The SECP's web site reveals it had reviewed listed companies' financial statements during the years 2001 to 2003. The shortcomings show a total abandon of law.
Due to space constraints only few are cited: directors of an insurance business commenced business without obtaining the registration certificate from the commission; deferred charges were said in the notes to be written off over three years period but written off in one go in the year; revenue expenses were included in capital work in progress; gain on sale of plot was not taken to profit and loss account but shown as revenue reserve, and amount of prepaid interest/mark-up of over a million was not charged to profit and loss account, depreciation on revaluation of assets was not charged to profit and loss account but adjusted against surplus on revaluation of fixed assets, and surplus on sale of revalued assets was included in the profit and loss account
The SECP, as it should be, have held the misdoings to be wilful acts to " mislead public, investors and the regulatory authorities".
The SECP have, again, as they should have, imposed fine on auditors under section 260 of the Companies Ordinance, 1984 ('Ordinance') for not pointing out and reporting the misdoings in their report to shareholders. However, unbelievably, directors have been spared. Unbelievably- because it is directors who prepare financial statements.
In other words, the SECP have spared the perpetrators of their misdoings and imposed fine on the 'patrol' for not reporting about 'perpetrators' misdoings. Auditors only express their opinion on the director-prepared-statements, which they reiterate in their report to the members. Sections 233 and 255 of the 'Ordinance' are reproduced below:
Section 233: Annual accounts and balance sheet: The directors of every company .... shall lay before the company in annual general meeting a balance sheet and profit and loss account.
Section 255: Auditors' responsibilities: c. whether or not in their opinion the balance-sheet and profit and loss account or in the income and expenditure account have been drawn up in conformity with this Ordinance and are in agreement with the books of accounts.
The "ordinance' has a rare legal omission: it provides punishment for the patrol on the street but not for the wrongdoer. Luckily, the omission does not tie-down SECP's hands to hand-down the punishment to directors; notwithstanding such absence of a specific provision, they should have been hauled and fined under Section 492 of the 'Ordinance', reproduced below, that declares "whoever", that is, any body and everybody, who "makes a statement, which is false or incorrect in any material particular" liable to punishment.
492. Penalty for false statement. - Whoever in any return, report, certificate, balance sheet, profit and loss account, income and expenditure account, ... makes a statement which is false or incorrect in any material particular, or omits any material fact knowing it to be material, shall be punishable with fine not exceeding one hundred thousand rupees.
The directors clearly fall within the purview of "whoever" and fine ought to have been imposed under this section. Not invoking the section and sparing the directors from the process of law by the SECP, as shown below, was a legal oddity and was not intra-vires.
The word used in the section is "shall", which according to Blacks Law dictionary, excludes the idea of discretion, and imposes a duty to enforce, particularly where public interest is involved. Its operation therefore was doubly legal necessity because all companies that are traded on the regulated market (stock exchange) are public interest enterprises, that is, involve public interest.
Sparing directors from fine is a mystery and where mystery begins justice ends. As someone said, "who thinks the law has anything to do with justice? It's what we have because we can't have justice." Justice in the hands of the powerful is merely a governing system like any other. Why call it justice? Let us rather call it injustice- injustice sustained at the exact degree of necessary tension to turn the cogs of the huge machine-for-the-making-of-rich-men, without bursting the boiler."
It should be relevant here to point out that the object of the penalty is to punish offenders or deter breach, or to encourage compliance. The penalties therefore need to be such that they send proper signals to breakers of law. For instance, Section 377 of New Zealand's Companies Act provides the fine of (in terms of its local economic value) huge sum of NZ$ 200,000 (which in terms of exchange rate of 1NZ$= Rs40 works out to Rs8 million) for false statement.
The Companies Acts of the UK and South Africa and the penalties. The penalties provided by the 'Ordinance' are peanuts and do neither of these. Corporation Regulations of Australia also provide for equally tough, stringent and severe
As at now, even the maximum of the penalties, let alone the notional fines at the minimum of the scale, are petty and in no way deterrent. Imposing such petty amount as fine is like punishing money snatching by a jail term till the rising of the court. Such fines would not halt the menace rather allow the practice to continue undeterred with impunity.
If the menace of misstatement/omission of information and fraud is really to be eradicated, the medieval ages' penalty regime of the 'Ordinance' shall have to be scrapped and replaced not only by harsher and sterner penalties but also by 'roping in' more actions as offences and liable to punishment as most other jurisdictions have done.
It should be educative to note that against single digit actions held as offences by the 'Ordinance', other jurisdictions, for instance, Australia, New Zealand and South Africa regulations/acts declare 346, 170 119 actions respectively as offences and liable to fine laced with imprisonment up to 10 years. The UK company's act is no exception to this scheme of things. However, it is not the issue here and is a story for some other day.
Lastly, though the SECP have held that the published financial statements did not show the true and fair view yet it has not directed for the amended accounts. This is a common practice by the UK regulatory body. By not so directing, highly wrong financial information about the entity has been allowed to remain in the market. Further, if it is adjusted in future as "prior year's item" (without disclosing the reasons for the adjustment) the alarm signals shall not be rung for the market and the investors about the true bona fide of the directors etc.
However, all said, despite above, it was encouraging to note the SECP undertaking the review of published financial statements. One had hoped the momentum to pick up but no single order is posted in year 2004. It being unthinkable that all published accounts of listed companies during 2004 were impeccable, the SECP seems to have stopped reviewing the accounts.
Bringing discipline in the corporate sector is a function of the regulatory body. The stepping back is, therefore, most unfortunate. The regulators of other jurisdictions, on the other hand, have augmented their efforts in this behalf and increased the number of review of financial statements to bring about constructive change in the types of practices that contributed to the financial reporting and auditing failures. Sri Lankan regulators are doing so for almost a decade now. Other jurisdictions, e.g., the UK, Canada, New Zealand and the USA etc. now put in place rules to even spot check the firms to verify the quality of the rendered audit opinion.
Hopefully, the SECP shall not only re-commence the review of the financial statements but as well increase the number manifold.