autonomy and independence of audit in company laws of pakistan

Sayyid Mansoob Hasan

• FCMA, ACIS, Accredited Mediator, Certified Lead Assessor

• Managing Partner MANSOOB & CO.

Cost & Management Accountants

Management Consultants

Mediators & Arbitrators

• Chairman – Small Dispute Resolution Committee, Karachi (Sindh & Baluchistan) of SECP Insurance Division

• Member – Permanent Panel of Arbitrators Pakistan Stock Exchange

• Member Board of Governors PIPFA

• Chairman SME Board ICMA Pakistan

• Over 25 years of professional experience

Autonomy and Independence of AuditAccording to Company Laws of Pakistan

SAYYID MANSOOB HASANMANSOOB & CO.

STAKEHOLDERS CONFERENCE ONDRAFT COMPANIES BILL, 2016

The Evolution of Company Laws

Companies Act, 1913

Companies Ordinance, 1984

Draft Companies Bill, 2016

Based on BritishCompanies

(Consolidation) Act, 1908

Mostly based on British

Companies Act, 1980



UK Companies Acts

• Companies (Consolidation) Act 1908

• Companies Act, 1947


• Companies Act, 1967 (repealed)








Auditors – Appointment



Who appoints auditors? 1

The Companies Act, 1913

• No qualification of auditor defined

• No procedure for appointment of auditor defined

• No powers and duties of auditors defined

• No format of audit report defined




The Companies Ordinance, 1984

Section 252: Appointment and remuneration of auditors.

• (1) Every company shall at each annual general meeting appoint an auditor or auditors to hold office from the conclusion of that meeting until the conclusion of the next annual general meeting.

• (3) The first auditor or auditors of a company shall be appointed by the directors within sixty days of the date of incorporation of the company; and the auditor or auditors so appointed shall hold office until the conclusion of the first annual general meeting:




• Procedure as per Code of Corporate Governance

Audit Committee Board of DirectorsAnnual General

Meeting




The Draft Companies Bill, 2016

Section 246. Appointment, removal and fee of auditors.-

• (1) The first auditor or auditors of a company shall be appointed by the boardwithin three months of the date of incorporation of the company; and the auditor or auditors so appointed shall retire on the conclusion of the first annual general meeting.

• (2) Subject to the provisions of sub-section (3), the subsequent auditor or Auditors shall be appointed by the company in the annual general meeting on the recommendation of the board

• (3) A member or members having not less than ten percent shareholding of the company shall also be entitled to propose any auditor or auditors for appointment whose consent has been obtained by him and a notice in this regard has been given to the company not less than seven days before the date of the annual general meeting.




• Procedure as per Code of Corporate Governance

Audit Committee Board of DirectorsAnnual General

Meeting

Shareholder => 10%



Auditors – Rights



What Rights do Auditors have? 1


• No rights of auditors defined





Section 255:

• Every auditor of a company shall have a right of access at all times to the books, papers, accounts and vouchers of the company, whether kept at the registered office of the company or elsewhere, and shall be entitled to require from the company and the directors and other officers of the company such information and explanation as he thinks necessary for the performance of the duties of the auditors.





Section 248. Auditors’ right to information.-

• (1) An auditor of a company has a right,—• (a) of access at all times to the company’s books, accounts and vouchers (in whatever form

they are held); and The draft Companies Bill, 2016 20-Sep-2016 Page 153 of 301 • (b) of access to such copies of, an extracts from, the books and accounts of the branch as

have been transmitted to the principal office of the company; • (c) to require any of the following persons to provide him with such information or

explanations as he thinks necessary for the performance of his duties as auditor,- (i) any director, officer or employee of the company; (ii) any person holding or accountable for any of the company’s books, accounts or vouchers; (iii) any subsidiary undertaking of the company; (iv) any officer, employee or auditor of any such subsidiary undertaking of the company or any person holding or accountable for any books, accounts or vouchers of any such subsidiary undertaking of the company.



Auditors – Duties



What do Auditors have to Report? 1


• No duties of auditors defined

• No format of audit report defined




The Companies Ordinance, 1984255. Powers and duties of auditors. –• (3) The auditors shall make a report to the members of the company on

the accounts and books of accounts of the company…..• (c) whether or not in their opinion the balance-sheet and profit and loss account or

the income and expenditure account have been drawn up in conformity with this Ordinance and are in agreement with the books of accounts;

• (d) whether or not in their opinion and to the best of their information and according to the explanations given to them, the said accounts give the information required by this Ordinance in the manner so required and give a true and fair view

• (e) whether or not in their opinion- (i) the expenditure incurred during the year was for the purpose of the company’s business; and (ii) the business conducted, investments made and expenditure incurred during the year were in accordance with the objects of the company




The aftermath of Worldcom and Enron. “Disclaimer & Limitation of Scope”.

• Paras added in the Audit Report:• 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.

• We conducted our audit in accordance with the auditing standards as applicable in Pakistan. ……..





Section 249. Duties of auditor.

• (2) A company’s auditor shall conduct the audit and prepare his report in compliance with the requirements of International Standards on Auditing as adopted by the Institute of Chartered Accountants of Pakistan.

• (b) whether the company’s financial statements are in agreement with the accounting records and returns.

• (c) whether or not in their opinion the statement of financial position and profit and loss account and other comprehensive income or the income and expenditure account and the cash flows have been drawn up in conformity with the requirements of accounting and reporting standards as notified under this Act and are in agreement with the books of accounts and returns..

• (e) whether or not in their opinion,— (i) investments made, expenditure incurred and guarantees extended, during the year, were for the purpose of company’s business;




The Indian Companies Act, 2013

• Section 143 (1)• (b) whether transactions of the company which are represented merely by

book entries are prejudicial to the interests of the company;

• (c) where the company not being an investment company or a banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company;

• (e) whether personal expenses have been charged to revenue account;




The Indian Companies Act, 2013

• Section 143 (3) (f)• The observations or comments of the auditors on financial transactions or

matters which have any adverse effect on the functioning of the company;

• Section 143 (12)• Notwithstanding anything contained in this section, if an auditor of a

company, in the course of the performance of his duties as auditor, has reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the Central Government within such time and in such manner as may be prescribed.




Responsibility of Auditors in USA

• In USA the new fraud standard, Statement on Auditing Standards No. 99, Consideration of Fraud in a Financial Statement Audit, is the cornerstone of the AICPA’s comprehensive antifraud and corporate responsibility program.




International Standard on Auditing 240 the Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements

• Para 5: An auditor conducting an audit in accordance with ISAs is responsible for obtaining reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error…




IFAC’s New Audit Report

• More detailed more in-depth audit report

• Requires management audit knowledge and skills to execute and report audits

• Failure of ICAP to develop a draft report, waiting for ICAEW, PWC, KPMG, etc.



Auditors at AGM



Auditors at the AGM 1


Section 131. Annual balance-sheet:-(2) The balance-sheet shall be audited by the auditor of the company as hereinafter provided, and the auditor's report shall be attached thereto, or there shall be inserted at the foot thereof a reference to the report, and the report shall be read before the company in general meeting and shall be open to inspection by any member of the company.





Section 255. Powers and duties of auditors. –

• (6) The auditor of a company shall be entitled to attend any general meeting of the company, and to receive all notices of, and any communications relating to, any general meeting which any member of the company is entitled to receive, and to be heard at any general meeting which he attends on any part of the business which concerns him as auditor:

• Provided that, in the case of a listed company, the auditor or a person authorized by him in writing shall be present in the general meeting in which the balance-sheet and profit and loss account and the auditor’s report are to be considered.





Section 249. Duties of auditor.-

• (9) The auditor of a company shall be entitled to attend any general meeting of the company, and to receive all notices of, and any communications relating to, any general meeting which any member of the company is entitled to receive, and to be heard at any general meeting which he attends on any part of the business which concerns him as auditor:

• Provided that, in the case of a listed company, the auditor or a person authorised by him in writing shall be present in the general meeting in which the financial statements and the auditor’s report are to be considered.



Auditors & Members



Who the auditors report to? 1


Section 131. Annual balance-sheet:-(2) The balance-sheet shall be audited by the auditor of the company …………., and the report shall be read before the company in general meeting and shall be open to inspection by any member of the company.





Section 255. Powers and duties of auditors. –

• (3) The auditors shall make a report to the members of the company…

• 256. Reading and inspection of auditor’s report. - The auditor’s report shall be read before the company in general meeting





Section 249. Duties of auditor.-

• (4) The auditor shall make out a report to the members of the company…

• Reading of Audit Report at the AGM – Gone Missing



Questions

• How many times do you see auditors in AGMs?

• Are the auditors available to reply to queries of members?

• What actually happens at the AGM?



The Great Illusions

ILLUSION NO. 1Autonomy and Independence



Appointment of auditors – the reality

• Appointment in General Meeting

• Recommended by Board upon recommendation by Audit Committee

• Audit Committee mostly comprise of Board Members

• Board is elected by majority of shareholders

• No or rare representation of minority shareholders



Who the auditors really work for?

• Auditors do not work for the company

• Auditors do not work for the members of the company

• They only work for their “Fee”

• Frauds and mismanagement are mostly committed by the board

• The “Fee” and “Out of Pocket Expenses” are determined by the board and awarding “Other Assignments” is also determined by the board

• So where is autonomy and independence?

ILLUSION NO. 2Audit



The Audit and Audit Report

• Audit is an annual “Ritual”

• The auditors focus is mostly on compliance of international standards on accounting, reporting and audit (limited application in Pakistan)

• They do not report on mismanagement

• They do not report on frauds or leakages of funds

• The word “Audit” is “Misfit”

• The audit report is merely “An Accounting Compliance Report” and so it should be called



Recommendations



Recommendations

• Mechanism for appointment of auditors should be made more transparent and more independent of the majority shareholders.

• Since one of the main purpose of corporate laws and related regulations is to safeguard public money therefore reporting on fraud and mismanagement should be made integral part of audit report.

• Auditors should have powers and mechanism to report significant matters including fraud and mismanagement to SECP directly.