KARACHI, March 23: Under the shadow of Enron fiasco, the corporate governance is being subjected to multiple scrutiny and audit, in a bid to avoid pitfalls in an emerging market.
The State Bank, in its second quarterly report for 2001- 2002, has voiced its concern and that of the investors on poor disclosure by the companies and called for improved internal and external audit.
In the developed markets, the audit and consulting businesses are being split as a result of the Enron episode. The central bank would also like this to happen here.
The State Bank says that badla financing “now and then creates tremors in the market” and “needs some regulation.” Simultaneously acting as intermediaries and badla financiers presents another area of conflict of interest.
Press reports indicate that the SECP is likely to set up a statutory independent watchdog body that would monitor the account and credit firms. Currently, the professional audit firms are self-regulated through the Institute of Chartered Accountants.
In the past two years, Khalid Mirza says, he has significantly strengthened the regulatory framework of the market.
“We are now at the point that all the 30 principles of Securities Regulations of IOSCO are more or less implemented,” Mirza informed businessmen at the launching of Mutual Funds by Arif Habib Investments recently.
The SECP is now concentrating what its chief spells out as “the whole area of corporate governance, including taking steps to ensure that accountancy profession really performs at the standard expected from it.”
In addition to official agenda for the future, an environment is being created for companies to raise funds from the capital market for their projects. For launching of corporate bonds/TFCs, the companies are required to get credit ratings for flotation of bonds. Commercial banks are required by the State Bank to get credit ratings to give some indication of the state of affairs to the depositors and investors.
Banks maintain that project financing is not their cup of tea. They can do it on a very selective basis. However, they buy and sell corporate bonds. The integrity and quality of auditing and credit rating inspires or shatters the confidence of the investors operating in the capital market. Hence the concern and sensitivity of the regulators on the issue.
It is also true that while calling for transparency in the official decision-making, the companies themselves tend to hide more than reveal. This applies to multinationals whose parents are much more transparent in their business to meet the requirements of developed markets.
If a business group were to acquire an enterprise, it does reveal the share price or the money spent. It is understandable that negotiations are kept a guarded secret but the deal when concluded, should be made public in the interest of minority shareholders.
Similarly, big business tends to hide its assets rather than use its group strength to project its corporate image. It seems that it carries its assets with a “guilt conscience”, a trait of crony capitalism that prospers under patronage.
In the market-driven agenda, the corporates have to adjust to win confidence of the investors. They have to be transparent and reveal enough to manage funds from the market successfully.
And what is no less important is that they should move towards voluntary compliance, rather than invite intrusion of the regulators.
The governments, one after the other, have levied a series of laws, rules and regulations. They all have suffered from poor execution. The government is also victim of poor governance.
Reacting to what he described as an avalanche of laws and regulations on corporate governance and more to come, an entrepreneur, critical of the official moves, told this correspondent, “corporates appear to me as an enemy of the state.”
He cautions that regulations should not tend to hurt the corporate growth at a time when Pakistan is faced with slow economic growth, unemployment and low levels of investment.
Yet one of the scenarios seen emerging globally is that corporate citizens, sooner or later, may be turned into cyber nomads. Business and professionals may team together to execute a commercial contract like film producers and dissolve once the assignment has been completed. These are seen as cyber nomads.
Enrons are inevitable and they are punished by the market. Corporate fortunes and misfortunes, company profits and losses, economic boom and bust are all parts of the market economy and should be accepted as such. Time cycle(s) have become more frequent and social exclusion much louder, indicating the future trends. The investors must be aware and alert to the fast changes to protect their interest and fend for themselves. They should fear to tread on the grounds, about which they have no knowledge.