ICAP Rejects CBR's Proposal to Certify Clients Regarding Income Tax Payment

KARACHI: External auditors of companies have refused to certify that their clients have paid their income tax and other federal taxes.

Sources at the Institute of Chartered Accountants of Pakistan (ICAP) said on Tuesday that ICAP had rejected the proposal of the Central Board of Revenue (CBR) that the external auditors must certify as part of their certification process that the company has complied with the payment of income tax and all federal taxes.

The proposal was mooted by the CBR and accepted by regulators of the external auditors and the Securities and Exchange Commission of Pakistan (SECP). The CBR had proposed amendments to the Companies Ordinance, 1984, which stipulated that the external auditors of the company will certify that “in our opinion, income tax at source has been deducted and deposited in the treasury as required under the Income Tax Ordinance, 2001”.

The proposed amendment further reads: “All federal taxes which the company is required to collect or deduct under various statutes and regulations applicable to the company have been collected or deducted and have been deposited in the treasury.”

The ICAP, in its letter addressed to SECP chairman, said the prescribed form of the auditor’s report in Pakistan, which is form 35-A itself, needs to be reformed in as much as it is not in line with the relevant international accounting standards on auditing.

'In every country where the profession has gained due recognition, the audit report is a condensed opinion on the financial statements expressing whether it portrays a true and fair state of affairs,' he said.

'In our case in Pakistan, the audit report of course arising out of the relevant legal stipulation of the companies ordinance contains opinion on various aspects such as books of accounts, conformity of the financial statements with the same, admissibility of expenses and Zakat deductibility,' he added.

The ICAP said that instead of injecting a yet another opinion regarding withholding of taxes, the entire auditor report format should be harmonised with the global practice as enunciated by the international auditing standards framework.

It said the technical department of the institute has carried out a study of audit practice and reports across various countries such as UK, Australia, Canada, USA, Germany, Hong Kong, Malaysia, India, Sri Lanka and Bangladesh.

The findings of this study have revealed that none of the countries have the audit requirement to report on non-compliance with specific tax laws except in the case of India and USA where such special reports are issued by auditors in addition to the statutory audit report.

The ICAP has suggested that if the authorities desire to establish a monitoring mechanism to check the compliance by companies of certain specific provisions of tax law, in particular verification of compliance with the statutory provisions of withholding taxes, an initiative which is supported in principle by the institute, the same could be more appropriately and effectively done in the interest of all stakeholders through separate special-purpose professional engagements within the current applicable auditing framework rather than forming part of the normal statutory audit of financial statements.

The ICAP said: 'Since acceptance of the proposal of the CBR would mean that the SECP is actually willing to get Pakistan corporate entities audited outside the internally recognised framework which, we are sure, could not be the SECP’s intention.'

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