ROSC A&A e PAKISTAN nc ma for REPORT ON THE OBSERVANCE OF Per STANDARDS AND CODES, ket ACCOUNTING AND AUDITING arm al January 2017 pit Ca Sm erp pm all ris ent Ent elo &M e Dev edi um Sta erp s te ris Ent orm ow e Ref ned S NES IVE LUS INC Standard Disclaimer: This volume is a product of the staff of the International Bank for Reconstruction and Development/The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. ROSC: 118827-PK Table of Contents i ABBREVIATIONS AND ACRONYMS ii PREFACE ii ACKNOWLEDGMENTS iii EXECUTIVE SUMMARY 01 I. INTRODUCTION 02 A. Country Background 02 B. Approach 02 C. Economic Context 03 D. Corporate and Financial Sector 06 E. Linkage of the Assessment to Pakistan’s Development Agenda 07 II. ASSESSMENT 08 A. A&A Standards 10 B. Institutional Framework for Corporate Financial Reporting and Auditing requirements 25 C. Observed Reporting Practices and Perceptions 27 III. STATUS OF POLICY RECOMMENDATIONS OF ROSC A&A 2005 31 IV. KEY FINDINGS AND AREAS FOR CONSIDERATION 38 ANNEX 1A Companies Ordinance, 1984, Compared to IFRS 40 ANNEX 1B Summary of Financial Reporting Amendments in the Companies Bill, 2017 42 ANNEX 2 ICAP Assessment of Current Status of Observance of 7 IFAC SMOs 43 ANNEX 3 ICMAP Assessment of Current Status of Observance of 7 IFAC SMOs 44 ANNEX 4 ICAP Assessment of the Compliance with IAESB Standards 45 ANNEX 5 PIPFA Assessment of Assessment of Current Status of Observance of 7 IFAC SMOs 46 ANNEX 6 Significant Factors for Efficient Functioning of Audit Oversight Board ABBREVIATIONS AND ACRONYMS A&A Accounting and Auditing AAOIFI Accounting and Auditing Organization for Islamic Financial Institutions ACCA Association of Chartered Certified Accountants AFC Assessment of Fundamental Competence AFRS Accounting and Financial Reporting Standards AGP Auditor General of Pakistan AOB Audit Oversight Board AOSSG Asian-Oceanian Standard-Setters Group CAF Certificate in Accounting and Finance CAPA Confederation of Asia Pacific Accountants CGA Controller General of Accounts CIMA Chartered Institute of Management Accountants (United Kingdom) CIPFA Chartered Institute of Public Finance and Accountancy CPA Certified Public Accountant CPD Continuing Professional Development CPS Country Partnership Strategy EMBI+ Emerging Market Bonds Index Plus FDI Foreign direct investment FY Financial Year GDP Gross Domestic Product HEC Higher Education Commission IAASB International Auditing and Assurance Standards Board IAESB International Accounting Education Standards Board IAS International Accounting Standards IASB International Accounting Standards Board IASC International Accounting Standards Committee ICAEW Institute of Chartered Accountants of England and Wales ICAP Institute of Chartered Accountants of Pakistan ICMAP Institute of Cost and Management Accountants of Pakistan IES IFAC Education Standards IESBA International Ethics Standards Board for Accountants IFAC International Federation of Accountants IFIAR International Forum of Independent Audit Regulator IFRIC IFRS Interpretations Committee IFRS International Financial Reporting Standards IOSCO International Organization of Securities Commissions IPSAS International Public Sector Accounting Standards IPSASB International Public Sector Accounting Standards Board ISA International Standard on Auditing ISQC International Standard on Quality Control M&E Monitoring and evaluation MSA Multi Subject Assessment MSME Micro, small and medium-size enterprise PERN Pakistan Education and Research Network PFM Public financial management PIE Public interest entity PIPFA Pakistan Institute of Public Finance Accountants PSC Public sector company PSX Pakistan Stock Exchange QAB Quality Assurance Board QAD Quality Assurance Department QCR Quality Control Review RAET Regulations for Accounting Education Tutor ROSC Report on the Observance of Standards and Codes SAFA South Asia Federation of Accountants SBP State Bank of Pakistan SDG Sustainable Development Goal SECP Securities and Exchange Commission of Pakistan SME Small and medium-size enterprise SMO Statement of Membership Obligation SMP Small and medium-size practices SOE State-owned enterprise SRO Statutory Regulatory Order SSE Small sized entity ROSC A&A Pakistan PREFACE ACKNOWLEDGMENTS Report on the Observance of Standards and Codes The Report on the Observance of Standards and Codes, Accounting and Auditing (ROSC A&A) assess financial Accounting and Auditing (ROSC A&A) was conducted at reporting and auditing practices in participating the request of the Government of Pakistan. All findings countries. These reports form part of a joint initiative reflect the period of the review from March 2016 to implemented by the World Bank and the International January 2017; some stated future events may have been Monetary Fund to review the quality of implementation achieved by publication date. The World Bank team was of internationally recognized standards and principles in led by Akram El Shorbagi (Senior Financial Management 12 key areas (the ROSC program) with a view to promoting Specialist) and Qurat ul Ain Hadi (Financial Management financial and economic stability. Specialist) and included Henri Fortin (Lead Financial Management Specialist, GGOFR, Washington); Abid Khan This report provides an assessment of financial reporting (Program Associate, Islamabad); and consultants Abdul and auditing requirements and practices within the Rahim Suriya, Naveed Saeed, and Jael Billy. corporate sector in Pakistan and sets forth areas of co n s id eratio n fo r imp rovin g th e in stitu tio n al The review was conducted through a participatory environment for accounting and auditing¹. The ROSC A&A process involving the World Bank Country Office Pakistan used international benchmarks of good practice and various in-country stakeholders, including the governing financial reporting and auditing in the Ministry of Finance, Securities and Exchange Commission assessment, including International Financial Reporting of Pakistan, State Bank of Pakistan, Pakistan Stock Standards and International Standards on Auditing. As an Exchange, Institute of Chartered Accountants of Pakistan, update to an earlier assessment that was published in Institute of Cost and Management Accountants of 2005, this report was undertaken following a formal Pakistan, Auditor General of Pakistan, Institute of request from the Government of Pakistan. Business Administration, Association of Chartered Certified Accountants (United Kingdom), audit firms, academia, and other business communities. The ROSC A&A team would particularly like to thank the SECP self- assessment team members led by Ms. Khalida Habib, head of the Investor Education and International Relations Department, for carrying out a comprehensive self-assessment in advance of the World Bank team’s visit to Pakistan. This greatly facilitated the timely completion of the study. The team also gratefully acknowledges Illango Patchamuthu (Country Director for Pakistan) and Fily Sissoko (Practice Manager, Governance South Asia) for their guidance and support. The report also benefited from the comments of peer reviewers: Alex Berg (Senior Financial Sector Specialist), Patrick Kabuya (Senior Financial Management Specialist), Sarwat Aftab (Senior Private Sector Specialist), Shabana Khawar (Principal Country Officer, IFC), Jiwanka B. Wickramasinghe (Senior Financial Management Specialist) and Adrian Lim (IFAC Analyst) and Darlene Nzorubara (Senior Technical Manager, Quality & Development, IFAC). ¹ Not-for-profit companies and companies limited by guarantees are not in the scope of the ROSC A&A. ii EXECUTIVE SUMMARY Taking serious steps for economic revival, the Government of Pakistan set up Vision 2025 to elevate the country from lower middle-income to upper middle- RS income status. With the recent stability in the macro- economic environment, GDP growth rate has reached 4.7 percent, the highest in eight years. To continue with the pace of reform, the Government sought the World Bank's assistance in conducting the Report on the Observance of Standards and Codes, Accounting and Auditing (ROSC A&A). Adopting measures to strengthen the A&A environment Measures to Increase Capital Market Performance will allow the Government to make significant progress in the reform agenda as outlined in Vision 2025. An earlier Capital market acts as a catalyst for transforming the ROSC was conducted in 2005. Significant progress has economy. Vision 2025 aims to double market been made in implementing ROSC 2005 recommendation capitalization. The SECP and PSX have undertaken various which has contributed in economic revival. The ROSC A&A structural and legal reforms to enhance investors' 2.0 assessment focuses on three pillars: (a) A&A standard confidence such as strengthened corporate governance analysis with reference to international benchmark; (b) practices of the regulated entities. The Code of Corporate institutional framework, including institutional capacity; Governance is now embedded in the listing regulations, and (c) monitoring and enforcement and analysis of A&A and more than 90 percent of listed companies disclose a standards as designed and practiced. statement of compliance which is annually reviewed by auditors. The ROSC A&A assessment identifies following The outcomes of the assessment directly contribute areas to further improve capital market performance; toward the Government's reform agenda to improve capital market performance, state-owned enterprise · Efforts toward establishing an independent Audit (SOE) governance, small and medium-sized enterprise Oversight Board (AOB) will enhance investors' (SME) sector development, and knowledge economy with confidence and boost capital market. Protecting inclusive and indigenous growth. The assessment is in line investors' interest promotes true capital formation. In with the FY2015-19 Country Partnership Strategy, July 2016, major reform based on ROSC 2005 providing a framework for the World Bank Group and recommendation was undertaken that resulted in the other donors to support Pakistan in its reform plan. establishment of AOB regulations through amendments in the SECP Act, 1997. Earlier, the audit The key regulators responsible for the policy reforms are profession was self-regulated by ICAP. The ICAP has an the Securities and Exchange Commission of Pakistan established Quality Assurance Board (QAB) (SECP), Pakistan Stock Exchange (PSX), and State Bank of functioning since 2005. The QAB will now be Pakistan (SBP), and Institute of Chartered Accountants of supervised by AOB. This reform lends greater Pakistan (ICAP). credibility to the quality assurance process and is in ROSC A&A Pakistan iii EXECUTIVE SUMMARY line with international good practice. However, auditors are required to annually review the considerable resources are required to build AOB statement of compliance for public sector companies. capacity, which includes affiliation with the However, considerable efforts are still required by all International Forum of Independent Audit Regulators key players, which includes board of directors and (IFIAR). management of PSCs, regulators and auditors to improve the status of compliance particularly in the · Full compliance with IASB-issued International areas of accountability for public wealth, transparent Financial Reporting Standards (IFRS) will improve internal and external reporting and use of appropriate foreign direct investment (FDI). Vision 2025 aims to accounting policies and procedures. increase FDI by a factor of 15. Pakistan has adopted most, though not all IFRS. Significant effort has been · Defined financial reporting framework for made to achieve substantial alignment with IFRS authorities will provide relevant information to the through amendments in the Companies Bill 2017 and decision-makers. Most authorities defined as state- insurance rules.² However, some gaps exist in the owned enterprises prepare their financial statements banking and power sector, which constitutes 26 without following any defined financial reporting percent of total market capitalization. The power framework and thus are unable to provide relevant sector has a great potential to attract foreign information to decision-makers. The ICAP, one of the investment through privatization / restructuring country's professional accounting organization and considering these companies largely operate as principal standard-setter, should work in close unlisted companies with a capital base of almost 25 collaboration with the Auditor General of Pakistan percent equal to the current market capitalization³. (AGP) for defining a financial reporting framework for Compliance with IFRS will reduce the investment cost such entities. for foreign investors because of the ease of co m p a ra b i l i t y a n d e n h a n c e d d i s c l o s u re o f · Defined oversight mechanism in Ministry of Finance information. will ensure accountability in the use of public resources. Oversight of A&A practices for federal and Economic Turnaround in SOEs through Greater provincial authorities are not well defined. The reform Transparency and Accountability actions might include setting up monitoring and enforcement teams in the Corporate Finance Wings of Improved governance and financial reporting and the Finance Division and Provincial Finance auditing practices in unlisted state-owned enterprises Departments, hiring of professional accountants, and (SOEs) will improve performance and reduce fiscal drain developing risk-based review methodologies to on the Government's scarce resources. Majority of monitor A&A practices and improve assessment of unlisted SOEs are burdening the national exchequer by fiscal risk for federal and provincial authorities. incurring ongoing losses. Pakistan's Vision 2025 envisages turning loss-making institutions into profit-making · The quality of financial information will improve entities for the good of the public sector. The ROSC A&A with the enhanced transparency. The financial assessment identifies several key areas for improving statements of SOEs are often not easily accessible and economic turnaround in SOEs: contain several audit qualifications. The quality of financial information will be improved with greater · Compliance with the Code of Corporate Governance transparency such as availability of audited financial for Public Sector Companies will instill confidence statements through public domains. among citizens and stakeholders. Compliance with the Corporate Governance Rules, 2013, being relatively new for public sector companies, is gradually improving. Similar to regulated entities, ² Companies Ordinance 2016 was promulgated through Presidential Ordinance on ³ Total capital employed in power sector as mentioned in SOE performance report is Nov 11, 2016. However, the Senate turned it down and insisted the GoP to take approximately PKR 1.9 trillion (US $ 0.02 trillion). the routine parliamentary approval process. The Companies Bill 2017 is now iv undergoing deliberations in the Senate, after due acceptance in the National Assembly. EXECUTIVE SUMMARY SME Sector Development This reform will be more effective when filing audited financial statements is also relaxed for the purposes of The Government has targeted an increase in GDP, job tax returns⁶. ICAP and ICMAP also consider providing a creation, and export services through development of series of trainings to small and medium-sized the SME sector. This can be achieved by providing a practices focusing on how small audit and level playing field and a fair competitive environment. accountancy firms obtain the knowledge to be trusted Following recommendations of the 2005 ROSC, SECP business advisers for the SME sector and facilitate took measures in collaboration with ICAP and access to finance. introduced local accounting and financial reporting standards (AFRS) for small-size companies in 2007 and · The SME sector can benefit from a greater level of IFRS for SMEs for medium-sized companies in 2015. engagement with the SME Board at PSX to access This provided a structured template for providing potential investors for raising capital at lower cost. simplified information that is most relevant to users of Due to the limited capacity of SMEs, this potential the financial statements of SMEs. The sector will be change agent is still unexplored. The capacity gap can further facilitated with the adoption of the Companies be bridged with the active involvement of Bill, 2017, and active involvement of professional professional accountants with the SME sector. accountants as business advisors to improve private sector development. Measures to Enhance Inclusive and Indigenous Growth · Adoption of Companies Bill 20I7 will improve quality of financial information for small size Develop a profession gender action plan to increase the entities and encourage documentation of number of female accountants in the country. Pakistan economy. The current audit requirement for has one of the lowest representations of female small-size entities is stringent and imposes an accountants in the region at 9 percent, compared with 30 undue burden on small-size entities. The percent in Sri Lanka and 22 percent in India⁷. The requirement for financial statements to be percentage of female students enrolled in the audited by chartered accountants applies to accountancy profession is also quite low, ranging from 18 companies with paid-up capital greater than PKR 3 to 22 percent over the last three years. A major factor million (US$ 28,639). Thus, 75 percent of the total contributing to low female participation is the lack of an registered companies are incurring a relatively enabling work environment with day-care and pick-and- high cost for mandatory audits performed by drop facilities. Increasing the participation of women in auditors not subject to professional standards⁴. As the labour force is a key aim of the Vision 2025 reform a result, audit quality is compromised. This agenda. deficiency will be removed by having introduced auditors' qualification in the Companies Bill, 2017. Develop a national accounting curriculum and accreditation body in collaboration with the Higher The Companies Bill 2017 also removes the audit Education Commission (HEC) to provide equal requirement from the private companies with professional opportunity for all and career progression paid-up capital of less than PKR 1 million (US$ for the mid-tier accountants. The ICAP has recently 9,546)⁵. These companies will be required to file revised its education policy to attract aspiring students by annual unaudited accounts with SECP. The offering more exemptions to graduates of the top amendment would reduce the cost of compliance universities that offers international-level accounting and burden on smaller firms and serve as an enabler auditing curricula. However, this has also resulted in for documentation of the informal economy, varying levels of exemptions for professional qualification which is more than 50 percent. due to lack of a national accounting curriculum. Further, the profession has a strong pipeline of partly qualified ⁴ Total registered companies are 73,207, whereas total companies with the paid- ⁷ Pakistan's female representation includes chartered accountant, cost and up capital of PKR 3 million or less are 54,456. management accountants, and ACCA accountants. ⁵ Two-third of total registered companies v ⁶ Rule 34 of the Income Tax Rules, 2002 EXECUTIVE SUMMARY professional accountants. The ICAP has introduced a mid- tier certification for partly qualified professionals; however, because of lack of a national accreditation body, the Higher Education Commission has not provided equivalence to such certification. Professionalize public financial management (PFM) by strengthening existing infrastructure. The ICAP and the Institute of Cost and Management Accountants of Pakistan (ICMAP) collaborated with AGP in 1993 to form the Pakistan Institute of Public Finance Accountants to work jointly to develop a policy and code of conduct for (PIPFA). The PIPFA produces a mid-tier accountant stream providing quality services at the global level. Improving for the public and corporate sector. With the effort of the knowledge economy index by promoting technology- ICAP, the Chartered Institute of Public Finance and based solutions is also a key pillar of Vision 2025. Accountancy (CIPFA) and PIPFA signed a Memorandum of Understanding (MoU) in 2015 to promote high-quality Introduce third party assurance requirements on service PFM practices in Pakistan. Other avenues in training are organizations for improved performance and enhanced being pursued under an MoU with ICAP, ICMAP, AGP, and user satisfaction. There has been an increasing trend of CGA. However, a defined charter is required to put in place outsourcing services in Pakistan particularly in the field of a business model for professionalizing PFM and to reap payroll processing, business process services, cloud the full benefit of the existing infrastructure. computing, consulting, pension administrators, and others. This heightened operational risk is beyond the Measures to Improve Competitiveness through control of the user entity. To overcome this risk, IAASB has Knowledge Economy put forth International Standard on Assurance Engagement (ISAE) 3402, which prescribes an assurance Develop standard operating procedures and code of methodology for service organization control to provide conduct to offer quality accounting shared services to comfort over processes. An ISAE 3402 report, which the world. With a vibrant accounting profession, Pakistan constitutes an independent auditor opinion, is an holds great potential to serve as a competitive knowledge effective method of communication that internal controls economy by offering shared services to the world. There over systems and processes are suitably designed and are are three professional accountancy organizations with operating effectively within a well-controlled IFAC membership in Pakistan. The local organizations, environment. Such formal communication has recently ICAP and ICMAP, are the full members of IFAC, the South become an important success factor when differentiating Asia Federation of Accountants (SAFA) and the between service organizations and demonstrating ability Confederation of Asia Pacific Accountants (CAPA). The to achieve high-quality performance. The SECP and SBP other professional accountancy organization, PIPFA, is an may consider introducing third-party assurance IFAC associate member. requirements for service organizations providing outsourcing services. This will improve global and The international organizations ACCA and Chartered domestic market of the service organizations and provide Institute of Management Accountants (CIMA) also have a enhanced user satisfaction. strong presence in Pakistan. The profession's contribution to the skills sector in Pakistan is significant with, almost 31 Progress on ROSC 2005 Recommendations percent of the national accounting professionals working The reform agenda is demand driven. Significant progress abroad and being a source of foreign remittances. has been made in implementing the 2005 ROSC Pakistan has made good progress in accounting- recommendations (Table A). The detailed status of 2005 outsourcing sector in the last two years. Local policy recommendations is presented in section 3 of the professional accountancy organizations are encouraged report. vi EXECUTIVE SUMMARY ROSC A&A Pakistan vii EXECUTIVE SUMMARY Key Areas for Consideration The thematic areas for consideration for the 2017 ROSC A&A assessment are summarized in Table B. The detailed policy recommendations with responsible parties and timeframe for implementation are presented in section 4 of the report. The findings and policy reforms in the report will contribute to the development of the country action plan. The World Bank and other development partners can provide support to Pakistan as it addresses these issues. viii INTRODUCTION INTRODUCTION 1. Pakistan is a lower-middle-income country located at Other sources of data were collected through interviews the crossroads of South Asia, Central Asia, China, and the with stakeholders from government, regulatory and Middle East, Pakistan is strategically positioned for trade accountancy bodies, accounting and auditing firms, and regional cooperation with its neighbours. banks, state-owned enterprises (SOEs), small and medium-size enterprises (SMEs), Commercial Audit A. Country Background Wings of the Auditor General of Pakistan (AGP), and academia. The review focused on assessing the 2. Pakistan has reserves of natural resources such as institutional framework underpinning A&A practices in coal, oil, natural gas, and minerals. However, challenges the regulated entities; private sectors, including SMEs; persist in leveraging these considerable resources into and SOEs of the country in comparison with international sustainable, inclusive economic growth and prosperity for standards and good practice. The outcomes of the its nearly 190 million citizens. The Government of assessment directly contribute toward the Government Pakistan has set up Vision 2025 to elevate Pakistan from a reform agenda and provide means of achieving the lower-middle-income country to an upper-middle- income country. With the recent stability in the targets set for the Sustainable Development Goals (SDGs) macroeconomic environment, GDP growth rate has [Table 1]. reached 4.7 percent, the highest in 8 years. 3. Pakistan's Vision 2025 will continue to focus on several priority areas as it moves toward upper-middle- SDG 16: Build effective, accountable, Improved A&A practices in SOEs income status. Those areas include (a) meeting basic and inclusive institutions at all levels needs of people; (b) achieving sustained, indigenous, and Developing entrepreneurial skills for small and medium-size practices SDG 9: Build resilient infrastructure, inclusive growth to empower people particularly women; (SMPs) and SMEs promote inclusive and sustainable (c) encouraging responsible and accountable government Increase in GDP by improving industrialization, and foster and public sector; (d) improving human and social capital; capital market performance innovation (e) increasing private sector-led growth; (f) improving Improving knowledge economy competitiveness through knowledge economy; and (g) Develop Gender Action Plan for SDG 8: Promote sustained, inclusive, profession and sustainable economic growth; modernizing infrastructure and strengthening regional full and productive employment; connectivity. and decent work for all Develop national curriculum that SDG 4: Ensure inclusive and provides equal opportunity to all equitable quality education and students and strengthen public promote lifelong learning B. Approach sector certification programs 4. The Government of Pakistan has taken steps for C. Economic Context economic revival. To continue with the pace of reform, the Government has sought the World Bank's assistance for a 5. The GDP growth continues to increase but remains repeat assessment with a second Report on the timid at 4.7 percent (FY2015/16), below the level required Observance of Standards and Codes, Accounting and to accelerate job creation and significantly improve living Auditing (ROSC A&A). The previous ROSC A&A was standards. The GDP growth rate was at 8 percent in 2005; conducted in 2005. This most recent ROSC A&A was however, it was adversely affected by challenges ranging from the political and law-and-order environment in the conducted from March 2016 to January 2017. All findings country. The GDP growth in 2016 increased, albeit at a reflect this period of the review; some stated future- slower rate than the pre-financial crisis levels and below designated events may have been achieved by publication the South Asia regional average of 6.8 percent. The date. The data and information used for the review were growth for FY2015/16 remains modest, increasing to 4.7 gathered from the revised ROSC A&A 2.0 diagnostic percent from 4.0 percent in the previous year, driven by questionnaire completed by stakeholders and by large-scale manufacturing growth of 3.2 percent and reviewing professional accountancy-related documents. services growth of over 5.7 percent (Figure 1). 02 INTRODUCTION Figure 1. GDP Growth Figure 2. FDI Inflows 10 US$ Million 8 6000 6 4 4000 2 2000 0 2005-06 2006-07 2007-08 2008-09 2012-13 2013-14 2014-15 2015-16 2009-10 2010-11 2011-12 0 2005-06 2006-07 2007-08 2008-09 2012-13 2013-14 2014-15 2015-16 2009-10 2010-11 2011-12 GDP Growth Rate Source: World Bank website Source: World Bank website 6. Pakistan has made significant progress in reducing 8. The level of private investment is relatively low. poverty over the last decade. Based on the poverty line Pakistan has one of the lowest investment-to-GDP ratios set in 2001, the percentage of people living below the in the world. At 15.6 percent of GDP, the rate is less than poverty line decreased from 34.6 percent in FY2002 to half of the average for South Asia. Pakistan is currently less than 10 percent in FY2014. Moreover, these gains in ranked 144 out of 190 countries in the overall ease of income were shared with everyone; even the poorest 5 Doing Business rankings. The implementation of the percent of the population saw real improvements. In April federal and provincial governments' joint action plan to 2016, the Government announced a new national poverty improve the investment climate will be one important line that sets a higher standard for well being, identifying step toward reversing this long-term trend. Measures to 29.5 percent of the population as poor.¹ Economic growth, improve the investment climate are underway, and there particularly private sector-led growth, is therefore critical is evidence that some of these measures are starting to if poverty reduction targets are to be met. have a positive impact. During 2015-16, 6,200 new 7. The economy witnessed slim increase in foreign companies were registered, an increase of 24 percent direct investment (FDI) in 2015–2016. During FY2016, FDI with respect to the previous year. This has raised the total inflows stood at US$2.8 billion against the outflow of number of registered companies to 73,207. US$860 million, compared with US$2.732 billion inflows and US$1.809 billion outflows in FY2015 (Figure 2). In D. Corporate and Financial Sector absolute terms, the volume of FDI is low; the current surge in overall FDI is because of the low base from the previous year. However, improvement in corporate governance 9. The Securities and Exchange Commission of Pakistan practices has started showing benefits to the economy. (SECP) has a strong regulatory presence domestically and Pakistan's benchmark equity index, Karachi Stock is actively engaged with international regulatory bodies. Exchange-100, outperformed by 46 percent and turned With the exception of banks and deposit-taking financial out as Asia's best performing market in 2016. High- institutions, which are regulated by the State Bank of quality, reliable financial information such as that Pakistan (SBP), the SECP is the primary regulator for the required by International Financial Reporting Standards nearly 70,000 registered companies in the country. The (IFRS) and good practice signals to investors that Pakistan governance mechanisms, powers, and remit of SECP are is an investment-friendly country and increases the prescribed in the Securities and Exchange Commission of attractiveness of the business climate for foreign Pakistan Act, 1997. The authority of the SECP with respect investors. to corporate financial reporting is established in the ¹ World Bank. 2016. “Pakistan Development Update: Making Growth Matter.” ROSC A&A Pakistan 03 INTRODUCTION Table 2. Pakistan Stock Exchange: Overview Companies Ordinance, 1984, the principal legislation for companies. The SECP is a member of international Total listed companies (Domestic) standard-setting bodies such as the International Organization of Securities Commission (IOSCO) and the 2013 2014 2015 2016 International Association of Insurance Supervisors. 557 560 572 559 10. The Pakistan Stock Exchange (PSX) is gaining Number of initial public offerings (IPOs) recognition from international investors as an emerging market. The country's three stock exchanges recently 2013 2014 2015 2016 completed a merger to form PSX. In December 2016, PSX 3 5 8 5 sold 40 percent of its strategic shares to Chinese Consortium for PKR 8.96 billion (US $ 85.5 million) – a sale Number of additional public offerings of strategic interest in the regional market. The PSX has in the last three years five listing segments, including an SME Board targeted 2013 2014 2015 2016 toward companies with paid-up capital from PKR 25 (US$ 0.24) to 200 (US$ 1.91) million. As of November 2016, 14 26 27 28 there were 559 listed companies (less than 1 percent of registered companies) with a market capitalization of PKR Trading volume for the previous four years (PKR Million) 6.8 trillion (US$ 64.92 billion). Banks, insurance companies, and mutual funds comprise the principal 2013 2014 2015 2016 institutional investors in the domestic market. The PSX 49,570 51,514 54.045 52,231 was recently reclassified from a frontier market to emerging market status on a leading international Trading volume for the previous four years benchmark index, effective May 2017. This recognition is (US$ Million) expected to attract more foreign investors to PSX (Table 2). 2013 2014 2015 2016 473.22 491.78 515.94 498.63 11. The market's perception of country risk is improving. Note: Information provided by the SECP in response to the Pakistan's Emerging Market Bonds Index Plus (EMBI+) risk ROSC questionnaire on listed companies/ spread has declined from its peak of 1,011 basis points (bps) in March 2013 to 369 bps in December 28, 2016. Moody's changed the outlook for its Caa1 sovereign credit implying a spread of about 460–560 bps over U.S. rating from “stable” to “positive” in March 2015. Later, in Treasury. The Government issued a US$1 billion, five-year, June 2015, Moody's upgraded Pakistan's foreign currency international Sukuk in November 2014 at 6.75 percent. In bond rating to “B3” and assigned it a stable outlook. September 2015, Pakistan once again tapped Moreover, Standard & Poor's raised Pakistan's credit international capital markets and issued a 10-year rating outlook from “stable” to “positive” in May 2015 but Eurobond worth US$500 million at 8.25 percent. As affirmed its “B-” rating. Recently, in November 2016, international markets had significantly tightened, the Standard & Poor's revised Pakistan's long-term credit pricing of the bonds was the same as a year earlier despite rating from “B-” to “B” because of improvement in the significant improvements in Pakistan's macroeconomic macroeconomic environment of the country. conditions. More recently, in October 2016, Pakistan successfully issued a five-year Sukuk worth US$1.0 billion Market confidence allowed Pakistan to raise US$2 billion at a historical low rate of 5.5 percent. Issued Sukuk are in in April 2014 through two dollar-denominated Eurobonds alignment with the standards of the Accounting and with bullet maturities and coupons of 5 years at 7.25 Auditing Organization for Islamic Financial Institutions percent and 10 years at 8.25 percent, respectively, (AAOIFI). 04 INTRODUCTION 12. The banking sector is growing, largely driven by rise contributing 20.7 percent to the country's GDP. Out of 175 in private sector advances and investments (mostly in public sector companies, 12 are listed on PSX. Listed SOEs government securities). There are 35 banks in Pakistan, contribute 34.4 percent and 38 percent to the total assets which together hold approximately PKR 14 trillion (US$ and total turnover of SOEs, respectively. The Government 133.65 billion) in assets; of these, 20 are commercial is an important source of finance for SOEs, having banks, 6 are Islamic banks, and 9 are owned by the state. provided PKR 150 billion (US$ 1.43 billion) in loans, PKR The Government's domestic debt accounts for PKR 8.47 272 billion (US$ 2.6 billion) in subsidies, and PKR 134 trillion (US$ 80.86 billion) or nearly 62 percent of net billion (US$ 1.28 billion) in other forms of finance in banking assets.² However, private sector credit is on the FY2014. Federal authorities represent a large investment increase with a modest rise in lending to SMEs. Overall, of public money, with 85 percent and 20 percent share in nonperforming loans fell to 11.1 percent of the loan loans and guarantees to SOEs and sole recipient of grant portfolio in 2016. Net nonperforming loans also continue to SOEs in 2013-14. However, such authorities are to decline because of adequate provisioning, dropping to reporting on cash or accrual basis without any defined 2.2 percent in July 2016. Nonperforming loans for SMEs financial reporting framework, whereas a few have declined from 30.5 percent to 26.1 percent. adopted IFRS. Good governance of SOEs is particularly crucial to the success of the reform agenda as a number of 13. The insurance sector, particularly life insurance, is a these enterprises operate in sectors that are key to key area for growth. The insurance market in Pakistan economic growth and public service delivery such as compared to its peers in the region is relatively energy and transport. underdeveloped. However, the market is steadily growing at an average of 6 percent in the last three years. There are 15. The SMEs continue to face significant challenges in 51 insurance companies, including 4 that are owned by accessing finance. Although SMEs comprise nearly 97 the state. Net written premiums are approximately PKR percent of registered companies in Pakistan, access to 1.99 billion (US$ 18.99 million), over three-quarters of credit for SMEs remains a challenge and poses constraints which are derived from the life insurance market.³ on growth. One reason could be the low-capital base of SMEs that do not meet the requisite debt-to-equity ratio. 14. The SOEs continue to play a significant role in the Micro, small and medium-size enterprises (MSMEs) economy. The SOEs are categorized under three broad require further learning on the added value of financial categories: public sector companies (PSCs),⁴ development reporting and assurance services to facilitate their access finance institutions,⁵ and federal/provincial authorities. to finance. Credit provided to SMEs represented just 7 The SECP ensures corporate compliances as per percent of the total bank lending to the private sector in Companies Ordinance, 1984, and Rules of Business. Line 2014. While still relatively high compared with the overall ministries and Ministry of Finance regulate authorities loan portfolio, the level of nonperforming loans for SMEs whereas the development finance institutions are is on the decline. Further, the small-size entity sector regulated by State Bank of Pakistan. An SOE report for requires real support to increase its level of equity 2013-14, published by the Ministry of Finance,⁶ showed financing, which increases capital investments enabling that SOEs constitute a considerable portion of the more companies to operate as medium-sized companies country's macro economy — employing 423,254 people, that also generates employment. More professionals yielding a considerable 5.5 percent contribution in nontax would need to engage with SMEs to provide technical revenue in the form of dividends, with a significant asset support to access potential investors for raising capital at base worth PKR 9.633 trillion (US$ 91.96 billion) and a a lower cost through the SME Board at PSX. turnover of PKR 5.257 trillion (US$ 50.19 billion) ² Pakistan Development Update November 2016. ⁵ Development finance institutions provide a broad range of financial services in ³ Information provided by the SECP in response to the ROSC questionnaire on the developing countries such as loans or guarantees to investors and entrepreneurs, insurance sector. equity participation in firms or investment funds, and financing for public infrastructure ⁴ Public sector company means a company, whether public or private, which is directly projects. or indirectly controlled, beneficially owned or not less than 50 percent of the voting ⁶ Federal Footprint State-Owned Entities Performance Review Fy2013–14. The report is securities or voting power of which are held by the Government or instrumentality or available at agency of the Government or a statutory body, or in respect of which the Government http://www.finance.gov.pk/publications/State_Owned_Entities_FY_2013_14.pdf or any instrumentality or agency of the Government or a statutory body, has otherwise power to elect, nominate, or appoint majority of its directors and includes a public sector association not for profit, licensed under section 42 of the Ordinance. ROSC A&A Pakistan 05 INTRODUCTION Table 3. Capital-based distribution of companies 17. The 2017 ROSC A&A update is relevant to the Government's reform agenda and Country Partnership % of companies Strategy (CPS) 2015-19. The updated ROSC A&A exercise Paid-up Capital in each category was undertaken following a formal request from the Economic Affairs Division at the joint request of SECP and Paid-up capital up to ICAP. Adopting measures to further enhance the A&A PKR 100,000 38 (US$ 954) environment will allow the Government to make significant progress in achieving the reform agenda Paid-up capital from outlined in Vision 2025 and contribute to improving GDP PKR 100,001 to PKR 500,000 15 (US$ 955 to US$ 4,773) by capital market and private sector development, improving service delivery of public sector entities, Paid-up capital from developing knowledge economy, and building human PKR 500,001 to PKR 1,000,000 11 capital through equitable opportunities. The outcome of (US$ 4,774 to US$ 9,546) the assessment directly relates to the strategic themes of Paid-up capital from the FY2015-19 CPS, which include private sector PKR 1,000,001 to PKR 10,000,000 25 development, inclusion, and service delivery. The ROSC (US$ 9,547 to US$ 95,465) A&A provides a foundation for the World Bank Group and Paid-up capital from donors to support Pakistan in achieving its upper-middle- PKR 10,000,001 to PKR 100,000,000 8 income country agenda. (US$ 95,466 to US$ 954,653) Paid-up capital from PKR 100,000,001 to PKR 500,000,000 2 (US$ 954,653 to US$ 4,773,269) Paid-up capital from PKR 500,000,001 to PKR 1,000,000,000 0.38 (US$ 4,773,270 to US$ 9,546,539) Paid-up capital from PKR 1,000,000,001 to above 0.54 (US$ 9,546,540 to above) Total 100 Source: SECP report for 2015−2016. E. Linkage of the Assessment to Pakistan's Development Agenda 16. The World Bank support through development policy credits over the last three years has complemented stakeholders in achieving many of the recommendations identified in ROSC 2005. Among those recommendations were amendments in the SECP Act and the Companies Bill, 2017. These amendments have strengthened the auditing and accounting standards for the corporate sector in Pakistan. 06 Instit Fram utional ewor k dsr nda Sta II. Assessment s& r a c tice ns P eptio Perc II. ASSESSMENT 18. This section reports on A&A standards, institutional 23. A few requirements of the Companies framework for corporate financial reporting, and Ordinance conflict with those of IFRS but are addressed observed reporting of practices and perceptions. in the Companies Bill, 2017. The Companies Ordinance, 1984, prescribes A&A requirements for companies, some A. A&A Standards of which diverge from IFRS requirements. These include the accounting treatment for revaluing fixed assets or redeeming preference shares and the definition of 19. This subsection will provide an analysis of financial subsidiaries and associates in joint arrangements. The reporting (accounting) standards and auditing standards. amendments to the Companies Bill, 2017, address a majority of these areas of divergence. Financial Reporting Standards Analysis Thus, the impact of these differences in company financial 20. Accounting standards are critical business-related statements is expected to be limited in the future. Refer to language tools for investors and other stakeholders. Annex 1A and Annex 1B for a detailed description of the Pakistan is seeking to improve the business climate in differences between the Companies Ordinance and IFRS order to attract FDI and mobilize finance in support of and the amendments in the Companies Bill, 2017. These productive and job-creating activities. If adopted amendments were first introduced through Companies accounting standards for listed companies differ Ordinance, 2016, which was promulgated through significantly from the increasingly adopted universal Presidential Ordinance on November 11, 2016. However, international benchmark, namely IFRS,⁷ it could be the Senate turned it down and insisted that the difficult for foreign investors to understand the financial Government take the routine parliamentary approval reports of domestic companies, thus potentially process. The Companies Bill, 2017, is now undergoing hampering investment and growth. deliberations in the Senate after due acceptance in the National Assembly. 21. Despite IFRS being adopted in Pakistan, full compliance has been hampered by a small number of exemptions and deferrals, mainly in the banking and power sector. Table 4 summarizes the key areas of divergence between adopted accounting practices and IFRS. The IASB-issued standards that have effective dates in 2018 and 2019 — IFRS 9, Financial Instruments; IFRS 15, Revenue from contracts with customers; and IFRS 16, Leases — are under consideration for adoption in Pakistan. 22. The SBP has deferred adoption of certain IFRS for banks under its regulatory purview. The standards deferred include IAS 39, Financial Instruments: Recognition and Measurement ; IFRS 7, Financial Instruments: Disclosures ; and IAS 40, Investment Property. The rationale for the deferral with respect to financial instruments is because of differences between the valuation of investments and applicable disclosures prescribed by the corresponding IFRS and the preferred approach of SBP given the level of capitalization of domestic banks. The rationale for deferring the adoption of IAS 40 by banks, however, was less clear. ⁷ IFRS are the standards issued by IASB, the standards issued by its predecessor IASC and adopted by IASB, and the interpretations issued or adopted by IFRIC. 08 II. ASSESSMENT Table 4. Key areas of divergence between adopted IFRS and IASB-issued IFRS Relevant Topic Description of key differences IFRS IFRS not adopted First time adoption of IFRS IFRS 1 IFRS 1 was not adopted because of deferrals of some IAS/IFRS. However, it is under consideration and is expected to be adopted in the short to medium term. Presentation of financial IAS 1 The financial statements for insurance companies diverge from the presentation requirements of statements IAS 1. However, insurance ordinance is undergoing revision, and the SEC Policy Board approved the Insurance Accounting Regulations, 2016 (Accounting Regulation) in January 2017. Under the Insurance Accounting Regulations, insurance companies are required to present financial statements in accordance with IAS 1, for periods commencing July 1, 2017, which is expected to eliminate these differences. IFRS adopted but exemption granted to specific sectors Financial instruments IAS 39 IAS 39 and IFRS 7 have not been adopted for entities regulated by SBP. The requirements still IFRS 7 apply to other companies that prepare financial statements according to IFRS, as notified in Pakistan. The 559 listed companies include 22 banking companies that are exempt from IAS 39 and IFRS 7 requirements. Investment property IAS 40 IAS 40 has not been adopted for entities regulated by the SBP. The 559 listed companies include 22 banking companies that are exempt from IAS 40 requirements. Consolidated financial IFRS 10 IFRS 10 does not apply to investments by companies in mutual funds established under a trust statements structure. Share-based payments IFRS 2 The SECP, through notification dated June 7, 2011, grants exemption from IFRS 2 share-based payment to certain SOEs, which are otherwise required to comply with IFRS 2 while accounting for the ‘Benazir Employee Stock Option Scheme’, dated August 14, 2009. However, the exemption is subject to compliance by these entities with the requirements of IFRS regarding effect of disclosure of such departure. The effect of changes in IAS 21, Power sector companies have been allowed deviation from requirements of IAS 21 (in respect of foreign exchange rates IFRIC 4 capitalization of exchange differences), IFRIC 4 (determining whether an arrangement contains a and IFRIC lease), and IFRIC 12 (service concession arrangements). However, the same is in accordance with 12 IAS 1, which allows departure from requirements of IFRS in exceptional circumstances. In compliance with IAS 1 and IAS 8, such companies are required to make complete disclosures, including the financial effect of the departure on each item in the financial statements that would have been reported in compliance with the requirement. The 559 listed companies include 19 listed companies that follow the modified requirements of IAS 21, IFRIC 4, and IFRIC 12. IFRS not applicable Revenue recognition IFRS 15 This is applicable from 2018 and is in the process of adoption. Leases IFRS 16 This is applicable from 2019 and is under consideration for adoption. Financial instruments IFRS 9 This is applicable from 2018 and is in the process of adoption. Note: IFRIC = IFRS Interpretations Committee. Auditing Standards Analysis Matters in the Independent Auditor's Report. The SECP has approved the audit report format in line with ISAs 24. International Standards on Auditing (ISA) have been 700R and 701 and submitted to the Cabinet for fully adopted in Pakistan with the exception of ISA 700R notification. Pakistan has adopted ISA and other (revised), Forming an Opinion and Reporting on Financial international standards and pronouncements issued by Statements, and 701 (new), Communicating Key Audit IAASB, including those related to quality control. The ROSC A&A Pakistan 09 II. ASSESSMENT IAASB recently revised the standards associated with the 25 Full adoption of international standards without content and format of the auditor's report, particularly for exceptions could be a means of attracting and mobilizing listed companies. These standards were adopted by ICAP private investment. Internationally recognized standards before December 2016; however, adoption requires such as IFRS and ISA bring increased credibility, revision in the format of the audit report, which is comparability, transparency, and investor confidence specified by SECP under statute. The SECP has approved (Box 1). Pakistan has adopted most, but not all, IFRS and the audit report format in line with ISAs 700R and 701 and has introduced IFRS for SMEs for medium-size, unlisted submitted to the Cabinet for notification. The audit report companies. Significant effort has been made to achieve format is in line with the revised standard and has been alignment with IFRS. However, because of a few deferrals communicated by SECP for the period ending or closing and deviation of local laws with applicable IFRS, full January 1, 2017 onwards. The application date of such observance cannot be claimed. Pakistan should be able to standards by IAASB was December 15, 2016. As per IFAC improve its perception as an investment-friendly country compliance program, the status of ISA adoption is only by adoption of full, unmodified IFRS. considered if it has legally adopted or incorporated the 2016 ISA into the national requirements. Therefore, B. Institutional Framework for compliance with the ISAs 700R and 701 will be considered only after Cabinet's notification. Given that the new Corporate Financial Reporting and Auditing requirements Box IFRS adoption and FDI: Evidence from Nigerian quoted firms (A study from Department of Accounting, Covenant University, 01 Nigeria) 26. This subsection looks at the institutional framework for corporate financial reporting and auditing as it relates to (a) general financial reporting requirements, (b) listed The result of the referenced study revealed a positive companies, (c) banks, (d) insurance companies, (e) public and statistical significance between IFRS and FDI in sector companies, (f) the accountancy profession, (g) Nigeria. It showed that the company that fully adopts audit regulation, (h) professional education and training, IFRS leads to a significant increase in FDI, as 1 percent (i) setting A&A standards, and (j) standard-setting process increase in the IFRS causes 120.1 percent and 136.1 for other financial reporting standards. percent rise in FDI on Nigerian economy. General Financial Reporting and Auditing The study investigated the view of the preparers and users of the annual financial statements of the listed Requirements companies that adopted full IFRS. The results of the study were similar to earlier studies in this field such as 27. G e n e ra l f i n a n c i a l re p o r t i n g a n d a u d i t i n g Beenish, Miller, and Yohn (2010) that the IFRS adoption requirements for the corporate sector are prescribed by in the European Union significantly increases FDI. law and are largely in line with international good Similarly Pius, Jane, and Raymond (2014) also practice. The Companies Ordinance, 1984, is the principal supported similar facts for adoption of the IFRS in legislation that establishes general financial reporting Nigeria. requirements for companies in Pakistan. Corporate Governance Rules and sector-specific ordinances also apply to regulated entities such as listed companies and auditor's report represents a significant change from the financial institutions. Table 5 summarizes the key 'boilerplate' language in the traditional audit opinion and legislation for corporate sector A&A requirements. should increase transparency and understanding of key issues identified during the audit, adoption of these standards will increase the transparency and enhance investors' confidence on presentation of the financial statements. /b Note that companies formed under sections 42 and 43 of the Companies Ordinance, 1984 as nonprofit entities, charities, or the equivalent which are included in the Fifth Schedule, Notes: are outside the scope of this review. /a /c This list is focused on A&A reporting requirements. Prudential reporting, listing Refers to 'banking companies' as defined by the Banking Companies Ordinance, 1962. /d regulations, taxation, and other similar corporate reporting requirements have therefore Effective from December 31, 2016. not been included. /c Refers to 'banking companies' as defined by the Banking Companies Ordinance, 1962. 10 /d Effective from December 31, 2016. II. ASSESSMENT Table 5. Summary of principal statutory financial reporting requirements for the corporate sector/ Legislation Legislation Applicable Applicable companies Companies Keyfinancial Key Financialreporting Reportingrequirements Requirements Companies Ordinance, 1984 Listed companies Fourth schedule - Contents of financial statements for listed companies SRO 633, 2014 – International financial reporting standards (IFRS) for listed companies Unlisted companies Fifth schedule - Contents of financial statements for unlisted companies/b SRO 929, 2015 – IFRS Banking Companies Ordinance, Banks/c Second schedule - Contents of financial statements for 1962 banks SRO 633, 2014 – International financial reporting standards (IFRS) for listed companies Insurance Companies Ordinance, Life and nonlife Part VII, Accounts and audit - Specific requirements for 2000 insurance companies financial statements of life and nonlife companies Code of Corporate Governance, Listed companies Section (xvi), Corporate and financial reporting 2012 framework - Information to be included as annex to the directors’ report in the financial statements Code of Corporate Governance for Insurance companies Section (xix), Corporate and financial reporting Insurers, 2016/d framework - Information to be included as an annex to the directors’ report in the financial statements Public Sector Companies Public sector companies Section 16 Corporate and financial reporting framework (Corporate Governance) Rules, 2013 28. All companies are required to prepare an audited 29. The audit threshold can pose an undue burden on annual report with, at minimum, a balance sheet and small companies. Nearly two-thirds of registered profit and loss statement.⁸ Companies are classified as companies have paid-up capital of PKR 1 million large, medium, or small based on minimum paid-up (approximately US$9,540) or less. The requirement for capital or turnover, or by sectors, as illustrated in Table 6. financial statements to be audited by Chartered Companies are required to appoint an auditor to hold Accountants (CAs) applies to companies with paid-up office at the annual general meeting of shareholders on capital greater than PKR 3million (US$ 28,639).⁹ Thus, 75 an annual basis. Failure to comply with these percent of small companies have to bear relatively high requirements could result in a fine or even imprisonment costs for mandatory audits performed by auditors who for company directors. may not be subject to ICAP's quality control and other professional standards such as ethical requirements. Such Note: financial statements are not even required to be filed by /a Unless stated otherwise, the definitions are as per the Companies Ordinance, 1984. /b As notified by SECP in September 2015 in SRO 929. /c /h Sections External audit and Frequency of financial reporting (xix), respectively, An extract from the definition in the PSC (Corporate Governance) Rules 2013. /i Corporate Governance Code, 2012. Public sector companies as defined in SRO 929 and the only subset which is in scope for /d Refer to the definitions of 'banking' and 'banking company' in the Banking Companies the ROSC A&A. /j Ordinance, 1962. Section 23, External Auditors, Public Sector Companies Corporate Governance Rules, /e Section 35, Banking Companies Ordinance, 1962. 2013. /f /k Refer to the definitions of 'insurance' and 'insurer' in the Insurance Companies Section 254, Qualification and disqualification of auditors, Companies Ordinance, Ordinance, 2000. 1984. /g Section External audit and Frequency of financial reporting (xxi) Corporate Governance ⁸ Section 233, Annual accounts and balance sheet, Companies Ordinance, 1984. Code for Insurers, 2015. ⁹ Section 254, Companies Ordinance, 1984. 11 II. ASSESSMENT SECP as the threshold for filing of accounts applies from 9,546) or less; however, such companies are required to paid-up capital of PKR 7.5 million (US$ 71,599) and above. file unaudited financial statements with SECP. Further, It may be more cost-effective for non-audit assurance audit qualification of chartered accountant and members reviews of historical financial information, such as limited of the Institute of Cost and Management Accountants in reviews, to be performed for such companies by Pakistan (ICMAP) is also proposed for auditors of the professional accountants. The amendments in the companies with paid-up capital of PKR 3 million Companies Bill, 2017, remove audit burden from the (US$28,639) or less. companies having paid-up capital of PKR 1 million (US$ Table 6. Summary of A&A requirements in Pakistan by type of enterprise Accounting Legal definition Statutory audit requirements standards Listed A company or other body IFRS as · Annual audit of financial statements by auditor with a company/a whose securities are allowed to applicable in satisfactory rating from ICAP’s QCR program be traded on a stock exchange Pakistan · Rotation of audit firm every 5 years for companies in the financial sector (e.g., banks, insurance companies) · Rotation of audit partner every 5 years for other companies · Limited scope review of half-yearly financial statements /c Bank Any company that transacts IFRS as · Annual audit of financial statements by a chartered accountant the business of banking in applicable in on panel of SBP-approved auditors /e Pakistan /d Pakistan · Limited scope review of half-yearly financial statements Insurance Any company carrying out the IFRS as · Annual audit of financial statements by auditor with a company business of insurance in applicable in satisfactory rating from ICAP’s QCR program Pakistan /f Pakistan · Limited scope review of half-yearly financial statements /g Public sector A company, whether public or IFRS as · Annual audit of financial statements by a CA with satisfactory companies/b private, which is directly or applicable in QCR rating indirectly controlled, Pakistan /i · Rotation of audit firm every five years for companies in the beneficially owned by the financial sector Government, or not less than · Rotation of audit partner every five years for other 50% voting power is held by companies/j the Government/h Large-size A non-listed company that has IFRS as · Annual audit of financial statements by a chartered accountant company paid-up capital greater than applicable in with satisfactory QCR rating PKR 200 million (US$ 1.91 Pakistan million) or turnover greater than PKR 1 billion (US$ 9.54 million) Medium-size A non-listed company that is IFRS for SMEs · Annual audit of financial statements by a chartered accountant company not a public interest company, as applicable large-size or small-size in Pakistan company Small-size Company having paid-up AFRS for · Annual audit of financial statements company capital less than PKR 25 million small-size · Private companies with paid-up capital greater than PKR 3 (US 238,663) and turnover less entities million (US$ 28,639) require an audit by a chartered than PKR 100 million (US$ accountant/ k 954,653) - (other than a nonlisted public company) 12 II. ASSESSMENT 30. The Companies Ordinance promotes transparency increase in the threshold for mandatory filing of financial in financial reporting. Private companies with paid-up statements and (b) significant increases in the penalties capital over PKR 7.5 million (US$ 71,599) are required to applicable to company directors for noncompliance with file financial statements with the SECP Business Registry. financial reporting requirements. Annex 1B summarizes Listed companies and financial institutions are required to the key proposed changes. make annual financial statements publicly available; financial statements for the larger unlisted companies are Listed Companies available from the Business Registry on payment of a small fee. However, some challenges remain in accessing 34. Financial reporting requirements for listed the financial statements of unlisted SOEs. Effective companies have been strengthened and are further compliance of Corporate Governance Rules for public aligned with international good practice. The Code of sector companies will improve the timeliness of financial Corporate Governance was enhanced in 2012 and now statements availability for public sector companies. forms part of the listing regulations of the PSX. The PSX is an affiliate member of IOSCO. An IOSCO ordinary 31. The SECP monitors financial statements for member, SECP has been a board member of IOSCO for the compliance with applicable financial reporting last three years. In addition to annual financial requirements. Responsibility for the review of audited statements, listed companies are required to publish financial statements of unlisted companies rests with quarterly balance sheets and profit and loss statements.¹⁰ SECP's Corporatization and Compliance Department. The Quarterly financial statements may be unaudited, but Corporate Supervision Department reviews the financial auditors are required to perform a limited scope review statements of listed companies, and subsidiaries and on the half-yearly statements. Listed companies are associates of the listed companies. Initial reviews of further required to include statements of compliance financial statements of companies with paid-up capital of with IFRS applicable in Pakistan and with the code in the less than PKR 100 million (US$ 954,653) are performed by annual reports as an annexure to the directors' report.¹¹ the corporate registrars who use comprehensive Responsibility for compliance with these mandatory checklists to assist in detection of noncompliance. requirements rests with the chairman and board of directors and chief executive officer. 32. The Corporate Registrars' Office has adequate resources and suitably qualified staff to perform its 35. Listed companies are required to have an audit monitoring duties. Initial reviews of financial statements committee. The audit committee of a listed company are performed by the corporate registrars who use should report to the board and must comprise a minimum comprehensive checklists to assist in the detection of of three non-executive directors and one independent noncompliance for SMEs. There are eight corporate director. At least one of the audit committee members registrars; four are professional accountants and four must have significant expertise and experience in have extensive business expertise. Potential areas of finance.¹² Stipulated in the Code of Corporate noncompliance are forwarded to the Corporatization and Governance, the duties and responsibilities of the audit Compliance Department for review and appropriate c o m m i tte e i n c l u d e re c o m m e n d a t i o n s o n t h e enforcement or other corrective action as required. The appointment and removal of external auditors, level of SECP has taken measures to expand its outreach through audit fees, and nonaudit services provided by the external establishment of a Company Registration Office at Gilgit auditor as well as review of financial statements before Baltistan, a capital market hub at Abbottabad, and approval by the board of directors. facilitation counters at Sialkot and Gwadar. 36. Listed companies may only appoint audit firms with 33. The SECP has proposed a number of changes to the a satisfactory rating from ICAP's Quality Control Review statutory framework, which will significantly impact the (QCR) program, and auditor rotation is mandatory. The financial reporting requirements for companies . Code of Corporate Governance for listed companies Amendments of the Companies Bill, 2017, include (a) an stipulates the criteria for the appointment of auditors. ¹⁰ Section 245, Companies Ordinance, 1984. ¹¹ Corporate financial reporting framework section (xvi), Corporate Governance Code, 2012. ¹² Committees of the Board, Corporate Governance Code, 2012. ROSC A&A Pakistan 13 II. ASSESSMENT Only firms of auditors with a satisfactory rating from requirements. These requirements include the IFRS, the ICAP's QCR program, whose partners are in compliance IFRS for SMEs, and ISAs as applicable in Pakistan as well as with the Code of Ethics for Accountants as adopted in the Code of Corporate Governance for listed companies. Pakistan, are eligible to be appointed as auditors of a Reviews are performed using risk-based criteria. The listed company. Approximately 100 audit firms currently Corporate Supervision Department reviewed 928 have an ICAP-issued satisfactory rating. As noted in Table, financial statements in 2015 (1,116 in 2014 and 1,368 in listed companies in the financial sector (e.g., banks, 2013). There was a decrease in the number of statements insurance companies) are required to rotate auditors reviewed as responsibility for the review of private every five years. Other listed companies must rotate, at companies with paid-up capital less than PKR 100 million least the audit engagement partner, every five years. (US$ 954,653) was transferred to Corporatization and Compliance Department. Summaries of the findings in 37. As promoted by international good practice respect of enforcement actions are included in the SECP's regarding ethics and independence, auditors of listed annual report which is publicly available. companies are restricted in the nonaudit services they may provide. The PSX listing regulations provide a Banks detailed list of services that auditors of listed companies are prohibited from providing to their clients. These 40. Banks and other deposit-taking institutions are include preparation of financial statements, actuarial subject to high standards of financial reporting. In services, and corporate finance services. addition to the prudential requirements of the Banking Companies Ordinance and the general financial reporting 38. The Corporate Super vision Department is requirements of the Companies Ordinance, listed banks adequately staffed to perform monitoring and and state-owned banks are also subject to Code of enforcement of A&A requirements applicable to listed Corporate Governance for listed and public sector companies. The Corporate Supervision Department has companies, respectively. The Banking Companies separate departments for reviewing the financial Ordinance takes precedence if there are conflicting statements of companies and another for enforcement requirements. actions where necessary. The Department, which is led by an executive director with 19 years of experience as a 41. Banks are only permitted to select auditors from a professional accountant, comprises 27 staff with a mix of panel approved by the banking supervisor. The SBP has accountancy and commercial experience in a range of established a framework for the audit of financial industries. Both on-site and off-site reviews are institutions within its regulatory purview and requires conducted. On average, each staff member of the M&E banks to select auditors from an approved panel. In team in the Corporate Supervision Department reviews addition to the statutory requirement of being a 40 listed and 100 unlisted companies on an annual basis. chartered accountant, an aspiring auditor of banks must The SECP has undergone restructuring in 2017 and, as per have a 'satisfactory' rating from ICAP's QCR program. recent arrangement, the examination of all unlisted Auditors selected to the panel are further classified: companies except subsidiary and associate of listed Category-A auditors are eligible to audit all banks; companies will be done by the Corporatization and Category-B auditors can audit banks with assets up to PKR Compliance Department. 100 billion (US$ 954.65 million) or up to 160 branches; and Category-C auditors can audit banks with assets up to 39. The SECP applies comprehensive, risk-based review PKR 15 billion (US$ 143 million) and up to 30 branches. techniques and provides a summary of inspection Audit firms are required to submit to SBP their findings and enforcement actions in its publicly available applications for selection to the panel on an annual basis. annual report. The Corporate Supervision Department As of January 2016, 15 audit firms were classified as unit within the SECP has developed comprehensive, Category A; 15 as Category B; and 13 as Category C.¹³ standardised checklists for reviewing the level of compliance of financial statements with applicable ¹³ Annex-A to BPRD Circular Letter No. 02 of 2016. 14 II. ASSESSMENT 42. The SBP performs on-site and off-site reviews of balance sheet, a statement of assets and liabilities is financial statements to determine compliance with required. Life insurance companies are required to applicable A&A requirements. The SBP's Banking provide financial statements on each statutory fund run Inspection Department performs on-site examination by the company. and inspection of banks and other entities regulated by SBP. The Off-site Supervision and Enforcement 46. Corporate Governance Rules specifically for Department reviews financial statements (quarterly, half- insurance companies have been promulgated. The Code yearly, and annual statements) against the unaudited data of Corporate Governance for Insurers, 2016, are effective reported by banks to the SBP. as of November 9, 2016. The Code establishes mandatory additional A&A requirements similar to those for listed 43. The SBP has adequate resources to perform companies such as the requirement to have an audit comprehensive reviews of financial statements of committee, mandatory auditor rotation, publication of regulated banks . Reviews are conducted using quarterly unaudited statements, and half-yearly comprehensive checklists to verify compliance of statements subject to a limited scope review by the financial statements with minimum regulatory disclosure auditors. requirements, internal controls requirements, Code of Corporate Governance, and disclosures required by the 47. Insurance companies are only permitted to select auditors. On-site reviews focus on financial reporting auditors from a panel approved by SECP, the insurance requirements involving significant judgments (i.e., fair supervisor. The Insurance Ordinance requires insurance value, provisions, appropriations, and others). The staff companies to appoint an SECP-approved auditor and involved in the monitoring and enforcement functions in stipulates the responsibilities of the auditor. To be the SBP are experienced professional accountants. considered, an audit firm must have a minimum of two partners who are ICAP members and currently hold a 44. While SBP communicates inspection findings with 'satisfactory' rating from the QCR process. Firms are banks and their auditors, such findings are not included scored according to selection criteria such as size (number in the annual report, even at the summary level. The of qualified and partly qualified staff, including trainees); SBP's inspection teams conduct thorough reviews that the last three QCR ratings from ICAP; affiliation with include meetings with the auditors of banks to discuss international network firms; audit experience of the firm areas of concern (e.g., weaknesses of the banks' internal with insurers during the preceding five years; and audit control systems, adequacy of provisions, and compliance experience of the firm with listed companies in the last with statutory and prudential requirements).¹⁴ However, two years. Approximately 14 audit firms are on the results of monitoring and enforcement activity are not approved auditor panel for insurers. Life insurance included in SBP's annual report, even at the aggregate companies are further required to obtain an opinion from level, or publicly disclosed. Nonetheless, SBP discloses its an appointed actuary on the valuation of the policyholder major actions such as restructuring/dissolution of liability in the balance sheet.¹⁵ institutions in SBP reports. 48. The SECP Insurance Division performs on-site and Insurance Companies off-site monitoring and enforcement of A&A requirements for insurance companies. Financial 45. The insurance industry, though relatively small, is statements of insurance companies are reviewed by SECP growing and subject to similarly high standards of for compliance with the Companies Ordinance, Insurance financial reporting and good governance as listed Ordinance, SEC (Insurance) Rules, Federal Government companies and banks. Financial reporting requirements Insurance Rules, and Code of Corporate Governance for insurance companies are stipulated in the Insurance where applicable. The SECP Supervision Department also Companies Ordinance, 2000. These requirements include reviews quarterly regulatory returns, including solvency separate statements of premiums, claims, claims analysis, returns for life insurance companies and admissible expenses, investment income, and exposures; instead of a assets. The review team comprises 24 members with ¹⁴ BSD Circular Letter No. 10 of 2003 and Para 3.3 of Part-A BPRD Circular No. 7 of 2015. ¹⁵ Section 52, Insurance Companies Ordinance, 2000. ROSC A&A Pakistan 15 II. ASSESSMENT requisite competence and knowledge of financial on the statement of the company's compliance with the reporting and auditing. The Supervision Department has Code of Corporate Governance. developed methodologies and manuals to review compliance on a more robust and consistent basis. 52. The monitoring and enforcement of compliance with applicable A&A requirements by public sector 49. Filing of annual statements is mandatory in companies will improve with the recent restructuring in compliance with Section 11 and 12 of the Insurance the Corporatization and Compliance Department. The Companies Ordinance, 2000. To enhance the monitoring review of financial statements of public sector companies of compliance with elementary licensing requirements on has recently been added to the mandate of the an annual basis, the Insurance Division has made it Corporatization and Compliance Department. The mandatory for the insurers (as of December 31, 2015) to Department has undergone internal restructuring and is submit a statement of compliance with Section 11 and 12 now being led by the Executive Director with 20 years of of the insurance ordinance duly signed by the chief experience as a professional accountant. Professional executive/ principal officer and two directors of the accountants will perform the monitoring activities. It is insurer within five months of the close of the year. The expected that the increase in the reviewers' work force statement is required to be filed along with the review and strict compliance with the Code of Corporate report and certificate by the statutory auditor of the Governance will improve A&A practices in the public insurer. sector companies. Public Sector Companies 53. Monitoring of the compliance of the Code of Corporate Governance in public sector companies is 50. Transparency and accountability in the financial performed by the Corporatization and Compliance reporting of public sector companies was significantly Department. The Code of Corporate Governance in public boosted by the introduction of PSC (Corporate sector companies is a fairly new undertaking; however, a Governance) Rules. The PSC Rules were introduced in marked improvement is seen in filing of the statement of 2013 and have been a positive development in improving compliance in public sector companies. Sixty percent of the quality of financial reporting of state-owned/- the public sector companies filed the statement of controlled commercial enterprises. Similar to the compliance in 2016. The actual compliance of the Code of requirements for listed companies and financial Corporate Governance in the public sector companies institutions, public sector companies are now required to requires strengthening the governance, accounting, and prepare quarterly balance sheets and profit and loss auditing practices for effective utilization of resources. statements. The contents of the director's report to the The A&A-related provisions of the Corporate Governance shareholders of public sector companies include Rules showed that out of the total public sector disclosure of subsidies or other forms of financial support companies registered with SECP, 58 percent are filing their from the government as well as a summary of key accounts, 32 percent have formed independent audit operating and financial data for the previous six years. committees, and 72 percent are holding regular annual general meeting. 51. Audit requirements for public sector companies are now of a similarly high standard as those of listed The Accountancy Profession companies. Public sector companies are required to have audit committees comprising a majority of non-executive 54. There are five professional accountancy directors who are financially literate. Public sector organizations in Pakistan, with 22,000 professional companies in the financial sector (e.g., banks, insurance members, including chartered accountants, ACCA companies) are required to rotate auditors every five accountants, and cost and management accountants. As years. Other public sector companies must at least rotate the principal professional accountancy organization, the the audit engagement partner every five years. Auditors Institute of Chartered Accountants of Pakistan (ICAP) has of public sector companies must provide a review report over 7,428 members in public practice, industry, and to a ¹⁶ As of December 9, 2016. 16 II. ASSESSMENT lesser extent in the public sector.¹⁶ The ICAP has almost development (CPD) each year. Following an adopted input 25 percent of professionals in public practice. Pakistan has approach, ICAP members are required to (a) complete at a large number of small and medium-size accounting and least 120 hours or equivalent learning units of relevant auditing firms. There are 489 registered practicing firms in professional development activity in each rolling three- Pakistan, with 354 sole proprietors and 135 partnership year period, of which 60 hours or equivalent learning firms. The chartered accountant designation is highly units should be verifiable; (b) complete at least 20 hours prized, and ICAP has close working relationship with s or equivalent learning units in each year; and (c) track and leading international professional accountancy measure learning activities to meet the above organizations, the Institute of Chartered Accountants of requirements. The ICMAP has adopted the 2015 Code of England and Wales (ICAEW). The ICMAP membership is Ethics with modifications. Professional accountancy also held in high regard. Both professional accountancy organizations may also consider employing modern organizations are members of the International techniques such as webinars and e-learning assessments Federation of Accountants (IFAC)¹⁷ as well as the modules to increase members' participation in Confederation of Asia Pacific Accountants (CAPA), South professional development activities. Asia Federation of Accountants (SAFA), Asian-Oceanian Standard-Setters Group (AOSSG), and the AAOIFI. The two 57. Members of ICMAP are primarily cost accountants. UK-based professional accounting bodies, ACCA and Practicing members of ICMAP perform statutory audits of Chartered Institute of Management Accountants companies where paid-up capital is PKR 3 million (US$ (CIMA),¹⁸ have full IFAC membership and have branch 28,639) or less; however, only 64 ICMAP members are in offices in Pakistan. The ICAP and ICMAP also collaborated public practice. The ICMAP has recently established its with the Auditor General of Pakistan in 1993 to form the Quality Control Department; however, no quality Pakistan Institute of Public Finance Accountants (PIPFA), assurance report has been published so far. The majority which is producing a mid-tier accountant stream for the of ICMAP members work in industry. In addition, some public sector and corporate sector. The PIPFA is also an ICMAP members provide cost audit services to companies associate member of IFAC. falling within certain manufacturing industry sectors. The ICMAP revised its curriculum in 2012, which was then 55. The ICAP is run by a governing council that is further reviewed in 2015, keeping in view the global responsible for discharging its statutory responsibilities. changes in information and communication technology Positions on the council are voluntary. The council and following IFAC-issued International Education comprises 15 elected members and 4 members Standards. nominated by the Government for a four-year term. The council elects the ICAP president for a one-year term.¹⁹ 58. Professional accountancy organizations and The ICAP's responsibilities include issuing practicing regulators are promoting companies in adopting licenses to statutory auditors and serving as the sustainability reporting and integrated reporting. The examining body for the chartered accountancy profession is embracing new global trends for qualification.²⁰ The ICAP lacks sufficient staff to facilitate sustainability reporting and integrated reporting on a research activities and largely relies on its members for voluntary basis. The ICAP and ICMAP joint committee has technical input on a voluntary basis. taken the initiative to encourage sustainability reporting by introducing an award based on the criterion of the 56. Members of ICAP and ICMAP are held to high Global Reporting Initiative, an international standard on standards of professional and ethical conduct, although sustainability reporting by IFAC and the International these standards could be improved by greater alignment Integrated Reporting Council. The SECP has also issued with international good practice. The local code of ethics voluntary guidelines for Corporate Social Responsibility. is based on the Code of Ethics for Professional Accountants of the International Ethics Standards Board 59. The PIPFA was constituted in 1993 by ICAP, ICMAP, for Accountants (IESBA). Members of ICAP and ICMAP are and the Auditor General of Pakistan to provide long- expected to complete 40 hours of continuing professional ¹⁷ Refer to Annex 2 for details of compliance with IFAC's membership obligations. ¹⁹ Section 12(2) of the Chartered Accountants Ordinance, 1961. ¹⁸ Information for CIMA members was not obtained as it has recently started its ²⁰ Section 9 of the Chartered Accountants Ordinance, 1961. operations in the country and most of the CIMA members are holding either of the 17 certifications included in the total number of professionals. II. ASSESSMENT term and enduring foundations for almost all public 61. As is the case in many countries, the 'blue chip' financial management (PFM) reforms. An associate IFAC end of the audit market is highly concentrated and member, PIPFA provides a mid-tier accounting stream for dominated by audit firms affiliated with international the profession. The PIPFA qualification is set as mandatory networks. The rest of the market is subject to intense by the Auditor General of Pakistan for promotion in competition among small and medium-size practices. government audit and accounts department from the According to ICAP, nearly two-thirds of listed and large clerical tier to the operational tier. Also, its members are private companies are audited by six firms that are part of eligible for the position of company secretary in the public an international network. Small and medium-size listed companies as per SECP criteria. It has 2,104 practices typically provide audit and tax services to small members, including associate and fellow members from and medium-size enterprises. There is a high cost and the corporate sector as well as from the public sector. resource effort associated with delivering quality audit With ICAP efforts, the Chartered Institute of Public services to these smaller enterprises, which have limited Finance and Accountancy (CIPFA) and PIPFA signed a demands for audits other than the statutory requirement. memorandum of understanding in October 2015 to It is therefore a competitive environment for new promote high-quality PFM practices in Pakistan. The entrants and small and medium-size practices. IFAC SMP reform initiated with the joint collaboration of private and committees, IAASB, and various leading professional public sector accountants and the firm commitment from accountancy organizations around the world have issued the Government to create a unique stream of PFM guidance for small and medium practices. professionals. However, it requires continuous commitments from the sponsoring agencies to evolve a 62. Pakistan has one of the lowest representations of well-designed professional qualification framework that female accountants in the region. The percentage of is sufficiently robust yet flexible in its mode of delivery, female accountants is 9 percent,²³ compared with 30 and offers opportunities for the development of other percent in Sri Lanka and 22 percent in India. Out of a total training modalities to meet the inevitable progress in PFM of 7,135 chartered accountants in the country, only 500 needs. are women. The percentage of female students enrolled in the accountancy profession is also quite low and has 60. With a strong presence in Pakistan, ACCA has ranged from 18 percent to 22 percent over the last three approximately 8,000 Pakistan national members, of years. A major factor contributing to low female which 23 percent are working in the public sector. The participation is the lack of an enabling work environment ACCA qualification is well recognized in Pakistan; the such as day-care and pick-and-drop facilities at Auditor General of Pakistan has included ACCA workplaces (Box 2). One of the measures adopted by the qualification in Basic Scale-16 and above for direct Big-4 international network firms and large corporations recruitment. The Ministry of Finance has also included that seem to work well in increasing retention rates of ACCA qualification eligible for additional allowance for female professional accountants has been the provision public sector employees.²¹ Further, ACCA qualification is of day-care services for staff. Measures should be also included under Code of Corporate Governance, 2012, introduced to increase the participation of women in the as one of the prescribed qualifications for a chief financial accountancy profession. officer of a listed company. The Pakistan chapter of ACCA also established practicing firms in 2015 to facilitate its Box Employing quality resources and reducing gender gap through 32,000 students, which include 6,800 affiliates.²² The 02 unique working model ACCA members are subject to 40 hours of mandatory training in the relevant field. The ACCA Pakistan chapter is actively promoting export of accounting services and has A QCR-rated all-women chartered accounting firm has been set up by a senior female ICAP member. This entered into memorandum of understanding with various model provides opportunities for female accountants global companies for providing offshore accounting through flexible work hours and work-from-home solutions. arrangement and ensures quality services to the client. ²¹ F.No. 1(2)imp/2016-333 dated July 1, 2016 ²² Passed all the exam but have not undergone training ²³ This includes chartered accountant, ICMAP accountants, and ACCA accountants. 18 II. ASSESSMENT 63. Pakistan has a competitive edge to be part of the promote accounting shared services in international and high-end finance and accounting global outsourcing local markets. An established telecom sector provides market, which is growing over 10 percent annually and readiness of the infrastructure to establish an accounting forecasted to reach US$35 billion by 2017 (Box 3). outsourcing industry. Pakistan has made progress in this Pakistan has total of 22,000 professional accountants with sector in the last two years. Professional accountancy national and international professional accountancy organizations are encouraged to work jointly to develop organizations. Currently 70,000 students are registered policy and code of conduct to promote finance and with the professional accountancy organizations. The accounting shared services in Pakistan in the international average increase in students is 10 percent per annum. The and local market and provide code of conduct for shared profession's contribution to the skills sector in Pakistan is services and relevant talent, which is technically and ethically strong, commercially aware, and digitally Box Growing finance and accounting enabled, with strong communication skills and proper 03 outsourcing trend in Pakistan service orientation (Refer Table 7). Ÿ International telecom operators have set up a shared Table 7. Number of accounting professionals and students in various Professional accountancy organizations services center (including finance and accounting) in Name of professional Qualified Qualified professionals Number of students and Pakistan, which is serving their operations across the accountancy professionals working working outside partially qualified globe. organization in Pakistan Pakistan students Ÿ ACCA (in 2015) assisted a U.K.-based finance and ICAP 5,878 1,550 20,000 accounting services aggregator ICMAP 6,428 1,000 15,000 'iplanaccounting'/Azure Premier (Pvt) Limited to ACCA 3,100 /a 4,200 32,000 partner with a Lahore-based professional accounting PIPFA — — 2,104 /b institute. Now they are serving over 1,300 clients with TOTAL 15,534 6,750 69,104 more than 70 resources in Lahore. /a Ÿ Another U.K.-based SMP, 'adroitaccountax' Excludes 118 members of ICAP holding dual certifications. /b From IFAC Dashboard Report. accounting practice, set up its back office in Pakistan and in six months' time has expanded from less than 5 resources to over 30 resources based out of Pakistan. 64. A number of entities, including banks in Pakistan, Ÿ Arthur Lawrence Pakistan, a U.S.-based business have organisational/business structure where process outsourcing, having a back-end office in outsourced services organizations are used for Karachi, has witnessed an exponential growth in finance and accounting outsourcing, with a vision to operational purposes. Service providers of all types — expand their talent base from the current more than especially those servicing the financial institutions, 50 professional accountants. hosting data centers, providing telecommunication Ÿ 'Upwork.com' has several individuals and SMPs who services, arranging payroll-related services, managing have delivered over thousands of hours in the field of logistic procedures — have a need to demonstrate to their finance and accounting from Pakistan. customers and their customers' stakeholders that they Ÿ The Big 4 are either establishing or have established provide complete, accurate, and secure transaction their shared service practices for local and processing in a controlled environment. Further, the international clients out of Pakistan. organizations that provide services effecting a company's financial statements necessitate a report on internal controls for the benefit of the company's management significant with almost 31 percent of national accounting and their financial statements auditors. This report can professionals working abroad, also providing a source of eliminate or significantly reduce the requirement for the foreign remittances. Pakistani accountants have company's auditor to do additional testing of a service demonstrated great acceptability in the international provider's control. An International Standards on market due to hands-on knowledge of IFRS. Pakistan has Assurance Engagement (ISAE) 3402 report, which an opportunity to develop knowledge economy and constitutes an independent auditor opinion, is an ROSC A&A Pakistan 19 II. ASSESSMENT effective method of communicating that internal controls 67. The quality assurance reviews carried out as part of over systems and processes are suitably designed and the QCR program are a combination of (a) engagement operating effectively within a well-controlled audit reviews and (b) firm quality control system environment. Such formal communication has recently reviews, in line with international good practice. The become an important success factor when differentiating audit engagements reviewed are selected in such a between service organizations and demonstrating ability manner that at least half of the audit partners are to achieve high-quality performance. Awareness of the covered. Inspections are carried out using a checklist use of such third party assurance under ISAE 3402 issued by the QAB predecessor, QCR Committee. On a appears to be low in the country. regular basis, QCRs are charged with conducting the inspections. These individuals are part of the ICAP staff Audit Regulation and as such are appointed and remunerated by it. 65. The accountancy profession in Pakistan was largely 68. The main competency requirements to become a self-regulated by ICAP until the recent establishment of QCR reviewer is ICAP membership and a minimum two- the independent Audit Oversight Board (AOB). The ICAP year post-qualification experience, which is relatively recently revised its QCR program. The SECP has made it low given the importance of the QCR process and its mandatory for all audit firms conducting statutory audits potential complexity. The QCR reviewers cannot have any of listed, large-size companies or other regulated involvement with an audit firm, but they are not subject to companies to have a satisfactory QCR rating.²⁴ The QCR any 'cooling-off' requirement if they are former program follows the requirements of IFAC's Statement of practitioners. Membership Obligation (SMO) 1, Quality Assurance, in terms of overall design, basis for selecting firms, and 69. The outcome of the QCR inspection depends on the criteria for assessing compliance with the IAASB's ISQC 1. result of the assessment of each review (engagement The program is based on a mixed approach, which versus firm quality control) and may result in the combines elements of risk-based and cycle approaches removal of the audit firm from the list of QCR-approved with quality reviews of audit firms conducted every two- firms. For each audit firm review, a 'satisfactory' or and-a-half years.²⁵ Any audit firm operating in Pakistan 'unsatisfactory' rating is assigned to both engagement wanting to be 'QCR-rated' can participate in the program. and the firm's QCR. If both reviews lead to an unsatisfactory conclusion, the firm is removed from the 66. The QCR program is placed under the oversight of list-subject to appeal with QAB. When only one of the the Quality Assurance Board (QAB). Board members are reviews is deemed unsatisfactory, the reviewed firm appointed for a three-year term, renewable once. The remains on the QCR-approved list but is required to QAB reviews results of the QCR and approves the rating undergo a review one year later instead of the normal assigned as a result of it (Table 8). The QCR framework two-and-a-half years (Table 8). requires that the majority of QAB members are ICAP members. Currently, 9 of the 11 board members are ICAP Table 8. Outcome of individual audit QCRs members. Out of 9 ICAP members, the QCR framework expressly requires only 2 members to be non- Firm’s Quality Control Satisfactory Unsatisfactory practitioners. The current composition of the Board is 4 Firm’s Engagement SECP nominees, 1 nominee from both SBP and PSX and 5 ICAP nominees (3 practicing and 2 non-practicing). No action One-year probation Satisfactory (firm maintained on period and follow-up QCR-approved list) review One-year probation Removal from QCR- Unsatisfactory period and follow-up Approved list review ²⁴ Insurance, corporate brokerage, and ‘Modaraba’ companies. ²⁵ ICAP Framework of QCR Program 2015. http://www.icap.org.pk/quality- assurance/qcr-framework-revised/. 20 II. ASSESSMENT 70. In 2015, QAB published a comprehensive report on at the initiative of ICAP, SECP, and other regulators and QCR activities conducted during the FY2014-15, stakeholders. The amendments in the SECP Act, 1997, including a summary of the main deficiencies uncovered were approved in the National Assembly and in the by the quality assurance reviews. The report is published Senate in July 2016. According to the amendments on the ICAP website.²⁶ The number of audit firms and obtained as part of this ROSC A&A, the AOB's roles would individual engagements reviewed was 52 and 133, include (a) registering and de-registering audit firms, (b) respectively, (compared to 62 and 123 during the previous overseeing QAB and the QCR system, (c) directing ICAP to year). The report includes a table summarizing the make changes to the QCR system as AOB deems assessment of individual audit engagements reviewed necessary, (d) ensuring auditing standards in Pakistan over the last 5 years. It indicates that the proportion of conform with ISA, and (e) conducting inspections and engagements “not supported by appropriate audit inquiries. The AOB have seven members appointed by the evidence” was the highest in the more recent reviews, Government²⁷ on the recommendation of a Nominating namely 39 percent versus 20 percent on average during Committee comprising high-level government officials, the previous 4 years (see Figure 3), however, the report including Secretary to the Government's Finance Division, does not provide an explanation for such a sharp increase. SBP Governor, ICAP President, and SECP Chairman). 72. Although steps have been taken toward Figure 3. QCR: independent oversight, with the establishment of AOB, Assessment of Individual Audit further development and a sustainable institutional Engagements Reviewed framework are required. The institutional capacity of AOB needs to be built, by ensuring adequate funding 100% 150 arrangements for AOB and QAB, affiliation with the 80% International Forum of Independent Audit Regulator 100 60% (IFIAR), and support in building the capacity of AOB and 40% 50 QAB. (Refer to Annex 6 for factors to be considered for the 20% 0% 0 efficient functioning of the audit oversight). 2012-13 2013-14 2014-15 2011-12 2010-11 73. The ICAP is adopting a draft practice review Not supported by appropriate audit evidence Supported by appropriate audit evidence framework that will run in parallel to the QCR program Number of engagements reviewed and will upgrade licensing procedures for non-QCR- rated firms. This program aims to enhance the current licensing regime for all practicing members and compliance with ISQC 1. The scope of the practice review includes all firms operating in Pakistan providing audit, assurance, or related service assignments conducted under any legal or financing reporting framework, as 71. The creation of AOB with wide-ranging powers will applicable in Pakistan. The draft framework will ensure aid Pakistan in meeting the level of standards of other the compliance of SMO 1 across the board and will jurisdictions around the world that have recently taken provide mechanism to review performance before steps to strengthen the independence of auditors and renewing the practice license for non-QCR-rated firms. the quality of audits. The AOB was established through The framework is under active consideration of the ICAP amendments in the SECP Act, 1997, which were prepared Council and will improve the procedure for obtaining license by the auditors engaged in practice. ²⁶ http://www.icap.org.pk/quality-assurance/qcr-documents/qab-report/. ²⁷ The Government of Pakistan has announced the 7 AOB member on December 26, 2016, and the first AOB meeting was held on January 20, 2017. Audit, Assurance and Related Services. ²⁸ Refer to Annex 4 for IES compliance status. ³² It includes Financial Reporting and Assurance and Strategic Management. ²⁹ It includes subjects of Functional English, Business Combination, Quantitative ³³ Criteria is detailed in Bylaw 123 separately for students with 14 years of education, Methods, and Introduction to Information Technology. higher secondary school certificate or equivalent, and A level. ³⁰ It includes subjects of Introduction to Accounting, Economics and Finance, Business ³⁴ As per ICAP Directive 1.2 of 2014, the approved regulations for accounting education Law, Business Management and Behavioral Studies Application, Financial Accounting tutors (RAETs) provide coaching facility for module AFC and CAF. and Reporting, principles of Taxation, Cost and Management Accounting and audit and ³⁵ National University of Science and Technology, University of Lahore, Sukkur Institute of assurance. Business Administration, Institute of Business Management, and University of ³¹ It includes subject of Advanced Accounting and Financial Reporting, Corporate Law, Management and Technology. 21 Business Management and Strategy, Business Finance Decisions, Advance Taxation and ³⁶ ICAP's directive 1.03 training regulations and guidelines 2015. II. ASSESSMENT the chartered accountant program. Students with 14 years of education from any degree-awarding institution recognized by the Higher Education Commission (HEC) are also eligible to claim exemptions from 4 AFC and 2 CAF papers after fulfilling the criteria specified.³³ However, the percentage of students who passed the final examination has been low. In the last three years, the passing rate ranges from 20 percent to 30 percent. 76. The ICAP has revised its education scheme and increased the level of cooperation with leading universities and higher education providers in the country to better support aspiring members. To attract the best students to the profession, ICAP has developed a policy for recognizing universities, in addition to approved registered private tutors.³⁴ This system works through prescribing the syllabus of the education providers along with a monitoring system. Under this scheme, specified degree-awarding institute status was given to two of the highest-ranking universities in Pakistan: Lahore University Professional Education and Training of Management Sciences and Sukkur Institute of Business Administration. Graduates of these universities are 74. The ICAP has revised the syllabus for the chartered eligible to claim 13 exemptions from AFC and CAF levels. accountancy qualifications to further align with the The ICAP has signed memoranda of understanding for International Education Standards for professional mutual recognition with some universities³⁵to create the accountants. The ICAP has restructured the chartered arrangement for a Relevant Degree Awarding Institute accountancy qualification by incorporating the latest (RDAs). Graduates with a minimum of 16 years of developments in the curriculum.²⁸ This was done by education from institutions other than the Specified adopting a learning outcomes-based approach and Degree Awarding Institute or any local or foreign closely aligned the syllabus to that of ICAEW. Aspiring institution recognized by the Higher Education chartered accountant complete 21 papers spread over Commission are eligible to claim exemption from 8 papers four levels: Assessment of Fundamental Competence (4 AFC and 4 CAF). The ICAP has mutual recognition (AFC),²⁹ Certificate in Accounting and Finance (CAF),³⁰ arrangements in place with leading international Certified Finance and Accounting Professional (CFAP),³¹ professional accountancy organizations such as ICAEW, and Multi Subject Assessment (MSA).³² Each stage has CIPFA, and CIMA, and Certified Public Accountants stand-alone recognition. Ethics are also embedded in (Canada). each discipline being taught and examined. The syllabus was reviewed by ICAEW at ICAP's request and was found 77. Practical training is a prerequisite for ICAP to be in line with IFAC International Education Standards membership. The period of training varies with the mode (IES). of entry in the training organizations, which provides much needed flexibility and enhances the attractiveness 75. Acceptance to the chartered accountant of the profession. The practical training period for CAF- qualification program is relatively straightforward and qualified students is 3½ years, 4 years for students accessible to a wide range of aspiring professional entering directly for graduate programs or Relevant accountants. Students scoring a minimum of 50 percent Degree Awarding Institute, and 3 years for students marks in the higher secondary school certificate or graduating from the Specified Degree Awarding completed A-levels or at least 45 percent marks in a Institute.³⁶ Further, to accommodate students who may university degree program are eligible for admission to increase with revision in the education policy, ICAP has 22 II. ASSESSMENT revised its training regulation and expended the horizon Pakistan in collaboration with the renowned of training organizations by approving training in entities accountancy college. An IFAC member, the Association of other than audit firms such as large corporate and Accounting Technicians has recently entered into an MoU regulatory organizations. with one of the accountancy colleges and the registered tuition provider for chartered accountancy qualification. 78. The ICMAP has revised its syllabus to address the The short courses are particularly designed to help SMEs gaps with IES requirements. The realignment of with understanding of budgeting for a business, managing curriculum has enabled ICMAP in entering the cash flow to help keep a business healthy, and reading and memorandum of understanding for mutual recognition understanding financial documents. with CIMA and other institutes such as CPA Australia and CPA Ireland. The ICMAP has also approved new training 81. The profession has a stream of partly qualified scheme for its students. Under the new scheme, the accountants who lack career progression. In the absence students will be enabled to get practical training, of a proper accreditation body, the career progression for including the entire cycle of accounting and finance. The the partly qualified accountants poses a real challenge. ICMAP is taking steps to review their program against the The mid-tier accountants are well positioned to serve the latest IES requirements and address any identified gaps. growing market of SMEs. The Higher Education Commission of Pakistan in collaboration with the 79. The PIPFA is encouraged to take full member status professional accounting institutions would be well served for IFAC. The PIPFA responsibilities include setting by a national accountancy accreditation body that could requirements for initial and continuing professional set equivalence criteria and allow exemptions based on development and ethical requirements, and establishing specified criteria. This would serve the need of the SME an investigative and discipline system for mid-tier sector and sets the career paths for partly qualified corporate and public finance accountants. The PIPFA is an accountants. IFAC associate member.³⁷ The reciprocal exemptions on PIPFA qualification available with the major accounting Setting A&A Standards bodies, such as ICAP, ICMAP, ACCA, CIMA, and CIA, are only for corporate-stream students. Due to a recent MoU 82. Financial reporting standards applicable to the with CIPFA, some exemptions are now available for public corporate sector are stipulated in SECP-issued statutory sector accountants as well. The PIPFA provides training on notifications as recommended by ICAP, whereas ICAP IPSAS to employees of the Auditor General, Pakistan promulgates adoption of the ISA. The SECP holds the Military Accounts Department, Local Fund Audit, Treasury statutory authority for promulgating accounting Departments of the Punjab Government, and Pakistan requirements in Pakistan. In practice, ICAP's A&A Railways Accounts Department. To keep members up to Standards Committees, under the supervision of the date on IPSAS, PIPFA monitors new and amended IPSASB Professional Standards and Technical Advisory pronouncements, and disseminates them to members Committee recommend accounting standards based on through journals and CPD programs. In addition, PIPFA full, unmodified IFRS to the SECP, whereas auditing participates in the international standard-setting process standards are notified for adoption by the ICAP Council by inviting members to review and respond to exposure after due consultation. The mandate of the A&A drafts issued by IPSASB. The PIPFA is encouraged to Standards Committees includes providing comments and participate in the international standard-setting process holding stakeholder consultations on exposure drafts by reviewing and responding to IAESB-issued exposure circulated by IASB for IFRS and by IAASB for ISA. These drafts. The PIPFA is also considering IFAC guidance on the comments and recommendations on the proposed education training and development of accounting standards are discussed at the Professional Standards and technicians. Technical Advisory Committee and approved by ICAP's Governing Council before submission to SECP for 80. The Association of Accounting Technicians has consideration (Figure 4). After discussion, ICAP's recently launched short qualification programs in recommendations are accepted; however, the SECP has no legal obligation to act on these. ³⁷ Refer to SMO status in Annex 5. ROSC A&A Pakistan 23 II. ASSESSMENT Standard-setting Process for Other Financial standards, so developed, are exposed to stakeholders; Reporting Standards: AFRS for small-size entities any comments received are duly considered; and the and Islamic Financial Accounting Standards revised standards are presented to the Professional Standards and Technical Advisory Committee. The 83. The ICAP has developed accounting and financial standards are then approved for adoption by the ICAP reporting standards (AFRS) for small-size entities and Governing Council and subsequently sent to SECP for Islamic Financial Accounting Standards (IFAS) for Islamic notification.³⁸ banks/development finance institutions. The Accounting Standards Committee develops the standards for interest free modes of investment and financing. The Figure 4. Directorate A&A standard setting process of Technical Services at ICAP Professional Standards and Issuance of Technical ISAs, ISAEs, Advisory and ISQC by Committee at IAASB and ICAP issuance of A&A IFRS by IASB standards committee at ICAP Discussion on Consultation comments and Session with recommendations stakeholders at ICAP at ICAP ICAP Council ICAP's Council Recommends to adopts auditing SECP for standards accounting standards ³⁸ SRO 929 of 2015. 24 II. ASSESSMENT 84. The national standard-setting process requires C. Observed Reporting Practices and more transparency. Public consultation on discussion papers and exposure drafts for national standards is not a Perceptions statutory requirement; however, ICAP does undergo a consultation process with all stakeholders for the national 87. This subsection summarizes the ROSC teams review standards. The consultation process may take four to six of financial statements and perceptions of the accounting months. The comments received on the national and auditing practice in Pakistan. standards are not shared publicly. Statement Of Changes In Equity 85. The AFRS were introduced in 2007 and suggest a Audit Report consistent and simple format for the presentation of the Accounting Policies KEY AUDIT MATTERS financial statements for small-size entities. The objective of issuing standards for small-size entities is to outline the MATERIALITY ACCOUNTING ESTIMATES SHAREHOLDERS bare minimum provisions to report financial information POST BALANCE SHEET EVENTS by such an entity. The framework requires information PROFIT AND LOSS ACCOUNT about financial performance and financial position and at minimum includes statements of financial position, GOING income statements, accounting policies, and explanatory notes. CONCERN AUDITOR QUALIFIED QUALIFIED Audit Report 86. Islamic Financial Accounting Standards have been Management Financial Statements BALANCE SHEET MATERIALITY TNEMEGANAM Statement Of Changes In Equity MODIFIED Auditor SEICNEGNITNOC developed by ICAP in line with AAOIFI Accounting Standards and tailored according to Pakistan's needs, MODIFIED thus enhancing consistency of presentation and PROFIT AND LOSS ACCOUNT promoting comparability with international market. A summary of IFAS is as follows: Accounting Policies MANAGEMENT Financial Statements Auditor BALANCE SHEET CONTINGENCIES Post Balance Sheet Events BALANCE SHEET · IFAS 1 for Murabaha is mandatory for banks QUALIFIED Accounting Estimates undertaking of Murabaha transactions effective from August 24, 2005.³⁹ KEY QUALIFIED AUDIT MATTERS · IFAS 2 for Ijara is mandatory for Islamic banking institutions.⁴⁰ GOING CONCERN PROFIT AND LOSS ACCOUNT CONTINGENCIES Shareholders Auditor GOING CONCERN · IFAS 3 for profit and loss sharing on deposits was to POST BALANCE SHEET EVENTS MATERIALITY be implemented in June 2013 by SECP notification. Accounting Policies However, SBP has not yet issued its regulatory 41 instruction for implementation of this standard. ³⁹ http://www.secp.gov.pk/ciculars/pdf/cir_2010/Cir_07.pdf. ⁴⁰ http;//www.secp.gov.pk/otification/pdf/2007/Notif_May22_IFAS2.pdf. ⁴¹ SRO 584/2013. ⁴² This represent listed SOE company in energy sector. The delay in the publishing of report was because of regulatory dispute with regulators on revenue recognition. ⁴³ Approved accounting standards as applicable in Pakistan, which comprise such IASB- ⁴⁴ Includes 22 listed companies (9 manufacturing, 3 energy sector companies, 2 banks, issued IFRS as are notified under the Companies Ordinance, 1984—the provision of insurance, leasing and service sector companies, and one brokerage house); 4 unlisted and directives issued under the Companies Ordinance, 1984. In case requirement public interest companies and public companies; and 3 SOEs. differs, the provisions or directives of the Companies Ordinance, 1984 shall prevail. ⁴⁵ Out of 50 selected financial statements, 10 relate to MSE where applicable reporting Hence, there may be deviations in the financial statements prepared based on standards are the IFRS for SMEs. The application date of the IFRS for SMEs is the approved accounting standards and provisions and directives of the Companies period beginning January 1, 2015. Thus, the availability of such financial statements is Ordinance, 1984, and the IFRS requirements. expected after September 30, 2016. ROSC A&A Pakistan 25 II. ASSESSMENT Financial Statements Review 88. A sample of 39 financial statements recently issued in the jurisdiction were reviewed by the ROSC team to determine whether the statements largely align with the expected presentation and disclosure requirements of the applicable financial reporting framework and have been prepared without significant errors or omissions. The sample comprised financial statements related to the year ending June 2015 with the exception of two audited 42 statements for 2014, and one for 2012, which were prepared under approved SECP-adopted accounting 43 standards. The sample includes the financial statements of 29 companies44 prepared under IFRS as adopted in Pakistan and 10 prepared according to AFRS. An assessment of 11 statements prepared according to IFRS 45 for SMEs applicable in Pakistan was not possible as the first such statements prepared were not available until after June 30, 2016. The sample includes financial statements of manufacturing companies; banks and brokerage houses; and insurance, leasing, energy, and service sector companies. 89. No significant deviations from the expected Perceptions of A&A Practices reporting framework were noted . However, the inferences drawn from the review should be considered 91. In addition to roundtable discussions with with a degree of caution given the limited sample size as stakeholders such as industry associations, an online well as the inherent limitations in attempting to gauge survey was circulated to gauge the perceptions of the compliance without performing an independent audit. quality of financial statements. The inferences drawn Generally, the disclosures in the reviewed audited from the survey served to corroborate some of the earlier financial statements seem to be in compliance with the observations from other assessments regarding the A&A applicable accounting standards notified by SECP. environment. Typically, financial information reported by listed companies and financial institutions were 90. Review of the financial statement of public sector perceived as high quality and useful for decision-making companies showed that financial statements did contain purposes and in lending decisions. The SOE and SME comprehensive disclosures; however, audited financial financial reporting was seen as relatively less credible and statements are not timely and auditor's report contains useful. The financial statements of unlisted SOEs in several matter with emphasis of opinion. In some of the particular were considered less likely to provide a fair ROSC-reviewed financial statements, auditors' opinion representation of the company's financial statements. raised doubt on the fair presentation of the company's Users faced challenges in accessing the financial financial statements. It is expected that as the principles statements of unlisted SOEs and smaller companies. The of the Code of Corporate Governance for public sector general perception regarding the quality of audit in small- companies are further embedded in practice, the board of sized entities was not satisfactory. The Bankers place low directors will be empowered and will thus help to improve reliance on the financial statements of the SSEs. Bankers corporate compliance and enhance transparency and generally deploy their own teams in the field to obtain disclosure. comfort over the financial statements assertions. 26 2017 III. STATUS OF POLICY RECOMMENDATIONS 2005 OF ROSC A&A 2005 III. STATUS OF POLICY RECOMMENDATIONS OF ROSC A&A 2005 Implementation Recommendation Actions taken status A&A standards Develop simplified accounting and For unlisted small-size companies, separate local AFRS applied since 2007. IASB-issued reporting requirements for the Yes IFRS for SMEs apply to unlisted medium-size companies since 2015–16. SMEs. Rationalize the Companies SRO 929 of 2015 requires unlisted public interest companies and large-size company to Ordinance to improve compliance apply IFRS as notified by SECP. culture, which includes application Private companies with issued capital less than PKR 7.5 million (US$ 71,599) are exempt of IFRS for listed companies, non- from filing audited annual financial statements with the Registrar of Companies. listed companies filing Private companies where issued capital is below PKR 3 million (US$ 28,639), there are requirements, eligibility criteria for Yes no qualification/eligibility criteria for auditors. The Companies Bill 2017 has defined the the auditors of listed companies, qualification for auditors. The SECP in consultation with ICAP has established audit establishing AOB, and granting oversight through amendments in the SECP Act. authority to regulators for improving administrative The Companies Bill 2017 includes provisions to grant more authority to the regulators sanctions. for imposing administrative sanctions. Capacity to implement A&A requirements Improve the delivery of the PAOs are active in organizing quality training programs and workshops, as well as a 40 - Yes continuing professional education. hour director-training program. ICAP is working with many universities that have included IFRS, ISA, and professional ethics in their syllabus. These universities are engaging experienced chartered accountant to teach IFRS and ISA. IFRS and ISA are included in curricula and taught at universities where ICAP is offering mutual recognition. Teaching should focus on the practical implementation aspects of these standards using illustrations and cases. Ethical standards are embedded in different subjects covered in the syllabus. Ethics as a separate subject is not a recommended approach of IES. ICAP in 2013 revised and updated its education scheme to the latest international Take steps for improving academic standards. The training regulations have also been updated, effective September 1, and professional curriculum and Yes 2015, in line with the latest IES requirements. education. Revised RAET and training regulation for training organizations include appropriate monitoring controls. However, implementation has yet to commence. Monitoring of education providers. The performance of RAET, specified degree- awarding institute, and relevant degree-awarding institute is monitored by ICAP using key performance indicators. Education providers are required to prepare a self- evaluation report accompanied by a reasonable assurance report issued under the International Standards on Assurance Engagement by a practicing chartered accounting firm that carries satisfactory QCR rating. Hence, the quality of education delivery is kept under consistent check by ICAP. Previously, ICAP used to appoint its own inspectors. Usually the implementation guidance issued by IFRS foundation for each IFRS is more than sufficient. In addition, ICAP has issued a disclosure checklist for the guidance of members. ICAP publicly issues technical opinions providing guidance on IFRS and ISA and guides its Issue practical application members and others. Yes guidance on IFRS and ISA. An IFRS guide, Gripping IFRS, has been made available to ICAP members. ICAP has arranged for PERN II knowledge base portal, provided by Higher Education Commission of Pakistan, which has a digital library consisting of leading international publications and research material from the top international universities. This material is instantly and remotely accessible to ICAP students and members on the Internet. 28 III. STATUS OF POLICY RECOMMENDATIONS OF ROSC A&A 2005 Implementation Recommendation Actions taken status Introduce awareness programs for ICAP and SECP are designing awareness programs highlighting the significance of improving the degree of Yes compliance with A&A standards. These are aimed at shareholders, directors, and top compliance with IFRS officials from the corporate sector. requirements. ICMAP has revised its curricula, which now include comprehensive coverage of IFRS and IAS. Training on IFRS and IAS are also part of CPD. ICAMAP regularly organizes Strengthen capacity of ICMAP to nationwide trainings, seminars, w orkshops, and conferences. function as a premier professional Yes ICMAP has also launched a specialized diploma in IAS/IFRS to equip members with the body of management accountants globally accepted reporting standards. in the region. ICMAP has established a cooperative linkage with CIMA to provide its members an accelerated entry gateway to CIMA qualification. Monitoring and enforcement SECP has strengthened monitoring and enforcement mechanisms and improved its capacity, both for listed and non-listed sectors. SECP has 93 professional accountants (35 in 2005) including 13 chartered accountants. SECP has developed and implemented monitoring manuals. The monitoring process covers review of accounts and other regulatory returns, inspections, investigations, adjudication, and prosecution. Strengthen the monitoring and Yes All annual and quarterly financial statements of listed companies are reviewed. In- enforcement mechanism. depth analysis of the financials is conducted to ensure compliance with applicable statute and standards. Regulatory actions have been taken against noncompliant c ompanies and their auditors. During the last 5 years, SECP has acted against 43 auditors for violations of disclosure requirements under s.260, s.255, and s.259 of the Companies Ordinance. Through these efforts, there has been greater monitoring and significant improvement in reporting standards. SBP and SECP have taken steps for improving capacity by hiring more professional accountants. Take steps for improving the Yes SBP has hired 51 professional accountants. capacity of regulators. SECP trains staff on developments in accounting standards. Various trainings have been conducted for SECP staff in the past 5 years. Introduce an arrangement for AOB was created in July 2016 by amendments in the SECP Act, 1997. However, independent oversight of the Yes effectiveness of the audit oversight needs to be strengthened auditing profession. Composition of ICAP Council is such that most members are in the profession; however, i ation of professional and ICAP has made a conscious effort to balance the particp private representation in QAB. Status of compliance with SMOs has been improved. ICAP has employed 29 chartered accountants (13 in 2005). Further, in the various committees of ICAP, over 100 most renowned chartered accountants are working Strengthen capacity of ICAP. Yes around the year to achieve the assigned objectives. For the Investigation Committee, there are 3 full-time chartered accountants who conduct monitoring and enforcement. For the Quality Assurance Department, apart from 11 board members, there are 5 (4 in 2005) full-time chartered accountants, including the quality assurance director for dealing with periodic reviews of audit firms. ROSC A&A Pakistan 29 III. STATUS OF POLICY RECOMMENDATIONS OF ROSC A&A 2005 Implementation Recommendation Actions taken status Audit practice review Periodic performance evaluation is covered under the QCR program whereby all QCR- rated firms and their partners’ engagements are reviewed in 5-year intervals. Further, based on periodic reviews of engagements of the firms under the quality control framework, sanctions are imposed through withdrawal of QCR ratings that act as a significant catalyst on the practice license-holders to improve their quality control standards. For firms that are not QCR-rated, there is no mechanism to review pe rformance before renewing their practice license. Regarding upgrade of the procedure for obtaining a practice license by ICAP members, a comprehensive framework for practice review is Upgrade the procedure for under consideration of the Governing Council. A draft of recommendations of the task obtaining license by accountants Partially force was publicly shared with members, with several consultative sessions with and auditors engaged in public stakeholders held during the last year. Based on feedback, amendments in the practice. framework are being internally debated. This includes reviews of individual partner engagements with implications for renewal of the practice license. The matter is under active consideration of the Council. Compliance with CPD requirements is governed by ICAP Directive 8.01. On noncompliance with CPD requirement at the end of each year and at the end of a 3- year rolling period, members are required to sign a declaration form of noncompliance with a firm commitment to make up the deficit within 180 days. On failure to comply with the requirements of this directive, CPD committee is required to refer the noncompliant cases to the Council for its consideration. ICAP discharges its role in assigning quality control ratings to professional firms through an exhaustive quality control framework that has been updated with latest enhancements, keeping in line with international developments through independent QAB members; carrying out investigative actions on professional misconduct of its members through a composition of independent personalities and ICAP Governing Council members;, and disseminating guidance on professional matters, including opinions on A&A matters. ICAP has amended its bylaw whereby independent members, who are not members of ICAP Governing Council, have been inducted in the Investigation Committee to bring more transparency in the investigation process. Further, a lawyer attends the meeting Investigation. Investigate valid of the Investigation Committee to provide legal insight on the matters. To strengthen complaints against auditors and the investigation and discipline mechanism, ICAP is reviewing a comprehensive set of audit firms and any irregularities Yes amendments in the Chartered Accountants Ordinance, 1961. identified from reviews of financial statements and audit practices. The provision of Section 20 D of the Chartered Accountants Ordinance, 1961, requires the High Court to take a decision after the case is referred by the Governing Council for removal of a name from the register of members for a period exceeding 5 years or he view that the member should be held permanently, or in case the Council is of t guilty of professional misconduct specified under the provision of Schedule II of the Chartered Accountants Ordinance, 1961. ICAP has proposed in the revised draft amendments in the Chartered Accountants Ordinance to remove the conditions of referring the case to the High Court to avoid unusual delays in the enforcement mechanism. However, AOB has enacted rigorous principles for review of auditors of public interest companies. Under the Code of Ethics 2015 by ICAP, there is no restriction in providing audit services and tax advocacy for the same client; and even same partner can provide the audit and tax services to its client. As per revised Code of Ethics 2015, the cooling-off period must Disciplinary powers. Prescribe be met before a key audit partner or firm managing partner joins PIE audit clients as guidance to ensure adequate director, officer, or employee in an important position (i.e., mentioned in key highlights ethical standard and Yes and also paragraphs 290.137 and 290.138 of the Code of Ethics 2015). The revised Code independence of auditors. is in accordance with the latest IFAC Code and more stringent requirements under Chartered Accountants Ordinance, 1961. Cooling-off period must be met for partners and senior and other managers of an audit firm before they are allowed to join PIE clients with whom they have done audit work. 30 IV. KEY FINDINGS AND AREAS FOR CONSIDERATION IV. KEY FINDINGS AND AREAS FOR CONSIDERATION 1. T h e fo l l ow i n g f i n d i n g s a n d co r re s p o n d i n g good international standards and practices. The following recommendations relate to further improvements that table provides an outline for preparing the country action can be made to existing and generally successful plan. The table identifies the responsible agencies for regulatory initiatives undertaken largely by regulators and implementing the recommendations and the suggested professional accounting organizations in the recent years; timeframe (short term equals less than a year, medium significant and commendable progress has been made in term is 1-3 years, and long term is 3-5 years). each area, but further improvements could help to attain Responsible Findings Recommendations Timeline agency A&A standards assessment A road map should be developed to attain fully compliant status Pakistan is largely compliant with for IFRS to enhance comparability, credibility, and investor’s IFRS; however, full compliance confidence. Internationally recognized standards such as IFRS SBP, ICAP, and Medium term cannot be claimed because of a bring increased credibility, comparability, and transparency at an SECP small number of exemptions and international level, which foster investor confidence, increasing deferrals. FDI but decreasing its cost. ISA have been fully adopted in As per IFAC compliance program, the status of adoption of ISA is Pakistan except for ISA 700R and only considered adopted if it has legally adopted or incorporated 701. SECP has approved the audit the 2016 ISA into the national requirements. Therefore, SECP SECP, Cabinet Short term report format in line with ISA 700R should seek Cabinet approval at the earliest to seek compliance and 701 and submitted to the status. Cabinet for notification. Trends of outsourcing services by SECP and SBP may consider introducing ISAE 3402 requirement service organizations are for service organizations. This will improve global and domestic SECP and SBP Medium term increasing without any required market of the service organizations and provide enhanced user assurance model. satisfaction. Institutional framework Financial Reporting Framework Increased consultation with local Efforts are required to enhance consultation with local industry at Medium term industry to assess the impact of the time of IFRS adoption to minimize the possibility of ICAP IFRS before adoption. waivers/exemptions. No formal arrangement exists ICAP should include a range of stakeholders to systematically between ICAP with AGP and CGA address the needs of private and public sector stakeholders in the to support A&A practices and standard-setting process. A standard-setting committee in ICAP, CGA, and Medium term adoption of IPSAS in federal collaboration with AGP and CGA will support A&A practices and AGP authorities and other public sector adoption of IPSAS accrual in federal/provincial authorities and entities. other public sector entities. As per statute, SECP notifies accounting standards for adoption. ICAP after due consultation recommends The documented process of adoption of IFRS may be officially accounting standards for adoption ICAP Medium term prescribed. to SECP. SECP is statutorily not bound to act on the recommendation of the recognized accounting body. Anomalies exist between the Companies Ordinance and The draft Companies Bill, 2017, should be adopted to remove international good practices and anomalies between the Companies Ordinance and international Short term Banking Companies Ordinance SECP, Senate standards. (Refer to Annex 1A for differences in Companies with reference to contents of Ordinance, 1984, and IFRS and suggested amendments.) audit report and certain accounting treatments. 32 IV. KEY FINDINGS AND AREAS FOR CONSIDERATION Responsible Findings Recommendations Timeline agency The Companies Bill 2017 removes the audit requirement from the FBR private companies with paid-up capital of less than PKR 1 million (US$ 9,546). However, this reform will be more effective when filing audited financial statements is also relaxed for the purposes of filing of tax returns. Undue audit compliance burden Small-size entities are encouraged to obtain business advice and ICAP, ICMAP on small-size entities. other structured non-assurance/assurance services (that is, agreed upon procedures, compilations, limited reviews) that MSME requires assistance to provide small business stakeholders with some c onfidence even Medium term understand value added from where no audit opinion is provided and provide assurance to financial reporting and assurance lenders for access to finance for small-size entities services. PAOs in collaboration with micro-finance institutions and micro- ICAP and finance banks, other lending institutions, and industry ICMAP, trade associations should work to equip MSMEs with international associations, good practice and improve the quality of financial information, and micro- which will enhance their growth potential and access to local and finance international credit markets. institutions Institutional Capacity including Monitoring and Enforcement Arrangements Pakistan lacks national accounting curriculum, which resulted in varying levels of exemptions for professional qualification. Further, ICAP has introduced three-tiered certification leading to average passing rate in profession chartered accountancy, namely (a) CAF, (b) Professional is 25% with 10% increase in Accounting Affiliate, and (c) Certified Accounting and Finance students every year. Therefore, Professional. the profession has a strong PAOs may consider creating a national accountancy accreditation HEC, ICAP, and pipeline of partly qualified body in collaboration with Higher Education Commission. This Medium term ICMAP professional accountants. ICAP has body may support prescribing a uniform curriculum of recently introduced the mid-tier accountancy, setting equivalence criteria, allowing exemptions certification for partly qualified based on specified criteria, and promoting IFRS education across professional; however, because of all universities in Pakistan. This will support career path for mid- lack of national curriculum, Higher tier accounting technicians. Education Commission has not provided equivalence to such certification. A defined charter is required to put in place a business model for professionalizing PFM and mid-tier accounting technicians in corporate and public sector and to reap full benefit of the existing infrastructure available in the form of PIPFA. PIPFA is strongly encouraged to attain full IFAC membership status. More formal arrangements are required to implement professional skill Existing arrangements for development program for public sector accountants. It is also HEC, ICAP, professionalizing PFM and mid-tier suggested to take into account the approach adopted by other ICMAP, AGP , Medium term accounting technicians have weak countries in the region for the professionalization of public sector and PIPFA institutional arrangements. accountants (e.g., Sri Lanka). PIPFA should also refer to IFAC guidance on education training and development of accounting technicians http://www.ifac.org/publications- resources/education-training-and-development-accounting- technicians PAOs may develop a Gender Action Plan to facilitate professional opportunities and equal economic participation by female accountants. Encouraging women to seek accountancy Pakistan has the lowest qualifications and provision of an enabling environment like day- representation of female care centers will allow female accountants to contribute to ICAP and ICMAP Medium term accountants in the region. socioeconomic growth in a more effective way because of their education and knowledge of the environment. Financial assistance in setting up business will also enhance their participation. 33 IV. KEY FINDINGS AND AREAS FOR CONSIDERATION Responsible Findings Recommendations Timeline agency PAOs consider engaging in a process to educate their members about assurance and non-assurance offerings. Some aspects are less restrictive when dealing with small-size entities regarding non-audit services being provided to audit clients. PAOs may also The audit market is highly consider providing series of training/workshops focusing on how concentrated and dominated by small business auditors obtain the knowledge to be trusted audit firms affiliated with the business advisers as provided in many IFAC SMP committees, international networks. Small and IAASB, and various leading PAOs around the world. medium-size practitioners typically http://www.ifac.org/publications-resources/guide-compilation- provide audit and tax services to engagements ICAP and ICMAP Medium term SMEs. There is a high cost and http://www.ifac.org/publications-resources/guide-review- resource effort associated with engagements delivering quality audit services to http://www.ifac.org/publications-resources/guide-using- SMEs, which have limited international-standards-auditing-audits-small-and-medium-sized- demands for audits other than the en statutory requirement. Further, the technical and technological support to small and medium-size practice will assist in streamlining the internal quality control policies and procedures and improve the quality of the services provided. The SME Board at the PSX is not SME sector can be benefit from greater level of engagement with fully functional and requires the SME Board at the PSX to access potential investor for raising Professional support to facilitate medium-sized capital at lower cost. The capacity gap can be bridged with the accounting companies to access potential active involvement of professional accountants with the SME firms, SME Medium term investor for raising capital at lower sector. Professional accountants can also serve as Board at PSX, cost. Due to the limited capacity of financial/transaction advisor in raising capital and other forms of SECP the SMEs, this potential change business combination. SECP should also facilitate and work in agent is still unexplored. collaboration with SME Board to increase capital market players. Adoption of draft practice review framework will provide Up-grade the licensing procedure mechanism to review performance before renewing the practice ICAP Medium term for non-QCR rated firms. license for non-QCR rated firms. Engagement partners should be encouraged to share their training plans with ICAP, in order that CPD activities can be effectively planned to meet requirements o f members in general, and engagement partners in particular. Also, CPD activities should be linked with learning outcomes. Consider use of technology to reduce CPD variable costs and improve access for members. Price Quality and relevance in CPD CPD based on its value, offer a range of premium and standard ICAP, ICMAP program of ICAP and ICMAP needs Medium term CPD, and facilitate low-cost mechanisms where demanded by and PIPFA to improve constantly. members. Integrate CPD and quality assurance system that will add perspective of QCR-based findings in the training and will reduce noncompliance. Members responsible for training are also mandated to be CPD compliant. ICAP can enhance the quality of service to its members by maintaining the database of the regulatory findings and aligning CPD activities accordingly. ICMAP is encouraged to conduct gap analysis against the requirements of IES to report on compliance with full IES ICMAP is not fully compliant with standards and address the gaps. Further, ICMAP should have ICMAP Medium term the IFAC SMOs. separate appeal body to bring independence in the investigation process. PAOs are encouraged to work jointly to promote finance and Untapped potential for finance accounting outsourcing services in Pakistan in international and and accounting outsourcing ICAP, ICMAP Medium term local markets and develop policy and code of conduct for shared services services. 34 IV. KEY FINDINGS AND AREAS FOR CONSIDERATION Responsible Findings Recommendations Timeline agency Enhancing independence and A sustainable structure is required for AOB, which includes quality of audit process. AOB lacks affiliation with IFIAR. The capacity of AOB members also needs to a business and training plan for its be built for efficient and effective performance of their duties. board members and senior Further, there is a need to enhance capacity of QAB by hiring AOB Short term management team. Further, ICAP sector specialist auditors to review the related audit file and also requires adequate staffing to increase the number of reviewers while also giving due attention effectively discharge its quality to the revision of their terms of references. assurance function. The review of financial statements of unlisted public sector SECP has recently undergone internal restructuring where more companies has recently been resources were transferred to Corporatization and Compliance added to the mandate of SECP’s Department for the purposes of review. In order for SECP to Corporatization and Compliance SECP Medium term adequately discharge its mandate of monitoring A&A practices, Department. The Department also continuous enforcement of the compliance of the Code of monitors the compliance of code Corporate Governance is required. of corporate governance for public sector companies. ICAP ICMAP, SECP, and PAOs and SECP should work with Finance Division and Finance Economic Lack of A&A monitoring Departments to build their capacity in monitoring A&A practices Reform Unit in arrangements in Economic Reform and improving assessment of fiscal risk for federal and provincial Ministry of Unit in Ministry of Finance and authorities. The reform actions could include setting up Medium term Finance and Corporate Finance Wings in the monitoring and enforcement teams in Economic Reform Unit and Corporate Finance Departments. Corporate Finance Wings, hiring of professional accountants, and Finance Wings developing risk-based review methodologies. in Finance Departments Observed reporting practices and perceptions Develop risk-based plan for improving A&A compliance in SOE ICAP and sector. Accessibility of audited financial statements of SOEs ICMAP, SECP, A&A practices in unlisted SOEs through websites should be encouraged. Plans should be devised and Economic (federal authorities and public for unlisted SOEs for (a) improved financial reporting for better Reform Unit in entities) are too weak to apply and informed management decision-making and (b) greater Ministry of transparency and accountability. PAOs in consultation with Medium term international standards due to lack Finance and of capacity and inactive Board of Ministry of Finance and SECP should include unlisted SOEs, Corporate Directors. including federal and provincial authorities in the directors’ Finance Wings training program and conduct specific training to SOEs on in Finance reporting. Departments Introduction of audit qualification will improve the quality of audit. ICAP and ICMAP may consider providing support to small and medium-size practices for audit of small-size entities through technological support such as audit software and audit training and to encourage small and medium-size practices to apply ISQC Less reliance of Bankers on the ICAP and ICMAP 1 that enhances the quality processes at firm and engagement audited financial statements for and Pakistan Medium term levels. Adoption of draft practice review framework will also small-size entities. Banking Council enhance the quality of audit in SMPs. Further, ICAP and ICMAP should also hold regular meetings with the Pakistan Banking Council/Financial Institutions to improve quality of audit of SMEs and enhance Bankers reliance on the audited financial statements. This will also facilitate SMEs in access to finance. ROSC A&A Pakistan 35 NOTES: 36 ANNEXes ANNEX 1A: COMPANIES ORDINANCE, 1984, COMPARED TO IFRS Requirements of the Companies Ordinance, 1984 IFRS Comments Requirements of IAS 16: SECP has proposed revision in the Presentation: If an asset's carrying draft Companies Bill, 2017, to amount is increased as a result of a align it with IAS 16. It is suggested Surplus on revaluation of fixed assets (Section 235): revaluation, the increase shall be that such specifications may be Presentation: Shown in the balance sheet after capital and recognized in other comprehensive avoided in the Companies reserves. income and accumulated in equity Ordinance to accommodate Accounting treatment: The surplus on revaluation of fixed under the heading of revaluation future development in financial assets may be applied by the company in setting off or in surplus. IAS 16 allows the decrease reporting. diminution of any deficit arising from the revaluation surplus of to be recognized in other The difference in the accounting any other fixed assets of the company. comprehensive income to the treatment results in reduced extent of any credit balance existing equity if treated per local law as in the revaluation surplus in respect compared to international good of that asset. practice. Definition of Associates (Section 85): “Associated companies” and “associated undertakings” mean The Companies Ordinance used any two or more companies or undertakings, or a company and the term companies and an undertaking, interconnected with each other in the undertakings. However, nowhere following manner, namely: does it define an undertaking. (a) If a person who is owner or a partner or director of a In legal definition the “associate” company or undertaking, or who, directly or indirectly, holds or Requirement of IAS 28: relationship is basically controls shares carrying not less than 20% of voting power in IAS 28 defines associate as “an established through person(s) such company or undertaking, is also owner or partner or entity over which the investor has who is a director/shareholder in director of another company or undertaking, or directly or significant influence.” said companies and not through indirectly, holds or controls shares carrying not less than 20% of direct holding of an investor voting power in that company or undertaking; or company. (b) I f the companies or undertakings are under common Draft Companies Bill, 2017, has management or control or one is the subsidiary of another; or aligned the definition of associate (c) I f the undertaking is a modaraba managed by the company; with IAS 28. and a person who is the owner of or a partner or director. Definition of Subsidiary [Section 2(2)]: A company or a body corporate is subsidiary of another if: The criterion of 50% holding (a) That other company or body corporate directly or indirectly Requirement of IFRS 10 shares is not applied in IFRS 10. It controls, beneficially owns, or holds more than 50% of its IFRS 10 defines subsidiary as “an is recommended that the voting securities or otherwise has power to elect and appoint entity that is controlled by another definition of “subsidiary” should more than 50% of its directors; or entity.” be aligned with the definition in (b) The first mentioned company or body corporate is a IFRS 10. subsidiary of any company or body corporate, which is that other's subsidiary. 38 ANNEX 1A: COMPANIES ORDINANCE, 1984, COMPARED TO IFRS Requirements of the Companies Ordinance, 1984 IFRS Comments Definition of Related Party (Section 3): An entity that has the ability to control the company or exercise significant influence over the company in making financial and Requirement of IAS 24 operating decisions or vice versa and includes the following: A related party is a person or entity (a) Entities, which directly or indirectly through one or more that is related to the entity that is intermediaries, control or are controlled by or are under preparing its financial statements common control with the reporting company, including holding (referred as “reporting entity”). companies, subsidiaries and fellow subsidiaries; (a) Person or close member of that (b) Associates, as defined in the IAS 28, Accounting for Investments person’s family is related to a in Associates; reporting entity if that person: (c) Individuals owning, directly or indirectly, an interest in the (i) has control or joint control voting power of the reporting company that gives them over the reporting entity; significant influence over the company, and close members of (ii) has significant influence over the family of any such individual; the reporting entity; or (d) Key management personnel (i.e., persons having authority (iii) is a member of the key and responsibility for planning, directing, and controlling the management personnel of activities of the reporting company, including directors and the reporting entity or of a officers of such company and close members of the families of parent of the reporting such individuals); entity. (e) Entities in which a substantial interest in the voting power (b) An entity is related to a Proposed amendments in the is owned, directly or indirectly, by any person described in reporting entity if any of the draft Companies Bill, 2017, greatly clause (c) or (d) or over which such person is able to exercise following conditions applies: align with the requirement of IAS significant influence, including entities owned by directors or (i) Entity and reporting entity 24 and define related party as; major shareholders of the reporting company and entities that are members of same group (a) Director or their relative; have key management personnel in common with the (which means that each (b) Key managerial personnel or reporting company; parent, subsidiary, and their relative; (f) Entities in which one or more of directors or members of fellow subsidiary is related (c) Firm, in which a director, the governing board are appointed by the reporting company to the others); manager, or his/her relative is a or vice versa; (ii) One entity is an associate or partner; (g) Where one or more of the directors or members of the joint venture of the other (d) Private company in which a governing board of the entity as well as the reporting company entity (or an associate or director or manager is a member are appointed by the same person or persons; joint venture of a member of or director; (h) Entities whose process of manufacture or business is wholly a group of which the other (e) Public company in which a dependent on the use of know-how, patents, copyrights, entity is a member); director or manager holds along trademarks, licenses, franchises, or any other business or (iii) Both entities are joint with his relatives, any shares of its commercial rights of similar nature, or any data, ventures of the same third paid-up share capital. documentation, drawing or specification relating to any patent, party; invention, model, design, secret formula, or process, of which (iv) One entity is a joint venture The requirements of IAS 24 are the reporting company is the owner or in respect of which the of a third entity and the substantially aligned; however, company has exclusive rights or vice versa; other entity is an associate more consultation is required to (i) Where more than half of the raw materials and of the third entity; fully align the provisions of the consumables required in the process of manufacture of an (v) Entity is a post-employment Companies Ordinance with the entity are supplied by the reporting company, or by persons benefit plan for the benefit requirements of IAS 24. specified by the company, or vice versa, and the prices and of employees of either the other conditions relating to the supply are influenced by the reporting entity or an entity entity or the company; and related to the reporting (j) Where goods or articles manufactured or processed by an entity. If the reporting entity entity are sold or transferred to the reporting company or to is itself such a plan, the persons specified by the company, or vice versa, and the prices sponsoring employers are and other conditions relating thereto are influenced by the also related to the reporting entity or the company. entity. (vi) The entity is controlled or Explanation: (a) In considering each possible related party jointly controlled by a person relationship, attention should be directed to the substance of identified in (a). the relationship and not merely to the legal form. (b) For the (vii) A person identified in (a)(i) purposes of this clause (i) “entity” means a partnership firm or has significant influence over a Hindu undivided family or an association of persons or a trust the entity or is a member of or a company; and (ii) “close members of the family of an the key management individual” means persons who may be expected to influence, personnel of the entity (or of or be influenced by, that individual in their dealings with the a parent of the entity). ROSC A&A Pakistan 39 reporting company. ANNEX 1B: SUMMARY OF FINANCIAL REPORTING AMENDMENTS IN THE COMPANIES BILL, 2017 Provisions of the Companies Bill, 2017 Applicable companies Proposed amendments • SECP will have authority to change financial reporting Contents of financial statements (s.225) All companies requirements in the schedules that currently require action by the Federal Government. • Requirements of Companies Ordinance will be aligned with Quarterly financial statements (s.237) Listed companies those of the Code of Corporate Governance for Listed Companies. • Directors’ report will be amplified to include descriptions of the principal activities and key risks facing the company. Directors’ report (s.226 and s.227) All companies • Listed companies will also have to comment on future performance and the company’s impact on the environment. • Concept of statement of compliance by directors is proposed. • Increases in penalties for company directors for failure to comply with financial reporting requirements of the Companies Ordinance; the following penalties apply: o Listed companies — Imprisonment for up to two years Penalties for noncompliance (s.220) All companies and a fine of PKR 500,000 (US$ 4,773) and not more than PKR 5,000,000 (US$ 47,732) ; o Unlisted companies — Imprisonment of up to one year and a fine of up to PKR 100,000 (US$ 954). • Minimum threshold for filing financial statements has been raised to companies with paid-up capital greater than PKR10 Companies with paid-up million (US$ 95,465). Filing requirements for financial capital greater than PKR • Listed companies are required to file statements within 30 statements (s.223) and 233 10 million days of the annual general meeting. • Unlisted companies are required to file financial statements within 15 days of the annual general meeting. • Classifications for small-, medium-, and large-size companies Classification of companies (s.224) All companies as well as public interest companies are defined in the Companies Ordinance. 40 ANNEX 2: ICAP ASSESSMENT OF CURRENT STATUS OF OBSERVANCE OF 7 IFAC SMOs SMO Degree of responsibility Current status and challenges Complied. ICAP has developed a self-assessment checklist to help firms assess and demonstrate their level of compliance with ISQC and provided mentoring programs to assist firms with implementation of ISQC 1. QAB also issued a revised ISQC 1 Implementation Guide with the dual objective of providing guidance and understanding ISQC 1 requirements as well as augmenting its acceptability and implementation within small and medium-size practices. It has developed a checklist for ISQC 1 compliance to be completed by the reviewer at time of visit of firm under the said standard. QCR program has been revised in July 2015 to make it more in line with the good practice approaches. SMO 1, Quality Assurance Direct Further adoption of Draft Practice Review Framework will provide assessment on compliance of ISQC 1. Challenges. An inclusion of a new section in the Chartered Accountants Ordinance, 1961, was recommended in 2009; however, no change in the legislation has been made to date. Under this section, a member of ICAP shall produce a document or disclose information to the Governing Council or a committee of the Council that may be required by the Council or such committee in pursuance of an investigation of a complaint against a member or in pursuance of proceedings for the purposes of a Quality Control Review. Complied. ICAP has revised its curriculum and syllabus to be compliant with IES. ICAP is in compliance with IES 2, 3, 4, 5, 6, and 7. IES 1 requires that POA should allow entrance only to those with a reasonable chance of successfully completing the professional accounting education program while not representing excessive barriers to entry. ICAP in addition to the university graduates also allows higher SMO 2, IES for Professional secondary school qualified candidates to take the chartered accountant exam. Accountants and other Direct IAESB Guidance Challenges. ICAP is working on a proposal for changes and improvement in existing rules, regulations, and guidelines to bring them in line with IES 8. The revised IES 8, which is applicable from July 1, 2016, requires specific CPD requirements for engagement partners. Currently, following international practice, ICAP relies on the judgment of engagement partners to decide their specific CPD requirement. SMO 3, Standards and Shared with SECP and SBP Complied. Codes by IAASB Complied. SMO 4, IESBA Code of ICAP Code of Ethics has been revised in light of 2014 IESBA Code of Ethics for Ethics for Professional Direct Professional Accountants. The revised Code of Ethics is applicable from July 1, Accountants 2015. At prequalification level, students are tested on the Code of Ethics at both intermediate and final levels. ROSC A&A Pakistan 41 ANNEX 2: ICAP ASSESSMENT OF CURRENT STATUS OF OBSERVANCE OF 7 IFAC SMOs SMO Degree of responsibility Current status and challenges Partially Complied. ICAP coordinates through the public sector committee with the Controller General and Auditor General Offices and other important stakeholders to organize meetings, seminars, and roundtables to raise awareness of IPSAS. ICAP has also organized two conferences to disseminate the importance of PFM. The conferences have given insight into the scale and complexities of PFM issues that often need to be addressed in developing countries and emerging SMO 5, IPSAS and other economies. The enforcement of Public Sector Companies (Corporate Indirect IPSASB Guidance Governance) Rules 2013 is an important step for improving governance and transparency of public sector companies . ICAP has also included two public sector accounting standards in its syllabus to create awareness and interest of professional accountants in financial reporting of public sector. Challenges. ICAP is exploring ways to integrate with the Auditor General of Pakistan to provide technical support. Complied. ICAP publishes news about the findings and decisions of the ICAP Governing Council on investigation cases from time to time in its publications. A manual containing decisions of the Council on investigation cases has been developed, which is being referenced during Council meetings and those of the Investigation Committee for guidance and consistency purposes. Challenges. SMO 6, Investigation and To strengthen the Investigation and Discipline mechanism, the ICAP Governing Direct Discipline Council is in the process of reviewing a comprehensive set of amendments in the Chartered Accountants Ordinance, 1961. A detailed exercise is being carried out in consultation with legal experts to holistically review the Chartered Accountants Ordinance. After following due process, including public consultation, the draft of amendments finalized by ICAP will be submitted to the Federal Government for approval, which may take time because of the legislative requirements. The revised provisions of the Chartered Accountants Ordinance will be available on the ICAP website and to ICAP members once they are finalized and approved by the relevant authorities after following due process. Partially Complied. As part of ICAP’s strategy for full compliance of IFRS by banks and development finance institutions by January 2017, SBP should be persuaded to eliminate deviations in adoption of IAS/IFRS. SMO 7, IFRS and other ICAP should consider adoption of IFRS 9, Financial Instruments, by January 1, IASB-Issued Indirect 2018, after due notification by SECP. Pronouncements Challenges. A joint road map for convergence to IFRS needs to be developed among ICAP, SECP, and SBP. 42 ANNEX 3: ICMAP ASSESSMENT OF CURRENT STATUS OF OBSERVANCE OF 7 IFAC SMOs Degree of SMO Current status and challenges responsibility Complied. ICMAP has established QAB with the objective to enhance quality of services rendered by cost and management accountant firms. Purpose of QAB is to improve quality of financial, cost, and tax audits; to ensure transparency in financial accounts and management reporting; and to comply with relevant rules, regulations, and professional standards. SMO 1, Quality Assurance Direct ICMAP has taken the following measures to strength QAB: (a) ICMAP developed program essential for implementation of QCR. Program applies to all cost and management accountant firms holding valid Certificate of Practice. (b) ICMAP has also developed QCR Checklist essential for QCR implementation. (c) ICMAP established Quality Control Department to expedite decisions taken by QAB. The ICMAP Council has also approved hiring the services of reviewers to conduct quality audit of cost and management accounting firms. Partially Complied. ICMAP offers Certificate in Accounting and Management, which involves the completion of a two-year course plus six months of supervised practical training. ICMAP also offers direct admission to the three-year CMA course. Students who have completed 14 years of SMO 2, IES for education or attained a Master’s degree in any subject are eligible. IFRS were Professional Accountants incorporated to enhance local and global acceptability of qualified members. MoUs, Direct Mutual Recognition Agreements, and Mutual Pathway Agreements were signed with and other IAESB-issued Pronouncements other accounting bodies. Every member is required to complete 40 hours in one year or 120 hours every three years with a minimum of 20 hours per year. ICMAP has extended the required length of practical experience to three years to meet the requirements of IES 5 on practical experience requirements. ICMAP is encouraged to conduct a thorough review of its system against IES requirements to report on compliance with the full IES standards. SMO 3, Standards and ICMAP continues to support ongoing adoption and implementation of IAASB-issued None Codes issued by IAASB pronouncements through both pre-qualification and post-qualification training provision. SMO 4, IESBA Code of Direct Complied. ICMAP has adopted 2015 IESBA code of Ethics with modifications. Ethics Complied. SMO 5, IPSAS and other At ICMAP level, initiatives are being taken to promote the importance of IPSAS. For this IPSAB-issued None purpose, ICMAP organized a conference on public sector accounting. The main objective of Pronouncements this conference was to improve the quality of public sector accounting, particularly in relation to disclosure, transparency, and corporate governance. Partially complied. The ICMAP National Council has been empowered under Section 34 of the Cost and Management Accountants Act, 1966, to frame rules of professional and other conducts SMO 6, Investigation and and to exercise disciplinary powers in relation thereto. In 2016, ICMAP completed a review Direct Discipline of its investigation and discipline system and has incorporated many of requirements of SMO 6. It has noted that an appeals body does not exist that is separate from its disciplinary committee. ICMAP reports to IFAC that it has plans to address the identified gaps. ICMAP has launched a six-month diploma in IAS/IFRS to equip professionals with globally SMO 7, IFRS and other accepted reporting standards to enable them to avail such employment opportunities in IASB-issued None the global and local corporate markets. As part of the strategy, ICMAP is fully cooperating Pronouncements with ICAP to promote ongoing convergence with IASB pronouncements. 43 ANNEX 4: ICAP ASSESSMENT OF THE COMPLIANCE WITH IAESB STANDARDS International Education Comments Standards The minimum entry requirement equivalent to that for a university degree program, (i.e. higher secondary school certificate or A-Level qualification) is considered appropriate in view ICAP’s own basic accounting education program that runs before an aspirant of chartered accountancy takes up Initial Professional Development. Further details on IES 1 ICAP’s streams are available at; http://www.icap.org.pk/become-ca/entry-routes/full-time-scheme/ http://www.icap.org.pk/become-ca/entry-routes/trainee-scheme/ The competence areas of professional accounting education programs detailed in IES2 (financial accounting and reporting; management accounting and reporting; finance and financial management; taxation; audit and assurance; governance, risk management and internal control; business laws and regulations; information technology; business IES 2 and organizational environment; economics, and business strategy and management) are incorporated throughout the curriculum of the chartered accountant program. For details visit the link: http://www.icap.org.pk/students/education-scheme-2013/ s nal and communication, personal, and The key professional skills highlighted in IES 3 (intellectual, interpero organizational skills that a professional accountant integrates with technical competence and professional values, IES 3 ethics, and attitudes to demonstrate professional competence) are assessed by ICAP through various methods such as written examinations, practical training under supervision of a ICAP member and training through Registered Accounting Education Tutors. ICAP’s education and training system ensures development of professional values and adherence to the code of IES 4 ethics issued by ICAP. ICAP has mandatory practical training periods varying from 3, 3.5 to 4 years based on the qualification or years of education at commencement of training. The training is regulated under the Bylaws and Training Regulations issued IES 5 by ICAP. ICAP provides a software-based training log, which is maintained by the students and monitored by ICAP member responsible for training. ICAP can review the progress on test basis. ICAP has revised its education scheme. The old modular system has been replaced with the new scheme of four IES 6 levels that translates the role of the aspirants in terms of their expected achievement at the workplace. IES 7 Details of CPD requirements for ICAP in compliance with IES 7 are provided in para 56 IES requirements with regard to the professional competence that professional accountants performing the role of an engagement partner responsible for audit of financial statements is fulfilled through education program that contains relevant assessments and compulsory training in practice for at least two years. Maintenance of said IES 8 competencies is currently the responsibility of the professional accountants through CPD activities relevant to the role of an engagement partner to audit professionals. ICAP is deliberating on prescribing specific and structured CPD requirements for all members in practice. 44 ANNEX 5: PIPFA ASSESSMENT OF ASSESSMENT OF CURRENT STATUS OF OBSERVANCE OF 7 IFAC SMOs Degree of SMO Current status and challenges responsibility PIPFA evaluates ways to work with ICAP to support quality assurance reviews of auditors in Pakistan. To further develop its members’ awareness of ethics and issues related to accounting and auditing, PIPFA conducts continuing professional development on ICAP’s QCR framework, SMO 1, Quality None which incorporates ISQC 1. Other activities by PIPFA to keep members informed on quality control Assurance include the Technical Committee that updates members on developments by IFAC in regards to SMO 1, through technical update emails, the main website, and the PIPFA journal, in order to improve their quality of work. Partially Complied. With direct responsibility to set initial and continuing professional development for its members, PIPFA introduced a new education scheme in June 2015, which incorporates IES requirements. SMO 2, IES for The new education scheme addresses gaps that were previously identified such as incorporating Professional ethics into the syllabus, increasing CPD hours, and increasing practical experience requirements. Accountants and Direct To support the learning of members, PIPFA has established a CPD framework, which includes other IAESB-issued running seminars on various topics related to public finance such as performance management, Pronouncements audit risk, and corporate governance. PIPFA plans to review its system against the revised IES, as it is introducing a new syllabus for its candidates. PIPFA is encouraged to participate in the international standard-setting process by reviewing and responding to exposure drafts issued by the IAESB. PIPFA has an ongoing process to monitor pronouncements by IAASB to keep members and SMO 3, Standards students informed on relevant updates to the standards. In addit ion, PIPFA has a Technical and Codes issued by None Committee in place to conduct research on pronouncements by IAASB to incorporate in its IAASB syllabus and CPD content. PIPFA also participates in the international standard-setting process by reviewing and responding to IAASB exposure drafts. Complied. With direct responsibility to set ethical requirements for its members, PIPFA has adopted the SMO 4, IESBA Code 2014 IESBA Code of Ethics and has a process in place to monitor pronouncements by IESBA to Direct of Ethics include updates in its initial and CPD content. Ethics is taught as a separate subject in the new syllabus for students. PIPFA also offers CPD courses on ethics, in which examples of case studies of conflicts and challenges are presented. PIPFA is active in promoting full adoption of IPSAS by the Auditor General’s Office, including having discussions on strategies to move to full adoption of IPSAS in Pakistan. Other activities with the Auditor General include discussions on disclosures in financial statements of public sector entities and working with the Auditor General to monitor public sector corporations in the SMO 5, IPSAS and country. PIPFA provides training on IPSAS to employees of the Auditor General, Pakistan Military other IPSASB-issued None Accounts Department, Local Fund Audit, Treasury Departments of the Punjab Government, and Pronouncements Pakistan Railways Accounts Department. To keep members up to date on IPSAS, PIPFA monitors new and amended IPSASB pronouncements and disseminates them to members via journals and CPD programs. In addition, PIPFA participates in the international standard-setting process by inviting members to review and respond to exposure drafts issued by IPSASB. Partially complied. SMO 6, Investigation and Direct The PIPFA has investigation and discipline process in place for its members, and its disciplinary Discipline committee reports that it began reviewing this system in 2015, but a timeline has not been established as to when this review will conclude. SMO 7, IFRS and PIPFA also updates its educational syllabus to take into account new and amended standards other IASB-issued None issued by IASB. PIPFA also plans to consider introduction of short-term online and offline courses pronouncements on IFRS for members. ROSC A&A Pakistan 45 ANNEX 6: SIGNIFICANT FACTORS FOR EFFICIENT FUNCTIONING OF AUDIT OVERSIGHT Key Areas Status Comments/Considerations Organization’s Location Independent of regulators and Government In line with IFIAR principles . Majority of governing body is a non-practitioner. Governance Structure Comprised of lawyers, former audit professionals, In line with IFIAR principles and board members of PSX and SBP and retired government officials. . Develop business plan and training plan for Board Chief executive officer not hired; lacks members and management. Financial assistance is Organizational Structure organizational structure and basic infrastructure. required to fund start-up and operational cost for initial years. To affiliate with IFIAR. Framework allows: • Government contribution; no commitment yet. • Raising revenues from registration of audit firms; low possibility as audit fee structure in Pakistan is the lowest in the region. • Fee/charges to PIEs; AOB does not intend to Financial and technical assistance is required for Sustainable Funding Model charge a fee to PIEs at the outset, consider sustainable funding model. charging a fee once it starts rendering its mandated services to these organizations. • Voluntary contributions from key stakeholders (ICAP, SECP, and SBP); SECP committed PKR 30 million (US$ 286,396). 50 percent is paid. • Grants and borrowings; none received so far. Quality Assurance Department housed at ICAP and overseen by AOB lacks sector specialists and Hire reviewers and develop risk-based, sector-specific Regulators’ Accounting and appropriate audit tools to review; Impact of QAB audit plans and methodologies. Equip with proper Auditing Capacity over the years is not encouraging. AOB currently audit tools. required to hire reviewers 46 NOTES: DESIGN: SINA121.COM ROSC A&A PAKISTAN REPORT ON THE OBSERVANCE OF STANDARDS AND CODES, ACCOUNTING AND AUDITING January 2017