The Sri Lankan Sunday Times/Financial Times has a detailed account of the role of the auditors in the Sri Lanka Insurance Corporation (SLIC) privatization. For the first time, we see the extent to which PWC and EY partners were implicated in what has turned into something of a scandal in Sri Lanka. The accusations levied are extremely serious and damaging including acting on both sides of the transaction, charging exorbitant fees, unexplained and retrospective reclassification of accounts and accounts manipulation.
Any one of these allegations would be serious in its own right but to see so many different types of unsatisfactory practice in a single case is shocking. The concluding paragraphs sum up this shoddy affair:
The GAP report states that none of the above manipulations would have been possible if this transaction had been carried out transparently by government officials and auditors who truly represented the interests of the public. Most importantly, Deva Rodrigo, a senior partner of PWC, was also a member of the Steering Committee that selected PWC as consultants on the transaction. He supervised their work and authorized payments to them while he simultaneously worked for them himself and received a share of such fees as a Senior Partner, PWC Sri Lanka.
As a firm, E&Y too had a conflict of interest. The report stated that the firm continued to be the auditors of SLIC after the purchasers took possession, management and control on April 11, 2003. At the same time, E&Y was committed to audit SLIC accounts on December 31, 2002 and April 11, 2003 for the government, i.e., the sellers.
The report further states that because of its representation on the Steering Committee, PWC was aware of the misconduct of E&Y. As consultants to the government, PWC had failed to discharge its duties, due diligence and responsibility to protect the interest of the government who was the client of PWC. When questioned by PERC under a succeeding administer by letter dated November 17, 2004 about the retrospective reclassification of SLIC investments on December 31, 2001, PWC failed to provide an explanation. Moreover, PWC failed to ensure that SLIC accounts were audited in accordance with international accounting standards. If PWC were going to attract an international investor for the purchase of shares of SLIC, then PWC itself would need to guarantee that SLIC’s accounts were audited correctly by E&Y.
The report said there has been no action taken by the Institute of Chartered Accountants of Sri Lanka (ICASL) which is a quasi-statutory body to which the government grants funds and appoints nominees and as such, has a legal obligation to pursue allegations of misconduct and fraud. As long ago as August 2005, the ICASL received a complaint about the misconduct of E&Y and PWC in the privatization of SLIC.
Among other things, 0ne has to wonder whether ICASL is toothless.
As I pondered on this matter it struck me that this is the first time I’ve seen such a detailed account of what went wrong. Should I be surprised that partners are conflicted and the extent to which that taints their work? Of course not. This is the way people operate when their moral and ethical compass is out of whack. If anything we should not be surprised at all. Instead, we should realize that despite the Big Four’s usual tactic of stone walling and feigning innocence, no amount of PR can hide these ugly findings. Message to the Big Four: stop pretending you are in control of the global networks. Either do the job properly or acknowledge that in reality it’s all a PR stunt.
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