This Order will dispose of the show cause proceedings initiated against Mr. M.Akbar Alam under Section 260 of the Companies Ordinance, 1984 (the "Ordinance") read with Section 492 and Section 476 of the Ordinance.
2. Mr. Muhammad Akbar Alam is an associate member of the Institute of Chartered Accountants of Pakistan (the "ICAP'). He was registered on February 11, 1990 under the Registration Number 1780. He is a practicing Chartered Accountant and conducting his business under the name and style "M/S M.A. Alam & Co.," Chartered Accountants at 1/7-B, Mohammad Ali Housing Society, Karachi.
3. The facts relevant to this case, briefly stated, are that Mr. M.Akbar Alam was appointed as Auditor of M/S Carvan East Fabrics Limited (the "Company") in its Annual General Meeting held on December 22, 2000 to hold office from the conclusion of the said meeting until the conclusion of next Annual General Meeting.
4. The Commission has conducted an examination of the financial statements of the Company for the year ended June 30, 2001 (the "Accounts") 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, 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.
5. The aforesaid examination of the Company's Accounts revealed that the Company has not observed the following requirements of the International Accounting Standards (IAS) and Fourth Schedule to the Ordinance in regard to the accounts and preparation of the Balance Sheet and Profit and Loss Account for the year ended June 30, 2001: Disclosure of financial instruments has not been made in the accounts contrary to requirements of Para 56, 66 and 77 of IAS 32 (Financial instruments: Disclosure and Presentation). No provision for employees' retirement benefits has been made contrary to Para 25 of IAS 1 (Presentation of Financial Statements). Number of employees has not been disclosed contrary to requirements of para 102(d) of IAS 1 (Presentation of Financial Statements). Earning per Share has not been disclosed in the accounts as per IAS 33 (Earnings Per Share). Disclosure of liabilities against assets subject to finance lease has not been given according to Para 23(b) of IAS 17 (Leases). The Company did not disclose accounting policies of staff retirement benefits and trade debts contrary to Para 97 of IAS 1. The company failed to comply with the provisions of Clause (ii) of Para 2 of Part I of Fourth Schedule to the Ordinance regarding disclosure of non-following of fundamental accounting assumption, namely going concern and accrual in preparation of the financial statements. Advances and prepayments have not been separately disclosed in the accounts as per Clause
(A) of para 6 of 4th Schedule of the Ordinance. Disclosure of long-term loan has not been made in accordance with the requirements of sub- clause (b) of Clause (E) of Para 8 of 4th Schedule of the Ordinance. Further current maturity of long term loans has not been disclosed contrary to Sub-clause (b) of Clause (B) of Para 12 of Part II of 4th Schedule of the Ordinance. Disclosure of cash and bank balances is not in accordance with Sub-clause (xii) of Clause (A) of Para 6 of Part II of Fourth Schedule to the Ordinance.
6. The Auditors of the Company, however, have not drawn attention of the members in their Audit Report signed on December 03, 2001 towards the aforesaid non-disclosures in the Accounts. The Auditors has also failed to draw attention of the members towards possible going concern problem. The Company has incurred loss of Rs. 26.072 million during the year and has accumulated losses of Rs. 186.822 million, which not only eroded the equity but resulted in negative equity of Rs. 86.822 million. Current liabilities have exceeded its current assets by Rs. 122.629 million and lenders have filed recovery suits in the banking courts against the Company.
7. In view of the above, a notice dated January 18, 2002 was issued to Mr. Muhammad Akbar Alam to show cause as to why fines mentioned in Sub-section (1) of Section 260 read with Section 476 of the Ordinance of the Ordinance may not be imposed on him. The reply to the show cause notice was received through letter dated April 11, 2002. In order to provide an opportunity of personal hearing, the case was fixed on June 26, 2002 in Karachi. Mr. Rizwan Badar, Assistant Supervisor of the firm appeared on behalf of Mr. Muhammad Akbar Alam.
8. In the written submissions as well as at the time of hearing, it was contended that ISA 23 required that if the financial statements were not prepared on going concern assumption that fact should be disclosed in the financial statements. The net loss sustained by the Company during the year was less than the loss of previous year. Moreover, said losses were being faced by the whole textile industry. The Company was utilizing 85% of its total production capacity, the credit worthiness of the Company had improved and the management was hopeful for rescheduling of loan for repayment. So far as para 25 of IAS -1 was concerned, the Company had no policy regarding employee's retirement benefits. Whereas the accrual basis of accounting was concerned, the annual accounts had been prepared on the same basis. Regarding other disclosures, it was stated that the same were inadvertently overlooked and would be taken care in the future audits. Mr. Rizwan, however, during the course of hearing has admitted the defaults and requested for the lenient view.
9. I have given careful consideration to the arguments advanced on behalf of Mr. Muhammad Akbar Alam, however, the same are found to be unsatisfactory. The omission of expression of opinion on the disclosure requirements of IAS as well Fourth Schedule of the Ordinance cannot be ignored. It is ironical that the auditors have failed to modify/qualify their report on the going concern issue. In this regard, I would like to refer to para 16 of Auditing Standard 23 (Going Concern) which requires that if adequate disclosure is made in the financial statements, the auditor should ordinarily express an unqualified opinion and modify the auditor's report by adding an emphasis of the matter paragraph that highlights the going concern problem by drawing attention to the note in the financial statements that discloses the matters set out in paragraph 15.
The accounts neither include such disclosure nor auditors have given any opinion in this regard.
Moreover, they have failed to provide the audit evidence gathered to resolve the question regarding the company's ability to continue as going concern in operation for the foreseeable future. The other replies of the auditors are also unsatisfactory as they had not been able to give any justifiable excuse for the contraventions. The carelessness of the auditors is obvious, and it is abundantly clear that the Auditors have failed to perform their duties with reasonable degree of care and skill. There could be no other opinion except that the auditors have been grossly negligent in the performance of their duties. The Audit report, therefore, has been made otherwise than in conformity with the requirements of Section 255 of the Ordinance.
10. 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, 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. Mr. M.Akbar Alam has not followed the prescribed practices and above stated mandatory requirements of law.
11. The shareholders are the ultimate entity to whom the auditors are responsible. They are supposed to keep this in mind while auditing the accounts of a company and reporting thereon.
Keeping in view the shareholding structure of most of the listed companies, the sponsoring directors manage to appoint auditors of their own choice in the annual general meetings. It would have a devastating affect, if the auditor sign a clean report on the misleading accounts or otherwise breach the mandatory requirements while auditing accounts and reporting thereon.
12. In view of the foregoing, the undersigned is convinced that an action against the Auditors is necessary. As the Auditor have admitted the default and have not been able to give any justifiable excuse for the same, therefore, I consider it a deliberate act on the part of Mr. M.A. Alam 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.
13. For the reasons stated above, I impose a fine of Rs 2,000 (Rupees two thousand only) on Mr. Muhammad Akbar Alam under Sub-section (1) of Section 260 read with Section 476 of the Ordinance.
14. Mr. Muhammad Akbar Alam 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.