Responsibility of fair financial accounts rests with directors: SECP

The Securities and Exchange Commission of Pakistan (SECP) has ruled that the responsibility of preparing true and fair financial accounts rests with the directors and it cannot be shifted to the accounting staff of the company. Sources said the Company Law Division of the SECP has issued an order to dispose of the proceedings initiated against the directors including the chief executive (respondents) of a company.
The company has failed to incorporate the disclosures as required under section 235 of the Companies Ordinance and Accounting and Financial Reporting Standards (AFRS). As a result, the annual audited accounts of the company for the years mentioned above are, prime facie, misstated. The amount and effects of above referred observations are material. Therefore, show cause notice was issued on April 21, 2014 advising the respondents to explain their position within 14 days from the date of the notice as to why penal action may not be taken against him for contravention of provisions of Section 492 of the Ordinance.
The SECP order observed that in terms of section 233 of the Companies Ordinance, it is responsibility of the directors of every company to lay before the company in annual general meeting a balance-sheet and profit and loss account or in the case of a company not trading for profit an income and expenditure account for the period not later than eighteen months after the incorporation of the company and subsequently once at least in every calendar year, in the case of the first account for the period since the incorporation of the company and in any other case since the preceding account, made up to a date not earlier than the date of the meeting by more than four months the directors of the company to lay accounts at the annual general. Section 234 of the Ordinance provides that balance sheet and profit and loss account should give a true and fair view of the financial statement. In view of the above, the responsibility of preparing true and fair financial accounts rests with the directors of the company and it cannot be shifted to the accounting staff of the Company, the SECP said.
The SECP said that the objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions. The said information is helpful that the prospective investors need financial statements to assess the viability of investment in a company. Investors may predict future dividends based on the profits disclosed in the financial statements. Furthermore, risks associated with the investment may be gauged from the financial statements. For instance, fluctuating profits indicate higher risk. Therefore, financial statements provide a basis for the investment decisions of potential investors. Secondly, financial institutions (eg banks) use financial statements to decide whether to grant a loan or credit to a business. Financial institutions assess the financial health of a business to determine tile probability of a bad loan. Any decision to lend must be supported by a sufficient asset base and liquidity. Thirdly, suppliers need financial statements to assess the credit worthiness of a business and ascertain whether to supply goods on credit. Suppliers need to know if they will be repaid. Terms of credit are set according to the assessment of their customers'' financial health and employees use financial statements for assessing the company''s profitability and its consequence on their future remuneration and job security.
The SECP said that a regulator is a public authority or government agency responsible for exercising autonomous authority over some area of human activity in a supervisory capacity. An independent regulator is a regulatory agency that is independent from other branches or arms of the government. Regulator deals in the areas of administrative law, regulatory law, secondary legislation, and rulemaking (codifying and enforcing rules and regulations and imposing supervision or oversight for the benefit of the public at large).
The company has to follow AFRS prescribed for medium-sized entities, treatment of depreciation and surplus on revaluation of assets as defined under section 235 of the Ordinance and AFRS is vital for the fair presentation of the financial statements. Fair presentation of the financial statement is very helpful for the users as mentioned above to take decision regarding the company, the SECP said.
The SECP has analysed the facts of the case, relevant provisions of the Ordinance, arguments put forth by the respondent and the authorised representative, and SECP is of the firm view that treatment of deferred tax liability, surplus on revaluation of fixed assets and presentation of financial statements in accordance with the section 235 of the Ordinance and AFRS was the responsibility of the directors and response given by the directors is found to be unsatisfactory. The aforesaid section does not give or provide any exception for omission of material facts presented before the shareholders and regulators.
The accounts are considered to be as misstated. There is no reason to believe that the default of the respondent in compliance of the required AFRS was not wilful. The respondents have made themselves liable under the provisions of Section 492 of the Ordinance. However, keeping in view that fact that the company is a private company, the SECP taking a lenient view in the matter and instead of imposing maximum fines on the respondents imposes a token fine of Rs 30,000 in aggregate on respondents under the provisions of Section 492 of the Ordinance, the SECP order added.