Wednesday, June 03, 2015

CA Sri Lanka, Audit Firms & Their Slaves - some thoughts

A former accounting trainee V Kanthaiya had written an article faulting accounting firms for underpaying their trainees and going on to describe this as modern day slavery. There is some substance to his complaint but the charge of slavery is perhaps taking things too far. Serendipity has weighed in on the side of the student, these are my thoughts on the matter. 

While there is a problem of underpayment, things have improved a great deal over the past few decades.

In my father's day one apparently had to place a bond with the firm in order to be admitted as a trainee. The bond was non refundable but the allowance paid to the trainee over the four years was equal to the value of the bond. In other words 'allowance' the students received was only a repayment of the original bond, excluding interest. In effect students had to pay for the privilege of being a trainee!

Although current allowances are still low, at least they represent actual payment from the firm and it is a big improvement on the amount of Rs300/- that was the standard starting monthly allowance twenty years ago.

I do notice that the trainees work great deal harder, much longer hours and do more demanding work (although the firms themselves take less and less responsibility-the representations made by management are now at ridiculous levels- the firms take almost no responsibility at all - almost everything is taken on the representation of the management!) The firms do not even perform the simple service of putting the accounts into the audit format, which used to be standard previously, all work is passed on to the client.

I do think the firms could increase the training allowances, at least in line with inflation; I don't think they have been revised in the last 5 or perhaps 10 years.

My bigger grouse with the profession is its hasty embrace of the ill-conceived IFRS basis of accounting. IFRS was a knee-jerk reaction to problem that was fundamentally in the sphere of economics, all that accountants needed to do was ensure better disclosure of contingent liabilities and positions held in the market. This could have easily been achieved by way of notes, there was no need to turn the fundamental basis of accounting, developed over a couple of centuries on its head.

The basic principle in accounting is the proper recording of transactions, with IFRS the accounting system records notional, unrealised gains and losses that can distort reality.

Nothing illustrates this better than the 'poster boy' for the introduction of IFRS in Sri Lanka: a certain firm called Touchwood Investments PLC.

In their eternal wisdom, the auditors and accountants of Touchwood determined that the true position of Touchwood would only be reflected by adopting IFRS methodology, which they proceeded to do with gusto, neglecting to notice the minor fact that the so called investment scheme is what is known as a Ponzi scheme.

That a Ponzi scheme could be dressed up to appear as a legitimate investment is a damning testament to the fundamental flaws inherent in IFRS.

Such is the complexity of IFRS that management and even accountants have difficulty understanding their own figures. This provides lucrative opportunities for accounting firms to sell additional consultancy services to clients, which suits the profession very well.

Unfortunately it is now deeply entrenched so no one has the sufficient incentive to unwind it, at least until the next big implosion in the banking sector.

Related Post : Touchwood - Sri Lanka's listed Ponzi scheme