The recent SRO issued by the Securities and Exchange Commission of Pakistan (SECP), requiring all listed companies to prepare a balance sheet and profit and loss account on quarterly basis for circulation among its members and stock exchanges is indeed a step in the right direction which will not only improve the corporate governance of the listed companies but will also curb the menace of insider trading due to the availability of timely information to the shareholders, and hence, will protect and safeguard the interest of the small investors.
The SECP is continuously striving to bring about improvements in the corporate sector to bring it at par with the developed markets. The latest measures will improve the practice of disclosures concerning the diversified operations of the corporate sectors. It will help in building the confidence of investors’ and will curb speculative trading.
According to reports, some companies have resisted the quarterly reporting requirements on the pretext of impracticality in preparation of quarterly accounts in such a short time period of one month and involvement of extra expenditure in printing and dispatch of reports.
It would have been much better, had the time limit for filing of accounts been reduced to 15 days of the close of the quarter because the computerization of accounting systems have made the life much easier for today’s management and reports are not needed to be compiled manually. These reports are available by just a click of the computer button and the reduced time limit will also eliminate the chances of manipulation in actual figures.
Secondly, with every quarterly accounts, the requirement of profit forecast for the next quarter in the directors report/chairman’s review should also be made mandatory and if the actual profits are not in line with the forecasts made in the earlier reports and there is an abnormal variance, the reason for such variance should also be disclosed in the report.
The SRO issued by the SECP is vague and incomplete in many respects and needs further clarification. Instead of issuing a detailed circular with all relevant explanations, the SECP has issued a one paragraph SRO that has raised a lot of questions but without answers. Lately, the SECP has hired chartered accountants, cost and management accountants, MBAs and other professional with rich experiences, but the kind of professionalism which is expected from these highly qualified professionals and from an organization that is a watchdog on corporate entities is still lacking.
The following shortcomings have been felt in the SRO which needs further clarification:
* As half-yearly and annual accounts are being prepared and sent to the members in the second and fourth quarter, the listed companies are in a quandary over quarterly accounts, i.e., whether quarterly accounts needs to be prepared and send to the members in the second and fourth quarter in addition to half-yearly and annual accounts.
* As regards the accounts for the six months, i.e., end of second quarter, what would be the time limit? Will it be one month or same as previous two months.
* The SRO does not mention whether these quarterly accounts need to be approved by the board of directors, as has been the case with the half-yearly and annual accounts. If these accounts are not required to be approved by the board of directors, then it should be made mandatory to be approved by the board to make it more worthy. Normally non-executive directors are not aware of the financial position of the company, this will give them an opportunity to remain abreast with the financial position of the company, and in this way, they can be held accountable of the operating results of the company.
* Whether these accounts need to be accompanied by the directors report/chairman’s review (report) is also not mentioned in the SRO. In my view, to make the quarterly accounts more meaningful, the report should be made mandatory along with the future profit forecasts as has been required in the case of annual accounts or all the requirements needed to be covered in the directors report/chairman’s review should be made mandatory along with quarterly accounts.
* It would be pertinent to go through the laws which govern the publication of accounts in case of listed banking companies. The accounting year of all the banks invariably ends on December 31. As per the Companies Ordinance, 1984, all listed companies are required to hold Annual General Meeting within four months from the date of close of the accounting year. However, the Banking Companies Ordinance, 1962 further restricts the bank to hold the AGM within a period of three months from the date of end of accounting period, which effectively means that banks have approximately two months to publish their accounts in order to meet the requirement. Section 36 of the Banking Companies Ordinance, 1962 states: “The accounts and balance sheet referred to in section 34 together with the auditor’s report as passed in the AGM shall be published in the prescribed manner, and three copies thereof shall be furnished as returns to the State Bank of Pakistan within three months of the close of the period to which they relate”
This section further states that the SBP in “special circumstances” may extend the said period of three months by a further period of not exceeding three months but for that extension circumstances needs to be very “special”.
Now, if the publication of quarterly accounts are in addition to the annual accounts, for all practical purposes, it will not be possible for banks to prepare and circulate the quarterly accounts for the period ending December 31 as they would have to finalize the audited annual accounts, for which they have limited time, and then prepare the quarterly accounts which are to be printed and dispatched by January 31. Further, quarterly accounts will be sent while audit will be in progress and by the time audit is finalized and audited accounts are dispatched to the members, there could be difference in quarterly and audited accounts due to audit adjustments which will create confusion in the minds of the readers. * In the light of the above discussion, the last quarter accounts will be due within one month, whereas the annual audited accounts for the preceding year will be published and mailed to members within approximately two months in case of banks and three months in case of any other company from the year-end. The members will be receiving last quarter accounts before receiving the annual accounts for the preceding year.
In the light of the above discussion, this SRO has raised many questions and certainly the author, i.e., the SECP is in the best position to answer these questions before its office, if not already, is flooded with the queries not only from all the listed companies but also from the various professional bodies and associations representing different sectors of the economy. It would have been much better, if the SECP before releasing this SRO had invited comments on the draft SRO from the professional bodies like the ICAP and the ICMAP.
In future, it will be in the interest of the corporate sector, if the SECP should consult the professional bodies before releasing any such SRO or amending any ordinance to avoid miscommunications.
