Monday Nov 25, 2024
Monday Nov 25, 2024
Thursday, 22 May 2014 00:40 - - {{hitsCtrl.values.hits}}
It is an interesting theme to talk about the supply chain, because we are normally used to talking about supply chains when it comes to 
government industry or some manufacturing process. But you will basically speak of supply chain in a profession, and then you begin to think of all the different components what are involved in that profession and what it does and that certainly is an important way of reflecting on it. I must congratulate all those who have thought through the theme in order to provide that inspiration to those who are due to participate today.
Talking about financial reporting for economic development and looking at the two themes it interests me profusely and profoundly. First when I look back as Arun mentioned in his introduction I have been involved in the financial reporting supply chain in almost all these different components. Of course many years ago, some of those areas have been many years ago, some are current but it has been a wonderful experience for me to have been involved in all these different components. Second I am keen that financial reporting has improved because it helps robust economic development which is what I am now foreseeing as the Governor of the Central Bank. So both those reasons are good enough for me to accept your invitation and I am particularly glad that you did so because it allowed me to bask in a little nostalgia of my own profession and to also keep pace with what you are doing and I am definitely willing to learn a lot more when you do share with me some of the proceeding that you will probably have over the next two days.
Let me elaborate the first reason which is my own involvement in the financial reporting supply chain. I took the time to jot it down and I realised as an article clerk I used to prepare financial statements and in various features of my career in the process of establishing internal controls, audit procedures, carried out audits, the peer reviewing of financial reporting standards and then came the analysis and the comparison of results of entities as conveyed by their financial reports; educating, training and examining people who are going to become Chartered Accountants or Accountants. Setting standards for financial reporting; ensuring compliance with financial reporting standards, establishing, maintaining and regulating frameworks relating to financial reporting I did hear about the service that Arjuna and Sujeewa are rendering as the members of the Accounting Standards Monitoring Board. These are all elements that fit in to the entire supply chain of providing the regulatory basis for reporting standards to be improved and enhanced as well as complied with.
I was also involved in extending the scope of financial reporting towards new components such as corporate governance, the judging of annual reports all of which is an extension of this supply chain. Then recent decisions on analysing based on financial reports on an accumulative basis at a macro level, perhaps what I am indulging in now. So it is a vast array of activities that you are going to reflect upon over the next two days.
Each component of the financial reporting supply chain has evolved to its current levels over a long period of time while of course addressing many challenges. These standards have evolved over the years seems to be evolving further as we speak. This conference is also expected to reflect on those matters over the next two days.
The accounting professions have often struggled with certain perennial issues and as with many laws and standards those issues and challenges have changed over time based up on the changing requirements, debacles and sometimes little scandals and scams. When you have those scandals and scams; the professions respond to those by having new standards, new areas of attacking those problems and that is another way of the evolution of a profession.
We all know how difficult it is to reach agreement in any profession to establish any local standards, let alone global standards. But in that context, I think the accountancy profession seem to be one of the few professions that have been able to reach a high degree of consensus on many issues and thereby reach an agreement in a manner of reporting the financial status of an organisation.
I want to congratulate IFAC, CAPA, SAFA and several other regional bodies which have been able to generate a lot of interest in these matters to ensure that there is agreement and consensus, and I know it is not a very easy thing to do.
As a result of improving financial reporting standards and the global standards being promulgated, economic development in my view has been supported. The business climate in those countries which have good financial reporting has improved, rendering it more conducive to domestic and foreign investments. Access to finance has also been made easier for local enterprises including SMEs.
The integration of domestic enterprises with the world economy has taken place as a result of the alignment of the financial reporting standards and practices with those of the country’s overseas trade and investment partners.
At the same time the risk of crisis in various sectors have been reduced and their consequences have been mitigated and also pension funds have been also mitigated to move across borders and make the investments because of the uniformity of financial reporting standards have brought to this sphere of reporting.
Sound financial reporting has also become an important component of a country’s governance agenda, because it improves financial reporting makes illegal transactions more difficult to undertake and easier to detect.
Sri Lanka is one of those few countries that took the steps to bring in corporate governance under a mandatory quote, particularly in our banks. We promulgated directions from the Central Bank making it mandatory that all banks and finance companies are obliged to act in a particular way which has been set out in a code of best practice. We ensure that is carried out and that has helped to bring the performance levels as well as the governance structures up to a level which can be now recognised as being quite high in the world.
However, we must understand and remember that sound financial reporting is not the answer to every issue. The global financial crisis showed that financial reporting is not only a technical subject but also a political subject. It has demonstrated a tremendous impact that financial reporting failures could have on the real economy.
The real economy has to be supported by financial reporting and at the same time financial reporting will be a mirror of the real economy. So if the mirror does not capture the image properly you could have a picture being somewhat different to what is really available and that can be quite depressing for those who take decisions based on the picture that they see.
After being around in the accountancy profession for the last 40 years, in the accounting and business fields, it is my view that also not every entity that is supposed to be bankrupt as per the accounting standards is actually bankrupt. Also not every entity that is supposed to be healthy as per the accounting standards is actually healthy too. So you have to be also able to read through these pictures like how a doctor sometimes has to look at x-rays and decide what is wrong with the patient. You got to also have the experience and the overall knowledge to understand the pictures that are conveyed by the financial reports in order to be to take your decisions in the right manner.
The global financial meltdown in the ever growing inter-linkages in the world economy have also highlighted the fact that the world accounting community must move towards high quality global financial reporting standards and common accounting principles now more than ever. Such a step in my view would serve to provide comparable financial statements across countries and that is something I think already the accountancy profession has done, but a lot more also needs to be done as we go along.
Let me come to the second reason as to why I am happy that I was invited today. Financial reporting has improved and keeping it at improved levels is important because it helps robust economic development which we are now pursuing as a country. In my view good financial reporting improves the business climate and investor sentiments, it makes comparison easy, it helps to address and assess risk and it also helps to improve governance structures. But good financial reporting by itself is not a substitute for common sense and it will not be a foolproof remedy to manage the decisions. It cannot be covered under good financial reports and say because of the financial report they took this decision and now it has not worked out as I originally planned. At the same time financial reporting must always attempt to keep abreast in the real economy in the practical sense to ensure that the financial picture should reflect the actual conditions as well.
It is important that wise decisions should be taken not only based upon financial reporting but on other features of what you see within a framework of an organisation or a country. In that sense it appears that there are limitations for financial reporting and the major limitation that I see is the valuation of assets and liabilities. This assessment of assets and liabilities has been one of the most vexed and controversial topics for accountants and I think that it dates back to the time Luca Pacioli started double entry book keeping way back in 1494. Nobody has still been able to have an arrangement that will reflect values properly; particularly because we are reminded of the famous saying ‘beauty is in the eye of the beholder’. Different people perceive values in different ways. Often values are judgmental and it could be driven by time, the scenario, the person and the environment. For example the value of an identical property in different parts of the world could be quite different.
Various valuation methods have evolved and at different times different approaches have also been employed. But still controversies rage and it would rage even in the future. In my view the accountancy profession has also become a little too obsessed with the instantly available market values in ascertaining all values of assets and liabilities.
In today’s day and age the fluctuations of values of most assets is rapid and are often driven by sentiments which are captured and reported minute by minute or sometimes second by second. From 15-16 May the valuation of all the Indian companies listed on the Mumbai stock exchange increased by over 6%. In real terms the financial assessment of many billions of dollars took place overnight. Within a day thousands of companies changed their values. If you take the entire stock exchange, many billions of values enhanced overnight.
The value of the Japanese Yen depreciated from around 74 yen to a US dollar to about 120 yen to a US dollar within a space of few months. As a result the value of all the assets of Japanese companies when converted to US dollars and absorbed in to the US holding companies would have undergone a massive diminution in value. Could anyone argue that this sudden enhancement or diminution in value was due to the skills of the management? Or it was due to the negligence of the management? And who was the brave Accountant who would offer advice to clients based up on such valuations?
I think we are the people who are grappling with these problems and I am sure day to day you see this happening, day in and day out and I don’t know whether we will be able to find answers to all these questions. But at least being aware that this is the background helps us to understand the limitations of the financial reports that we have.
As the Governor of the Central Bank it is sometimes fascinating for me to observe the fickleness of the values of assets when converted in to different currencies at different times. When an organisation holds foreign currency reserves, its valued local currency is reflected in its balance sheet at the exchange rate prevailing on the final day of the year. That’s what we learned many years ago and that is what I believe we practice even today. As a result if we have a foreign currency reserve of around $ 10 billion, a Rs. 1 appreciation would compress the value of the reserve in rupee terms by Rs. 10 billion. One rupee depreciation could enhance the value by Rs. 10 billion.
Just imagine the extent of the fluctuations. Again it only tells you the difficulties that you have to grapple with when you are the people who are working through the supply chain to bring integrity to the financial reporting structures that you are today reflecting up on. Of course it is an undeniable fact that high quality financial statements and good financial reporting plays a key role towards attracting investment. We know that very well, because we practice that in Sri Lanka.
In 2005 the President asked his team of officials as well as politicians to prepare a plan to take Sri Lanka forward and at that time we had a per capita income of about $ 1,200. When we projected by 2016 we should move to a $ 4,000 per capita income and we prepared the plans to do so, one of the gaping gaps that we saw was that Sri Lanka had a huge investment gap. It did not give us sufficient resources to take us to the level that we need with the goals that we should have to take us there. So we had to find the resources to come into the country in order to meet this investment gap. Then we realised in order to be able to project Sri Lanka to the outside world we had to gain ourselves the best accounting standards, the best reporting standards in order to be able to tell the world and tell the global investors Sri Lanka is a country that embraces these types of standards and they could place reliance on the accounts as well as financial statements. So they could come in and invest in our country without too much apprehension.
Of course we did understand that financial reporting alone was not sufficient. So we had to heavily invest in bringing peace to the country, yesterday we commemorated the peace that has come in to our country for the last five years and that is an important change in the way that Sri Lanka has been able to project to the world.
Pix by Lasantha Kumara
