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June, 2002 |
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Cover Story |
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Auditors'
Paradise With Enron Corporation’s debacle still fresh in the mind, and one of the five biggest international accounting firms Arthur Andersen (AA) facing a high profile indictment in USA for the Enron scandal, people in Nepal wonder how many of similar cases in accounting manipulations may be there in Nepal. We put that question to the major accounting firms, and the answer we received has been an unanimous ‘none’. A very satisfactory situation indeed. But that is only at the first glance. Upon being probed further, the senior chartered accountants told us that there must be ‘a lot’ of such cases in Nepal, but none has been ‘detected’ officially. If any of such cases of manipulation by the auditors has come to the fore, it is only in the government sector organisations. The private sector case examples are almost nil. It is not because the Nepali private sector firms or the auditing professionals who audit private firm are totally clean. Rather it is because the Nepali private sector is so small and closely held that there is no distinction between the investor and the manager. Therefore, if there is any manipulation by the auditor, the objective is to dupe the taxman, not the investor who is already in cahoots with the auditor. Since an average Nepali firm is not listed in the stock exchange, there is no need for the manager to bloat the profits figure to please the investors. Rather it pays to show lower profits so that you pay less taxes and retain the surplus with yourself. But with the number of public limited companies listed in the stock exchange growing (there are 119 as of the record for mid-April 2002), the Enron-like problems are emerging gradually also in Nepal (sample the examples on the box). These are only some examples, and do not form an exhaustive list. And all of them are made possible with the benevolence of the auditors. The successor auditors seldom try to pinpoint the fault of their predecessors, in an exemplary show of the spirit of professional fraternity. The Chartered Accountants themselves say, on customary request for anonymity, that there are plenty of cases illustrating unethical practices in auditing in Nepal, but the auditors are never held responsible for these lapses. This is because an effective regulatory mechanism is not in force. And these examples show that Nepal is indeed a paradise for the auditors. They are free to pursue their profession the way they like. There is no risk of facing the same fate as AA in USA. The auditors we contacted could remember only one case of penalizing the auditor, if it can be called a penalty. NRB has reprimanded one auditor of a bank once upon a time. Though there are liabilities fixed for the auditors in various acts, the provisions are never enforced to punish the recalcitrant auditors. Surendra Man Pradhan, a CA who is the ED in Inspection and Supervision Department in NRB and who is also the Chairman of the Association of Chartered Accountant of Nepal, says NRB has been comparing the auditor's report with that from the bank and if there are indications from bank's report that the NRB directives are not being complied, but the auditor's report does not comment about it, such auditor is warned of being expelled from the NRB panel of auditors, if the same mistake is repeated by the auditors in the future. Fortunately, these auditing lapses have not had the same impact as that of the Enron-AA scandal, as Nepal has no company of the magnitude of Enron. Even the big companies, of which only a few are listed on the stock exchange, are virtually family-held. The law requires a minimum of 30% shares of a banking company to be issued to the general public, and the promotors issue only 30%, not more, to the general public. This seems to be a blessing in disguise, because any manipulation of the share prices by the company management is going to affect only a small number of the population, if at all. Taragaon Regency Hotels Ltd., the company with the largest number of shareholders, has about 42,000 of them, followed by Nepal Industrial and Commercial Bank with some 30,000 shareholders. Majority of the companies have 1000 or less shareholders. And these numbers include also the promotors. Even if the entire stock market is affected, the effect will be limited to some 50,000 or 100,000 people. You bump across almost the same persons in the AGMs of each of the listed companies. Auditing and Consultancy Enron scandal was caused, as some CAs explain, because of the mixing up of auditing and consultancy. While AA's one arm was auditing Enron, its another arm (a consultancy unit) was advising the same company on methods to manipulate the accounts by using the regulatory loophole (see box for the brief about Enron case). And in Nepal, auditors are in both consultancy and auditing, thus providing a perfect breeding ground for Enron-like cases. “In fact, it is more of consultancy and less of auditing”, says one auditor about the situation of the profession here, indicating that his fellow auditors are, instead of auditing the statements that the companies submit, preparing the statements themselves which they also certify as authentic and true. If such accounting manipulations are possible in a country like USA which is regarded as the most regulated country in the world, how would be the situation in a country like Nepal? One can only imagine the situation in the absence of official information or any specific study in this regard. But the conclusion that the people make is that the situation must be much worse here than is USA. The reason is the lack of regulation. According to Tirtha Upadhyaya, a renowned Nepali auditor who also represents KPMG, one of the big four international auditing firms, there is no regulatory body to regulate the auditing profession in Nepal (see a later section in this story). According to Ram Krishna Neupane of BRS Neupane & Co., a firm that represents Deloitte Touche Tohmatsu (DTT), another of the big four international accounting firms, the existing regulatory framework in Nepal meets some of the essential requirements, while many other requirements are left unprovided for. There is the auditing Act. The Chartered Accountants Act was introduced some six years ago, but the regulations to operationalize the Act are not promulgated yet. “It means everything out here is moving at a snail’s pace”, comments Neupane. But as Neupane also says it is not only in auditing profession that there is the problem of unethical practices. Such problems are there also in medicine, law, engineering, journalism and the like. And the root of the problems lie in the fact that even the existing rules are not properly implemented. For example, there is a code of conduct for the auditors as outlined in a number of laws. Things that are not included in the Chartered Accountants Act are included in other Acts, such as the Companies Act and the Commercial Bank Act. But in practice there still are anomalies, because those provisions are not properly implemented. For example, financial statements submitted to the bank asking for loan finance are made very much attractive, but another statement is also prepared for the same period to be presented to the Income Tax office showing a very dismal picture of the business thus pleading for zero tax assessment. Yet another statement is prepared for the real owners of the business. According to one estimate, there are as many as rise different books prepared and all these are certified by auditors. “Many, though not all, auditors are doing so, but the wrong-doers are not punished. Thus they are being encouraged”, says Neupane. Can this be stopped or controlled? Perhaps, but not as long as the government and the society adopt a system of recognizing the audited financial statements, declares Neupane. Since the government offices always try to come up with one or the other pretext to refute the financial statement that the businessman presents, he has no other recourse than cooking up the accounts. And this job is made easy by the obliging auditors which are available in sufficient numbers for a price far less than what the businessman saves by cooking up the figures. As one of the case examples in page 30-31 shows, financial statements submitted by companies are not likely to be accepted by the tax authorities just because they are audited by qualified auditors. Otherwise they would not be so many professionally managed companies complaining of wrong assessment of their taxes. “Another reason for the lapses in auditing is the low fee. The result is a superficial auditing. It is like work according to the pay”, explains Neupane. Auditors give example of a bank that pays Rs. 150,000 for its audit while other almost equally big banks pay only Rs. 45,000 or 60,000. What is equally true is that once a CA accepts an assignment he/she has to do the job completely. Otherwise, the job should not be accepted at all. Giving a more detailed explanation of the low fee, Sashi Satyal, another well known CA, says that as the law requires that the auditors have to be appointed by the AGM which also has to fix the remuneration for the audit, the amount fixed is always low, because the ordinary shareholders think that the auditors receive their charges from so many other methods, e.g. by charging extra for every visit. CAs have to try to change that image. Talking further about the difficulty, Neupane views that the problem in implementation of the law is because the provisions are scattered across different laws. Otherwise, auditing profession is not a difficult field to regulate in Nepal. “There are hardly 100 practitioners, though the number of registered auditors is much larger”, he adds. Upadhyaya also agrees to Neupane’s estimates, and adds that this low number of auditors is another problem in Nepal. “Though there are some 12,000 auditors registered in Nepal, but only about 200 are in active practice”, says Upadhyaya and asks to compare that with Australia, a country of 25 million population almost same as of Nepal which has about 150,000 qualified auditors. Due to this lack of enough qualified auditors, the profession is being handled by semi-qualified persons. The institute of Chartered Accountants of Nepal (ICAN) has started training people to become CAs, but the first batch is expected to pass out only in 2003. Three of the world’s largest auditing firms – KPMG, PricewaterhouseCoopers (PwC) and DTT – are present in Nepal. And their representatives say, they are following the international professional code of conduct. “DTT has a 200 page long documents of professional ethics, and similar are the standards for other big international firms”, says Neupane. Still there are anomalies, and for the same, Neupane blames the authorities themselves. “The cases that come out in the press, for example of the bank directors taking loan from the same bank, are reported frequently by the auditors in the course of the audit report, but the authorities never take action on the same”, he adds. One important reason why such cases are not acted upon is provided by the example of Nepal Rastra Bank (the central bank), which has shar es in a number of banks and sends its representatives in the boards of these banks. “There is a conflict of interest. Being a shareholder, NRB’s interest is to get more dividend declared whereas being the regulator it may have to curb dividend declaration”, points out Neupane. However, NRB's Executive Director Pradhan claims that NRB has been doing at least something and if all the other regulators do the same, the situation will improve, he adds. Looking at the situation also from another angle, Neupane says, there are plenty of cases of the auditor and the client (business) colluding to hide the information. Then there are cases of the business (taxpayer) and the officer colluding to pay less taxes. In the absence of any provision to punish the officer, the problem is never going to be resolved. “There are seven pages devoted in the law spelling down provisions for the punishment to the tax payer, but there are only two lines about the provision for the punishment to the tax officer.” Most importantly, the government itself is seen as the violator of the accounting norms, as presented in the reports of the Auditor General (see box). Regulatory Mechanism The various laws in Nepal have designated the following agencies as the regulators for the auditing profession in Nepal: 1. The Office of the Auditor General (OAG) 2. Company Registrar’s Office (CRO) 3. The Securities Board (SB) 4. Nepal Rastra Bank (NRB) 5. Nepal Stock Exchange Ltd. (NEPSE) 6. Institute of Chartered Accountants of Nepal (ICAN) But none of them is effective. While OAG has now limited itself to the role of licencing body with almost nothing in monitoring, both the CRO and SB suffer from the lack of sufficient resources to carry out the responsibilities. NEPSE too has not proved effective. Of the 119 companies only about 50 are submitting the audited reports regularly, still NEPSE has not been able to take any action against the defaulting companies. Even companies with negative net worth are not suspended from trading. Thus NEPSE has failed to safeguard the interest of the general investors, say the CAs. NRB has the necessary resources to be an effective regulator and it is entrusted with the responsibilities to regulate the financial sector companies. But as the examples of Nepal Bank Ltd. and Rastriya Banijya Bank show, NRB too has not been effective in this function of regulating the accounting of the companies under its purview. One example is the banking law that the NRB has been drafting, says Upadhyaya. According to him, the draft is full of lackings. For example, the main duty of the auditor is to give opinion on the financial statement and state whether it gives the true and fair picture of the transactions. But this function is not mentioned in the draft law. Rather it requires the auditor to do something that he/she cannot do. For example, it requires the auditor to say whether the bank has done the necessary things or not to protect the interests of the depositors and the investors. “Auditors can’t do that . They can only certify the financial statement”, says Upadhyaya. “He can’t judge whether the salary of the MD of the bank is excessively high, reasonable or low. If NRB itself drafts such law, how can one be optimistic?” Impractical regulations are not going to be implemented. If one provision of a rule is not implemented, gradually the entire law will be left unimplemented. According to Upadhyaya, NRB is trying to increase its power unnecessarily. While the Companies Act is already there and it is a comprehensive act on its own regarding any company, and this Companies Act itself is being revised now, NRB has been trying to make itself the regulator of the banking sector companies. The argument is that the other regulators (SB and CRO) have not been effective. But Upadhyaya questions, “how can NRB guarantee that it will be more effective than the SB and CRO?” His suggestion is to strengthen the CRO itself and make it more effective. Regarding the other provisions of the draft law, Upadhyaya says that as in the existing laws, the criminal and civil liabilities of the directors of the bank companies are not clearly spelled down in the draft law as well. Furthermore, it is silent on the disclosure requirements and puts the same under the discretion of NRB. ICAN is a recent institute set up only about six years ago and it is still in its formative stage. Its focus now is more in running CA trainings then in developing regulations. Moreover, the CAs also say that the existing law is still not providing sufficient authorities to ICAN to become an effective regulator. In this situation, auditing manuals of the auditing firms are the only reliable regulating methods. But it is only the representatives of the big four international auditing firms that can boast of a proper auditing manual. They also have a system of peer review (evaluation by peers from any of other big three international firms) and Continued Professional Education (CPE). Among the operational manuals in an auditing firm is the Risk Management Manual (RMM) which spells out the guidelines about what to check before signing an auditing contract and how to get the authorization letter from the client so that the obligations of the auditor are clearly spelled out and any trouble in the future are avoided. Despite all these arrangements in place, AA, one of the five biggest international auditing firms till a few months back, is now regarded as good as extinct. Hence the argument that only independent watchdog mechanism is not going to be effective. You need the entire society to be ready to play the watchdog. Moreover, as the auditors are so far not made liable for any lapses on their part, there is no need for them to have a RMM. Strange Methods Though the regulatory mechanism is not controlling the auditors, they are being controlled from some unimaginable quarters. For example, the company management of the bank in case no. 9 in the box on page 31 changed the auditor who wanted to submit a qualified report. And interestingly, the new auditor accepted the assignment without any hesitation, despite widely accepted ethics of the profession to first check with the predecessor if he has any reservation about it. The controller in this case was the company management. Similarly interesting is a complaint filed with ICAN against the appointment of a firm as the auditor in a bank. As per the rule only individual auditors can be appointed in a bank because NRB has listed only the individuals in its panel, not firms. It shows that NRB does not care whether any firm is internationally recognized in terms of its quality control system or not. In some examples, the general shareholders themselves have been blocking good auditors from being appointed to audit their companies. They, led by some most vociferous VVIP shareholders, refuse to approve the name proposed by the management and, instead, a name, who is in close contact with such VVIP shareholder, is proposed and approved. Because of the conflicts in the AGM, sometimes, the auditors are appointed by drawing lots in which case the names appointed may happen to have vested interests in the company, thus with possible harm to the shareholders themselves. According to Satyal, the Company Act's provision for appointing auditor by the AGM needs some changes. Auditors should be proposed by the management and the AGM should only endorse it. Or there can be a panel of auditors out of which the AGM can select one for one particular year. The hope that the CAs place now is on the Accounting and Auditing standards that ICAN has drafted and about which the comments are being collected. But that is not going to be sufficient to professionalize the entire accounting profession, view the professionals. The need is to have a total overhaul of all the relevant laws and to put together all the relevant provisions in a single code of conduct, which is made sufficiently enforceable. At the same time, the general public too needs some awareness programs so that before deciding to buy shares they will be able to distinguish a company that uses professional auditors from the others that use ordinary consultants. Or as NRB's inspection and supervision
department's chief Pradhan says, if all the regulatory authorities start
being vigilant and exhibit it, for example, by warning the auditors that
they will be removed from the panel of authorised auditors, compliance
to the norm will improve immediately. But an auditor without the fear of
any liability for his job is more dangerous than no auditor at all.
People complain that auditors can easily frame the managers making them
punishable under law if the auditors are not pleased by the managers. Case Examples of Accounting
Manipulation in Nepal 1. Salt Trading Corporation Ltd. (STC), a public limited company generally acclaimed till a decade ago, as one of the most efficient and professionally managed business organisation of the country, has substantial holding in companies including Gorakhkali Rubber Udyog Ltd. (GRUL) and Butwal Spinning Mill Ltd., both of which have been reporting huge losses year after year causing massive erosion in the owner’s equity. However, STC management till 1998-99 was recording in its books its ownership in these companies at the face value. The profit was shared as dividend to the shareholders and also as bonus to the directors. In 1999-2000, the face value of GRUL shares was reduced to Rs. 75 and STC recorded its ownership in the company at the new face value. The same basis was followed also in 2000-01, the AGM for which was held on mid-April, 2002. In July 2001, GRUL shares were selling at Rs. 36 per share on the stock exchange. 2. There is a chartered accountant who is a senior partner in one of the reputed accounting firms and represents one big business house in the boards of several companies. And he utilizes the position in those companies to bag the auditing job for himself, though he takes the precaution that he does not figure directly as the contractor, though effectively it is him who earns the revenue out of it. 3. A hotel company issued its shares to the general public in the recent past and received an overwhelming response from the investors oversubscribing the issue by several multiples. But when the time came for the enlisting of the scrip for trading on the stock exchange floor, it turned out that the company management had bloated out of proportion the hotel's operational records in the prospectus used for inviting the subscription from the general people. So much so that the figures were bloated even for the period that was already completed months before the prospectus was prepared. The result was that the stock exchange delayed the enlisting of the scrip to punish the management, but in effect it further harmed the interests of the investors who had their investment frozen for those many days of the delay. But the chartered accountants and the company management guilty of the manipulation were left unscathed. 4. A banking company (there are a number of them like this) has been reporting a very huge profit every year and distributing very good dividend. The company shares were selling at a very high premium on the stock exchange. But when the central bank last year came out with a strict rule that the profits should be calculated on cash basis and the accounts in arrears for more than six months should be treated as non-performing asset and hefty provisioning has to be made for the same, the profits of the company reduced drastically and the share value plummeted to the ground. 5. Another banking company, praised by all for a remarkable turnaround within a short period, reported in a quarter two years back, a very huge increase in the quarterly operating profit without any remarkable change between the quarters in the amount of loans and advances. The huge increase in the profit was left unexplained in the quarterly report to the general public. A typical case to indicate how the disclosure practices are in Nepal. 6. Public sector RNAC offers several examples of how auditors become obliged from the management and indulge in the appeasement of the management. All the auditors, with a few exceptions, have gone on foreign trips with their wives on a free ticket plus Per Diem allowance from RNAC. The officially declared business is the visit to the foreign stations of RNAC, and the wife is the assistant of the auditor. No one can question the expense. 7. In another instance, again from RNAC, the auditor actually visits only 10 or 15 domestic stations, but receives TA and DA for the visit of all the stations. In return, management receives the auditor’s favours. 8. One very senior officer invested with the duty of checking malpractices in the government offices has received special grants from the Ministry of Home under the heading better known as AASACHAPU (which is abbreviation of the heading in Nepali). This is the heading that is often cited by all the anti-corruption agencies as the major source of irregularities. What is more interesting about this is that, as the sources say, the official himself who received this grant, has questioned the legality of the amount he has received. 9. In one of the newly operational banks, there is Rs. 150 million expense unaccounted for. Sources claim that out of the amount, Rs. 7.2 million was paid to various levels within and outside the Nepal Rastra Bank to get the banking licence, an allegation that the NRB officers promptly deny. Of the rest (Rs. 7.8 million), it is said that the amount is for the value of the promotors’ shares which is shown as fully paid for but on account of which there is no corresponding amount of money deposited in the company’s account. “Looks unbelievable, but is true”, says one CA. 10. Privatization provides some interesting and classic cases of accounting manipulations. In one case, the money that the private sector buyers paid the government was actually borrowed from a government-owned financial institute. “That was not privatization in effect”, comments one CA. The company is running in a loss ever since, providing typical cases in various fields that can be used in management schools – poor labour management and poor technological management but very clever financial management. In another case, the private sector buyer group paid the government by raising the money from issuing the shares to the general public. This company too has been running in perpetual loss ever since its privatization. 11. There are several examples of big projects involving heavy construction works in which the major promoter, who has the management control in the company, is also the contractor of the civil works and installation of the plant and machinery. Bills inflated by several times of the cost are approved by the company board before submitting them to the financing institutions, generally a consortium of government-owned ones, which have no other alternate than making the disbursement. This is so particularly in big hotels and power projects, say CAs. 12. A travel agency company a few years ago bought some luxury vehicles out of a loan borrowed from a bank. At the same time, the company had purchased tax free government bonds for the amount that was far in excess of the amount paid for the purchase of the vehicles. As the company saved its tax liabilities by this method, the Office of the Auditor General (OAG) questioned the tax concession granted by the tax office to the travel agency. The New Income Tax Act promulgated recently has a provision to nullify such tax planning intended to evade tax, but the earlier Act did not have such a provision. Still there was the question indicating that rules in Nepal do not match the accepted practices. 13. Once upon a time, there was one footwear company set up under a joint venture between a government-owned company and a private sector promoter. Later the government-owned company was liquidated under the process of privatization. The shares of the government company in the footwear unit were procured by the private sector promotor on easy terms. Now there is no footwear company. Instead, there is school in the same premise and is owned by the private sector promotor of the earlier footwear company. 14. A hotel company a few years back went for a judicial recourse for the exorbitant tax assessed on its income by the tax authority. The amount imposed as tax was in excess of Rs. 35 million. Finally the tax assessed through the judicial process was about Rs. 30,000 only. Again the same company has been fighting another litigation of similar nature. Such cases are normal mainly in professionally managed companies and subsidiaries of MNCs, say CAs, because these companies cannot pay kickbacks the tax officers. 15. The auditing fee for a public sector banking company a few years ago used to be around Rs. 80,000 per annum. One very senior CA bagged the same job for two years for Rs.10 million to be financed through a loan from the world bank. But he did not pay the tax out of the fee. The Auditor General’s Office questioned the fee payment. The source does not know what happened to that case later. 16. About three years ago, the authorities had raided a nursing home company on the allegation that it showed less income. The auditor was left unscathed. 17. There are some "stamp-in-pocket" auditors who certify audit reports for any firm prepared by any body as long as they get the fee they ask for. “Auditors are little accountable” K B Chitracar Chitracar was the president of ICAN in
its first executive committee and his firm is the representative of
PricewaterhouseCoopers (PwC), one of the big four international
accounting firms. Here is the excerpt from a brief interview with him
over the email: Do you think that the auditors in Nepal have been effective in their jobs? Where is the situation if it is measured along a scale of 1 to 10 with one taken as the best situation and 10 as the worst situation? Eight. Do you think that cases like those of the ENRON and Arthur Andersen are also happening in Nepal? How frequent are such cases in Nepal? Not detected. Why are the auditors in Nepal not as effective as expected? Because of a low level of development of accounting profession. What is the percentage of the auditors (in your informed estimates) that indulge in unethical practices? Can’t say. What ongoing efforts are expected to bring positive results? Accounting and auditing standards are being developed; the authorities are increasingly taking interest in the subject with the growing pressure from donor agencies. Whom do you blame more for the corruption going on in Nepal? The bureaucrats, politicians, judiciary, or the police? Politicians, the most. How should a business house select an accounting firm? Chartered accountants with good reputation can be trusted to be good auditor. How should the general public (an aspiring investor) judge a public limited company on the basis of the auditor used? Chartered accountants with good reputation. How accountable are the public auditors today in your estimation? Very little. How can the auditors be made more accountable than they are right now? By enforcement of accounting and auditing
standards.
Abstract from the OAG audit report
2058 BS (2001 AD) The largest violator of accounting norms, practices or rules in Nepal is the government itself. Sample these from the 38th Report of the Office of the Auditor General: 1. Out of Rs 80,158.7 million of government accounts audited (Auditor General’s 34th Report-1997) 5.54 % was questioned. This increased to 7.0 % in the 37th report (2000) though it has declined slightly to 6.6 % in 2001 report - the latest so far.
2. Out of 37 public enterprises listed by HMG, the mandatory annual auditing is pending for over three years for seven organizations. 3.
Though there is a practice of showing profit and declaring dividend in
some organizations but the profit derived was not based on the generally
accepted accounting principles. The profit disclosed may vary
significantly if the adjustment is made accurately. Some examples were
the following:
Nepal Electricity Authority shows a profit of Rs. 973.2 million during the year 1999-2000. This profit seems to be overstated due to the following reasons: * Interest to be paid to the government is not provided for; * Profit increased due to revaluation of fixed assets; * Depreciation provided not sufficient or not provided at all in some cases; * Provision for doubtful debts have not been adequately provided for; * Capital nature expenditure were accounted for as revenue expenditure; * Obsolete and damaged stocks were not provided for; * Capitalization were not done though the project was completed and depreciation not provided for accordingly. Nepal Telecommunication Corporation shows a profit of Rs. 2867.8 million during the year 1999-2000 but the following defects are observed: * Store spare parts shortage, loss of assets, not adequately provided for; * Unreconciled spare parts under branch account not provided for; * Gratuity not provided for; * Advances outstanding since considerable long period of time is not provided for; * Provision for doubtful debts have not been adequately provided for; * No controls over inventory, fixed assets, capital work in progress The accumulated loss of Rastriya Banijya Bank with the following adjustments as per audit report comes Rs. 9635.9 million against Rs. 3334.8 million stated as on mid July 2000. * Cash in transit outstanding since more than 5 years; * Does not have a system of proper bank reconciliation; * Bad loans and advances, old Discounted Bill, Letter of Credit, Export loans; * Short provisioning for bad & doubtful debts; * Unrecoverable interest and advance to staffs; * Doubtful debtors; * Inadequate provision for retirement benefits etc. Out of the 10 organizations reporting profit during the year 1999-2000, only four organizations declared dividend which is in violation of the dividend policy issued by Ministry of Finance in 1998 July. The following organizations have not declared dividend in spite of having profit. * Nepal Electricity Authority; * Gorkhapatra Corporation; * Rural Housing Development Co. Ltd; * Nepal Transportation and Warehousing Co. Ltd; and * Citizen Investment Trust. Specific
Issues 1. Nepal Electricity Authority (NEA) has revalued its transmission line assets from Rs.111.1 million to Rs.1,1272.0 million but details were not available. NEA does not have proper internal control system in place. 2. Land ownership document not obtained by Nepal Telecommunication Corporation (NTC) for Rs. 7.9 million out of land purchased for Rs10.7 million. 3.
Fee of Rs 155.8 million were not paid to the Government on account of 10
years license to operate mobile services (NTC) 4.
Internal control in Nepal Rastra Bank seems inadequate as: *
NRB did not supervise and inspect finance companies and cooperatives
authorized for banking business. *
An investment made in Indian Treasury Bill were shown as foreign bank
balances, *
Provision for doubtful debts has not been accounted for. *
Revenue nature expenditure shown as capital expenditure, *
Non-interest bearing loan were charged to banking development fund, *
Capital work in progress has not been capitalized though the assets are
in use since earlier years. *
Depreciation provided short or not provided for at all. As per the rules, exporter
should get their payment within 6 months from the date of export.
However, till 2056-57, files of 182 parties were sent to revenue
inspection department but not returned till date. Pending payment of
US$6.42 million for as long as the previous 18 years related to 267
exporters. (Nepal Rastra Bank) Advance of
US$ 1.19 million was outstanding related to advance provided for medical
treatment outside country to be adjusted on the basis of actual invoices
and supporting documents. No effective steps were taken to liquidate the
advance outstanding for over seven years. (Nepal Rastra Bank) Five hundred
sets Goldstar television received in kind as Foreign AID to distribute
to the communities on deposit of Rs. 5,000 but 29 of the sets were found
to be distributed to Ministers, MPs, and Secretaries on returnable basis
but not returned as yet (the reporting date). (Nepal Television). Having qualified accountants is not enough however. Nepal Rastra Bank has perhaps the highest ratio of CAs to the total staff strength. But the number of remarks that its accounts receive in The Auditor General’s report are not less than what other public enterprises receive. Enron Case and its Relevance to Nepal In USA, the American Institute of Public Accountants (AICPA) has prepared the accounting guidelines and fixed the auditing standards. The companies listed in the stock exchange have to file details to the Stock Exchange Commission (SEC). The reporting requirements in USA are very strong and they are regarded world over as the model. That is to say that USA is the most regulated country in the whole world. Companies and the auditors are closely related as they have to depend on each other – for business and for certification of the business. Looking at the opportunities present, the accounting firms also started providing consultancy services. SEC objected to that because there was a conflict of interest. So SEC made a rule that the auditors cannot be consultants. As a result, most of the auditing firms have either closed down their consulting divisions or spun off a separate consulting firm. AICPA requires that there has to be a consolidated auditing of all the subsidiaries of a company or group. But there is a loophole. For special purposes, there can be a joint venture or a special project. These are called off-balance sheet items. Using this loophole, directors of Enron company started setting up outside partnerships keeping the company liable. When the partnerships went into loss, the claims fell on the company causing a gigantic corporate failure in the modern history. Accounting firm Arthur Andersen (AA) that audited Enron says, it was not aware of these off-balance sheet liabilities. This is quite possible. But it is also alleged that the Enron subsidiaries were opened under advice from the consulting arm of AA. In that case, AA’s claim is like your left arm saying that it does know what the right arm is doing. When Enron filed for protection under Chapter 11, the Houston office of Arthur Andersen, that looked after the accounts of Enron, shredded, as it is said, ‘tons’ of Enron related documents. It is also alleged that there was insider trading in the Enron stocks and in the process the Enron executives and auditors made millions by selling their stocks while the ordinary shareholders were encouraged to hold on to their shares as the prices were rising steadily. So much so that, the money that was collected in the kitty under the employee retirement plan was invested in buying Enron shares. Thus the employees lost both, their monthly income (being out of job) and their savings (as the value of the shares in the kitty came down to almost zero). As the number of people involved was very large (ordinary people and also the employees), all the investigative agencies of the country jumped into action. The result was that the clients of AA started an exodus in US as well as abroad. That was devastating for the firm. Of the nearly $ 9 billion income that AA used to make per annum from its worldwide operations, USA alone accounted for nearly $ 4 billion . In terms of employment, out of AA’s global work force of 70,000, US operations employed 23,000 people. AA audited 23,000 listed companies in USA. Now the issues being discussed in USA are related to three main questions: Whether
the whole problem was due to the loophole allowed for consolidating the
balance sheet of the subsidiaries, Whether it was mainly because of the insider trading Whether it was because the auditors are also consultants. Relevance to Nepal The first problem in Nepal is that there is not regulatory body to regulate the auditing profession. The Auditor General’s Office is the regulator in principle, and it was doing the regulatory job as well in the past. But it lacks the necessary resources to be an effective regulator. Therefore, now it is virtually a mere licencing authority that issues licences to the auditors. Secondly, the accounting standards are not fixed. Though the Institute of Chartered Accountants of Nepal (ICAN) has been preparing them, they are yet be finalised. If a country as extensively regulated as USA can face this sort of problem, one can only imagine the situation in Nepal where the regulatory environment is like this. (Based on an interview with Tirtha Upadhyaya) ICAN at a Glance * Established under Nepal Chartered Accountants Act 2053 * Main Functions To advise the government To undertake educational and training activities To regulate accounting profession in Nepal To promulgate accounting and auditing standards, etc. * Council Members : 17 of which 10 are elected CAs, 4 are elected registered auditors and 3 nominated by the government. * Examinations held: Three so far (the fourth is scheduled for June 2002). The first batch of Nepal trained CAs to qualify in 2003. * Accreditation: Four training institutes * Members : CAs: 138 CAs (out of about 180 present in Nepal), Fellow CAs: 101, CA members 37 Registered Auditors: 2857 (out of around 7,000 estimated to be in Nepal) Certificate of Practice: CA
members 101 & registered auditors 2857 |
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