Finance and leasing companies (non-banking financial institutions –NBFIs) will henceforth be compelled to use external auditors hand-picked by the Central Bank (CB), official sources said.These companies will not be permitted to select their own external auditors.
The move comes after the monetary regulator began cracking the whip over weak corporate governance in a majority of finance and leasing companies.
This is a step forward from the CB panel of 8-10 external auditors for the banking sector, which has been in existence over the years.
Under the move which should also ‘interest’ the Securities and Exchange Commission (SEC) in assigning independent auditors to listed companies, the CB wants to ensure clarity in financial reporting in the interest of wider financial system stability.
Ironically, the move has been welcomed by most finance companies. Chairman of the Finance Houses Association of Sri Lanka Kamal J. Yatawara, who is also the Director/CEO of The Finance Company told the Business Times that an external auditor must have independence when reviewing a company’s financial statements and the auditor cannot have any close ties with the company. He stressed the need of monitoring the viability of these institutions, although their asset base accounts for just 4.8% of total financial sector assets.
In newspaper advertisements this week, the CB called for expressions of interest from audit firms. They would be selected to the panel of qualified external auditors for the 57 NBFIs which include 43 finance companies and 14 leasing companies and examine the financial performance of these companies and its compliance with the law, a senior CB official told the Business Times.
Another objective is to direct these financial institutions to practise better auditing and accounting standards and follow rules and regulations set out by the regulator.The CB official said auditors of some companies were used to cook up figures to hide the true financial position thereby misleading the directors, a frequent complaint by minority shareholders in other listed companies.
This was one of the reasons for the collapse of some finance companies in the recent past, he revealed.
Shirley Perera, a former Association Chairman and Deputy Chairman Central Investments and Finance Ltd said that auditors of some finance and leasing companies were not fit to be auditors.These companies employed small audit firms without experience, facilities and adequate staff and they lacked the capacity to handle vast volume of accounts and financial transactions, he said.
The CB move, he added, would help review and verify the company’s financial statements to form an opinion about the company’s financial statements. He noted that the change of external auditors doesn’t happen regularly in finance and leasing companies.
The Monetary Board’s decision to appoint external auditors for finance and leasing companies is very prudent, he said. Managing Director, Abans Finance and another former Association chairman, Kithsiri Wanigasekera said the practice of deploying ill-reputed external auditors by some finance companies will have to stop with the CB initiative. Under the Finance and Banking Act auditors should be rotated every five years but this practice is not followed at present, he said.
Director CEO of Asia Asset Finance Ltd Rajiv Gunawardena said that the finance companies will able to maintain a better uniformity and high accounting standards under the new scheme. This is a welcome move towards implementing International Financial Reporting Standards (IFRS), he said. Given the responsibility of finance and leasing companies, it is important to ensure that the company can function as a going concern and, re-pay the depositors’ funds as and when needed.
The auditors’ opinion lends credibility to the financial statements and promotes confidence in the system, he said.