The New Rule for Company Secretaries in Sri Lanka: What You Need to Know

The roles of a company secretary and an auditor are both crucial for maintaining good governance and transparency in any organization. However, recent developments in Sri Lanka have clarified the legal stance on this matter. A gazette notice issued in 2024 explicitly prohibits a company secretary from acting as the auditor of the same company. Let’s explore the implications of this regulation, along with its advantages and disadvantages.

Legal Framework

The Companies Act No. 07 of 2007 already emphasizes the importance of independence in auditing. For instance:

• Section 154 of the Act requires auditors to remain independent to ensure unbiased financial reporting.
• Section 221 outlines the duties of a company secretary, which focus on governance and administrative responsibilities.

The recent gazette notice strengthens these principles by explicitly prohibiting dual roles. This regulation aims to eliminate any potential conflicts of interest and uphold the integrity of financial reporting.

Legal Implications

1. Conflict of Interest Avoidance: By separating these roles, the regulation ensures that the auditor can independently assess the company’s financial health without any undue influence.
2. Enhanced Governance: This move aligns with global best practices in corporate governance, promoting transparency and accountability.
3. Compliance Requirements: Companies must now ensure that their secretaries and auditors are distinct individuals or entities, failing which they may face penalties.

Advantages of the Regulation

1. Improved Transparency: With separate individuals handling these roles, stakeholders can trust the financial reports more.
2. Alignment with Global Standards: This regulation brings Sri Lanka in line with international corporate governance practices.
3. Reduced Risk of Bias: The independence of auditors ensures that financial assessments are fair and accurate.

Disadvantages of the Regulation

1. Increased Costs: Smaller companies may find it challenging to bear the cost of hiring separate professionals for these roles.
2. Operational Complexity: Companies may need to adjust their processes to comply with the new regulation.
3. Limited Flexibility: Organizations that previously relied on dual roles for efficiency will need to adapt to the new requirements.

Conclusion

The recent gazette notice prohibiting company secretaries from serving as auditors is a significant step towards strengthening corporate governance in Sri Lanka. While it may pose some challenges, particularly for smaller companies, the long-term benefits of transparency and accountability far outweigh the drawbacks. Companies must embrace this change and ensure compliance to build trust with their stakeholders.