A great deal of debate on corporate governance in Pakistan which we hear and see these days started in the UK and the USA many years ago.

In the UK, several committees were set up over the years for drawing a line between different stakeholders in a corporate body as to their duties and responsibilities. The first specifically dealing with the subject was the Cadbury committee whose report was published in 1992. It was followed by Greenbury Committee in 1994. In 1995, a task force was set up under the Chairmanship Sir Ronni Hampel to examine the issues arising out of the Cadbury and Greenbury committees. The report of the task force is referred to as Hample Committee’s report. Recognising the problems associated with over-regulation of corporate economic organisations, Sir Ronni Hampel warned against over regulations in October, 1996 saying that:

“We must not stifle, we must stimulate. Without prospering business, we have no Corporate Governance”.

Many a western management experts still have reservations on regulation of corporate governance and maintain that “it is difficult to identify benefits which are directly related to corporate governance codes per se and therefore there is little empirical evidence to suggest that there is a positive co-relation between resources spent on implementation Corporate Governance regulations and improved results”.

Since 1978, the New York Stock Exchange has required all listed companies to have audit committees composed solely of independent directors. A 1998 study revealed that 97% of major corporations in that country had these audit committees and yet the ENRON fiasco which created a storm in corporate sector and in particular about the role of auditors in good corporate governance.

The Cadbury Committee in its 1992 report made the following observations on the role of auditors in a corporate set up:

Annual audit is one of the corner-stone of corporate governance; Given the separation of ownership from management, the directors are required to report on their stewardship by means of the annual report and financial statements sent to the shareholders. The audit provides an external and objective check on the way in which the financial statements have been prepared and presented and it is an essential part of the checks and balances required;

Audits are a re-assurance to all who have a financial interest in companies, quite apart from their value to board of directors; shareholders require auditors to work with and not against management, while always remaining professionally objective - applying the professional skills and impartiality and retaining a critical detachment and a consciousness of their accountability to those who formally appoint them.

Talking about the role of auditors in good corporate governance, the Hample Committee, in its 1995 report said:

The basic statutory duty of the auditors is to report to the shareholders on whether the company’s annual accounts are properly prepared and give a true and fair view, and whether the directors report is consistent with the accounts”.

2. These are extensive responsibilities, they require auditors to demonstrate their financial expertise and skills of objective enquiry, analysis and report.

Impressed by the talk of corporate governance in the West, the Institute of Chartered Accountants of Pakistan (ICAP) resolved in 1998 to evolve and recommend a “Code of Good Corporate Governance” for the corporate sector of the country and formed a committee consisting of its past presidents and the presidents of the Karachi Stock Exchange and the Institute of Cost and Management Accountants of Pakistan (ICMAP).

The initiative of the ICAP regarding code of corporate governance was seen with skepticism in some circles. In the circles of corporate management, It was genuinely felt that the corporate sector in Pakistan was not ripe for further regulation. Their view was based on the fact that the corporate management and corporate ownership was not as divested in different hands in Pakistan as it is the situation in the UK and the USA. The majority - in fact a very substantial majority of the shareholding in most of the companies was held by management group. For beginning any exercise on corporate governance and subjecting the corporate sector to further regulations, it was necessary to carry out a detailed analysis of pattern of shareholding in listed companies. Unfortunately, there is no forum in Pakistan to assess the impact of such measures on country’s investment climate except the institute of professional accountants or stock exchange who are accused of having some vested interest. The chambers and associations of trade and industry take least interest in such matters. The Management Association of Pakistan (MAP) is dominated by multinationals and therefore no voice was raised against the proposal of this new regulatory measure from any quarter.

There is no doubt that good governance is essential for any organization whether it is a business organization a government department or a welfare body. The problem here is to subject our corporate sector to over regulation in the name of good corporate governance. There are people in our midst who are of the opinion that basic motive of initiation of the proposal of Corporate Governance was motivated by vested interests. It is difficult to accept or support their opinion but they have quite a few arguments to support their point of view. For example, the permeable to the modified version of code of corporate governance released by the ICAP in January, 2002 is spread over six pages and is full of advises and suggestions for the adoptions by the corporate management but does not say a word about the role of auditor in bringing about improvements in corporate governance. Another example being cited by them is that in the earlier draft of the code of good corporate governance issued by the ICAP on 6th July, 2000, it had given substantial emphasis to the improvement in quality of audit by dealing with issues like:

Independence of auditors; improvement of the quality and skill of auditors; review of the accounts by a second partner other then the partner in-charge of the audit; rotation of audit partners and the review of quality of audit.

However in the modified version of the code issued in January, 2002, all these provisions were deleted and the provisions regarding external auditors were reduced to a few lines instead of three pages in the earlier version.

Those who subscribe to the allegation of vested interest, point out to the provision in the ICAP Code which requires all the companies to:

Draw up and circulate annually a statement of ethics and business practices; adopt a vision/mission statement; prepare a corporate strategy and policy manuals in respect of 15 subjects listed in the code.

How far the code of ethics, vision statements, corporate strategy and policy manuals are relevant in relation to size of companies in our corporate sector and our corporate culture can be easily judged by those connected with our corporate sector. It is alleged that the only beneficiaries of these recommendations could be the individuals and firms who are expected to be entrusted with the work of preparing these documents. These provisions are not included in the code of corporate governance issued by the Security and Exchange Commission of Pakistan (SECP). The commission has also not accepted the proposal for amendments in the company law and has only got the code incorporated in the listing Rules of Stock Exchanges. The Code issued by SECP provides for replacement of auditor every five years and bars the auditors from accepting non-audit assignments from audit clients. The accounting fraternity managed to obtain a moratorium of the provision about rotation of auditors for 18 months and is likely to get a relaxation in respect of non-auditing work shortly.

It is being alleged by some quarters that our accounting profession is shy and reluctant in assuming the responsibility which they are expected to assume in accordance with the expectations of investing public and as enunciated by the several committees constituted in the UK as discussed in the beginning of this article. The most important example is the form 35A of the Company Law which provides a form for auditors report as prescribed by section 255(3) of the Companies Ordinance, 1984. This form which was in use for more than 50 years with minor amendments under the Companies Act, 1913 and the Companies Ordinance, 1984 provides for a clear certification of the annual accounts followed by the statement that:

“We have obtained all the information and explanation which were necessary for the purpose of our audit and after due verification thereof........”.

The report, among other things certified that “in our opinion the balance sheet, profit and loss account and the statement of changes in financial position give a true and fair view of the state of the company’s affairs “. There were no ‘ifs’ and ‘buts’ in this report.

Immediately after the issue of the first draft of Code of Corporate Governance, the form was amended on 25th August, 2000 very quietly - by the SECP with the addition of certain paragraphs and sentences in it diluting the responsibilities of external auditors. The newly added para 2 of the report says:

“It is the responsibility of the company’s management to establish and maintain a system of internal control, and prepare and present the above-said statements in conformity with the approved accounting standards and the requirements of the Companies Ordinance, 1984. Our responsibility is to express an opinion on these statements based on our audit.”

The above addition provides that the liability of the auditor was “to express an opinion on these statements based on our audit”. What will be that audit ? It is explained in second paragraph introduced in form 35A which reads:

“We conducted our audit in accordance with the auditing standards as applicable in Pakistan. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the above-said statements are free of any material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the above-said statements.”

How many of the users of published accounts in Pakistan are aware of “the auditing standards as applicable in Pakistan” ? It can be any body’s guess. Although the amendment in the form 35A was made by the SECP under the powers vested in it, by the law the ground work for the amendment was obviously done by the ICAP.

The argument in support of this change is that the amendment was necessary to reduce the “high expectations” of the users of accounts about the scope of audit. This may be true but we may ask ourselves if the readers and users of the accounts in Pakistan ever read the auditors report and observe these changes or do they just rely on their age old concept of the auditor’s responsibility on the basis of auditor’s name or his signature on the balance sheet and the income statement ?

As it has been explained in the earlier part of this article the ENRON episode has created an uproar in the corporate circles the world over about the responsibility of external auditors. We have a feeling of comfort that we have not seen anything of the type in our country. But is it true or we have merely kept our eyes and ears shut ? Is it true that such matters in our country are hushed up and do not come to our knowledge ?

Mian Asif Said, an ex-chairman of the National Finance Development Corporation (NDFC), made very bold disclosures in a published article on “Our auditors fraternity”. Referring to the “Arthur Andersen/Enron fiasco he writes:

“Whereas the criminal negligence of Andersen is still being mooted as a possible aberration, our leading audit firms have routinely practised similar skullduggery for decades without a whimper from authorities that be.”

Continuing he says: “In other words, over the last dozen years or so, we have blithely borne dozens of fiascoes of comparative size or even larger than Enron without batting an eyelid. Prominent among them have been any number of cooperatives scams, the Mehran Bank, the BEL, the Indus Bank, and the NDFC”.

Let us hope that our accounting profession shall take more care in discharge of its legal and professional obligations to improve its image and will keep in view the ground realities and the need for development of corporate sector and consequently the economy of our country, whenever they come up with a new idea.