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Financial Reporting of Private compnaies - Ehrar_ACMA - 07-27-2003

The introduction of code of Corporate is another good step for best corporate governance. The scope of corporate governance could expand further for over all corporate governance. By attaching it with listing regulation it is now only applicable to listed companies. I think if it is applicable to private companies as well then it will be very help for the economy as a whole.

Many areas have been covered in the Code but my concern is “Fair Financial Reporting”. The Code applies on listed companies because the governance should be strong where public money is involved. If we think in broad expect rum, the private companies also play from government & public money and there is no check & balance on their financial reporting.

Many private companies prepare accounts for income tax, sales tax purpose other then actual account either due to inefficiency of their accountants.. Even after investigation or inspection nothing is found in order because mostly companies have non-professional or unqualified accountants. If a qualified accountant is hired it is very easy to trace the books of account even after concealment. And hence there is leakage of government revenue. This is only due to fraudulent reporting.

Many private companies mostly obtain loan from bank after submitting that accounts which were not prepared or attested /verified by any professional accountant/firm latter these loans becomes stuck up wholly or partly. Another misusage of weak financial reporting is done with their clients. Because their accounts show more than they are; which creates problem with the investors. In other words ultimately they are playing money of general public/nation.

The thing which I suggested does not only remove the above problem but also open the opportunities for r the right persons at the right place.

It is impractical for all to have a qualified (as explained in the Code) Chief Financial Officer in these small companies but at least the Manager or Accountant should be a professional qualified in these companies that is practical and bearable for these.

It is noted that this practice is not seen in large private companies but these large companies are 10% of total private companies. This article is not for large companies or exceptional cases. SECP should take any suitable action for this aspect which reduces the corruption in the country

Kh. Ehrar Hasan

- smraza - 07-28-2003

A o A
Dear Ehrar, what do u want to say ?
what kind the problem is faced due to hiring of unqualified accountants, u said the investigators cannot find anything if the accounts are being prepared by unqualified accountants,
think about it again, r u saying correct ?????
u r talking tottaly opposite. bcaz if a professional accountant prepare accounts, then we can say it will be hard for investigators or inpectors to find out something wrong in the records.
as far as the loan from banks is concerned, so i would like to update your knowledge, No bank sanctions the loan on the basis of unaudited accounts.
The Code of Corporate Governance was issued after the scandal of Enron and Arthur Anderson, but i ll say that the things which happened in Enron, cannot happen in pakistan, as in pakistan no company shows false profits, it conceals it profit for the purpose of tax evasion,
as far as the CFO is concerned, Mr. Shirazi (Chairman Atlas Honda) rightly said, "now the SECP will tell us how to do the business, in our eyes, our unqualified (Angootha Chaap) accountant is more better than the Qualified Accountants, as we are satified with them"
Yes there should be check on the companies, but first of all we must take care of our revenue authorities,
i think Ehrar, u have never been to Income Tax department, u dont have any experience of assessment of any company, bcaz if u had the experience then u will be able to understand that how much it is difficult to get the company assessed, (i m talking about that which dont have any problem)
so dear i think we have to expell the black sheeps of our revenue authorities,


- Paki - 07-29-2003

asalam o alaikum
I think not. if CCG is made applicable to pvt. companies, I think its going to repel the investors and even the current companies might decide to change to partnership firms. cause too much governance is also not very popular, besides it has a cost too, and the present CCG is quite costly aswell.
ehrar you should read another topic "did yousuf adil deserve the membeship of DTT" and you will know that there is an agreed perception that qualified accountants are also involved in fraudulent reporting. and smraza is right when he says it because of the govt. dept. that separate accounts are maintained.
banks are supposed to give loans on audited financial statements (depending upon the amount of loan)
I dont think that is practical for each pvt. company to hire a qualified accountant - only if you look at the scale of their wages ,its pathetic, its violation of human right - darn those sethia people.
but you are right to say that there is lots of corruption in pvt. companies and it must be corrected without damaging their business - infect I believe the real (and a test for the so-called qualified big names) correction is one that improves your business, so the investor is happy to embrace it.

Me rulz

- Ehrar_ACMA - 08-01-2003

Yes you both are correct at some extent. But you both ,misunderstood, the point you raised are beyond the control of CCG and i am talking about the thing can be controlled by CCG.

I dont mean to apply the code fully for Pvt Ltd. My area of concern is finanical reporting. There are two ways, where income can be concealed or of fraudulent reporting. The first is intentionally as pointed out by Mr. SM RAZA but the second way is lack of knowlegde.
IF there is some thing is being done intentionally as it happens normally in developing countries, then govt. is doing remedies through its departments e.g. Income tax, NAB, State Bank etc by using qualified persons as much as possible. But what about those accountants that prepare accounts but there is no proper information to arrive at actual figure. Neither there is any system of accounting, IT nor procedure/ documentations. Specially when these accountants deal with costing plus financial reporting. It is very harmful for the investors. There are two types of investors here. One where these accountants are employed another is to whom this empolyer deals. Improper reporting either management or Financial may cause problem for these both investors.

As far as fraudulent reporting by qualifieds is concern, yeah most of the small C.A firms are doing these things,or concealment of income tax etc this is some thing beyond the control of CCG.

AS in UK there is certain ,limits for the Pvt companies beyoind which all laws related to Plc apply. For e.g Assets /turn over/ no of employees increases from a certain limit.

There should be check and balance to monitor the Pvt Ltd companies .

But in future in Pakistan these restrictions will be inforced because the concept of single member company adopted from UK law, CCG is also adopted from USA SEC regulations for plc.

Kh. Ehrar Hasan

- Pervez - 08-01-2003

Hi Friends!

I fundamentally agree with Ehrar's point of view that we should have some form of CCG for pvt companies. But the hurdle is lack of resources. I don't know if any of us know what SECP annual budget is? SECP has a big mandate but is very poorly funded. As far as I know, even CCG project was funded by a foreign institute. The major object of SECP at the moment is to make our financial markets more efficient. This is essential if we want to attract foreign investments direct or indirect.
Most of the pvt companies are family owned, and if they have minority shareholders, these are family friends, who have made the investment on the basis of trust in majority shareholders. As far as misreporting is concerned, the only incentive is tax evasion. Now for that we have plenty of laws on the books. There is a whole regime of tax laws enforcers. If they fail in their roles that is a seperate problem.
As far as somebody not being involved in the tax assessment, does not reflect anything on his/her qualification as accountant. Tax assessment in Pakistan is an art seperate from accounting or finance. That process is total "vodoo accounting". You don't have to know even the definition of current asset to be sucessful in it.
I think a very good place this CCG project can start is ICMAP. They will have a support of many management accountants and it can be made a part of management audit of small firms. Management accountants can perform this audit and issue a report. Ehrar can even take it up with CMA council! Anything to get more work for our fellow accountants!!!

Edited by - Pervez on Aug 01 2003 052642 AM

Edited by - Pervez on Aug 01 2003 053452 AM

- smraza - 08-01-2003

Yaar Pervez,
can you tell me any benefit which we have availed or we will be availing from recent implemented COCG ?
Ooh bhai yeh COCG say kuch nahi ho ga, humara Income Tax Dept. theek ho jaaye to sub kuch theek ho jaye ga, I dont know why dont the CBR hire CAs or ACMAs as ITO or Commisioners,
I agree with you pervez regarding the Knowledge of Accouting of our IT Authorities
I tell you a joke of an ITO, i was going through the assessment of a Pvt. Ltd. Co. ITO wrote me a letter of querries, i ll tell you the two points raised by him

Point No. 2. Provide the complete detail of Liability against assets subject to finance lease, with complete support (like agreements, repayment schedules, mode of payments, entries of payments in bank statements, etc.)

Point No. 7. What does this current portion of Liability against assets subject to finance lease represents ? Why it is shown under Current Liabilities. as from Note number 5 to the accounts you have written in the accounts that the company obtained the lease from Orix Leasing Co. then this liability must also relates to the Orix Leasing. Please explain why are you showing the liability relating to One company under two heads ??

Now tell me what i m supposed to answer ?????????????????

Please CBR start hiring those ITOs who has done AT LEAST BCOM


- Ehrar_ACMA - 08-02-2003

Hi professionals

I appreciate the points raised by pervaiz & SM Raza. This is the fact due to many resons there are unqualified hands in revenue and finance departments of our country.

Any how I am a qualified ACMA(PAK) , CIA, MA(Eco) and doing CIMA .
It was very nice dicussion with all. Please comments on my newtopic ragarding "Developement of Capital MArket Vs Taxes"

Kh. Ehrar Hasan