1. This appeal No.4 of 2005 has been filed under section 33 of the Securities and Exchange Commission of Pakistan Act, 1997 by Hyder Ali Bhimji FCA, Muhammad Hanif Razzaq FCA, Shaik Mohammad Tanvir, FCA and Syed Aftab Hameed, FCA who are all partners in Hyder Bhimji & Co.
Chartered Accountants against the order dated 09 -02-2005 passed by Director (Enforcement II).
2. Brief facts of the case are that Hyder Bhimji & Co. had conducted the audit of the accounts of Tristar Power Limited ('Company') for the year ended 30-06-2002. The audit report was signed by the auditors on April 18, 2003. The examination of the said accounts of the Company by the Enforcement Department revealed the following deficiencies and irregularities.
(i) Going Concern Assumption The Company is a captive power project and is engaged in generating, distributing and supplying electricity to its associated undertaking Tri Star Polyester Limited (TPL). The Company's ability to continue as a going concern was reportedly dependent on its sole Client's ability to continue as a going concern and the TPL was in financial and operational distress. The Company had suspended its operations since 2001, its accumulated losses stood at Rs.32.296 million and it had a negative cash flow during the year. Directors had not given any prospect for the revival of the Company in their report to the members. These circumstances gave rise to significant doubt regarding the Company's ability to continue as a going concern. The Company had not explained the appropriateness of using Going Concern assumption in preparation of the Accounts and the Auditors failed to modify the opinion regarding validity of going concern assumption as per Auditing Standards, as applicable in Pakistan;
(ii) Impairment of Investment The Company had not made provisions for impairment against investments amounting to Rs.36.700 million in its associated company Tristar Energy Limited considering the fact that it had not started its commercial operations and the Commission had filed a petition for winding up of Tristar Energy Limited on 08-12-2000. The Auditors failed to modify their opinion in audit report on the accounts of the Company for the year ended 30 -06-2002 in this regard.
(iii) Verification of Assets Income Tax authorities seized the record of the Company in 1996 and since then Company did not maintain Fixed Assets Register. Note 4.2 of the financial statement for the year ending 30-06-2002 disclosed that Auditors had not been able to physically verify fixed assets of the Company valuing Rs.71.745 millions and note 5.4 disclosed that NIT Units amounting to Rs.34.595 millions were not in the custody of the Company. The auditors have just given matter of emphasis to the relevant notes and have stated in their report that proper books had been kept by the Company.
(iv) Disclosure Deficiencies Company had not followed the disclosure requirements of the following International Accounting Standards and Fourth Schedule to the Ordinance: a. Disclosure of Staff Retirement benefits according to Para 120 of IAS -19 (Employee Benefits) b. Disclosure for shares held by associated undertaking in the share capital of the Company as required by Para 74 of IAS 1(Presentation of Financial Statements). c. Building shown in fixed assets had not been distinguished into building on leasehold or freehold land as required by Para 2 of Part II of 4th Schedule of the Ordinance. d. Disclosure regarding date, as to when the financial statements were authorized for issue, and who gave that authorization, had not been given as required by IAS 10 (Events after balance sheet date) e. Plant capacity for the year had not been given as per the clause (vii) of Para 2 of Part 1 of the Fourth Schedule to the Ordinance. f. Name and amount due from each associated undertaking was not disclosed (Note 7 to the accounts) as per Sub-clause (b) of clause C of para 6 of Part II of Fourth Schedule to the Ordinance. g. Purpose of reserve had not been given as per Para 74 (b) of IAS 1(Presentation of Financial Statements). h. Disclosure of Credit risk as per Para 66 of IAS 32 (Financial instruments: Disclosure and Presentation). i. Accounting policy relating to provisions was not given as required by Para 97 of IAS 1 (Presentation of Financial Statements); Moreover, the accounting policy on stores and spares was not correct as per IAS 2 (Inventories)
3. Consequently, a show cause notice dated 04-06-2004 was issued to all partners of Hyder Bhimji & Co. under section 260 read with section 255 of the Companies Ordinance, 1984 ('Ordinance').
After providing an opportunity of hearing, Director (Enforcement) imposed a fine of Rs.10,000/- each on all partners of Hyder Bhimji & Co., namely the Appellants under sub-section (1) of section 260 of the Ordinance for making a report otherwise than in conformity with the requirements of Section 255 of the Ordinance. He also sent the order to President, ICAP for his information and necessary action in accordance with the provisions of the Chartered Accountants Ordinance, 1961.
The Appellants have preferred the appeal against this order dated 09-02-2005 ('Impugned Order').
4. Mr. Munawar Salam Advocate along with Appellants No. 3 and 4 appeared before us on the date of hearing on behalf of all the Appellants. On the issue of going concern the Appellants stated that the Audit of the Company was started in March 2003 and the Audit Report was signed on 18-04- 2003. At the time of the signing of the report both the Company and the TPL were in operation and there was no real issue of the going concern assumption. The Going Concern Review Checklist duly completed by the in -charge of the audit provided that there was no significant doubt regarding the going concern assumption. Besides the Company was in order and capable of generating electricity at anytime. The project was an equity financed project without any financial leverage hence there was no imminent risk of defaults of any nature and neither was there a risk of foreclosure.
5. On the issue of impairment of investment it was contended that the audited accounts of the investee Company were relied upon and that the same was also fully disclosed in the audited accounts of the Company. Mr. Salam contended that the Director failed to appreciate that the audited accounts of the company are independent third party evidence and the same can be relied upon in law. He argued that the Disclosure Deficiencies alleged against the Appellants were not material or other wise disclosed in the annual report of the Company. He argued that section 260 provides for a penalty only if 'material facts' about the affairs of the Company are not disclosed. He further argued that the penalty under section 260 could only be imposed if the default by the Appellants was willful, which it was not. He referred to different definitions and interpretations of the term 'willful' given by the superior courts. He contended that in its ordinary dictionary sense, the term willful means intentional or deliberate and not accidental or inadvertent.
He stated required auditor's attention. We also agree that the Appellants should have qualified their report on the issue of verification of assets. The fact that the Company did not maintain proper books and its assets were unverified for six years should be a reason for concern for the auditors appointed by the shareholders of the Company. Section 230(1)(c) requires that every company shall maintain proper books of accounts with respect to assets of the company. In this case this register was not there, and yet the Appellants stated in their report that the report was in accordance with the provisions of the Ordinance.
12. Similarly, the Appellants argument about disclosure requirements with regards to employees of the Company is without merits. Para 102(d) of IAS 1 clearly lays down the requirement on the auditor to disclose the number of employees. As also held in the case of Shaikh Jalaluddin F.C.A, the argument that disclosure of employees is not a material fact is unacceptable. The term 'materiality' has been defined in the IAS. It provides that, 'Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements'. The fact that the company has no employees can and should influence the economic decisions of the users of the financial statements. Also, in our view there is a difference between not reporting something, and reporting that there is nothing to report. If there were no employees, the Appellants should have reported that fact, as they are required to do so, instead of not reporting anything. On the issue of building shown in fixed assets not been distinguished into building on leasehold or freehold land as required by Para 2 of Part II of 4th Schedule of Ordinance, the Appellants admitted their fault.
12. In our opinion the facts which were not disclosed by the Appellants in their report were material facts about the affairs of the Company. In the case of London and General Bank Ltd. (1895) 2 Ch 166 it was observed by the court that, 'A person whose duty is to convey information to others, does not discharge that duty by simply giving them, so much information as is calculated to induce them, or some of them, to ask for more. ...the duty of an auditor is to convey information, not to arouse inquiry and although an auditor might infer from an unusual statement that something was seriously wrong, it by no means follows that ordinary people would have their suspicions aroused by a similar statement...'. Based on the grounds mentioned above, we are of the view that the Appellants have not made a report which is in conformity with the requirements of Section 255 of the Ordinance and therefore, uphold the Impugned Order. This appeal is dismissed.
Date of Impugned Order: February 09, 2005