November 3, 2003	Monday	Ramazan 7, 1424

Following the collapse of WorldCom and Enron—the biggest financial failures in US history—enormous pressure was brought to bear on the accountancy profession.

Arthur Anderson—the then world’s fifth largest accounting firm, was accused of having failed in its duty as auditors, to blow the whistle on Enron’s creative accounting. Following those financial scandals, corporate regulators stirred to bring accountancy under greater scrutiny. That pressure now looks to be abetting a bit, thanks in part to the clout that the profession enjoys in Washington D.C.

The winds of change that blew across the accountancy field in US and Europe, forced Regulators in this country also to look afresh at the profession and enact new laws. Aamir Naveed Siddiqi, Deputy Director at the Securities and Exchange Commission, says: “The Commission is committed to create such a framework for the profession that would ensure that accountants deliver their services with skill, due care, honesty and objectivity and in a transparent manner according to international standard”.

It has been made mandatory on listed companies to adopt International Accounting Standards (IAS)—issued by International Accounting Standards Board, UK,in preparation of their financial statements. External auditors must also follow International Standards on Auditing (ISA) in their audit engagements. ISAs are issued by the International Federation of Accountants based in New York, USA. The Commission has made it obligatory for auditors of listed companies to ensure compliance with IFAC’s “Guidelines on Code of Ethics”. It has been made obligatory for listed companies to change their auditors after every five years. However, in order to ensure smooth transition, the requirement becomes effective for general meetings to be held after December 31, 2003. Auditors of listed companies have been barred from providing non-audit services to their clients except a few services exempted by the Institute of Chartered Accountants of Pakistan (ICAP)—the frontline regulators of the profession.

The Commission recently made it compulsory for auditors of listed companies— to obtain satisfactory rating from the Institute under Quality Control Review (QCR) programme. Going by the steps that the SECP has taken, the days of sole proprietorship and small partnership firms in accountancy are numbered.

Audit firms need to posses huge resources in terms of men and material to be able to comply with the tough new regulations under the IAS and ISA. Big accountancy firms in Pakistan are jostling to become bigger. In a first institutional merger of its kind, Fordes, Rhodes, Robson, Morrow (FRRM) combined business with Sidat Hyder Qamar & Co.

The company is a member firm of one of the big four global accountancy firms: Ernst & Young. The other three are also affiliated with Pakistan’s big wigs in business:

The world’s largest, Price water house Coopers is in affiliation with Pakistan’s biggest, A.F. Ferguson & Co; Taseer Hadi Khalid & Co is a member firm of KPMG and M.Yusuf Adil Saleem & Co. that of Deloitte Touche Tohmatsu (DTT). Like in other professions, partnerships are formed and disintegrate also among accountants. It is sometimes interesting to read some newer name plates.

One name runs as long as this: “Khalid, Majid, Rehman, Sarfraz, Rahim, Iqbal, Rafiq”. It doubtless has nothing to do with professional capabilities of the firm, but a joke goes among accountants that for a quick pick of name for a newborn baby, one has just to look up at this firm’s name. But that merely suggests how so many accountants are joining hands to form bigger and better firms for it would be impossible for tiny audit firms to catch up with the change.

And just like old-fashioned doctors who keep writing prescriptions for medicines that drug companies no longer manufacture, some auditors have been fined the maximum sum of Rs 2,000/- by the Regulators for issuing out-moded audit reports. Can it be expected of such auditors who are not even aware of the change in format of auditors’ report to be able to interpret, much less comply fully with IAS and ISA regulations.

Under the recently enacted ‘Code of corporate governance,’ the work load of auditors has increased manyfold. Gone are the days when the auditor would merely certify that profit & loss account and the balance sheet presents a “true and fair view” of the company’s state of affairs.

The auditor must now also express his opinion on the “cash flow statement” and “statement of changes in equity together with the notes forming part thereof”. The auditor also has to present “Review Report to the members (shareholders) on statement of compliance with best practices of code of corporate governance”. And companies make up lofty claims under the new requirements of “vision statement”; “mission statement” and “values”.

Managements must also draft “statement of compliance with the code of corporate governance”, stating that the company has complied with the Code contained in the listing regulations of the stock exchanges. Separation of audit from consultancy services could not possibly have resulted in loss of clients for accountancy firms for the jobs have been transferred to separately created associated consultancy firms.

Whether the scrutiny of addition requirements have fattened the bill books of audit firms is perhaps debatable. But for most struggling smaller listed companies, all of that signify a drain on scarce resources as well as a great deal of hassle.

No wonder companies have lined up at the stock exchanges to seek delisting as a means to step out of the way of the corporate watch-dog. And what purpose does the ‘mission statement’, ‘vision statement’ and ‘statement of compliance’ written and presented by company managements really serve? Do they go on to instil greater integrity, honesty and sense of responsibility in company managements? Again a debatable question.

Without necessarily subscribing to its views, it would be interesting to behold cover of the August 17th—23, 2002 issue of ‘The Economist’. The prestigious US magazine presents a caricature of a company chairman on its cover page. The company boss is shown signing an amusing oath which reads: “I swear that, to the best of my knowledge (which is pretty poor and may be revised in future), my company’s accounts are (more or less) accurate.

I have checked this with my auditors and directors who (I pay to) agree with me...” But for all that, it is difficult to argue against change. Sole proprietors and small audit firms may grumble, but the auditing profession must continue its endeavour to bring its work to match international standards.

That would be imperative in the post- WTO regime in 2005, when together with trade, the services sector would also open up to competition from all across the world.