The Securities and Exchange Commission of Pakistan has been taking some bolder steps in the direction of improved corporate governance. Not all of these have been well received though in all of the corporate circle.

This is sad as it is not just the companies that are being regulated. Those to whom the companies give an account of their accounts are in for regulation too. So, the intent is to improve the performance of all those involved in corporate governance including the auditors. If that be the case, then the SECP regulation should be viewed as a guide towards the improvement of corporate performance unless it is demonstrated that the contrary would be the outcome through SECP mandated reforms.

The SECP has initiated action not just against listed companies but also against some 14 audit firms after discovering irregularities involving 18 listed companies. The idea is not just to have financial disclosure but to have reliable financial disclosure. So, audit firms might now be monitored too, as self-regulation in an age of intense competition, even within the auditing industry, might cease to maintain the high standards it could when ethical standards were tough and competition less so. The fallibility of audit firms is clearly evident as even the world renowned M/s Arthur Andersen, once one of the big five, deviated as in the cases of Enron and WorldCom etc. Arthur Andersen has been convicted of obstruction of justice for destroying evidence in the case of Enron. WorldCom kept recanting daily costs as capital expenditures to conceal loss and Arthur Anderson were the auditors.

Foreign examples should not be required if the case within the country is strong for external monitoring. However, these examples help make a point in a socio-cultural milieu where anything “foreign” is taken more seriously than what is local even though the quality of financial disclosures in the country is generally known.

The SECP’s intent to monitor the audit firms and the quality of audits is, therefore, long over-due. Thus the action above against the audit firms as well as the requirement of rotation of auditors after every 3/4 years by listed companies. Further, the auditors and their families have been banned from investing in shares of audit clients. A number of regulatory requirements have been introduced in connection with the improvement of the quality of audits. A redeeming feature is that the audit community has been contributing to this reform process instead of feeling intimidated. Their favourable response is more than a ray of hope. Their desire to improve quality shows a commitment to the nature of the profession which revolves around accountability. As they hold others accountable, apparently they do not consider themselves to be above it.

Who would then hold the SECP accountable? The regulatory agencies are accountable to the special and general publics and their representatives or any other branch of government that would want to take account of their actions or call them to account. Plus, over time the performance of SECP will be gauged by the public not on the basis of the number of regulatory orders issued but on the basis of the difference actually made on the ground in corporate governance. So, while there is time before the SECP gets to that stage; in the interim, its performance will be evaluated on the basis of the effort made by it in the direction of good corporate governance. As for those segments being held accountable now, they have surely reached the stage at which they are obligated to account for their actions. Thus the reason why the SECP has the public sanction to now sit in judgment over those who have been in the field for a long time. The public would now like to see them called to account.

If there have been grave issues of public disclosure, then obviously it is the Board of Directors (BOD) in general and its audit committee in particular that has to explain a lot. Enron and WorldCom are not the only ones who have been hitting headlines for financial scandal. Others being investigated include Haliburton that provides energy services mainly to the energy sector (Huck Gutman: Dawn, 17-7-02). What brings it in greater limelight is that it was headed by the current Vice President of the USA, Dick Cheney, when Haliburton introduced new accounting practices on cost overruns that are currently being investigated . Harken Energy’s is another name gaining prominence for the fact that the current President Bush was on its audit committee when he sold off his shares shortly before Harken announced a loss . Also, he benefited from a corporate loan. Subsequently his personal liability for the loan was erased by the corporation . Incidentally, these two companies were clients of Arthur Anderson too. The two powerful persons at the helm of the US government are having to explain their positions just like the behemoth corporations or one of the big audit firms.

This shows that irregularities can land you in trouble even if you are economically or politically powerful as above in none other than the world’s superpower. Many here might want to interpret the above as a sanction for deviant practices. “See, it happens there too!” might be a response implying that if it happens here, “..so what?” Alternatively, the above situation would be alarming and would sound notes of caution. That is, greed and lack of ethics does not pay off even in corporate “capitalistic” materialistic America. There can be action and a public outcry which can damage reputation, can lead to a loss of goodwill, and may even sound a death bell for the enterprise. A materialistic society disallows irresponsible wealth acquisition that harms the interest of the society in general and that of immediate stakeholders in particular. This is a significant contributory factor to the success of developed countries’ business organizations that end up engulfing the world. Deviation from the laid down norms compels them to roll back and reorganize. Heavy costs are incurred in the process.

Checks on performance are considered essential for long-term business success. Compliance is mandatory as none would want to go down in business history as the Enrons or the WorldComs of the world. Far, if there are far too many of them in a particular economy, then business performance will not trickle up into sound economic performance and the virtuous cycle will not be set into motion. Since our situation comes closer to the latter type, there is need for more action on the part of the SECP.

As already mentioned, proceedings have been initiated against 14 audit firms and 24 chartered accountants have been penalized for professional misconduct. So, it is not just the corporate sector that is having to withstand the tests. According to a report, there are 692 listed companies, 2,212 non-listed public companies, and 39,444 private limited companies (Dawn, 4-4-02).. However, 27,000 companies defaulted in filing of statutory returns. Out of these, only 3,500 availed the Companies Regularization Scheme started January 1, 2002 to enable the defaulter companies to file overdue returns by payment of additional fee equal to the normal fee. Further, 9000 companies were untraceable. Consequently, the SECP launched a Companies Easy Exit Scheme (CEES) for those dormant companies that would like to have their names struck off the register of companies. CEES operated during the months of April and May, 2002. A total of 2,788 companies applied for Reregistration (Dawn. 4-6-02). Reportedly, others could not qualify even for the CEES. The above, however, shows that over 60 per cent of registered companies could not survive. It is a strong case for oversight so that the rate of companies’ demise is reduced and those which exist do not just survive but prosper and grow..

The SECP has accordingly directed the BODs of listed companies to set up audit committees with powers to oversee their financial management. Abroad, these committees came in vogue when the BOD members faced increasing litigation due to poor company performance that would surface soon after the BODs would give them a clean bill of health. Many such companies would even go bust. As the personal stake of the BOD members increased, they sought a more activist role in not just financial management but also in the company’s overall management and direction setting. Consequently, BODs’ strategy committees took shape as well that would liaise with the company’s Chief Strategy Officer (CSO) in not only determining strategic intent but also in steering the organization in that direction. The scope of audit was also expanded from financial to strategic audit. So, the role of the BODs stood transformed from minimal requirements of a mere periodic review of financial performance to intense involvement in all of company’s affairs. Outside members were brought in. While some CEOs might view it as an infringement on their role and authority, wise CEOs would carry the BOD along as it is not only prudent to do so in difficult times but valuable insights and support may be sought in areas of CEO’s responsibility.

As a step in the above direction, the SECP notified a Code of Corporate Governance early this year. The code addresses the issues of BOD’s composition, eligibility criteria, terms of office, responsibilities, and reporting requirements. There is an emphasis on bringing in outside members. BODs are to be constituted in a manner that would help avert insider trading as well. The above are long awaited basic measures. However, the emphasis appears to be only on guarding the interests of minority shareholders. While the shareholders’ interest is certainly of great importance to ensure business success, the interest of all stakeholders needs to be promoted for sustainable business growth. This aspect of business success needs to be somehow factored in if the corporate sector’s performance is to be truly revolutionized in the country.