ISLAMABAD, March 30: The Securities and Exchange Commission of Pakistan (SECP) has issued to all the listed companies an elaborate set of dos and don’ts for the maintenance and audit of their accounts in order to ensure fairness, discipline and transparency in their affairs, according to an official source.

Under these instructions, every listed company shall have to institute an internal audit function whose head will have access to the chairman of the audit committee. It will also be mandatory on the listed companies to provide internal audit reports to the external auditors so that they may report matters of significance detected therein to the Board of Directors.

In order to avoid any overlapping and conflict of interest, the SECP has forbidden the listed companies to appoint as internal auditor a person as the Chief Executive Officer (CEO), the Chief Financial Officer (CFO) or a director of the company who was a partner of the firm of its external auditors (or an employee involved in the audit of the company) at any time during the two years preceding such appointment.

This bar is also applicable to a close relative, i.e. spouse, parents, dependents and non-dependent children, of such partner (or employee).

The SECP’s instructions are similarly explicit on the powers of listed companies to appoint or remove the persons connected with the matters related to financial management and audit. For example, it is stated, the appointment, remuneration and terms and conditions of employment of the CFO, the Company Secretary and the head of internal audit of listed companies would be determined by the CEO with the approval of the Board of Directors.

Similarly, only the CEO will have the powers to remove the CFO or the Company Secretary subject to approval by the Board of Directors.

The powers of the listed companies in regard to the appointment of external auditors have long remained a matter of concern owing to their significance for the objectivity of their reports. The SECP has, in this connection, set out certain guidelines.

The tenure of external auditors, to be recommended by the Board of Directors after approval by the Audit Committee, would be one year. It is, however, considered desirable to retain the same auditors’ firm for three years.

Nonetheless, every listed company is required to change its external auditors every three years. If, for any reason, this is impractical, a listed company may at a minimum, rotate the partner in charge of its audit engagement after obtaining the consent of the SECP.

In case, a listed company wants to remove an external auditor before the elapse of three consecutive financial years, it is required to include the reasons therefor in the Directors’ Report.

Although the auditors are supposed to be under the regulatory discipline of the Institute of Chartered Accountants of Pakistan (ICAP), a serious concern continues to be felt about the efficacy of such “self-regulation”.

ICAP, in its turn, is answerable to the State Bank of Pakistan. But the Commission is empowered under the company law to require the fulfilment of certain standards where the listed companies are concerned.

It has, therefore, directed the listed companies not to appoint as external auditors a firm of auditors which has not been given a satisfactory rating under the Quality Control Review programme of the Institute of Chartered Accountants of Pakistan.

“No listed company shall,” the SECP has further ordered, “appoint as external auditors a firm of auditors which firm or a partner of which firm is or appears to be non-compliant with the International Federation of Accountants’ (IFAC) Guidelines on Code of Ethics, as adopted by the ICAP.”

Under the SECP’s instructions, the listed companies are prevented from appointing its auditors to provide services in addition to audit except in accordance with the regulations.

These companies have been further required to ensure that the auditors observe the applicable IFAC guidelines in this regard and that the auditors do not perform management functions or make management decisions, responsibility for which remains with the Board of Directors and management of the company.

Under other instructions, the SECP has directed the listed companies to:

* require external auditors to furnish a Management Letter to its Board of Directors not later than 30 days from the date of audit report;

* require a partner of the firm of its external auditors to attend the Annual General Meeting at which audited accounts are placed for consideration and approval of shareholders.

* publish and circulate a statement along with their annual reports to set out the status of their compliance with the best practices of corporate governance set out above.

* ensure that the statement of compliance with the best practices of corporate governance is reviewed by auditors, where such compliance can be objectively verified, before publication by companies.