Chandra J writes to CB chief on classification of auditors

Friday, 1 June 2018 00:00 - - {{hitsCtrl.values.hits}}

Good governance activist Chandra Jayaratne has written to the Central Bank Governor Dr. Indrajit Coomaraswamy on the issue of classification of qualified auditors under the Banking Act. Following are excerpts of the letter which has been copied to Auditor General, President and Council, CA Sri Lanka,

Chairman, Sri Lanka Accounting & Auditing Standards Monitoring Board, Director, Bank Supervision,

Chairman, Securities & Exchange Commission, Chairman, Ceylon Chamber of Commerce and the media.

I refer to the newspaper advertisement published by the Director – Bank Supervision Department of the Central Bank of Sri Lanka, calling for expressions of interest of audit firms to be included in the list of qualified auditors under the Banking Act. (See at the bottom of this article).

The aforesaid advertisement sets out the minimum eligibility criteria to be satisfied by applicant firms; and further states that the assessment of the applications will be conducted based on criteria such as qualification of partners, staff strength and qualifications, experience and expertise of the firm and availability of technical competencies, etc.

I have on many occasions appealed to the Institute of Chartered Accountants of Sri Lanka, that following a capability assessment of its practicing member firms, the Institute should on its own initiative classify the licensed firms of practicing accountants. I have urged that capabilities linked to size, complexity, and technical nature of assignments; as well as the distinctive expertise and skills applicable to specific assignment specialism must be the first level drivers of such classifications.

In addition, the firm level core commitments demonstrated, the values and attitudes in practice and due adherence to Professional Code of Ethics and Conduct; and especially, any reports or findings on a member firms failure to assure due adherence to standards, laws and regulations and even purportedly being charged or even being questioned by any regulator or law enforcement agency on account of suspected gross negligence or being directly or indirectly a part of facilitating any unlawful activity or concealment thereof, should be other filters embedded in the classification process.

The priority need for above type of classifications in the sustainable interests of the nation, the profession itself, business and public in general were urged in the context of there being confirmed reports of:

1. The lack of an effectively enforced Professional Code of Ethics and Conduct

2. Slow and ineffective disciplinary processes within the Institute

3. No action being taken even pursuant to publicly reported significant cases of non-adherence to Standards and the reported observations of the Sri Lanka Accounting and Auditing Standards Monitoring Board (SLAASMB)-refer http://slaasmb.gov.lk/

4. No action being taken even where negligence of member firms are reported in court actions and in analysts and media reports

5. Failure of member firms to adhere to the stipulations of the Prevention of Money Laundering Act in force from 2006, where in terms of section 5 there is a “Duty of certain persons to disclose knowledge or belief of acts constituting the offence of money laundering.” – refer attachment

6. Due emphasis and commitment by members, both in practice and in professions, as well as the Institute to ensure effective compliance and enforcement of the new provisions of the Code of Ethics and Conduct which compulsorily require response action by accounting professionals to all known issues of non-compliance with laws and regulations – https://www.casrilanka.com/casl/images/stories/2016/2016_pdf/code_of_etics/responding_to_non%20_compliance_with_laws_and_regulations.pdf

The Director Bank Supervision may find the under noted submission useful in the proposed assessment:

1. Undernoted extracts – refer annex- from - Competence requirements for audit professionals – https://www.iasplus.com/en/binary/ifac/0504educationies8.pdf

a. Developing and maintaining audit capabilities and competences

b. Knowledge content – refer annex

c. Professional skills

d. Professional values, ethics and attitudes

e. Assessment

f. Assessment of transnational and specific industry auditors

2. Sri Lanka Auditing Practice Note 1000 – Special Considerations in Auditing Financial Instruments – https://www.casrilanka.com/casl/images/pdf/audit_st_vol1/slaus_1000.pdf

3. IFAC Publication on” Block Chain: Impact on Business, Finance, and Accounting” – http://www.ifac.org/publications-resources/blockchain-impact-business-finance-and-accounting

I trust that the President and Council of CA Sri Lankan and Sri Lanka Accounting & Auditing Standards Monitoring Board will with commitment support the Director Bank Supervision in this endeavour.

As regulator, business and civil society pressure and affirmative action by them will ensure better compliance this submission will be released to the media.

Prevention of

Money Laundering Act, No. 5 of 2006

Duty of certain persons to disclose knowledge or belief of acts constituting the offence of money laundering.

5. (1) Any person who knows or has reason to believe from information or other matter obtained by him in the course of any trade, profession, business or employment carried on by such person, that any property has been derived or realised from any unlawful activity, shall disclose his knowledge or belief as soon as is practicable, to the Financial Intelligence Unit.

(2) Any person who fails to comply with the provisions of subsection (1) shall be guilty of an offence under this Act, and shall on conviction after trial before the High Court be liable to a fine not exceeding fifty thousand rupees or to imprisonment of either description for a period not exceeding six months or to both such fine and imprisonment

(3) The disclosure by a director or officer or servant of an Institution in terms of the provisions of the Financial Transactions Reporting Act, No. 6 of 2006 of his knowledge and belief that any property has been derived or realized from any unlawful activity, shall be sufficient compliance by such director, officer or servant, of the duty imposed on him by subsection (1).

(4) The provisions of subsection (1) shall have effect notwithstanding any obligation as to secrecy or other restriction upon the disclosure of information, imposed by any written law or otherwise, and accordingly any disclosure by any person in compliance with the provisions of subsection (1) shall be deemed not to be a contravention of such obligation or restriction.

(5) In a prosecution for an offence under subsection (2) it shall be a defence for the accused to prove to Court, on a balance of probabilities that he had reasonable grounds for not disclosing his knowledge or belief.

Developing and maintaining audit capabilities and competences

1. A broad knowledge of the business environment in which public, private and not-for-profit entities are structured, financed and managed is essential to the competence of audit professionals.

2. To acquire the capabilities required of audit professionals, professional accountants may need to take education and development programs and activities in addition to those they needed to qualify as professional accountants. The additional education and development requirements for audit professionals can be fulfilled either subsequent to, or at the same time as, the education and development program for qualifying as a professional accountant.

3. The education and development process for developing the capabilities of audit professionals can include advanced professional education pursued at academic institutions or through the programs of professional bodies; on-the-job training and experience programs; off-the-job training; and continuing professional development (CPD) courses and activities. IFAC member bodies may wish to impose specific requirements, in addition to the minimum benchmarks required in this standard, for professional accountants working as audit professionals. In particular, IFAC member bodies may consider prescribing specific CPD activities for audit professionals.

4. IFAC recognizes that each member body will need to determine not only how best to comply with this standard, but also what emphasis to place on the various parts of the education and development process. While member bodies need to consider the wide range of development and assessment options available, this standard prescribes requirements relating to practical experience and the assessment of capabilities and competence.

5. All members of the global accountancy profession are obliged to engage in life-long learning and to keep up to date on developments influencing the profession and the quality of the services they provide. IES 7, Continuing Professional Development: A Program of Lifelong Learning and Continuing Development of Professional Competence sets out the fundamental requirements for CPD for all professional accountants, including audit professionals.

Knowledge content

The knowledge content within the education and development program for audit professionals should include the following subject areas at an advanced level:

(a) financial statement audit;

(b) financial accounting and reporting; and

The knowledge content of the financial statement audit subject area should include the following at an advanced level:

(a) best practices in the audit of financial statements, including relevant current issues and developments; and

(b) International Standards on Auditing (ISAs) and International Auditing Practice Statements (IAPSs); and/or

In determining the appropriate breadth of content coverage, the following topics are to be considered: (a) quality control of audit work;

(b) audit documentation;

(d) audit materiality and risk assessment;

(e) audit evidence;

(f) audit sampling and selective testing procedures;

(g) going concern, including the effect of insolvency or liquidation;

(h) using the work of others;

(i) risk assessment and internal control; and

(j) audit conclusions and reporting

The knowledge content of the financial accounting and reporting subject area should include the following at an advanced level:

(a) financial accounting and reporting processes and practices, including relevant current issues and developments; and

(b) International Financial Reporting Standards (IFRSs)1 ; and/or

The knowledge content of the information technology subject area should include the following:

(a) information technology systems for financial accounting and reporting, including relevant current issues and developments; and

(b) principles and practices for evaluating financial accounting and reporting systems, including evaluating controls and assessing risk; and

“advanced level” refers to a level of knowledge that is:

(a) deeper than that expected of individuals qualifying as professional accountants outside the specialist fields of financial reporting or audit; and

(b) sufficient to enable audit professionals to competently perform their role.

Professional skills

The skills requirement within the education and development program for audit professionals should include:

(a) The application of the following professional skills in an audit environment:

n ability to identify and solve problems;

n ability to undertake appropriate technical research;

n ability to work in teams in a consultative process;

n ability to gather and evaluate evidence;

n ability to present, discuss, and at times defend views effectively through formal, informal, written, and spoken communication; and

n ability to treat sensitive and confidential information appropriately. (b) The development of the following professional skills at an advanced level in an audit environment:

n ability to apply relevant audit standards and guidance;

n capacity for inquiry, abstract logical thought, and critical analysis;

n professional scepticism;

n professional judgment; and

n ability to withstand and resolve conflicts.

Professional values, ethics and attitudes

Individuals should be able to apply the required professional values, ethics and attitudes in an audit environment before they undertake substantial involvement in financial statement audit assignments.

All professional accountants need a thorough understanding of the potential ethical implications of professional and managerial decisions. They need to be aware that decision makers can be under tremendous pressure when it comes to upholding ethical principles. This is true in industry, commerce, the public sector, education and public practice.

Code of Ethics for Professional Accountants sets out the fundamental principles as:

(a) integrity;

(b) objectivity;

(d) confidentiality; and

(e) professional behaviour

Practical experience

A period of practical experience relevant to an audit professional should be gained before an individual may assume the role of an audit professional. This period should be long enough and intensive enough to permit them to demonstrate that they have acquired the professional knowledge, professional skills and values, ethics, and attitudes required to competently perform the work of an audit professional.

Assessment

Professional capabilities and competence should be assessed before individuals assume the role of audit professionals.

The assessment should be comprehensive enough to permit individuals to demonstrate that they have the professional knowledge, professional skills and professional values, ethics and attitudes required to competently perform the work of audit professionals.

Assessment of transnational and specific industry auditors

Professional capabilities and competence should be assessed before individuals assume the role of transnational audit professionals and also auditors of Specific Industries.

The assessment should be comprehensive enough to permit individuals to demonstrate that they have gained the professional knowledge, professional skills and professional values, ethics and attitudes required to competently perform the work of a transnational audit professional.

Specific industries

Some entities operate in heavily regulated industries (such as banks and chemical companies). Laws and regulations governing financial statements may vary considerably in specific industries and environments. Furthermore, accounting treatments may differ, resulting in different recognition and measurement practices.