May 1, 2006	Monday	Rabi-us-Sani 2, 1427

THE government has appointed a commission to review the Corporate Laws and recommend appropriate amendments to bring these laws in consonance with the best practices and take care of stakeholders by providing a level playing field.

When the new realities emerge, they make traditional practices and procedures redundant. According to the time tested principle, only those institutions, societies and entities remain relevant which have the capacity to change themselves with the changing environment.

At present, the profession of conducting audit is concentrated in the hands of very few big audit firms which are developing horizontally and vertically with great speed leaving no room for the small and medium practicing firms, licensed by the Institute of Chartered Accountants of Pakistan (ICAP).

In the absence of any prohibitive provisions in the Companies Ordinance (CO), 1984, the job of audit is concentrated in the hands of few audit firms and majority of audit firms are operating with small clients and small jobs. This situation has led to a state where the small practicing firm cannot build the capacity which is required to conduct audit in accordance with the International Accounting Standards due to lack of human resources.

The capacity building of small firms is not possible as they have no audit assignments of big companies as the job of audit cannot be rotated in the absence of any provision of law in the Companies Ordinance, 1984 or there is no prohibitive provision to place the limit of accepting the audit on the basis of equity, turnover or total capital employed.

In the past under the provision of Code of Corporate Governance (CoCG), it was made mandatory for the listed companies that they will rotate their auditors after every five years from one firm to another which provided a window of opportunity to small firms. They got the chance of audit assignments of the listed companies in due course of time. This development provided a hope that small firms will develop their capacity to conduct the audit.

Unfortunately, the big firms prevailed upon the policy makers and succeeded in amending the provision by incorporating a clause that rotation will be completed if the audit assignment within the firm is changed from one partner to the other. This mockery of amendment nullified the very basic provision included in CoCG which was introduced to break the vicious link between the auditor and auditee and promote the true spirit of audit.

It is important to mention that in the Indian Companies Act (ICA), 1956 through the Companies (Amendment) Act, 1974 two new sub-sections, viz., 224(1B) and 224(1C), were added with a view to restricting number of companies in which a person/firm can be appointed as an auditor. The idea was to prevent concentration of audits in few hands. Section 224 was further amended by the Amendment Act of 1988.

According to section 224(1B), of the ICA, 1956, an individual cannot be auditor of more than 20 companies at a time. Further, out of which not more than 10 should be companies having a paid up share capital of Rs2.5 million or more. In case the auditor is a partnership firm, the ceiling is 20 companies per partner of the firm. And where any partner is also a partner in any other firm or firms, the overall ceiling in relation to such a partner will be 20.

The ICA, 1956 by virtue of this clause has provided that by computing the specified number of audits, the following shall be taken into account:

(i) All company audits where a person or a firm is appointed as joint auditor; (ii) audit of non-profit companies; and, (iii) Companies limited by guarantee and having share capital.

Side by side, the act excluded the following for the purpose of fixing a ceiling on audits:

(a) Branch audits – if X & Co. are the auditors of ‘A Ltd.; and its 10 branches, the assignment will be counted as only one audit; (b) guarantee companies not having share capital;(c) Special audits, investigations and audits of corporations set up under a separate Act; (d) foreign companies.

The Monopoly Control and Restrictive Trade Practices Act, 1969 was promulgated to check the undue concentration of economic wealth in the hands of few people/groups which at that time was concentrated among 22 famous families of Pakistan.

Resultantly, although all the objectives could not be achieved, however, it provided an appropriate dent to the big monopolies and wealth trickled down with great speed which ultimately created the new businesses and prospered the existing ones. Now, a similar situation has engulfed the audit profession where monopolistic state of affairs is in vogue.

Unfortunately, Section 252 to Section 258 of CO, 1984, which deals with the matters pertaining to appointment and other relevant provisions of audit do not contain any prohibitive clause pertaining to ceiling of audits which has resulted in concentration of audit assignments in the hands of 10 to 25 firms which are operated by more than four partners and have blocked the development of audit profession.

If through a broad-based research the audit job conducted by the firms is to be analyzed, it would be a startling fact that 90 per cent of the audit is being conducted by these 25 firms out of 402 licensed to practice as auditors due to absence of any provision relating to ceiling on audit in the CO, 1984.

Every company and conglomerate incorporated under the CO, 1984 is required to complete the process of preparation of its annual financial statements, get these statements audited, hold meetings of board of directors to get these approved and subsequently hold annual general meeting of share holders within a span of four months from the close of its financial year.

The requirement of holding annual general meeting by giving 21 days notice to the share holders also requires to send notice of the meeting with copies of audited financial statements duly approved by the board of directors virtually leave only three months for the process of preparation of financial statements and submission to auditors.

No audit can be conducted in less than a period of two months as it involves the process which starts from pre-engagement to planning to execution phase. Thus, virtually the partners of firm have only one month available to review the whole audited working papers of all its client companies and issue audit reports to share holders. The available period is further cut short due to two days weekly holidays observed by big firms. These time constraints were the logical basis of the rational of introducing an amendment by virtue of Section 254(IB), in the ICA, 1956 that an individual cannot be an auditor of more than 25 companies as it is humanly not possible for an auditor to review the financial statements and issue audit report to such a large number of companies.

Moreover, firms with more partners do not place all the partners on the audit job as they are given the assignments pertaining to tax matters, corporate matters and consulting services within the ambit of firms professional workload.

It is suggested that the circular No. 19 of 2002, dated December 27, 2002, which was issued by Securities & Exchange Commission of Pakistan after having careful examination be included in the statute by an additional sub-clause in Section 252 of the CO, 1984, with consequential amendments in the CoCG.

The commission designated to review the corporate laws may consider the following options pertaining to amendment in the section 252 of the CO, 1984;

A parallel provision to Section 224 of The ICA, 1956 may be incorporated in the CO, 1984 thereby fixing the Ceiling of Number of Audits per partner in a Firm.

Rotation of audit of all listed Companies be made compulsory after continuous holding of audits by a firm for five years and retaking of audit assignment be barred for three years in the law.

A concept of joint audit by two firms (one big and one small) may be introduced in the statute when a particular listed company cross a certain specific threshold pertaining to turnover, equity and total assets of the company.

These proposals may not be having the support of big firms because it would lead to break the monopoly of conducting audit of big companies and conglomerates. But the law makers have the responsibilities to set the pattern for future development of the audit profession.