Auditor called to account in SEC row
Deloitte Touche Tohmatsu has broken a business taboo by showering contempt on the Securities and Exchange Commission, Siriporn Chanjindamanee and Thanong Khanthong write.
THERE are certain taboos in Thailand: You don't criticise a judge's verdict; you don't argue with traffic police; you don't sue the Bank of Thailand; and you don't pour contempt on the Securities and Exchange Commission.
Deloitte Touche Tohmatsu, the international accounting firm, has breached one of these taboos by showering contempt on the Thai exchange watchdog in defence of one of its senior partners, Professor Toemsakdi Krishnamra. The Office of the SEC has deemed that Toemsakdi, who is also dean of Chulalongkorn University's Sasin School of Business Administration, failed in his professional duty to properly audit the books of the now-defunct Finance One Plc, and decided to suspend his auditing licence for six months.
Toemsakdi has failed three times in appeals to the SEC for a reversal of the decision, despite his argument that his auditing of Finance One was based on the accounting standards acceptable to the Bank of Thailand at the time.
On Tuesday, Robert Campbell, a Deloitte managing partner, issued a statement in defence of Toemsakdi, charging that the SEC's decision reflects its failure to understand the financial reporting practice in Thailand at the time.
''The decision constitutes an attempt by the Office of the SEC to punish Prof Toemsakdi for failing to comply with practices which were not applicable in Thailand,'' he said. ''The decision reflected a fundamental misunderstanding of the auditors' role in financial reporting practice in Thailand and the extent to which it has contributed to Thailand's current difficulties.''
Campbell's statement touched a raw nerve with the SEC. For if the SEC could not understand the financial reporting practice in Thailand, how could it regulate the Bt1.3-trillion capital market?
The SEC would understand Campbell's point if he came up with arguments to defend Teomsakdi, but it could not accept the charges made by Campbell or Deloitte that, as regulator of the capital market, it did not have an understanding of the financial reporting in Thailand.
Indeed, after the systemic failure of the financial system, questions have been raised over the role of auditors, who are also blamed by the investing public for their lax standards. If the auditors adopted tougher accounting standards on the companies, investors would have been given an early warning about their actual financial positions. The auditing industry is now undergoing a revamp.
Dr Prasarn Trairatvorakul, the deputy secretary-general of the SEC, stood firm on the SEC's decision on Toemsakdi, insisting that the regulatory officials have relied on the opinions of both internal and external experts before arriving at the final decision that Toemsakdi failed to strictly comply to the Generally Accepted Accounting Principles (GASP) in Thailand and the Generally Accepted Auditing Standards (GAAS).
For instance, the Office of the SEC found that Toemsakdi failed to scrutinise Finance One's policy of interest rates charged to related companies as required by the auditing standard.
''There was a settlement transaction between loans granted to related companies and repayment made by such related companies, with the interest rate charged to related companies being considerably lower than that charged to other companies even though the loans were granted on the same day,'' the SEC statement said.
According to GAAS, such practices were regarded as being highly unusual and could lead to the siphoning off of benefits among related companies. ''Such standards require the auditor to examine the policy adopted by the company on interest rates,'' the SEC statement said.
Prasarn said the Office of the SEC would ask Deloitte's headquarters whether Campbell's statement in defence of Deloitte's accounting and auditing practice for Finance One was a ''particular case'' or whether it was a ''general practice'' of Deloitte.
''If they say that it was a particular case, whose local opinions might differ, then we will not pursue the matter further. But if they insist that the Finance One case is a general practice of Deloitte's policy, then I feel extremely concerned about Deloitte's worldwide standard,'' he said.
Prasarn did not rule out the possibility that the SEC would bring up the case of Deloitte's accounting practice to the attention of the International Organisation of Securities Commission and International Federation of Accountants.
Finance One was a colourful saga. The SEC and Deloitte are not the first antagonist pair. In March 1997, Dr Amnuay Viravan, the then finance minister, and Rerngchai Marakanond, the then governor of the Bank of Thailand, tried to force a marriage between the troubled finance company and Thai Danu Bank, hoping that the merger of the two would restore confidence in the sagging Thai financial system.
Finance One appointed Dhana Siam Finance & Securities as its financial advisor for this merger deal, while Thai Danu Bank hired Phatra Thanakit. After Dhana Siam went through Finance One's books, it asserted that Finance One still had a positive net worth of Bt5 billion. Phatra Thanakit also cross-checked on Finance One but found that Finance One was insolvent with a negative net worth of Bt5 billion.
Both Amnuay and Rerngchai were at their wits' end over whose financial reports were more believable. Naturally, the merger deal collapsed and it triggered another round of the baht attack because foreign currency speculators read that the Thai authorities did not have a credible game plan to deal with the insolvent financial system.
Finance One now goes into the historical record of Microsoft Encarta 99, which is the most popular multimedia encyclopaedias, as one of the major causes of the Thai financial crisis.
An industry source said it appears that Deloitte, among the world's top five accounting firms, intends to further challenge the SEC's decision point-by-point because it has its global reputation to protect. Since Deloitte is insisting on waging the war against the SEC, one can expect to see a very nasty outcome indeed.