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Is the Auditor General the panacea for all our ills?

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by Avantha Munasinghe

One of the contentious issues surrounding the 20th Amendment seems to be the issue of the removal of Auditor General’s capacity to audit companies where the Government, Public Corporation or a Local Authority has a majority shareholding. Many critics seem to have picked on this issue, and most of them are resisting the proposed change. Their fear seems to be that if the Auditor General is not permitted to audit a certain government company, it is prone to be riddled with corruption and malpractices.

The audit by definition is a systematic and an independent review and investigation on certain subject matter, which in this case is the financial statements, management accounts, management reports, accounting records etc. of a company. In the case of a company, there is a statutory requirement for such review and investigation to be reported to shareholders annually. The review, is produced as an “opinion” of the “Auditor”.

Other than the shareholders, it is also customarily used by the tax authorities, banks, creditors, analysts or public for their respective decision-making and also to form their own opinion about the status of the company and its future. In all the government companies, the law required them to be audited by independent auditors, qualified to do so as specified by the Companies Act, until 2015. The 19th Amendment changed their auditor to be the Auditor General.

Auditing, just like Accounting, depends on certain commonly adopted set of principles. The audit of financial statements is normally done in accordance with International Standards on Auditing sometimes modified by local auditing standards. In Sri Lanka’s case, the Sri Lanka Auditing Standards are based on the International Standards on Auditing (ISAs) published by the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFAC), with slight modifications to meet local conditions and needs. Thus, to begin with, whether it is the Auditor General or a private auditor, the standards applicable to the task are the same. It is the approach that is different.

There are a large number of companies in Sri Lanka whose shareholding in some way is linked to Government or quasi government entities for whom Auditor General has now become the Statutory Auditor. Some of these companies are merely an extension of government entities serving a function of the government. For example, Rakna Arakshaka Lanka Limited is a government-owned company, providing security services to government installations. Another is Ceylon Petroleum Storage Terminal Ltd., whose only customers are its parent entities i.e. Ceylon Petroleum Corporation and Lanka IOC PLC, only to whom it provides services. Such entities do not have to face competition to secure business.

However, there are also a large number of government-owned companies which do business in the marketplace competing with other local and international companies, which are publicly and privately owned. Lanka General Trading Company Ltd., Lanka Hospitals Ltd., Sri Lanka Insurance Corporation Limited and Milco (Pvt.) Ltd., are a few examples. Each of them has to compete for business with large segment of local and foreign companies which are purely driven by profit motive and enhancement of shareholders’ value.

These companies have very flexible systems and procedures. Their boards of directors can take appropriate decisions in a timely manner to make an urgent procurement or select suppliers to be more competitive and manage all their affairs just in time. They can buy their raw materials without calling for quotations if they think it is a profitable opportunity. Even a junior level executive of such a company may be able to decide a price discount to secure a sale.

The situation of a state-owned company in the marketplace in such scenarios is quite the opposite. They cannot do procurement as the situation demands. They have to dutifully follow the procurement rules, which even the board of directors cannot overrule. The officials have very little flexibility to seize a business opportunity. It is so easy for a private company to grab business from state-owned enterprises as the latter cannot be proactive. There is little surprise most such companies are loss-making and is a burden to the government and taxpayers.

The government officials and Ministers however want these quasi state organizations to be profitable or run at least without being a burden to the Treasury. The basic business model of these organizations is at a severe disadvantage to begin with. What 19th Amendment brought to such companies by way of auditing by the Auditor General was to push them from pillar to post. This is quite evident by the powers granted to the Auditor General in the National Audit Act, which even a crime investigator would envy. Some of the powers are:

(1) The Auditor-General shall…

… access or call for any written or electronic records or other information relating to the activities of an auditee entity;

… call any person whom the Auditor-General has reasonable grounds to believe to be in possession of information and documents, as he may consider necessary to carry on the functions under this Act, to obtain written or oral statements and require the production of any document, from any person, who may be either in-service or otherwise;

… examine and make copies of or take extracts from any written or electronic records and search for information whether or not in the custody of the auditee entity;

… after obtaining permission from the relevant Magistrate’s Court, examine and audit any account, transaction or activity of a financial institution, of any person, where the Auditor-General has reason to believe that money belonging to an auditee entity has been fraudulently, irregularly or wrongfully paid into such person’s account;

…require any officer of financial institutions to produce any document or provide any information relating to an account, transaction, dealing or activity of person referred to in paragraph (d) and to take copies of any document so produced, if necessary… There is a fundamental difference in the audit approach of a professional auditor and a Supreme Audit Institution such the Auditor General. In a private sector audit, the primary objective is to ensure the report’s recipient gets a true and fair view of the financial status of the company. While the professional auditor is supposed to report on adequacy of the controls in place and report any lapses to shareholders, the focus is primarily on the status of the shareholder’s investment.

The approach of Auditor General is more on ensuring the Compliance to rules, regulations and procedures. This is natural since the Auditor General is supposed to audit the manner in which a government organization has handled its allocation from the consolidated fund to provide a service to the public. The approach is, therefore, not focused on whether the organization is making adequate return on the government’s funds.

What the 19th Amendment did was to replace the professional auditor, who focused on performance of government companies by the Auditor General who is focused on compliance. The officers running such government-owned companies got a signal quite contrary to what the government officials and ministers were pushing them before. Compliance became the key. There is no better way to achieve compliance than to do nothing. The truth is in the last few years; these organization put profit motive in the back burner and wanted to escape from various audit queries raised by the Auditor General. The best way to do that is not to go that extra mile their competitors would go to make the organization profitable. Doing nothing became the modus operandi.

Some of the supporters of Auditor General’s auditing argue that his mere presence stops corruption. Stamping out corruption was the all-pervasive theme of the 19th Amendment. So many new entities were instituted under it to check corruption. Where are we today? Do we see any positive results? In the Corruption Perception Index published by the Transparency International in the year 2015, when the 19th Amendment was enacted, Sri Lanka’s scored 37 out of hundred. In 2019, our score was only 38. We rank 93 out of 198 countries, four places down. It is no secret that the public perceives state sector organizations as corrupt as ever and certainly more corrupt than any private sector organization in this country. The Auditor General has been auditing these state sector organizations for more than 200 years. If the cure against corruption is audit being done by the Auditor General, why are we in this situation today?

The truth is the Auditor General’s presence is a necessary evil in any government ministry or department, which does not have a commercial objective. His presence does ensure at least some level of corruption is made more difficult to accomplish. However, we must not come into the false conclusion that the presence of the Auditor General is the way to root out corruption. In a State-Owned Enterprise (SoE) with commercial objectives, his presence certainly does more harm than benefit.

There is a wrong perception that most public companies are loss making and, therefore, they should be subjected to an Audit by the Auditor General so that the “control” of public funds will put things right. As explained above, it is the business model and restrictions placed that is the very cause for loss-making SoEs to proliferate. If this argument is correct, we should see, out of more than 120 or so government companies, at last one which became profitable due to the Auditor General’s presence during last five years. There is none to show. In fact, this remedy will only make the patient even more sick.

Another untruth floated on the matter is that the financial statements of the government companies are not required to be submitted to Parliament unless they are audited by the Auditor General and that would undermine parliamentary financial oversight. The truth is that the entity, which is the shareholder in these companies, have to consolidate the company’s financial statements with that of the parent entity and the latter is certainly subjected to parliamentary oversight with financial statements of the company audited by a private auditor.

Another misconception is that supervision by COPE will put everything right in the public institutions. COPE’s examination carried out by set of parliamentarians, who on most occasions have no knowledge of the particular business, is not what is required to put these organizations right. In most cases it is the bad business model rather than lack of COPE’s oversight that fail these businesses.

SriLankan Airlines is a case of point. Many people say the bad procurement deals, continued losses and increased dependence on the Treasury by the airline would continue to happen if the Auditor General is not auditing the airline. It was making losses ever since it was set up with or without Auditor General as the auditor. The Airline business is one of the most competitive businesses globally. Even the largest airlines sometimes find it difficult to be in the black. The industry needs split second decisions to be made by professional management. As said before, this is not possible at SriLankan Airlines. We have seen Chairmen and Directors coming and going with every change of the subject minister. Nobody is having a long-term commitment to make it a success. Its competitors have boards, which are removed only if the airline makes losses, not if their political masters change. Without changing the business model, even if we have hundred auditors to audit SriLankan Airlines, nothing will change.

We all know that our country is suffering from a severe debt crisis. We invested on massive infrastructure projects, which were all debt financed. To balance that off, we desperately need to bring foreign equity into our economy. Further debt, while giving us temporary solace, will only aggravate the problem. The government is devising Public Private Partnership (PPP) programs to bring Foreign Investment from large global corporations. The government also needs to be in control of them. The 19th Amendment requires such PPP companies to have the Auditor General as its Auditor. Which global business entity would drop their global audit arrangements by the likes of KPMG, Ernst & Young or PwC and accept this arrangement? We can talk till the cows come home on how professional our Auditor General is and how independent he is, but the reality is that we live in a dream if we seriously want to promote PPP structures with this kind of legislation on.

The effective functioning of Superior Audit Institutions such as the Auditor General is definitely an essential requirement of a functioning democracy. However, let’s not fool ourselves – it is not a panacea for all ills.

Even in India where the previous Companies Act required the appointment of Auditors to Government Companies by the Controller and Auditor General of India, the arrangement has been questioned in the Report of the Expert Committee On Company Law, which said “The Committee discussed the application of the corporate law framework to Government companies on many occasions and took the view that in general, there should not be any special dispensation for such companies. …Therefore, the extension of special exemptions and protections to various commercial ventures taken up by Government companies in the course of their commercial operations along with strategic partners or general public should be done away with so that such entities can operate in the market place on the same terms and conditions as other entities. In particular, reflection of financial information of such ventures by Government companies and their audit should be subject to the common legal regime applicable. The existing delays are enabling a large number of corporate entities to evade their responsibilities and liability for correct disclosure of true and fair financial information in a timely manner. In this context, the relevance of the present section 619B of the Act was considered appropriate for a review.”

If the government needs its companies to compete with private sector, the way forward is to make their management more flexible. Throwing those decision-makers to the Auditor General is the last thing required to be done if we want them to compete effectively with the private sector. While the world is moving to embrace the scarce private capital by making things easier for such investors, some of our so-called professionals seem to be, while paying lip service for bringing more and more FDI, doing exactly the opposite by criticizing the removal of this disastrous piece of legislature brought in by the 19th Amendment.

(The writer is an Accountant based in New South Wales, Australia)



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Features

Credibility in governance through elections and not security forces

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Ranil Wickremesinghe

By Jehan Perera

President Ranil Wickremesinghe’s warning that he is prepared to declare a state of national emergency and use the military to suppress any public protests for change of government would reflect the pressures he is under. The manner in which he has used the security forces to deal with the protest movement has been unexpected. His words and deeds are contradictory to what he has previously stood for as a five-time former prime minister. This is especially true in the case of the ethnic and religious minorities who have consistently voted for him and his party at elections. They have felt safer and more secure under his governments which always sought to reduce the heavy hand of state oppression in which national security is given pride of place. He has always promised them much though he has been unable to deliver on much of what he promised.

Notwithstanding the unfortunate rhetoric and actions of the present time the belief still persists that President Wickremesinghe is the best of the available options. Recent pronouncements of the president have reignited hope that he will address the problems of the religious and ethnic minorities. He has stated that he does not want to leave this problem to the next generation. He has said that he wants to resolve this intractable national problem by the country’s 75th independence anniversary on February 4 next year. The hope that the president will make a fresh effort to resolve their problems has led the main Tamil party, the TNA, to desist from voting against the budget which passed with a relatively small majority. Their spokesperson, M A Sumanthiran said in Parliament that due to the president reaching out to them, stretching out his hand, they did not vote against the budget although they disagreed with it.

It is not only in words that the president has reached out to the ethnic and religious minorities. Reports from the north and east indicate that the Maveer (Heroes) Day commemorations this year took place without incident. During the past two years scores of people were arrested and a massive presence of security forces blocked the people from participating in public events. On this occasion the security forces did not get involved in any attempt to stop the commemorations. University students distributed sweets and even cut a birthday cake to celebrate slain LTTE leader Velupillai Prabhakaran’s birthday. The analogy that the president drew to himself being seen as a Hitler who exterminated ethnic and religious minorities is misplaced. The release of those held under the Prevention of Terrorism Act for engaging in similar acts in the past would further contribute to the reconciliation process.

WORSENING CRISIS

In this context, the president’s use of militaristic rhetoric can only be understood in relation to the growing economic crisis that shows no sign of abating. The anticipated IMF bailout package is at risk of getting indefinitely delayed. It was initially anticipated to come in September then in November but now January is being targeted. Japan’s top brokerage and investment bank, Nomura Holdings Inc, has warned that seven countries – Egypt, Romania, Sri Lanka, Turkey, Czech Republic, Pakistan and Hungary – are now at a high risk of currency crises. Sri Lanka is in third place on the table of risk. The next devaluation of the rupee could see another spike in inflation that will make the cost of living even more unbearable to the masses of people.

The president is on record as having said that the economic crisis will get worse before it improves. Both anecdotal and statistical evidence indicates that it is indeed worsening. University teachers at the University of Sabaragamuwa reported that attendance in their classes was down by at least a quarter. Students who come from other parts of the country are unable to afford the cost of meals and so they stay at home. A study by the Institute of Policy Studies has shown that about four percent of primary, 20 percent of secondary and 26 percent of collegiate students had dropped out of school in the estate sector, which is the worst affected. The future costs to the country of a less well educated population is incalculable and inhumane.

As it is the situation is a dire one for large swathes of the population. Research from the University of Peradeniya has revealed that close to half of Sri Lanka’s population, 42 percent (up from 14 percent in 2019) are living under the poverty line. Professor of Economics Wasantha Athukorala has said there is a dramatic increase in the poverty level of over three-hold across the past three years. In 2019, nearly 3 million people lived below the poverty line, but that number has increased to 9.6 million in October 2022. In these adverse circumstances stability in a polity can be ensured either through legitimacy or through force. It would be tragic if the latter is the choice that is made.

ELECTORAL SOLUTION

President Wickremesinghe has been stressing the importance of political stability to achieve economic development. His recent statement that the security forces will be used to negate any unauthorised protest is a sign that the government expects the conditions of economic hardship to escalate. The general public who are experiencing extreme economic hardship are appalled at the manner in which those who committed acts of corruption and violence in the past are being overlooked because they belong to the ruling party and its cliques. The IMF has made anti-corruption a prerequisite to qualify for a bailout, calling for “Reducing corruption vulnerabilities through improving fiscal transparency and public financial management, introducing a stronger anti-corruption legal framework, and conducting an in-depth governance diagnostic, supported by IMF technical assistance.”

It is morally unacceptable even if politically pragmatic that the president is failing to take action against the wrongdoers because he needs their votes in parliament. As a start, the president needs to appoint a credible and independent national procurement committee to ensure that major economic contracts are undertaken without corruption. Second, the president needs to bite the bullet on elections. The country’s burning issues would be better accepted by the country and world at large if they are being dealt with by a statesman than by a dictator. Government that is based on the people’s consent constitutes the sum and substance of democracy. This consent is manifested through free and fair elections that are regularly held. Local government elections have been postponed for a year and are reaching their legal maximum in terms of postponement. These elections need to be held before March next year.

Elections will enable the people to express their views in a democratic manner to elect their representatives for the present. This would provide the government with guidance in terms of the decisions it is being called to take to revive the economy and place the burden in a manner that will be acceptable to the people. The provincial council elections have been postponed since 2018. Democratically elected provincial councils share in the burdens of governance. The devolution of power that took place under the 13th Amendment was meant to promote ethnic harmony in the country. The president who has taken the position that he is for a solution to the ethnic conflict should seriously consider conducting the provincial council elections together with the local government elections se their financial costs. By doing so he will also gain legitimacy as a democratic statesman and not a dictator.

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WEDNESDAY – Movie Review

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The Addams Family is back with a new tale to tell! Originally created by Charles Addams as a comic strip published in The New Yorker, it offered readers a sarcastic take on the ‘typical nuclear family’ by substituting it with a more macabre bunch of strange and eerie individuals. Since then the titular family has been adapted on to the big screen many times, from live action movies to animated versions, the Addams Family has gained many fans throughout the years. Created by Alfred Gough and Miles Millar, with Tim Burton working on four episodes of the eight-part series, Wednesday is a welcoming tale for young fans, but unfortunately fails to think outside the box and remains anchored to the floor with a messy storyline.

Dead-eyed Wednesday Addams (Jenna Ortega) is a stubborn, independent and intelligent teenager in this new series. Her penchant for attracting trouble wherever she goes alarms her parents, Morticia (Catherine Zeta-Jones) and Gomez (Luis Guzmán). With an already strained relationship with her parents (specifically her mother), Wednesday is enrolled at Nevermore, an academy for outcasts like herself. Having attended the academy themselves, Morticia and Gomez are hopeful that their daughter will ‘fit right in’. Caught between trying to build her own identity and other teenage complexities, Wednesday soon finds herself in the middle of a twisted mystery.

This is the first time audiences are introduced to a teenage Wednesday, which allowed the creators to build a new world on their own terms, but while keeping true to the original nature of the character. The creators do a fair amount of world building by introducing other outcasts like the Fangs (vampires), Stoners (Gorgons), Scales (sirens) and Furs (werewolves), among others. Nevermore Academy itself is beautiful and comes with the classic package of creepy crypts, hidden rooms and secret societies. The series also offers a decent amount of gore, although they could have added more given Wednesday’s proclivity for gore-related activities. The series deals with classic young-adult tropes which includes teenage crushes, bullies, relationships and even prom, among other things. The series navigates through Wednesday’s journey of self-discovery, which is a new avenue for both the character and the fans. From understanding and displaying her emotions to discovering her identity and understanding her peers, the series takes a deep dive into heavy material.

Ortega’s performance as the titular character plays a major role in keeping audiences glued to the screen. This is also the first time viewers are shown a teenage Wednesday Addams, which works to Ortega’s benefit as she depicts more dimensions to the ghoulish, morose character many are associated with based on previous renditions. Her facial expressions and ability to deliver on seriously emotional moments strengthens her role as the lead. The rest of the Addams Family, even with limited screen time, lack the eccentricities their characters should have. Hopeless romantics Morticia and Gomez seem incompatible in this version and Uncle Fester is far less crazy than he ought to be. The only member worth mentioning is the Thing—a severed hand— who brought more character and spirit to the series acting alongside Ortega. With barely any room to develop a majority of the characters are prosaic and tedious, even though they remain vital to the plot.

Apart from Ortega, Gwendoline Christie and Emma Myers deserve honorable mentions for their roles as Nevermore’s head teacher, Larissa Weems and the peppy Enid Sinclair respectively. Enid quickly became a fan favorite as the character was the polar opposite to Wednesday. Her character is vital to Wednesday’s character development and their journey to find common ground as mismatched individuals is amusing.

Christina Ricci who played Wednesday in the 90s returns as ‘normie’ teacher, Miss Thornhill and unfortunately barely stands out and this in large part due to the messy storyline. The series is bogged down with numerous subplots and overlapping tropes and the characters with potential for growth are completely overlooked. With love triangles, bullies and killer monsters on the loose, the series self-destructs and the climax sinks into disappointment.

At the end of the day, Wednesday plays to the beat of the new generation and touches on new themes, which is welcoming seeing as the character should grow up at some point. While not everyone may relate to Wednesday’s teenage perils, it is interesting to witness her growth and her journey as an ‘outcast’ or ‘weirdo’. And while Wednesday doesn’t exactly offer a distinctly unique story, it gives audiences a small taste of what Jenna Ortega’s Wednesday is capable of. Creating a story around a well-established franchise is a difficult task, and in this case the creators fail to add value to their visions. If the series continues, the creators will have the opportunity to think further outside the box and push the limits to Wednesday’s character and give audiences a bone-chilling experience. Wednesday is currently streaming on Netflix.

 

 

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Stage set for… AWESOME FRIDAY

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The past few weeks have been a very busy period for the new-look Mirage outfit…preparing themselves for their big night – Friday, December 2nd – when they would perform, on stage, for the very first time, as Donald Pieries (leader/vocals/drums), Benjy (bass), Niro Wattaladeniya (guitar), Viraj Cooray (guitar/vocals), Asangi Wickramasinghe (keyboard/vocals), along with their two frontline female vocalist, Sharon (Lulu) and Christine.

They have thoroughly immersed themselves in their practice sessions as they are very keen to surprise their fans, music lovers, and well-wishers, on opening night…at the Peacock, Berjaya Hotel, in Mount Lavinia.

Action starts at 8.00 pm and, thereafter, it will be five hours of great music, along with EFFEX DJs Widhara and Damien, interspersed with fun and excitement…for the whole family!

Yes, opening night is for the whole family, so you don’t need to keep some of your family members at home – kids, especially.

Working on their repertoire for Friday, bassist Benjy says “what we will dish out will be extra special, with lots of action on stage.”

It would be interesting to see Sharon (Lulu) doing her thing with Mirage, after her early days with the Gypsies, and, I’m told, a dynamic performance from Sharon is what is in store for all those who make it to the Peacock this Friday

Edward (Eddy) Joseph (centre) with Donald and Benjy

While the band was at one of their practice sessions, last week, they had a surprise visitor – Edward (Eddy) Joseph, a former member of the group Steelers, who is now based in Germany.

Eddy is here on a short visit and is scheduled to return to Germany, tomorrow (30).

He spent an hour with Mirage, at their practice session, and says he is disappointed that he would not be around for the group’s opening night.

However, there is a possibility of several well-known personalities, in the showbiz scene, turning up, on Friday night, to experience the sounds of the new-look Mirage, including Sohan Weerasinghe and Joey Lewis (from London).

Rajiv Sebastian, too, says he is keen to be a part of the fun-filled evening.

You could contact Benjy, on 0777356356, if you need to double check…their plans for AWESOME FRIDAY!

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