Timely availability of correct and material
information is the key to effective regulation and bringing back
From SHAMIM AHMED
Feb-25 - Mar- 10, 2002
The Chairman Securities and Exchange Commission of
Pakistan (SEC), Mr. Khalid A. Mirza has said that the successful
completion of first phase of the reforms has resulted in significant
improvement in the capital market and its healthy impact is being
noticed both within and outside the country. The key indicator is a
visible revival of investor confidence and recent upsurge in the stock
market despite serious destabilizing factors in the region.
He said that SEC has fairly and effectively dealt
with issues of stock market integrity (proper price discovery and
effective settlement of transactions), stock broker integrity and stock
Addressing a press conference in Islamabad on
Wednesday the Chairman said that SEC has constituted a consultative
group comprising of professional bankers and capital market experts in
order to have an independent and professional feedback for consolidation
of key policy measures and improved monitoring of stock market. The
group that acts as a think tank and a sounding board to the Chairman SEC
discussed wide ranging capital market issues during its first meeting
held in Karachi last week. The meeting noted with satisfaction that the
reforms and regulatory measures taken so far by the SEC have made a
healthy impact on the market, which has now become more efficient, fair
Highlighting the present focus of SEC reforms, Mr.
Khalid Mirza said that in addition to enhancing its surveillance,
monitoring and enforcement capacity, the SEC is now concentrating on
improving corporate governance, transparent accounting practices and
reliable disclosure through audits. Timely availability of correct and
material information is the key to effective regulation and bringing
back investor confidence. The entire system critically depends upon it
and sound reporting of corporate financial is a key element of
disclosure and transparency.
To achieve this, the Commission is not only committed
to strengthening the accounting profession but is also ensuring maximum
transparency and minimizing conflict of interest. Collapse of US energy
giant Enron, which led to the biggest bankruptcy in world history,
involving about $200 billion, occurred mainly due to misleading accounts
and shady auditing due to crony alliances between corporate managers and
auditors. This financial scam along with several other similar incidents
in the recent past has brought the performance and responsibility of the
accounting profession into question all over the world, he added.
Continuing, the SEC chief said that in Pakistan,
accounting profession has significant strengths. We have within the
profession a large number of very competent accountants and auditors —
perhaps world class. But the profession also has significant weaknesses.
There are a few that may well have succumbed to the growing apathy and
erosion in moral values we have been afflicted with in recent years. In
particular, a minimalist approach has been taken in complying with
international accounting standards, consistency is sometimes
non-existent, disclosure levels are weak and the attempt is to avoid
liability rather than inform, and there is a noticeable reluctance to
submit to quality control reviews. There has been no shortage of
accounting scandals and failures in recent years in Pakistan. It is high
time the profession gears up and takes decisive steps to visibly enhance
its quality as well as image.
There is considerable intellectual ferment that is
calling for major reform in several areas such as.
A, it is increasingly being argued that
self-regulation is not enough to maintain standards. It is felt that the
profession must be regulated by a tough, statutorily independent body
under the direct aegis of the Securities Commission (or a part of it) -
the agency must have teeth to fine or ban erring auditors;
B, conflicts of interest in accounting firms need to
be properly addressed. It is simply inappropriate for an auditor to also
provide consulting services. Even if there isn't any conflict, the
perception of it is enough to undermine confidence.
C, it is improper, almost insensible, for the same
auditor or audit firm to continue to audit books of a client for years
and years. There must be mandatory rotation after 3-4 years.
D, staff of external audit firms should not be hired
by their clients as internal auditors, managers etc.
"We will have to decisively address these areas
and others calling for improvement, as this is a very important area for
Pakistan to effectively tackle if we are to engender investor confidence
and attract investment," the chairman added.
Giving details of measures taken by the SEC to ensure
better disclosure, Mr. Khalid Mirza said that SEC has already taken some
initial measures by issuing directives to stock exchanges about
accounting and auditing of listed companies. These are:
1, the Commission has directed listed companies to
facilitate the QCR process by requiring them to authorize their auditors
to make available all audit working papers and other information for
2, no listed company would be allowed to retain or
hire an auditor found guilty of professional misconduct for a period up
to 3 years as may be determined by the Commission.
3, the SEC has directed that listed companies must
not hire their auditors as consultants or advisors or for the provision
of other services. This is a basic rule albeit we may make some
exceptions in respect of services that are a natural to auditing and are
not in conflict with the external audit function.
4, the Code of Corporate Governance that is being
finalized will stipulate provisions with respect to rotation of
auditors, banning auditors and their families from investing in shares
of their audit clients, instituting audit committees and the internal
audit function, and requiring the appointment of only those firms as
auditors that have gone through the QCR process.
Talking about investors' confidence in capital
market, the SEC Chairman said that in his view, everything else in
Pakistan appears to be coming together and the circumstances for the
country are most propitious. All macro-economic factors are improving,
geo-politically we are in a most advantageous position, we are
internationally acceptable and receiving a lot of economic assistance,
the regulatory framework of the capital market is of international
standard, we have an independent, no- nonsense regulator, and the
capital market is offering phenomenal values. We should, if we play our
cards right, attract substantial capital. For that, we need to put our
accountancy house in order, he added.