This order shall dispose of the proceedings initiated against the Directors of M/s Quice Food Industries Limited (hereinafter referred to as "the Company") under the provisions of Section 253,255(7), 257,259 and Section 492 of the Companies Ordinance, 1984 (hereinafter referred to as "the Ordinance").
2. The facts leading to this case, briefly stated, are that the Enforcement Department received a complaint dated August 15,2006 from the Company's auditor Namdar & Co., Chartered Accountants (hereinafter referred to as "Namdar") who audited the accounts of the Company for the years ending June 30,2001, June 30,2002 and June 30,2003. Namdar in his aforesaid complaint has informed to the Commission that they had issued an initialed qualified audit report for the years 2001, 2002 and 2003 which is still not authenticated by them and the management has published the accounts without their authentication. In support of their complaint, Namdar enclosed his letter dated May 6,2005, addressed to the Chief Executive of the Company, which reads as follows: "We regret to inform you that accounts for the year ended June 30, 2001, June 30, 2002 and June 30, 2003 are not authorized by us. Henceforth, neither it can be printed nor it can be presented to annual general meeting to be held on May 9, 2005. Presentation, acceptance of accounts by the incoming auditor and by the management is in clear violation of the Companies Ordinance, 1984, directives issued by the SECP and ICAP. Our various reminders in this regard have gone in vain and now we are in process of intimating to appropriate authorities in this regard."
The Enforcement Department had also received a complaint dated June 25,2006 from the Company's subsequent auditors Kanwer Furqan Ali & Co., Chartered Accountants (hereinafter referred to as "Kanwer") for the years ending June 30, 2004 and June 30, 2005, which was also accompanied with the aforesaid complaint of Namdar, the contents of which are reproduced below: "We have been appointed in AGM but due to the bad reputation of the management we neither issued any consent to act as auditor of the Company for the year 2004 & 2005 nor audited the account for these years. Further, it came to our knowledge that the Company issued annual account for the year 2004 & 2005 & used our firm name as the auditor."
The Company on the query from the Commission, however, submitted the signed photocopies of the accounts for the year 2004 and 2005 duly signed by the Company and the audit report signed by the auditors Kanwer on January 2, 2006.
3. In order to probe the matter, the record of the Commission was perused which revealed that the Company had submitted the annual accounts of the Company for the year ended June 30, 2001, 2002 and 2003, in compliance with the Section 233 of the Ordinance which were to be laid in the Annual General Meeting held on May 9, 2005. Review of the said accounts revealed that the accounts were signed by the Chief Executive and the Director of the Company but the Audit Report attached with the accounts was not signed by the Auditors but was infact initialed.
4. The Company was required vide Commission's letters dated August 23,2006 and August 25,2006 to submit the copies of published accounts (in original) for the years 2001,2002,2003,2004 and 2005 duly signed by the auditors and the Chief executive and Director of the Company. The Company, in response, again submitted the unsigned copies of the accounts for the said years on August 29, 2006.
5. As the Company was reluctant in providing the accounts for the years 2001,2002,2003 duly signed by its auditors, it was apprehended that the Company had approved the said accounts in the Annual General Meeting which were neither approved nor authenticated/dated by the auditors as per Section 257 of the Ordinance. It was also inferred that the Company had suppressed the right of the auditor to make representations in contravention to the provisions of Section 253 of the Ordinance and did not provide the notice of meeting to the auditor in violation to the provisions of 255(7) of the Ordinance. Moreover, the Company has prima facie made a false statement in the notice of meeting by providing the accounts audited by the auditors which were not audited by the auditors and attracts the provisions of Section 492 of the Ordinance. In view of the foregoing, Show Cause Notice bearing No EMD/ 233/578/2002-1975-82 was issued on September 27, 2006 to the Company and its Chief Executive and its respective Directors for the years 2001, 2002 and 2003.
6. As regards the accounts of the Company for the year 2004 and 2005, the Commission was deeply concerned regarding the authenticity of the audited accounts submitted by the Company which the auditors claim have not been signed by them. Therefore, another Show Cause Notice No EMD/ 233/578/2002- 1983- 90 dated September 27, 2006 was issued to the Company, Chief Executive and the respective Directors of the Company for the accounts for the year 2004 and 2005.
7. The responses to both the Show Cause Notices were received on October 16, 2006. Thereafter, in order to provide an ample opportunity to the Company to advance arguments in support of its contentions contained in the reply to the show cause notice, the case was fixed a number of times.
Mr. Muhammad Afaq Shamsi, CEO and Mr. Akhtar Rasheed, Director appeared on one hearing fixed on October 12,2006 to present the case. The final hearing for both cases was fixed on February 16, 2007 in which no one appeared.
8. In the written submissions as well as verbal arguments at the time of hearing, the following contentions were raised: Reply for Show Cause Notice issued for the accounts for the years 2001, 2002 & 2003 Namdar kept the accounts with them for a long period for audit purpose. On the other hand the Company had applied for extension of AGM to SECP which was accepted by SECP. The extension period was about to expire. On several requests Namdar handed over the accounts to the Company which were signed and stamped. The same accounts were considered and adopted in the AGM held on May 9, 2005. The accounts were authorized and authenticated by the Auditors, Namdar as they had signed them and affixed their official stamp on them. It was also added that Namdar use the same signatures on their letters. The Company representatives also presented original copies of the so claimed audited accounts of the Company for the years 2001, 2002 and 2003, for the verification of the Commission.
The Company has submitted that Kanwer were appointed as auditors of the Company in the Annual General Meeting held on May 9, 2005. They also presented Kanwer's letter of consent to act as auditors of the Company dated April 7, 2005 and the Company's letter dated May 12, 2005 informing Kanwer of their appointment as auditors. Kanwer audited the accounts for the years ended June 30, 2004 and 2005 and lodged their resignation with the Company on January 5, 2006.
Mr. Kanwer authorized and authenticated the accounts for the said years which were presented in the Annual General Meeting held on March 20, 2006. The Company later received a letter from Tariq Ayub Anwar & Co., Chartered Accountants its subsequent auditors informing it about a letter from Kanwer claiming that they did not give their consent to act as auditors of the Company and neither have they audited the accounts.
9. I have carefully considered the arguments of the Company for the Auditors' complaint. The main issue of contention in this case is that whether the Company has issued/published the accounts for the years 2001, 2002, 2003, 2004, and 2005 which the Auditors claim not to have signed and authenticated. I will, therefore, confine this Order to the determination of the questions as to : Whether the auditors have signed/dated the Audit Reports for the aforesaid years? Whether the Directors and Chief Executive of the Company have made a false statement regarding the audit of the accounts of the Company for the relevant years in the notices of meeting? Whether the Company and the Directors have suppressed the right of the Auditor of making representation in the meeting by failing to give notice of meeting to the auditor?
10. In order to decide the aforesaid questions, the law on the subject has to be examined. The provision of Sub-section (1) of Section 257 provides that only the person appointed as the 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' or sign or authenticate any other documents of the Company required by law to be signed or authenticated by the auditor. Sub-section (2) of the same section also states that the report of auditors 'shall be dated' and 'indicate the place at which it is signed.'
The Company has failed to provide the signed copies of the accounts for the years 2001, 2002, 2003 signed by Namdar despite several requests of the Commission. The auditors report annexed to the original accounts presented at the time of the hearing for verification of the Commission was in effect the initialed report given by Namdar and was not dated. Therefore, the said report cannot be deemed as anauditors' report in terms of law. The claim of the auditors that they have not issued signed audit reports for the said years, therefore, seems justified.
11. Considering the conclusion drawn in the preceding paragraph, it is established that the Directors and Chief Executive of the Company have made a false statement regarding the audit of the accounts of the Company for the years 2001, 2002, and 2003 as the same were presented to the Commission and the shareholders as audited accounts. The notices of the meeting held on May 9, 2005, attached with the said accounts transmitted to the Commission in terms of Section 158 and 233 of the Ordinance portrayed the aforesaid un-audited accounts as audited and initialed auditors reports as auditors reports . For ease of reference, the relevant extract of the notice of the meeting of the Company is given below: "To receive, consider and adopt the audited accounts of the Company for the years ended June 30, 2001, June 30, 2002 and June 30, 2003 together with Directors' and Auditors' Reports thereon."
12. Moreover, as per the minutes of the aforesaid meeting, furnished by the Company to the Commission, it was also noted with deep concern that the auditors were not present in the meeting. The Company has failed to provide the proof of dispatch for the notice of meeting to the auditor. The auditors have also confirmed that they did not receive the notice of meeting. This shows that the Company has suppressed the right of the auditor to make representations in the meeting as per the requirement of law.
13. Before proceeding further, I find it relevant to discuss duties of directors. The directors, in addition of day to day running of the Company and the management of its business, also have some 'fiduciary' duties i.e. duties held in trust and some wider duties imposed by statute and breach of these statutory duties will usually be a criminal offence, punishable by fines or imprisonment. Hence the directors are held to a higher standard of accountability which requires them to be vigilant and perform their duties and obligations with due care. In the instant case, however, the Directors have failed to perform their duties with due care and skill. They did not take necessary steps for finalization of audit within time and also failed to present true state of affair of the Company.
14. From the above discussion, facts of the case and arguments put forward by the representatives, I am of a considered view the provisions of Section 257 of the Ordinance have been violated and the person appointed as the auditor of the Company has not signed the auditors' report due to which the Company and its Directors and Chief executive are liable for penalty as defined in Section 259 of the Ordinance amounting to Rs 50,000/- (Rupees Fifty thousand ), which I impose each on the Company, its Directors and Chief Executive for the years 2001, 2002 and 2003.
15. Further, the Company and its Directors and Chief executive have also violated the provision of Section 255(7) of the Ordinance by failing to give notice of general meeting to the auditor and therefore another fine of Rs. 5,000/-(Rupees Five Thousand) each is imposed on the Company and each of the Directors and Chief executive for the year 2001, 2002 and 2003.
16. As a Company has provided a false statement in the notice of meeting that the annual accounts for the years 2001,2002 and 2003 were audited which were in fact initialed, the Directors and Chief Executive are liable for a penalty of Rs. 100,000/- (Rupees one hundred thousand) as defined in Section 492 of the Ordinance. However, I take a lenient view and instead of imposing a maximum penalty of Rs. one hundred thousand, I impose a penalty of Rs. 50,000/- (Rupees Fifty Thousand Only) on each of the Directors and Chief Executive of the Company. I hope that the Directors would react positively and would ensure compliance with the requirements of law in letter and spirit.
17. The Company and its following Directors and Chief Executive are hereby directed to deposit the fine amounting to Rs.790,000 (Rupees Seven ninety thousand only) in aggregate within thirty days of the date of this Order in the designated bank account maintained in the name of Securities and Exchange Commission of Pakistan with Habib Bank Limited or pay through a demand draft in the name of the Securities and Exchange Commission of Pakistan and furnish receipted bank vouchers to the Commission, failing which proceedings for recovery of the fines as an arrear of land revenue will be initiated: {{TABLE}} Name Penalty (Rupees)
The Company 55,000 Mr. Muhammad Afaq Shamsi (Chief Executive) 105,000 Mr. Muhammad Farooq 105,000 Mr. Akhtar Rasheed,Director 105,000 Mr. Muhammad Asim, Director 105,000 Mr. Muhammad Fahim, Director 105,000 Mr. Shahid Durvish, Director 105,000 Mr. Muhammad Ahmed, Director 105,000 Total 790,000 {{TABLE}} It may also be noted that the said penalties are imposed on the Chief Executive and the Directors in their personal capacity; therefore, they are required to pay the said amount from their personal resources.
18. The issue of appointment of Kanwer as auditors of the Company for the years 2004 and 2005, filing of consent by them and subsequently issuing audit report under their signatures is a complex one. On one hand, the Company claims appointment of Kanwer, receipt of duly signed consent letter and issuance of audit report on the accounts for the year 2004 and 2005. To support their stance the Company has provided signed copies of both consent letter and aforesaid audit reports. It is however, noted that consent letter duly signed by Kanwer was not filed with the concerned Company registration office. On the other hand, Kanwer claims that he has neither given consent to act as auditors nor signed the audit reports on the accounts for the years 2004 and 2005. The issue needs further investigation and therefore, a copy of this Order is being sent to the President, Institute of Chartered Accountants of Pakistan for his information and necessary action in accordance with the provisions of the Chartered Accountants Ordinance, 1961.