10-02-2009, 07:40 PM
Dear Star and hshamsi,
It has really been a quality discussion which has and will certainly raise very significant aspects.
First of all let me know if any ISA any where describes the word "certification by auditors". I hope it has no where been used. Still, one may have to see ISAs for concluding this fact. Therefore, quite recently the audit firms (and specially the big 4) have changed the formats of their certifications. They have started issuing almost all certificates in the shape of and titled as "auditors' report to the management". However, the law still uses the word certification invariably, mostly without prescribing its format, thereby providing leverage to auditors to draft their certificate/report as they deem fit.
Now coming to the issue in hand, I would like to reiterate that the certificate required to be issued under Rule 8 of Companies (Issue of Capital) Rule, 1996 and the resulting verification by practicing CA has to cover the following broad areas
- the qualification and registration of Valuer etc
- the fact that whether or not all the required assets have been included in valuerâs report
- the fact that whether or not depreciation has been charged on consistent basis to reduce the gross valuation. {I differ on its interpretation with Star}***
- the fact that whether or not the valuer has excluded all the excludable assets (goodwill and intangibles etc) from his report / valuation.
***{Charge of deprecation is not meant for to reduce the value for depreciation subsequent to valuation date. Such valuation is normally done quite nearer to the date of transfer of assets and issuance of shares etc. May I point out that the valuation is always made either on market values or on the basis of replacement values (both of which reflect current fair values of similar un-used/new asset). Therefore, in both cases these valuations have to be reduced by charging depreciation consistently for the period for which asset has already been used, in order to match the values with the current condition of the assets as of the valuation date. This is the sense and purpose of adding this line to the rules, and this is what practicing CA must check and certify.}
I must say the above is the broad outline of the areas to be checked before certification. However, let me also explain that when rule 8 says that practicing CA has to certify that above conditions {i.e. three conditions from (i) and (iii); and not the four conditions} have been met, it provides a very wide ranging scope to such practicing CA.
I may remind that when valuers used to be approved by SBP (instead of PBA) many CA firms were also included in the list of approved valuers. So, many of CAs had been in touch with valuation techniques and its pros and cons and in past used to associate qualified engineers on the panel of their firms as well.
Keeping this in mind or even otherwise, if a situation arises where a practicing CA based upon his experience and knowledge believes that the valuation has been made wrong materially, what will he do? Certainly, people do it, and such voilations are always expected. This is where certification of CA has the greatest relevance. Mind it, this is not merely purposed for ensuring whether all documents are avaialble in file or not. Otherwise, can the Registrar or SECP not check whether or not the conditions have been met, if it has to be based merely on checking whether or not the report is appended with documents being filed?
Should the practicing CA keep quiet by assuming that his obligation is only to confirm that conditions (i) to (iii) have been met (i.e. report is available or not) so he should issue the certificate regardless of how wrongly the valuation of net worth and issuance of shares will it lead to, as a result? I am of strong view that this would be a professional misconduct.
Therefore, in my view, although the certification has to be made about whether or not the conditions are met, but since these conditions include a large amount of aspects which all relate to valuation only, the scope of certification remains unlimited. Accordingly, I feel like endorsing the views given by hshamsi in his post.
Regards,
KAMRAN.
It has really been a quality discussion which has and will certainly raise very significant aspects.
First of all let me know if any ISA any where describes the word "certification by auditors". I hope it has no where been used. Still, one may have to see ISAs for concluding this fact. Therefore, quite recently the audit firms (and specially the big 4) have changed the formats of their certifications. They have started issuing almost all certificates in the shape of and titled as "auditors' report to the management". However, the law still uses the word certification invariably, mostly without prescribing its format, thereby providing leverage to auditors to draft their certificate/report as they deem fit.
Now coming to the issue in hand, I would like to reiterate that the certificate required to be issued under Rule 8 of Companies (Issue of Capital) Rule, 1996 and the resulting verification by practicing CA has to cover the following broad areas
- the qualification and registration of Valuer etc
- the fact that whether or not all the required assets have been included in valuerâs report
- the fact that whether or not depreciation has been charged on consistent basis to reduce the gross valuation. {I differ on its interpretation with Star}***
- the fact that whether or not the valuer has excluded all the excludable assets (goodwill and intangibles etc) from his report / valuation.
***{Charge of deprecation is not meant for to reduce the value for depreciation subsequent to valuation date. Such valuation is normally done quite nearer to the date of transfer of assets and issuance of shares etc. May I point out that the valuation is always made either on market values or on the basis of replacement values (both of which reflect current fair values of similar un-used/new asset). Therefore, in both cases these valuations have to be reduced by charging depreciation consistently for the period for which asset has already been used, in order to match the values with the current condition of the assets as of the valuation date. This is the sense and purpose of adding this line to the rules, and this is what practicing CA must check and certify.}
I must say the above is the broad outline of the areas to be checked before certification. However, let me also explain that when rule 8 says that practicing CA has to certify that above conditions {i.e. three conditions from (i) and (iii); and not the four conditions} have been met, it provides a very wide ranging scope to such practicing CA.
I may remind that when valuers used to be approved by SBP (instead of PBA) many CA firms were also included in the list of approved valuers. So, many of CAs had been in touch with valuation techniques and its pros and cons and in past used to associate qualified engineers on the panel of their firms as well.
Keeping this in mind or even otherwise, if a situation arises where a practicing CA based upon his experience and knowledge believes that the valuation has been made wrong materially, what will he do? Certainly, people do it, and such voilations are always expected. This is where certification of CA has the greatest relevance. Mind it, this is not merely purposed for ensuring whether all documents are avaialble in file or not. Otherwise, can the Registrar or SECP not check whether or not the conditions have been met, if it has to be based merely on checking whether or not the report is appended with documents being filed?
Should the practicing CA keep quiet by assuming that his obligation is only to confirm that conditions (i) to (iii) have been met (i.e. report is available or not) so he should issue the certificate regardless of how wrongly the valuation of net worth and issuance of shares will it lead to, as a result? I am of strong view that this would be a professional misconduct.
Therefore, in my view, although the certification has to be made about whether or not the conditions are met, but since these conditions include a large amount of aspects which all relate to valuation only, the scope of certification remains unlimited. Accordingly, I feel like endorsing the views given by hshamsi in his post.
Regards,
KAMRAN.