Professional Documents
Culture Documents
Mutual Funds
Mutual Funds
Mutual Funds
Vice Presidents
Information Technology
Hidayat Ali, FCA Flowcharting and Accountants
Asad Ali Shah, FCA 39 Noor-ul-Huda Ashraf, FCA
Members Human Resource Management
Imran Afzal, FCA Attributes of a Successful Manager
Syed Ahmad, FCA 48 Amirali Kassim Merchant, FCA
Muhammad Shoaib Ansari
A. Husain A. Basrai, FCA Institute News
Mujahid Eshai, FCA Obituary
Nasimuddin Hyder, FCA 50 Sk. Hashmat Ali
Dr. Tariq Hassan
Khaliq-Ur-Rahman, FCA SAFA Conference
Dr. Faizullah Khilji SAFA Conference
Fazal Mahmood, FCA 51 Tasneem Yusuf, ACA
Masud Muzaffar
Abdul Rahim Suriya, FCA IFAC News
Syed Mohammad Shabbar Zaidi, FCA 56 IFAC eNews
Executive Director: Health News
Moiz Ahmad, FCA Constipation: Prevention and Treatment
Secretary:
58 Dr. S. M. Wasim Jafri
F. H. Saifee, FCA Students’ Section
Publications Coordinator: The Brilliant Scholar - Irfan Ghani
Asad Shahzad 61 Interviewed by Shakil Akhtar Qureshi, FCA
Mutual Funds
Some Unique Issues Nasim Beg, FCA
Most readers of this journal are reasonably well informed about the the market value. This would be at the cost of the rest of the
advantages of investing through mutual funds. However, there are investors in the fund as their interest will be diluted. A similar logic
some issues unique to mutual funds that should be of special will apply for someone leaving the fund, where the person must be
interest for professional accountants. paid fair market value rather than historic cost.
Income Tax Daily Financial statements: The NAV based accounting makes it a
Most professional accountants will know that mutual funds are not must to draw up daily financial statements with full accruals so as
taxed provided they distribute 90% of their income. However, what to ensure determination of accurate NAV. Some mutual funds
is generally not realised is that this is not an ‘exemption” but simply subject themselves to a continuous audit throughout the year so as
a mechanism for avoidance of double taxation. A person investing to ensure accuracy, as errors cannot be undone once units have
directly in the market would pay tax on dividends received. If, been issued or redeemed.
however, the person went through a mutual fund and the fund
suffered tax on the dividend received by it and in turn the investor Element of Profit or Gains included in NAV
also were to suffer tax on the income distributed by the fund, it Having addressed the matter of the importance of issuing and
would amount double taxation of the same income. The tax law is redeeming units of an open-end fund on the basis of an accurate
designed to avoid this anomaly.
marked-to-market NAV, another interesting aspect from the
accounting view point is of the treatment of certain elements
Net Asset Based Accounting included in the NAV.
The Net Asset Value (NAV) is an important aspect of mutual funds.
An investor buying or selling a share (unit or certificate) of a closed- Each time new units are issued one could simply take the entire
end mutual fund through the stock exchange needs to know the proceeds of the issue to the capital account of the fund as this
underlying true market value of the share so as to make an informed would be new capital coming into the fund. However, this would
decision. In the case of open-end funds, the units are issued and pose a problem as, at any point in time, a fund will have some
redeemed on NAV based prices. realised and unrealised income and gains (or losses), thus the
distributable amount of income per unit (if any) at that point in time,
The NAV is the market value of the portfolio of assets/securities less will be diluted by the new units that are issued (albeit at NAV and
any liabilities; and the NAV per unit is the NAV of the fund divided therefore not impacting the overall worth per unit).
by the number of its units in issue. The point to note is that the
assets of a mutual fund are valued at market and not at “cost or The way to manage this is to work out the break-down of the net
market whichever is lower”, which is what is considered prudent assets. Assuming that some new units are being issued at this point
for most other situations. The reason for using market value is that in time but there has been no issue or redemption since the
anyone buying into or exiting from a mutual fund must be treated beginning of the financial year prior to this, then the net assets at
fairly with respect to the true value of the portfolio. The significance
this point in time will comprise of the capital at the beginning of the
of this is illustrated by the example in the following paragraph.
financial period, some amount in the Income Statement (profit or
loss resulting from realised gains or losses, income such as
If we assume a fund was set up a few years ago and it continues to
dividends etc., less expenses) and an unrealised surplus or deficit
hold the shares bought by it then and that the market value of the
on the valuation of the assets (being marked to market). The NAV
shares today is three times the original cost. If we also assume that
per unit applicable to the new entrant will be apportioned between
the original size of the fund was Rs. 1,000,000,000 and it had
issued 100,000,000 units at Rs. 10 each, the market value of the the Income Statement and the Capital Account in proportion to
portfolio today will be Rs. 3,000,000,000 and the NAV Rs. 30 per their relative weight in the net assets.
unit. In the event we valued the portfolio at historic cost and
consequently the price of Rs. 10 per unit, a person joining the fund Thus if an investor comes into an open-end fund on the last
today with say Rs. 1,000,000 would get 100,000 units instead of day of the financial year, the person will buy into
33,333 units (if market value was applied). In other words, this new the income (or the loss) accrued for the financial year
investor would get an undue benefit by paying a lower price and and will be entitled to get some portion of this back by
becoming a 1.0% owner of the portfolio instead of 0.33% owner at way of dividend that may be declared after the close of the year.
This new entrant will be entitled to the lodged so as to avoid deliberate arbitrage surplus left over from the transaction costs
dividend distribution for the year (at par by exiting at the historic price when the recovered from new entrants as there will
with other unit holders) and the Income market may have fallen. Mutual funds can be some redemptions and therefore
Statement will have the capacity to favour some clients by bending the rules in somewhat lesser amount of securities to be
accommodate this new entrant’s this regard, something we must guard purchased as a result of the net cash
entitlement as it would have been credited against. received from the proceeds of issues less
with the element of income this person has redemptions.
bought while coming into the fund. Once
the dividend is paid out, the NAV will drop
Transaction Costs
to the extent of the dividend. Thus a person
Having dealt with various issues in trying to Valuation of Debt Securities
ensure that we have a fair (to everyone) As has been elaborated earlier, it is
remains indifferent as to when he or she
system for allowing entry into and exit extremely important that all securities in
enters or exits an open-end fund (expect to
from a mutual fund, there still remains one the portfolio of a mutual fund are valued at
the extent of tax impact, if any, on
important issue which is not widely market. However, the NBFC Rules, which
dividend). On the other hand, the dividend
recognized. This relates to the transaction govern mutual funds, have their origin in a
distribution capacity of the fund is not
costs of buying or selling securities in the set of earlier rules which were structured
impacted by dilution.
market such as brokerage and custodian’s with listed shares in mind. The Rules
movement charges etc. When some new require listed securities to be valued at the
Element of income at redemption stage:
entrant comes into the fund on an NAV price at the stock exchange and unlisted
Similar to the principle applied at the entry
based price, it is assumed that the fund will securities at cost or break-up value.
stage, a person exiting the fund gets full
be able to buy more securities out of the Corporate bonds (TFCs) are listed but rarely
NAV and takes the accrued earnings with
new entrant’s money by buying these at the traded at the exchanges. Thus the last price
him or her. This means that the dividend
prices used for working out the NAV. Even recorded at the exchange can be quite
distributable out of the Income Statement is
if the fund is able to, (we assume that some outdated and at times does not even
reduced in proportion to the number of
times it will pay more and at times less, account for in part redemption of the TFC.
units redeemed, thus the amount
thus averaging out over time), it will still These prices are therefore not
distributable per unit remains undisturbed.
have to suffer transaction costs that would representative of true market value at
not have been included in the NAV, as the which these are traded at between financial
Timing of NAV based prices NAV reflects market prices without institutions outside the exchange.
The NAV based prices are designed to brokerage etc. These transaction costs Government bonds are not listed and it
ensure that all unit holders of a fund are should be ideally be recovered from the would be totally inappropriate to value
treated fairly at the time of any investor new entrant. Funds following best industry these at historic cost. Most mutual funds
joining or leaving the fund. Since the NAV practices estimate these transaction costs as value these at true market but in violation
based price reflects the marked-to-market a percentage of the NAV and add these on of the Rules, thus the audit reports of such
valuation of the portfolio of the fund, one to the NAV for determining the issue price funds get qualified by their auditors. On the
expects that the by using this price we will of the units. The transaction costs are other hand some funds are known to have
achieve the objective. However, in view of separate to any sales load a fund may treated government bonds as “Held to
the price volatility of the underlying assets, charge for paying towards distribution maturity” under IAS 39, thus totally flouting
by the time we act in the market after an costs. The sales load recovered in the issue the NAV principle and yet their accounts
investor comes in, the prices in the market price is retained by the management do not get qualified – Perhaps the
may have moved up, thus the fund would company and paid out in form of selling accountant community needs to be a bit
pay more than it has recovered from the commissions etc. However, the transaction more alive to the matter and propose some
new investor. This would be at the cost of costs that are recovered are paid to the fund remedial measures for having the Rules and
the rest of the unit holders. The best way enabling it to offset the costs it will suffer. the IAS brought in line with ground
would be to charge the new entrant the realities.
exact purchase cost and not the historic Based on this rationale the transaction costs
NAV, however this is not practical, thus the should also be recovered from exiting unit
About the Author:
next best way is to charge the NAV based holders so that the fund does not suffer
price next fixed after the person joins the these costs while selling securities to pay Mr. Nasim Beg is a Fellow Member of
fund. In this manner the new entrant off the exiting unit holder. This would be the Institute of Chartered Accountants of
cannot deliberately attempt arbitrage achieved by deducting the estimated costs Pakistan. He is the Founder and Chief
against the fund by trying to buy units at a from the NAV. However, if a fund is at a Executive Officer of Arif Habib
historic price when the market may have growing stage, i.e., it has net inflows, it is
Investments. Readers are welcome to
moved up. Similarly, a person exiting the not likely to be selling securities to pay off
contact him at:
fund is best paid off at the price determined exiting unit holders, thus it need not
after the application to redeem has been recover this cost. In fact it may have some nasimbeg@arifhabib.com.pk
Think of a group of people who collectively decide to peanuts to depositors like us and keep the cake for
contribute funds with an intention of making a return by themselves.
investing the pool prudently in financial securities - primarily
in shares of companies listed on stock exchange. You do not have to believe me. We will discuss only one
representative example. Just pick up the Annual Report 2004
The above is a practical illustration of what ‘mutual funds’ of Al-Meezan Mutual Fund Limited, a close-end mutual fund
are all about. In a slightly sophisticated way, it is simply a listed on the Karachi Stock Exchange, and go to ‘Categories
legal arrangement where by a group of investors contribute of Shareholders as of 30 June 2004’ on page 33.
funds with the specific objective of investing it in securities.
You will find that on 30-6-04, the general public held 21%
You may be wondering why should one be bothering about only of its shares, whereas banks, development finance
‘mutual funds’ when you can just about walk in any bank institutions, insurance companies and other institutions held
and deposit almost immediately your entire funds there in 79%. Specifically, these included names like Meezan Bank
any of the so-called ‘attractive’schemes such as certificate of Limited (2%); Meezan Islamic Fund (12%); Al-Meezan
investments etc. Alternatively, you may also invest in Investment Management Ltd. (14%); NIT & ICP (4%); Pak
National Saving Schemes, which offers Khas Deposit Kuwait Investment Company (Pvt) Ltd. (19%); State Life
Certificates, or Defence Saving Certificates. The advantage of Insurance Corporation of Pakistan (3%); and 10% held by
doing so is that you can go for whoever is offering you the Union Bank Ltd, Faysal Bank Ltd., Muslim Commercial Bank
best ‘rate’ and lock your funds. It is easy and relatively risk- Ltd., Prime Commercial Bank Ltd., PICIC Commercial Bank
free. Isn’t it? Ltd., and Dawood Leasing Company Ltd. The last 15% was
held by provident funds, corporate bodies etc.
Panel -1
Net Asset Value: The bottom line here is that if you are a little ambitious than
To compute NAV of a close-end mutual fund, we simply take a conservative deposit holder, to start with, you may as well
the total of ‘shareholders’equity’and divide it by the number consider investing a part of your funds in a mutual fund in
of shares. your quest for finding better ‘returns’ than a bank deposit.
For example, the total of shareholders’ equity of Al-Meezan As time goes by, with an experience of couple of accounting
Mutual Fund at 30 June 2004 was Rs. 1,127,312,058 (the cycles, you are likely to grow in confidence. Investing in
same as net assets). On that date, there were 77,500,000 Mutual Funds may sound a bit risky to a new comer as there
shares outstanding (Note 12). is no promise of a pre-determined ‘rate’, but you can be sure
that the level of risk you are accepting is no different then
This means on that date its NAV was 1,127,312,058 divided that of the banks who invest in them.
by 77,500,000 = Rs. 14.54 per share.
Assuming that you feel confident enough to explore this
True. However, you need to see what happens after you lock topic further, remembering the difference between ‘close-
your funds. Whoever has promised you to pay a certain end’ and ‘open-end’ mutual funds can be helpful.
‘rate’, whether it is an established bank or a government
saving institution, they would not sit on your money. They As a rule, you will find a ‘close-end’ mutual fund only to be
listed on stock exchanges in Pakistan, primarily because the
need to invest funds where it earns a return not only to keep
holders of its shares or certificates can buy and sell it without
Johnnies like us happy but also to make something above it any reference to the company (except for registering change
to keep making all those high-rise buildings and immaculate in ownership), just like any other security traded on the stock
offices. And where do you think they invest? They either loan exchange. For example, if you wish to buy 1000 shares of Al-
it out to businesses who promise to pay them even higher, or Meezan Mutual Fund Limited, only a holder who has already
invest it in capital market. And its in the capital markets (of got it can sell it to you. The funds involved in the transaction
which stock exchange is an example), where you find ‘close- would not go to the Fund directly. Does it mean that all
end’and ‘open-end’ mutual funds in which these institutions mutual funds listed on Stock Exchanges in Pakistan are close-
invest heavily, hoping that at the end of the day they will pay end Funds? Certainly!
2. Net Dividend = For individuals there is a 10% at source As a courtesy to my readers, I must also disclose that I own
deduction hence the difference between dividend and net some of the close-end funds mentioned in this article and
dividend. Example: Pakistan Strategic Fund declared a cash that I carry out investment research for my clients.
dividend of Rs. 1 but an individual investor would only get
Rs. 0.90.
3. Average = The average of high and low prices during last About the Author:
52 weeks. Example: Abamco Growth Fund = high + low
divided by 2 = Rs. 31+ Rs. 19 divided by 2 = Rs. 25. Mr. Altaf Noor Ali is Chartered Accountant practicing in
his own name.
4. Yield = Net Dividend divided by Average Price. Example:
Readers are welcome to contact him at:
Golden Arrow = 1.80 divided by 6.65 = 0.2707 or 27.07%.
altafnoorali@yahoo.com
A fund operated by an investment company that pools / Each shareholder ’s investment is priced at a net asset value
raises money from shareholders and invests in a variety of representing that share’s portion of the collective investments
securities, including stocks, options, bonds and money of the fund and at which price shares may be purchased or
market instruments. redeemed (sold).
1.HOW TO READ A Fees and expenses — Sales and change. Value stocks held in the
management fees associated with a portfolio over a period of time may
FUND PROSPECTUS mutual fund must be clearly listed. The become growth stocks and vice versa.
Key Elements of a Mutual Fund prospectus will also display the impact Other research may give a more
Prospectus are: these fees and expenses would have on current and accurate account of the
a hypothetical investment over time. style of the fund.
Date of issue—First, verify that you
have received an up-to-date edition of Tax information — A prospectus will
the prospectus. A prospectus must be include information on the tax status 3. HOW TO EVALUATE
updated at least annually. and implications of a fund’s FEES AND EXPENSES:
distributions, and whether they will be Mutual funds charge some amount for
Minimum investments—Mutual funds treated as dividend income or capital their services. Of course, these charges
differ both in the minimum initial gains. will affect the amount of money you’ll
investment required, and the minimum have someday. The secret is to
for subsequent investments. Investor services — Shareholders may evaluate the full potential of an
have access to certain services, such as investment—the amount you keep
Investment objectives — The goal of automatic reinvestment of dividends after paying the fees. Here’s a simple
each fund should be clearly defined — and systematic withdrawal plans. strategy to help you get started:
such as income with preservation of Be sure to read the prospectus and ask
principal or long-term capital questions about items that you are not 1.Understand fees and expenses.
appreciation. Be sure the fund’s sure about before investing.
objective matches your objective. 2.Compare charges that apply to
2. HOW TO ASSESS A mutual funds.
Investment policies — A prospectus FUND MANAGER’S
will outline the general strategies the 3.Consider redemption fees or rates
fund managers will implement. You’ll INVESTMENT STYLE AND (difference of buying selling)
learn what types of investments will be ITS MPACT ON
included, such as government bonds Shareholder Fees
or common stock. The prospectus may
RETURNS: These fees are paid directly from the
Some fund managers follow an
also include information on minimum share-holder's account and may
investing "style" to try and maximize
bond ratings and types of companies include:
fund performance while meeting the
considered appropriate for a fund. Be
investment objectives of the fund.
sure to consider whether the fund Sales Charge
Fund styles usually fall with in the
offers adequate diversification. following three categories. This fee, also called a "load," is paid to
the shareholder's investment
Risk factors—Every investment involves Fund Styles: professional as compensation for
some level of risk. In a prospectus w Value: The manager invests in acting as the intermediary between the
you’ll find descriptions of the risks stocks believed to be currently fund company and the investor.
associated with investments in the undervalued by the market.
fund. Refer to your own objectives and Front-end Load
decide if the risk associated with the w Growth: The manager selects This load is imposed at the time of the
fund’s investments matches your own stocks they believe have a strong purchase. It is shown as a percentage
risk tolerance. potential for beating the market. of the fund's offering price (the fund's
price per share, which includes the
Performance data—You’ll find selected w Blend: The manager looks for a front-end sales charge).
per-share data including net asset combination of both growth and
value (NAV) and total return for value stocks. Exchange Fee
different time periods since the fund’s This fee is levied to help defray the
inception. Remember that past results To determine the style of a mutual administrative costs associated with
do not guarantee future performance. fund, consult the prospectus as well as exchanging from one fund to another
When evaluating performance, look at other sources that review mutual funds. within the same family, within the
the track record of a fund over a time Don't be surprised if the information same class of shares. Often, a fund will
period that matches your own conflicts. Although a prospectus may allow a certain number of free
investment goals. state a specific fund style, the style may exchanges before imposing this fee.
Redemption Fee The expense ratio excludes Call Risk. The possibility that falling
In an attempt to discourage frequent shareholder fees and some other interest rates will cause a bond issuer
trading in and out of a fund, a charges such as portfolio trading costs. to redeem—or call—its high-yielding
redemption fee may be imposed. This Because portfolio transaction costs are bond before the bond's maturity date.
fee may be eliminated after the shares not always paid separately from the
are held within a fund for a certain cost of buying or selling securities, they
amount of time, such as 30 or 60 days. Country Risk. The possibility that
do not appear in the fund's expense
This fee can apply to redemptions as political events (a war, national
ratio.
well as exchanges out of a fund. elections), financial problems (rising
Anything that affects operating costs inflation, government default), or
Account Fee natural disasters (an earthquake, a poor
can have a bearing on the expense
This may be applied to help cover the harvest) will weaken a country's
ratio. When you're examining expense
administrative costs of maintaining an economy and cause investments in
ratios among funds, be sure you're
account. For example, some funds may
comparing apples-to-apples — that country to decline.
charge an annual fee.
because the average costs of managing
Annual Fund Operating Expenses different types of investments can vary Credit Risk. The possibility that a bond
These expenses are deducted from the dramatically. And, while expense issuer will fail to repay interest and
fund's assets and typically cover ratios make it easy to evaluate the costs principal in a timely manner. Also
ongoing costs associated with running of similar funds, don't forget to called default risk.
the fund itself. These may include the compare a figure that's even more
following: important in your investment decision:
Currency Risk. The possibility that
total return.
returns could be reduced because of a
Management Fee
rise in the value of the currency against
This is often the largest operating "No Load" Doesn't Mean "No Fees"
expense and it covers the costs Although mutual funds labeled as "no foreign currencies. Also called
associated with the professional load" don't have an up front sales exchange-rate risk.
management of a fund's portfolio. charge that does not mean they are free
of other charges. No-load funds may Income Risk. The possibility that a
Other Expenses carry purchase fees, redemption fees, fixed-income fund's dividends will
These include miscellaneous custodial, exchange fees, and account fees. And, decline as a result of falling overall
legal, accounting, and other of course, shareholders of almost all interest rates.
administrative expenses associated funds are subject to the indirect costs
with operating a mutual fund. associated with annual operating Industry Risk. The possibility that a
expenses. group of stocks in a single industry will
Adding it up — Total Annual Fund
Operating Expenses decline in price due to developments
Now that you know what your fund is 4. HOW TO EVALUATE in that industry.
paying for and how you're being RISKS
charged, you need a way to evaluate Inflation Risk. The possibility that
Different mutual funds have inherently
and compare these costs. The tool for increases in the cost of living will
different risk characteristics and should
this job is the expense ratio and it
not be compared side by side. A bond reduce or eliminate a fund's real
generally appears in the "Total
fund with below-average risk, for inflation-adjusted returns.
Operating Expenses" line at the bottom
of the Annual Fund Operating example, should not be compared to a
Expenses table in the prospectus. stock fund with below average risk. Interest Rate Risk. The possibility that
Even though both funds have low risk a bond fund will decline in value
Simply defined, the expense ratio is the for their respective categories, stock because of an increase in interest rates.
percentage of a fund's average net funds overall have a higher risk/return
assets (assets minus liabilities), which potential than bond funds.
Manager Risk. The possibility that an
is spent on operating expenses during a actively managed mutual fund's
fiscal year. For instance, if a fund has Mutual funds face risks based on the
investments they hold. investment adviser will fail to execute
assets of Rs.500 million and annual
operating expenses of Rs.10 million, Following is a glossary of some risks to the fund's investment strategy
the expense ratio in this case would be consider when investing in mutual effectively resulting in the failure of
2%. funds. stated objectives.
Market Risk. The possibility that stock w The fund produces capital gains by ARE UNIT TRUSTS
fund or bond fund prices overall will selling securities at a profit, and
decline over short or even extended distributes those gains to you. DIFFERENT FROM
periods. Stock and bond markets tend MUTUAL FUNDS?
to move in cycles, with periods when w You sell your shares of the fund at a From an investment perspective, there
prices rise and other periods when higher price than you paid for them are no major differences between unit
prices fall. trusts and mutual funds. Both are
The average annual return for a mutual professionally managed portfolios
Principal Risk. The possibility that an fund is stated after expenses. The
which invest in a wide variety of
investment will go down in value, or expenses include fund management
fees. Average annual returns are also financial instruments.
"lose money," from the original or
invested amount. factored for any reinvested dividend
and capital gain distributions. To
compute this number, the annual About the Author:
5. HOW TO CALCULATE returns for a fixed number of years
RETURN ON (e.g., 3, 5, life of fund) are added and Mr. Nadeem Butt, ACA qualified
divided by the number of years, hence from Gardezi & Co., Lahore in
INVESTMENTS the name "average" annual return. This
You make money from mutual fund 2001. Presently he is working as
specifically means that the average
investment when: Head of Internal Audit & Budget
annual return is not a compounded
rate of return. In addition to this Depts. at TAQ Logistics. Readers
w The fund earns income on its appreciation in the sale price of the are welcome to contact him at:
investments, and distributes it to you fund share / unit over that period is nadeem.butt@tlpk.com
in the form of dividends. also part of the profit.
The key difference between the two lies in the legal structure:
Legal document in which the rules Trust deed Company's articles/ bye laws &
are laid down custodian agreement
Who protect investor interests Trustee Custodian (but according to the custodian
agreement and articles / bye laws).
Who owns or holds the fund assets Trustee holds the The mutual fund company
assets for the owns the assets and
benefit of the Investors are shareholders
investors of the company.
Looking for income and some growth from your few of them calling them as balanced fund. However, as the
investments? market grows we may witness products with complex and
sophisticated investment strategies and overlapping asset
Who isn’t? classes.
The big problem: You typically can’t have your cake and eat We appreciate regulators recognition of the sensitivity of the
it too. The higher the return on an investment, the greater industry. In accordance with the NBFC Rules, a fund
the risk. Mutual Funds are the tools to diversify risk and manager cannot advertise in any form unless the proof of
earn decent returns. advertisement is approved by the regulators. However, there
is still a lack of awareness about the concept of mutual funds
Thanks to the break of the bear spell over the stock market among the masses that needs to be taken up by the regulators
that catalyzed the rebirth of mutual funds in Pakistan. It now and the industry players.
promises to be one of the fastest growing industries in the
Scaring from the past experience of investment companies
financial sector. The economic overturn of the country after
scams, most of us still conceive mutual funds as the new
9/11 has played significant role in the boost of this sector.
version of such companies. Mutual Funds are different from
Once reluctant corporate giants are now the leading our nightmare investment companies in terms of their
investors in the mutual funds. The concept of mutual fund is regulations, supervision and professional management.
very simple. It replicates a prudent single individual by Nevertheless, the investments in mutual funds are not free
pooling the resources to exploit the underlying asset class from risk. Before you invest in any mutual funds, be it stocks
more efficiently and effectively. or bonds, it is important understand all the risks. The greater
the risk, the greater the potential return. Unfortunately, there
Securities and Exchange Commission of Pakistan introduced are quite a few types of risks to consider.
Investment Companies and Investment Advisers Rules, 1971
and Asset Management Companies Rules, 1995 to regulate Market risk is the risk that your individual stock, bond or
open and close end funds. Although not comprehensive, mutual fund will decline if the stock or bond market
however these were the initial steps in regularising the fund declines.
management industry in Pakistan.
There is the risk that bad news about a single company will
Later in 2003 The Non-Banking Finance Companies tumble its stock price. Similar there may be a situation
(Establishment and Regulation) Rules, 2003 were introduced wherein a rumour or the social or political issues nosedives
that not only combined scattered regulations governing non- the market. In such a situation the fund manager would not
banking financial sector but also tried to be more be able to prevent the loss however; if the asset class of a
fund is adequately diversified you may witness reduction of
comprehensive then the predecessors individual laws. This
loss in comparison with its benchmarks and peers.
shows progression and commitment of the regulators for the
sector. However still the issues of benchmarks for fund On the bond side, you face interest rate risk. Bond prices
return, addressing accounting and reporting issues and move in opposite directions to interest rates. So when rates
standardised risk control measures for investment in other rise, bond prices fall.
than stock sectors are few of the concerns that need proper
attention. There also is inflation risk. The income you get from your
bonds through the years, may not keep pace with rising
In Pakistan, at present 14 open end and 20 close end funds costs.
are under operation. Many more are in pipeline and several
are in conceptual phase. Most of them are plain vanilla funds Credit risk is the danger that the issuer of a money market
investing purely in capital markets or money markets and a instrument could go bankrupt.
Due to influx of new and giant market before its official Harvesting the field in the favourable
corporate and financial sector players announcement. The fund having conditions is not a big task. Anyone
in the market, there is a sign of good pricing policy protecting the interest of can reap the benefits in bull markets.
healthy competition in the industry. the unit holder is the preferred choice. You may be looking for one who can
However, on the other hand this would sail your boat during tumbling times.
also be a test of investors’ preference. FUND RETURNS: One should also take into account the
Although the fund’s return would top The past performance of the fund fund’s performance during down
the investors’ choice however, it is not reflects the fund manager’s capability markets. How much the fund asset
as simple as it appears; there are a few of rowing the boat. Stable returns over shrinks during such period? Do the
things that require deeper digging a longer period is more important then funds NAV falls in line with the market
especially in our nascent market: peaks of a short period followed by index or its peers or it falls more
trough. rapidly then the market index or its
WHAT DOES THE FUND peers? Naturally, the one who can
The asset class of the fund may
INVEST IN? perform well due to some alien
provide you decent returns in all
Does the fund invest in stocks or weathers would be the preferred
conditions and in turn the fund may
bonds? Does it invest in large, perform well. However, as soon as the choice.
medium-size or small companies? triggering conditions are no longer in
Does that fund invest in growth stocks the field the fund’s return may show PAYING TOO MUCH IN
or undervalued stocks? Does the fund nosedive effects. Take an example of
invest in bonds for income? These all from our markets, if a fund having asset EXPENSES
questions have relevance to your concentration in PSO Stock, its returns Costs matter. Fund expenses - the costs
investment goals and risk preferences. shoot up as soon as we hear the of running a fund, measured by its
Stock funds tend to involve more risk announcement of its privatisation due expense ratio - come directly out of the
then the bond funds and trading stock to market expectations of having its fund's income and can significantly
funds riskier then the stock funds pricing over its fair value. However, as dampen your return. Over time, a
having strategy to invest in soon as the government put off the seemingly small difference in expenses
undervalued and growth stocks. decision of its privatisation or the can have a big effect on your nest egg.
company is sold off below the
expected market price, the market Managers of high-cost funds have to
WHAT ARE THE FEES? would dilute its price to its fair level. earn higher returns in light of expenses
The level and method of charging load Although quiet riskier, this also give just to outperform their low-cost peers.
may also have impact on your choice. rise to an opportunity to earn good
Mind it there might be some expenses
Do you have a choice of a front-end or returns by playing with the market.
whose dilution effect to the fund’s
back-end load, or is there an ongoing
level load? A load is a commission. earnings could not be picked from the
Nevertheless, focusing too much on a
The higher the load the longer it would naked eyes, you might require to go
mutual fund's past performance is also
take to make your absolute returns in not advisable. While it's easy to get deep into the waters to see such
line with the fund returns. swept up in the latest investment trend, effects. All else being equal, it is
relying solely on past results rarely recommended to avoiding funds with
leads to success. Instead, ask yourself, high expenses.
PRICING METHODOLOGY: "Is this a good investment right now?"
Is the fund has forward pricing There may be situations where bond
mechanism or it announces the offer ACCOUNTING
funds may be outperforming the stock
and redemption prices in advance? returns. TREATMENT FOR THE
Generally, stock funds or the funds
having significant equity asset class
INCOME AND EXPENSE
The advisable thing is to review a
follow forward pricing mechanism to fund's return against the return of its ITEMS:
avoid arbitrage against the fund. stated benchmark and its peer group Being new and specialised industry,
over the most recent three- year lack of standardised accounting
On the other hand, bond funds may period. Then consider how the asset treatments / pronouncements may
advance pricing mechanism as the class as a whole has fared during this have significant impact on the fund
underlying market is not volatile and period. If the asset class has performed returns. Book returns may not
any expected move in the interest rates well recently, consider whether now is correspond to the implicit returns and
may already being digested over in the the right time to invest. may result in enronimism.
Mutual funds being specialised even in the case of very large market might not be aligned with the
industry require standardisation of cap companies limited to a single performance of your fund. In some
accounting procedures for its major company. scenarios, committees manage some
class of transactions. In certain cases, funds. So if one of the co-managers
generally accepted accounting Investing too much in the focused fund leaves, it‘s not that big a deal.
principals may provide flexibility for is exposing you to volatile returns.
presentation however, from mutual Focused funds are subject to greater
OVERLOOKING
fund's perspective it may not be the volatility than diversified funds
case. Like a fund may not defer the because they fail to completely EXCESSIVE DEMANDS ON
valuation of its securities for the year diversify security and sector risk. YOUR MANAGER'S TIME
end as it has to announce the net asset The next issue is that a successful fund
value of the underlying asset frequently
RISK CONTROLS manager could be promoted to run
or it may not adopt a certain IAS in toto multiple funds or chair multiple
Risk controls are policies such as limits
to avoid distortion in the net asset committees, or become chief
on stock or sector weights. Although,
values of the underlying assets. investment officer for the firm. It's
NBFC Rules address this issue to a
basic extent however, it is really an important to revaluate whether the
In such a scenario, the fund that adopts manager is going to be focused enough
internal risk control policy and its
the accounting policy that fairly on your fund. Start by reviewing how
effective implementation that provides
reflects the net asset value of the assets many funds your manager is
security and disciplined returns to the
would be the preferred choice in managing, and in what roles. The
investors. They set the playing field for
comparison with the book return. better money management firms give
a fund and ensure that the portfolio
Further, the matter should not be left in their best managers ample support so
manager seeks to generate returns in
abeyance. We should not wait for the they can devote sufficient time to
an efficient manner.
eruption of accounting scam. Being the managing your money.
involvement of people hard earned
Being the investor in the fund you have
money, issues should be taken up by
the SECP and ICAP more proactively.
the fullest right to learn about what THE BOTTOM LINE:
types of risk controls portfolio No doubt mutual funds are the best
managers use while exercising options tool for earning decent return with risk
FUND SIZE to buy or sell specific securities. The diversification. Entrance of new fund
Every fund category has a range of more risky or volatile the investment managers and growth of the sector
assets under management where, all category, the more important it is to would witness a number of
other factors being equal, fund have these controls in place. opportunities knocking your door.
managers have their best chance to With a number of mutual funds to
compete against their peers. In general,
NOT KNOWING WHO IS choose from, the selection process can
it's best to avoid funds with really be overwhelming. Being aware of
small asset bases. And, it's generally MANAGING YOUR these issues, should help narrow the
best to avoid small cap funds with MONEY field.
large amounts of assets under How long has the fund manager been
management. Selecting the right-size running the fund? If the fund manager About the Author:
fund is no guarantee of success, but it is new, you might want to go with a
can enhance your prospects for a manager with a longer-term track Mr. Rizwan Razzak is an Associate
better return. record. After all, your hard earned Member of Chartered Institute of
savings should be in the safe hand. A Management Accountants, UK and
PUTTING TOO MUCH IN loss of profit is bearable as against the the Institute of Chartered
loss of capital. Accountants of Pakistan. He is
FOCUSED FUNDS presently serving as Chief Financial
Focused funds concept is new to our Officer of RUSD Investment Bank
A fund's prospectus should clearly
environment due to limited market
identify who makes the investment Inc, Labuan, Malaysia.
size. However, as the size of the
decisions. Be wary of investing in a
market grows we would witness Readers are welcome to contact him
fund with a novice manager or a
emergence of focused funds. Focused at: rizwan@rusdbank.com
faceless team whose compensation
funds are limited to a single sector or
A basic building block for economic success of every In case price fluctuations of the hedged position (e.g. oil)
company is the management of the risks inherent to its could be fully offset via price fluctuations of the hedging
business activities. Risk is closely associated with uncertainty instrument (futures, options and others) a perfect hedge
and the extent to which probabilities could be attributed to would have been achieved. In reality a perfect hedge often
the occurrence of future developments FN1. With respect to represents only a theoretical possibility. One reason for this
prices the magnitude of risk could be expressed in terms of being that the price of the hedged position respectively
price volatility. underlying commodity and the price of the hedging
instrument do not move in tandem. That difference between
The prices of primary importance to each economic
the price in the physical, cash market and the price of the
enterprise are the interest rate in the capital market, prices for
goods and services sold and received, exchange rates, as hedging instrument is called the basis and the risk associated
well as the market value of the company (e.g. expressed in with it is known as the basis risk.
terms of the market capitalization of the company’s shares).
Crude oil, refined products and natural gas represent the
Techniques to manage the risk associated with the underlying commodities in the Petroleum Industry for which
fluctuations of these prices have further been developed, hedging instrument could be used.
which resulted in the creation of a variety of hedging
instruments. Futures, options and swaps, as well as forward contracts
represent the standard hedging instruments.
Hedging
A hedge basically aims at initiating a market transaction in (1) Forward Contracts
order to dispose of the risks of price volatility. The company’s Forward contracts represent over-the-counter transactions
philosophy and attitude towards risk management, trading with a varying degree of standardization. Forward contracts
and hedging is typically reflected in its Risk Management essentially represent an agreement to buy or sell a
Policies and Procedures FN2. An integrated oil company for
commodity such as oil at a specific future date. Physical
example with the entire upstream production of crude being
processed in the refinery experiences two offsetting price delivery of the oil traded is required upon agreed terms as
risks – i.e. a natural hedge - and might opt not to use stipulated in the contract. Forward contracts could be further
additional hedging instruments. Alternatively the oil indorsed and traded on to other market participants, which
company might run its up- and downstream divisions as could result in a large number of transactions known as
completely independent profit centers, which are requested Strings and Daisy Chains. As forward contracts are traded
to hedge its relevant price risk. The oil company might go for over-the-counter the risk of non-fulfillment of the contract
an alternative scenario and hedge only a fraction of the total remains. In case of a hedging instrument that trades on an
production but not 100%, which could again form part of the exchange a clearinghouse would guarantee fulfillment,
Risk Management Policies and Procedures. which provides additional liquidity for that hedging
instrument.
A competitive spot market for the underlying commodity as
well as an associated market for derivative securities forms
the basis for applying hedging technology. (2) Futures
Futures are standardized contracts, offered to the general
Markets for hedging instruments could be highly organized public while being traded over an exchange. Buyers and
such as in an exchange for stocks and commodities or sellers are connected at this exchange via a clearinghouse,
otherwise be governed by individual over-the-counter (OTC) which matches the longs (buyers) and the shorts
transactions. (sellers).The clearinghouse charges a margin for its services
but guarantees the fulfillment of the futures contract, which
The basic concept of hedging is to hedge risks originating makes futures a much easier negotiable asset. Companies
from a present transaction in the physical market by interested in trading futures contracts often interact with the
simultaneously initiating an equal and opposite position for clearinghouse via a clearing broker. Conversations between
a future transaction in the futures market. the client and broker are regularly recorded.
The futures contracts traded in the also known as trading in bought, i.e. offsetting positions are
petroleum industry are for crude oil, oil backwardation. Inverted futures traded back-to-back. A standard
products such as heating oil or markets are linked to the expectations NYMEX futures contract requires
unleaded gasoline, as well as natural of market participants for prices in the physical delivery at the end of its term.
gas futures. Other energy futures are cash market for the underlying In case the originally sold futures
also available for electricity. commodity to fall. Otherwise if later contract would not be offset and
month trade at a premium over closer bought back the physical delivery of
The principle energy futures exchanges month the market is referred to as oil would be required on the basis of
worldwide are the NYMEX (New York trading in contango, which is linked to the futures contract and the company
Mercantile Exchange or the “Merc”) the expectation of rising prices in the would have to sell oil twice, once in
and the IPE (International Petroleum cash market. the physical and once in the futures
Exchange) in London. Futures contracts market. (See Table)
are further traded on other exchanges The link of the futures to the physical
such as the SIMEX (Singapore market provides the confidence that In this example the hedger has sold oil,
International Monetary Exchange). prices on both markets tend to move in -which in the language of traders is
tandem, which is a prerequisite for a usually referred to as going short of oil
Most energy futures traded on the futures contract to serve as at hedging – and ultimately bought futures, i.e. he
NYMEX require upon expiry the instrument for the physical commodity. goes long of futures. This type of
physical delivery of the underlying transaction is also known as a short
commodity at a predefined delivery hedge. The basic aim of the short
point. The paper barrels originally
Hedging Example – Futures hedge is to protect companies such as
An oil company sells crude oil today,
purchased with the futures contract oil producers from falling prices in the
Sep. 15, for physical delivery on
consequently turn into wet barrels physical, cash market by originally
Dec.1, at prices prevailing at the date
upon the expiry date of the future. selling futures and locking in the prices
of delivery. The company is concerned
for future sales.
about falling prices and wants to lock
With the IPE alternative delivery in the price offered by a futures
methods - especially cash settlement A hedge where oil should be
contract today for deliveries in three
upon expiry of the contract as it was purchased at a future date and futures
month, i.e. Dec. 15, which is 39 $/bbl.
the case for a financial futures – are would first be bought and then sold
The company consequently sells 3-
more common. would be a long hedge. A long hedge
month futures on NYMEX on Sep. 15.
aims at protecting the buyer of oil from
Going short in futures (i.e. selling
For a futures contract requiring rising acquisition costs for oil. The
futures) thereby constitutes a contract
physical delivery (e.g. at NYMEX) the buyer intending to purchase oil in
that gives the right to sell in future at
purchaser of that contract is future consequently buys futures now
today’s price of the futures contract.
consequently not responsible for in order to try to fix the price of oil at
On Dec.1 the physical transaction
storage of the petroleum, i.e. the costs the future delivery date. At that future
takes place at a price of 39.5 $/bbl.
of carrying, up to the future point of date and the then prevailing prices the
The company subsequently has to
delivery FN3. The same could be valid oil buyer would, nevertheless, have to
close its futures position and buys
when purchasing commodities on the ultimately sell futures in order to avoid
futures at Dec.1-prices of 39.5 $/bbl as
basis of a forward contract. physical purchase upon expire of the
well. Futures for same underlying,
futures contract.
contract quantity are first sold and then
Prices of contracts on a forward basis
plotted against time represent on a
The following table should visualize this concept:
graphical basis the forward curve. The
forward curve, nevertheless, not only Physical Hedging
includes costs of carrying but also the Cash Market Futures Market
price expectations of the market Credit/(Debit) Credit/(Debit)
participants. Today: Sep.15 Sell at 39 $/bbl
If futures prices for closer month are Delivery: Dec.1 sell at 39.5 (buy at 39.5
higher than for later month – e.g. May $/bbl $/bbl)
35 $/bbl, June 30 $/bbl - the market is
said to be inverted. Even though costs Hedging Costs (0.5 $/bbl)
of carrying would point towards rising
prices the overall price decline is what Net Sales Price 39 $/bbl
causes an inverted market, which is
ADP & EFP hedge ultimately represents a highly original margin respectively a deposit
The buyer and the seller of the futures risky form of speculation but not a is a payment the clearinghouse could
contract could agree upon an hedge. request from its customers in order to
Alternative Delivery Procedure (ADP), prove and provide financial security. If
which deviates from the standardized In contrast to a hedger a speculator not required the deposit would be
futures contract in which case the enters into open position trading. The returned (including interest) at the
clearinghouse would not generally speculator for example sells at 39 $/bbl close out of the futures contract.
in the futures market and speculates on During the trading of the futures a
guarantee for fulfillment of the
buying back later at a lower price, e.g. difference between the original cost of
contract.
38 $/bbl leaving him with a profit the contract and the daily closing or
margin of 1 $/bbl. Position trading settlement price arises. That difference
In case the exchange of an equal and
consequently aims at taking advantage is known as the variation margin. A
opposite position is directly achieved
of changes in absolute prices of a negative margin represents a loss a
between buyer and seller during the futures contract. positive margin a profit. The hedger
trading period of the future the holding the futures contract has to pay
associated transaction is known as Spread trading of futures represents the negative margin on a daily basis. In
Exchange of Futures for Physicals another trading activity for a case payment was not received funds
(EFP). The EFP contract trades futures speculator, which aims at profiting provided by the deposit would be
for physicals under conditions other from changes in relative prices of utilized. The clearinghouse receives all
than what is defined with respect to the futures contracts. Unlike with position negative margins and distributes it to
delivery point of the exchange traded trading - where the speculator goes the holders of the positive margins on a
future. An EFP agreement shows some either short or long in futures - in case daily basis. The daily balance for the
similarity with an Alternative Delivery of spread trading a short and a long clearinghouse is consequently always
Procedure (ADP), which is a provision position is acquired. These positions zero.
in the futures contract that allows for are held in different futures contracts
delivery conditions in alternation to relating to same or similar underlying All positions in the futures markets are
the futures contract. Whereas with an commodities. The spread consequently consequently valued daily on the basis
EFP a transfer of title, nevertheless, comprises of two opposite and equal of market clearing prices, i.e. they are
takes place such transfer is not part of positions in the futures market. The marked-to-market.
an ADP. speculator could gain or loose once
the relative prices of the futures Contracts such as futures and options
The IPE has successfully developed a contract change FN4. are known as derivative securities or
Brent crude oil future, which requires derivatives as they derive their value
physical delivery based on an EFP with The market participants in the futures from an underlying asset or commodity
an option for a cash settlement. The market that are required for a company such as for example crude oil.
Brent futures contract with a combined to finalize its hedging transaction are
cash settlement plus EFP mechanism usually not the speculators but hedgers (3) Options
for deliveries is meanwhile traded on searching for an opposite coverage. Options are standardized contracts
the SIMEX, as well as on the Merc that could be traded via an exchange
(NYMEX). A third group of market participants or as an over-the-counter (OTC) traded
could be the arbitrageurs, searching to
option. Options on physical assets are
profit from price differences for same sometimes referred to as real options.
Hedgers, Speculators & products in different markets. Arbitrage Exchange traded energy options are
Arbitrageurs is an inconsistency that should not generally options on an underlying
The basic concept of hedging is to exist in perfect markets. However, in futures contract. On the NYMEX
offset a position in the physical market case of less than perfect markets
options on all energy futures contracts
with an equal and opposite transaction arbitrage provides a riskless (risikolos) are available. The IPE offers options on
in the futures market. profit opportunity thereby pushing Brent crude and gas oil futures. A non-
prices towards perfect market standardized OTC option could
To otherwise buy oil in the physical conditions. otherwise be based on any energy
and the futures market or to sell vice market.
versa is sometimes humorously Costs of Trading Futures
referred to as a Texas hedge. Rising or The costs of trading futures for the Options are short-term contracts with a
falling prices consequently result in hedger on an exchange such as the maturity of for example up to half a
this scenario in gaining or loosing NYMEX basically comprise of a year. For crude oil and oil products
twice, as there are no equal and deposit, a variation margin and the futures and options are usually traded
opposite positions involved. The Texas broker’s commission. An initial or at the same exchange.
Types of Options out-of-the-money unless the value in would only occur when prices in the
Different types of options could be the physical market coincides with the physical market are higher than the
distinguished further such as American strike price (here USD 35 bbl), which strike price of the call and the buyer of
or European options. An American refers to an option trading at-the- the option requests fulfillment of the
option could be exercised during each money. contract. By selling the call the
day of the validity of the option at producer consequently receives a call
prices of the day, whereas a European During the period between issuance premium but has given up the upside
option could be exercised only at the and expiry of the option a time period potential beyond the strike price of the
due date. Asian options further provide during which a potential for favorable option. (III) Assuming now a consumer
the right to execute the option during movements of oil prices in the physical who wants to buy oil at a future date
every day of its term but at an average market – or prices of the underlying and intends to lock in prices. The
price with reference to a stated period. commodity in general - exists. The typical long hedge for the consumer in
value associated with this potential is this case would be to buy calls in order
The main difference between options the extrinsic value of the option. Once to be protected against rising prices.
and futures is that options provide the an option has expired that extrinsic
(IV) Alternatively the consumer -
right but no obligation to buy or sell. value is zero and only the intrinsic
intending to purchase oil in the
For that right an option premium has to value of the option remains.
physical market at a future date - could
be paid. sell puts and receive an option
Option pricing models have further
been developed in context with the premium for assuming a granter’s
The purchaser of an option is thereby position. In case of rising prices the
called taker whereas the seller is called Black-Scholes Model originally
designed for financial, stock markets taker of the option would further not
granter or writer. An option could
FN5. Black further adapted this model execute his option rights. Only in case
further constitute the right to sell,
– known as the Black ’76 Model - so as of falling prices the put would have
which is a put option or to buy in case
to evaluate options on forward to be fulfilled. When selling puts the
of a call option. The combinations of
buy/call, buy/put, sell/call and sell/put positions such as in the commodity consumer consequently limits his
are the four basic positions of option markets. The purpose of option pricing possibility to fully participate in the
trading. Straddles, strangles and is to calculate a theoretical, fair value downside potential associated with
spreads further represent combinations that provides in the long run for a falling oil prices.
of call and put options - or just calls break even between traders FN6.
respectively just puts - with varying (4) Oil Price Swap
contract terms. Complexly structured Hedging Examples – An oil price swap is an instrument that
options, - which do not represent a
usual or standardized option contract – Options is designed to provide protection
(I) An oil producer intends to sell oil – against fluctuating prices.
are also referred to as exotic options. In
trading terminology the converse of an i.e. he goes short in oil - at a future date
exotic contract would be a vanilla or and wants to lock in a price of 35 $/bbl Swaps are no classical hedging
plain vanilla position. in order to be protected against falling instruments in the sense of establishing
prices in future. Consequently the equal and opposite transactions in the
producer goes long in options and cash and futures market but could
Option Value buys a put during the current period provide the price stability required for
The option premium – describing the
with a strike price of 35 $/bbl. In case hedging.
total value of an option – consists of an
prices rise above the strike price of the
intrinsic value and a time value also
option he could let the put expire and Price swaps represent an agreement
referred to as extrinsic value.
sell at the higher price in the physical between two parties to interchange a
The intrinsic value describes the value market. That short hedge – going long
predetermined series of payments.
of an option in case it could be in the current period in the futures
immediately exercised. When prices market but short in the physical market
for Brent crude oil in the physical for future deliveries - otherwise Plain Vanilla Swap
market were for example USD 35 bbl provides the producer with the The exchange of payments between
and the strike price of a call option was opportunity to fully participate in any seller and buyer of an oil price swap
USD 34 bbl – respectively USD 36 bbl upside potential by paying an option consists of a fixed amount, Af, and a
for a put option - the intrinsic value of premium in return. (II) An alternative variable amount, Av. The balance of
the option was USD 1 bbl. These strategy for the producer intending to
the two amounts determines the actual
options are further described as in-the- sell oil in future in the physical market
could be to sell a call at 35 $/bbl for payout, which is settled in certain
money due to their positive intrinsic
value. Otherwise – in case an option – which he could receive a call intervals such as every month or
has no intrinsic value it is known as premium. A pay out for the producer quarter.
The seller of the price swap – usually a While over-the-counter transactions Literature / Footnotes:
trading company or bank – agrees to such as forward contracts are linked to FN1: For a more detailed discussion on
pay a fixed amount, Af, to the buyer of the fulfillment of the contract in kind uncertainty (i.e. knowing the
the swap - an oil company - for which an oil or gas price swap otherwise does possibility of a future outcome but not
the seller receives a premium. not demand physical deliveries. the probabilities) and risk (i.e. knowing
Price swaps are usually long term the probabilities) and the associated
That fixed amount, Af, is the product of agreements with a typical duration in management strategies see e.g.
an agreed locked-in price, P, and a M.Hamberg, “Strategic Financial
the order of one to ten years.
notional quantity of oil, i.e.: Af = P * Qn. Decisions”, Liber AB, Malmo, 2001, p.
91-118.
Price swaps consequently protect the
The variable amount, Av, is paid by the oil company on a long-term basis from FN2: A description of the concept of
oil company to the trader and is the
prices falling below the locked-in price Risk Management Policies and
product of an indexed price, Pi, and Procedures is provided in J. Wengler,
– e.g. 30 $/bbl –, as the trader of the
same notional quantity of oil, i.e.: Av = “Managing Energy Risk: a
swap has to compensate the company
Pi * Qn. nontechnical guide to markets and
for the loss occurred. When prices
trading”, Penn Well, Tulsa, 2001, p.
The daily average of WTI (West Texas move otherwise above the lock in
47- 69.
Intermediate) futures contracts on the price the oil company generates the
NYMEX during a stipulated period full sales value in the physical market FN3: A brief, quantitative description
could serve as an example of such an but has to pay to the trader the surplus of commodity futures and the
indexed price. price generated with reference to the associated costs of carry is provided by
agreed upon, notional quantity of oil. Y.-D. Lyuu, “Financial Engineering and
The type of oil price swap described Computation. Principles, Mathematics,
above is also referred to as a plain Swap Agreements could further be Algorithms”, Cambridge University
varied and designed so as to express a Press, Cambridge/UK et al., 2002, p.
vanilla swap FN7.
166-67.
floor or collar agreement. An oil price
Terms and Types of Swaps floor represents an agreement whereby FN4: For an overview on speculation
The buyer and the seller of an oil price the oil company ensures a minimum and spread trading see: S. Errera, S. L.
swap could be individual companies oil price by concluding a contract with Brown, “Fundamentals of Trading
in the petroleum industry. An oil a trader who in return for that Energy Futures & Options”, 2nd ed.,
company as buyer of the swap and a guarantee receives an upfront Penn Well, Tulsa, 2002, p. 53-74.
trading company respectively bank as premium. In case the company wants
to be protected against market prices FN5: An introduction to calculating a
the seller provides an alternative
falling below a floor price but also risk premium on the basis of the
combination. Oil Company and trader
Capital Asset Pricing Model, as well as
swapping fixed and floating liabilities, intends to save on that upfront
to the valuation of options in the
nevertheless, represent the standard premium the oil company could enter financial market is provided by e.g. R.
scenario. into a collar contract with the trading Pike, B. Neale, “Corporate Finance
company. This type of agreement and Investment Decisions and
Oil price swaps usually are non provides for a floor price as well as a Strategies”, 4th ed., Prentice Hall /
standardized, over-the-counter ceiling price above that the company Pearson Education Ltd., Harlow et al.,
transactions while futures and options passes on all upside to the trader. 2003, p. 331-366 and 398-425.
are exchange traded. Other types of
swaps are occasionally exchange FN6: For a brief introduction to option
A type of swap that is of further
traded in the futures market. Options pricing in context with commodities in
importance to the downstream the energy markets see e.g.: M. Lynch,
on swaps – known as swaptions – are petroleum industry is the refining
sometimes issued further. “Options Strategies” in J.E.Treat (ed.),
margin swap. This sort of swap aims at “Energy Futures Trading Opportunities”,
simultaneously hedging the price of 3rd ed., Penn Well, Tulsa, 2000, p.
For swaps, which are not exchange
the refinery output products as well as 178-194.
traded no clearinghouse guarantees for
the price of input crude. Consequently
the fulfillment of the contract. A high FN7: For an overview of other types of
crude is purchased and products are
rating and financial standing of the swap agreements in the energy market
companies involved consequently sold for an equivalent forward period,
see C. Mason, S. Jones, “Swaps”, in:
represent a prerequisite for trading which contributes to locking-in the
“Managing Energy Price Risk”, Risk
price swaps. refinery margin. Publications, London, 1995, p.81-96.
Hedge Funds
Challenging Conventional Investment Management
Mohammad Shoaib Jan Memon, ACA, ACCA
The hedge fund industry has experienced enormous growth Hedge funds strategies
in the last several years growing by some estimates from as Hedge funds employ variety of investment strategies, some
few as 300 funds in 1990 to more than 8,700 funds today. of which use leveraging and derivatives while others are
They have become highly visible in the global markets and more conservative and employ little or no leverage. Many
the financial press, and are stated to command up to $950 hedge fund strategies seek to reduce market risk specifically
billion in capital. The article briefly describes a hedge fund, by shorting the equities or derivatives. Their returns over a
investment strategies and performance analysis supporting sustained period of time have outperformed standard equity
the importance gained by hedge funds in global financial and bond indexes with less volatility and risk of loss than
markets. equities carry.
Emerging Markets:
Difference between mutual funds and Invest in securities issued by businesses and/or governments
hedge funds of countries with less developed economies that have the
The essential difference between the two asset classes is potential for significant future growth.
what can be called as "investment freedom." Essentially,
Macro:
hedge funds can invest in anything they want. On the other
Aim to profit from changes in global economies, typically
hand, mutual funds are highly regulated and have very
brought about by shifts in government policy which impact
specific investment guidelines. Typically, with mutual funds, interest rates, in turn affecting currency, stock, and bond
the investor knows exactly what he is getting into and markets.
therefore are one dimensional. However, the same can't be
said of hedge funds. The fact that they can invest in many Market Neutral - Arbitrage:
different strategies, ideas, or assets allows hedge funds to Attempt to hedge out most market risk by taking offsetting
produce positive returns in any investment climate. positions, often in different securities of the same issuer.
However, this freedom also makes it that much harder for the Focus on obtaining returns with low or no correlation to both
average investor to understand hedge funds. the equity and bond markets.
Operational risk management is not a new concept. and Supervision of Operational Risk" issued in December
However, it was not until the turn of the century that the 2001. The framework analyses the risk management, which
stakeholders especially the regulators started to pay close is generally seen as a continuous process, into the following
attention to the operational risk management practices identifiable steps:
adopted by the banks. Especially the 9/11 acted as a catalyst
in generating interest in the operational risk management.
The dreadful incidence of 9/11 unearthed the reality that in
general the firms had adopted a somewhat laid back
approach to operational risk management; many did not
have a comprehensive disaster recovery plan, some did not
have enough geographical space between their offices, some
lacked redundant technology and others (including New
York Stock Exchange) did not have the physical back up
infrastructure.
Source: Basel Committee on Banking Supervision, 2001a, Operational Risk, Consultative Paper 2 January.
The risk identification process must be ongoing and open to Tools that banks use to identify the operational risk include:
review based on new risks posed by a changing environment
or changing aspects of the products and services. Best w Self or risk assessment;
practice is to have the Board of Directors' approval for all the a bank assesses its operations and activities against a
new products and services and a periodic review of the menu of operational risk events. This process is
existing practices by internal and external audit, moreover, internally driven and often incorporates checklists and/or
increasing number of banks have established dedicated risk workshops to identify the strengths and weaknesses of
management units which have a direct reporting line to the the operational risk environment.
Board of Directors.
w Risk mapping;
In a consultative paper on Operational Risk issued by the in this process, various business units, organisational
functions or process flows are mapped by risk type. This
Committee in 2001 the operational risk has been categorized
exercise can reveal areas of weakness and help prioritise
into the above seven categories with indication of their
subsequent management action.
frequency and severity based on the data collected.
w Key risk indicators;
The above table classifies risk into broad categories and risk indicators are statistics and/or metrics, often
definition of low medium and high frequency across financial, which can provide insight into a bank’s risk
different risk types may not be consistent (i.e. "low" position.These indicators should be reviewed on a
frequency for internal fraud is not equal to a "low" frequency periodic basis (often monthly or quarterly) to alert banks
of damage to physical assets!), however, a bank may use the to changes that may be indicative of risk concerns.Such
above table as a starting point for identification the potential indicators may include for example the number of failed
risk in its business or each business line. Frequency and trades,staff turnover rates the frequency and/or severity
severity data given here may assist the management in of errors and omissions.
focusing on specific risks and assessing the likely impact of
these risks on their bottom line, however, in all such analyses w Threshold/limits; and
the peculiarities of individual businesses should be given typically tied to risk indicators, threshold levels (or
due considerations. The Committee emphasized that low changes) in key risk indicators, when exceeded, alert
frequency high severity events should be given due management to areas of potential problems.
significance in identification process - bear in mind that
Barrings went down because of an internal fraud and various w Scorecards
problems were identified in business practices adopted by these provide a means of translating qualitative
Enron during the bankruptcy proceedings! Although, in these assessments into quantitative metrics that can be used to
cases actual loss was driven by the market or credit risk allocate economic capital to business lines in relation to
exposures, taking on such risk could have been avoided in a performance in managing and controlling various
low operational risk environment. aspects of operational risk.
Measure the GI = annual gross income, where Within each business line, gross
positive, over the previous three years income is a broad indicator that serves
operational risk n = number of the previous three years as a proxy for the scale of business
Some bank managers argue that due to operations and thus the likely scale of
the lack of consistent and reliable data for which gross income is positive
operational risk exposure within each
and suitable statistical models, it is a a = 15%, which is set by the
of these business lines. The capital
futile exercise to attempt to measure Committee, relating the industry wide charge for each business line is
the operational risk. They believe that level of required capital to the industry calculated by multiplying gross
the focus should be on managing the wide level of the indicator. income by a factor (denoted beta)
risk based on the qualitative assigned to that business line. Beta
assessments rather than attempting to Gross income is defined as net interest serves as a proxy for the industry-wide
measure or quantify it statistically or income plus net non-interest income. It relationship between the operational
through proxy measures. Others are of is intended that this measure should: risk loss experience for a given
the opinion that measurement of business line and the aggregate level of
operational risk should be the part of gross income for that business line. It
(i) be gross of any provisions (e.g. for
overall risk management framework should be noted that in the
unpaid interest); Standardised Approach gross income is
and attempts should be made to
(ii) be gross of operating expenses, measured for each business line, not
measure the risk in order to facilitate
communication of risk to investors and including fees paid to outsourcing the whole institution, i.e. in corporate
regulators and to provide meaningful service providers; finance, the indicator is the gross
information to the stakeholders (iii) exclude realized profits/losses from income generated in the corporate
the sale of securities in the banking finance business line.
allowing them to compare the risk
profile of the bank with its peers and book; and
The total capital charge is calculated as
over different periods. (iv) exclude extraordinary or irregular the three-year average of the simple
items as well as income derived summation of the regulatory capital
The Basel Capital Accord II requires from insurance. charges across each of the business
the banks to quantify their exposure to lines in each year. In any given year,
operational risk and presents three negative capital charges (resulting from
This methodology is the most simple of
methods to calculate operational risk negative gross income) in any business
capital charge (i.e. quantify the the three methodologies presented and
line may offset positive capital charges
operational risk). Banks have the there are no prerequisite conditions for
in other business lines without limit.
option to choose any of the following a bank to use it. This is based on the However, where the aggregate capital
methods considering their individual premises that the level of revenues of a charge across all business lines within a
sophistication and risk sensitivity and bank can be used as a proxy to assess given year is negative, then the input to
subject to their respective regulator's the complexity of its operations and the numerator for that year will be zero.
approval:2 thus can be used to estimate its Those banks that are unable to
operational risk. Insurance revenues disaggregate their gross income into the
w Basic Indicator Approach other six business lines can aggregate
have been specifically excluded from
w Standardised Approach (and the total gross income for these six
the computation recognizing the fact business lines using a beta of 18%.
Alternative Standardised Approach)
w Advanced Measurement Approach that the operational risk of insurance
business is very different from that of The total capital charge may be
Basic Indicator Approach banking business. expressed as:
Under this methodology the capital
charge is equal to the average over the w Standardized Approach (and KTSA={∑years 1-3 max[∑(GI1-8 x ß1-8),0]}/3
previous three years of a fixed Alternative Standardized Approach)
Where:
percentage (denoted alpha) of positive
annual gross income. Figures for any KTSA = the capital charge under the
In the Standardised Approach, banks'
year in which annual gross income is activities are divided into eight Standardised Approach
negative or zero should be excluded business lines: GI1-8 = annual gross income in a given
from both the numerator and year, as defined above in the Basic
denominator when calculating the w Corporate finance indicator Approach, for each of the eight
average. The charge may be expressed w Trading & sales business lines
as follows: w Retail banking ß1-8 = a fixed percentage, set by the
w Commercial banking Committee, relating the level of required
KBIA = [(GI1…n xa)]/n w Payment & settlement
Where w Agency services capital to the level of the gross income for
KBIA = the capital charge under the w Asset management each of the eight business lines. The values
Basic Indicator Approach w Retail brokerage of the betas are detailed below.
Business Lines Beta Factors Under the ASA, banks may aggregate retail and commercial
Corporate finance (ß1) 18% banking (if they wish to) using a beta of 15%. As under the
Standardised Approach, the total capital charge for the ASA
Trading and sales (ß2) 18% is calculated as the simple summation of the regulatory
Retail banking (ß3) 12% capital charges across each of the eight business lines.
Commercial banking (ß4) 15%
Advanced Measurement Approaches (AMA)
Payment and settlement (ß5) 18% Under the AMA, the regulatory capital requirement will
Agency services (ß6) 15% equal the risk measure generated by the bank's internal
Asset management (ß7) 12% operational risk measurement system using the quantitative
and qualitative criteria. Use of the AMA is subject to
Retail brokerage (ß8) 12%
supervisory approval. Diversification benefits might be
factored in under certain circumstances and allocation of risk
The Alternative Standardised to subsidiaries also needs to be supported by empirical
evidence and approved by the relevant supervisors.
Approach ("ASA")
A bank may be permitted by its supervisor to use the ASA if
The appropriateness of the allocation methodology will be
it can satisfy its supervisor that this alternative approach
reviewed with consideration given to the stage of
provides an improved basis by, for example, avoiding double
development of risk-sensitive allocation techniques and the
counting of risks. However, once a bank has been allowed to
extent to which it reflects the level of operational risk in the
use the ASA, it will not be allowed to revert to use of the
legal entities and across the banking group. Supervisors
Standardised Approach without the permission of its
expect that AMA banking groups will continue efforts to
supervisor. The Committee does not envisage that large
develop increasingly risk-sensitive operational risk allocation
diversified banks in major markets would use the ASA.
techniques, notwithstanding initial approval of techniques
Under the ASA, the operational risk capital
based on gross income or other proxies for operational risk.
charge/methodology is the same as for the Standardised
Approach except for two business lines - retail banking and
This approach provides maximum facility to the banks that
commercial banking. For these business lines, loans and
have enough resources to implement sophisticated systems
advances - multiplied by a fixed factor 'm' - replaces gross
to gather and process operational risk data and demonstrate
income as the exposure indicator. The betas for retail and
that they have the capability to reasonably estimate the
commercial banking are unchanged from the Standardised
operational risk based on actual risk factors rather than
Approach. The ASA operational risk capital charge for retail
proxies. Robustness of statistical techniques currently used to
banking (with the same basic formula for commercial
model the operational risk is questionable as these suffer
banking) can be expressed as:
mainly from a lack of sufficient real life data against which a
model can be tested. A bank may benefit (or is most likely to
KRB = ßRB x m x LA RB benefit) from implementation of such statistical models as it
Where can achieve a lower capital charge for operational risk,
KRB is the capital charge for the retail banking business line however, due to the resource requirements it is beyond the
ßRB is the beta for the retail banking business line reach of most of the smaller to medium sized banks and thus
LARB is total outstanding retail loans and advances (non-risk puts them in a disadvantaged position compared to other
weighted and gross of provisions), averaged over the past giant players in the market.
three years
m is 0.035
Monitoring the Operational Risk
For the purposes of the ASA, total loans and advances in the Monitoring the risk involves regular reports to the adequate
retail banking business line consists of the total drawn level of management e.g. daily reports of processing errors to
amounts in the following credit portfolios: retail, Smal and line managers, weekly/monthly summary of operational
Medium Entrprises (SMEs) treated as retail, and purchased effectiveness and efficiency to department heads,
retail receivables. For commercial banking, total loans and monthly/quarterly assessment of actual and potential losses
advances consists of the drawn amounts in the following due to operational errors (including internal audit reports)
credit portfolios: corporate, sovereign, bank, specialised and external/regulatory reports should also be circulated to
lending, SMEs treated as corporate and purchased corporate senior management and board of directors. Board should
receivables. The book value of securities held in the banking also review all the related reports submitted to bank's
book should also be included. supervisors.
Reports can be quantitative or service provider for any part of its added together to arrive at the overall
qualitative in nature e.g. sensitivity operations it should have policies and risk measure of the bank in
analysis, results of self assessment procedures to ensure it is not exposed standardized approach which implies
surveys, internal audit assessments or to significant risks of the service that the diversification of the revenue
quantitative data on errors trends etc provider. Such policies may include streams has no impact on operational
and should clearly communicate the service provider selection criteria, due risk of the bank; an assumption that
risk levels to the management and diligence procedures before selection might not be considered theoretically
board. With additional requirements of and ongoing monitoring of the sound by many.
more disclosure to the investing public activities of the service provider,
it is increasingly important to have regular performance reviews and Basel II envisions a more active role of
adequate monitoring systems in place clearly documented service levels the local bank supervisors in
that can generate reliable timely agreements etc. operational risk management and
information for internal and external banks are required to obtain approvals
use. Committee of Sponsoring Organizations of their supervisors for adopting any of
of the Treadway commission ("COSO") the suggested measurement
Controlling the has developed a framework for internal approaches. Supervisors are also
control which can provide a good required to monitor the banks to
Operational Risk reference point for establishing
As the risk cannot be eliminated, ensure they are correctly applying the
adequate system of internal control. selected approach. However, most of
management attempts to reduce it to However, internal controls should be
an acceptable level. It can accomplish the regulators, especially those in the
highly tailored to suit the business developing countries, do not have the
this by either insuring it internally or needs and operational facts of
transferring it to an external party (in capability and resources to carry out
individual bank. the task which may lead to divergent
which case it exchanges its own
operational risk with a third party risk) practices within a marketplace and
in the form of an outsourced operation Issues and Implications of make it an uneven playing field.
or buying insurance on employee the Basel II
infidelity. Opting to handle risk Basel II marks a significant milestone in More practical implications of the
internally or externally is a management of operational risk as it Basel II involve the real business
management decision based on the forces quantitative measurement of the impact on small banks especially those
specific circumstances of the business risk. However, it has been criticized for in underdeveloped countries. Large
and management style. For example sophisticated banks with resources to
its simplistic approach to a
most banks run large internal control implement the advanced measurement
significantly complex problem. Use of
departments while fund managers approach will be able to measure the
gross revenues as an indicator of
outsource almost all data processing to operational risk with increased
operational risk (as suggested by basic
external service providers. precision using better indicators of risk
and standard approaches) is not quite
than revenue or advances portfolio.
However, most of the operational risks acceptable to many risk managers and
These banks will be in a position to
have to be managed internally thus the use of standard beta factors to
keep their operational risk at a low
management invests significant time measure risk tends to ignore the
level notwithstanding their revenues or
and resources to internally ensure that differences of quality of earnings
portfolio while for smaller banks
the operational risk is within among different banks. Alternative
increase in revenue or advances
acceptable levels. This requires a Standardized approach does allow
portfolio will mean an automatic
system of regular compliance review banks to use gross advances as a proxy
increase in operational risk! This
and sufficient documentation of for risk in their retail and corporate
would put the smaller banks in a
approval and authorization to ensure business lines but even this does not
disadvantaged position and restrict
accountability. Control activities quite resolve the problem for banks
their ability to lend money and
should be considered as part of the that see themselves at a disadvantaged
generate revenues for per unit of
operating/business processes of the position compared to ones that can use
capital compared with their larger
bank and should involve all level of advanced measurement approach and
counterparts. Some see this as a force
personnel. Management should ensure use their own indicators and measures
that would catalyze the merger and
adequate segregation of duties and pay of risk.
acquisition activity in the banking
due attention to operational
sector over the next few years and may
disruptions such as information system Furthermore, the risk measures of
failures etc. If the management uses a harm local institutions.
various business lines are simply
DISTORTIONS IN AN INVESTOR
FRIENDLY BUDGET ? Adnan A. Mufti, ACA
It is rare that the business community in Pakistan happens to for such products. For sometime this provision was made
be a key advocate of the Government and more particularly applicable to importers but this time, it has again restricted
of Central Board of Revenue (the Board). It is but, happening only to manufacturers.
today. The other day when I was attending a Post Budget
Seminar jointly hosted by the Federation of Pakistan The ‘retail price’ vehicle under section 2(27) of the Act read
Chamber of Commerce & Industry (FPCCI) and Karachi Sales with 3rd Schedule thereof is a distortion of Value Added Tax
Tax Bar Association, I was amazed to hear a key business (VAT) concept. The idea is to recover the entire tax leviable
leader of the apex trade body carrying compliments for the
on a particular product from the manufacturer instead of
Board and saying; “I was wrong in my early perception. CBR
is an angle”. following the VAT machinery and recovering the said tax
from all sectors of the supply chain and thus documenting
Undoubtedly, the businessmen have reasons to be jubilant the economy till retail level.
over the taxations measures announced in the Finance Bill
2005. With the textile and leather industries getting the much Now, induction of consumer items like Toilet & laundry
desired breathing space which was now perhaps overdue in soap, Detergents, Shampoo, Toothpaste, Shaving cream,
the post WTO regime – the zero rating of sales tax on the Perfumery and Cosmetics, Biscuits, Confectionery, Tea,
entire chain of products, the much talked about relief has Powder drinks, Milky drinks, Footwear confirms that the
been provided by the Government. Government has miserably failed to extend the tax net to the
intermediaries namely, distributors, wholesalers and retailers
Besides zero rating of 5 major products, other major and therefore decided to make the manufacturer the single
announcements of the Finance Bill 2005 were extension of escape goat. This manifests we are moving again in the
time limit for adjustment of input tax from 3 months to 12
reverse gear.
months, reduction in time limit for maintenance of records to
3 years, fixation of time limit of 90 days for the Collectors to
dispose refund applications filed under section 66 and Input Tax Carried Forward
admissibility of payments made through credit cards for the As a, probably, biggest uncomprehending move, the benefit
purposes of section 73 of the Sales Tax Act, 1990 (the Act). of carry forward of input tax has been withdrawn and now
the taxpayers would need to seek for refunds for so much
Despite the aforementioned incentives announced in the input tax as it left after adjustment of output tax for a tax
Finance Minister’s Speech, the climax cannot be called as period. This reflects that there remains a hidden hand in the
over until we actually come across the Budget Documents
and the relevant notifications. As soon as I saw the policy corridors of the Revenue Authorities which desires the
underlying data, I was confirmed that on the contrary, the taxpayers to continue fighting the tax machinery and do not
taxation amendments would make the implementation even focus on business and trade.
more difficult and perplexed. That exactly happened later
on. Immediately few days after the Budget was announced The biggest drawback of the amendment, besides the hide
amid thumping applause form the business community, the and seek game usually involved in refund processing, lies
Budget which was initially termed as “Investor Friendly where the excess input tax on purchases / imports is not
Budget” started receiving severe criticism from taxpayers, refunded to the taxpayer on time and he also makes the sales
who ascertained the actual substance after settling the dust. of relevant goods on credit. At this point of time, the taxpayer
would surely suffer double taxation – a concept never
In the ensuing paragraphs, we shall look upon various entertained by the modern VAT theories. As another
aspects of, what we reckon as, major distortions of this ambiguity, the Refund Rules do not suggest procedures
Investor Friendly Budget: which would be followed for processing and sanctioning
applications for excess input tax. In the wake of the potential
Extension of 12 more items problems including the time limit within which the relevant
under 3rd Schedule refunds would be paid to the registered persons, it is highly
The Third Schedule to the Act specifies items which are suspected taxpayers would resort to ‘tax planning’ for
charged to tax at the retail price fixed by the manufactures avoidance of excess input tax.
Disposal of Cases by mandatory payment of 15% in section rendered by banks and financial sector
45B should be withdrawn forthwith. were proposed to attract Central Excise
Collector (Appeals) Duty, adjustable under VAT mode.
By virtue of fresh amendment, the However, with the reported late
Collector (Appeals) has been bound to Tax Refunds minute intervention of Governor State
pass orders within 90 days from the The Finance Act 2005 has prescribed a
Bank of Pakistan, the move was
date of filing of appeal or equally maximum time limit of finalisation of
deferred till a ‘reasonable time’.
extended period. In our view, this refund applications under section 66
amendment can only become effective as 90 days from the date of filing the
Services contribute a sizable portion of
and fruitful if the aforesaid time limit is relevant claim. It is imperative that a
our GDP. Hence, there is a need for a
made as a directory provision instead corresponding explicit provision is
proper and thoughtful study before
of mandatory. To facilitate this process, added to the statute whereby delayed they are brought under the Service Tax
reference could be made to various refunds may carry 6% interest to the Regime. The facts, however, depicts a
judgments of Customs, Excise & Sales taxpayer if his claim filed under section very bleak picture on the contrary.
Tax Appellate Tribunal whereby the 10 or 66 are not finalized within 90
Appellate Tribunal has taken days. These unambiguous wordings of In the year 2000, eleven services were
cognizance of late decisions by the section 67 are intended to bring brought under the Sales Tax Regime
officers of CBR and held that revenue desired relief to the taxpayers. through Provincial Ordinances
officers were bound to dispose of the promulgated by respective provinces.
case within the prescribed time. Secondly, a significant inconsistency Till the year 2004, there was a total
and disparity between section 34 and chaos with respect to taxability of
section 67 of the Act. In accordance subject services, adjustment of relevant
Mandatory Payment of with section 34, a registered person is inputs against output tax of Federal
15% tax penalized for additional tax @12% or Legislature, value of services, etc. The
As a clear deviation of what is claimed 18% p.a if he fails to pay off the tax only hope emerged in the year 2004
to be taxpayers’ friendly policies, the liability on time. On the other hand, when Special Procedure Rules 2004
Office of Collector (Adjudication) has failure of the department to pay off the were enacted and specific definitions
been dismantled thereby making the due tax refunds would only cost it 6% of taxable services, value of service,
Office of Collector (Appeals) as the p.a. It is proposed that the interest rate time of service, levy and other allied
forum where first stage appeals would on delayed refund be enhanced to matters were notified.
lie. To make the things more complex atleast 12%.
and cumbersome, the taxpayers would Inspite of such promulgation, various
be required to make a mandatory Tax Return for Retailers provisions of Service Tax are self
payment of 15% of the impugned Since the year 2004, the Retail Tax is contradictory. For example, the
principal tax before preferring such collected in terms of the Special definition of the term ‘value of service’
appeal to Collector (Appeals). It would Procedures Rules which require a has been defined to mean “Gross
not be out of context to mention that in minimum value addition of 10% on amount charged or the consideration
few case relating to Income Tax, the purchases a retailer makes in a in money received by the service
superior courts have held that first particular tax period. No inputs are provider from the clients or customers
stage appeal cannot be burdened with allowed anymore to such retailer, as or members for providing or rendering
any fees. the tax paid becomes the final taxable services”.
discharge of his liability. However, a
It is worthwhile to note that the perusal of the tax return prescribed for A plain reading of the definition would
mandatory payment of 15% of alleged retailer would reveal that a specific deduce the apparent conflict hidden in
liability before preferring appeals was Column No. 11 for refund has been the definition. Gross amount charged
done away with in Income Tax prescribed, which is complicating the to customers could, at times, be
Ordinance 2001 vide Finance Act stream. It is, therefore, imminent that different than what the service provider
2004. However, the corresponding the tax return be modified to bring it in receives from them. For instance, a
provision, as contained in section harmony with the Special Procedure. service provider could bill his
45B(4) of the Act, is still very much customer for Rs. 10,000 (excluding
intact and applicable and has now sales tax). However, he might end up
made a significant place in the statute. Service Tax in recovering Rs. 8,000 (excluding
The government is making all possible
sales tax) from his client. What would
It is imperative that, in order to efforts to bring the services in the tax
be the value of taxable services
streamline fiscal laws and to provide net. In the original draft of the Finance
keeping in view the aforesaid situation
cheap and speedy justice, condition of Bill 2005, the financial services
in consideration?
Secondly, a proviso of the term ‘value b) The last sentence of Rule 110 Based on our understanding of
of service’ asserts that in case the prescribe that “no tax shall be law as aforesaid, we understand
consideration for providing taxable payable at the time of issuance of that the ‘Amount of Sales Tax
service is in kind, it would be the open tax invoice in pursuance of Involved’ would invariably
market value of the service that would advance payment receipt issued remain equivalent to ‘Amount of
be taken for sales tax purposes. Sales Tax received in Advance’.
by the registered person on which
Evidently, one could not easily Accordingly, in the absence of
tax has already been paid at the any relaxation in payment of
determine market value of the service time of receipt of advances.” output tax on advances, there
rendered. Therefore, there is a need to would be no “Balance Amount
modify such conditions before they are A study of the above in the light of Sales Tax” since the recipient
misused by the departmental auditors of section 2(44) of the Act would of money would have already
for harassment of taxpayers. mean that a registered person discharged all his liability to the
receiving payments would not be extent of advances. However, the
Tax Payment on Advances liable to pay anything further in last 2 columns in the format of
respect of future supplies since all the Advance Payment Receipt, as
through ‘Advance Payment the tax must have been paid at
prescribed in the rules,
contradict the last sentence of
Receipt’ the time of supply (receipt of Rule 110 of the rules, section
A perusal of the rules read in advance). In other words, we 2(44) of the Act and the Sales Tax
conjunction with the definition of ‘time understand that in case of General Order (Part – 1).
of supply’ in terms of section 2(44) of advance receipts, the supplier
the Act, instigates the following key (recipient of advance) is liable to c) In most of the cases, the recipient
question / anomalies: offer all the advance receipts for of advance does not know the
tax purposes and no exception is ultimate goods which would be
a) The preamble of the rules (Rule permissible under the statute in adjusted against such receipts.
107), suggests that the rules ‘shall this respect. In this respect, we This uncertainty hold on the
apply to all the registered persons are also enlightened by Sales Tax ground till the supplier receives a
receiving advances against their confirm Purchase Order with
General Order (Part – 1) wherein
taxable supplies’. On the contrary, complete specification and
it has been held that: quantity of goods to be bought.
Rule 110 of the rules prescribe
that ‘a registered person at the In that scenario, the prospective
“…sales tax is chargeable if supplier would not be able to
time of receipt of advances may
the amount is received in define ‘description & quantity’ of
issue a serially numbered
“Advance Payment Receipt” in advance. Although this the future goods on the face of
concept is clear, problems Advance Payment Receipt at the
the format as prescribed in
arise when full payment is not time of receipt of advance.
Annexure- A to this Chapter. The
received and only some Hence, there is a need to either
sales tax invoice…………….may modify the said Format or to
be issued at the time of actual percentage of the actual
amount is received in allow the registered person not
delivery of goods.” It appears to fill in the unwarranted
that the preamble is not in advance.……… It is,
columns for lack of information.
harmony with the remaining rules therefore, clarified that sales
as the latter provide an option / tax for a tax period should be
discretion to the taxpayer to charged only on that portion About the Author:
either issue advance payment of money which is received ….”
Mr. Adnan Mufti is a Partner in
receipt or not?
Inspite of the above, the format of Shekha & Mufti, Chartered
Keeping in view the provision of the ‘Advance Payment Receipt’ Accountants.
section 23 read with section 2(44) prescribes the following He is a member of Publication
of the Act, one might construe as additional 2 columns besides the Committee of ICAP and Chairman
if the aforesaid option applies to column of “Amount of Sales Tax
of Technical & Research
only those taxpayers who do not Involved”:
wish to issue a ‘tax invoice’at the Committee of Karachi Sales Tax
time of supply. However, there is w Amount of Sales Tax received Bar Association (KSTBA).
a need to clarify the issue for in Advance Readers are welcome to contact
better understanding of the
him at: shekhamufti@cyber.net.pk
taxpayers and the tax w Balance amount of Sales Tax
practitioners. Payable (if any)
The Central Board of Revenue (CBR) proposes to bring more But except for the Custom agents, all of the above services
services into the general sales tax (GST) net subjecting these were already subjected to un-adjustable excise duty and
services to the Central Excise Duty in GST Mode. Before any provincial duties wherever applicable. All such direct and
final decision is taken in this regard, I would urge, in the best unadjustable revenues were replaced by VAT mode of Sales
interest of our country to analyze the existing revenue Tax which allowed input tax adjustment, particularly on
electricity which form substantial part of Hotel, Restaurant
collection from the service providers and to make objective and fast food Industry. If the above tabled contribution is net
cost-benefit analysis of the proposal [net revenue collection collection then reasonable otherwise the CBR need to wok
vs. additional expenses (Registration, maintenance of out the figures of net collection, i.e., output tax charged by
records filed, audits, litigation etc.) on net collection) of the the above services less the same if claimed as input tax by
proposed levy of GST on more services. Each proposed the recipients of the services in making their taxable
service to be taxed is to be analysed individually. As we are supplies. This net collection then be compared with what the
all aware that if adequate net revenue cannot be generated government was already earning on the excise duty and
out of a particular service, it will be an exercise in futility provincial taxes (wherever applicable) on such services so as
resulting not only in a net loss to the country's exchequer to arrive at the incremental revenue.
but also reduced concentration on the tax collection from As regards contribution from Custom agents are concerned,
the existing registered persons. For all this consequence, the the entire payments of sales tax by custom agent is the input
one responsible, for the final decision should owe an tax of importers which is adjustable against the supplies by
explanation for the foreseeable waste of the scarce resources such commercial importers and in case of importers of raw
since the decisions cannot be left to the caprice of the materials against the supplies of finished goods by the
regulators or outside agencies neither having insight of the manufacturers. So the ultimate (net) contribution from
VAT mode in the context of our peculiar economy nor the custom agents seems to be ZERO. However, the state has
conditions and business practices (ability of the indirect tax incurred expenses on the registration of custom agents,
payer of passing of the indirect tax burden to the final maintaining voluminous record of their monthly returns
filed, maintaining their files/profile, and expenses on audit
consumers) prevalent in the country. The problems being and matters arising out to be dealt with by the
faced with the existing registered persons are manifold and adjudication/collectorate etc.
in a number of cases are pending with adjudication and at
appellate forums. This shows that the CBR has to give serious thought before
bringing in those services against which the buyers of these
The last year's reasonably low collection from the following services will have the undeniable rights under VAT mode to
services (as reported in the daily, Business Recorder dated adjust against their output tax due. The appropriate cost
February 17,2004) from all the four provinces reflected the benefit analysis should, therefore, be conducted. Further
error of judgment to bring these services to the tax net in the documentation of the economy should be done only if the
desired results can be foreseen with substantial accuracy. The
past. economy of Pakistan has already been burdened with the
futile exercise of Survey in the name of documentation. The
Services Tax Collection During 2002-03 failure of the government to document the retail sector is a
ground reality. The cost-benefit analysis, therefore, prevail
Luxurious clubs 00.58 million over the mere documentation of economy. A gradual, steady
Laundries & dry cleaners 02.44 million and careful fiscal approach is the dire need to boost the
Marriage halls, lawn 07.63 million economy.
Beauty parlours, clinics,
slimming centers 14.45 million The professional firms of accountants, consultants and
lawyers, particularly large and medium sized firms provide
The following services have, however, on the face of it services mostly to the large and medium sized companies
shows considerable revenue. that are already registered under the Sales Tax Act (except few
service providers) 1990. If sales tax is charged by these
Hotels, restaurants, professional firms to the buyer of the services, they may argue
fast food & caterers 717.00 million
Courier services 416.70 million to claim this payment as input tax (the CBR may finally, under
Advertisement on television 214.15 million the logical pressure from concerned quarters, allow such
Custom agents 241.79 million adjustments and the cost of such adjustmentsmay go unnoticed).
The admissibility of input tax paid on any system of control is effective only if section 22 and 23 of the Sales Tax Act
services is, however, disputed. Section 7 introduced as a moral check and future may not be practically followed.
read with section 8 may be interpreted in guide to improve rather than a punitive
favour of the registered person and input tool in the hands of auditors allowing As regards indenting services, such firms
tax paid for the purpose of making them to detect irregularities to the extent whose commission is received from the
taxable supplies will have to be allowed. necessary to serve their purpose only. foreign principal will have to be
The purely punitive tool may only teach exempted. By zero-rating their supply
The root cause of any taxable supply is the registered persons to accumulate the CBR may lose as the input tax paid
the carrying on of that business which means and commit acts to meet such need to be refunded plus cost of
makes the taxable supply. If there is no punishment on a net profit basis. registering them and maintaining their
business there is no supply at all. All records/profiles etc.
activities of a business-whether So far as the small sized firms are
manufacturing, selling, finance or concerned, they also provide the services It is interesting to note that the Sales Tax
administration or for that matter any to the already registered persons and Act 1990 still has its firm roots in the
other relevant activities, must be put impact of bringing them into net would repealed Sales Tax Act 1951 which
together to generate taxable or non- be almost the same as with the large and
primarily dealt with sales tax on
taxable supplies. It transpires that any medium sized firms. If by all means, the
activity whether consultancy, audit, manufacturers in Pakistan. The
CBR is forced to bring in more services
taxation, legal services etc. are acquired categories such as importer, wholesaler,
into GST net, it should atleast go for a
for the business then it is for the purpose gradual implementation with a justified distributor and retailer of goods were
of making supplies. Any input tax paid in policy for both- the suppliers of goods also brought under sales tax net under
acquiring such services will have to be and the providers of services. A good the Sales Tax Act 1990, which were all
allowed. This is the gist of VAT mode, in number of the firms' gross revenue is not exempt under the repealed act. The
my opinion. This finally may mean over Rs.1.0 million. Since the Sales Tax Act 1990 was, however, not
ZERO net revenue from such service government has already exempted modified to cater to the requirements of
providers (the tax paid on services does retailers having turnover of not over taxing these further categories. Issues
not, generally, result in the Rs.1.0million such small sized firms relating to invoices, maintenance of
proportionate increase in the value of need also be exempted on the basis of records etc. cropped up. The present
supply made by the recipient of services) their gross fee. Furthermore, turnover tax sales tax rate of 15% would be
plus cost of registration, maintenance of scheme may be extended to the service exorbitant to the services providers. The
the records and profile of such service providers whose annual revenue is service providers would hardly benefit
providers, cost of audit, cost on Rs.1.0million and over but do not exceed from the GST mode, as they would
adjudication and appellate officers etc. a certain sum. The definition of whole- hardly have any input tax to adjust rather
This fact need to be explained to those seller need be amended to they would suffer as a result of
pressure group urging that such services accommodate their exemption or to competition since they would not be
be brought under tax net. The CBR is qualify for turnover tax as the case may abl;e to pass on the burden which is the
already short of sufficient staff to cater to be since in most of the cases their fundamental of GST Mode. It is,
the need of audit and other matter receipts are subject to at source income therefore, important to bring in a distinct
pertaining to the existing registered tax deduction. The above step will legislation on services before bringing
persons. The experience has shown that enable the CBR to generate more more service to sales tax net.
adding an army of auditor is not likely to revenue by making least efforts and with
result in increasing the revenue. minimum expenditure.
However, it is likely that the auditors, About the Author:
taking the advantages of various vague Furthermore, the government needs
provisions of the law, may generate more additional/modified enactments to Mr. Abbas is a fellow member of
personal revenues. It has been tried at exempt the service providers from a the Institute of Chartered
various forums to convince the number of provisions of sales tax act Accountants of Pakistan. He is in
government to simplify the law and 1990 since they are not practical. By
make them clear. The back-door, purely traditions and under the Income Tax practice under the name and style
budget oriented and hurriedly Ordinance 2001 such professional firms of Abbas & Co., Chartered
introduced legislation is not only causing are allowed to account for their revenue Accountants since September
problems to the honest tax-payers but on receipts basis due to inherent risk in 1994. He has specialized in the
also creating problems for the CBR in the the receipts of such profession.
form of unwanted disputes. It is, Sales Tax Laws and Systems
Therefore, the supply, time of supply and
therefore, more important to build an a number of other provisions may not Consultancy. He is a member of
effective system of taxation incorporating practically be applied in case of such Technical Advisory and Quality
simplified and duly legislated tax laws. firms. The revenue is not frequent and Control Review Committees.
The audit being important component of not on daily basis. The requirements of
4. Manual Input Indicates manual input of data into the system under review.
6. Automatic / Pre-defined Process Use to represent when an automatic event takes place.
This usually occurs as a result of external influence and
will trigger some action or process to occur.
10. Display Indicates a computer display screen (CRT or PC) used for
input, output, or inquiry purposes.
13. Permanent File A triangle is used to denote a permanent file. Typically the
basis for filing or order of the files is shown within the
triangle.
15. Flow Line Show the connection between steps and the direction of
the process flow.
17. Off-Page Connector Use when a flowchart is spread over pages. It is used to
show how and where the pages are connected with the
linking label/number shown in the symbol.
Types of Flowcharts Document flowchart - depicts the flow 15 paragraphs of text that describe the
A flowchart is essentially a picture of a of documents through specific same thing.
process. Auditors have been using processing steps.
Process flowcharts examine the process
flowcharts for decades as a tool to detail
Program flowchart - A more detailed in great detail. They provide a
management processes in order to comprehensive listing of all the major
flowchart that illustrates specific steps in
evaluate internal controls. The and sub-steps in a process.
a computer run.
following types of flowcharts may be
used by auditors: Deployment Flowchart - A Deployment
Network Diagram - A network diagram
chart is used to show a process or
can show the layout of anything from a
Basic flowcharts quickly identify all the procedure as it flows through different
small network to a world-wide network.
major steps in a process. They are used departments or uses different resources.
You can use hyperlinks between charts
to orient a team with the major steps by to show the overview (organized by
Deployment flowcharts are similar to
just giving a broad overview of the region, department, or office) and then
Process flowcharts in that they are very
process. the finer details to show the actual
detailed but also indicate the people
hardware and connections.
who are involved in the process. This
Systems flowchart - Depicts overall or
could be very useful when the process
broad flow of operations (minimal Process Flowchart - A process flowchart
is the most common type of business involves cooperation between
detail). They may show the flow of data functional areas.
diagram, and it is used to communicate
or the sequence of operations of a
any idea that consists of a series of
system. Sometimes they include all Opportunity flowcharts highlight
steps. These types of diagrams truly
steps to process data into information. demonstrate that a picture is worth a decision step and check point. They are
thousand words. It is so much easier to used for very complicated processes
Procedures flowchart - presents the learn a new task by following a process because they highlight specific
steps in a process. flowchart than it is to understand 10 or opportunities for improvement.
Flowcharting Benefits and w As flowcharts become more In the 1980’s new flowcharting tools
complex they can resemble were introduced which made the
Limitations ‘spaghetti’. standard flowcharting template a
Benefits dinosaur. The software was easy to use
w No obvious mechanism for
w Portrays the logical "flow" between and made modifications as easy as the
proceeding from one level to the
tasks next. click of the mouse. While the software
made it easier, it is clear that
w Visually successful in communicating
w What is done can easily get lost in management is finding that
the sequence of tasks
the detail of how it is done. flowcharting was not only a science
w Easy to know the sequential impact but a combination of science and art.
of changes Flowcharting for Auditors
For decades, accountants and auditors
w Easy to spot redundant operations have used flowcharting as an audit tool
Flowcharting Guidelines
& other inefficiencies to understand and evaluate systems for and Standards
their clients. Clarity and simplicity in presentation
w Training tool for new employees are essential. Mistaken use of extreme
Following is process overview for
detail may tend to conceal rather than
w Spot internal control weaknesses building flowcharts:
expose key points. However, narrative
w Helps the auditor see the “whole w Auditors interview employees, explanations should be kept brief. In
picture” write-up narratives of the most cases, the combination of the
interviews and then flowchart the flow chart and a narrative description
w Better Communication process. tends to be far superior to either
document alone.
w Effective analysis w Subsequent interviews and follow-
ups result in adjustments to the
w Effective synthesis original flow chart. Drawing a Flowchart
w Proper program Documentation w Eventually, a revised detailed
flowchart of the process is • Decide what activities are to be
w Effective coding produced as explained by shown and the purpose of
employees and confirmed by drawing the flowchart.
w Systematic debugging management.
• Obtain the information needed
w Systematic testing w Then management’s signatures are to draw the flowchart.
obtained attesting to the accuracy
Limitations of the flow chart and the process • A flowchart proceeds from top to
w Task start and finish dates are not under review. bottom and from left to right.
known.
w From that flowchart, auditors • Use arrow heads to show the
w The duration of tasks are not
identify where the controls were direction of flow and improve
known.
weak and the processes required clarity.
changes.
w Resources needed are not known.
• A flowchart may be of any size
w The flowchart analysis of controls but keep dimensions and be as
w Lacks the incorporation of resource
helps to design an audit work neat and tidy as possible.
constraints.
program that would test those
w Physical locations of tasks are not controls to ensure that they were • Put a title on each chart
known. operating as designed. identifying the process that it
illustrates. (For example: "Order
w Difficult to distinguish importance w As a by-product of the evaluation of
Entry Process").
of tasks. internal control, management
usually requested a copy of the
flowchart for use in orientation • Put the author's name and the
w Different levels of detail can easily date on each chart.
become confused. training for new employees.
Only transactions/documents with w Accounting and administrative q What error detection methods
control significance should be shown policy and procedure manuals, are used?
(i.e., control over authorization, charts of accounts
recording, safeguarding, reconciliation, q What is done when errors are
and valuation). This can generally be w Policies found?
accomplished by including only those
activities within an application where w Laws and regulations q When was an error last found
data is initialized, changed, or and describe the type of error?
transferred to other departments. For a w Prior audit working papers
w Follow one procedure at a time to a
process to be flow charted, it must be
logical conclusion.
broken down into its component parts, Interviewing Employees
namely actions and decisions. Also, Interviewing responsible personnel is a
productive way to obtain information w Ask to see documents described by
the name(s) and position(s) of the the employee, and relate them to
people performing the transactions about how the system or process
operates. Strong interviewing information received. This may
should be indicated for each action. help to identify inaccuracies or
The names of each document should techniques are important.
incomplete answers.
also be included within the document
It is important to select the right
symbols. w Ask about the impact of changes in
employees to interview. If an employee
is responsible for an entire function, routine during slack or busy
The auditor usually obtains questions should be directed periods, vacations or sickness.
information necessary for preparing or exclusively to him.
updating flow charts by interviewing w Be careful not to oversimplify or
personnel at each site about over-elaborate.
procedures followed, and by reviewing
Cradle to Grave Approach
It is best to document the system from
procedure manuals, existing flow the beginning of the process. It is much Avoiding the Common
charts and other system easier if employees begin at the
documentation. Sample documents beginning. The interviewer should
Pitfalls of Detailed
are collected and each department clearly explain the objectives of the Flowcharting
involved is questioned about its interview before asking any questions.
specific duties. Inquiries can be made It is important that the interviewer
w Develop a detailed flowchart only
concurrently with the performance of control the interview and not allow the
employee to wander “off track.” when it is required.
transaction reviews, particularly when
flow charts are being updated. If
Use the following guide for obtaining w Complicated detailed flowcharts
possible, the auditor should observe
the necessary information: cannot be drawn accurately on a
the process.
first attempt. Rough out an initial
w Ask each employee: draft. Eliminate all irrelevant,
Documentation confusing information.
q What procedures are
Techniques performed?
The first step in flowcharting involves w Too little detail may not provide a
obtaining an understanding of the meaningful analysis. Clearly
q What records they maintain,
system. This involves documenting including unofficial records understand how the flowchart will
how transactions are processed and be used before preparing.
assets are safeguarded. The q What documents are processed
documentation process involves and what documents are w Large complex systems cannot be
understanding how the system works prepared? presented in a single flowchart.
and the nature of the transactions Prepare separate flowcharts tied
processed. Typically, auditors prepare q From whom are the documents together by an overview flowchart.
received?
an overview which may come from the
following sources: w Provide an overview flowchart for
q What information is recorded
complex detailed flowcharts. This
on the documents, and what is
w Narrative descriptions of the system the source of the information? provides the reader an opportunity
to understand the overall process
w Interviews with employees q To whom are the documents before attempting to understand the
responsible for the system sent? detailed process and flow.
Tips for Preparing inefficient steps or highlight major include trivial sub-steps of one task
control weaknesses such as lack of while treating another equivalent
Flowcharts segregation of incompatible duties, task as a whole. If one-step or task
no approval of key events, lack of needs to be analyzed in detail,
w Create a flow chart beginning at a accountability. make a separate chart illustrating
high level on the first draft. As you that sub-process.
look at each of the operations or w Involve all people actually involved
processes, fill in the detail. Do not in the process in order to get w Avoid crossing flow lines. In a well-
be concerned about getting all the accurate perceptions. designed chart, flow lines will not
detail on the first draft (this is an
cross each other. If two lines must
iterative process). w Have a manager or supervisor of cross, use a "bridge" (also known as
the actual operations review and a "line hop") to show that the lines
w Refrain from trying to analyze and
attest to the accuracy of the do not intersect.
fix a process until it is completely
completed flow chart.
flow charted.
w Make sure there are at least two
w Review your chart. Does it show w Clearly indicate the starting and outcomes from every decision
the proper flow of information or ending points of the process, using diamond.
operations? Does it reflect the standard terminator symbols.
sequential and simultaneous w Label your flowchart components.
events? Does it accurately capture w Keep the direction of flow Use active verbs to label activity
what really happens? Are all major consistent. Avoid confusion by steps and questions to label
decisions reflected? keeping your flow lines moving decisions. Clearly label the
from top to bottom and left to right. outcomes from a decision diamond
w When the operations and decisions in terms that answer the question.
are charted as they actually w Number your steps.
happen, analyze the process to w Know your symbols
determine possible improvements.
w Break the steps down to a
You should concentrate on
consistent level of detail. Don't w Create charts that flow form the top
eliminating unnecessary or
to the bottom of the page
It may be stated at the very outset that the word MANAGER III. A WELL CONCEIVED 'TIME PLANNER’ &
as used in this write-up means "any person who manages"
and that he may be of any RANK / DESIGNATION / STATUS. THE RELATED CYCLE
Man by nature is imperfect, in the real sense of the word, as Of the ladders leading towards the success of a Manager, the
the Creator Himself has retained the divine power of above stated ingredient in my opinion, emerges to be of
perfection with Him. pioneer / torch bearing / and one which is crowned with
famous dictum 'if time is lost, everything is lost". In other
In a product manufacturing industry following is the words, Time Management in an. ideal manner, itself speaks
generally acceptable HIERARCHY of the MANAGERS who of the degree of success of a Manager. What it means in a
contribute most significantly, through their respective practical sense is the ensuring of an equilibrium in his
disciplines, in the material progress thereof. multifarious engagements of the day, week, quarter, bi-
annual and annual events taking place, of his regular
1. Procurement Manager (both for local as well as imported professional package of the work to be executed/ handled
raw materials / supplies). most efficiently. In short, he as the Head of a given
2. Production Manager (also called Plant/Works/Factory department must be able to apply his time to the required
Manager) cycle.
3. Sales Manager
4. Marketing Manager IV. MANAGERIAL DECISIONS: IN THE CONTEXT
5. Personnel Manager
6. Human Resources Development Manager OF TIME, SOUNDNESS & EFFECTIVENESS
7. Public Relations Manager Gone are the days, when people used to ponder over a
8. Finance Manager long/abnormal period, by way of an interval between a.
9. Manager – CISA (Certified Information Systems Auditor) proposal having been presented and a decision either to
10. Manager – Internal Audit -Risk Assessment and implement or give-up used to take place. Although the
Evaluation phenomenon as described above may be witnessed in
common among the Departments of any Government
If a significant number of the below stated ingredients are organization, in a developing country, such a negation has
found in a manager, these would be construed as a Manager, no place in the functions of a successful Manager of today.
with virtues and as such he, in my humble opinion, is a
successful Manager. It would not be out of place to mention here that among the
important duties which have been delegated to a manager,
I. CONTEMPORARINESS IN THE FIELD OF his ability to take, timely, sound and effective decisions, is
the CORE of it.
DEVELOPMENT, IN HIS PROFESSION
We are today in the world of innovations which in turn have The simplest, among the list of so many examples to
emerged with new things coming up in operations. A substantiate our contents of this para is: his ability to take a
successful manager, to my mind and as the expression of an timely and sound decision as to "whether to make, or buy,
independent opinion, is one who keeps a timely pace with whether to borrow or raise additional share capital".
the development in his profession.
his team (which may be small, medium VII.LISTENING TO THE TEAM X. HANDS ON COMPUTER
or large). What it means is that he must GRIEVANCES Computer literacy has become
exercise a restraint against the use / A successful Manager is one who never indispensable these days, hence each
application of his prerogative, resulting considers himself as the SOLE Manager must be fully conversant with
into an embarrassment inconvenience atleast the following:
MONARCH of his kingdom, under a
/ harm, to any of his team members. If
belief of "MY SHIP, MY ORDER" and
he is wise and farsighted, then be must a) MS Word
such an attitude is undoubtedly to
remember that "a slave of today may b) MS Excel
result, sooner of later, in his downfall.
be the king of tomorrow”. c) MS Power Point
It is therefore necessary that he must d) MS Access
listen, very carefully, patiently, e) Outlook Express
VI.DELEGATE AND TRUST sympathetically and impartially to all f) Use of Internet
To manage the Departmental affairs the GENUINE COMPLAINTS being
most successfully, it is necessary that
brought to his notice by his team either In addition to what has been
the authority conferred upon a
individually or collectively. elaborated in the preceding paragraphs
Manager be delegated in a suitable
following being in an ABRIDGED
manner among his team members.
VIII. WINDOW DRESSING manner supplementary ingredients to
Too-much concentration of authority
augment or provide a fillip to the
or its retention in a significant manner /MATERIAL CONCEALMENT
contents of this write-up.
by a manger himself may not result A Manager is viewed in the context of
into a smooth running of his his duties, as the man reporting to
1. Requisite degree of an acumen in
Departmental affairs. A time may come higher authority, and. there is an
visualizing the impact of his
when he is completely bogged down absolute FIDUCIARY relationship planned strategies.
in routine affairs or matters of an between him and his higher authority
insignificant nature, directly leading to Window Dressing" is the concept of a. 2. An ever-readiness for an
the application of an unproductive material concealment. A Manager must ALTERNATIVE line of action/stand-
time and result. Such a situation is exercise complete care that there is no by under any EVENTUALITY, or
undesirable for a Manager both in material concealment while presenting where deviation is expected to
terms of the rank he is holding as well accrue from a defined path of any
true picture to the Management.
as the duties he has been entrusted contemplated action.
with. IX.ACCEPTANCE OF CRITICISM - 3. Ability to read ACCURATELY (and
A KEY TOWARDS FUTURE if not accurately then much nearer
Another factor in relation to the thereto) the MIND of the
delegation is that of trust. The fact that CORRECTION Management.
a Manger has delegated a part of his It is not necessary as a matter of
authority among his team members, prudence, that whatever a Manager 4. Unshattered CONFIDENCE in his
does is free from : incorrectness, fault own talents, skills and dexterity.
equally implies on his part that. the
requisite degree of trust has been or mistakes. To err is human and that 5. RESULT-ORIENTATION being the
reposed in them. Trust is the reflection an error free work is very rare. sole supreme goal to be chosen by
of the degree of confidence, which a him.
manager has in his team and that the Negative / faulty outcome of a
same is built up in the due course of delegated job is bound to arouse 6. Ability to positively ASSERT of all
time. In short it is hereby emphasized criticism from the Management. This his CONVICTIONS.
that a successful Manager never works must not cause any pessimism or
7. He is a problem SOLVER and not
in a unilateral manner as well as in an disappointment to a Manager.
its CREATOR.
environment of SINGLENESS. The Successful Manager must gladly accept
more the smoothness on his part of the criticism, which in my opinion is a 8. He is responsible for FUTURE
delegating trustworthiness among his source of strength in rectifying faults, if LEADERSHIP. He identifies and
team, the more the prospects, .for his any as of today, as a better destination nurtures future Leader, as his
departmental success. of tomorrow. timely REPLACEMENT.
9. He is a very strong 1. Duties are his DESTINY. In other 8. He has an abnormal degree of
NEGOTIATOR. words, he never grumbles for any PATIENCE and BROAD
of his rights, of which he may have MINDEDNESS.
10 .He defines/EXPLAINS the tasks. been DEPRIVED of.
His team FOLLOWS the path 9. He never INFLICTS pain, he
drawn by him, for the 2. He always SERVES and that he always BEARS the pain.
accomplishment thereof. never RULES.
10. He leaves behind himself
11. He never SURRENDERS to the 3. He ADHERES to all the ASSETS/LEGACY and not any
pressure. COMMITMENTS made by him. LIABILITY.
12. He is responsible for 4. NO FICKLE MINDEDNESS in the
EFFECTIVENESS. What it means decisions taken by him and CONCLUSION
is that efficiency is doing a absolutely no COMPROMISE Having discussed the above stated
RIGHT THING whereas there against. "ATTRIBUTES11 of a successful
effectiveness means doing the Manager. I am of the opinion that he
thing in a rightful manner. 5. An ever-readiness to ACCEPT has to develop these not simply by
responsibility in the event of being a part of the Management, but
ETHICAL ATTRIBUTES FAILURE, if any. also by an -equal application of;
Each Manager, in addition to being a
TECHNOCRAT, which undoubtedly 6. Achievement of success is just like (a) Tact,
his job demands, is equally, expected an ILLUSION to him, whereas (b) Exposure,
to posses some ETHICAL ATTRIBUTES failure, if any, (in his tasks) is an (c) Groom,
in order to soften/ease the burden of EYE-OPENER. (d) Systematized application of mental
his onerous/cumbersome duties. These faculties, and
ethical attributes have been stated as 7. NEUTRALITY is the only justice, (e) Humbleness / Submissiveness in
under:- which he administers. approach
Institute News
OBITUARY
Mr. Sk. Hashmat Ali On having passed C.A. Final 1975 he joined the IBRD (now World
born on 07 September Examinations of ICA (Eng. & Wales) in Bank) Oil Palm Project of the Ministry
1939, Benaras in the 1966 he was admitted to membership of Agriculture and Natural Resources,
Province of U.P. of that Institute in October 1966. E.C.S., Nigeria where he served for few
British India, arrived years. He returned to Paksitan in
in the former East Mr. Sk. Hashmat Ali was admitted as an December 1978 and than he joined M/s
Pakistan (now Associate Member in April 1967 of the Pakistan Gum & Chemicals Ltd. where
Bangladesh) in 1947. he worked upto 1980. He again joined
Institute and was admitted to Fellowship
on 23 July 1977. M/s James Finlay plc. in 1981 where he
He passed matriculation Examination served until 2001.
from the then East Bengal Secondary
He was a very senior member of the
Education Board, Dacca in April 1954
Institute. He had joined the EPIDC in Mr. Sk. Hashmat Ali expired on 23 April
and graduated in Commerce from the
February 1967 and subsequently joined 2005 due to post surgical complications
Dacca University in 1958 and secured which resulted in coma and eventual
James Finlay & Co., Ltd., Chittagong in
First Position. He obtained SEATO death.
April 1967 as Chief Accountant. In
Scholarship and did his Masters in Arts
1971 he came over to West Pakistan
in 1961 from the University of the
and proceeded to Zambia to join M/s He left behind a widow and two
Philipplines and then proceeded to U.K. Timber Merchants of Zambia where he daughters.
to join M/S PricewaterHouse in London. served for around 3 years. In December
The South Asian Federation of Accountants (SAFA) visit Pakistan. He presented his views on International
conference jointly hosted by Institute of Chartered Accounting Standards (IAS) and International Financial
Accountants of Pakistan (ICAP) and Institute of Cost and Reporting Standards (IFRS). His first slide which stated that
Management Accountants of Pakistan (ICMAP) was held at the suicide rate among ICAEW members was higher than the
Karachi on May 6 and 7 2005. The theme chosen for the national average caught everybody’s attention and from that
conference was “Transformation of Accounting Profession”. moment onwards his unique presentation kept the
About 1,000 local and 45 foreign delegates attended the participants fully involved and attentive. There was a lot of
conference. food for thought in his presentation for all the participants.
The learned key note speaker, in view of his vast knowledge
The inaugural session took place at Sheraton on the evening and involvement with several Task Force and Committees,
of May 6, 2005. Dr. Ishrat Hussain, Governor of State Bank had complete command over the subject and he very ably
of Pakistan, graced the conference by being the chief guest. discussed the problems being faced in the implementation of
several IASs, the changes in the IFRSs that he saw
Chairman of the conference organizing committee, forthcoming in the future and the challenges being faced by
Mr. Khaliq-ur-Rahman presented the welcome address. the professional accountants the world over.
The SBP governor kept his tradition of closely interacting Mr. Mirza gave a practical demonstration to the relevancy of
with the professional accounting bodies of Pakistan and the the theme of the conference “Transformation of Accounting
large gathering of professional accountants, bankers, Profession” by transforming himself from a highly competent
businessmen and regulators both from within the country and technically sound accounting professional into a high-
and from India, Bangladesh, Sri Lanka and Nepal were class singer as after the inaugural session, he thrilled and
fortunate enough to listen to his highly thought provoking amazed the participants with his songs. His performance was
and lively address to the participants. contrary to the popular belief that ‘we accountants can only
deal with numbers!” He had complete command on the
The chief guest dwelt at length on the macro and micro traditional “key notes” as well. For me it was difficult to
economic issues with which the developing countries judge whether Mr. Abbas Ali Mirza excelled as a keynote
particularly in the SAARC region are faced. He emphasized speaker or as a singer.
that with the removal of quota restrictions, the European
Union countries need to take structural reforms and remove Others who spoke on the occasion were the SAFA President,
rigidities with regard to goods and labour markets. In the Mr. Muhammad Nurul Hassan of Bangladesh; SAFA Vice
SAARC region, the governments and the exporters need to President, Mr. Sunil Goyal of India; SAFA Advisor, Mr.
take measures to capture the increasing market share by Badruddin Fakhri of Pakistan; ICAP President, Mr. Zafar Iqbal
enhancing productivity, improving quality and cutting costs. Sobani and ICMAP President, Mr. Muhammad Rafi.
The SBP governor identified 3 key risks to the global
economy, namely (1) further sharp increase in oil prices, (2) The technical sessions were held on the 2nd day of the
continued fiscal and current account imbalances in USA and conference. Unlike in the past, the technical sessions were
(3) sluggish demand in Japan and the European Union. divided into 2 groups and the participants were given the
choice to attend any 3 sessions either at Sheraton or at Pearl
The keynote speaker on the occasion was Mr. Abbas Ali Continental (PC). Full credit goes to the organizers for giving
Mirza, partner of Deloitte and Touche (M.E). The participants choice to the participants. The last session was held at
were fortunate that the Pakistan Consulate in Dubai, after Sheraton and all the participants were required to attend the
great persuasion and phone calls, granted him the visa to same.
Technical sessions problems. The accountants can infrastructure that is most supportive to
identity the capabilities of individual the people. Accountants are new
The following subjects were covered in men and women who are the real getting out of their traditional role of
assets of an enterprise and the nation. book keeping and finance and getting
the technical sessions held at PC.
By utilizing these talents, resources cab more involved in business decisions
be put to optimum use to reduce like marketing and sales, customer
1) Opportunities for Accountants in service, R&D and HRD etc. In order to
the post - WTO Regime poverty.
meet the new challenges, accountants
must continue to strive to enhance
Mr. Mohammad Hanif of Pakistan 3) Recent Developments in Professional
their skills to be successful in the future.
Reporting Standards and their
presented this paper. The thrust of his
Implications
paper was about the changes under the 2) Education, Training and Research
WTO regime that on the one hand
Mr. Reyaz Mihular of Sri Lanka
offered good opportunity to expand Mr. Kashi Prasad Khandelwal of India
presented the paper. Mr. Reyaz is a presented the paper on this subject.
and grow, while on the other hand renowned accounting professional and
posed serious threats and challenges to The learned speaker emphasized the
is frequently seen at numerous need to structure the education and
the developing economies. With international accounting seminars and
globalization in many aspects of life, training of the future accountants in
conferences where he has presented such a way as to meet the demands of
the financial reporting system across his papers. His presentation was in the standardization and globalization of
the globe is governed by the IASs and most practical manner punctuated with the auditing and accounting reporting
IFRSs and now the trade and industry humorous comments. He discussed the standards, corporate governance,
would be governed by the WTO rules inadequacies and inconsistencies of information technology etc. He very
and regulations. He was of the view the IASs, the emerging trends including ably dealt upon the present education
that the accountants of Pakistan were the convergence of US GAAP and and training system in India and the
yet to gear up to the challenges of moving off balance sheet items onto plans to re-design the system to cater to
WTO. balance sheet items like intangibles, the future needs of the profession,
customer lists and brands. In light of business and industry.
2) Role of Accountants in Poverty the changing scenario, the session
Alleviation through Capacity Building chairman was of the view that we need 3) Professional Ethics and Social
to “unlearn, learn and re-learn” to keep Responsibilities
Professor Dr. Muhammad Habibur ourselves abreast of the constant
Rahman of Bangladesh presented his changes that are taking place in the Dr. Jamaluddin Ahmed of Bangladesh
paper on “Accountants Role in Poverty reporting and auditing regulations. was the speaker at the 6th technical
Alleviation through Capacity Building”. session on the subject “Professional
He highlighted the role of NGOs, Sessions held at Karachi Ethics and Social Responsibilities”. Dr.
particularly of BRAC and Grameen Jamaluddin discussed the background
Bank to address the problem of poverty
Sheraton Hotel and Towers of ethical issues facing the profession,
alleviation in Bangladesh. These and covered the following topics the need for ethics, common
other NGOs have greatly contributed misconceptions, the reasons why
in helping the poorest of the poor to 1) Diverse Roles of Professional people tend to act unethically and the
Accountants fundamental principles of professional
become self-reliant through
conduct. He emphasized the need for
community cooperation, training, skill
Mr. Nadeem Mustafa Khan of Pakistan, professional independence and
enhancement etc.
another eminent speaker, presented adequate fee structure to enhance the
this paper. His paper covered (i) level of compliance to the code of
The learned speaker suggested that professional ethics. The speaker
background – change, (ii) diverse roles,
accountants through cost and waste (iii) skills, (iv) meeting the challenge distinguished the difference between
controls and by introducing effective and his concluding remarks. The auditors and other professionals and
accounting systems can help in learned speaker very ably and why it is more important for an auditor
enhancing the productivity and interestingly covered the entire to conduct himself at a high
profitability to reduce poverty. He spectrum of the diverse role of professional level as the statements
suggested that the accountants could professional accountants. The main certified by auditor are used and relied
identify small groups of entrepreneurs emphasis of his paper was that one has upon by various stakeholders such as
for designing human resour ce to look to the future, be adaptive to the the shareholders, bankers, creditors,
development programs to address their changing world and provide the credit rating agencies and customers.
After each technical paper, two revised International Standards on another round of songs by the keynote
panelists very briefly commented on Auditing (ISAs). The changes would speaker and singer Mr. Abbas Ali Mirza.
the paper, which was followed by apply to all financial statement audits The conference included trips for the
questions and answers and concluding and all audit firms. The changes foreign dignitaries to places of
remarks by the session chairmen. anticipate more emphasis on historical and cultural importance,
inspections by the regulators. He fishing off the coast of Kaemari and
The eminent scholar and Chairman of stressed the need for the auditors to shopping trips around the city. It was a
SEC of Sri Lanka, Dr. Dayanath enhance their learning requirements great sense of pride for me when all the
Jayasuriya and Mr. Asad Ali Shah of and make greater use of specialists. foreign delegates praised the
Pakistan jointly addressed the 7th and hospitality shown towards them by the
last session on “Auditors in Changing The changes lay greater emphasis on host Institutes and all its members.
Regulatory Environment”. detection of frauds and errors put in
place effective risk and quality control
Dr. Jayasuriya discussed the corporate standards and which would involve
responsibilities and the role of the more independence, professional About the Author:
regulatory bodies to have in place ethics and quality learning. Changes
systems that would alert them to will continue and an auditor has to Ms. Tasneem Yusuf is an associate
emerging problems and to take increase his level of competence to member of the Institute of Chartered
corrective measures before it is too keep pace with the changing world. Accountants of Pakistan. She is also
late. a member of the Association of
The event concluded with remarks and Chartered Certified Accountants.
Mr. Asad Ali Shah in his address
vote of thanks by Mr. Abdul Rahim
underlined the need for auditors to She can be contacted at:
keep themselves abreast of the Suriya, Vice Chairman of the
conference organizing committee. This tasneem.yusuf@yahoo.com
challenges faced by them on account
of significant changes in the new and was followed, on popular demand, by
Advertisement Tariff
(Four Colors)
Positions Per Issue Three Issues Six Issues
For further details please contact Asad Shahzad, Publications Department, ICAP
Ph: 9251636-39 Fax: 9251626 E-mail: asad.shahzad@icap.org.pk
IFAC eNews
1. Education Committee Extends Comment Comments on the ED are requested by September 30, 2005.
To download the ED, please visit http://www.ifac.org/EDs.
Period for Auditor Competence ED
IFAC's Education Committee has extended the comment
period on its exposure draft (ED), Competence Requirements 4. IAASB Issues New Standard on Review
for Audit Professionals, until August 15, 2005. The proposed of Interim Financial Information
International Education Standard is designed to ensure that To further enhance consistency in auditor performance and
audit professionals have the necessary knowledge, skills, reporting, the International Auditing and Assurance
values, ethics, and attitudes to perform competently and Standards Board (IAASB) has issued a new standard:
carry out their public interest responsibilities. The proposed International Standard on Review Engagements (ISRE) 2410,
standard will apply to all professional accountants, not just Review of Interim Financial Information Performed by the
the audit engagement partner, who have a substantial Independent Auditor of the Entity. The new ISRE contains
involvement in the audit assignment and who are standards and guidance on the inquiries and analytical and
responsible for making significant judgment decisions other review procedures that the auditor performs to
contributing to the overall audit opinion. conclude on such interim financial information. The
standard is effective beginning December 15, 2006.
2. IFAC Strengthens Code of Ethics for
Professional Accountants 5. IAASB Invites Comments on Proposed
The IFAC Ethics Committee has issued a newly revised Code Standards on Auditor Reporting
of Ethics for Professional Accountants, which establishes a The IAASB is seeking comments on exposure drafts of two
conceptual framework for all professional accountants to proposed International Standards on Auditing (ISAs)
ensure compliance with the five fundamental principles of designed to further enhance the quality of auditor reporting.
professional ethics - integrity, objectivity, professional Proposed ISA 701, The Independent Auditor's Report on
competence and due care, confidentiality, and professional Other Historical Financial Information, addresses auditors'
behavior. Under the framework, all professional accountants reports for a wide variety of engagements, including
are required to identify threats to these fundamental reporting on a single financial statement or a specific
principles and, if there are threats, to apply safeguards to element of a financial statement. Proposed ISA 800, The
ensure that the principles are not compromised. The Independent Auditor's Report on Summary Audited Financial
framework applies to all professional accountants, whether Statements, provides new standards and guidance on the
in public practice, business, industry or government. The criteria to be used and the procedures to be performed in an
Code is effective from June 30, 2006, and early adoption is engagement to report on summary financial statements.
encouraged.
Comments on the exposure drafts, which can be
3. Ethics Committee Invites Comments on downloaded at http://www.ifac.org/EDs, are requested by
October 31, 2005.
ED on Network Firms
The Ethics Committee has issued an exposure draft (ED)
proposing revisions to the definition of a network firm in the 6. 2004 IFAC Annual Report Available
IFAC Code of Ethics for Professional Accountants. Network Online
firms are required to be independent of an audit client of a IFAC has issued its 2004 Annual Report . The report
firm within the network. The ED, Proposed Revised Section highlights IFAC activities to develop the global profession.
290, Independence - Assurance Engagements, proposes These include initiatives to strengthen standard setting, to
changes that would classify a firm as a network firm of identify and address the needs of small and medium
another firm if the two share a common brand name or if practices and professional accountants in business, to reach
they share significant professional resources or revenues, out to developing nations, and to encourage quality
profits, costs or expenses. performance by all accountants.
7. IFAC Expands Support believes will "both serve the public 10. Keynote Speeches on
interest as well as respond to the International Accountancy
for Developing Nations circumstances of SMEs and those
IFAC's Developing Nations Permanent Issues Available on IFAC's
Task Force is continuing its work to
external users interested in their Website
general purpose financial statements." Visitors to IFAC's website
build the capacity of the accountancy
profession throughout the world. To (http://www.ifac.org) may view more
IFAC's response may be downloaded than a dozen speeches presented over
assist in the establishment and from the IFAC website. The IASB
development of professional the last few months by IFAC President
questionnaire and other responses to it Graham Ward, IFAC Chief Executive
accountancy bodies, the task force is are available on the IASB's website at
developing a tool kit that will provide Ian Ball and other IFAC leaders to IFAC
http://www.iasb.org.
guidance on the essential elements member bodies, regional accountancy
necessary for a successful accountancy organizations, governmental bodies,
organization, including guidance on 9. Information on National and investor groups on a range of
relations with government, Regulatory Frameworks topics including the profession's role in
membership requirements, education serving the public interest, building an
and training, and regulation and Available as Part of IFAC investment climate of trust, and
standard setting. The task force is also Compliance Program promoting strong corporate
providing comments on a number of As a result of Part 1 of the IFAC governance. The speeches are
key projects by IFAC's standard-setting Member Body Compliance Program, available in the Media Center
boards and committees and other Assessment of the Regulatory and (http://www.ifac.org/MediaCenter) as
international standard setters to ensure Standard-Setting Framework, IFAC's well in the Articles and Speech Library
they give due consideration to issues compliance team has collected (http://www.ifac.org/Library).
relevant to developing nations. information from more than 145
member bodies on the roles of IFAC For more information about any of the
For more information on these and member bodies and other items mentioned above or for other
other initiatives, please visit the organizations (including government, information about IFAC, please contact
Developing Nations Permanent Task pr@ifac.org.
regulatory or other appointed
Force's home page.
authorities) with respect to:
Constipation:
Prevention and Treatment
Dr. S. M. Wasim Jafri
Constipation is a very common symptom at all ages, constipation) or enemas (medicine in liquid form or water
especially in the elderly. However, at any age if it develops given through anal orifice or back passage to help passing
as a change of bowel habit, it needs thorough evaluation by stools). The treatment measures listed below are explained in
a physician who would then seek a gastroenterologist's more detail in the following paragraphs:
opinion for further tests like sigmoidoscopy / colonoscopy
(passage of a flexible tube through rectum for examination of w Eat a diet high in roughage (fibre);
rectum, sigmoid and other parts of large intestine to diagnose
or rule out problems like carcinoma, stricture, etc). Blood in w Eat regular meals; it is especially important to have
stools almost always necessitates through examination by a breakfast;
gastroenterologist. The following discussion regarding w Take bulking agent with meals and follow with a full glass
constipation is in the absence of any serious cause and is of water. Begin with:
referred to the habitual constipation or as a result of dietary
modification. l 1-2 tablespoons miller bran three times a day or;
l 1-2 heaping teaspoons Metamucil (Ispaghula husk) three
Constipation times a day;
Constipation is a symptom, not a disease. It is frequently
caused by a disturbance of how the colon (large intestine) w Do not take harsh (stimulant) laxatives except as directed;
works. The normal functions of the colon are to: w Establish regular daily bowel habits; DO NOT ignore the
urge to have a bowel movement;
w Remove water from the waste material that passes from the
small intestine into the colon; w Allow 15 minutes after breakfast to sit on the toilet - do not
w Serve as a storage area for waste material, and; strain;
w Help move and expel stool from the body. w If there has been no bowel movement after 48 hours, take
1or 2 tablespoons Milk of Magnesia at bedtime. If
unsuccessful, the dose may be increased the next evening;
Constipation may occur because:
w If now bowel movement occurs after three days, use a
w Too much water s removed by the colon, causing dry or glycerin suppository or, if necessary, you may take a small
hard stools; tap water enema;
w Stool moves too slowly through the colon, or; w Exercise daily;
w The patient is unable to expel stools. w Whenever possible, avoid medications that contribute to
constipation. DO NOT stop taking any prescribed
Normal bowel habits among healthy people vary greatly medications unless approved to do so by your physician.
from three times a day to three times a week. In some
individuals, constipation may refer to infrequent bowel
movements (less than three in a week). While troublesome, Proper Diet
constipation is usually not serious. It should be treated and The first treatment for constipation is to eat a high fibre diet
corrected to reduce abdominal discomfort and other related to provide natural bulk in your daily food intake. Dietary
symptoms and to prevent the development of complications. fibre, often called roughage, is a portion of food that passes
Untreated chronic constipation may lead to or aggravate through the intestine and colon almost unchanged.
more serious problems such as haemorrhoids (Piles) or fecal Undigested fibre holds water to keep the stool soft and adds
impaction (partial blockage due to hard stool). bulk which helps move stool to the rectum. Most eat a lot of
roughage and this is often a major factor in frequent bowel
Measures to Treat Constipation movement. An increase in dietary fibre generally results in a
The goal of treatment is to re-establish normal bowel habits softer and bulkier stool which can be passed more easily. For
without the use of laxatives (tablets or syrups used to treat details, consult your physician.
If you do not have a bowel movement medications without approval from may find it helpful to apply external
for three days after beginning the your physicians. pressure by pushing with your hand
retraining programme, you may use a placed in front of the rectum or just
single 250 cc (one cup) enema. If an Habits behind the rectum.
enema is necessary, use tap water. I It is extremely important to have
would recommend that you consult a regular habits to re-establish normal Whenever possible, plan in advance
physician before the use of enemas. bowel function. Establish a regular for changes in your daily routine.
routine based on your own schedule. Constipation often occurs during
travel, vacation or stressful situations.
Medications Try to have a bowel movement at the
Take bulk agents and glycerin
Some medications slow the same time every day. The activity of
the colon increases after waking up in suppositories with you in case you
movements of the colon and may need them.
cause constipation or make it worse. the morning and after eating, so the
Medicines that you can buy in the urge to have a bowel movement is
drugstore without a prescription and usually greatest after breakfast. Get up Regular Exercise
early enough in the morning to eat Exercise increases muscle movements
which should be avoided include:
breakfast, exercise, and sit on the of the colon and promotes normal
antacids containing aluminum
toilet. This should become a daily bowel habits.
hydroxide (for example Aludrox) or
routine.
bismuth (for example, Pepto Bismol),
antihistamines (for example, Benadryl)
Promptly obey all urges to have a About the Author:
and iron. When buying medicine off
bowel movement - do not delay or
the shelf in the drugstore, ask your postpone a visit to the bathroom as the
pharmacist for help in choosing a drug Dr. S. M. Wasim Jafri,
urge will disappear. Repeated ignoring FRCP, FRCPE, FRCPG, FACP, FACG
that does not make constipation worse. of an urge will change your normal
It is important to discuss your Ibn-e-Sina Professor,
sensation in the rectum and can lead to Chief of Gastroenterology
medications with your physicians as constipation.
there are a number of prescription Chairman, Department of Medicine
drugs that may cause constipation. Do The Aga Khan University Hospital,
Avoid over stressing. If you feel stool in Karachi.
not stop taking any prescribed the rectum but cannot expel it, you
Subscription Rates
THE PAKISTAN ACCOUNTANT
CA STUDENTS
(After Completion of Training Period)
OTHERS
Annual Subscription Rs. 200
Mr. Irfan Ghani, a vanquisher of FOUR GOLD MEDALS in After the announcement of exam results on January 31,
final exam of Chartered Accountancy held in December 2005, he was invited to share coverts of his effulgent
2004, says, "January 31, 2005 was one of the most special accomplishment in professional examination of Chartered
days in my life. It was WONDERFUL, MARVELLOUS, AND Accountancy. He stated, "Chartered Accountancy is not
AWESOME. I never expected such a grand finale. Only easy with one’s articles going along with one’s studies.
passing the exam within my training period would have been Passing the exams in straight attempts is blend of many
quite satisfying but having done it with four Gold Ones was factors mainly honesty with your studies and work, prayers
a real blessing of Allah. I have secured gold medals before of parents and friends and most importantly Graces of Allah
but to secure four of them in the final exam of Chartered Almighty". His explicit riposte to assorted questions put to
Accountancy is something very special, a pleasure not him is replicated vide infra for the readers of Pakistan
describable". Accountant in general and enlightenment of Chartered
Accountancy students in particular.
Education: Q. Why did you choose Chartered Accountancy profession?
w September 98 – June 2005 : Chartered Accountancy from
Institute of Chartered Accountants of Pakistan A. When I did my matriculation I had a faint idea that I do
w June 98 – June 2000 : Graduation – Economics, English not have the making of a scientist. With my schooling and
Literature and Statistics (Optional), from Punjab family background I knew nothing about the profession of
University, Lahore. Chartered Accountancy. What I liked was English Literature.
w June 96 – June 98 : Intermediate from Government In the free period before joining Government College I asked
College, Lahore my teacher of Literature "What is Chartered Accountancy?"
to which he replied "I do not know much about it but have
heard that it is something very professional, difficult and
Awards: adventurous." I knew my teacher to be very selective about
Chartered Accountancy
the use of words and these three adjectives appealed to me
w Gold medal in Management Accounting – Final
so much that I decided to join the ‘elite force’.
Examination
w Gold medal in Advanced Taxation – Final Examination
w Gold medal for overall performance in Module F – Final Q. How did you plan your studies at school / university /
Examination RAET institution and final level examination of Chartered
w Gold medal for overall performance in Module E & F – Accountancy?
Final Examination A. I have never been a truant when it comes to studies. The
w Gold medal for overall performance in Foundation studies did not require much planning during the school,
Examination college or RAET days. The only requirement for full time
Graduation studies is to revise daily whatever has been taught in class.
w Gold medal for highest marks in English Literature The planning is crucial when a CA student enters a CA firm.
Intermediate His life is split apart in many a segment. The fight between
Silver medal for 2nd position in Lahore Board his conscious and sub conscious begins, whenever he is
loyally performing his duties as a trainee student his sub
I conscious keeps on nagging him and weighing him down
nterests and activities: about his studies. It is time for him to realize that his studies
w English Literature – Classical and contemporary, snooker require conscious planning. I made it my habit to study
etc. regularly planning for the month of Ramadan which was
coinciding with my study leaves before exams of Module F.
Training: I made a promise to myself that I will study eight hours a
w July 2000 to-date : A. F. Ferguson & Company, Chartered week during the period from the announcement of the result
Accountants of Module E to my study leaves for Module F –
E-mail address: ig_ghani@yahoo.com approximately 14 months. I took classes for Management
Accounting and Business Finance Q. Did you aim for distinct position / Q. Are you satisfied with education and
Decisions quickly after my passing GOLD MEDAL in final level training scheme of ICAP? If not, what
Module E so that I had sufficient time to examination of Chartered Accountancy are your suggestions?
revise the syllabus and understand the well before exam? A. ICAP education and training scheme
concepts. The most important thing A. Although my colleagues asked me to has been recognized world over by
which I understood very late in Module plan for gold medal but the only thing I different professional bodies of
E is the fact that good performance in accountants which in itself is good
could do to aim for it was try to cover
one subject and poor performance in evidence that the scheme is
the whole syllabus diligently. You do
other subjects undermines one’s worthwhile. But my main grievance is
not know whom you are competing with the examination system when an
chances of passing the final exam. All
against. I tried to understand what I was unsuccessful candidate cannot get
the subjects are equally important and
hence after recognizing this fact I tried studying and enjoyed it thoroughly. The personal appraisal of his paper even if
to give equal time to every subject – same amount of effort is required for he is willing to pay for it. Many students
every subject is tested for 100 marks passing the final exams, the ‘over and make the same mistakes in the
and D grade in Auditing or Taxation is aboves’ are very welcome. examination hall time and time again
as detrimental as it is in Financial but never know the cause of their failure
Reporting or Business Finance Q. Did you expect securing GOLD and as a result lose their self-
Decisions. MEDAL after final exam? confidence. Many students with
A. I could not tell how my papers would extraordinary track record leave
Q. To whom do you owe this enviable Chartered Accountancy despondently
have looked through the eyes of the
achievement i.e. your own hard work, after repeated failures not because they
examiner. I received medal when I did
your schooling / university / RAET / failed but because they did not know
not expect it in Intermediate, CA why they were failed.
audit training background, your Foundation and Graduation but did not
parents or sheer luck?
get it when I expected to get one in Q. What do you want to do for the
A. Luck and blessing of parents are the
Financial Reporting in Module E. Hence country in general and chartered
things that are indispensable in every
I decided not to expect anything golden accountancy profession in particular?
wake of life. I used to thank Allah a few
this time although at heart I believed all A. My dream is to see Pakistan as a true
days before exams that I was lucky
my papers especially that of Islamic State and as a stepping stone I
enough that I was able to prepare for the
Management Accounting went very intend to find an economically viable
exams as I intended to without any
well. solution to the problem of "riba" and
untoward incident. After every paper I
insurance - apart from changing their
used to thank Allah that I was able to
name instead of substance. I believe
perform in the examination hall and Q. What is your advice to other
that there is a solution as Islamic
negotiate with uncontrollable variables students of Chartered Accountancy to
community thrived more in the olden
outside the hall, variables like weather, excel in exam? times of Khulafa than it does now, what
traffic, etc. Allah is so beneficent that A. Well I am not in a position to advise we lack is belief in Allah. As for
He does not let us feel our insecurity in anyone because every student is chartered accountancy profession I
this world against the factors which we different and peculiar in many respects. would really like to play my part to
cannot control, if we study hard and do However, if I narrate my own strategy it bring it at par with the standards of
our part (the factor which we can was very simple; study honestly and accountancy profession in the
control) our luck would shine on us. developed countries.
seriously because my career depended
on it, take my work as trainee student
A man is thankfully not alone in this About the Author:
seriously as I have a commitment with
world. I was supported well by my
the firm, ask my mother to pray for me Mr. Shakil Akhtar Qureshi is a fellow
mother, my family and friends. I would
and take good eight hours sleep before member of ICAP and member of
like to name two Chartered
every paper. Many things I have Publications Committee, Accounting
Accountants, Hammad Ali Ahmad and
and Auditing Standards Committee
Khawar Meer, colleagues of mine, who mentioned may not seem related to
and Educational Research Faculty of
inspired in me self belief that I could success in CA but I have said before,
ICAP.
strike gold. I owe this success to their Allah is the One who compensates and
believing in me and making me prepare Readers are welcome to contact him
rewards for things He likes – honesty,
at: accountancyupdate@yahoo.com
for this coveted award. commitment and dedication.