Rep-ort oni te OCs e .rance of Stdards d Clodes Accouit ng & Auittng I r ki L i ine 2031 WORLD BANK GROUP Sri Lanka Report No: ACS1 3798 Democratic Socialist Republic of Sri Lanka Sri Lanka RoSC Accounting and Auditing Update June 2015 GGODR SOUTH ASIA Standard Disclaimer: This volume is a product of the staff of the International Bank for Reconstruction and Development' The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Copyright Statement: The material in this publication is copyrighted. Copying and/or transmitting portions'ralo.hswr wtotpriso a be a violation of applicable law. The International Bank for Reconstruction and Deeomn'TeWrlCakecuae dissemination of its work and will normally grant permission to reproduce portionsoftewrpomly Looking ahead with an open mind For permission to photocopy or reprint any part of this work, please send a request The development goals of the country have changed and so have the goal posts of the financial reporting architecture of Sri Lanka. Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA, telep In order to support these changes and be globally relevant, Sri Lanka's accountancy profession should continue to proactively play a thought leadership role and enhance financial reporting practices taking into account global developments. It needs to raise the bar and look beyond, to achieve greater financilal benchmarks that would be relevant to this changing All other queries on rights and licenses, including subsidiary rights, should be add environment. The report comprises these messages. An abstract depiction of looking ahead with an open mind attepts to capture this overarching objective of the ROSC. World Bank, 1818 H Street NW, Washington, DC 20433, USA, fax 202-522-2422, e pr ol. CURRENCY EQUIVALENTS (Exchange Rate Effective = May 31, 2015) Currency Unit = Sri Lanka Rupee (LKR) US$1.00 = LKR133.93 Abbreviations and Acronyms AATSL Association of Accounting Technicians of Sri Lanka ACCA Association of Chartered Certified Accountants (UK) AQA Audit Quality Assurance Acknowledgments BPO Business process outsourcing CAPA Confederation of Asia Pacific Accountants CASL Institute of Chartered Accountants of Sri Lanka This report was prepared by a team led by Jiwanka B. Wickramasinghe (Senior Financial Management CBA Certified business accountant Specialist, GGODR) and included Patrick Kabuya (Senior Financial Management Specialist, GGODR CBSL Central Bank of Sri Lanka and ROSC Team Adviser), Enoka Wijegunawardene (Financial Management Specialist, GGODR), and CIMA Chartered Institute of Management Accountants (UK) COPE Committee on Public Enterprises Aruni Rajakarier (Consultant) of the World Bank, on the basis of a diagnostic review carried out from CPD Continuing professional development December 2013 to September 2014. The review was conducted through a participatory process CSBA Certified senior business accountant CSE Colonmbo Stock Exchange involving World Bank Country Office in Sri Lanka and various in-country stakeholders, including FI Foreign direct investment government, professional accountancy organizations, regulators, audit firms, academia and business GOP Gross domestic product communities. The report benefitted immensely from comments of peer reviewers: Andrei BusuiocStandards Board IAS International Accounting Standards (Senior Financial Management Specialist, ECCAT)); Mozammal Hoque (Senior Financial Management IASB International Accounting Standards Board Specialist, GGODR); Sriyani Hulugalle (Senior Economist, GTCDR); and Marta Russell (Technical IASB International Auditing and Assurance Standards Board IBSL Insurance Board of Sri Lanka Manager, Member Body Development, IFAC). The team also gratefully acknowledges Francoise ICAEW Institute of Chartered Accountants of England and Wales Clottes, Country Director for Sri Lanka and Maldives; and Fily Sissoko, Practice Managerfor South Asia ICMA Institute of Certified Management Accountants Region Financial Management, for their guidance and support.International Education Standard IESBA I nternational Ethics Stan dard s Board for Acco untants IFAC International Federation of Accountants IFIAR International Forum of Independent Audit Regulators IFRIC International Financial Reporting Interpretation IFIRS International Financial Reporting Standards The report was cleared for publication by the Ministry of Finance on April 29, 2015. IPSAS International Public Sector Accounting Standards ISA International Standards on Auditing ISOC International Standard on Quality Control IvsC International Valuation Standards Council Regional Vice President : Annette Dixon LKAS Sri Lanka Accounting Standards MOF Ministry of Finance Country Director Francoise Clottes MOU Memorandum of understanding Practice Director : Samia Msadek ROSC A&A Report on the Observance of Standards and Codes, Accounti Practice Manager : Fily Sissoko SAFA South Asia Federation of Accountants SEC Security and Exchange Commission Task Team Leader :Jiwanka B.Wickramasinghe sic Standards Interpretation (lAS) SLAASMB Sri Lanka Accounting and Auditing Standards Monitoring Boa SLFRS Sri Lanka Financial Reporting Standads SLSQC Sri Lanka Standards on Quality Control SBE Specified business enterprise SME Small and mrediumn-size enterprise SMO Statement of Member Obligation SMP Small and medium-size practitioner SOE State-owned enterprise UsJ University of Sri Jayawardenapura SInstitutional Framework 1 tA S ta M o y F ra n ek 1 4 3, P ofesdonal A c utf y O1 en uitn v.narsa aCcnon Designed and 0, AuditMn Probassion 31 Practiced sl D). Educ~o and ExecLUve Summary Il Trin E- Set~n A=cunfing F, Sottng Audiing Standards 4 G. Motaqing, and Entmrnent 4 SIntroduction 2 A, Country Cæoxnt 3 B, EconomraCcntced Vi Emnerging Trends 52 Executive Summary This Report on the Observance of Standards and Codes, Accounting and Auditing (ROSC A&A) assesses the progress made since the first ROSC A&A in 2004 and identifies reforms necessary to strengthen the accountancy profession in Sri Lanka. The reforms would enhance the quality of corporate financial reporting, which contributes to improved investment climate, attracts foreign direct investment, and fosters business development. 2 The ROSC review, requested by the Ministry of Finance (MOF), was conducted from December 2013 to September 2014. All findings reflect this time period of the review; some stated future events may have been achieved by publication date. The review used the World Bank multi-layered review methodology with inputs from a wide range of stakeholders, including government, regulatory and accountancy bodies, accounting and auditing firms, banks, insurance companies, state-owned enterprises, small and medium-size enterprises, and academia. 3 The Sri Lanka country context has changed significantly since the 2004 ROSC, particularly with the cessation of the 26-year conflict in May 2009 and the subsequent transition to middle-income country status. Sri Lanka aspires to attain upper middle-income level by 2016. A key component of the strategy for economic growth is the development of Sri Lanka as a regional hub in South Asia for aviation, maritime, tourism, knowledge, energy, and commercial activities. Enhanced financial reporting infrastructure in the country will contribute to the achievement of this growth, particularly the knowledge and commercial activity hubs that rely on the accounting profession to build capacity and benchmark international good practice. With an accountancy student population of over 100,000, the profession's contribution to the skills sector in Sri Lanka is significant. This can be illustrated via the burgeoning business process outsourcing (BPO) industry in Sri Lanka. The finance and accounting outsourcing emerged as a significant contributor to the BPO industry due to the large pool of accountancy students, technicians, and professionals and Sri Lanka's convergence to International Financial Reporting Standards (IFRSs). Additionally it is imperative that investors have financial information that is comparable across countries in compliance with globally acceptable accounting and auditing standards and codes for informed decision-making as foreign and private sector investments are necessary to reach the targeted GDP growth rate. 4. Small and medium-size enterprises (SMEs) make up a large part of the Sri Lankan economy and contribute to N inclusive growth. Providers of capital and the Department of Inland Revenue perceive financial reporting by SMEs to be unreliable. Providers of capital routinely reconstruct financial statements based on cash flows into bank accounts in order to estimate the creditworthiness of SMEs, and there is a perception that financial statements understate the profitability and financial position of SMEs. These can result in restrictions to access capital and lower tax revenues to the country. SMEs are perceived to lack capacity; this also calls into question the quality and credibility of practitioners that audit SMEs. There is opportunity for the growth and expansion of the SME sector via actions focused on bringing credibility to SME financial statements. II State-owned enterprises (SOEs) play a strategic role in the national economy. Their vast asset base of almost 43 percent of the GDP is larger than the market capitalization of all the listed companies in the Colombo Stock Exchange. The elimination of prevailing losses made by state-owned business enterprises could alone bring about an economic turnaround, and improved financial reporting has a significant role to play in this for (a) better and informed management decision-making; (b) improved oversight, assessment of fiscal risk, and governance of SOEs; and (c) greater transparency and accountability. - - ~~~~~~~~The outcomne of the ROSC A&A will contribuLte toward achievemnent of theFY31ConrPatesiSrtgy The Country Partnership Strategy focuses on four areas: (a) facilitating sustained private and public investment, (b) supporting the structural shifts in the economy; (c) improving living standards and social inclusion; and (d) improving resilience to climate and disaster risks. A strengthened institutional framework for the accountancy profession will contribute toward achieving the country's goals in these areas, especially by improving investment climate and developing skills for a knowledge-based economy. Improving accountancy facilitates the pro information in the economy that is essential for domestic and foreign investment decision-making and for improving corporate governance and corporate and economic accountability. There is a vibrant accountancy profession in Sri Lanka. There are 5 professional accountancy organizations in the country, of which the Institute of Chartered Accountants of Sri Lanka (CASL) is the largest, accounting for over one-third of members and students. CASL is a member of the International Federation of Accountants (IFAC); and two other local bodies, the Institute of Chartered Management Accountants (ICMA) and Association of Accounting Technicians (AATSL), are associate members of IFAC. The two UK-based professional accounting bodies, Association of Chartered Certified Accountants (ACCA) and Chartered Institute of Management Accountants (CIMA), have full IFAC membership and have branch offices in Sri Lanka. CASL is the promulgator of accounting and auditing standards in the country, plays a key role in developing the profession locally, and actively contributes to the profession globally. CASL has also launched aseries ofinitiativesto enhance public sector accounting and reporting practices. A public sector wing of CASL has emerged with the establishment of the Association of Public Finance Accountants of Sri Lanka (APFASL) to implement professional skilt development programs for the public sector accountants. CASL has signed memorandum of understanding (MOU) with the Chartered Institute of Public Finance Accountancy (UK) to offer a joint qualification titled Chartered Public Finance Accountant. CASL has published ten Sri Lanka Public Sector Accounting Standards (SLPSAS) jointly with the MOE Emerging trends include progressive companies embracing both sustainability reporting and integrated reporting in line with global developments, on a voluntary basis since these are not mandated in Sri Lanka. Several companies that prepare integrated reporting have won awards at the South Asia Federation of Accountants Annual Report Awards competition, which exemplifies a level of high quality. Significant progress has been made in implementing 2004 ROSC recommendations in partnership with international organizations such as the World Bank and IFAC. Of the 14 policy recommendations, 7 have been fully implemented while another 5 are under implementation. The reforms have strengthened the institutional framework that supports accountancy profession. A number of regulatory changes since the 2004 ROSC have led to a strengthening of the frameworks supporting IV the development of a robust financial reporting regime. The Sri Lanka Accounting and Auditing Standards Board, the only Figure A: Summary of Recommendations audit regulator in South Asia and represented on the International Forum of Independent Audit Regulators (IFIAR), has significantly increased its technical capacity and coverage of reviews. Other regulators too have enhanced their technical capacity. CASL has a rigorous education and training program that is based on International Education Standards ROSO Qfll A ec omm end in promulgated by the International Accounting Education Standards Board (IAESB). Sri Lanka has adopted IFRS and ISA and all IFRIC and SIC pronouncements issued by the International Accounting Standards Board (IASB). The technical capability of CASL has been increased as recommended in the 2004 ROSC A&A to fully support the technical work. CASL supports implementation of accounting and auditing standards by offering capacity-building initiatives and by issuing an audit toolkit. Accountin & There are some key challenges for strengthening corporate financial reporting and taking it to the next level. There Local PAOs Auditing are limitations in the statutory framework, as follows: (a) It does not clearly classify companies into different categories and specify the financial reporting and auditing requirement and applicable standards for each category. m Companies Act Compliance with Develop policy for Expand National (b) It allows registered auditors to carry out audits of non-SBEs although they are not professional auditors and hence not Code of Conduct re-admitting Quality bound by the continuing membership requirements of CASL, including mandatory continued professional development *Provide and disciplinary auditors who have Framework to and compliance with the Sri Lanka Auditing Standards; a code of ethics; or any investigation or disciplinary action. for differential procedures of been out of include all PAOs (c) It has no provisions to license audit firms, only individual auditors. reporting members practice for more (d) It does not allow SLAASMB and some of the other regulators to have additional sources of funds to supplement the t Enhance existing government funds - to support the enhanced work of the regulators. *Require sufficient structured (e) Mandatory provisions to carry out audit firm-level reviews do not exist. information on lmlement framework for (f) No differential reporting requirements for different categories of companies are recognized in the law. The capacity of Inorton tograr sole laning SMEs, SOEs, and SMPs are too weak to follow international financial reporting and auditing standards. the Registrar of practitioners and employers companies Inraespot .meeta 12 The ROSC A&A proposes several policy recommendations that take into account international experience, good ,Monitor CPD and practice, and local circumstances. Addressing the gaps and weaknesses in the statutory framework is key to setting the Mandate sanction right foundation to move forward. The quality of training to prospective accountants can be further enhanced by the compliance non-compliance professional accountancy organizations designing and implementing structured frameworks for accrediting and monitoring with auditing learning providers and approved employers. The National Qualification Framework developed by the Ministry of Higher standards for Reduce disparity Education should be amended to include professional accounting qualifications to facilitate comparability by employers all categories in service and potential students. The professional accountancy organizations should implement comprehensive programs to monitor of auditors between Western continuing professional development (CPD) and sanction non-compliance. CASL should introduce audit specific CPD for groups the audit license. The regulators should enhance their coordination in order to enhance regulation of the accountancy ICASL oMe SMPs profession. There is room for further improvement in the methodologies used by regulators with increased resources. CASL CAcLrpchamber should implement a mandatory audit quality assurance review process for audit firms to encourage implementation of Sri Lanka Standards on Quality Control (SLSQC) 1. The recommendations are summarised in Figure A. Registration of 1'3 The findings and the policy recommendations summarized in the report will contribute to the development of a practicing audit comprehensive reform action plan. The action plan will identify the proper sequencing of actions and the responsible firms parties for implementation.at s a PAit VrmwokPrfsso I ntroducton The Report on the Observance of Standards and Codes, Accounting and Auditing (ROSC A&A) in Sri Lanka aims to assess the progress made on implementation of the policy recommendations of the first ROSO A&A in 2004 and supports the Government of Sri Lanka in preparing a country action plan. This will further enhance the quality of corporate financial reporting, and thereby contribute toward the country's goal of improving the investment climate, attracting foreign direct investment (FDI), and fostering business development. The ROSC review, requested by the Minister of Finance and Planning, entailed an evaluation exercise that assesses the strengths and weaknesses of existing institutional frameworks that underpin financial accounting and auditing practices; determines the comparability of national accounting and auditing standards; and evaluates the effectiveness of enforcement mechanisms for ensuring compliance with existing national standards, rules, and regulations. The review was conducted from December 2013 to September 2014 using the World Bank's multi-layered review methodology. All findings reflect this time period of the review; some stated future events may have been achieved by publication date. The data and information used for the review was gathered from a diagnostic questionnaire completed by stakeholders; by reviewing accountancy profession-related documents; and through interviews with many stakeholders from government, regulatory and accountancy bodies, accounting and auditing firms, banks, insurance companies, state-owned enterprises (SOEs), small and medium-size enterprises (SMEs), and academia. The review focused on assessing the institutional framework underpinning accounting and auditing practices in the private sector and in SOEs of the country in comparison with international standards and good practice. 'as outlined in Figure 1.1 below. Figure 1.1. Approach Statutory Education & Accountancy Accounting Auditing Monitoring, Framework Training Profession & Standards Standards Enforcement Ethics&Ovrih An overview of the ROSC A&A and the detailed presentation of methodologies are available on the Wrd Bank worsht A. Country Context A.CutyCnet6 Sri Lanka's GDP is estimated to be US$67.4 billion for 2013,' reflecting a growho . ecn nraeoe 02 3 The Sri Lanka economic situation has changed significantly since the 2004 ROSC. With the end of a 26-year conflict in May marginally below the 8 percent growth rate required to achieve the stated go 2009, Sri Lanka has transitioned to middle-income country status. The macroeconomic situation has improved. Sri Lanka Per capita income was US$3,282 in 2013, reflecting growth from US$2,923 in 2 can now focus on long-term strategic and structural development challenges for achieving the Government's vision. Its goal ambitious target of achieving US$4,000 per capita income by 2016. Foreign dirE to increase per capita income to US$4,000 by 2016 - will require sustained high economic growth (8 percent per year), which is an increase of 73 percent from the recorded US$1,066 in 2012. As f driven by a high investment rate. The second goal is shifting toward a more knowledge-based, globally integrated and necessary to reach the targeted GDP growth rate, it is imperative that inv competitive, environmentally friendly, internally integrated, and increasingly urban economy. The third goal is ensuring comparable across countries in compliance with globally acceptable accounti improvement in living standards and social inclusion. A key component of the strategy for economic growth is the informed decision-making. Figures 1.1 and 1.2 provide a snapshot of the countr development of Sri Lanka as a regional hub in South Asia for aviation, maritime, tourism, knowledge, energy, and development. commercial activities. Enhanced financial reporting infrastructure will contribute to achieving this vision. Figure 1.1. GDP Growth and FDl Inflows Figure 1.2, CptlMre eeomn A The ROSC A&A is relevant to the FY13-16 Country Partnership Strategy as it provides a foundation for the World Bank Group support to Sri Lanka in addressing its emerging middle-income country agenda. The Country Partnership Strategy focuses on four areas: (a) facilitating sustained private and public investment; (b) supporting structural shifts in the Inflows 2,5000 economy; (c) improving living standards and social inclusion; and (d) improving resilience to climate and disaster risks. 9 $160 Accordingly, the World Bank Group supports the Government effort to improve the investment climate, strengthen governance, and reduce the inefficiencies of the public sector; deepen its assistance to the knowledge-based economy 6 1,500.00 with investments in skills, research, and innovation to support a structural shift in the economy; and continue to support 5 improvements in living standards and social inclusion in order to ensure the benefits of rapid growth and higher-quality $0.60 services are broadly shared. A strengthened institutional framework for the accountancy profession will contribute toward 2 S040 50000 achieving the country's goals in these areas, especially by improving investment climate and developing skills for a $0.0 knowledge-based economy. Improving accountancy facilitates the provision of high-quality, comparable financial information in the economy, which is essential for domestic and foreign investment decision-making and improving corporate governance and corporate and economic accountability. bo tnflows -4- GoP Growth Rate ra of a U10ilo en B. Economic Context Sri Lanka continues to improve its business environment in order to attract investment and increase economic growth. Sri Sri Lanka has made significant improvements in accounting and auditing p in t d e en Lanka was ranked 85 of 189 countries in the 2014 Doing Business report, which was the highest within South Asia The 2004 ROSC. Chapter will discuss how the country has implemented most f Sm ion Colombo Stock Exchange (CSE) has 291 companies representing 20 business sectors with a market capitalization of Rs. partnership with international organizations such as World Bank and IFAC.ThSrLakAconignduitg 2,499.8 billion (US$18.8 billion), which is approximately 28 percent of GDP The country's financial services comprise 24 Standards Monitoring Board (SLAASMB) is the only audit regulator in South As oe prte otenta licensed commercial banks, 9 licensed specialized banks, 48 licensed finance companies, 10 specialized leasing Forum of Independent Audit Regulators (I FIAR), and its model of combining ba nari ha companies, and 22 insurance companies. Significant structural reforms are taking place in banking and non-banking recognized as a good practice by IFIAR and shared among its members. SLA a r a dsor financial institutions and insurance sectors to build a dynamic, more effective, and more resilient financial sector in Sri Board, the Consultative Advisory Group of the International Auditing and Aurt n s ad ia e Lanka. There are 64,423 companies registered under the Companies Act No.7 of 2007, of which 3,938 are public Consultative Advisory Group of the International Ethics Standards Board for Ac companies, 1,591 are associations, 348 are limited by guarantee, 232 are registered as foreign entities, 9 are offshore Valuation Standards Council (IVSC). These developments within the professionraepvdtewyfreegneo entities, and 2 are unlimited companies. vibrant business process outsourcing (BPO) sector for financing and accounting otorig 'Doing Business reports available for downloading at http://www.doingbus;ness.org/reparts/global-repoirts/do;ng-bustness-2014 4Road Map 2014, Monetary and Financial Sector Policies for 2014 and Beyond by Central Bank of Sni Lanka, h tp:/w wb/.o.kmdafane2l.p. 'ColmboStok Echage wbsie ww,cse,k- s ofFebuai 19 204.'Refer to Annex i for Sri Lanka's IFIAR membership pro file. . Status of Implementation of 2004 Po cy Recommendatons The Government of Sri Lanka has made significant progress in implementing the policy recommendations in the 2004 ROSC A&A report. Of the 14 policy recommendations, 7 have been fully implemented while another 5 are under implementation. Progress made since the issue of the ROSC 2004 is testimony to the commitment of the profession and the Government to improve the quality of financial reporting in Sri Lanka. Table 2.1 summarizes the key recommendations and status. Table 2.1. Key 2014 ROSC A&A Recommendations Key recommendations Status as of March 2014 Implemented (11 a) The Sri Lanka Financial ReportigSadrs(LR)crepn to the IFRSa 2012 bound volumef exception of IFRS 9, for which implementation from January 201m expected that the 2014 IFRS-boundvlmrilb dpe,wt h exception of IRS 9, by the th (1)(a) Mandate the use of 1AS/IFRS standards in line with the curren without modification for specified Accounting Standards Committeeri s S o on business enterprises, and as a policy of adoption, the stan s n i (1)(b) Issue standards Lanka is among the first countries nSuhAi hthv dpe implementation guidance to ensure IFIRS. IFRS 15, which has an effect uniform application of standards and be effective from this date. This h arte brin facilitate the improvement of in the 2014 ROSC A&A. compliance practices a(ib) CASL has published two anders enteen o lly Depreciated Assets and Guidelines on Souty Pant ad adpt and Biological Assets Valuatiov dth e of Fillcal Reporting, in view of pertinent isases rentified by revatior n other stakeholders. Additionally ilar wastaem e on Application of SLFRS 7 for comparatives and SLFRS 10, 12, and 13. Key recommendations Status as of March 2014 Key recommendations Status as of March 2074 Implemented. (5) Initiate legal reforms for Outstanding. SLAASMB conducts reviews of financial statements and audits on an engagement basis as the accounting and audit regulator. Its technical improving compliance with the There have been no revisions of or capacity has been strengthened, the methodologies have improved accounting and auditing standards and Auditing Standards Act to clari from a disclosure checklist approach to one of exercising professional auditors. judgment on recognition, measurement and disclosure, a high degree (2) Make cohesive efforts for of coverage (50% of accounts for 2013) is achieved, and the regulator (6) Introduce a system of Outstanding. strengthening the enforcement is expected to increase coverage in the coming year. Companies and independent oversight of audit SLAASMB continues to carry out i mechanism auditors are informed of the findings and other regulators are copied profession by SLAASMB focusing engagement level. As recommend when applicable. Findings are published annually on the website. on: introduced a system of independer Other regulators, such as the CSE, SEC, IBSL, CBSL Banking (a) Defining requirements for eligibility Supervision, and non-banking financial institutions supervision, have of firms, in consultation with CASL, As a first step to introducing also strengthened enforcement mechanisms. Utigation has been for undertaking audit assignments of introduced professional self-regU initiated by the SLAASMB in collaboration with the SEC in two specified business enterprises; Assurance (AQA) Initiative, which m Instances, with many other issues resolved prior to escalation due to (b) Monitoring the performance of The AQA Board, established by CA the vigilance of regulators. practicing auditors which may Council and is represented by all k include (i) on-site review of audit of the AQA Board must be maintaine napaac n at h Implemented. firms with regard to compliance with Director General of SLAASMB is m (3) Strengthen the capacity of SLAASMB increased the number of Chartered Accountants it auditing standards and other AQA Board and the panel of review SLAASMB and other regulators employs in 2013 from 6 to 14 and improved its methodologies, applicable requirements, including external consultants on the review p achieving higher rates of coverage and effective reviews. All other code of ethics; (ii) preventive have been carried out on a voluntar regulators (SEC, CSE, CBSL, and IBSL) have also strengthened their measures for ensuring that audit being currently trained on SLSQCt capacity with increased numbers of professionally qualified firms have adequate quality process effective. accountants and are achieving high coverage rates. assurance arrangements; and (Iii) Partial Implemented.adequate investigation and An independent audit monitoring m Partia iplemeted.teetbiheto teItrRgltr disciplinary proceedings, along with when country conditions are conducie CBSL has initiated the establishment of the Inter-Regulatory ipsto faporaesntos Institutions Council to ensure the formation of appropriate policy Tmoiton shouldabe basedionsa directions for the orderly development of the financial sector, and to rbs mtod ing on facilitate coordination and the exchange of information in the interest international good practice. (4) Ensure better coordination of wider financial system stability. The IBSL, SLAASMB and SEC among regulatory bodies for Board have a nominee of the Central Bank, who is at present the improving compliance practices Deputy Governor. Additionally, the SEC and CSE work closely Take steps for wider public Implemented. together to ensure complete coverage of fourth-quarter reports and (7) annual reports. The MOU between SLAASMB and SEC identified in a bl of ri rB i its indite r the ROSC of 2004 remains effective to date. SLAASMB writes to follow-on enforcement actions to an auit obs onu ei other regulators. However, there is further room to improve help augment a culture of ieirm ubied annle communication by other regulators such as IBSL, CSE and compliance. advice. Non-Banking Financial Institutions Supervision. 78 Key recommendations Status as of March 2014 Key recommendations Status as of March 2014 Partially implemented. Implemented. ((8) Introduce an awareness program This has not been initiated by SLAASMB mainly due to the Considerable improvementsohaveCtakeneplace inptheeprofessional for improving the degree of convergence to IFRS; the first financial reporting period for SLFRS (12) Ipo trofina education and training arrangement compliance with accounting compliance was March 31, 2013. However, it is noted that significant requirements by specified business efforts were undertaken by the profession to increase awareness of arrangements of CASL, including: Training manuals were published fo enterprises, accounting requirements, particularly with regard to the first time o Improve training manuals to be syllabus, and a contract has been a implementation of SLFRS. compatible with international international repute to produce mat ____________________________ ________________________________________learning__learing raterals (9) Upgrae the liensing prcedureso Teach business ethics as a Business ethics will be taught and asse sasprt (9) Upgrade the licensing procedures emphasis ivethsuc for accountants and auditors in Partially implemented. a Employ instructors with training public practice. CASL has aligned its educational requirements with the in the practical dimensions of by testing in the Audit and Assuran The curriculum and system of International Education Standards for Professional Accountants accounting and auditing subjects. qualification examinations should be from 2010. A new syllabus was launched in March 2014, which is standards. improved to conform to the also fully compliant with the International Education Standards for IFAC-issued International Education Professional Accountants. has commenced a program of regis Standard for Professional the quality of tuition provided, whic Accountants. CASL, the only PAO recognized to issue audit practicing licenses to instructor profiles. CASL should develop a sound eligible members, Is yet to develop a sound mechanism for mechanism for renewing practice renewing the practicing license of auditors in public practice on the license of the auditors in public basis of their performance evaluation (results of audit quality practice on the basis of their reviews) and compliance with CPD policy. 13) Improve academic accounting performance evaluation curriculum and teaching in _________________________________________________________________________________universiuniersiies "Update curriculum and increase Implemented. focus on international Partially implemented (10)uRquire sepanaudterdicle f The new Companies Act No.7 of 2007 requires the disclosure of development and practical Significant improvements have bee auitan nn-uitsevie ee.audit fees separately from non-audit services. aspects; while others have more work to do. h nvriyo r ___________________________ __________________________________________" Teach Techubuinessethiciass aJayawrdenauraahsdmadpcommndablsprogess,cndmit separate subject; graduates are offered many exempAccountants (11) Strengthen the capacity of Implfemented. Adequate attention to be given to due to its syllabus coverage, while CASL by building a full-time team CASL has strengthened its capacity and has 8 professional staff in teaching corporate finance, of qualified professionals closely full-time employment under the supervision of the CASL Council and English, communication skills and supervised by the Council to its Committees. However, further strengthening of capacity is developing the critical thinking ensure its effective role in meeting required to achieve a higher degree of compliance with IFAC ability of students. IFAC member obligations, member obligations. ( R1 Imlmetd Key recommendations Status as of March 2014 IllI nstitut ona Framework (14) CASL should carry out the Partially implemented. following in reference to continuing CASL has introduced continuing professional development as a professional development: mandatory requirement for all qualified accountants. * Introduce CPD as a mandatory requirement for all qualified CASL delivers a number of high-quality training programs on accountants in line with accounting and auditing standards conducted by experienced IFAC-issued accountants who are able to discuss practical implementation Continuing Professional aspects of accounting and auditing standards. Development- Proposed International Education Guideline CASL conducts programs with training providers of international for Professional Accountant; repute, including Duke Corporate Education, post-graduate * Arrange for delivery of high-quality universities such as INSEAD, to improve quality of training training programs on practical opportunities within the country. It has an ongoing Master of Business implementation aspects of Administration Program with the University of Southern Queensland, accounting and auditing standards, Australia, affording qualified accountants further opportunities. CASL and code of ethics for professional accepts training from other parties who are experts in their field. accountants; * Facilitate access to programs CASL requires its practicing members to provide declaration that they offered by universities and other have compiled with CPD requirements, but there is no mechanism training providers so that its developed for enforcing and monitoring the same. members can meet requirements for CPD; All PAOs have active CPD calendars covering SLFRS and other * Develop a mechanism for related topics to facilitate CPD compliance by members and monitoring and enforcement of the recognize the CPD programs of other IFAC bodies. requirements on CPD of the practicing members. 9 This chapter evaluates the institutional framework underpinning the accounting profession and the regulation of auditors in Sri Lanka with a view to improving the quality of financial reporting in the country. A strong institutional framework provides an environment conducive to improving the quality of financial reporting leading to an improved investment climate and more robust development of capital markets. Figure 3.1 provides an overview of the institutional framework in this regard. Figure 3.1: Institutional Framework S-AASIVIBeAccounting and Auditing Standards Act 7 Sri Lanka Accounting & Auditing Act No.15 of 1995 e--- Accounting Standards Committeeand Auditing Standards Act No. 15 of 1995 specifies arrangements for accounting and auditing of specified business enterprie(SE7Iemo rstenttuef -eAuditing Standards Committee Companies Act No.7 of 2007 ~~~Chartered Accountants of Sri Lanka (CASL) to issue accounting and auditing stadrsapial oseiidbsns ----e Companies Act No.7 of 2007 e-eRegistar of Companies enterprises and provides for the formation and functioning of the Accounti S dSecurities & Exchange Commission Act CommitteN o that make recommendations to CASL inadopting accti Institutional Securities & Exchange Commission Act No.36 of 1987 established the Sri Lanka Accounting and Auditing Standards Monitoring BoardExchange Framework Banking Act No.30 of 1988 e CBSL Dept of Baing SupervisionSri Lanka accounting and auditing standards. The Act has an indemnity provisio l to their action against non-compliance. Finance Business Act 2012 m CBSL Dept of Non Banking Supervision Regulation of Insurance Industry Act a---A Insurance Board of SrI Lanka2 The Accounting and Auditing Standards Act requires all specified busine accordance with the Sni Lanka Accounting Standards and have them auditediyaCS ebri codnewt Inland Revenue Act No.38 of 2000 0--Rthe Sri Lanka Auditing Standards. It also requires specified business enterprisRevenue Mini