This order shall dispose of the proceedings initiated against M/s Kamran & Co., Chartered Accountants (hereinafter referred to as the "Auditors") through show cause notice dated December 21, 2005 under sub-section (1) of Section 260 read with Section 255 and 476 of the Companies Ordinance, 1984 (the "Ordinance") for making report to the members of M/s Morafco Industries Limited (hereinafter referred to as the "Company") on the accounts and books of accounts and balance sheet and profit and loss account otherwise than in conformity with the requirements of Section 255 of the Ordinance.
2. M/S Kamran & Co., Chartered Accountants is a sole proprietary firm and the partner Mr. Kamran Fatah, FCA is a practicing member of the Institute of Chartered Accountants of Pakistan (the "ICAP").
3. In order to fully appreciate the issues involved in this case brief narration of the background facts is necessary. M/s Kamran & Co., Chartered Accountants were appointed as auditors of the Company in its Annual General Meeting held on November 11, 2004 to hold office until the conclusion of next Annual General Meeting. The auditors have audited the accounts and books of accounts of the Company and have made audit report on the financial statement of the Company for the year ended June 30, 2005 (the "Accounts").
4. The Enforcement Department conducted an examination of the financial statements of the Company for the year ended June 30, 2005 to determine, among other things, whether Auditors' report pertaining to the aforesaid financial year had been made in conformity with the requirements of Section 255 of the Ordinance, is otherwise true, contains no such statement which is materially false and there is no omission of material facts about the affairs of the company.
5. The examination of the audited accounts of the Company for the year ended June 30, 2005 revealed that the auditors have failed to discharge their duties with regard to following deficiencies and irregularities.
5.1) Going Concern: Examination of audited accounts of the Company revealed that the manufacturing activity of the Company had been closed since the year 1997. As on September 30, 2005, its accumulated losses stood at Rs.837 million which resulted in net capital deficiency of Rs.825.758 million. These circumstances gave rise to significant doubt regarding the Company's ability to continue as a going concern. It was stated by the management itself in Note 2.2 of the accounts that the Company is no longer considered to be a going concern and no explanation was given by the management regarding appropriateness of using going concern assumption in preparation of the accounts. However, the accounts were prepared on going concern basis and yet the auditors did not modify their opinion to give an adverse opinion as provided in Para 35 of International Standard on Auditing (ISA)-570. The directors did not give any reasonable indication of future prospects for profits and the revival of the Company as justification for preparing accounts on going assumption rather; plans for privatization of the unit were disclosed in Director's Report as follows: "Ministries of Industries and Production have already requested the Privatization Commission (PC) for inclusion of Morafco Industries Limited, Faisalabad in their Privatization program. The Board of Directors of PC and Cabinet Committee on Privatization have also approved the privatization of this unit. The evaluation and other formalities are in process with the privatization commission. It is expected that the PC will be able to privatize this unit during the current financial year."
It was thus evident that the Company was not a going concern on the date of audit report, but still accounts prepared on going concern basis without any justification as such by the management and did warrant an adverse opinion in auditors' judgment.
5.2) Reference to the previous Auditor's Report: The accounts of the company for the year ended June 30, 2004 were audited by another auditor M/s Javaid Jalal Amjad & Co. Chartered Accountants, who in their report dated October 13, 2004 had expressed an adverse opinion on those financial statements due to invalid going concern assumption. However, the auditors while auditing the accounts of the current year have failed to report emphasis of matter paragraph regarding the substantive reasons for expressing an opinion different from that expressed on previous years' accounts, when the matter that gave rise to the modification is unresolved, as provided in Para 17 of ISA-710.
5.3) True and fair view of the state of Company's affairs: The auditors in their report to the members of the Company have expressed a clean opinion on the accounts in spite of the fact that the Company was not a going concern on the date of audit report, but accounts were prepared on going concern. The audit opinion was as follows: "In our opinion and to the best of our information and according to the explanations given to us, the Balance Sheet, Profit and Loss Account, Cash Flow Statement and Statement of changes in equity together with the notes forming part thereof conform with approved accounting standards as applicable in Pakistan, and, give the information required by the Companies Ordinance, 1984, in the manner so required and respectively give a true and fair view of the state of the Company's affairs as at June 30, 2005 and of the profit, for the year then ended."