SHAMS MEHMOOD MIRZA, J.---This order shall decide the present appeal and connected appeals bearing C.As .
Nos.2 and 4 of 2013 as all the petitions raise common questions of law .
The facts of all the appeals are similar . For the purposes of this order , the facts of the present case shall suf fice.
2. This appeal is filed under section 34 of the Securities and Exchange Commission of Pakistan Act, 1997 read with section 7 of the Companies Ordinance, 1984 (the Ordinance ) to lay a challenge to order dated 16.07.2013 passed by the Appellate Bench of the Securities and Exchange Commission of Pakistan (the Commission ).
3. The appellant is a chartered accountant firm which was issued a show cause notice on 13.03.2012 with the allegation that it being the auditor of Ranyal Industries (Pvt.) Limited while auditing the accounts of the said company "...provided the un-qualified Report to the members." The nature of allegations in the show cause notice were that:
3. AND WHEREAS , it has been observed from Note 8 (Stock in Trade) to the accounts that, the value of stock amounting to Rs.189.62 million which is 43% of total balance sheet footing was not physically verified by us.
4. AND WHEREAS , para 5 of International Standard on Auditing (ISA) 501 (Audit Evidence -Additional Considerations for Specific Items) stipulates that: "When inventory is material to the financial statements, the auditor should obtain sufficient appropriate audit evidence regarding its existence and condition by attendance at physical inventory counting unless impracticable"
5. AND WHEREAS , the inventory comprises of 43% of the total balance sheet footing however , aforementioned fact has not been disclosed in the Report despite of the fact that, the value of stock was not physically verified by you, you have not expressed a qualified opinion as appropriate with specific reference to the fact you were unable to observe the stock taking at the year-end.
4.. The appellant filed reply to the show cause notice. The Enforcement Officer of Securities and Exchange Commission of Pakistan (the Commission) through order dated 27.04.2012 rejected the stance of the appellant holding that it violated the provisions of section 255 of the Ordinance and accordingly imposed the penalty of Rs.50,000/-. The first appeal before the Appellate Bench of the Commission filed by the appellant also failed and was dismissed on 16.07.2013.
5. Learned counsel for the appellant submitted that the show cause notice was issued without lawful authority in as much as the Commission was not the regulatory authority of the appellant and could not hold it to account for the auditing standards for which there was no sanction in the Ordinance. In this regard, he referred to the Explanation to section 234 to contend that the Ordinance only encompassed International Accounting Standards. It is stated that with the enactment of Companies Act, 2017 the International Auditing Standards have come within the purview of the Commission. The learned counsel further referred to Para 7 of International Standards on Auditing (ISA-501) which stipulates that if attendance at physical inventory counting is impracticable the auditor shall perform alternative audit procedures to obtain sufficient appropriate audit evidence regard ing the existing and condition of the inventory . It was also apprised to this Court that the Commissioner brought this matter to the knowledge of the Institute of the Chartered Accountants of Pakistan (ICAP) which in disciplinary proceedings "reprimanded" the petitioner against which order an appeal has been filed.
6. The learned counsel for the Commission while supporting the orders impugned herein placed reliance on sections 255(3) and 260 of the Ordinance to contend that the Commission had the jurisdiction over auditing standards to be observed by the auditors of the companies. It is stated that the appellant does not deny the allegation levelled in the show cause notice and as such the penalty was rightly imposed on it.
7. The precise allegation against the appellant is that it did not physically verify the stock-in-trade of Ranyal Industries (Pvt.) Limited amounting to Rs.189.617 Million' comprising of 43% of the balance sheet which fact was disclosed in Note 8 of the audited accounts but was omitted to be mentioned in the auditors report and instead an unqualified report was issued to the members.
8. Both the Enforcement officer and the Appellate Bench of the Commission heavily relied on various provisions of ISA-501 to substantiate the allegation against the appellant. The question requiring determination is whether the Commission could at the relevant time hold the appellant to account for the allege d default committed by it of the duties/obligations imposed by ISA-501.
9. Section 255 as it is relevant reads as under:
255. Powers and duties of auditors. ---(1) Every auditor of a company shall have a right of access at all times to the books, papers, accounts and voucher s of the company , whether kept at the registered office of the company or elsewhere, and shall be entitled to require from the company and the directors and other officers of the company such information and explanation as he thinks necessary for the performance of the duties of the auditors.
(3) The auditor shall make a report to the members of the company on the accounts and books of accounts of the company and on every balance-sheet and profit and loss account or income and expenditure account and on every other document forming part of the balance-sheet and profit and loss account or income and expenditure account, including notes, statements or schedules appended thereto, which are laid before the company in general meeting during his tenure of office, and the report shall state -- (c) whether or not in their opinion the balanc e-sheet and profit and loss account or in the income and expenditure account have been drawn up in conformity with this Ordinance and are in agreement with the books of accounts;
(d) whether or not in their opinion and to the best of their information and according to the explanations given to them, the said accounts give the information required by this Ordinance in the manner so required and give a true and fair view .
(i) in the case of the balance-sheet, of the state of the company's af fairs as at the end of its financial year;
260. Penalty for non-compliance with provisions by auditors. ---(1) If any auditor's report is made, or any document of the company is signed or authenticated otherwise than in conformity with the requirements of section 157, section 255 or section 257 or is otherwise untrue or fails to bring out mater ial facts about the affairs of the company or matters to which it purports to relate, the auditor concerned and the person, if any, other than the auditor who signs the report or signs or authenticates the document, and in the case of a firm all partners of the firm, shall, if the default is wilful, be punishable with fine which may extend to one hundred thousand rupees.
10. It is apparent from the afore-mentioned provisions that the auditors report must violate any of the provisions of the Ordinance in order for the Commission to exercise jurisdiction over it and impose penalty . Admittedly , section 234 of the Ordinance deals with the balance sheet and obligates the auditors to follow such International Accounting Standards in regard to the accounts and preparation of balance sheet and profit and loss account as are notified, in the Official Gazette by the Commission. There was, however , no provision in the Ordinance dealing with the auditing standards. The situation was remedied in Companies Act, 2017. Section 249 as it is material reads as under:
249. Duties of auditor .--(1) A company's auditor shall conduct the audit and prepare his report in compliance with the requirements of International Standards on Auditing as adopted by the Institute of Chartered Accountants of Pakistan.
This clinches the issue with regard to the power and authority of the Commission to hold proceedings against an auditor in respect of the breach of duties imposed by ISA-501. The appellant was thus justified in asserting that the Commission had no authority to impose penalty on it on account of its alleged failure to observe, the provisions of ISA-501. The Ordinance at the relevant time did not contain any provision for enforcing auditing standards contained in ISA-501. Resultantly , all the proceedings taken against the appellant on the allegations contained in the show cause notice were nullity in the eyes of law .
11. In the result, this appeal and connected appeals (C.A. No.2 of 2013 and C.A. No.4 of 2013) are allowed and order dated 16.07.2013 is hereby set aside.