain Accounting Standards have to be updated on a going concern,” Reyaz Mihular, a Partner at KPMG said.

When asked whether the loopholes used to window dress Accounts have all been closed, he said that, the rules are increasingly becoming more and more stringent, so that, people wont be able to play around.

“It is very hard to have a perfect set of Standards. Only a crook would know the tricks of his trade well, and therefore, it’s not easy for the Standard setting up committee members to find all these tricks and close them. That is why Standards are reviewed frequently,” Mihular said.

However, the application of Standards such as the usage of Fair Values/Market Values in Accounting can be distorted, owing to the amounts being only estimates.

“There is a practical problem in ascertaining these values, since we do not have a readily available Capital Market, so, sometimes, certain figures may be subjective,” Shamura Hadgie retorts.

Dependency

Rating agencies, among many others, are one of the most significant and important users of Audited Statements. The Ratings assigned on companies, by these agencies, are very much dependent on the reliability of the Audited Reports.

“Ratings are always dependent on the role of Auditors, especially, for structured Finance instruments, although, we make our own checks. However, the integrity of the Auditors and their transparency would, to a certain extent, also represent a part of our view,’ says Country Head- Fitch Ratings Lanka Ltd, Chanaka Wickramasuriya.

He added that, the Audit process should be done on an ongoing basis, rather than a once-a-year issue, so that, Audit firms would have a good grasp of a company’s transactions.
“Normally, the remuneration given to Audit staff is often criticised to be less than average, and not what they should get, based on their qualifications and experience. So, you can’t expect these Auditors to dig into every extraordinary transaction, when their own motivation levels are low,” he claimed.

Criticism

The scandals that have been uncovered in the past few months, have also reminded the Auditors of their responsibilities and obligations, to keep up with the spirit of professional skepticism, Shamura Hadgie further explains.

“It is the responsibility of the Auditors to overcome some natural tendencies, such as over reliance on client representations and biases, and to approach the Audit with a skeptical attitude and questioning mind. It is also essential that, the Auditor must set aside past relationships and not assume that all clients are honest,” she said.

Auditors utilise sampling techniques, to test certain transactions, during the performance of an Audit or Review, since it would be nearly impossible and too expensive to test every single transaction. The sampling may be aimed at the largest items or the items on the Financial Statements that pose the most risk of misstatement. If material errors in the Financial Statements are discovered, the Auditors will direct Management to correct them.

“In our experience, the Auditors, sometimes, do not highlight some exceptions in their Audit Reports and, as a result, some of the qualitative aspects of a Firm cannot be ascertained,” says Financial Analyst- RAM Ratings Lanka, Prakash Jerome.

He said that Auditors have sometimes failed to take an independent approach and were not sufficiently bold in standing up to their views.

“They should be able to call a spade a spade. The main focus should be on Corporate governance,” he remarked.
He also welcomed a rotational policy approach to be undertaken by companies, when appointing Auditors, which would enhance transparency.

However, errors are much more likely to be discovered during an Audit, than are fraud.

“Fraud schemes are crafted to purposely exploit Accounting System and Controls, and therefore, it is more difficult for an Auditor to find them. Since Auditors are not all-knowing beings, the assurance that the Financial Statements are correct, could only be a “reasonable” assurance, not total assurance,” concludes Reyaz Mihular.

 

Nokia to empower customers with affordable connectivity

Will bridge digital divide in Sri Lanka through wide portfolio and enabled devices- GM

Prem was appointed General Manager of Nokia for Emerging Asia in April 2006. In this role, he is responsible for Nokia operations in Bangladesh, Sri Lanka, Nepal, Bhutan and the Maldives. He is also responsible for the development and execution of Nokia’s strategies in these emerging markets.

A Chartered Accountant by profession, Prem obtained his tertiary qualifications from Otago University, Dunedin, New Zealand and his MBA from Australian Graduate School of Business in Sydney. He was founding Chairman and President of Finland Australia Chamber of Commerce.

Following are excerpts of his interview with The Nation Economist…

By Indika Sakalasooriya
This week Prem Prakash Chand, General Manager, Nokia, for Emerging Asian markets, currently based in Dhaka, Bangladesh, shares his views on Nokia’s strategy for the Sri Lankan mobile market, and other emerging markets in Asia, with The Nation Economist.

Q: As an emerging market, how important is the Sri Lankan mobile market to Nokia?
A:
Sri Lanka presents a huge opportunity and potential for Nokia with regard to our growth strategy in Emerging Asian markets.
Considering the growing need for communication and access to information, our aim is to bring affordable connectivity to the people of Sri Lanka. The recent growth in tele-density in Sri Lanka has been markedly urban-centric. We see future growth opportunities for Nokia, as more and more semi-urban and rural areas will come under the telecommunication network.
We are also looking forward to bringing the benefits of internet and email to a wider Sri Lankan population. The current internet penetration rate is around 1.4%, and for majority of Sri Lankan, as in other emerging markets, their first internet experience would be through their mobile devices. We, at Nokia, look forward to bridging the digital divide in Sri Lanka through our wide portfolio of internet and email enabled devices, at all price points.

Q: Are there any special characteristics that Nokia has identified in the Lankan mobile market when compared to other emerging markets?
A:
The high literacy rate in Sri Lanka compared to other countries in the region, is an advantage as we transform ourselves to an internet services company. Consumer mindset and readiness towards internet services and convergence is a unique characteristic of the Sri Lankan market. Sri Lanka is also the only market under the Emerging Asia sales unit, offering 3G at this point. Nokia offers a wide portfolio of 3G devices ensuring superior experience for Sri Lankan consumers.

In Sri Lanka, the biggest challenge for us would be consumer’s affordability in the face of rising prices of food and other essentials. High incidence of customs duty and taxes also add to the cost burden on consumers and all as such pose a challenge to us.

Q: If I’m not mistaken, the first Nokia Store was opened in Sri Lanka last month. What took it such a long time to open this single store? What is the purpose it would serve?
A:
The first Nokia Store in Colombo was launched in January, at 230/1, Galle Road, Colombo. We started authorised distribution in Sri Lanka in 2006, and have been continuously looking into ways to better serve the Sri Lankan market. Our initial focus was to extend our distribution reach, and establish a Care network in Sri Lanka. The next phase of ensuring a ‘True Nokia Experience’ begins with the launch of Sri Lanka’s first Nokia Store.

Nokia Stores are designed to provide consumers with a unique three-dimensional experience with the Nokia brand. We do this with great care and great attention to detail. We always strive to raise the bar and look at ways to delight the consumers, and provide them with exceptional Nokia experience. The newly launched Nokia Store is another initiative to deliver on these promises, and will herald a new era in shopping experience for consumers in Sri Lanka. It will offer a world-class retail environment, and a wider range of Nokia devices and accessories with expert advice and the assurance of authenticity.

Q: The grey market is a huge problem when we talk about the mobile telephone industry in Sri Lanka. Has Nokia done any research on this? How do you plan to tackle this situation?
A:
Certainly, illegal or unauthorised devices coming into the Sri Lankan market have a negative impact on consumer experience, besides depriving the government of much needed tax revenue. We always encourage our consumers to buy original Nokia handsets and genuine accessories, so that they can enjoy the true Nokia experience.

With the support of our authorised distributor Softlogic, we are currently reaching consumers through a wide network of retail outlets. We will continue to focus on building a stronger distribution network to make our devices more accessible across Sri Lanka.

To control the growing grey market, firstly we need to work closely with regulators to lower the incidence of duty and taxes. Secondly, we need to make our devices readily available through a strong distribution network. Raising consumer awareness on the benefits of buying original Nokia handsets, and ensuring the best in providing high class customer service through Nokia Care, are some of the other strategies we need to adopt.

Q: How successful has been the localisation of Nokia handsets. For example: using native language of a country, in Sri Lanka? Have you achieved the target market segment?
A:
Consumers are at the forefront of everything we do at Nokia. Localisation of our devices e.g. offering user interface in native language, is a key component of our strategy to make our devices more accessible and user friendly to our local consumers. Our user interface in native language has received very positive response from consumers, and is also a key differentiator from competitive offers. We believe in connecting people and localisation is always a priority for us to offer our consumers an opportunity to express and communicate in their own language.

Q: Why does Nokia no longer want to identify itself as a mobile device manufacturer? Why does it want to be known as an internet consumer services company instead?
A:
Asia has been the mobile communications leader since the industry took off in the 1990s. Today there are more than one billion people around the world using a Nokia device. Our global reach into some 150 countries, and our extensive consumer research, gives us more insight into people’s use of technology than any other company. With this insight, and with a vision of an industry that will be transformed by bringing complete mobility to the internet, Nokia created a Services Unit at the beginning of 2008. Soon after this, we identified and decided to focus on five key areas that we believe have the greatest consumer demand and business potential: Maps, Music, Messaging, Games and Media.

Mobile is the fastest growing communication device in the world, with a global subscriber base of approximately 4 billion. Mobile devices are more affordable and accessible compared to PCs. Hence access to internet for the next billion people, and the ICT revolution, will be through mobile devices.

The convergence of the internet and mobile is slowly but surely, changing the way people communicate, share, search and consume. This change is an important driver in Nokia’s services strategy. Today, Nokia’s vision is not just to offer consumers leading devices, but complete solutions that enhance consumers’ experiences. Our broader services strategy, truly differentiates Nokia’s offering from competing solutions out in the market.

Q: What would be Nokia’s strategy for the emerging markets in the next three-four years?
A:
Emerging Asian markets namely, Bangladesh, Sri Lanka, Nepal, Maldives and Bhutan offer exciting opportunities for growth in telecommunication. Nokia is exceptionally well placed to satisfy the different needs of people throughout emerging markets, with an unrivalled portfolio. We will continue to focus on ease-of-use, high quality, functionality, right features, design and local relevancy in our devices and services.

We plan to work in partnership with the regulators to look at how we can reduce the ‘cost of ownership’ to the consumers, by lowering the incidence of customs duty and tax. In coming days, we need to work in partnership with telecom operators and regulators, to make technology affordable and cost effective.

When it comes to internet access, emerging markets have one of the biggest challenges of them all - lack of infrastructure. For many, accessing the internet through their mobiles is the only connection they can have with the outside world. Mobiles are more accessible than PCs, and now the PC is no longer necessary to access the internet. The next billion internet users of the world will be very different from the first billion. We are well set to offer internet access to the next billion users in emerging markets through our devices.

We believe in ‘Progressing together’. Our aim is to empower customers in Emerging Asia by providing affordable connectivity and hence the opportunity for consumers to create, consume and share information and content on the go and progress in their lives.

****

NSB former head gets Lifetime Bankers’ Award

The Governor of the Central Bank of Sri Lanka has awarded S.H. Piyasiri, the former head of National Savings Bank (NSB) the Lifetime Bankers’ Award for the year 2008. The presentation of life time awards in banking is an annual event organised by the Colombo centre of the Chartered Institute of Bankers London presently known as IFS School of Finance.
S.H. Piyasiri is presently the Deputy Chairman of the Aspic Corporation Ltd.

He joined the NSB as a Management Trainee in 1974, and was elevated from time to time to the posts of Assistant General Manager, Deputy General Manager, Senior Deputy General Manager and Additional General Manager in the NSB. In 2006, he was appointed as the General Manager/ Chief Executive Officer of the National Savings Bank. While serving in the NSB, he had held various positions in other subsidiary companies of NSB and other institutions as well. He had been the Director of NSB Fund Management Company, Director of Institute of Bankers, Sri Lanka, Director of Financial Ombudsman of Sri Lanka and a Director of Education Employees’ Co-operative Thrift and Credit Society Ltd., Trustee of NEHA Trust and a Trustee of Employees’ Provident Fund, NSB.

Prior to joining the NSB, Piyasiri had served as an Assistant Lecturer in Economics at Peradeniya University. After serving for 2 years, he joined the University of Colombo at the same capacity and concluded his academic carrier in 2004 and joined the Banking sector.

Piyasiri is an Honors graduate of Economics with second class upper division (Banking & Currency) obtained from the University of Ceylon, Peradeniya. He obtained his postgraduate degree, MBA from the Irish Business School in London. He became an Associate of the Chartered Institute of Bankers in September 1995. Within a very short period of 4 years he was then recognised as a fellow of the Chartered Institute of Bankers, London, which is now known as IFS School of Finance.

He has also obtained the Post Graduate qualification in Consultancy Skills from the Post Graduate Institute of Management of Sri Jayewardenepura University. Piyasiri had been the President of the Colombo Centre of the Chartered Institute of Bankers London for two consecutive years as well.

****