This Order shall dispose of the show cause proceedings initiated against M/S F.R. Merchant & Co.
Chartered Accountants under Section 260 of the Companies Ordinance, 1984 (the "Ordinance").
2. M/s F.R. Merchant & Co. Chartered Accountants is a partnership firm and the partnership comprises of Mr. Fida Hussain R. Merchant and Mr. Fakhar uddin Yousafali. Both of them are Fellow members of the Institute of Chartered Accountants of Pakistan (the "ICAP') and were registered with the ICAP on December 14, 1961 and July 01, 1961 under Registration Numbers 177 and 135 respectively. The firm has offices in Lahore and Karachi.
3. The relevant facts for the disposal of this case, briefly stated, are that M/S F.R Merchant & Co., Chartered Accountants were appointed as Auditors of M/S Beema Pakistan Limited (the "Company") in its Annual General Meeting held on June 30, 2001 to hold office from the conclusion of the said meeting until the conclusion of next Annual General Meeting. They have audited the accounts and books of accounts of the Company for the year ended December 31, 2001 and have issued audit report to the members signed on June 08, 2002.
4. The examination of the annual accounts of the Company for the year ended December 31, 2001 (the "Accounts") received by the Commission under Section 233 of the Ordinance along with the directors and auditors report was conducted in order to determine, among other things, as to whether the Auditors' Report pertaining to the aforesaid financial year has been made in conformity with the requirements of Section 255 of the Ordinance, is otherwise true, contained no statement, which is materially false and that there is no omission of material facts about the affairs of the Company. It was noticed from the published accounts and other information available on record that: i) The Company had failed to obtain the Certificate of Registration from the Commission as required under Sub-section (1) Section 6 of the Insurance Ordinance, 2000 and, therefore, is not authorized to carry on the business of insurance. ii) The Board of Directors rescinded the allotment of shares made to Mr. Hameedullah, Ex-Chief Executive of the Company. These shares were subsequently re-issued and allotted to Mr. Shahnawaz Agha, present Chief Executive of the Company. The consideration for the aforesaid allotment amounting to Rs.15.773 million made to Mr. Shahnawaz Agha and that for advance against right issue of shares amounting to Rs.45.077 million was in the form of property which were not mutated and transferred in the name of the Company till the date of the signing of the auditors' report. The entire process of initial allotment without consideration, rescinding of the same and re-allotment were, prima facie, in violation of the requirements of Section 86 of the Ordinance. iii) The Company has also not followed the following requirements of the International Accounting Standards (IAS) and Fourth Schedule to the Ordinance in preparation of the financial statements for the year ended December 31, 2001: o "Deferred Revenue Expenses" of Rupees 1,717,682 have been written off during the year as prior period item in the Accounts in contravention to the accounting policy given in notes to the accounts, which states that the deferred expenses are to be amortized in three years. Further, the deferred revenue expenses included expenses in contravention of items mentioned in Para 5 (B) of Part II of the Fourth Schedule to the Ordinance. o Disclosure of the number of employees as per Para 102(d) of IAS 1 (Presentation of Financial Statements). o Disclosure as per the requirement of Para 11 of IAS 1 (Presentation Of Financial Statements). o Disclosure of provisions for diminution in value of investments as requirements of paragraph 3 (F) of Part II of the Fourth Schedule to the Ordinance and Generally Accepted Accounting Practices. o The description of the nature of the Company's operations as per the requirement of Para 102 (b) of IAS 1 (Presentation of Financial Statements). o Accounting policies with respect to current and deferred taxation and estimated liability in respect to outstanding claims. basic principal of Code of Ethics i.e. Due Care and Timeliness, which an auditor has to follow to achieve the objectives of chartered accountancy profession. I have also perused the letter dated June 06, 2002 It talked about only the mistakes in the Accounts and not the incorrect printing of audit report. I have also noticed that initialed accounts released by the auditors to the Company did not contained any qualification regarding Registration Certificate and even the Accounts did not contained any statement on this issue. This is further strengthened from the fact that the Inspector namely Mr. Mohammad Tariq, FCA appointed by the Commission under Section 265 of the Ordinance in his report to the Commission has reported that the audit report circulated to the members was not even on the prescribed format. Further audit report circulated to the members was not even qualified with regard to dividend and registration issue. In my views, it was the duty of the auditors to have made his report in accordance with the guidelines provided in Auditing standard 570 (Going Concern) as there was significant uncertainty about the future of the Company in view of the non-registration of the Company under the Insurance Ordinance, 2000 and the Company was not in position to transact the business of insurance in Pakistan and the business being undertaken was in violation of the insurance law. iii) As regards to other deficiencies and irregularities, Mr. Zafarullah Siddiqui either admitted the defaults or has not been able to give any satisfactory reply. I, therefore, do not consider it necessary to deliberate on these issues.
10. Before concluding the issue it would be beneficial to understand the spirit of law. The Ordinance laid down provisions regarding several matters to be followed by the company in regard to the preparation of the accounts. The International Accounting Standards have been adopted to improve the quality of the financial statements and to improve increased degree of comparability.
It is the responsibility of Directors to ensure that these provisions of law are followed in letter and spirit. At the same time, it is the duty of the Auditor to bring to the notice of the members the major breaches observed in the financial statements. The International Accounting Standards and Auditing Standards establish standards, which must be followed by the Auditors to ensure that financial statements are prepared in accordance with the Generally Accepted Accounting Principles and that the auditors carry out their responsibilities in accordance with the Generally Accepted Auditing Standards.
11. The shareholders are the ultimate entity to whom the auditors are responsible and are required to give a report on the accounts and books of account after conducting the audit in accordance with the prescribed procedures and requirements of the Ordinance and Standards. If they found any irregularity, they are required to issue a modified report, if the said irregularity is material to the accounts. They must keep this fact in mind while auditing the books of account and reporting thereon. They must also realize their true role and restrain themselves from performing their duties indulgently.
12. The auditors are required to conduct audit in accordance with the auditing standards and they should take into consideration such issues while reporting on the annual accounts of companies. It is clear from the above discussion that the auditors had failed to perform his statutory obligations by not communicating the discrepancies noted in the accounts and the auditors report published by the Company. It was also incumbent on the Auditor to have drawn attention to the members of the Company towards the non-compliances/ contraventions of various provisions of law in his Audit Report. In the circumstances, it is clear that the Auditor has failed to perform his duties with reasonable degree of care and skill.
13. As the Auditor has admitted the defaults and has not been able to give any justifiable argument for the same, therefore, I consider it a deliberate act which is certainly more than mere omission and default on the part of Mr. Fida Hussain R. Merchant who was under legal obligation to perform his duties, in the course of audit of Accounts of the Company and reporting thereon, in accordance with the provisions of the Ordinance, International Accounting Standards and Auditing Standards.
Mr. Fida Hussain R. Merchant has, therefore, made himself liable for punishment under Sub-section
(1) of Section 260 of the Ordinance.
14. For the reasons stated above, I impose a fine of Rs. 2,000/- (Rupees two thousand) under Sub- section (1) of Section 260 of the Ordinance on Mr. Fida Hussain R. Merchant. As has already been discussed earlier, Mr. Fida Hussain R. Merchant has assumed sole responsibility of the audit of the Company, therefore, no fine is imposed on Mr. Fakhar uddin Yousafali.
15. Mr. Fida Hussain R. Merchant is directed to deposit the above stated fine in the 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.
16. A copy of this Order may also be sent to President, ICAP for his information and necessary action in accordance with the provisions of the Chartered Accountants Ordinance, 1961.