THE RECENT failures of the Enron, the Worldcom and the Xerox in the USA speak very poorly about the standard of well-reputed audit companies in that country.

What will be the position of the auditors in developing countries including Pakistan where they are, for their earnings, completely at the mercy of the companies which hire them and the regulatory controls are either not stringent or if they do exist - the enforcement is not effective , is any body’s guess.

The need, therefore, is that the governmental agencies frame the effective regulations for the audit companies and strictly enforce them for the purpose of protecting the interests of the minority shareholders of the public limited companies. The minority shareholders also need to keep a vigilant eye over the periodical audited accounts of the companies, analyse these reports and call upon the management of the companies for clarification on the disclosures made by the audit companies in the periodical reports. The general public should also have a vigilant eye on the audited accounts of the banking companies whose business flourish on the deposits of the public and off and on, commit frauds and get away with the public money.

More responsibility devolves on the State Bank of Pakistan (SBP) in so far as financial institutions are concerned. The management of the SBP has recently decided to close down at least two financial institutions viz the Indus Bank and the Bankers Equity and also changed the management of the Prudential Bank. These are, no doubt the SBP’s bold steps unheard of in the past but its inspection functioning needs to be improved.

The Habib Bank, the largest public sector bank has published its annual report for the calendar year 2001 a few months back. The bank posted a pre-tax profit of Rs2224.23 million. After adjustment of the taxes, the post-tax profit is put at Rs 1112.342 million. The capital and reserves aggregate Rs 26,560 million which are largely offset by the accumulated losses of Rs17,058.007 million. This reduces the net equity to Rs9502.282 million only. The equity has been raised from Rs9502.282 million to Rs12,814.168 million by revaluing the assets by Rs3,108.366 million. It may be stated that after taking into account revaluation surplus, the equity amount aggregate Rs12,610.648 million and not Rs12,814.168 million.

It is not understood what does the difference of Rs203.52 million (i.e. Rs12,814.168 million - Rs12,610.648 million) represent. It may be stated that the bank’s capital and reserves position had become so vulnerable in the year 2000 that the SBP had to pump Rs8000 million in the bank’s equity. If we exclude that amount, the bank’s capital and reserves as on the 31st December, 2001 shall come down from Rs9,502.282 million to a paltry amount of Rs1,502.282 million only.

The disclosures made by the auditors in the annual report for the year 2001 are less revealing than those in the previous year’ report. One important disclosure made in the annual report for the year 2000 (Auditors’ Note No. 7.1) was that the loans amounting to Rs6.953 billion were granted by the bank on no other security than the personal security of the debtors. In addition to that, additional loans amounting to Rs17.382 billion were granted by the bank on the security of the personal liabilities of one or more parties in addition to the personal security of the debtors. How can a loan liability be secured by personal liability of some one is not comprehensible.

The loans granted on the basis of personal security are treated as “clean” loans and as per the SBP’s prudential regulations such loans cannot be granted in excess of Rs 25,000 to any individual party. This disclosure is conspicuous by its absence in the bank annual report for the year 2001. It is futile to imagine that such huge amounts of loans may have been properly securitised as per the prudential regulations of the SBP during the year 2001. The non-disclosure of such an important information should be taken notice of by the regulatory authority with a view to rectifying the irregularity. The auditors or the bank authorities should also clarify the matter giving the current status for public information.

The process of write offs of the loans by the bank continued during the year 2001. As per the list published in the annual report, the aggregate amount of the write-offs of the loans (principal) of Rs 500,000 and above/interest thereon is given below:

Principal Rs 93,777 million

Interest Rs 493.772 million

Total: Rs 587.549 million

As per auditor’s note No.9, the write offs of the loans amounting to Rs500,00 and below total to Rs343.101 million. Thus in all, a total sum of Rs930.650 million was written off during the year 2001. These write-offs were not charged to the profits loss and account of the bank but partially adjusted against the provisions as per the details given below:

Total write offs: Rs 930.650m

Adjustment against

the provisions: Rs 892.734m

Gap Rs. 37.916m

It is not clear where this gap of Rs37.916 million has been accounted for when it has neither been adjusted against the “provisions” nor charged against the profit and loss account.

As per the auditors’ note No.8.1, there had been a loss of Rs597.149 million during the year 2001 on the revaluation of the securities. As a matter of principle, either a provision should have been made to cover this loss or it should have been directly charged to the profit and loss account. In both the cases, the profit of the year would have been reduced by the like amount. However, this loss was adjusted against surplus on revaluation of assets (auditors’ note No.19).

If we deduct the loss on revaluation of securities (Rs597.149 million) and short adjustment of loan write-offs against the provisions (Rs37.916 million) from the pre-tax profit of Rs2224..23 million, it will stand reduced to Rs1,589.165 million and consequently, the post-tax profit will also drop down from Rs 1112.342 million to roughly Rs556.171 million. This is a paltry profit for the largest commercial bank of the country. The net profit of about Rs1 billion made in the year 2000 was also not a real profit but it owed its origin to the change in the accounting procedure.

If the profits of the bank remain at such a low margins despite induction of the professional management since early 1997, it will take another two decades to absorb the accumulated losses of over Rs17 billion.

The public sector banks including the Habib Bank are busy in retrenching the staff and closing down the branches at a massive scale at the diktat of our international bosses i.e. the IMF/ World Bank etc although our government terms the programme as ‘‘home grown”. It may be partially true because we are growing our own programmes but by sowing the “certified seeds” provided by the international bosses.

The precarious financial position of the public sector banks does not permit them to dish out staff exodus cost from their own resources. The auditors’ note No.25 to 2001 annual report of the HBL indicates that a cost of Rs4,784.775 million was incurred on the exodus of the staff during that year out of which funds to the extent of Rs4,497.300 million have already been received from the government while the balance sum of Rs287.475 million is yet to be paid by the government. The government must have paid the amount involved from the World Bank banking sector adjustment loan. Imagine that in case the cost of exodus of the staff had to be borne by the bank itself, its losses during the year would have exceeded Rs4 billion.

The irony is that in the past, we used to secure foreign/ loans to build the institutions thereby creating employment opportunities but currently we are adding to the heap of external debts for creating unemployment and partially closing down the institutions.

Despite precarious financial condition of the bank, there has been no reduction in the lavish expenditure on administration including the salaries and the perks of the employees. Since professional management was inducted in the public sector banks in early 1997, it will be desirable to compare the 2001 position of the HBL with the 1997 position:

1997 2001 (-) Decrease /

(+ Increase)

No. of branches 1838 1516 (-) 17.5%

No. of employees 23,338 19352 (-) 17-08%

Salary Rs 6036.817 7838.73 (+) 29.85%

Expenditure. (million) (million)

It would be seen that during the reign of the professional management since early 1997, there has been a reduction in the number of branches and employees by over 17 per cent But the salary expenditure has shot up by about 30 percent. Is there any justification for that particularly when the financial condition of the bank remains as vulnerable as it was half a decade back. Apparently, what the “so-called” professional management has done is that with the exodus of low paid employees thereby creating unemployment in the country, it has recruited highly paid officers and executives with “fatty” perks. Has that policy paid any thing? The reply will certainly be in negative. Will the regulatory authorities look into the issue and take the remedial measures? Or else the public should simply continue to watch the decay under the professional management till these banks are sold to the private entrepreneurs who will also take their own toll in creating further unemployment in the country?