Financial disclosure practices in Pakistan

O“O ye who believe! Eat not up

your property among

yourselves in vanities: But let

there be amongst you Traffic

and trade by mutual good-will:

Nor kill (or destroy) yourselves:

for verily Allah hath been to you

Most Merciful.”[4:29]

Introduction

OGood corporate governance is fundamentally

based on four principles which are:

transparency, accountability, fairness, and

responsibility.

OThe company must, clearly state and

appropriately disclose their financial

transactions in their annual reports.

Brief history of corporate Governance in Pakistan

O Security and exchange commission ordinance 1969

O Security and exchange commission act 1997 .

O Securities and Exchange Commission of Pakistan

(SECP) in March 2002 issued the first Code of

Corporate Governance for listed companies as part

of the stock exchanges’ regulations using power

under section 34(4) of security and exchange

commission ordinance 1969.

O in December 2004, the Pakistan Institute of

Corporate Governance (PICG) was

established.

O in April 2012, issuance of a revised/new

Code of Corporate Governance, 2012 for

listed companies by SECP.

Companies ordinance 1984

Stock exchange regulations

Code of corporate governance

Financial Disclosure

Financial Disclosure

OThe act of releasing all relevant information pertaining to a company that may influence an investment decision. In order to be listed on major stock exchanges, companies must follow all of the Securities and Exchange Commission's disclosure requirements and regulations.

Financial reports are the documents and

records you put together to track and review

how much money your business is making .

how much profit you are getting and in how

much loss you are.

What makes the companies to disclose their financial transactions

Companies are used to initiate

disclosure practices under two

conditions;

OOne when the companies are forced by

the legislative authorities

O Secondly when the direct and indirect

costs of disclosure are less than the

perceived benefits and penalties by

regulators.

Advantages of Financial Disclosure

Regulatory Compliance

When a business is coming with

performance data and out and out

disclosure of its transactions, it creates

better and tighter relationships with

regulatory authorities. Regulatory

compliance goes a long way toward

preventing significant operating losses as

fines, temporary suspensions and

penalties.

Improved Corporate Reputation

companies may rely on financial and

accounting software to reveal to the public

the company's ins and outs. Fair practices

followed in preparation of balance sheet,

cash flow statement and profit and loss

account increases trust of shareholders on

company. Firms with straightforward, clean

reporting processes often enjoy a good

reputation in the marketplace, which usually

translates into increased market share and

customer loyalty.

Financial Transparency

The goal here is to ensure "back-to-back

financial transparency," this term means

that transparency of one financial

transaction validates transparency of

subsequent ones. Meaning auditing

experts want to set appropriate

procedures from transaction recording

and entry verification to financial reporting.

Increased financial transparency eases

the disclosure of performance data in

accounting statements.

Increased Investor Interest

Companies that adequately

disclose financial information

generally see an increase in their

share values .when all the financial

information about a company is

available before hand to the

investor then he will be able to trust

on company.

Disadvantages of Non Disclosure

O A supplier or lender with no information

about the credit-worthiness of a client

because of faulty disclosure will probably

take his business to other well known

corporate entities. In short, lack of

disclosure means the lack of any

information about the future potential of a

company and this can result in a backing

off of investors.

it causes bad name of the company in

financial market. in secondary financial market

they lose share buyers confidence. It is the

lack of proper disclosure laws that have

caused mishaps like the Mohib textile case,

the loss of millions of rupees to share holders

in the companies of the crescent Group case.

Who is involved in preparation of financial reporting

Management

Auditors

Regulator

Financial statement Fraud

OAccording to a study conductedby the Association of CertifiedFraud Examiners (ACFE),fraudulent financial statementaccounts for approximately 10%of incidents concerning whitecollar crime and Assetmisappropriation and corruptiontend to occur by hidingtransactions.

Fraud ACFE defines fraud as

"deception or misrepresentation that an

individual or entity makes knowing that the

misrepresentation could result in some

unauthorized benefit to the individual or to

the entity or some other party.”

Five basic types of financial

statement fraud exist:

Ofictitious sales

Oimproper expense recognition

Oincorrect asset valuation

Ohidden liabilities

Ounsuitable disclosures

Corporate financial fraud root causes

Maximization of

shareholder wealth

Lack of business

for company

Financial fraud

Financial Statement Red Flags

Financial statement Red Flags

Financial statement red flags provide a general

overview of the warning signs investors should take

note of.

Some very common financial red flags include:

O Accounting analogies

O Unusual rapid growth

O Rapid financial actions by senior management.

OA rapid and unexplainable rise in the number

of day's sales in receivables in addition to

growing inventories.

OThe company maintains consistent gross

profit margins while its industry is facing

crisis.

O such as growing revenues without a

corresponding growth in cash flows.

Instances of Financial Frauds in Pakistan

PTCL privatization scandal (2005)

OPTCL privatization took place on June18, 2005 when 26 percent shares weresold in bidding to Etisalat at Rs 117 pershare. The deal was closed on 2.6billion dollars including U-fone &Paknet,. Moreover, pricing decisionswere made through old records insteadof determining current market value.September 2006, when Etisalat hadrefused to pay.

Crescent investment bank scandal (2007)

O The entire board of directors and CEO ofCrescent Standard investment bank werelegally stopped from running their offices onevidences of suspected fraud andirregular accounting books. External Auditorshad predicted a missing amount of over Rs.6Billion, apart from illegal maintenance ofparallel accounts, concealment of bankassets, un-authorized massive funding ofgroup companies, unlawful investments in realestate and stock market, etc.

Field Study

Table No:1

Sectors No of companies

Fertilizer 2

Textile 4

Transport 1

Bank 3

Tobacco 1

Refinery 1

Sugar mills 3

Table 2. Disclosure items by

categoryNo of companies

disclosing this item

percentage

Financial and operating

results

15 100%

Critical accounting

estimate

14 93%

Board responsibilities

regarding financial

communications

15 100%

Company

objective(present+futur

e)

11 73%

Directors report to shareholders 15 100%

International accounting principles

have been followed

13 86%

Proper books of account has been

maintained

15 100%

Disclosure of interest by company

directors holding shares of

company

14 93%

Statement of earnings per share 13 86%

No doubt on company’s going

concern

13 86%

1st Qtr

2nd Qtr

86%

1st quarter is representing compliance with

regulations and 2nd quarter represents non-

compliance.

Case Study

2013 CLD 103

Before Imtiaz Haider, commissioner of SECP

Ghulam Haider (chief executive)

V

Executive Director Enforcement SECP

Order

The penalty was rightly imposed on

respondent under section 492 of

companies ordinance 1984.which provides

that whoever makes a statement which is

false or incorrect in any material particular

in the balance sheet and profit and loss

account shall be punishable with fine.

2007 CLD 599

Security and Exchange Commission

of Pakistan

Usman Textile Mills

In matter of show cause notice No

EMD/Enforcement -ii/289/2003

Judgment (by director enforcement SECP)

O It is also to be clarified that filing a quarterly

account is a mandatory provision of the

ordinance. Therefore it can be concluded that

the directors along with chief executive director

deliberately committed the default in

preparation and circulation of the account.

100,000 fines is being imposed on all directors

of the company and further fine of 1000 per day

on case of default .

Conclusion

O The investors are more interested in the

objectives that company has achieved

and if not then what was the reason

behind. in many cases where due to

dishonesty of the company, bankruptcy

was the fate, for example Enron scandal.

Result oriented and information based

companies are likely to brace the

confidence of the investors.

OIt is the need of hour that regulators

should kept an eye on financial

statements of listed companies as well

as non listed companies.

the regulatory authorities have provided

guidelines for disclosure requirements of listed

companies, nevertheless, administration over

such requirements is feeble. Administration of

corporate business should be stronger to

tackle the mal-practices with iron hands.

OPenalties for non compliance should be

increased because in many cases when

penalties are less than estimated profit,

companies prefer to go for penalties. These

practices must be tackled by increasing

penalties.