WATCHING THE WATCHERS
In the wake of the Finance One scandal, authorities in Thailand start to get tough with local accounting firms.
By Margo Towie

In August, the Securities Exchange Commission (SEC) suspended Toemsakdi Krishnamra, a senior partner at Deloitte Touche Tohmatsu Jaiyos, for the first quarter of 1999. According to the SEC charges, Toemsakdi didn’t carefully examine loans given to companies related to Finance One Plc, Thailand’s largest finance company until it went broke last year. The complaint further alleges that Toemsakdi failed to examine an investment classification and express a qualification on investments in Finance One subsidiaries that didn’t comply with Generally Accepted Accounting Practices (GAAP). Managers at both Deloitte’s international arm and the firm’s Thailand affiliate have appealed the SEC suspension of Toemsakdi for the first quarter of 1999, insisting that Toemsakdi did comply with auditing standards in signing off the books for Finance One. The appeal is scheduled to be heard by the beginning of November.

Whatever the decision, industry insiders say the SEC’s action signals a seismic shift in the regulatory landscape of Thailand. Until recently, officials at the SEC and the Stock Exchange of Thailand (SET) tended to go easy on offenders, issuing warnings rather than suspensions. But in the wake of the collapse of the financial services sector in Thailand, the SEC is now investigating the audits of all 26 former SET-listed finance companies that have been shut down. A second auditor, Sangah Sriariyametta of SGV-Na Thalang, was also suspended for up to six months for audits of Thai Financial Trust. "It’s a huge loss of face," notes Mark Greenwood, managing director of Paribas Asia Equity, a former Finance One affiliate. "It would have been quite impossible to unmask them two years ago." And officials at the SEC say more suspensions may follow. "As far as auditing is concerned, we have to look at all of them," says Pakorn Malakul Na Ayudhya, secretary general at the SEC. "In the case of Finance One, we spotted some serious flaws as far as auditing is concerned. We suspended two of these auditors. It’s a step in the right direction."

It’s a step that’s likely to send shock waves through the accounting community in Thailand. Toemsakdi is a former dean of Chulalongkorn University’s commerce and accounting faculty. What’s more, he’s founder and president of the Sasin Graduate School, one of the country’s top training grounds for accountants. He’s probably overseen the training of most of Thailand’s leading auditors, says John Wheatley, CEO of PricewaterhouseCoopers’ Thailand operation. Despite the suspension of one of Thailand’s most prominent auditors, some industry watchers believe the SEC has not gone far enough in cracking down on fraud. Says Greenwood: "A few rich and powerful people have to go behind bars to lead to meaningful change."

Political dynamite

Regulatory authorities may have little choice but to get tough with local accounting firms. Faced with the need to attract foreign capital - and eager to meet the conditions set forth in the International Monetary Fund bailout package finance officials are already scrambling to overhaul the country’s auditing system. "There are probably very few public corporations that have conformed to the letter of the tax code and other accounting codes," says Greenwood. "You’ve got the get-rich-quick guys who’ve used the tax code and other accounting codes to conserve cash inside and artificially deflate the costs."

Generally, auditors have not questioned these accounts - with good reason. "Many of these companies have milked their core business to put the money into property and shares," says David King, former director of operations for Asia of Pannell Kerr Forster International, an auditing company. "If you follow the money trails, they lead to interesting people and interesting places. Exposing all of that would be political dynamite." What’s more, King, who is now a financial controller with US-based Transcontinental Tobacco Corporation, says many auditors he’s worked with in Thailand simply don’t recognize double-dealing when they see it. "They’re like teams of clerks: as long as there’s a tax invoice, they’re happy," he says. "They use no modern auditing procedures."

Part of the problem is that all registered businesses - regardless of size - are required to submit audited financial reports each year. That makes for a whole lot of reporting. Last year, 390,000 registered businesses were examined by Thailand’s 2,500 practicing auditors. Of those, 46 auditors were authorized by the SEC to look at the books of the 423 companies listed on the SET at the end of June. Not surprisingly, compliance has come to dominate the auditing business. "The partners here abandoned financial services years ago because we could not do the amount of work needed to come to an opinion," Wheatly says. The fees were atrociously low. Without financial services, Wheatly says there’s no real way to make sure auditors are doing their jobs. It’s coming home to roost now."

But Nontaphon Nimsomboon, president of the Institute of Chartered Accountants and Auditors of Thailand (ICAAT), doesn’t agree: "My identification of the problem is that it’s on the regulatory side and the individual’s ethics, not the profession as a whole." Nontaphon, who is also Thailand’s auditor general, believes that ICAAT’s inability to sanction wayward members is a serious problem. "Once you can regulate, then you have the authority to call for the working papers, all the documents supporting the quality of the work of the auditors," he says. "Right now, we don’t have that authority."

Currently, the auditor of Thailand’s auditors is the Department of Commercial Registration, which comes under the Ministry of Commerce. But the department’s director general, Noravut Suwarn, admits that the sheer volume of work hampers the agency from effectively policing the industry. "We have 390,000 businesses registered with our department and every one has to submit audited financial records every year," says Noravut. "We can’t do all the checking." Along with random audits, the department’s rule of thumb is to scrutinize all the work of any auditor who signs off on more than 300 firms. Explains Noravut: "Over 300 can’t be done by an ordinary person."

No welcome mat

Apparently not. In September, two auditors were convicted of selling their signatures to scores of local companies. According to regulators, one of the accountants had signed off on audits of 16,563 companies.

Despite these convictions for audit fraud, Thai authorities seem keen on getting the industry to watch itself. Under new proposals, the job of overseeing auditing and licensing would be handed over to an independent board. That board would oversee ICAAT - the auditing body - and a yet-to-be-established accounting body. Both would have legal authority to punish cheats. Government officials, academics and industry professionals would make up the membership of the board. Wheatley questions the setup. "There are vested interests," he says. "I don’t see why a regulatory board has to have practitioners."

Still, many accountants in Thailand support the proposals. One reason for their backing: a planned lifting of the rule that requires auditors to sign off on the books of limited partnership companies. "Most are small family businesses that don’t need an auditor. Audits are to protect shareholders," says Suchart Leungsuraswat, a PricewaterhouseCoopers partner. "Lifting the mandatory requirement will make it easier to change the attitude toward audits being something that adds value."

Such attitude-changing is crucial if finance managers at Thai companies hope to attract foreign capital any time soon. With funds earmarked for Asia in short supply, the few institutional investors in the region will go where accounting and auditing regulations are best. This fact has not escaped officials at the SET. New exchange regulations require listed companies to have audit committees comprised of independent, non-executive board members by the end of next year. "We are trying to instill a sense of good corporate governance," said SET vice president Patareeya Benjapolchai. "Right now, only 25 percent of SET member companies comply with professional standards."

Getting the other 75 percent up to par won’t be easy. As it is now, managers at some Thai businesses don’t welcome auditors with open arms. More reporting will not be cheered. Says Patareeya: "Many Thai companies are family companies that don’t want outsiders checking or revealing transactions where there may be a conflict of interest." And Patareeya admits that companies may find it difficult to find experienced finance professionals to staff the audit committees. Still, she believes the committee is a good starting point. "We have to change the attitude of the executive and the board to realize they need to provide a transparent financial statement. And auditors have to perform their duty as well."

That, or risk going to jail.

Margo Towie is a Bangkok-based writer.