March 4, 2002	Monday	Zilhaj 19, 1422

A GREAT deal has been said of the need for absolute accountability of political leaders in Pakistan, and they on their part talk of the lack of accountability in other sectors, specially the military, the bureaucracy and the private business sector.

A pre-requisite to affective accountability is transparency in official transactions and the right of the public to know what is really happening in the government, and why.

Poor accountability or the lack of that had left us with about 4,000 sick industrial units, and about Rs300 billion of non-performing bank loans and almost Rs200 billion of loan default. Which made the public sector banks too sick. And it made a major development finance institutions like the National Development Finance Corporation go burst and a few new private sector banks close down, with the Bankers Equity at the top among them.

Prior to the enforcement of accountability in the private sector, clean and efficient auditing becomes a major pre-requisite. And that has been highlighted by the collapse of the Enron, the largest power company in the US, after its chiefs had indulged in a series of malpractice and its famous auditors Anderson had hushed them up.

Globally the earlier folly of the auditors was brought to light when the Bank of Credit and Commerce International collapsed without advance warning by the famous Price Water House. That brought a great deal of infamy to the auditors with their world-wide network.

The collapse of the Mirror Group in London and the apparent suicide committed by its chief Robert Maxwell as also eventually blamed on the auditors who did not spotlight the rot which had set in the organization with its free wheeling boss.

In all these organizations if the auditors had done their job well and rang the alarm bells well in time they could have been saved or the damage minimised a great deal.

A series of such developments or failure of the famous auditors of world-wide standing has awakened the official and business quarters here to the important role auditors play in the corporate sector and the need to keep them clean, efficient and conscientious. There has been a great deal of emphasis on the kind of role they should be playing here while auditing the accounts of public limited companies, and particularly the companies quoted on the stock exchanges of the country.

Many quoted companies with public share holdings are hampered in many ways. The sponsors of the companies have 60 to 80 per cent of the shares are more and are able to dominate the company at will. Their word is law at the annual general meeting, if at all held. And they are often managed by their own family members who spend a great deal on themselves. And since the board of directors of such companies have a majority of family members plus domestic employee as directors the family can get done anything it chooses. The auditors of the company well aware of these facts go along with the managements, often for a small fee.

But in recent years the Securities and Exchange Commission of Pakistan (SECP) has been tightening the screws on such companies one after another. It has made it obligatory for the management to come up with regular annual reports of the company complete with the relevant data. And they are now obliged to hold regular annual general meetings.

That was followed by the demand of the SECP on the companies to publish six monthly reports, though un-audited. And now the chairman of the SECP, Khalid Mirza, has now asked them to published quarterly reports. And under the new rules of the SECP the family cannot have a majority of directors on the board.

And now profiting by the Enron experience, restrictions are coming on the auditors as well. Auditors of companies are not allowed to function as consultants of such companies or in any other position of pecuniary advantage.

The Institute of Chartered Accountants has also come up with its code and tried to keep the profession clean or above board. But it has not been very effective, as in all other professions in Pakistan.

Meanwhile, more and more companies are trying to get off the hooks of the SECP as well as of the stock exchanges of Pakistan to avoid scrutiny of their commercial transactions. Apart from the action taken against some of the erring companies the Karachi Stock Exchange has suspended about two dozen companies following their malpractices or proven misdeeds.

Now as the law permits, they buy back the shares of the public at agreed prices and make their companies private limited operations. After that they have no small share holders and no need to answer questions from them. They can then do what they like with the money at their disposal subject to the demand of the CBR and minimal laws of public limited companies that are not quoted. The small share holders too are happy to get what at this moment may seem fair value as the alternative is to get nothing at all or too little as the share price goes down and down.

This return to private limited companies represents a vast throw-back to the days when the country had no NIT and the ICP. When the newly set up quoted companies were making a great deal of money in the 1960s the government decided to get a small share of that for the public through the NIT. Later came the ICP certificates to enable the middle class to get its share of the profits. But in the second half of the 1990s as the profits of the quoted companies went down and thereafter the prices of NIT units and ICP certificates crashed the people came to lose heavily. They had not only to forfeit their profits but also the prices of their units or certificates.

If on one side the NIT and ICP certificate holders came to lose heavily because of the failure of the corporate sector, the banks too lost heavily because of the massive loan default and non-performing loans.

For some years now very few companies have come up with their share flotations to raise capital from the public. Instead they go for Term Finance Certificates for short term, finance usually three years, with a handsome fixed return. And they are able to raise the fund they need as the banks buy them because of the attractive interest rates. The people, too, buy them for the same reason; but they would prefer the investment-to-be for a long term.

TFCs as the name implies are not good for long term investment but better to meet short term working capital needs.

When it comes to large investment capital the banks are ready to give it to good performers with a long track record, but such borrowers are not ready to raise finance from banks unless they are sure of making reasonable profits on a sustained basis.

We have still 762 companies listed on the Karachi Stock Exchange and their accounts have to be audited very properly to the advantage of the ordinarily share-holders and not to suit the selfish or whimsical needs of sponsors of such companies.

To begin with, too many companies in Pakistan did not become sick, they were born sick as the sponsors of such companies had siphoned off a part of the capital when machinery was brought from abroad and more when the factory premises and offices were built. This dimension of the problem should be looked into by the SECP and the stock exchanges before the company is listed or its shares offered to the public sometimes at far higher prices than the face value.

It has been suggested in the West now that the auditors should be rotated at least once in five years. That move is being opposed by auditors who do not want to lose their best clients.

It is argued, validly, that auditors should be paid far more so that they can do a better job and give more time to their work. At the moment Italy is stated to be the only country with mandatory rotation of auditors.

Khalid Rafi of Fergeon, the premier auditing company, says that auditing of listed companies should be done by auditors with more than one partner to be more effective.

Sir Howard Davies, chairman of the British Financial Services Authority, says: “This could be a defining moment for the accounting industry.” And that is true for the whole world today, including the developing countries.

The British government has set up a review board to investigate concerns expressed about issues such as the profession’s alleged lack of independence, the cost of audit and comprehensibility and relevance of company accounts.”

The British system of audit is said to be better than the American, and Pakistan can benefit greatly by the findings and recommendations of the Review Board before we finalise our own remedial system.