' TASSADUQ HUSSAIN JILLANI, J.-Through this petition, petitioner has challenged the judgment dated 24-7-2003 passed by a learned Division Bench of the Lahore High Court, vide which petitioner's Intra Court Appeal was dismissed and the judgment (W.P. No,3582 of 2003) of the learned Single Judge of the High Court dated 25-6-2003, was affirmed.
2. Petitioner in his capacity as a Chartered Accountant is Member of the Institute of Chartered Accountants and thereby is subject to the regulatory control of the said Institute and the Council created by it under the Chartered Accountants Ordinance, 1961. He is aggrieved of two paragraphs of the directive dated 28-3-2002 issued in the form of Code of Corporate Governance by the Securities and Exchange Commission of Pakistan. The Security Exchange laid down/recognized the satisfactory rating under the Quality Control Review Program of the Institute of Chartered Accountants as a condition precedent for any appointment as external auditor of a listed company. The said directive primarily relates to the external auditors of the listed companies which is as follows:-- "External Auditors (xxxvii). No listed company shall appoint as external auditors a firm of auditors which has not been given a satisfactory rating under the Quality Control Review Programme of the Institute of Chartered Accountants of Pakistan.
(xxxviii). No listed company shall appoint as external auditors a firm of auditors which firm or a partner of which firm is non-compliant with the International Federation of Accountants' (IFAC)
Guidelines on Code of Ethics, as adopted by the Institute of Chartered Accountants of Pakistan."
3. The Securities and Exchange Commission, issued directions to the Stock Exchanges in Pakistan requiring them to insert the above directive in their respective listing regulations. The learned High Court dismissed the constitutional petition on the ground that there is nothing in the Companies Ordinance or the Securities and Exchange Ordinance, 1969, which prohibits the Commission to issue the kind of directive which is impugned in the petition; that there is no conflict between section 254 of the Companies Ordinance and section 34 of the Securities and Exchange Ordinance; that Security Exchanges being independent entities are themselves empowered to frame their own listing regulations; that principal objective of the Securities and Exchange Ordinance, 1969 in terms of its preamble is protection of investors and the impugned directive issued to ensure certain quality of external audit of the listed companies was in accord with the said objective; that the Companies Ordinance, 1984, is a general law enacted for the purpose of regulation of all types of companies including listed companies whereas, the Securities and Exchange Ordinance, 1969 is limited in its domain and is confined to matters such as Security Exchanges and the listing of companies by such Exchanges. The said directive, it was further found, is not violative of Articles 18 and 25 of the Constitution as restriction imposed is neither impermissible nor does it reflect any discrimination. The petitioner could act as an external auditor of listed companies after obtaining requisite certification from the Institute of Chartered Accountants provided it meets the standard prescribed by the Institute under its Quality Control Review Program. This judgment has been upheld by a learned Division Bench of the High Court vide the impugned judgment. In dismissing the Intra Court Appeal, the learned Division Bench repelled petitioner's contentions that the impugned directive, in any manner, violated any provision of law or the Constitution.
4. While seeking leave to appeal against the concurrent judgments of the learned High Court, the learned counsel in all fairness, lauded the noble objective in issuing the impugned directive by the Securities and Exchange Commission and did not join issue with even the text of the impugned directive but his only grievance is that the same does not have the backing of any provision of law rather according to him it is violative of section 254 of the Companies Ordinance, because the said section does not spell out any classification of auditors. He contended that "auditor" stands defined in terms of section 21(i)(ix) of Chartered Accountants Ordinance, 1961, read with Article 18 of the Constitution. He maintained that besides being without lawful authority, the directive in question is a clog on the fundamental right of petitioner to pursue his trade and profession. He lastly, submitted that a similar directive issued by the Institute of Chartered Accountants was held to be without lawful authority by a learned Single Judge of the learned Lahore High Court in W.P. No,8987 of 2001 and the order of the High Court attained finality as it was never challenged. A directive of the same kind, he contended, could not be issued in view of the said judgment of the learned Lahore High Court.
5. The learned counsel for the respondent, Institute of Chartered Accountants, defended the impugned directive by submitting that the impugned directive has been issued in public interest; that the Quality Control Review Program of the respondent-Institute is based on voluntary compliance and consent of the clients; that the Securities and Exchange Commission and the Institute of Chartered Accountants are carrying out their functions and have passed the impugned directive strictly in terms of the mandate of law and charter of their duties; that the auditors are appointed by the share holders in their annual general meeting to safeguard their interest in accordance with their requirements; that the Securities and Exchange Commission is an independent regulatory body working under the Securities and Exchange Ordinance; that in terms of the mandate of its duties under the law, it can require listed companies to have their accounts audited by firms that have a satisfactory rating under the Quality Control Review Program of the Institute of Chartered Accountants of Pakistan and no exception can be taken to it. He lastly submitted that the petitioner has since cleared the Quality Control Review Process and the requisite certification has already been done by the Institute of Chartered Accountants of Pakistan.
That being so, according to him the petition has become infructuous and should be disposed of accordingly.
6. We have given anxious considerations to the submissions made and have gone through the relevant provisions of law.
7. The questions/issues which crop up for consideration would be as under:--
(i) Whether in issuing the impugned directive has the Securities and Exchange Commission travelled beyond the mandate of its functions under the Securities and Exchange Ordinance, 1969.
(ii) Whether the impugned directive is in derogation to section 254 of the Companies Ordinance.
(iii) Whether the impugned directive is violative of the fundamental right provisions of the Constitution or can be protected under the doctrine of reasonable classification.
(iv) Whether the respondent-Securities and Exchange Commission is estopped to issue the impugned directive in view of the judgment dated 4-7-2003 in W.P. No, 8987 of 2001.
8. Issues Nos. (i) and (ii) have a close nexus and therefore are being taken up together.
9. For a proper consideration of these issues, a reference to the functions of the Securities and Exchange Commission would be pertinent. The preamble of the Securities and Exchange Ordinance, 1969 lays down its objective which, inter alia, is, "to provide for the protection of investors, regulation of markets and dealings in securities and for matters ancillary thereto". The Ordinance provides for composition of Commission and its functions, the mandatory registration of Stock Exchanges with the Commission, periodical inspection of accounts of Stock Exchanges (section 6), cancellation of registration (section 7), listing and delisting of securities (section 9), prohibition of insider trading within the stock exchanges (sections 15-A and 15-B), provision for enquiries, penalties and orders for violation of laws and the rules framed there under (sections 21 and 22), provision for civil and penal liabilities (section 23), the rule making power (section 33), the power to make regulations (section 34), inter alia, qua the powers and functions of the Governing Body of the Stock Exchanges, laying down qualifications for membership of the Stock Exchanges, the power of the Federal Government directing Stock Exchanges to make any regulation or rescind any regulation and in the event of its non-compliance, to make, amend or rescind the regulation itself which was directed to be made, which in that event shall be deemed to have been made, amended or rescinded by the Stock Exchange (sections 34, 4 and 5).
10. The afore-referred recital of various provisions of the Securities and Exchange Ordinance, 1969 would indicate that it is confined to the regulation of markets and securities with the prime objective of protecting the investors' interests. The Companies Ordinance, 1984, on the other hand, is a general law which has been enacted for regulating all matters relatable to all types of companies including the companies which are listed. The impugned directive is reflective of Commission's intent to protect investors' interests by ensuring that the external auditor of a listed company has a certain level of professional competence i,e, has obtained a satisfactory rating under the Quality Control Review Program of the Institute of Chartered Accountants of which petitioner is a member. This is not only in accord with the preamble of the Ordinance but the Securities and Exchange Commission has been specifically empowered by section 34 of the Ordinance to direct the Stock Exchange to make a regulation. The said provision reads as under:- "(4) Where the [Federal Government] considers it expedient so to do, it may, by order in writing, direct a Stock Exchange to make any regulation, or to amend or rescind any regulation already made, within such period as it may specify in this behalf."
11. A bare reading of the impugned directive as reproduced in paragraph-2 above would show that the directive was a directive/resolution of the kind stipulated in section 34(4) reproduced in the preceding paragraph.
12. So far as the argument that the directive is violative of section 254 of the Companies Ordinance is concerned, a reference to the said provision at this stage would be in order which is as follows:- 1254. Qualification and disqualification of auditors.-A person shall not be qualified for appointment as an auditor:--
(i) in the case of a public company or a private company which is a subsidiary of a public company unless he is a Chartered Accountant within the meaning of the Chartered Accountants Ordinance, 1961 (X of 1961);
(ii) in the case of a private company having paid up capital of three million rupees or more unless he is a Chartered Accountant within the meaning of Chartered Accountants Ordinance, 1961 (X of 1961).]
(2) A firm whereof all the partners practicing in Pakistan are Chartered Accountants may be appointed by its firm name as auditors of a company referred to in subsection (1) and may act in its firm name.
(3) None of the following persons shall be appointed as auditor of a company, namely:--
(a) a person who is, or at any time during the preceding three years was, a director, other officer or employee of the company;
(b) a person who is a partner of, or in the employment of, a director, officer or employee of the company;
(c) the spouse of a director of the company;
(d) a person who is indebted to the company;
(e) a body corporate {;and} [(f) a person or his spouse or minor children, or in case of a firm, all partners of such firm who holds any shares of any audit client or any of its associated companies: ' Provided that if such a person holds shares prior to his appointment as auditor whether as an individual or a partner in a firm the fact shall be disclosed on his appointment as auditor and such person shall disinvest such shares within ninety days of such appointment.] ' Explanation.-Reference in this section to an officer or employee shall be construed as not including reference to an auditor.
(4) A person shall also not be qualified for appointment as auditor of a company if he is, by virtue of the provisions of subsection (3), disqualified for appointment as auditor of any other company which is that company's subsidiary or holding company or subsidiary of that holding company.
(5) If, after his appointment, an auditor becomes subject to any of the disqualifications specified in this section, he shall be deemed to have vacated his office as auditor with effect from the date on which he becomes so disqualified.
(6) A person who, not being qualified to be an auditor of a company, or being or having become subject to any disqualification to act as such, acts as auditor of a company shall be liable to fine which may extend to {twenty-five thousand} rupees.
(7) The appointment as auditor of a company of an unqualified person, or of a person who is subject to any disqualification to act as such, shall be void, and where such an appointment is made by a company, the {Commission} may appoint a qualified person in place of the auditor appointed by the company."
13. A close look at the above statutory provision suggests that, inter alia, it lays down minimum qualification or a threshold point for an auditor to serve a public company whether listed or otherwise. However, it does not lay down any prohibition on the Securities and Exchange Commission or the Stock Exchange to add any additional condition for appointment of auditors for those companies who are listed with Stock Exchanges. Thus the directive under challenge is in no way violative of any provision of the Companies Ordinance much less section 254.
14. Issue No, (iii) is relatable to Articles 18 and 25 of the Constitution which read as under:- "Article 18. Freedom of trade, business or profession.--Subject to such qualifications, if any, as may be prescribed by law, every citizen shall have the right to enter upon any lawful profession or occupation, and to conduct any lawful trade or business: ' Provided that nothing in this Article shall prevent:
(a) the regulation of any trade or profession by a licensing system; or
(b) the regulations of trade, commerce or industry in the interest of free competition therein; or
(c) the carrying on, by the Federal Government or a Provincial Government, or by a corporation controlled by any such Government, of any trade, business, industry or service, to the exclusion, complete or partial, of other persons.
' Article-25. Equality of citizens.--(1) All citizens are equal before law and are entitled to equal protection of law.
(2) There shall be no discrimination on the basis of sex alone.
(3) Nothing in this Article shall prevent the State from making any special provision for the protection of women and children."
15. Article 18 of the Constitution allows freedom of conducting lawful trade, business or profession.
The expression, "subject to such qualification, if any as may be prescribed by law" and "lawful trade" connotes two things: first that the State can by law ban a profession, occupation, trade or business by describing it to be unlawful; second the State or the competent authority in law can regulate any trade, profession or business. The State thus has power within reasonable and proper limits to control or regulate public utilities within the bounds of law.
16. The impugned directive has been issued by the Securities and Exchange Commission by virtue of the regulatory powers vested in it by the Securities and Exchange Ordinance, 1969 and falls within the permissible acts/actions contemplated under Article 18 of the Constitution and is not a clog on free trade or profession.
17. Article 25, on the other hand, enshrines the concept of equality before law. It lays down that all citizens shall be equal before law; that there shall be no discrimination on the ground of citizens being members of a particular group, sect or sex and no citizen shall be extended an undue privilege which reflects discrimination. It makes a special exception in matters of affirmative action taken or a scheme launched by the State for the protection of the weaker section of the society i,e, women and children. While construing the mandate of this provision, this Court has also excepted differentiation, restriction and exclusion if they are reasonable and justified with reference to any provision and purpose of law. While interpreting a similar provision in the then Constitution in vogue, this Court in Jibendra Kishore Achharya Chowdhury v. The Province of East Pakistan and Secretary Finance and Revenue, Revenue Department, Government of East Pakistan PLD 1957 SC
(Pak) 9 at page 38, held as follows:-- "One of these propositions is that equal protection of the laws means that no person or class of persons shall be denied the same protection of the laws which is enjoyed by other persons or other classes in like circumstances, in their lives, liberty and property and in pursuit of happiness. Another generalization more frequently stated is that the guarantee of equal protection of the laws requires that all persons shall be treated alike, under like circumstances and conditions, both in the privileges conferred and in the liabilities imposed. In the application of these principles, however, it has always been recognized that classification of persons or things is in no way repugnant to the equality doctrine provided the classification is not arbitrary or capricious, is natural and reasonable and bears a fair and substantial relation to the object of the legislation."
18. The concept of equality before law, "and equal protection of law" as couched in the Article under consideration are two dimensions of the fundamental right of equality. However, this right does not prohibit permissible classification but what is permissible classification? This Court was called upon to decide this issue in Brig. (Retd.) F.B. Ali and another v. The State (PLD 1975 SC 506) wherein at page 529 it observed as follows:-- "Be that as it may, the only generalization that is possible is that it means "subjection to equal laws applying to all in the same circumstances" but this does not mean that laws must affect every man, woman and child alike. This guarantee does not forbid discrimination with respect to things that are different nor does it prohibit classification which is reasonable and is based upon substantial differences having a relation to the objects or persons dealt with and to the public purpose sought to be achieved. It guarantees equality and not identity of rights.
' The principle is well-recognized that a State may classify persons and objects for the purpose of legislation and make laws applicable only to persons or objects within a class. In fact almost all legislation involves some kind of classification whereby some people acquire rights or suffer disabilities which others do not. What, however, is prohibited under this principle is legislation favouring some within a class and unduly burdening others. Legislation affecting alike all persons similarly situated is not prohibited. The mere fact that legislation is made to apply only to a certain group of persons and not to others does not invalidate the legislation if it is so made that all persons subject to its terms are treated alike under similar circumstances. This is considered to be permissible classification."
19. In the case in hand, the impugned directive has been issued for a class of companies i,e, the listed companies and it is applicable to companies which are desirous of a common object i,e, to be listed in the Stock Exchange. Similarly the Quality Control Review Program launched by the Institute of Chartered Accountants is meant only for those which are desirous to be listed companies. The directive, therefore, falls squarely within the ambit of permissible and reasonable classification and is not violative of Article 25 of the Constitution.
20. This brings us to the last proposition whether the securities and exchange commission is estopped to issue the impugned directive in view of the Lahore High Court judgment passed in W.P.
No,8987 of 2001 has not impressed us because in the said judgment, the learned High Court did not annul the directive and had merely observed that coercive mechanism to ensure its implementation may require backing of law. The learned Judge, however, did not consider the mandate of section 34(4) of the Securities and Exchange Ordinance, 1969 which has been alluded to in paragraph No,10 (supra) and that the directive was issued under the said provision. It also escaped the notice of the learned Judge that respondent-Institute of Chartered Accountants is an independent regulator and in the said capacity had issued its own Quality Control Review Program prior to the issuance of the impugned directive the said program required the companies to undergo rating/quality control test. The impugned directive has primarily acknowledged the efficacy of the said review Program and has called upon the Stock Exchanges to ensure that external auditors of the companies listed with them possess a satisfactory rating under the said program. It may be observed that the learned Judge who disposed of W.P. No,8987 of 2001 (Jawwad S. Khawaja, J.) is the same judge who passed the impugned judgment dated 25-6-2003 dismissing petitioner's constitutional petition out of which has arisen this petition for leave to appeal.
21. Before parting with the judgment, we may like to add that the impugned directive is part of a detailed Code of Corporate Governance issued by the Securities and Exchange Commission under the mandate of its duties on 28-3-2002 at a time when the international corporate world was facing the shocks of the scandals of Enron and other prominent companies in the United States.
Enron scandal led to many legislative and executive reforms in United States, the objective of which was to lay down a Code of Corporate Governance. It led to the passage of Sarbances-Oxley Act, 2002. A brief reference to the changes brought about through legislative reforms would be in order.
Commenting on these reforms Andrew Cornfold, Senior Economic Advisor, Division on Globalization and Development Strategies, UNCTAD in his article "Internationally Agreed Principles for Corporate Governance and the Enron Case" wrote as follows:-- "A more direct influence on the cross-border financial relations of the United States will be exerted by the Sarbanes-Oxley Act, whose passage in 2002 constituted the first major legislative response to recent corporate malfeasance. This Act is directed at a wide range of the abuses revealed in recent scandals and prescribes stringent penalties under several of its headings. Provisions affecting directors and senior executives include a requirement for certification of reports filed with the SEC, prohibition of insider lending to a firm's executives and directors, penalties for accounting restatements reflecting misconduct, bans on trading by executives and directors in the firm's stock during certain "blackout periods" for retirement plans, and a requirement for independence for members of audit committees. Enhanced disclosure is to be achieved by various provisions including the following that requirement that the SEC review a firm's periodic financial reports at least once every three years; the obligation on directors, officers and others owning 10 per cent or more of the firm's securities to report changes in their ownership within a specified, short period; new requirements for disclosure concerning subjects such as off balance-sheet transactions, internal controls, and the existence or absence of a code of ethics for a firm's senior financial officers; and timely disclosure of material changes in firm's financial condition (so-called real time disclosure). Auditor independence is to be strengthened by limiting the scope of non-audit and consulting services for audit clients, and by requiring that a firm's audit committee pre-approve non-audit services provided by the firm's auditor. Under the same heading an audit firm will not be permitted to provide audit services to a client if the lead or coordinating partner with primary responsibility for the audit or the partner responsible for reviewing the audit has performed audit services for that client in the previous five fiscal years. Standards for accounting firms and professionals are also to be strengthened by the establishment of a Public company Accounting Oversight Board, which will have the authority to conduct investigations and disciplinary proceedings in connection with compliance with the act annually and will carry out periodic inspections of such firms, annually for those auditing more than 100 issuers and every three years otherwise. (Emphasis is supplied).
' Other provisions of Sarbanes-Oxley include rules to strengthen the independence of research analysts, lengthening the stance of limitations for litigation involving the violation of certain securities laws, the establishment of new securities and exchange Ordinance, 1969-related offences and increases in certain criminal penalties, and new protections for employee "whistleblowers". Interestingly the Act calls for studies and reports to be prepared for the Untied States Congress in the various areas-reports which can be presumed to serve as a possible basis for further legislative or regulatory measures. The studies will cover the adoption of principles- based accounting, mandatory relation of accounting firms, funds for restitution for injured investors, SPEs, the consolidation (and thus concentration) of the accounting industry, credit rating agencies, the extent of violations of securities laws by securities processionals, SEC enforcement actions (the aim being to identify areas of financial reporting most susceptible to fraud), and the role of investment banks in assisting issuers to manipulate their financial reports Sarbanes-Oxley is self-evidently intended to prevent malpractices important in the Enron case with respect to financial reporting, self-dealing, and the independence and integrity of auditors. But the act will also affect the country's regime of corporate governance much more generally, and thus the form and extent of its compliance with the OECD Principles."
22. Appointment of auditors of competence and integrity has been one of the main issues of concern not only in the reforms carried out in the United States but the same concern is reflected in the Code of Corporate Governance issued by the Securities and Exchange Commission of Pakistan of which the impugned directive is a part. Such concerns have been heightened in the post Enron period the world over. We have had our own "Enrons" and corporate scams. But unfortunately a swift, appropriate, retributive and deterrent response has been lacking making the corporate world vulnerable to human weaknesses of greed, temptation and lack of scruples leading at times to skewed audit reports. I In the ordinary course of events, a company or a corporation which is responsible for its financial statements prepared by self-appointed managers appoints its own accounting firm to give a clean chit to its financial health by endorsing those statements and then these D auditors/accounting firms are compensated for giving this clean chit. As rightly remarked by Sean O'Connor, "It is as though baseball pitchers called their own balls and strikes and then hired umpires to verify their calls." In "Be Careful What You Wish For: How Accountants and Congress created the Problem of Auditor Independence [(45 B.C.L. Rev. 741 (2004)]". In such a backdrop, the Quality Control Review Program of the Institute of Chartered Accountants and the impugned directive are timely and geared to ensure a certain level of credibility in auditing of the accounts of the listed companies. To the extent of the said objective even petitioner's learned counsel did not join issue.
23. For what has been discussed above, we are of the view that the impugned directive issued by the Securities and Exchange Commission does not reflect any jurisdictional defect and is in accord with the letter and spirit of the Securities and Exchange Ordinance, 1969 and the judgment of the learned High Court is unexceptionable. We do not find any merit in this petition which is dismissed and leave refused.
' A copy of this judgment shall be sent to the Chairman of the Securities and Exchange Commission, Islamabad for information.