...But Should Shares or Debt be Offered in the Absence of a Regulatory Framework?
By:
Prof Armaso Bawn
The creation of a regulatory framework and a policing agency that will be charged with the responsibility of protecting investors, maintaining a fair, orderly, and efficient market and facilitating capital formation would require a legislative act approved by the House of Representatives and the Senate of the Republic of Liberia.
However, the sale of shares and the issuance of debt (bonds) or unsecured loans (debentures) have already begun; so the capital markets of Liberia are here to stay.
Our primary concern now is what mechanism will be put in place in the absence of the required legislative act to protect the interest of the public and maintain the confidence of investors to allow this fledgling market to evolve and who should have the oversight responsibility? Until there can be a legislative act that specifically addresses the issuance of securities and the oversight responsibility, the New Financial Institutions Act of 1999 that created the Central Bank of Liberia should supersede, along with extreme legal consequences for Certified Public Accountants (CPAs) in respect to negligence and fraud. Assuming that our laws are modeled after those of the United States, a pronouncement by the court to enforce a criminal liability claim against the CPA that knowingly issues an incorrect audit report upon which an investor has relied to make his/her investment decision would send a strong signal that Liberia is ready for business in its newest arena of capital formation, the capital markets.
The CPA is responsible for every aspect of public accounting work, including auditing, taxes, management advisory services, and accounting and bookkeeping. However, if he or she fails to exercise the reasonable amount of care that can be expected of a person in the profession or does anything tantamount to reckless behavior, that CPA could be sued for common law liability to third parties – a category in which all users who rely on the CPA’s services to make an investment decision would fall.
This in no way indicates that I dislike auditors. However, the standard of due care to which the auditor is to perform his or her duty would lend support in the creation of the securities industry and the protection of investors. For example, the laws and rules that govern the securities industry in the United States are derived from a simple and straightforward concept – that all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it. This is why the Securities and Exchange Commission (SEC) requires public companies to disclose meaningful financial and other information to the public. The availability of this information enables the investor to judge for themselves whether to buy, sell or hold a particular security. It is through the steady flow of timely, comprehensive, and accurate information that people can make sound investment decisions. This is why the CPA’s audited financial statements and opinion are so vital to the protection of investors’ interests and the creation and sustenance of the Liberia Capital Markets.
An important concern for all professionals is the extent to which the law may hold them liable for malpractices against third parties – those persons other than the client, who may be the expected or intended users of professionals’ product and services.
Recently in the US, several important legal developments have expanded the risk perimeter of auditor liability to third parties as well as the extent to which an auditor’s work product should reasonably be expected to give rise to liability for primary and secondary users. Given this expanded risk perimeter, it is in the best interest of the CPA to negotiate a fee with the client that is fair, just and comparable to the level of risk he or she is taking. In other words, do not settle for cheap.
The New Financial Institutions Act of 1999 governs the licensing of commercial banks and non-financial institutions. In the interest of protecting investors who may desire buying shares or giving unsecured loans to companies in Liberian capital markets, the same licensing requirements for banks could apply. In addition, CPAs wishing to assist in the capital formation of a company should also be required to register and be approved by the Central Bank of Liberia. Additionally, companies should be required to have a prospectus, a legal document that institutions and businesses use to describe the securities they are offering for participants and buyers. This, I believe, would be a humble beginning towards protecting the interests of the investing public in the absence of an approved legislative regulatory framework.
Investors should be aware that the buying of shares or the issuance of debt is a risky business. Do not risk money you cannot afford to lose. Always seek the advice of an expert.
The writer
Armaso Bawn is professor of Accounting at the A.M.E. University in Monrovia. He earned an MBA from the Graduate School of Business, Public Administration and Information Sciences, Long Island University; a Master’s Degree in Management Information Systems, Keller Graduate School of Management, Devry University. He managed an investment portfolio for a New York-based real estate co-operative and specialized in Spread Trading. He can be reached on 06-589571.
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Updated: February 16, 2010 - 12:27am
The creation of a regulatory framework and a policing agency that will be charged with the responsibility of protecting investors, maintaining a fair, orderly, and efficient market and facilitating capital formation would require a legislative act approved by the House of Representatives and the Senate of the Republic of Liberia.
However, the sale of shares and the issuance of debt (bonds) or unsecured loans (debentures) have already begun; so the capital markets of Liberia are here to stay.
Our primary concern now is what mechanism will be put in place in the absence of the required legislative act to protect the interest of the public and maintain the confidence of investors to allow this fledgling market to evolve and who should have the oversight responsibility? Until there can be a legislative act that specifically addresses the issuance of securities and the oversight responsibility, the New Financial Institutions Act of 1999 that created the Central Bank of Liberia should supersede, along with extreme legal consequences for Certified Public Accountants (CPAs) in respect to negligence and fraud. Assuming that our laws are modeled after those of the United States, a pronouncement by the court to enforce a criminal liability claim against the CPA that knowingly issues an incorrect audit report upon which an investor has relied to make his/her investment decision would send a strong signal that Liberia is ready for business in its newest arena of capital formation, the capital markets.
The CPA is responsible for every aspect of public accounting work, including auditing, taxes, management advisory services, and accounting and bookkeeping. However, if he or she fails to exercise the reasonable amount of care that can be expected of a person in the profession or does anything tantamount to reckless behavior, that CPA could be sued for common law liability to third parties – a category in which all users who rely on the CPA’s services to make an investment decision would fall.
This in no way indicates that I dislike auditors. However, the standard of due care to which the auditor is to perform his or her duty would lend support in the creation of the securities industry and the protection of investors. For example, the laws and rules that govern the securities industry in the United States are derived from a simple and straightforward concept – that all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it. This is why the Securities and Exchange Commission (SEC) requires public companies to disclose meaningful financial and other information to the public. The availability of this information enables the investor to judge for themselves whether to buy, sell or hold a particular security. It is through the steady flow of timely, comprehensive, and accurate information that people can make sound investment decisions. This is why the CPA’s audited financial statements and opinion are so vital to the protection of investors’ interests and the creation and sustenance of the Liberia Capital Markets.
An important concern for all professionals is the extent to which the law may hold them liable for malpractices against third parties – those persons other than the client, who may be the expected or intended users of professionals’ product and services.
Recently in the US, several important legal developments have expanded the risk perimeter of auditor liability to third parties as well as the extent to which an auditor’s work product should reasonably be expected to give rise to liability for primary and secondary users. Given this expanded risk perimeter, it is in the best interest of the CPA to negotiate a fee with the client that is fair, just and comparable to the level of risk he or she is taking. In other words, do not settle for cheap.
The New Financial Institutions Act of 1999 governs the licensing of commercial banks and non-financial institutions. In the interest of protecting investors who may desire buying shares or giving unsecured loans to companies in Liberian capital markets, the same licensing requirements for banks could apply. In addition, CPAs wishing to assist in the capital formation of a company should also be required to register and be approved by the Central Bank of Liberia. Additionally, companies should be required to have a prospectus, a legal document that institutions and businesses use to describe the securities they are offering for participants and buyers. This, I believe, would be a humble beginning towards protecting the interests of the investing public in the absence of an approved legislative regulatory framework.
Investors should be aware that the buying of shares or the issuance of debt is a risky business. Do not risk money you cannot afford to lose. Always seek the advice of an expert.
The writer
Armaso Bawn is professor of Accounting at the A.M.E. University in Monrovia. He earned an MBA from the Graduate School of Business, Public Administration and Information Sciences, Long Island University; a Master’s Degree in Management Information Systems, Keller Graduate School of Management, Devry University. He managed an investment portfolio for a New York-based real estate co-operative and specialized in Spread Trading. He can be reached on 06-589571.