KARACHI, Jan 3: The Board of Directors of Karachi Stock Exchange on Thursday announced that it ‘welcomed and appreciated’ the efforts of the Securities and Exchange Commission of Pakistan (SECP) in connection with the improvement in the quality of audits by inserting the following causes in the regulations of the stock exchanges:

(1) All listed companies shall facilitate the Quality Control Review (QCR) of the audit working papers of practising chartered accountants, carried out by the Institute of Chartered Accountants of Pakistan (ICAP) and, therefore, shall authorise their auditors to make available all the relevant information, including the audit working papers to the QCR Committee of ICAP; (2) No listed company shall appoint for a period of three years or continue to retain any person as an auditor, who is found guilty of professional misconduct by the SECP or by a court of law.

The decision by the Regulator to step in and incorporate the above new clauses in the Regulations are understood to have been triggered by at least two recent cases, where the Commission had discovered that the statutory auditors had shown a clear ‘negligence’ in the performance of their duties. The audit reports were not on the prescribed format and the reports were not in conformity with the requirements of the ordinance.

Further the auditors had failed to bring ‘material facts’ regarding the affairs of the companies to the fore. If even the audit reports were not drawn up on the prescribed format — which happens to be the elementary requirement — it could well be judged how poorly the audits must have been conducted.

Reports suggested that the auditors had admitted to their negligence and pleaded for a ‘lenient view’, to which the Commission had fined them with a measly sum of Rs2,000 with stern warnings to be more cautious in the future.

The punishment, surely, did not fit the crime. But in a country where incidents of shareholders going to courts to sue auditors are rare — if any — the SECP’s steps, firstly to detect the cases of negligence; secondly to bring them to public notice and finally to incorporate the new clauses in the stock exchange regulations for proper monitoring of the auditors, are all revolutionary and perfectly in the right direction.

“Working papers” of an audit client have continued to be regarded as the property of the auditor. These are seldom shared with other people. In larger audit firms, only the audit team that has conducted the audit can access the working papers. And one sheet that discloses the profit and its appropriation (including proposed dividend) is shown by company boards to just the partner in-charge of audit.

All of that is understandably to prevent the information from passing on to the stock market, and preclude the possibility of ‘insider trading’.

The sharing of working papers (post the declaration of dividend) with the QCR Committee of ICAP should cause no problems. Although it is difficult to see how the committee could review stakes of working papers from hundreds of companies, but the step would, doubtless, go to strike terror in the hearts of habitually negligent firms.