ORDER UNDER SECTION 260 OF THE COMPANIES ORDINANCE, 1984 The facts leading to this case, briefly stated, are that M/S Iqbal Patel & Co., Chartered Accountants were appointed as auditors of M/S Delta Insurance Company Limited (the "Company") for the year ended on December 31, 2000 in the Annual General meeting of the Company held on July 29, 2000.
However, during mid term, they were allegedly removed and Mr. Mahmood Ali Khan, sole proprietor of M/S Mahmood Zuberi and Co., Chartered Accountants was appointed as auditor of the Company who has accepted the appointment in violation of the provisions of the Code of Ethics for Chartered Accountants prescribed by the Institute of Chartered Accountants of Pakistan (the "ICAP") which requires that in case of removal of an existing auditor by the proprietors of the business before completion of audit and submission of his report "the proposed auditor in practice should not accept the offer without clearance from the Institute". ICAP vide its letters dated June 14, 2001 and June 21, 2001 has restrained Mr. Mahmood Ali Khan to take up the audit of the Company for the year ended December 31, 2000 until advised to do so. However, in disregard to the assurance given to ICAP, he took up the audit of accounts of the Company. The Commission through its letter dated June 27, 2001 has directed Mr. Mahmood Ali Khan, FCA to clarify his position viz-a-viz ICAP's letter. He was also advised to send a signed copy of the audit report along with annual accounts of the Company for the year ended December 31, 2000. No response was received from Mr. Mahmood Ali Khan. Another letter was written on July 03, 2001 to remind him to reply to the Commission's aforesaid letter, however, he still preferred not to respond.
2. Meanwhile, the Company filed with the Commission the audited annual accounts for the year ended December 31, 2000. The examination of the aforesaid accounts indicated that the audit report to the members attached to the balance sheet and profit and loss account has been signed by one Mr. Nasim Akhtar, B.Com. A.C.A, on behalf of M/S Mahmood Zuberi & Co., Chartered Accountants. The report was signed at Karachi on June 08, 2001. On an enquiry from ICAP about particulars of M/S Mahmood Zuberi & Co., the Commission was informed that Mr. Mahmood Ali Khan, FCA is a sole proprietor of the said firm since March 18, 1969. It appeared Prima facie, that the audit report was signed by Mr. Nasim Akhtar with concurrence of Mr. Mahmood Ali Khan in contravention of the provisions of Sub-section (1) of Section 257 of the Companies Ordinance, 1984 (the "Ordinance") which requires that "only the person appointed as auditor of the Company, or where a firm is so appointed, only a partner in the firm practicing in Pakistan, shall sign the auditors' report".
3. In view of the aforesaid violation, a show cause notice dated September 06, 2001 was served on Mr. Mahmood Ali Khan "to clarify in writing, within seven days and to appear in person or through an authorized representative to explain as to why penalty may not be imposed on him as provided under Sub-section (1) of Section 260 read with Section 476 of the Ordinance and he may not be prosecuted under Sub-section (2) of Section 260 of the Ordinance for the aforesaid contravention."
4. In response to the aforesaid show cause notice, Mr. Mahmood Ali Khan, FCA vide his letter dated September 12, 2001 stated that: I cannot close my office during my absence from the Country. In such situation, I should authorize any Chartered Accountant to look after my office affairs and to sign the balance sheet. Partnership firm can be formed verbally at any time and at will. The Registrar, Joint Stock Companies issued a certified copy of Form -29 for our appointment as auditors, as such there is no violation on our part. We held out the assurance that we would not take up the audit till we are advised by the Institute as is clear from the Institute's letter dated June 14, 2001, however ICAP has not declared our appointment as illegal. It is true that we took up the audit of accounts of the Company in disregard to the assurance given to ICAP. It is wrong that Mr. Nasim Akhtar was not a partner. He can be made partner for specific purpose at any time for any period. Mr. Nasim Akhtar is quite competent person to become partner with us. As the Company was dealing with all the matters, therefore, we did not respond to the Commission's letter. We requested them to answer it properly and perhaps they did. We are ready to give up this audit in favor of previous auditors, if we are made free from charges and issues against us.
It was also requested to withdraw the show cause notice. A request was also made to fix the hearing at Karachi.
5. The case was fixed for hearing on October 25, 2001, at Karachi on which date Mr. Mahmood Ali Khan appeared and repeated the same arguments as were covered in his reply to the show cause notice. He also admitted that M/S. Mahmood Zuberi & Co., Chartered Accountants, is a sole proprietorship and he is its proprietor. He also requested for a lenient view of the default.
6. The main question before me is whether Mr. Mahmood Ali Khan has violated the law by allowing a person not being his partner to sign audit report on his behalf. Before proceeding in this matter, it would be appropriate to look at the relevant provisions of law for determination of the said question. Under Sub-section (2) of Section 252 of the Ordinance, "appointment of a partnership by the firm name to be the auditors of a company shall be deemed to be the appointment of all the persons who are partners in the firm at the time of appointment." According to Sub-section (2) of Section 254, a firm whereof all the partners practicing in Pakistan are Chartered Accountants may be appointed by its firm name as auditors of a company and may act in its firm name. Under Sub- section (1) of Section 257 it has been made mandatory that only the person appointed as auditors of the company or where a firm is so appointed in pursuance of Sub-section (2) of Section 254, only a partner in the firm practicing in Pakistan, shall sign the auditors' report. The Chartered Accountants Ordinance, 1961 also contains provisions to deal with such situations. According to Part 1 of Schedule I annexed to the said Ordinance, a Chartered Accountant in practice shall be deemed to be guilty of professional misconduct, if he allows a member not being his partner to sign on his behalf any balance sheet, profit and loss account, report or financial statement. The above provisions of law have been enacted with a view that only the person(s) who have been appointed by the members of a company to act, as auditor(s) shall sign the report on the accounts of the said company.
7. The bare reading of the above said provisions of the Ordinance indicates that the law has envisaged the appointment of a partnership firm by its name as auditors to be the appointment of all persons who are partners at the time of appointment. Moreover, a firm can be appointed by its name if all its partners practicing in Pakistan are Chartered Accountants. This postulates existence of two or more partners for a firm of Chartered Accountants to be appointed in its firm name as auditors. Thus, carrying on business by a single Chartered Accountant by a firm name is not envisaged by the law. According to Section 7 of the Chartered Accountants Ordinance, 1961, " Every member of the Institute in practice and any other member may use the designation of a Chartered Accountant provided that nothing in this Section shall be deemed to prohibit a firm, all the partners of which are members of the Institute and in practice, from being known as by its firm name as Chartered Accountants." This again indicates that a single Chartered Accountant in practice can use the designation "Chartered Accountant" and not "Chartered Accountants." In the instant case, Mr. Mahmood Ali Khan has been using the designation " Chartered Accountants" which is a misrepresentation. Moreover, this is misleading and violative of the aforesaid provisions of law.
ICAP being the apex regulatory body of Chartered Accountants must also look into this aspect and issue appropriate direction to its members.
8. Now coming to the reply of Mr. Mahmood Ali Khan to the show cause notice, it would be beneficial to discuss the issues raised by him before deciding this case. With regard to the authority to any Chartered Accountant to look after his office and sign balance sheet on his behalf, the provisions of law are quite clear that only a Chartered Accountant and in the case of appointment of a firm, any of its partners can sign the report and other documents. As such this argument is devoid of any force. The issue of authorizing a Chartered Accountant to look after the office is not relevant in this case and as such is not discussed here. There is no doubt about the argument that partnership firm can be formed at any time, however, only those partners can sign the report and balance sheet who according to the provisions of Sub-Section (2) of Section 252 of the Ordinance, are partners in the firm at the time of appointment of partnership firm as auditors.
Clause (c) of Sub-section (1) of Section 205 of the Ordinance requires that in the case of appointment of a firm, the full name, address, and nationality of each partner, and the date on which each become partner shall be entered in the register kept for the purpose. It is also obligatory on the auditors that within a period of ten days of his appointment or of any change therein, as the case may be, the auditors shall furnish to the company the aforesaid particulars and the Company shall file with the Registrar, the said particulars on Form 29 within prescribed time period. Form 29 dated February 06, 2001 filed by the Company with the Company Registration Office, Karachi for the appointment of auditors indicates that Mr. Mahmood Ali Khan s/o Mr. Mahboob Ali Khan Zuberi was appointed as auditors of the Company. M/S Mahmood Zuberi & Co. is not a firm and as such its sole proprietor Mr. Mahmood Ali Khan was appointed as auditor of the Company. Mr. Nasim Akhtar was never appointed as auditor of the Company. In the case of sole proprietorship, only one person is a proprietor, therefore, it is not regarded as a partnership firm and hence it cannot be appointed as auditor of a company under Sub-section (2) of Section 252 and Sub-section (2) of Section 254 of the Ordinance. In my view, in the case of sole proprietorship, the appointment of auditor must be made by the name of proprietor in his individual capacity rather than the name of his business. The aforesaid argument of Mr. Mahmood Ali Khan that Mr. Nasim Akhtar was his partner taken verbally or for a specific purpose, therefore, lacks substance.
As to the issue of certified copy of Form 29 by the Registrar, it is to be noted that the said form is qualified in the following term: "Certified true copy of the documents as filed by the company. However, this office does not take any responsibility for the correctness of the contents of the documents"
Therefore, issuance of certified copy of any document does not legalize any violation of law and it also does not exonerate the defaulters from punishment under the relevant provisions of law. As regard to the legality of appointment of Mr. Mahmood Ali Khan, Chartered Accountant, the matter is pending with ICAP and as such it is not appropriate to comment on it at this place. As for the partnership with Mr. Nasim Akhtar and its competency to become partner is concerned, the matter has been dealt above extensively and I do not find any need to discuss it any further. With regard to giving up of audit in favor of previous auditor, this matter is pending before ICAP and could be dealt at that level while giving findings on the validity of his appointment. I am stunned at his reply that the Company was dealing with all matters and that is why he did not respond to the Commission's letter. It is manifest from this statement that Mr. Mahmood Ali Khan has failed to fulfill his responsibility by referring the issue related to him to the Company for response. Accounting profession is known world over for high ethical norms. A high standard of care, duty, efficiency, self- discipline and integrity is expected from the members of this noble profession. However, it is perturbing that members of this profession in Pakistan are not following the standards of ethics laid down by ICAP and the provisions of the Ordinance. It is responsibility of ICAP to ensure that its members strictly observe the provisions of the Code of Ethics and the Ordinance applicable to them in order to protect the independence and dignity of the profession.
9. For the foregoing reasons and after taking into consideration all the relevant facts and circumstances, it is abundantly clear that Mr. Mahmood Ali Khan has contravened the provisions of Sub-Section (1) of Section 257 by allowing Mr. Nasim Akhtar who was not appointed as auditor to sign the audit report on the annual accounts of the Company. The auditors' report, therefore, is made otherwise than in conformity with the requirement of the aforesaid provisions of law. The default is willful and Mr. Mahmood Ali Khan, the sole proprietor of M/S Mahmood Zuberi & Co. has made himself liable for punishment. I, therefore, impose a fine of Rs 2,000 (Rupees two thousand) on Mr. Mahmood Ali Khan, FCA for the willful default under Sub-section (1) of Section 260 read with Section 476 of the Ordinance. Further, during the examination of this case, number of important matters have come to my notice due to which decision regarding the role of auditors in terms of Sub-section (2) of Section 260 of the Ordinance shall be decided through a separate order, after giving him an opportunity of personal hearing.
10. Mr. Mahmood Ali Khan is directed to deposit the fine in the designated bank account of Securities and Exchange Commission of Pakistan, maintained with Habib Bank Limited within 30 days of the date of this Order and furnish a receipted challan to the Securities and Exchange Commission of Pakistan.
11. Mr. Mahmood Ali Khan, Chartered Accountant is also guilty of professional misconduct in terms of Clause 12 of Part 1 and Clause 3 of Part 4 of Schedule I annexed to the Chartered Accountants Ordinance, 1961. I am directing my office to send a copy of this order to ICAP for taking appropriate action against Mr. Mahmood Ali Khan under the provisions of the Chartered Accountants Ordinance, 1961. I am not called upon to decide in this case the validity of the appointment of Mr. Mahmood Ali Khan, Chartered Accountant as auditor of the Company. This matter is also pending with ICAP which, I am sure, will be decided appropriately in accordance with the relevant laws and regulations. I impress upon ICAP to take a timely decision on this issue and also overcome procedural technicalities resulting into unnecessary delay in deciding such matters.