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The Global Financial Crisis catalysed many steps that President Trump’s predecessor President Obama took to build safeguards, which the Trump administration is now undoing. A review of these changes, whether legislation, institutions or their effectiveness will have been more prudent before rolling back institutional changes
“I was taken aback to read in the Wall Street Journal, many weeks ago, that the Trump administration, in the budget released that Monday had said that it would transfer the authority of PCAOB, to the SEC, in order to eliminate duplication between the two regulators and reduce regulatory ambiguity. The administration had estimated that eliminating the board would save an estimated $ 580 million over nine years.”
“From the moment the news from the White House hit the news channels, I chose to put pen to paper as it were, to build awareness of the potential risks and to catalyse an intellectual exchange or debate in my own country given its relevance to legally enabled similar institutions here. However, my time was consumed by more enjoyable family events – the wedding celebrations of my son-and thus I postponed the timing of this writing until today.”
SLAASMB: Our PCAOB, and the SEC
My motivation to catalyse thinking among policy planners, regulators, legislators, enterprise leaders, and members of my accounting profession-in industry, practice or in academia, here in Sri Lanka is that sometimes we may try to follow suit and fold in our “own home grown”, Sri Lanka Accounting and Auditing Standards Monitoring Board, our equivalent of the US PCAOB, (which preceded the PCAOB by more than a decade), into our Securities and Exchange Commission of Sri Lanka. 
The baby and the bath water
Both the SLAASMB and the SEC SL, are institutions on which I have served for long, and know full well, their statutory roles and responsibilities, public interest obligations, their strengths and weaknesses, their capabilities and inadequacies – and on a positive note, in essence the yet abundant opportunities to reform, restructure and reposition these institutions, rather than perpetuate mediocrity or throw the baby out with the bath water!
Restructuring and repositioning SEC and SLAASMB
I had the privilege to help restructure and reposition, the SEC, but only for a limited time, an effective 15-plus months, (given the time we lost due to the constitutional crisis between October 2018 to almost January 2019 and the Easter Sunday setbacks last April) and thus several more desirable changes were pending at the time I handed over in December 2019.
I have also submitted many proposals to restructure and reposition, the SLAASMB a key feeder to the SEC and believe that desirable and effective regulation can reside side by side with capital market development.
A non-accounting or audit, perspective
Before I comment from an accounting or audit, perspective, let me say that from a Sri Lankan economic perspective, it is important to recognise that the US is a key export market for Sri-Lanka, and thus the sustainability of that market, through the sustainability of its economy, components within that economy, whether trade finance or other banks, wholesale or retail importers, manufacturers of end products, or service providers, are of relevance to us.
The failure or collapse of an entity or the sluggish capacity to consume at wholesale or retail level in the USA, will have an impact upon our exporters, and indeed the sustainability of our export led economy, enterprises and people.
The Global Financial Crisis (GFC) of 2008 or the East Asian Financial Crisis (EAFC) of 1997/98 are examples. Rarely do we think this way, when legislators of the west think of either bringing in burdensome standards and strictures or choose to sweetly unbundle regulations when it suits them.
What gave birth to the PCAOB: Lest we forget
Let us look at the background to the evolution of the regulation of accounting, reporting and disclosure. The US Congress established the PCAOB as part of the landmark 2002 Sarbanes-Oxley Act, aiming to restore trust in financial reporting after accounting scandals led to the collapse of Enron and WorldCom.
The East Asian Financial crisis in 1997/8, which preceded these collapses, also was due to poor accounting, auditing, regulation, and bank supervision. While the west took swipes at the East Asian Tiger economies in 1998, the world and we in Sri Lanka were exposed to the GFC just 10 years later, in 2008. Of course this crisis, was first inflicted upon itself by the US and then “exported” to the rest of the world.
US former President Obama’s prudent and timely response
The GFC catalysed many steps that President Trump’s predecessor President Obama took, to build safeguards, which the Trump administration is now undoing. A review of these changes, whether legislation, institutions or their effectiveness will have been more prudent before rolling back institutional changes.
The Big 8, the Big 6 and now the Big 4 and audit quality
I have great respect for the UK and the US as countries, and have great admiration and affection for the global accounting profession – the Big 8, the Big 6 and now the Big 4 – who owe their beginnings to members of the profession of these countries. I have worked with three of the Big 4 locally and overseas. Nevertheless I believe that independent oversight and monitoring of audit quality, is a key component of a progressive nation.
Ensuring audit quality is a complex challenge
Independent oversight and monitoring of audit quality has to be undertaken by a dedicated institution which knows what accounting and auditing is. This function cannot be coupled with the functions of an apex capital market regulator for whom audit quality is a key feeder and provider. The UK in furtherance of ensuring higher audit quality is at this very moment attempting to break up the Big 4 and scrutinising audit quality with greater depth, breadth and frequency.
The west is not always the benchmark
My concern also stems from the fact that, on many occasions in the past, the IMF, the World Bank and the Asian Development Bank, on whose assistance we as an emerging economy, or let me say in a capital market context-yet as a “frontier market”, depend upon, tend to make recommendations and even tie assistance to legal and institutional restructuring to emulate countries of the developed world who do not depend on them.
For example, just after the then Financial Services Authority (FSA) in England (the then equivalent of our Central Bank, the Securities & Exchange Commission (SEC) and the Insurance Board of Sri Lanka (IBSL), combined) was established in the late 90’s and I was a Commissioner on the SEC in Sri Lanka, in 2000/2001, several multilateral agencies recommended the formation of a FSA equivalent here.
That is to move from multiple regulators of Banking, Capital Markets and Insurance to a single regulator. I had studied the Big Bang that had occurred in England, when the FSA was created and had also spoken to a few Bank Supervisors who had been absorbed into the FSA, who visited Sri Lanka, and who did not find favour with it.
“They called me difficult”
I was an ex-officio member of the SEC, as the then President of CA Sri Lanka, and was the youngest commissioner. Ken Balendra, who I had worked with at John Keells years before, was the Chairman and late GCB Wijeyesinghe, who was my Principal when I was an articled clerk at Ford Rhodes, was a senior commissioner.
There were other Chartered Accountants, much senior to me as well as Chairmen of large conglomerates on the Commission. Nevertheless, I recall conveying my disapproval of the move, saying that we should not dilute either the existing bank supervision function or create an inadequate insurance regulator while simultaneously losing focus of our core responsibility as an SEC – the apex capital market regulator. Thus I earned the middle name “difficult”.
Late ASJ, late Manik, et al.
I was encouraged by the fact that the Central Bank nominee was late Manik Nagahawatte, a seasoned Deputy Governor of the Central Bank, who was later Chairman of NDB, and Chairman of the Bank of Ceylon. Manik listened to me speak at many meetings, and later told me that he had conveyed to then Governor late A.S. Jayewardene, my position.
I knew ASJ from the days he was Secretary to the Minister of Industries with Ranil Wickremesinghe as Minister, when we prepared the Strategy for Industrialisation in 1989/90. We met almost thrice a week for over 8 months. Thus, I spoke to ASJ, and he was of course very clear that he will not permit any bank supervision to be taken away from CBSL.
IBSL formed within SEC but spared the appointment
Of course the rest of the Commission as a whole preferred to “go along” with the Finance Ministry’s request – or instruction, and many commissioners of the SEC were appointed to the Insurance Board and the insurance regulatory function began at the SEC.
Given my views I was spared the appointment! Of course here was yet another instance on a Commission, a Board, a committee or anywhere else that I was unfairly perceived difficult. This did not deter me since I felt wholesome, secure and content and holding positions was never a quest of mine. That was in the year 2000 or 2001.
Sincerity of purpose, and being proved right
Almost seven to eight years later, while in London and speaking to a FSA official, I learned that the FSA of England had been critiqued with regard to the inadequacy of its role, which contributed to the collapse of Northern Rock, which occurred at the beginning of the GFC. Northern Rock was a major bank in the UK.
I researched the analysis of the issue on line, and gathered that the FSA had publicly accepted a catalogue of inadequacies, which included relaxed assessments, every 36 months rather than every 24, and that until February 2007 the team responsible for regulating Northern Rock comprised of experts in insurance and not banks!
A rapid turnover of staff at the FSA and the fact that Northern Rock was the responsibility of three different department heads within the space of two and a half years, were among the revelations.
IBSL spun off from SEC
Sometimes, sincerity of purpose, and perseverance, is perceived as being difficult or rocking the boat, even if the boat is misdirected and heading towards a high unseen, coral reef (since we have no icebergs around Sri Lanka!)
In 2003/4 the then Commission, with late Lt. General Dennis Perera, a former Army Commander and High Commissioner to Australia, as Chairman SEC, retained me as a consultant to develop a business plan for the SEC.
I counter-proposed a Strategic Review and Redirection plan – sections of which are yet not implemented, but a key suggestion was that the IBSL should be spun out and it finally was. As I had predicted earlier when I objected to it being housed at the SEC, and certain SEC staff were paid two salaries to perform insurance regulation and capital market regulation, the plan did not work.
FSA UK abolished: Enter PRA and FCA UK
The financial crisis of 2007-2008, surfaced regulatory failure of the banks. The UK Government decided to restructure financial regulation and abolish the FSA. On 19 December 2012, the Financial Services Act 2012 received royal assent, abolishing the FSA with effect from 1 April 2013. These changes marked the end of the system set up by the previous Labour Government.
The two successor organisations were the Prudential Regulation Authority (PRA) which will ensure the stability of financial services firms and be part of the Bank of England and the Financial Conduct Authority (FCA), the City’s behavioural watchdog. The Bank of England also gained direct supervision of the whole of the banking system through its powerful Financial Policy Committee (FPC), which can instruct the two new regulators.
The US SEC appoints the PCAOB
The SEC of USA appoints the members of the PCAOB – I think the SLAASMB is structured much better though a few legal amendments to make the SLAASMB composition better and the audit regulator more effective, sans perceived or real conflicts of interest was being considered during the time I was Chairman of the SEC and I am hopeful that the current SEC Commission will pursue this.
Founding member of PCAOB says ‘It’s a mistake’
I was pleased to read the comments of Dan Goelzer, whose background I must first comment on. Dan, a fellow Deloitte alumni, a CPA and a lawyer who was appointed by the US Securities and Exchange Commission as a founding member of the Public Company Accounting Oversight Board in October 2002, was elected Vice Chair of the International Forum of Independent Audit Regulators and served in that capacity until his departure from the Board.
IFIAR is an organisation of 40 national audit oversight bodies that operate independently of the accounting profession. He was a partner in the Washington, D.C. office of the law firm of Baker & McKenzie and practiced securities and corporate law, specialising in matters involving the SEC. He had also served as General Counsel of the SEC.
Singular focus on Audit Quality will be lost
He has mentioned that the PCAOB’s singular focus on audit quality would be lost amid the larger mission of the SEC, and had said, “I think it would be a mistake.” He had stated further that “I think it’s been a success in improving audit quality and getting the firms to focus more on quality controls in their audit practice. Why tamper with something that’s working and has been successful.”
Sandy Peters of the CFA Institute
CFA Institute Head of Financial Reporting Policy Sandy Peters had questioned why the US would backtrack on audit regulation while the UK is actively strengthening its regulator and tightening oversight of the audit industry following a string of accounting scandals that plagued public companies there.
“Any cost-benefit analysis has to include the potential losses to investors – or actual losses, in the case of Enron and WorldCom investors and retirees,” he had said. “We’ve thought that it’s well worth the money, as the people who pay the bill,” Peters said of the PCAOB.
An American academic’s view
“Whether the SEC would maintain the same level of inspections, as the board is a question for policy makers. Rather than the fees, it’s the board’s inspections that companies and accounting firms don’t like,” said Michael Shaub, accounting professor at Texas A&M University.
Shaub said he can see the arguments to eliminate the redundancies between the two agencies, and he would support the SEC taking on the board’s inspection work. The problem, he said, is the SEC never did that before Sarbanes-Oxley, and only stepped in after there was a problem.
PCAOB needs to regain credibility, so with our SLAASMB
The Trump administration proposals are being introduced at a time, when the PCAOB is attempting to rebuild its own credibility – after former staffers leaked confidential details to KPMG LLP staff about the board’s inspection plans.
Here in Sri Lanka it is not about the integrity of the SLAASMB, but about its regulatory scope, coverage, effectiveness and timeliness. SLAASMB needs to build capacity, restructure and reposition. It needs to be well funded and regarded as an essential component of the economy by the Government and all stakeholders. This then is the purpose of my contribution to print media.
(The writer is a firm believer that a “Robust Regulator is a fundamental ingredient in a Sustainable Market Economy” and has authored many articles and engaged in policy dialogue and debate in print and electronic media and in public fora on the topic. His practical experience in regulation includes functioning as a member of SLAASMB; as one of the founder members of the Consumer Affairs Council under the first Consumer Affairs Authority Act and as a Capital Markets Regulator, having served two terms as a Commissioner and then as Chairman SEC from May 2018-December 2019. He is a practicing Chartered Accountant and an International Management Consultant, who has served in the accounting, auditing and consulting profession, with KPMG Sri Lanka, as a Manager with Deloitte in The Bahamas, and as Partner and Head of Consulting with PricewaterhouseCoopers Sri Lanka. He served in industry establishing the Group Business Development Division for John Keells Holdings PLC and functioned as its first Director. He has served in advisory roles in the public sector, in Sri Lanka for the Ministry of Industries and overseas as an independent international consultant in India, Afghanistan, Kyrgyzstan, Armenia and Azerbaijan for the Asian Development Bank. He has contributed to Boardroom Governance and Audit Committee effectiveness as an Independent Non-Executive Director and Chairman of the Audit Committee of John Keells Hotels PLC from 2005-2015 and as an Independent Non-Executive Director and Chairman of the Audit Committee of Bank of Ceylon from 2015-2018.)
