February 4, 2002	Monday	Ziqa’ad 20, 1422

THERE is almost a consensus amongst the capital market experts and regulators that the goals of good corporate governance cannot be achieved without improving the accounting and auditing systems in the country.

It is commonly believed that the financial frauds and bunglings can be checked to a great extent if chartered accountants and auditors perform their jobs diligently and honestly.

The Security and Exchange Commission of Pakistan (SECP) seems determined to play its role in reforming this sector as well in order to have a transparent and reliable corporate sector, inspiring confidence, both among the domestic and foreign investors. The recent happening in the United States — the Enron affair—, has reaffirmed this belief and added to the urgency of this task.

This is in that context that a number of amendments are being proposed by the SECP in the Companies Ordinance of 1984 to have stringent laws for improving the corporate governance including streamlining the much-criticised role of chartered accountants firms in Pakistan.

The draft law is reportedly being sent to the ministries of finance and law for necessary vetting aimed at improving corporate governance so that investors’ confidence could be restored. With the bifurcation of the State Bank into two organisations, investment banking, discount housing companies and housing financial companies will be exclusively handled by the SECP. However, due to various snags things are not what the SECP people believe moving in the right direction to bring improvement in the capital market.

Currently there are marginal penalties such as Rs2000 against chartered accountants for pursing alleged corrupt practices or not following certain rules and regulations. It is said that self regulation did not work, forcing the concerned authorities to propose new measures. The senior officials of the ministries of finance and law and justice are believed to have agreed, in principle, with the SECP that there is a need for new stringent measures to effectively regulate and monitor the corporate sector and at the same time assuring that new investors come to Pakistan specially in the wake of the reconstruction of Afghanistan.

All the major economic, financial and banking activities that are currently being planned by the US, western and Japanese governments for Afghanistan will have to be channelised through Pakistan for which the concerned officials say that things will have to be improved on account of corporate governance and ensuring credible capital market in the country.

One of the proposed recommendations is that chartered accountants firms will be blacklisted at least for three years if found guilty of misconduct and promoting negative practices. The idea is that auditors should not gain any thing by producing overly favourable audits. One way to ensure their impartiality and remove conflict of interest would be to allow companies to engage auditors on a non-renewable fixed term contract. Thus, the auditor would gain little as there would be no chance of renewing the engagement for a considerable period of time.

Although capital market reforms had been announced by the government, so far they did not help to have good governance that seeks to foster accountability and transparency in corporate sector despite the fact that there is a worldwide interest in good corporate governance. Concerned officials say that the need for good corporate governance in Pakistan is undisputed for the promotion of a healthy and competitive corporate sector and to attract local and foreign investors. Primary objective of the code of corporate governance is to establish a system whereby a company is directed and controlled by its directors in compliance with the best practices so as to safeguard the interest of diversified stakholders.

The government believes that strong capabilities are being developed to gear SECP to play an active role in the development of capital markets and that the national clearing and settlement system had been made operational as part of the capital market reforms. Capital market is considered an important source of funding investment activities as it also provides profitable opportunities of investment to small savers.

Now when people still expect more vital decisions by the SECP to better regulate and monitor capital market, the concerned officials say that a new code of conduct has been specified for stock brokers. The requirement of net capital for brokers has been significantly raised and capital adequacy properly defined together with enhanced margin requirements. Furthermore, SECP is developing a framework for the promotion of venture capital business in the stock market which will meet an important need for the development of the IT sector.

There has been no shortage of accounting scandals and failures in recent years, both within Pakistan and internationally. After the Enron affairs - and certain inherent problems with the profession this has highlighted - it is high time the profession gears up and takes decisive steps to visibly enhance its quality as well as image. It is increasingly being argued that self regulation is not enough to maintain standards. It is felt that the profession must be regulated by a tough, statutorily independent body under the direct aegis of the SECP.

There has been phenomenal increase in the turnover of shares on the stock market from 1.0 billion in 1991-92 to 67.6 billion in 1999-2000. Aggregate market capitalisation has increased from Rs 218.4 billion in 1991-92 to Rs 392 billion in 1999-2000, a rise of 79.5 per cent. The number of listed companies on the KESC has increased from 628 in 1991-92 to 762 in 1999-2000. However, there had been complaints against many listed companies for not pursing prudent practices, over which no serious notice had so far been taken.

The officials of the SECP maintain that they have accelerated their drive to enhance the efficiency of stock exchanges and ensure protection of the interest of investors. Disclosures requirements are being made more stringent. Another phenomenon taking shape with the general rise seen in the stock markets is the revival of the mutual fund industry.

“The 2002 is a year of consolidation and implementation of various programmes announced last year”, said an official of the SECP. One of the major tasks, he said, will be to remove indirect trading in the stock exchanges. “We are working on a draft to be finalised shortly to remove indirect trading”, he said adding that the main purpose was to remove the complaints of the investors and to develop new products during this calender year.