n Pakistan, even a doctor, engineer, mechanic, lawyer or even any illiterate citizen of Pakistan can conduct audit of a private limited company, not being a subsidiary of a listed company and having a paid up capital of less than three [3] million rupees apart from professional accountant. Rest of the audit can only be performed by the members of Institute of Chartered Accountants of Pakistan as per section 254 of the Companies Ordinance, 1984. However, due to the lack of quality in the provision of service of audit only the Quality Check (QC) approved chartered accountant firms are required to conduct the audit of listed companies. What a pity! SECP instead of providing the healthier competition within the accounting profession by opening the doors to other professional accounting bodies, like ACCA, ICMAP and PIPFA, escaped towards the restriction even within one accounting body’s members. People have a right to ask two fundamental questions; why isn’t there any other professional accounting body present in Pakistan except ICAP? Are SECP departments doing enough to ensure quality checks?
Accounting Profession in Pakistan
Accounting profession has its deep roots and is the modern form of stewardship. This profession has its deep roots prior to the independence of Pakistan through the Income Tax Acts, Companies Act, and Sales Tax Acts. Almost all of these legislations contain the names of foreign accounting bodies like ICAEW, ACCA [under old name] etc. In 1956, Industrial Accountants body was formed followed by ICAP in 1961. Almost all the members of these two accounting bodies are foreign qualified either from India or England and Wales.
ICAP emerged as the leading body owing to the understanding of the concept of external audit by the general public. However, ICMAP [industrial accountants] had open heartedly shared the still unknown concept of cost audit with the ICAP members. ICMAP members are also doing training under chartered accountants for getting the qualification of ICAP for practice purposes. However, the students of ICMAP have already studied those subjects.
ACCA showed its presence in mid-nineties in Pakistan and majority of the students are nowadays training with QCR-rated companies of ICAP for the last 4 to 5 years on a continual basis and the number is growing day by day. To prepare its Pakistani students for the local environment, ACCA has adopted the Pakistani Company andTax laws as part of its syllabus. Currently ACCA is conducting its examinations in almost all major cities of Pakistan through the British Council Library.
PIPFA [formerly known as AAT] is a body jointly sponsored by ICAP, ICMAP and Auditor general of Pakistan (AGP) to replace SAS. It is a second tier body with enormous syllabus and its final stage contains the crux of final stage of ICAP syllabus, except for IT. Within a decade this body had emerged as the only alternate for 2nd tier accountantapart from Certified Accounting Technician [CAT – a similar technician body of ACCA].
All the above referred accounting bodies require a minimum number of training periods ranging from 3 to 5 years. ICAP requires 4 year article ship under its member, ICMAP and PIPFA require a 3 year period. However, ACCA’s training of 3 years is a bit structured and documented. The student is required to fill diaries signed by their supervisor and may be selected for audit by ACCA. The diary contains a diversified exposure portfolio which includes audit, internal audit, cash management, finance, taxation etc.
External Audit
It should be noted that ICAP has placed the comments on its website regarding QCR checked firms for listed companies that they have not received any complaint in respect of these firms; hence, they are QCR checked firms. This approach does not suit a body like ICAP and raises doubts regarding the quality procedure. People see section 254 of the Companies’ ordinance as free advertisement for the Institute of Chartered Accountantsof Pakistan as any illiterate person can conduct the audit apart from them.
The suggested scenario of increasing the number of external audit bodies may be new in Pakistan but people will be surprised to know that in England CCAB comprises of six accounting bodies and all of them can conduct audits. CCAB includes ACCA and CIMA [a parallel body of ICMAP in UK]. The apparent solution of section 254 seems to be that private limited company with paid up capital of less than 3 million and not being a subsidiary of a listed company needs to be audited by PIPFA/CAT. The rest needs to be audited by ICAP, ACCA and ICMAP. This will create a healthier competitive environment within the accounting profession in Pakistan and may prove worthwhile to restore the image of investors. In furtherance, quality of audit is the primary goal of each accounting body’s member; however, SECP is making a cold review.
Futuristic approach of SECP
I remember the remarks of Mr. Akbar G. Merchant [in my opinion, one of the most decent and nicest people in accounting profession] on the promulgation of Companies’ Ordinance, 1984 [hereinafter referred to as “CO1984”] said that he hopes that this piece of legislation should be kept updated. SECP should not only remove the deficiencies from this piece of legislation but should also now be forward looking in its approach.
In my opinion, following are the key issues we face in the near future.
- Future regulation of Accounting profession
- 4th and 5th Schedule of CO1984 Vs. IAS
- Internal Control Certification by External Auditors
Following the Enron and WorldCom scandals, there is a loss of confidence in the ability of the accounting profession to regulate itself. But this cannot be solved merely by adding independent members to existing governing Boards or Councils.
Pure self-regulation may no longer be appropriate for statutory accounting bodies. But direct government intervention in the regulatory and monitoring process would undermine professional judgement. There is also a danger that it would stifle innovation as accountants seek merely to demonstrate minimum compliance rather than striving for continuous improvement in standards.
The best balance may be obtained through the model of “independent regulatory agencies” comprised of a mix of senior accounting and auditing professionals and a majority of informed non-accountants, drawn from all sectors of the user and public interest community.
All professional bodies should adopt fully transparent disciplinary procedures. Cases involving significant public interest issues relating to alleged under-performance or negligence should be dealt with by appropriately qualified multi-constituency agencies which are demonstrably free of direct political or professional control. However, audit monitoring by a specialist unit of the relevant professional body remains a superior alternative to the now largely discredited peer review approach. Control of professional ethics should stay within the profession itself.
At the same time, accounting professionals should try to achieve a balance. They must protect the public interest – and they must be seen to do so. And they must also protect and enhance professional standards and independence. There is no conflict between the two. The best protection for the public is said to be achieved when professionals work to the highest technical and ethics standards.
4th and 5th Schedule of CO1984 vs. IAS & IFRS
The 4th and 5th Schedule of the CO1984 basically governs the necessary ingredients of financial statements of listed and other types of companies. The reason for writing IAS and IFRS separately is that international body has just announced that only new standards will be called as IFRS.
SECP has adopted many IAS’s and are applicable over listed companies. However, at this point of time they must think about the conflict of basic ingredients and disclosure requirements between IAS and 4th/5th Schedule. The most obvious example is dividend which is no more being required to be shown as a liability under IAS. However, the law still requires the disclosure as a liability. There also are other examples but the thing to ponder upon is that is 4th schedule even necessary when we have embraced many IASs?
However, the partial adoption of IAS39 even by the accounting community may also have raised many doubts in the minds of legislators. The most obvious solution is the updation of the 4th Schedule on continual basis in contrast to the norms of the past by the legislators with close liaison of accounting profession. This exercise must not stop at any point of time and the law needs to be updated on annual basis in the light of the IAS and IFRS.
Internal Control Certification by External Auditors
It is suggested that the law must require the CEO and CFO to certify that the controls related to financial reporting are effective. This ensures that senior management take personal responsibility for the financial statements of their company. It is further suggested that external auditors must be required to attest to management’s assessment of the financial reporting controls. Auditors must consider management’s process of assessing financial reporting controls; they would also be required to form a view on whether the controls were effective or not.
However, people think this as a futile exercise due to the additional cost but effort would provide an important safeguard for the shareholders and those who felt that attention would be diverted from top management and that implementation would be unnecessarily expensive.
This requires extensive documenting, testing, reporting and auditor attestation on existing financial processes and controls. Full compliance needs to be required annually. Not every company will achieve a clean controls certification and the reaction of the marketplace and regulators to companies with control problems will be hard to predict. This may not be without a cost but for investors that cost is worth paying!
Hence, it is suggested that each company's annual report must contain (1) a statement of management's responsibility for establishing and maintaining an adequate internal control structure and procedures for financial reporting; and (2) management's assessment, as of the end of the company's most recent fiscal year, of the effectiveness of the company's internal control structure and procedures for financial reporting. However, the company's auditor is required to attest and report on management's assessment of the effectiveness of the company's internal controls and procedures for financial reporting.
Conclusion
SECP should promote healthier competition for the betterment of accounting profession in Pakistan. It should allow other professional accounting bodies to work as external auditors. SECP should not promote the monopolistic competition within the accounting profession through section 254 of CO1984.
From now on, SECP approach should be forward-looking and I must respond to the issue of corporate scandals in Pakistan by issuing a white paper for the sake of better future. It must also look at the future regulation of accounting profession, 4th and 5th Schedule of CO1984 vs. IAS and Internal Control Certification by External Auditors.
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