In the name of ALLAH, the Most Magnificent, the Most Merciful

The Weighing (of deeds) on that day is definite. As for those whose scales are heavy, they will be
the successful ones. (8) But those whose scales are light, they are the ones who have brought
loss to themselves, because they did not do justice to Our verses. (9) We established you on
earth, and created in it means of living for you. Little you appreciate. (10) We created you, then
gave you a shape, then We said to the angels, “Prostrate yourselves before ’Adam.” So, they all
prostrated themselves, except Iblis (Satan). He did not join those who fell prostrate. (11) Allah
said, “What has prevented you from prostrating when I ordered you?” He said, “I am better than
him. You have created me of fire, and created him of clay.” (12)
Surah Al-Araf, Ayat 8 to 12
Translation: Mufti Taqi Usmani | http:///www.quranexplorer.com

Fr om the
Holy Quran

Vision
Mission
& Core Values
Vision Core Value
Competence
To be the Preference in Value
Optimization for Business
Innovation

Ethics

Transparency
Mission
To develop Business Leaders through Professionalism
imparting quality education and training in
financial and non-financial areas to bring
This Journal is also available on ICMA Pakistan’s
value-addition in the economy Website : www.icmap.com.pk
 ICMAP

Estd. 1951

From the Desk of

President
I n today's global competitive business environment, corporate
governance is recognized as a tool for sustainable development
that brings efficiency and growth to the economy and at the
same time ensures better performance, financial credibility and
value addition in organizations. In fact, corporate governance is a
mindset that prevails at the Board, management and executive
levels that leads to improvement in business efficiency and
profitability. A good corporate governance image such as presence
of dynamic Independent directors on the board enhances the
reputation of companies and makes them more attractive to
customers, suppliers and investors. The modern corporate
At Institute's front, several initiatives have been taken by the
governance requires that company directors think 'sustainably'
Council for the benefit of members, students and the profession.
beyond profits for the long term survival of businesses and this
An entrepreneurship opportunity has been offered to members for
thinking has a salutary effect on the economy.
establishing own entrepreneur centres for CMA programs. The
Pakistan is emerging as a strong propelling force on global map Institute has also taken a historic decision to allow rights of
with the progress and developments taking place under CPEC. The information to examinees to preview their assessed examination
international investors are now looking at Pakistan as a lucrative answer scripts of core/analytical papers and if deemed appropriate
market for doing business. In this backdrop, adoption of best get the scripts re-evaluated w.e.f. Spring 2017 Examination. The
corporate governance practices has become quite imperative for SOPs of this initiative is already notified on website.
Pakistani companies to provide a conducive corporate
For professional development, a Global Management Accountants
environment that could entice global investors and guarantees
Conference (GMAC) was successfully organized in Dubai, UAE.
them security of their interests at all levels of the company.
The remarkable outcome of GMAC was the consensus of the
This issue of Management Accountant attempts to provide a management accounting bodies of SAARC to form a 'Global
holistic view of the current situation of corporate governance Forum of Management Accountants (GFOMA). The foundations
practices in Pakistan vis-à-vis the policy initiatives taken by the of GFOMA has been laid down by ICMA Pakistan and In sha Allah
government and regulators to ensure better governance framework it is expected that other management accounting bodies i.e. CIMA
in the corporate sector. Recently, the SECP issued a draft Listed UK and IMA USA would soon be joining the Forum.
Companies (Code of Corporate Governance) Regulations 2017 for
Another significant initiative taken by the Council is the decision
public comments. ICMA Pakistan arranged Stakeholder
to adopt the IESBA Code of Ethics in relation to responding to
Conferences on the draft Regulations and on the basis of comments
Non-Compliance with Laws and Regulations (NOCLAR). It has
received from the participants has submitted its recommendations
become applicable on members of the Institute with immediate
to the SECP for consideration.
effect. IESBA has made this Code effective from 15th July 2017
I am really indebted to Mohammad Zubair sahib, Governor of and countries around the world are presently in the adoption
Sindh for sparing from his precious time to meet ICMA Pakistan's process. The Institute would be arranging orientation session on
delegation for an exclusive interview. We had a very useful NOCLAR at ICMAP Campuses in major cities for members'
interaction with the Governor on a number of important matters enlightenment.
and let me mention that we were greatly impressed with his vast
The Election Committee appointed by the National Council has
knowledge and insight on accounting and finance. We really
finalized the timetable for elections of the Institute for term 2018-
appreciate Governor's endorsement of ICMAP's viewpoint for
2020 and an election circular to this effect has been issued.
establishing an independent Financial Reporting Council in
Pakistan. I am also grateful to Mr. S.M. Naveed, President of The themes that have been selected for next two upcoming issues
Pakistan-China Joint Chamber of Commerce and Industry of MA Journal are Retail Sector, Robotic Accounting and
(PCJCCI) for providing the opportunity to interview him on the Integrated Reporting. I would request our members to contribute
role of PCJCCI with reference to CPEC. articles on these topics. Please enjoy reading and share your
valuable comments and suggestions on rp@icmap.com.pk
The Focus Section covers some very enlightening write-ups
contributed by our valued members. I hope these articles would Mohammad Iqbal Ghori, FCMA
provide a useful source of information to the readers on corporate President
governance.
ICMA Pakistan’s Management Accountant, September-October, 2017 1
 MANAGEMENT
ACCOUNTANT
Official Journal of Institute of Cost and
Management Accountants of Pakistan
Research & Publications
Chairman
Mohammad Iqbal Ghori, FCMA
Members
Mian Nisar Ahmad, FCMA
Hamad Rasool Bhullar, FCMA
Faisal Shafique, FCMA
Syed Hassan Ahmed Al-Ahdal, FCMA
Syed Babar Ali, FCMA
Syed Zulfiqar Ali Shah, FCMA
Shoaib A. Tirmazi, ACMA
Zulfiqar Ali Mehto
Jawad Hamid Malik
Tanvir Shahzad
Editorial Board
Mohammad Iqbal Ghori, FCMA
President, ICMA Pakistan
Prof. Lakshman R. Watawala,
President, Institute of Certified Management
Accountants of Sri Lanka (ICMASL)
Dr. Samina Khalil, Direcor,
Applied Economics Research Center
(AERC), University of Karachi
Editor
Shahid Anwar, Joint Director
Research & Publications, ICMA Pakistan
rp@icmap.com.pk
+92 21 99243900 Ext. 117 / 107
www.icmap.com.pk
Our Next Issues
Nov-Dec, 2017
Retail Sector
Robotic Accounting
Jan-Feb, 2018
Integrated Reporting
Research & Publications Committee would
welcome articles on the above-mentioned
topic for Journal’s forthcoming issues.
Disclaimer: Views expressed herein are
author’s own thoughts/viewpoints and do
not represent ICMA Pakistan’s policy
unless so stated. Publication of paid
advertising and new product/service
information does not constitute an
endorsement by ICMA Pakistan.
Contents Volume : 26.5 l September-October, 2017
Interview Section
3 Mohammad Zubair
Governor Sindh
7 S. M. Naveed
President, Pak-China Joint Chamber of Commerce and Industry (PCJCCI)
Focus Section
12 Corporate Governance in Pakistan:
A freewheeling assessment 27 IT Governance Leads to
Corporate Governance
Abdul Jabbar Kasim Arshad Masood, FCMA
The aim of Good Governance is to align business to IT governance is now made to increase value of all the
attain its objective in an ethical way and protect the stakeholders such as employees, customers, suppliers,
right of shareholders and government etc.
14 Need for Corporate Governance
Scoring Index in Pakistan 29 Revisiting the Corporate
Governance Regulations
Syed Tariq Waqar, ACMA Mohammad Iqbal Ghori, President, ICMA Pakistan
The corporate sector plays a vibrant role in the socio- Regulation is a key instrument through which the
economic development of any country. The corporate governments achieve social and economic policy
sector in Pakistan has progressed significantly during objectives.
the last two decades.
16 Draft Code of Corporate
Governance - Random Thoughts 32 Global Corporate
Governance Landscape
Qaisar Mufti, FCMA Muhammad Abbas, ACMA
An alternate could be association of a Council An important challenge in corporate governance is that
Member of ICMAP / ICAP / ICSP, if the quorum is the company boards should be made accountable for all
otherwise made out. the bad decisions they make.
19 Impact of Corporate Governance
on Earning Management 34 Fine Tuning the Philosophy of
Corporate Governance
A Study of Listed Textile Companies of Pakistan
Sayyid Mansoob Hasan, FCMA
By Muhammad Hussain in supervision of Saif Ullah, By focusing the regulations on protection and
Ph.D.
safeguarding of public money the corporate
This study examines the relationship between
governance regulations can be strengthened and made
characteristics of Corporate Governance and Earnings
more effective to develop public confidence which will
Management for a sample of Personal Goods (Textile)
ultimately result in more corporatization and growth of
Sector.
Pakistan's economy.
Articles Section
37 Measuring the Success
of the Board 40 SAFA Index on Public
Financial Management
How do you measure your board's performance? Sir By Mohammad Iqbal Ghori, President ICMA Pakistan
Andrew Likierman describes the 10 key qualities and Chairman, R&P Committee
every board needs for success, and explains how to
measure them.
A sound public financial management (PFM) system is
essential for better governance that allows the
government to achieve macro-economic sustainability
and pro-poor economic growth.
Special Feature
43 and
Non-Compliance with Laws
Regulations (NOCLAR) 48 Pakistan, India and Sri Lanka join
hands to form a Global Forum
of Management Accountants
Other Features
52 Economy Watch 54 Accounting
Glossary of Management
Terms
 ICMAP

Estd. 1951

Exclusive

Interview

Mohammad Zubair
Governor Sindh
ICMAP: What do you think is the way forward in the record in the five year history of Pakistan. During 2006 to 2013,
current political and economic scenario of the country? there was an average three percent growth on an annual basis.

MZ: Every country has to face economic challenges and
Pakistan is not an exception. In June 2013 when the government
took charge, there were two main impediments to economic
growth viz. alarming power sector situation and the security
concerns. In the presence of these obstacles, you could not even
think of economic revival. It was our vision to bring large doses
of investments in power sector that could reverse this alarming
situation. You can see that during last four years, huge
investment in power sector has been made which is
unprecedented in the history of the country. Under CPEC, US$
34 billion investment is for power sector alone. Around 10400
mw will be added by April next year in national grid. During last
six months, if you see, many power projects have been launched.
I give you one example of US$ 4.5 billion Thar Power projects in
which HUBCO has invested US$ 2 billion whereas Engro has
made an investment of US$ 2.5 billion and these plants will be
using indigenous coal. To address security concerns, we started
operations in Karachi in 2013 and in June 2014 ‘Zarb-e-Azam’
was launched at country-wide level which altogether changed
the security paradigm of Pakistan. So we had to focus at two
fronts i.e. ensure credibility and assurance of economic policies
and at the same time improve the power sector and security
situation. Our goal was to make the macro-economic indicators
positive and today for the first time the GDP growth is over five
percent; fiscal deficit is lowest in last ten years and inflation has
remained in single digit, mostly below five percent. From
Rs.1900 billion tax revenues we are going to end at Rs.4000
billion by end of this fiscal year so more than doubling which is a
ICMAP: What are the major challenges at economic front
and how they could be tackled?
MZ: The two major challenges are ‘trade deficit’ and ‘current
account deficit’ which are interlinked. These are very serious
challenges as trade deficit has soared to more than 30 billion
dollars. The obvious reason for trade deficit is increased
ICMA Pakistan is one of the most
professional organizations and with the
sort of background of your members; I
think you can play a very significant
and proactive role
imports, mostly of typical items like oil and largely of plants and
machinery which cannot be stopped being fundamental to future
economic growth. Anyone who argues about high imports must
answer our counter question to identify any specific items which
should not be imported?
The second reason for trade deficit is falling exports which is
obviously an alarming situation but exports decline is an

ICMA Pakistan’s Management Accountant, September-October, 2017 3

 ICMAP

Estd. 1951

international phenomenon and with exception of

few countries, all nations are experiencing
downward trend in exports. The exports decline
of leading economies like China and India is
more than that of Pakistan. The international
commodity prices have gone down significantly
and for example an item which was exported at
an amount of 1 dollar is now reduced to 50 cents
so you have to double the units to get one dollar.
Having said that, there are very good examples,
like Bangladesh, who have increased their
exports. Recently, during this fiscal year, the
exports have starting picking up and I assure you
that some of the actions the Prime Minister has
taken will start giving the positive results on the
export side narrowing the gap in the trade deficit.
These are major challenges for Pakistan. But it is
not true that the economy has been totally
collapsed as general news is coming nowadays.
We have gone close to six percent of GDP
growth and massive investments under CPEC
were never thought before. In power sector we
have taken turn around. It was thought in
Pakistan that security was an issue but I say that power sector
was an issue. I talk about pipelines alone, if you had purchased
power stations then how you would have transmitted the same to
the national grid. Close to 6 billion dollars have been invested in
creating layout for pipelines and that was to be completed
simultaneously with power stations. The two biggest dams,
Bhasha and Dhasu started during this tenure are hydel and would
provide the electricity at cheapest rate when they will be
Recently, during this fiscal year, the
exports have starting picking up and I
assure you that some of the actions the
Prime Minister has taken will start giving
the positive results on the export side
narrowing the gap in the trade deficit
operational. LNG is also bringing a skyline change. When you
go to the Port Qasim and see left and right sides you will witness
the projects on which multibillion dollars of investments have
been made.
The problem is that we never review the performance; we
simply talk about irrelevant things so I think these are serious
challenges. Having said that, the government and everyone of us
has to do lot of hard work. The first thing is to promote Pakistan
as a destination for investment and to promote Karachi as a city
which has turnaround from a security standpoint. The more the
efforts of the Government and the private sector to attract
investment the better it would be.
ICMAP: As a professional we feel there is some deficiency
on the front of branding Pakistan at international level?
What are your views about institutional branding?
MZ: I absolutely agree that branding is needed. In today’s
organization, marketing and HR aspects has assumed the
importance of a science. In private sector there is a massive
competition that is why they have to promote. Coke is a well-
known brand in the world but there is not a single day that passes
in 200 countries of the world that it is not promoting itself. From
Pakistan’s perspective, there is a problem of perception. For
instance, the situation in Karachi was bad for whatever reason
but the international investors only knows that the situation is
bad; they are not concerned about its reasons. We say that we
have made turnaround and statistics prove that situation in
Karachi has improved but who will correct the perception verses
reality in the minds of investors. It will definitely correct over a
period of time but my theory is that lesser the gap between
reality and perception, more chances are for better economic
recovery. From the first month when I took charge as Governor, I
went to Dubai to do a road show to promote the great
opportunities that Karachi offers to global investors. I always
give one message to foreigners and diplomats whom I meet to
please tell your governments to review travel advisory
mechanism for Pakistan and specially Karachi. The global
investors and financial community need to be convinced that
inspite of recent happenings in Pakistan like disqualification,
JIT etc Pakistan is on right track with a Parliament in place and
sound economic policies ensured by government. We have
recently visited Boston, New York and Washington with a
business delegation comprising top management of fifteen
corporations i.e. HBL, UBL, Engro, PSO, OGDC and Pakistan
Stock exchange where we show cased Pakistan and also visited
New York Stock exchange. The President of Overseas Investors
Chambers of Commerce also accompanied to represent foreign
companies and to highlight how businesses have evolved over
the last few years and the positive outlook that they have about
Pakistan’s future economic growth.

4 ICMA Pakistan’s Management Accountant, September-October, 2017


Next month, we have decided to go to London, Bradford and
Brussels to conduct road shows to portray Pakistan’s true image.
Earlier, we conducted road shows in Doha, Singapore, Hong
Kong and all major countries to showcase Pakistan’s political
stability as branding and marketing is important to penetrate
markets.
The continuation of political process is very crucial. Last
democratic government completed its tenure of five years from
2008 to 2013 and our government is about to complete its tenure.
We are all set for another electoral process in 2018 and inspite of
everything that has happened in the last few years like dharna,
panama, etc, this is the new Pakistan which has emerged. In the
past, such serious crises led to wrap up of entire system. We
cannot keep experimenting. The investors and businessmen
want stability and continuation of process which is imperative to
be ensured to them.
ICMAP: What is your action plan for the privatization of
public sector organizations?
MZ: We made strenuous efforts and gained successes,
especially in equity market transactions through road shows in
which HBL was largest equity offering organization not just in
Pakistan but in frontier market. For privatization due diligence
process basically starts with the appointment of financial
advisor, which is led by a consortium of investment bank,
chartered accounting firms, communication strategists, HR
companies and in all cases we appointed the best in the world.
For selection purpose, Citibank, Merrill Lynch, Credit Suisse,
Deutsche Bank and Big four CA firms, out of which one is to be
qualified, were involved, in addition to top 40 law firms from the
UK. A very comprehensive due diligence process of about 40 to
45 public sector companies was carried out, covering financial,
technical, marketing, legal and HR aspects as per normal
process followed everywhere. Now, when you have completed
that process, there are three options i.e. restructuring,
privatization and privatization after restructuring to attract
investors of an entity. We carried due diligence process of 45
entities and for FESCO bids were also offered at last stage.
ICMA Pakistan’s Management Accountant, September-October, 2017
ICMAP
Estd. 1951
Politically, I have my own angle and I think that until the
opposition and media do not understand the actual process
behind restructuring and privatization, turnaround will not
happen. For restructuring you need larges doses of capital and
investment and also taking difficult decisions with respect to
employees. For instance, PIA restructuring required purchase of
aircrafts to compete with best airlines in the world.
The first thing is to promote
Pakistan as a destination for
investment and to promote Karachi as
a city which has turnaround from a
security standpoint. The more the
efforts of the Government and the
private sector to attract investment the
better it would be
This requires revenues for which strict decision on employees
has to be taken. During last thirty years, PIA has been in profit
just for one year so privatization of PIA is not a concern for a
single government; rather for all the governments. To ensure
merit culture and achieve turnaround there is a need for a strong
performance evaluation which may allow the management to
reward the best and punish the worst. The former Prime
Minister Nawaz Sharif once asked me that what I would do as
Chairman Privatization Commission. I told him that in my view,
there are two angles of privatization; one is professional and the
other is political. The professional aspect is highly challenging
and fascinating as you have to deal with top managements of
5
 ICMAP
Estd. 1951
I think that ICMAP must initiate a
process with major political parties,
considering that elections are just
around the corner, and ask them to
disclose their strategy to improve
transparency when they come into
power
public sector companies; global and local financial institutions;
CA firms; stock exchanges; Chambers; equity companies; bond
markets. So if I have all these resources and professionals I will
deliver for its due diligence process, marketing, etc. I told Mr.
Nawaz Sharif that the second aspect which is political is to be
taken care by you i.e., when the key time comes you have to take
the tough decision.
In my view, the way forward is privatization and if you don’t
take any initiatives for restructuring e.g., employees behavior,
transfers, etc. and keeping in view the current situation of our
courts or unavailability of doses of investments in plant and
machinery, IT, etc., then it could not be achieved.
ICMAP: IMF and World Bank has recommended to form
an independent Financial Reporting Council to regulate the
accounting and auditing profession, however the Audit
Oversight board formed recently is dominated by one
profession and restricted to public interest companies. We
are persistently pitching up with the government to form an
independent financial reporting council. What role you can
play?
MZ: In Pakistan, traditionally the chartered accountants have
dominated the policy making as far financial matters are
6 ICMA Pakistan’s Management Accountant, September-October, 2017
concerned. However, I feel that this should not be the
prerogative of anyone and we have to make effort in this regard.
I am fully supportive of this and with you hundred percent.
ICMAP: What will be your message to members of ICMA
Pakistan to play a more proactive role?
MZ: ICMA Pakistan is one of the most professional
organizations and with the sort of background of your members;
I think you can play a very significant and proactive role. All
modern organizations are process oriented having significant
check and balance; control and well-defined decision-making
process which are required to be broad base. The first proactive
step ICMAP should take is on transparency.
It should interact with the Government and propose to undertake
studies on key economic decision making processes of ECC,
ECNEC or specific Ministries that could lead to improving
transparency and creating a positive mindset through
communication and media about transparency in government
entities. ICMAP can review the processes; identify weakness
and provide pragmatic solutions for implementation. This
would dispel the wrong picture and create the correct narrative
about transparency in Pakistan. It needs to be understood that
accounting systems, reconciliation and other processes are to be
assessed. The CFO of IBM in New York which is operating in
200 countries, do not make daily phone calls to every country
asking for receipts and payment, rather he just reviews few
pages of processes for transparency.
Secondly, I think that ICMAP must initiate a process with major
political parties, considering that elections are just around the
corner, and ask them to disclose their strategy to improve
transparency when they come into power. You can form a strong
team and propose them and I can tell you no one will refuse you.
So, you should make proposals on improving systems and
processes and propose to the government and certainly I will put
up your proposal to the competent authority. This would be a
great service for Pakistan.
The interview ended with a vote of thanks to Mr. Mohammad Zubair,
Governor Sindh, who spared his valuable time and gave his candid views
exclusively for this Journal - Editor

Interview
S. M. Naveed
President, Pak-China Joint Chamber of Commerce and Industry (PCJCCI)
ICMAP: What was the idea behind the establishment of
Pak-China Joint Chamber of Commerce and Industry
(PCJCCI)? Please apprise us about its objectives, role and
achievements?
SMN: The idea behind the establishment of Pak China Joint
Chamber of Commerce was to create a platform to facilitate
investment and trade relations with China. By the grace of Allah
almighty, PCJCCI since inception is endeavoring to strengthen
bilateral business, investment and cultural ties between the two
brotherly nations. PCJCCI is playing a key role in numerous
Pak-China projects. Various delegations with opportunities visit
PCJCCI on weekly basis. Special services being provided by
Pak China Joint Chamber of Commerce and Industry include
but are not limited to direct interaction with top business leaders
of China/Pakistan through B2B meetings, business match
making, offering a conversational Chinese language course for
removing language barriers, capacity building of local
entrepreneurs with the collaboration of Chinese experts.
We have a diligent and hard working team for eliminating
hurdles between the business communities of both the countries
and facilitating moves that can harness bilateral relations with
China. Objectives of PCJCCI are to promote Trade, investment
& mutually beneficial commercial ventures between China &
Pakistan. To collect evaluate & disseminate among its members
statistical & other information concerning commerce & trade &
other matters of interest; to provide most effective channels of
communication between the two business communities.
There are many achievements on our profile that are
acknowledged by the Government of Pakistan, and particularly
by the consul general of China. The Year under consideration
proved to be a promising year for Pakistan-China Joint Chamber
ICMA Pakistan’s Management Accountant, September-October, 2017
ICMAP
Estd. 1951
of Commerce and Industry. PCJCCI successfully established its
2000 sq ft own office. We succeeded in satisfying various
delegations and Chinese investors with Market Intelligence
reports backed by market research, analysis and surveys.
Moreover, these delegates are facilitated by arranging their
meetings with the relevant organizations. We endeavored to
ICMA can enter into MOU with
PCJCCI for mutual collaboration and
cooperation in field of cost saving skills
and business management. I believe that
this sort of collaboration will be very
beneficial for both organizations and above
all for our beloved country Pakistan
arrange appropriate technology transfer from China with the
collaboration of Science and Technology University Qingdao
China. PCJCCI Business matchmaking services turned to be
fruitful in the form of official joint ventures in some prominent
industrial areas including, steel industry, shoe chemical
industry, logistics, insurance sector, and an experiment was
conducted with Chinese on agriculture inputs particularly
Compound Microbial fertilizers for enhancing production yield.
The experiment ensued amazing results with 20% more
7
 ICMAP
Estd. 1951
production yield. PCJCCI is now contemplating establishing an
office in Chengdu province with the collaboration of Chengdu
government. This year, PCJCCI, with the collaboration of
Ecommerce Gateway Pakistan organized "China Electrical and
Mechanical Machinery Expo" to which we invited 150 top
machinery manufacturing Chinese companies who later on
became members' of PCJCCI.
PCJCCI is making strategy for thee innovative and vocational
training of young industry professionals that is entrusted to
I see future of Pakistan very bright and
youth are Pakistan's most valuable
resources. They are very talented and
hardworking. They should follow high
work ethics, continue working hard and
concentrate in whatever they doing. I know
that Pakistan youth will play an important
role in the future of Pakistan
enable them to work for CPEC projects. The joint ventures of
Pakistan and Chinese companies have not only increased
investment opportunities but have also helped combat various
economic obstacles including unemployment, power shortage,
poverty, low standard of living, technology crises etc.
We are strongly embedded with the vision of PCJCCI that is the
economic integration of two nations - China and Pakistan
through increased regional connectivity for mutual benefit. Our
Mission is to accentuate on the proliferation of bilateral trade
between Pakistan and China, endeavoring the identification and
eradication of potential deterrents to the expansion of trade and
investment opportunities.
8 ICMA Pakistan’s Management Accountant, September-October, 2017
ICMAP: China is the second largest merchandise importer,
however its imports from Pakistan are quite negligible
considering the warmth and depth of bilateral relations.
What are the reasons?
SMN: It is generally perceived that China is exploiting Pakistan
by exporting more and importing less. In reality, Pakistan is
unable to virtually benefit from Chinese market due to its narrow
export base. It needs to be understood that there is no element of
exploitation at both ends. The problem is that we are not efficient
enough to increase our export base due to high cost of
production (Mainly high cost of electricity and overvalued
Pakistan rupee). We need to manufacture market driven goods,
this is how we can benefit from Chinese Investment and Trade
agreements. We are endeavoring to develop the manufacturing
sector by the transfer of technology from China to Pakistan.
When the manufacturing sector will be empowered enough,
automatically there will be innovation, perfection and variety in
our manufacturing sector. In short, increase export base,
produce market oriented goods and overcome this import/export
imbalance.
ICMAP: Can you identify the potential sectors in which the
Chinese entrepreneurs are more interested to invest in
Pakistan, either directly or through joint ventures?
SMN: PCJCCI after in-depth analysis of market trends in China
identified mainstream industrial areas in which Chinese joint
Ventures could be prolific. The areas highlighted included;
Furniture, Handicrafts, Textiles, Automotives, Fertilizer,
Cement, Glass work, Energy, Pharmaceuticals, agriculture, fruit
processing units, dehydration plants, gemstones, minerals, dairy
products and halal food industry. All these mentioned areas are
primarily labor intensive, capital intensive and eco friendly.
Recently, PCJCCI with the collaboration of Ecommerce
Gateway Pakistan organized "China Electrical and Mechanical
Machinery Expo" in which we invited 150 top machinery
manufacturing Chinese companies. China electrical and
mechanical machinery exhibition turned out to be fruitful in the

form of a number of official joint ventures in some of the very
prominent industrial areas including Automobiles, Fork lifters,
Crockery, Glass wares, Solar lighting, Auto spare parts, kitchen
wares, sports items and printing machinery. His Excellency,
Long Ding bin, Consul General China in Lahore, also
acknowledge the efforts of PCJCCI for facilitating trade &
investment endeavors of both countries' business corporations.
To make aware local investors, entrepreneurs and business
entities about the opportunities of investment with Chinese,
PCJCCI, frequently launch media campaign to highlight various
innovative ideas that could prove to be milestones in existing
bilateral relations such as Youth entrepreneurship, potential of
hosiery industry, SME's and Cottage industry etc.
PCJCCI highlighted through media, the need for taking on board
all relevant Chambers and associations to decide setting up of
the exact number and types of special economic zones (SEZs)
along the CPEC route.
ICMAP: PCJCCI is engaged in capacity building of local
entrepreneurs with the collaboration of Chinese experts
under the auspices of National Productivity Organization?
How can ICMA Pakistan join hands with PCJCCI
in imparting specialized knowledge on cost
saving skills and management?
SMN: Pak-China friendship has been
successful in bringing a number of
Pakistani and Chinese companies to
one platform for four years now.
Many MOUs have been signed in
these years, which in turn have
blossomed into successful
business relations. The joint
ventures of Pakistani and
Chinese companies have not
only increased investment
opportunities but have also
helped in boosting the trade
between two countries.
Many successful agreements were
signed in past four years which have
matured into blooming businesses. These
were segmented as education, agriculture,
furniture, handicrafts, textiles, fertilizer, building
materials, glass work, metallurgy, chemicals, marble
industry, food processing, rubber technology, energy &
biomedical.
ICMA can enter into MOU with PCJCCI for mutual
collaboration and cooperation in field of cost saving skills and
business management. I believe that this sort of collaboration
will be very beneficial for both organizations and above all for
our beloved country Pakistan.
ICMAP: The Chinese model is to engage academics and
technocrats in production facilities? Can PCJCCI and
ICMA Pakistan collaborate to impart this culture in
Pakistani industry?
SMN: Yes, PCJCCI believes that The Chinese model of
indulging academics and technocrats in production facilities
should be promoted in Pakistan to create more competitive and
research backed products. PCJCCI and ICMA Pakistan can
ICMA Pakistan’s Management Accountant, September-October, 2017
ICMAP
Estd. 1951
contemplate entering into partnerships with international
technology leaders to provide opportunities to young scholars to
generate fresh innovative startups. In this regard China-Pakistan
Economic Corridor (CPEC) will help achieve Pakistan's
knowledge economy goals, additionally, Pakistan's image
internationally has to be improved so that more international
partners are ready to visit and invest in Pakistan.
It is quite encouraging that the number of PhDs in Pakistan has
risen from 300 in 1998 to about 7000 today, but still, knowledge
platform and production platform is not synergized. PCJCCI
and ICMA can jointly put efforts to outline strategic goals where
fresh graduates and researchers could also contribute in value
addition of the commodities being produced in Pakistan. Sadly,
Pakistan is ranked very low on the Innovation and
Competiveness indices internationally, that is a serious dilemma
that needs immediate attention and investment, if Pakistan is to
move towards knowledge based product growth.
ICMAP: What strategy PCJCCI has developed to maximize
benefits for Pakistani industry under CPEC?
SMN: This project will not only help turn around Pakistan's
economy but will enable Pakistan to become self-
sufficient in energy and infrastructure," The
future economic prospects of Pakistan look
promising but their actual realization
would depend upon a number of
critical factors such as successful
integration of Pakistan into the
g l o b a l e c o n o m y, s o u n d
macroeconomic policies, strong
institutional and governance
framework, investment in
infrastructure and human
development and above all
political stability. Pakistan has
the potential to empower half of
the world's population living in
Asia, by developing special trade
routes between China and Pakistan,
and our chamber, I believe, can play a
pivotal role in harnessing economic
activities in this region.
In the rapidly changing geo-strategic and
security environment, both countries are likely to face
many regional and global challenges. The need of the hour is
that, leadership of both countries should work hands in gloves
for cementing the traditional Sino-Pak relationship with an
exclusive focus on the economic corridor project that would
bring economic prosperity for Pakistan and China.
We need to realize that Pakistan has the geostrategic importance
in interconnecting countries. It is through Pakistan that the
economic development will radiate to other countries in South
and Central Asia therefore earlier completion of CPEC projects
will speed up the construction of the other part of the Silk Road
which is why China attaches great importance to CPEC.
With regard to CPEC, PCJCCI is more concerned with
improving the quality of development instead of quantity. We
are in an effort to maintain a certain speed of development where
more attention is paid to the quality of development for the
sustainability of ongoing development programs.
9
 ICMAP
Estd. 1951
ICMAP: CPEC will be a game changer for the region. What
are your comments?
SMN: The Friendship between China and Pakistan has now
transformed into strategic partnership that has provided
Pakistan with an invaluable opportunity that nations come
across in centuries. CPEC- The fate changer is that this has
opened new vistas of prosperity for the people of Pakistan and
the nation as a whole. I being an economic analyst declare that
when CPEC will be implemented in true spirit, "it will re-open
the economic artery blocked for years". The China Pakistan
Economic Corridor is a $57 billion project intended to rapidly
expand and upgrade Pakistani infrastructure, as well as create
about 700,000 direct jobs between, 20152030, and adding 1 to
1.5 percentage points to the country's annual economic growth.
Realizing the importance of CPEC in the ongoing scenario,
PCJCCI decided to facilitate the development of Special
Economic Zones (SEZs) by bringing Chinese manufacturing
facilities and technology in Pakistan. PCJCCI frequently
arranged various briefings for Chinese delegations regarding
SEZs in Pakistan. We prepared reports and articles centered on
effectively constructing Special Economic Zones for attracting
massive Chinese investment from mainstream industrial
segments. PCJCCI took rigorous initiatives for the advancement
of construction industry of Pakistan. PCJCCI realized the need
of aligning this important sector of economy with the
international quality standards.
Moreover, to harness CPEC projects PCJCCI decided to
overcome the communication barriers that were observed as
major obstacle in way of progress. We are imparting Chinese
Language lessons in order to prepare people to easily
communicate. One of the objectives of PCJCCI in imparting
Chinese Language to Pakistani youth is to make them confident
in pursuing their innovative ideas and interacting more
effectively with the Chinese counterparts.
ICMAP: What, in your opinion, are the main threats to
CPEC in the region?
SMN: CPEC is center of attention of people but unfortunately it
is also focus of conspiracies by enemies who do not want to see
10 ICMA Pakistan’s Management Accountant, September-October, 2017
Pakistan making progress and development. China-Pakistan
Economic Corridor (CPEC) could be a fate changer, but only if
Pakistan succeeds in overcoming its security challenges.
Pakistan army has played a crucial role in improving the security
challenged facing Pakistan. Pakistan needs to handle not only
the security challenges at home, but also needs to promote
regional stability.
About 8,000 Chinese and 85000 Pakistanis workers at present
are working on 210 projects, executing large projects along the
proposed CPEC routes. Media and academics should play a
positive role in deflecting, malicious and misleading
propaganda by highlighting the significance of the CPEC for
Pakistan. Furthermore, Pakistan and China proposed 29
industrial parks and 21 mineral zones across the country which
will enable Pakistan to produce the goods for its public demand.
Through more foreign investment, young and educated people
will get more benefits by getting jobs in new industrial parks and
mineral zones. CPEC and industrial parks will bring up the
people from the poverty line and will bring a new look to the
country's economic market. Pakistan will be able to export more
public goods and related material in international markets.
Pakistan and China have to co-ordinate on mutually beneficial
development agenda. We need to be clear in what we need and
what China can give, Co-ordination of a development strategy
and plan is necessary.
ICMAP: Any message that you would like to give to
members and students of ICMA Pakistan?
SMN: I see future of Pakistan very bright and youth are
Pakistan's most valuable resources. They are very talented and
hardworking. They should follow high work ethics, continue
working hard and concentrate in whatever they doing. I know
that Pakistan youth will play an important role in the future of
Pakistan. They will make us all very proud!
The interview ended with a vote of thanks to Mr. S. M. Naveed, President, Pak-
China Joint Chamber of Commerce and Industry (PCJCCI) who spared his
valuable time and gave his candid views exclusively for this Journal - Editor
FOCUS SECTION
 ICMAP
Estd. 1951
Corporate Governance in Pakistan:
A freewheeling assessment
Abdul Jabbar Kasim
Code of Corporate
Governance 2017
emphasis a formal and
effective mechanism for
annual evaluation of
board and its committees.
The evaluation of the
committee is new
requirement (2017) and
as such Audit Committee
and Human Resource and
Remuneration
Committees will be
evaluated based on the
terms of reference given
to each committee. On
the matter of separation
of the office of Chairman
and CEO, the regulator
has taken the onus of
deciding companies
which need to have such
offices separated
12 ICMA Pakistan’s Management Accountant, September-October, 2017
B usiness Best Practices have evolved
over a period of time; there is a clear
history of the developments. The
aim of Good Governance is to align business
to attain its objective in an ethical way and
On the hand in US serious attempt on code of
best practices came through Sarben Oxley
Act 2002 which was in reaction to high
profile corporate fraud cases including
Enron and WorldCom. The work carried out
protect the right of shareholders. If we peep under the Act 2002 was primarily intended
into the history we garner that the thrust of to prevent similar situation. The salient
Corporate Governance emerged when it was feature of Sarben Oxley Act 2002 includes:
felt that financial misdemeanor has crept in o Creating and strengthening corporate
and lack of fiduciary behavior is rampant in controls
the corporate world. Investing shareholders
were not in the position to correct the course o Requiring enhanced financial
and gather enough power to assert their disclosures
legitimate rights and correct the o Creating new standards for corporate
misdemeanor. There were cases of accountability
corporate failures and broader disregard of
o Creating new penalties for acts of
fiduciary responsibility at the corporate
wrongdoing
board level. This situation got the investors
stranded and this was the time for policy In Pakistan the face of Business Best
maker to wake-up. Practices emerged in the shape of Code of
The need to inculcate discipline in the
Corporate Governance March 2002. The
code was mild as seen in retrospect, with
management of corporate affairs was never
proviso emphasizing composition of Board
felt like this. The endeavor of regulator and
and encouraging independent directors on
policy makers was to take cognizance of the
the board. The other features of the code
failing responsibility at the helm of affairs
covered areas like separation of the office
and enforce financial discipline to restore
Chairman and CEO, and regular meetings of
confidence in the corporate sector. The end
objective was to underscore that affairs of
the board. There was an added emphasis on
the frequency of financial reporting, to keep
the corporate sectors are run in a fair and
the shareholders abreast with the
transparent manner. Additionally those at
the helm of affairs are made accountable for
performance of the company.
protecting the interest of shareholder in Most of the listed companies at that stage
particular and stakeholders in general. were in phase of comprehending the code
Board of Directors was at the center stage. with less regard for its compliance. It
In the period around the early nineties
appears that the intent of the regulator to see
that the listing regulations in conjunction
corporate boards were under scrutiny and
with applicable code are followed in
the regulators were keen to restore of the
investing public trust with a long-term
practices. Since this was the first move to by
regulator for paving way for establishing
objective of evolving an enabling
good governance practices, there was time
environment to instill business best
practices. In UK Adrian Cadbury committee
frame given for remaining proviso of the
code. This stage was a wait-and-see
report published in December 1992 was a
situation.
watershed infusing sense of fiduciary
responsibility in the way shareholder money After about 10 years a revised Code of
is used. The report emphasized the role of Corporate Governance was introduced in
board of directors and their accountability. the year 2012. The Code of Corporate
The code also underscored the requirement Governance brought some significant
of competency, education and experience changes compared to 2002 including the
for individual seeking position on the board. emphasis on mandatory Independent
Similarly financial reporting and financial directorship on the board and also limiting
control were key features. the presence of executive directors on the

board compared to 2002. Other significant feature of the code
2012, were a comprehensive test for independence. Following
the international best practices which emphasized the board
evaluation, the regulator introduced board evaluation effective
year 2015. This was a formidable and legitimate move as the
board itself (people who are in trust of shareholders money)
came under review. With the passage of time companies were
required to have a mechanism in place to ensure this practice.
With the key development on corporate scenario and some of
the business failure, internationally, it was appropriate and
legitimate to keep on radar the performance of board including
the evaluation of individual board members. There was an
essence missing from the area of board evaluation. That is that
the evaluation still remains the domain of the board with no
disclosure to the shareholders. The UK code requires disclosure
of board evaluation every three years, which instill confidence
in the company conduct of affairs in the transparent manner.
An attempt to transparency emerged in code 2012 as the
external auditors are required to provide the Review Report to
the Members of Statement of Compliance with the code of
Corporate Governance, which make sense as an external party is
to provide its assessment as to the corporate practices.
Similarly responsibility falls on the shoulders of
CEO/Chairman to produce and place before the shareholders
titled: Statement of Compliance with the Code of Corporate
Governance. The intent of the regulator appears is to have a self-
assessment of the good governance practice by those at the helm
of affairs and provide such certification.
With the coming in of Companies Act 2017, regulator embarked
on an exercise to align the Code of Corporate Governance. A
draft Code of Corporate Governance 2017 is underway its final
shape. As in the past the regulators have endeavored to
introduce key features in sync with the international business
practices.
The key features of the Code of Corporate Governance 2017
(under finalization). Includes interalia mandatory requirement
in the composition of board of having two Independent
Directors (IDs) or 1/3 of the board whichever is higher. Also
that the SECP will develop a data base for selection of IDs, listed
companies are required to refer to such resource. SECP requires
that a Statement of Material fact should be given with the notice
of AGM indicating the justification of choosing the appointing
individuals as ID appointee. Database for selection will be
maintained. Individual director who is termed ID is required to
file a declaration indicating his ID status in terms of law. In the
matter of board composition there is a mandatory requirement
ICMA Pakistan’s Management Accountant, September-October, 2017
ICMAP
Estd. 1951
of one female director within one year of notification of
regulations.
Code of Corporate Governance 2017 emphasis a formal and
effective mechanism for annual evaluation of board and its
committees. The evaluation of the committee is new
requirement (2017) and as such Audit Committee and Human
Resource and Remuneration Committees will be evaluated
based on the terms of reference given to each committee. On the
matter of separation of the office of Chairman and CEO, the
regulator has taken the onus of deciding companies which need
to have such offices separated.
While the regulators intended aim is that listed companies
follow the code of governance in spirit and practices yet the
thrust is missing. Listed companies' financial performance is
far from desirable, and the list goes on. The financial
performance of company is highly dependent on the board and
how it leads the management to achieve the ultimate goal of
enhancing shareholders' value. A Mckinsey Survey has shown
that companies serious about ethical business practices and
good governance have higher market capitalization. Very few
listed companies in Pakistan have shown such trend and there is
need to work on this.
Pakistan code needs to provide Comply or explain proviso. In
UK the latest Code, have taken the 'comply or explain'
approach. This is based on the premises that one size does not fit
all; this provides the companies latitude to be complaint yet
follow practices that are in sync with their particular
environment.
Further improvement in the performance of listed companies in
Pakistan can come through a combined endeavor and elbow
from shareholders. Internationally there is a wave of
shareholders activist campaigns and it is gaining momentum.
The basic purpose is support and lunge long-term value creation
which is to the ultimate benefit of the shareholder. Shareholders
activism has also been influential to check the excess executive
compensation. As a corollary of which disequilibrium in
corporate resources is fixed which ultimately spur up returns.
In is important that attention is directed to key international
developments in the corporate corridors. As regulator can be
one part of improving the business best practices and other and
important part is the shareholders.
The author of the article has held senior level position in listed companies and
has been CEO of listed leasing companies. He has also taken board seats as a
nominee director. He has presented paper in seminar in Asian countries. He has
held training sessions on Corporate Governance. Current interests involve
research on Corporate Governance and corporate affairs. He has been invited
as speaker at IBA, ICAP and ICMA forums. His articles on the subject appear in
Business newspapers and journals. He is presently faculty at IOBM.
13
 ICMAP
Estd. 1951
Need for Corporate Governance
Scoring Index in Pakistan
T he corporate sector plays a vibrant role in the socio-
economic development of any country. The corporate
sector in Pakistan has progressed significantly during
the last two decades. The legal framework foundation of
corporate sector in Pakistan was first conceived, proposed and
executed by former Finance Minister Ghulam Ishaq Khan under
the regime of late President General Zia ul Haq which formed
the basis for a modern corporate sector. During the same regime,
the Companies Ordinance, 1984 and Listed Company
Regulations were issued that paved the way for establishment of
innumerable corporations. Thus, the foundations of corporate
governance practices were laid on 8th October 1984 with a
vision to promote modern international-styled corporate sector
and business development activities in Pakistan.
At present, the corporate sector in Pakistan is dominated by
family-owned organizations which, though being in minority,
enjoy political power and feudal dominance. These families
collectively being the large block shareholder, controls almost
all the internal and external matters of the corporate entities in a
way that all the returns are consumed by themselves with
minimum benefit to overall corporate market, stakeholders and
national interest at large. For this major reason, the corporate
market of Pakistan does not grow with pace historically evident
in the world. This situation creates an unjustified state of affairs
for small scale shareholders as the impartial treatment and
protection of their rights become difficult. This has created
dissatisfaction in small investors leading to disinvestment.
Hence, there is dire need for an effective corporate governance
mechanism which is capable of safeguarding the interests of
small corporate shareholders in the country.
Corporate Governance and its importance
In today's modern world, Corporate Governance is the
harmonization of balance of power between owners
(Shareholder) and controllers (board of director) of a company
in such a way that it may lead to corporate fairness, transparency
and accountability. Corporate governance is the set of
procedures, corporate practices, policy guidelines, rules &
regulations and institutions which dictates and guides the way a
company is governed, managed or organized. It is all about
governing the corporate entities to help them achieve their
objectives. Good Corporate governance is also crucial for the
creation of a competitive market as it stabilizes capital markets
and safeguard investors. It helps organizations to make their
performance efficient enough to attract investment. It also
empowers businesses to achieve their goals and to shelter the
rights of shareholders. After the incidence of commercial
corruption scandals at top U.S companies such as Enron, the
legislators, regulators and corporate administrators
collaborated in the call for corporate transparency by practicing
improved corporate governance.
14 ICMA Pakistan’s Management Accountant, September-October, 2017
It is a fact that any
country with weak
corporate governance
enforcement practices
would be unable to attract
global capital and
investment. If investors
are not assured with the
q u a l i t y a n d
trustworthiness of
disclosure, capital will
flow away. On the
contrary, a country
having good reputation
on corporate governance
landscape and meeting Syed Tariq Waqar, ACMA
international best
practices of governance and accountability would be able to
attract capital from investors.
Need for a Corporate Governance Scoring
Index
To facilitate all stakeholders such as investors, lenders and most
importantly the shareholders of every listed Company, a
comprehensive corporate governance scoring index (CGSI)
rating mechanism should be evolved and maintained by the
SECP, which should be displayed on every company's annual
financial report every year. To guide companies towards
improved CG mechanism, penalty for low scoring companies
and minor tax relief for best scoring companies can be imposed
legislatively.
CGSI or corporate governance scoring index is corporate entity
rating indicator regarding adoption of good corporate practices
or otherwise, creation of such index or rating mechanism is a
complex task which will involve lot of financial, non-financial,
qualitative as well as quantitative information about a corporate
entity. There is no final definition for ideal CGSI composition, a
mix of multiple key performance indicators KPI can
collectively define a corporate entity CG score which will
facilitate even a laymen for decision making regarding small
investment in shares or an international investor for huge
investment in share of that entity at large. All the stake holders of
a corporate entity can take benefit from such an index rating
system which will also promote healthy competition in the CG
Good Practice indicator. An experimental CGSI indicator has
been prepared which can be further refined and improved to
create a standard corporate rating indicator for corporate sector
of Pakistan.
The above diagram shows the conceptual visualization of CGSI.
The technical uniqueness of this index is that we construct a
 ICMAP

Estd. 1951

comprehensive CGSI corporate governance scoring index, Rating of sample Companies on basis of best
which has been calculated by adopting set of complex
mathematical techniques for each key performance indicator
average CGSI
(KPI) used in the construction of CGSI. This index is based on The data was gathered from the sample corporate entities with
thirty two KPIs including financial as well as non-financial KPI respect to factors of CGSI and the performance indicators. The
such as data on board size; board composition, CEO duality; CGSI score index which had 32 elements could result in a
maximum score of 100. From the table, we observe that the
CSR % NPBT RCED % NPBT CGSI score of governance lies between 70 maximun to 49
ROCE RCED % S
Rating of the sample Companies on basis of best average CGSI
CSR % S COGSTS
S.# Company CGSI
EPS
AT
CD NBOD
ROE
DCR 1 Pakistan Petroleum Ltd. 70.06
FETS ROA 2 Indus Motor Co. Ltd. 68.17
ACD BATD
3 Mari Gas Co. Ltd. 66.78
CGSI 4 Fauji Fertilizer Co. Ltd. 66.61
FOB CAR(F) 5 Lucky Cement Ltd 66.33
TDTS DER
VPS NPM 6 Pakistan State Oil Co. Ltd. 66.17
OS/C RCED CSR IO
7 Engro Corporation Ltd. 65.67
ATOR CR 8 Exide Pakistan Ltd. 64.11
9 Sitara Chemical Industries Ltd. 63.89
INTR CAR(CG)
10 Ittehad Chemicals Ltd. 63.56
OCTD INTCR
11 Atlas Battery 63.28
12 Fauji Fertilizer Bin Qasim Ltd. 63.28
13 ICI Pakistan Ltd. 63.06
Audit Committee Duality; Female on board; Ownership 14 Nishat Mills Ltd. 62.94
Structure/Concentration; Clear Audit Report (Financial); CG 15 Mehran Sugar Mills Ltd. 60.72
code compliance Report; Institutional Ownership 16 Gharibwal Cement Ltd. 60.56
Remuneration to CEO, Directors and Executives; Corporate 17 Attock Cement Pakistan Ltd. 60.28
Social Responsibility ROA, ROE, ROCE, NPBT, CFFO, and 18 Pakistan Engineering Co. Ltd. 59.50
other comprehensive analytical data-set required for calculation 19 Dadex Eternit Ltd. 59.39
of this index can easily be gathered from the annual financial 20 National Foods Ltd. 59.33

statements of companies. The detail of KPI's used in 21 Atlas Honda Ltd. 59.06
22 Dawood Hercules Chemicals Ltd. 58.83
construction of CGSI.
23 D.G. Khan Cement Co. Ltd. 58.39
Corporate Governance Scoring Index (CGSI) 24 Baluchistan Wheels Ltd. 57.72
S. # Key Performance Indicators Abbreviation 25 Hub Power Company Limited 57.06
used in Data Set 26 Nishat (Chunian) Ltd. 56.72
1 Acid test or quick ratio. AT 27 Al-Abbas Sugar Mills Ltd. 56.22
2 Financial expenses as % of sales FETS
28 Fauji Cement Co. Ltd. 56.11
3 Trade Debt as % of sales TDTS
4 Assets turnover ratio ATOR 29 Cherat Cement Co 55.78
5 Current ratio CR 30 Bolan Castings Ltd 54.56
6 Cost of goods sold to sales COGSTS 31 Bestway Cement Ltd 54.28
7 Debt equity ratio DER
32 Ghandhara Industries Ltd 50.94
8 Return on assets ROA
9 Return of equity ROE 33 Nimir Industrial Chemicals Ltd 49.67
10 Return on capital employed ROCE
11 Dividend cover ratio DCR minimum, which is quite a low rating. Thus, we can drive from
12 Inventory Turnover Ratio INTR
13 Interest cover ratio INTCR above result that the Pakistani companies should strive to
14 Net profit margin NPM improve their corporate governance mechanism by stressing on
15 Operating cash flow to debt ratio OCTD ethics, transparency and accountability in order to protect the
16 Earning per share EPS
17 Break-up value shares VPS
right of small shareholders and involve them in corporate
18 Board Attendance BATD decision making. This would lead not only to achieve higher
19 No. of board NBOD ratings but also to improve financial performance.
20 CEO Duality CD
21 Audit Committee Duality ACD There is a dire need for stringent CG enforcement mechanism.
22 Female on Board FOB The present structure of CG mechanism and its enforcement
23 Ownership Structure/Concentration OS/C
24 Clear Audit Report CAR(F)
from SECP require a major overhauling, implementation of
25 CG Code Compliance Report CAR(CG) regulations needs to be ensured. In the current scenario, both
26 Institutional Ownership IO regulation and regulator needs to be more strengthened through
27 Remuneration to CEO, Directors and Executives RCED
legislative steps in order to safe guard the interest of all
28 Corporate Social Responsibility CSR
29 Remuneration to CEO, Directors and Executives to NPBT RCED % NPBT stakeholders, especially small shareholders.
30 Social Responsibility to NPBT CSR % NPBT About the Author: For past 16 years Syed Tariq Waqar, ACMA involved in Govt.
31 Remuneration to CEO, Directors and Executives to Sales RCED % S side Accounting, having insight on Govt Audit & Accounts Consolidation. Working
32 Social Responsibility to Sales SRE % S for Pakistan Atomic Energy Commission, as Sr. Accounts Officer (Accounts).

ICMA Pakistan’s Management Accountant, September-October, 2017 15

 ICMAP

Estd. 1951

Draft Code of
Corporate Governance
– Random Thoughts
1. It would be advisable to restrict independent directors to
not more than three companies Boards to obviate
possibility of independent directors eventually emerging as
a pressure group. Because the more companies they are in,
the more possessive, assertive and self serving they may
prone to be.
2. In the event of listed subsidiaries of listed companies, not
restricted to have directorships of individuals in more than
five companies, possibility of more and more subsidiaries
of listed companies may rise.
Bar on simultaneous directorship in not more five listed
companies may be kept in tact, to avoid possible abuse of
law provision with reference to the proposal of doing away
with the rider in clause 3.
To the end of good governance one would normally vote for
independent companies in preference over subsidiaries
indirectly ruled. Qaisar Mufti, FCMA
3. To the end of hammering attention to the object of diversity
growth, following may be added at the end clause-4: 6. Fixing number of executive directors, in terms of clause-8,
“The companies shall submit, in relation to each director, appears a rather harsh provision as it will allow one
respective details of competence, diversity, requisite skills, executive director beyond the chief executive when the
knowledge, experience and other particulars notified by Board comprises seven directors. The provision appears
SECP from time to time, by end of three months of his divorced to such situations, which normally require more
assumption of office.” than one executive director beyond the chief executive.
4. What will be the status of decisions taken by a Board which 7. Provision in clause-9 is on separation of the office
does not have the independent directors and as such is not chairman and chief executive. To do away overlapping in
complete? To the end of clarity, SECP may opt to reword the main law, apparently, it is an unambiguous and hence
the provision appearing at end of sub-clause (1) of clause 6. laudable provision. However, it may not always be feasible
to follow. Advisable may be to give powers of giving
5. Clause-7 appears to suggest that female directors shall be a relaxation in this behalf to the SECP Regional Offices.
category of directors by itself. To secure compliance of this
clause, required would be two sets of election of directors Such powers may include having some other director of the
or an election in two phases: (a) both male and female and company, from any class or category, to act as chairman,
(b) female. when chairman is unable to act as such.
This would suggest reconstruction of the law, soliciting This is beside the fact that possible shortcoming in the main
nominations for election of directors in the aforesaid two law may not conveniently be overcome through a provision
categories, putting into process the propositions at (a) and in the code of corporate governance.
(b) herein above. Thus, according to the code, the board of a 8. In beginning of clause 10(3)(vi), relating to the decision on
company shall be deemed constituted after induction of a specified material transactions alongwith their dates of
female director in pursuance of (b) above in disregard of approval or updating, desirable may be addition of the
entry of a female director elected in terms of (a) above. In words: “at the end of each financial year”.
the face of decisions taken by an incomplete board i.e. sans 9. In 10(4) after the word “date of approval or updating” may
females. be added the words: “through well spelled minutes of the
On the electoral college for election of a female director board's meeting”.
e.g. consisting female votes or a mix of male and female, 10. “o” in 10(4) may be substituted by (5). Consequently
focus of law appears called for. clauses (5) and (6) shall stand renumbered to (6) and (7).
16 ICMA Pakistan’s Management Accountant, September-October, 2017

11. 10(6) is prone to be expensive for the company. It may not
be convenient to bear expenses on travel etc. of outstation
directors by every company.
The intended purpose may be served through each director
certifying that he or she had carefully watched and / or
listened video of the specified general, ordinary and extra
ordinary meeting and that he found nothing objectionable,
not in keeping with objects of the company worth reporting
to the authorities.
This may be required irrespective of the relevant director
attending or not physically attending the relevant
shareholders / general meeting.
For good order, the aforesaid evidence may be lodged with
SECP within seven days of holding a general meeting.
12. In terms of clause 13, the CFO and company secretary are
required to attend meetings of the board of directors.
Under provision appearing after the text they have estoppel
from being present at such or part of a meeting as takes-up
their performance, terms and conditions of their service.
The board may opt not to allow attendance of secretary and
/ or CFO in the situations specified by holding short
independent meetings after the stated sort of meeting,
secretary of which may be one of the directors who is
member of the Audit Committee.
13. A company may not have many independent directors. The
word “two independent directors” to take-up conflict of
interest of a director may accordingly be replaced by “an
independent director” in clause 16.
An alternate could be association of a Council Member of
ICMAP / ICAP / ICSP, if the quorum is otherwise made out.
14. Clauses 17 & 18 tend to suggest that remuneration of the
directors attending meetings of the board and its
committees, in between them, can be different.
No director may, on his free will, agree that his level of
responsibility and / or expertise is lesser than another
director. However, the code perceives that a variation in the
level of directors remuneration for attending the company's
meetings may be possible.
In case the articles of association permits, an independent
consultant may be engaged to recommend directors'
remuneration.
The code is pretty hazy on this point. For the code it should
not be that cumbersome. One also finds that the code does
not come-up with a lucid statement on this counter.
15. The movement, removal or a shift in the position of a
member of the Audit Committee shall be reported by the
chairman to SECP within 15 days. A clause to say that may
be ushered in the code.
16. Clauses 23(b) and 24(e), in the draft code, may mean hiring
for the job of internal auditor and chief financial officer
persons who may be poised for other jobs in the companies.
Having the suggested provisions in the code would mean,
other things remaining the same, doing away with the
requirements of 'education for the internal auditor' and
'chief financial officer'.
Looking at type and level of education being generally
imparted, clauses 23(b) and 24(e), blank range, may not be
in order. Pakistan Institute of Corporate Governance
(PICG) has laid down that to be eligible for 'A' class
directorship in a listed company, the incumbent should be
ICMA Pakistan’s Management Accountant, September-October, 2017
ICMAP
Estd. 1951
qualified from IBA or LUMS. SECP may appreciate that to
the desired end, to be had is certification for educational
competence from ICAP, ICMAP or SECP. Any of these
professional bodies should certify fitness to LUMS and
IBA graduates on case to case basis.
17. The company secretary is a key officer. The 'company
secretary' is described by section 2(21) of the Act, which
stipulates that his qualifications and experience may be
specified.
Ordinarily, a professional accountant, as such, is not
equipped to rein as company secretary. However, PICG or
ICSP may give fitness to professional accountants to take-
up the position of a secretary, on case to case basis.
Secretary's job entails sorts of jobs majority of which does
not permit substantial delegation. The secretary position is
different, which should have been catered by the code.
Although it is an allied discipline, even when an accountant
is well versed in secretarial and legal know, it is difficult to
truncate enough by a non-qualified company secretary.
18. To make the audit committee meaningful, in clause
27(2)(a), after the word 'held', “at least 24 hours” may be
added before the word “prior”.
19. Quality of writing is likely to improve with deletion of the
word “interim” in clause 27(2)(a).
20. After each of the three proviso cited in clause 27(2)(c), the
word “to be recorded in minutes of the directors meeting”
needs to be added to fully describe the issue.
21. The Company Secretary (defined by section 2(21) should
be different from 'chief financial officer', as defined by
section 2(15).
By having men of these two sections independent of each
other, intentions of the law makers appears to be that chief
financial officer and company secretary should be different
persons.
Apparently, the audit committee is not empowered to have
a company secretary as 'Secretary of the Audit Committee',
which course appears desirable.
Moreover, due to sensitivity of the subject, data and
information the committee's secretary comes to handle,
desirable may not be to combine the two offices into one
individual, company secretary or secretary of the audit
committee, in the companies' interest.
The framers of law would have been cognizant that despite
the fact that some study material to aspirants of the two
qualifications viz.: (a) secretary and (b) chief financial
officer may be identical, the two incumbents emerge from
different academic and expertise streams.
Accordingly, required in unequivocal statement in the
Code of Corporate Governance, is that the two, chief
financial officer and company secretary, shall be different
persons.
22. Clause 28(3)(i) providing for scrutiny by the Human
Resource and Remuneration Committee appears to provide
a gun to the committee to shoot the undesirables, leading
the process for board appointments identifying and
assessing candidates qualified for election of directors (in
particular, independent directors). That is after invoking
necessary procedures for making recommendations to the
board, prior to publishing names of nominees for directors'
election by the general meeting, and to recommend to the
17
 ICMAP
Estd. 1951
board for a policy framework's approval to determine
remuneration to both executive and non-executive
directors as also to members of senior management.
Section 159 of the Act caters procedure for election of
directors. The Human Resource & Remuneration
committee may have no role in the matter of election of
directors who are charged for also creation of this
Committee. To be clarified is whether the Committee will
be the one named by the directors whose term is ending or
the ones who have to come after (next) election. In the
former case directors are a spent force.
Appears missing by the code is whether the nominee
director(s) will be within the number of directors fixed by
the board, joining after election. In the present corporate
culture normal is a nominee director with election.
However, it can not be ruled out that a company may have
arrangements for nomination of their director with a
number of bodies.
Taking into account the relevant tits and bits, appears
plausible is that board will be duly constituted, empowered
to function, while formalities for 'induction' of independent
director(s) and / or a female director are on.
23. To reduce the number of committees, the Risk
Management Committee may be done away with and the
related job specifications may be assigned to the Human &
Remuneration Committee.
24 (i). The dichotomy proposed in clause 31(1) vis. a vis.
the head of internal audit reporting to both audit
committee and the chief executive will make hell life
of the man, keeping in view the fact that his job is to
point out what went wrong within chief executive
domain. This may also ignite fighting between the
Chairman of the Audit Committee and
Chief Executive.
To have the internal audit man 'administratively'
under chairman of the company appears to be
solution of the issue.
(ii). In 31(2)(a) the words “listed company” may be
substitutes by “Chairman of the Audit Committee” to
make the responsibility specific, pointed and
meaningful.
(iii). In 31(2)(b), the words “in lieu of” may be substituted
by the words “in the event of”.
25. In clause 38 “nominee directors” should be a distinct
category at (v).
26. In clause 38(i), “(including nominee director)” may be
added.
27. In clause 41(2) the words “all listed companies” may be
substituted by the word “chairman”.
28. Companies Act-2017 and the (draft) corporate governance
code enormously increase work load of SECP. Hiring for
these sizeable additional technical inputs on permanent
basis, the Commission may not find very convenient. To
reduce the incremental cost with no compromise on quality,
the Commission would be well advised to form benches /
committees, from outside SECP, to tackle certain issues.
Members of these committees may be drawn by SECP from
amongst ICMAP, ICAP, ICSP members and corporate
lawyers.
29. The law mentions the word “Secretary”. His play is
interwoven with life of the company and moving its
18 ICMA Pakistan’s Management Accountant, September-October, 2017
machine. The Companies Act omits to tell what he is like or
should be like. Already an important pillar of corporate
structure, the present law does not detail qualification a
Corporate or Company Secretary should have. However,
PICG gives due weight to the qualification of Corporate
Secretary.
Needless to say that in view of courses of their respective
Institutes and the specialized qualification they give, per se,
a Chartered Accountant or a Cost Accountant may not
ordinarily be a Corporate Secretary.
30. Appears called for is a distinct law providing space to
'Corporate Secretary'. The law should provide who is or can
be a Corporate Secretary to guide and drive, sine qua non
for the companies' constitutional affairs distinct from the
chief financial officer.
This writer is, however, inclined to surmise that enough to
the desired end is not featuring in the literature of PICG.
31. The SECP may have arrangements to see what goes to
crown one as Corporate Secretary. To this end it should
have a 'supervisory' or 'overseeing' woven in the structure
of the Institute of Corporate Secretaries. This the
Commission can best do through its representation on the
Council of the Institute.
Besides itself, SECP may also consider representation of
the Institute of Cost & Management Accountants of
Pakistan and Institute of Chartered Accountants of Pakistan
on the Corporate Secretaries' (ICSP) Council.
This is not likely to be an ticklish issue because ICSP is a
company limited by guarantee subject to directions of
SECP which can conveniently be tailored to the desired
end.
32. The theme of 'independent director' in our law appears to be
a derivative from the Indian Companies Act-2013. Section
150 whereof carries the provision of having a data bank,
containing names, addresses and qualifications of persons
who are eligible and willing to act as independent directors,
maintained in accordance with provisions of the said law.
Section 166 of Pakistani Companies Act lays down manner
of induction of an independent director. As in India, he is
required to be selected out of a data bank of persons eligible
and willing to act as independent directors. Such data bank
is to be maintained by any institute, body or association as
may be notified by SECP. The data bank is directed to be
posted on the website for use by a company desirous of
making the appointment of such director(s). As per section
166(1), of our Companies Law has introduced details of
independent director to be selected and elected.
The Code of Corporate Governance is silent on this issue
and on other issues in relation to such directors. The
election would need an electoral college, funds and
covassors for election of a candidate as such. Of course
funds outflows would be involved in this situation. Who
will foot such a bill and for what, needs to be spelled.
33. SECP may make it a point not to take decision on any of the
issues without prior debates at the trade / professional
bodies. Input in this behalf through communications may
not be really fruitful. SECP's representative should listen to
debates of the professional & business bodies members on
the issues.
The writer practices as Advocate & Corporate Counsel. E-mail:
mufti1002001@yahoo.com
 ICMAP

Estd. 1951

Impact of Corporate Governance on

Earning Management:
A Study of Listed Textile Companies of Pakistan
By Muhammad Hussain and Supervised by Saif Ullah, Ph.D. Scholar
Abstract: This study examines the relationship between characteristics of Corporate Governance and Earnings Management for
a sample of Personal Goods (Textile) Sector as a whole with data from Composite, Weaving & Spinning companies listed on
Karachi Stock Exchange during the period 2009-2013. Especially this study examines the impact of independent variables board
size, board composition, audit committee composition, CEO tenure, CEO compensation, CEO duality & return of assets, on
earnings management, the dependent variable. A sample of 25 listed textile companies of Personal Goods (Textile) Sector at the
KSE has been investigated to find empirical data about the relationship between practices of corporate governance and earnings
management for the years 2009 to 2013. Quality of Corporate Governance has been measured by assigning weights to a set of
related variables whereas earnings management has been calculated by discretionary accruals (Residuals) by using Modified Cross
Sectional Jones Model. Control variables, firm size, liquidity, assets collateral value & leverage have been used in this study to
decrease the bias of the independent variables. Ordinary least square estimation indicates the presence of Positive relationship
between corporate governance and earnings management. In this study panel data analysis random effect model has been used to
test the significance of the results. Results show that there is an indication that corporate governance practices are playing vital role
with positive and negative relationship in restraining earnings management.
Keywords: Corporate Governance, Earnings Management, Karachi Stock Exchange.

1. Introduction established local corporate governance principles as code of

1.1 Background
Corporate governance's has become very important in
monitoring role in recent years after prevalence of enormous
and renowned financial scandals of large companies such as
Enron, WorldCom, Union Carbide, San Lu, Tyco, Satyam
Computers & Global Crossing (Larcker et al., 2004; Wu, 2002).
La Porta, et al. (2000) defined, “Corporate governance is a set of
mechanisms through which outside investors may protect
themselves against expropriation by the insiders (managers and
controlling shareholders).” Corporate governance comprises
of private and public institutions (both formal and informal)
which govern the relationship between those who manage these
corporations and those who invest resources in these
corporations. These institutions typically include a country's
corporate laws, securities regulations, stock-market listing
requirements, accepted business practices and prevailing
business ethics” [Omran (2004)]. Prior research has found
relationships between corporate governance practices and weak
financial reporting of the firm (earnings management), financial
fraud and manipulation (i.e. Ali shah et al., 2009; Beasley, 1996;
Hashim and Devi 2008). Researchers should anticipate that
better corporate governance practices lead to better financial
reporting. Prior literature has focused on Earnings
Management, financial restatements and found that the role of
corporate governance players such as board members, internal
and external auditors is important in reducing the material
misstatements in financial reporting (Ali shah et al., 2009).
Corporate governance practices matter for the financial
development by increasing the flow of capital to the capital
market. The OECD, UNO, World Bank, ADB, SAARC, EU &
BASEL have established a set of corporate governance
principles as core template for assessing a country's and
corporation's corporate governance arrangements. In the light
of principles of international organizations, all countries have
corporate governance for better governance of corporations.
Further OECD and the World Bank Group combined their
efforts to promote policies on corporate governance and
established Regional Corporate Governance Round tables and
assessment of corporate governance practices with national
policy-makers, regulators and market participants. It draws
attention from the 1997 Asian financial crisis, assesses progress
and remaining challenges, and formulates common policy
objectives and a practical reform agenda for improving
corporate governance in the world especially in Asia.
In Pakistan the first code of corporate governance was issued in
March 2002 by the Security and Exchange Commission of
Pakistan in order to improve transparency, better governance
and protect the interest of the investors by improving the
disclosure in financial reporting of the companies. The issuance
of Code of Corporate Governance is result of joint efforts of the
Securities and Exchange Commission of Pakistan, the Institute
of Chartered Accountants of Pakistan, Institute of Cost and
Management Accountants of Pakistan (ICMAP) and three
Stock Exchanges. Many new financial instruments and
amendments have been introduced by the SECP in the code of
corporate governance with revised code in 2012 in order to
enhance corporate governance policies and practices. The
revised code has included many recommendations in line with
international good practices and policies. All listed companies
are bound to follow given principles as per revised code of
corporate governance and they are publishing and circulating a
statement along with their annual reports about the status of
their compliance with the best practices of corporate
governance. The Code primarily aims to establish a system
whereby a company is being directed and controlled by its
directors in compliance with the best practices to safeguard the
interest of all diversified stakeholders. It proposes to restructure
the composition of the board of directors in order to introduce
broad based representation by minority shareholders and by

ICMA Pakistan’s Management Accountant, September-October, 2017 19

 ICMAP
Estd. 1951
executives and executive directors. In August 2002 SECP
launched a project on corporate governance in collaboration
with UNDP and Economic Affairs Division of Government of
Pakistan mainly for the implementation of code of corporate
governance and strong regulatory frame work for the corporate
sector in Pakistan. Security and Exchange Commission of
Pakistan developed a board development series (BDS) with the
help of IFC. PICG conducted many workshops for the purpose
of understanding corporate governance and responsibilities of
boards of directors.
1.2 Theory
Prior research has examined the relationship between different
corporate governance factors and earnings management
(Beasley, 1996; Dechow et al., 1996; Peasnell, et al. 2005). The
vast majority of previous studies has concentrated on board and
audit committee as proxy for corporate governance mechanism.
For example, Klein (2002) found that firms with boards and/or
audit committees composed of independent directors are less
likely to have larger abnormal accruals. In the same manner,
Shen and Chih (2007) found that effective corporate governance
mechanism tend to conduct less earnings management.
Additionally, Abdul Rahman and Ali (2006) and Epps and
Ismail (2008) confirmed that board characteristics are important
determinants of earnings management. Bedard et al. (2004)
found significant negative relation between residuals of
earnings management and independent audit committees.
However, they found no significant relation between earnings
management and audit committee proxies by annual meetings.
Cheng and Warfield (2005) investigated whether the propensity
for earnings management is lower when management and
owners' interests are aligned through higher managerial
ownership. The results confirmed that earnings management is
lower for firms with higher managerial ownership. Corporate
governance is very important for developing countries like
Pakistan as it is the best practice for financial and economic
development of a country. Pakistan developed good corporate
governance laws but due to poor implementation of these laws
and political instability adversely affected corporate
governance. The quality of disclosure has improved over last
thirteen years due to increased monitoring role of the SECP and
the requirement of basic code revised in 2012. The code of
Pakistan is based upon the principles of corporate governance
issued by the Organization for Economic Cooperation and
Development (OECD) and other codes of corporate governance
developed at the regional and international levels. Therefore,
the revised Code of Corporate governance 2012 included rules
dealing with the essential aspects of corporate governance,
which were represented in the following six principles: General
Assembly Meetings, Equal Shareholder Rights, Management of
the company, Auditing principles, Disclosure and transparency,
and other stakeholders in the company (Al-Masri, 2009). In
Pakistan the main owners are local family-controlled business
groups and the families behind them, the state, and the affiliates
of multinational corporations. Ownership is very concentrated
in the few hands of large families. These families control
ownership shares through pyramids and tunnelling. These
20 ICMA Pakistan’s Management Accountant, September-October, 2017
business groups have lower transparency and weaker corporate
governance mechanism. Pyramid ownership structures made it
possible to control some firms with a very small share of their
total capital. The registration is secure and dematerialised
through Central Depository Committee (CDC). Changes in
Pakistani system of corporate governance are likely to have
important consequences for the structure and conduct of
business in this country. Several studies highlighted the
environmental and firm characteristics that play a significant
role in determining how firms use its discretion in the presence
of high quality standards (e.g., Ball, Kothari, & Robin, 2000;
Ball, Robin, & Wu, 2003; Ball & Shivakumar, 2005;
Burgstalher, Hail, & Leuz, 2006; Leuz, 2003). However, we
believe that there is a gap for research on the role played by
firm's characteristics (e.g. corporate governance system) in the
quality of financial reporting. The board of directors is being
considered as crucial player for corporate governance,
particularly when it comes to monitoring of top management
(Fama & Jensen, 1983). The debate on this topic of corporate
governance emphasizes the positive contribution that
independent board members provide in ensuring that top
management acts in the interest of all stakeholders (Fama, 1980;
Fama & Jensen, 1983). Prior research also emphasized on the
role of boards in constraining earnings management activities,
especially focusing on two aspects of board composition and
structure of: (1) the percentage of outside or independent
directors and (2) the percentage of outside or independent
directors in audit committee. While prior empirical research
widely supports this hypothesis that earnings management is
negatively related to the proportion of outside directors on the
board (Beasley, 1996; Dechow, Sloan, & Sweeney, 1996; Klein,
2002b). The effect of audit committee on earnings management
activities is more controversial in this area. Some scholars find
evidence that the presence of an audit committee limits earnings
management (Bèdard, Chtourou, & Courteau, 2004; Klein,
2002b), while others do not find significant relationships
(Beasley, 1996; Peasnell, Pope, & Young, 2005). Relevance of
accounting numbers creates powerful incentives for managers
to manipulate earnings to their advantages (Rahman & Ali,
2006). Healy and Wahlen (1999) stated two competing reasons
for managers to manipulate their income. The first is the capital
market pressure which states that the widespread use of
accounting information by investors and financial analysts for
stock valuation creates incentives for executives to manage
earnings in order to influence short-term stock performance.
The second reason is contracting motivation which stresses the
use of accounting data to monitor and regulate contracts
between firms and their stakeholders. Managers can manipulate
earnings in order to maximize their income or to signal their
private information, thus influencing the information of stocks
prices (Gul et al., 2003). Schipper (1989), Healy and Wahlen
(1999) declared that earnings management is the alternation of
performance by insiders to either mislead some stakeholders or
to influence contractual outcomes. In other words, managers
can work opportunistically for their advantage and
disadvantage for their companies.

1.3 Problem Statement
Despite being described as being most researched area of
finance, corporate governance there are questions which are yet
to be answered whether corporate governance and earning
management has any relationship. The aim of this paper is to
find out the answer of this question whether corporate
governance practices have an impact on firm's earnings
management. This study is also designed to fill the knowledge
gap by answering the research question whether components of
corporate governance (board size, board composition, audit
committee composition, CEO tenure, CEO compensation, CEO
duality, Return on total assets, Leverage, Firm size, Liquidity
and Assets Collateral Value) have an impact on the Earnings
Management of the firm. The concept of earnings management
took attention of corporate governance forces and practitioners
after renowned scandals in United States and other countries of
the world where management and auditors jointly managed
reporting of financial statements with manipulated high values
of assets and earnings to increase market price of their stocks.
The impact of Corporate Governance practices and policies on
performance and earnings management received much
attention in financial management literature at the end of last
century and in the beginning current 21st century. Renowned
worldwide companies and businesses collapsed and reported
many financial scandals across the world especially in United
States. After having these incidents in developed countries, it
has made imperative for other developing and developed
countries to focus on best corporate governance practices (Shah
et al. 2009). In Pakistan most of the organizations are being
owned and controlled by families, it creates agency problem
that remains between management (controlling family), owners
& board of directors (Abdelkarim and Jibra, 2010). Earnings
management is one of a technique used by accountants, by
delegation of the management with manipulated earnings to
maximize their own interest and benefits (Gulzar and Wang,
2011). In developed countries, earnings management technique
is being used to augment firm's stock prices, as the market price
is normally a key basis for the flexible components of
managerial rewards and benefits, which may be stock options,
bonuses and other incentives (Baker et al., 2003; Cohen et al.,
2008; Gao and Shrieves, 2002). In under developed countries,
these incentives and benefits may be irrelevant, as in developing
countries like Pakistan the listed companies have a highly
concentrated ownership structure and top line management is
controlling shareholders or directly represent the interest of
controlling shareholders (La Porta et al., 1999).
1.4 Objectives
The objective of this study is to investigate the impact of
Corporate Governance on Earnings Management of Personal
Goods (Textile) Sector as a whole (sample of 25 companies
from composite, weaving & spinning sectors for 5 years from
2009 to 2013). The main focus of this study is to investigate,
whether corporate governance matters in Pakistani equity
market? What are its implications for corporate valuation,
corporate ownership and corporate financing? The first
dimension of this issue is to measure corporate governance and
its impact on earnings management in Pakistan. Corporate
governance is interpreted as mechanism both institutional and
market based, that induces the self-interested managers
(controllers of the firm) to make decisions that maximise value
of the firm to its shareholders [OECD (1999)]. The purpose of
these mechanisms is to reduce agency costs that arise due to
principle agent problem; and that could be internal and/or
ICMA Pakistan’s Management Accountant, September-October, 2017
ICMAP
Estd. 1951
external in nature [Klapper and Love (2002)]. Internal
mechanism deals with the composition of the board of directors,
such as percentage of independent outside directors, distinction
of CEO and chairman etc. another important mechanism is
ownership structure, or the degree at which the ownership by
managers obvious trade-off between alignment & entrenchment
effects. External mechanism on the other hand rely on takeover
market in addition to regulatory system, where as the takeover
market act as a treat to existing controllers is that it enable
outsiders to seek control of the firm if bad corporate governance
results in significant gap between expected and actual value of
the firm. So, it is investigated that the legal system is the only
way to ensure good corporate governance. It is also examined
that effective presence of these mechanisms positively
associated with firm value. The second dimension of this issue is
to investigate the determinants of earnings management in
Pakistan and its affect on firm performance. The reason is that
when the legal structure does not offer sufficient protection for
the outside investors, entrepreneurs and original owners are
forced to maintain position in their companies which results in
concentrated form of ownership [La Porta, Shleifer, and Vishny
(1999)]. The third dimension of this study is to test the
relationship of firm's corporate governance practices and
earnings management to know the significance of results.
1.5 Significance of the study
Significance of this study is to revolutionaries and democratizes
the mindset of management towards a more openness as for as
the governance mechanism and ownership concentration issues
are concerned. This study is diversified in nature where sample
study of overall textile sector with sub samples comprising of
composite, weaving & spinning sectors have been used and will
be beneficial for the researchers, corporate decision makers and
other bodies for future aspects of corporate governance and
earnings management. A few prior studies have been conducted
in Pakistan for assessing corporate governance practices and its
impact on performance (Abdelkarim & Alawneh, 2008;
Abdelkarim & Ijbara, 2010). However, no prior studies have
addressed the relationship between corporate governance and
Earnings Management within the Pakistani Personal Goods
(Textile) sector as a whole
2. Methods
2.1. Sample & Data Collection
The sample has been collected from Textile Sector (Spinning,
Weaving & Composite) public limited companies listed on
Karachi Stock Exchange (KSE) in Pakistan, 5 year's data from
2009 to 2013 that must be available. The data instruments used
were annual reports of the years ending 2009 to 2013 and
publications available on the companies' websites in these
years. The unit has not qualified as sick unit / bank corrupt. The
sampling method used in this study is purposive sampling as it
fulfills study objectives to find out the impact of the Corporate
Governance on Earning Management of personal goods
(Textile) sector of Pakistan. Regarding Corporate governance
practices of Pakistani Listed companies, such an instrument is a
more comprehensive measure since it incorporates all crucial
elements of standard governance principles. Only publicly
traded companies listed at the Karachi Stock Exchange (KSE)
were analyzed, due to the absence of available governance
information for non-listed companies. The population was
comprised of 25 listed companies. The nature of this study is
quantitative in nature by using secondary data. In this study
panel data analysis will be used. Further we have applied
21
 ICMAP
Estd. 1951
housman test to select the appropriate model from random effect
model and fixed effect model. The null hypothesis of Hausman
test is that the coefficients estimated by the efficient random
effects estimator are the same as the ones estimated by the
consistent fixed effects estimator. If P-value is insignificant then
it is safe to use random effects. If we get a significant P-value,
however, we should use fixed effects.
o H0: random effects would be consistent and efficient
o H1: random effects would be inconsistent
Since the p-value equals 0.9222 (greater then 0.05) we failed to
reject the null hypothesis so we will use random effect model.
2.2. Description of the Variables
2.2.1. Earnings Management
It is dependent variable and in this study accounting accruals
(cash flow statement) approach will be used to measure
earnings management. Previous research has found
relationships between corporate governance practices and weak
financial reporting standards of the firm, earnings management
and financial frauds and manipulation (i.e. Ali shah et al., 2009;
Beasley, 1996; Hashim and Devi 2008). One can anticipate that
better corporate governance practices lead to improved
financial reporting, there is no agreement as to what comprises
financial reporting standards. Rather than define quality of
financial reporting, prior research has focused on Earnings
Management, financial restatements, the role of various players
that are a part of corporate governance, such as board size, board
members, internal and external auditors, in reducing the
material misstatements in financial reporting (Ali shah et al.,
2009). According to Shleifer and Vishny (1997), the separation
of ownership and control is the basis of the agency problem. The
agency problem can be reduced by through effective corporate
governance practices and measures in organizations. Therefore,
the fundamental role of corporate governance is to explore the
relationship among three key players of the firm: shareholders,
management, and board of directors (Wheelen and Hunger,
2009). Nevertheless, it should also be taken into consideration
that the quality of information produced by the effective
financial reporting system is fundamental for a corporate
governance system. (Melis, 2004). Levitt (1999, p. 2) stated that
the link between a company's directors and its financial
reporting system had never been more difficult.
Generally, there are two types of earnings management in the
literature; the accrual-based earnings management method and
the real earnings management method (Aharony et al., 2000;
Jones, 1991; Kothari et al., 2005). The basic tool for
measurement or proxy of Earnings management is discretionary
accruals. Throughout the literature, the most popular six models
used to measure discretionary accruals are the DeAngelo (1986)
Model, Healy (1985) Model, the Jones (1991) Model, the
Modified Jones Model (Dechow et al., 1995), the Industry
Model (Dechow et al., 1995), and the Cross-Sectional Jones
Model (DeFond and Jiambalvo 1994). Dechow et al. (1995).
These models evaluated the relative performance in detecting
earnings management by comparing the specification and
power of commonly used tests across discretionary accruals
generated by the models. Dechow et al. (1995) say that the
Modified-Jones Model has outperformed other discretionary
accrual models in calculating the earnings management.
Therefore, the Modified Cross-Sectional Jones Model will be
employed to measure Earnings Management in this study.
22 ICMA Pakistan’s Management Accountant, September-October, 2017
2.2.2. Board Size
It is an independent variable that influences the monitoring
ability of the firm that is number of directors on the company's
board. Prior research found negative relationship between
board size and earnings management (Karamanou and vafeas,
2005). This debate still remains until this day whether large or
small boards are more effective at restraining earnings
management. Empirical research has acknowledged that board
size may have direct influence on the level of discretionary
accruals. Some prior studies demonstrates, there is a positive
relationship between board size and earnings management
(Chin et al., 2006; Dalton et al., 1999; Gulzar and Wang, 2011).
Peasnell et al. (2001) and Xie et al., (2003) found a negative
association between board size and earnings management.
Some authors argue that a smaller board size provides better
financial reporting monitoring and controls, as some authors
found that a board size of four to six members is more effective
as they can effectively communicate and make timely strategic
decisions (Eisenberg et al., 1998; Yermack, 1996). On the other
hand, a larger board may be able to be more effective with
broader range of combined experiences. Xie et al. (2003) stated,
a larger board may be more effective to have independent
directors with corporate or financial experience, and it may be
better for preventing earnings management. According to these
conflicting results, it is very difficult to find out a directional
expectation between board size and earnings management but it
is clear that there is a significant relationship between both
variables.
2.2.3. Board Composition
The percentage of outside / independent director's
representation on the board of directors has been the subject of
debate in the literature for benefit of shareholders. According to
Xie, Davidson, and DaDalt (2003), the empirical evidence on
the effectiveness of outside directors in monitoring depends on
the setting in which it is examined. Previous research provides
evidence to support this concept as the greater percentage of
independent or outside directors in the Board the lesser likely
the firm management will engage in earnings management
(Klein 2002; Lee et al., 1992; Peasnell et al., 2000). Existing
literature has proved that Beasley (1996) finds a negative
relationship between the percentage of non-executive members
on the board and the percentage of financial / accounting frauds
among USA companies. In developing countries, the selection
procedure of top management and board members is based on
networking and personal ties (Johannisson and Huse, 2000).
Such a selection process is prevalent in Pakistan. As a
consequence, independent board members might have implicit
relations with the controlling-family; therefore these board
members may not be effectively independent (Bar-Yosef and
Prencipewrite , 2009). The Board's responsibility is to direct and
monitor the management to protect shareholders' interests;
therefore, it can be expected that with the higher percentage of
Board Independence the lower the possibility of engagement of
the company in Earnings Management. Hence, based on agency
theory, it can be hypothesized that there is a significant negative
relationship between board composition and earnings
management.
2.2.4 Audit Committee Composition
It is an independent variable and can be measured by dividing
the non-executive directors in the audit committee with the total
number of audit committee members at the reporting date.
Managena and Tauringana, (2007) stated, in their study based
 ICMAP

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on Zimbabwe Stock Exchange found negative relationship literature indicated negative relation between firm size and
between independent audit committee and earnings earnings management (Klein 2002; Xie et al., 2003; Abdul
management. Rahman and Ali, 2006). These findings support the idea that
2.2.5 CEO Tenure smaller companies are subject to less control of authority and
managers are more effectively engage in earnings management
Tenure of CEO may determine his or her effectiveness in activities. On the other hand, Moses (1987) argued that earnings
managing the firm. Some prior studies suggest that top officials management activities increase as the size of company increase.
with less experience have limited chances because it takes time
to gain an adequate understanding of the company (Alderfer, 2.2.10 Liquidity
1986). These studies suggest that the longer the tenure of the It is also a control variable in this study and will be calculated by
firm's CEO, the more understanding of the firm and its industry, dividing the current assets by current liabilities. There will be
and the better the performance of the firm. If more experienced lesser chances of earnings management if firm has higher
CEO enhances firm's performance that might also be associated liquidity ratio.
with lower use of discretionary accruals. Dechow and Sloan 2.2.11 Leverage
(1991) investigated the possibility that CEOs in their final years
of service become more prone to manage reported short-term This variable will be used as control variable to minimize the
earnings. biasness of independent variables and can be calculated by
dividing the long term debt over shareholders equity plus long
2.2.6 CEO Compensation term debt. Highly leveraged / geared firms may not be able to
It is also one of the independent variable in this study to check practice earnings management aggressively due to close
the relationship of corporate governance practices and earnings scrutiny of lenders. Bartov et al. (2000) concluded that levered
management. It has been calculated by taking log of total value companies have more incentive to engage in earnings
of CEO compensation at the end of one period. Prior studies management. DeAngelo et al. (1994) and DeFond and
states that it has either positive or negative relationship between Jiambalvo (1994) stated that empirical evidence of abnormal
CEO compensation and financial reporting mechanism. Hence accruals when firms face restrictive covenants from the lending
this study also showing negative relationship of both variables. institutions. Debt covenant violation predicts a positive
2.2.7 CEO Duality association between abnormal accruals and financial leverage.
In the same way, Park and Shin (2003) stated that financial
Another independent variable is CEO Duality. Gulzar and Wang leverage is negative and significant related to earnings
(2011, p. 136) found that, “in CEO duality, the CEO of the firm management
wears two hats one as chairman of the board of directors and
other as CEO of the company.” Therefore, non-duality means 2.3 Corporate Governance Measures
that there are different individuals holding the position of the Corporate governance variables that will be used in the panel
chairman of the board and the CEO of the same firm. Hashim data model were adjusted and selected for measurement of
and Devi (2008) argue that the separation between the CEO of corporate governance effects throughout previous literature
the firm and the Chairman of the board will most likely provide
an effective check and balance on the management's Table-1 Variables Description & Measurement
performance. It is normally assumed that the monitoring ability S. # Variable Abbreviation Measurement
of the board is less effective if the CEO in a firm is also a
1 Board Size B_Size Measured as total number
chairman of the board in the same firm (Gulzar and Wang, of directors in the board
2011). Recent empirical research gives mixed results on the
impact of CEO duality on the quality of financial reporting. 2 Board Composition B_Ind Measured by % of
independent directors to
Prior study done by Abdul Rahman and Haniffa (2005) reveals total directors
significant evidence that companies with CEO duality did not
3 Audit Committee Audit_Ind Measured by % of
perform as well as their competitors. However, most of the Composition independent directors
authors fail to find empirical support on the relationship to total directors in audit
between CEO duality and earning management (Abdul Rahman committee
and Ali 2006; Davidson et al., 2005; Kao and Chen, 2004; Meca 4 CEO Tenure C_Tenure Number of times it changes
and Ballesta 2009; Xie et.al, 2003). Some researchers support during the study period
this hypothesis that there is a significant positive relationship 5 CEO Compensation C_Comp Logarithm of CEO
between CEO duality and Earnings management (Gulzar and monthly salary measured in
Wang, 2011; Klein, 2003). millions of rupees.
2.2.8 Return on Equity 6 CEO Duality C_Dual Dummy Variable: 1 for
duality, otherwise 0
It is also an independent variable and can be measured by
dividing the profit after tax over the owner's equity. This study 7 Return on Equity ROE Percentage of net profit
before tax to Equity
states that return on equity has positive relationship with
earnings management but prior studies have proved both 8 Firm Size F_Size Logarithm of book value of
assets measured in millions
positive and negative relationships between ROE and EM. of rupees.
2.2.9. Firm size 9 Liquidity Liquidity Current assets/Current
It will be used as a controlled variable and refers to the total Liabilities
market capitalization of the firm's equity and has been measured 10 Leverage LEV Total Debt/Equity + Total
by taking log of total assets of each closing period. Market Price Debt
data will be provided by the Karachi Stock Exchange. Previous Note: Logs have been taken to convert a value into small value.

ICMA Pakistan’s Management Accountant, September-October, 2017 23

 ICMAP

Estd. 1951

(e.g. Gulzar, and Wang, 2011; Klapper and Love, 2002; Lo, 8 Observed NDAt a + B1(5) + B2(7) + E
Wong, and Firth, 2010).
9 DAt (Discretionary Accruals) │ DA t │ = TA t − NDA t
2.4 Earnings Management Measures
Note: All of the variables have been scaled by lagged total
In this study Cash Flow Statement Approach has been used for assets.
measurement of total accruals. Prior studies revealed that in
comparison of both approaches, researchers prefer cash flow 3. Analysis & Results
statement approach (Ali et. Al, 2009). Total accruals for each Following tests and models have been used to analyze above
firm are calculated by using the following equation
statements and hypothesis:-
TAt = N.It - CFOt
Descriptive statistics test between each of the corporate
Where: governance determinants and absolute Discretionary Accruals
TAt is total accruals in year t has been conducted prior to Panel Data Analysis to test the
N.It is Net Income or Earnings before extraordinary items in year t relationship between model variables. As reported in table 2, the
CFOt is cash flows from operating activities in year t absolute value of discretionary accruals of the listed companies
After determining the total accruals for each company in each on KSE has a mean value of 0.00 with a maximum value of
year t (TAt), Earnings Management was measured by the 0.361 and minimum value of -0.011 with standard deviation of
discretionary accrual technique, which is a measurement of 10.70% from the average. Audit committee independence mean
earnings management through non-cash operating transactions. value is 80.268 with minimum of 0.000 and maximum of 100.00
There are many ways to calculate discretionary accruals but this whereas board independence maximum and minimum values
employs the Cross-sectional Modified version of Jones (1991), are 75.00 and 22.222 respectively. In the same way board size
which is consistent with Klein (2002), Xie et al. (2003) and standard deviation is 65.4% with maximum of 9.00 and
Dechow et al. (1995). The Modified-Jones Model is being minimum of 6.00. The same parameters are shown by the above
considered to be on priority of other discretionary accrual table against other variables like liquidity, CEO Compensation
models in detecting EM (Dechow et al., 1995; Guay et al., 1996) & Tenure, CEO duality, firm size, ROE and leverage.
and it is frequently used in the accounting literature (DeFond Panel data cross-sectional random effect model has been used to
and Subramanyam, 1998; Guidry et al., 1999). According to this determine the relationship of corporate governance practices
model, discretionary accruals can be measured by subtracting and earnings management to measure the explanatory power of
nondiscretionary accruals from total accruals. corporate governance variables (independent variables) with
Since the error terms of this regression exhibit discretionary current accruals (dependent variable). According
heteroskedasticity, we follow Teoh, Welch, and Wong (1998) to findings, R²= 0.2092, it reveals that about 20.92% of the
and Jones (1991) and deflate each variable in the model by the variance in absolute Discretionary Accruals (DA), a measure of
book value of total assets from the prior year. earnings management, has been significantly explained by the
independent and control variables in the model. The R² is
Non discretionary accruals are calculated as follows:
moderate indicating there may be other corporate governance
1 Actual NDA= TAt / Assetsi (t-1) variables that are important in effecting earnings management
2 Change in sale (e.g. 2010-2009) that have not been considered in this study. It indicates the
3 Change in Accounts Receivable (e.g. 2010-2009) presence of a significant overall relationship between corporate
4 Difference of (4-3) (Change in A/R Change governance and Earnings Management. Unexpectedly, the
in Sale) overall direction of the relationship between corporate
5 Result 4 / Assets(t-1) governance and earnings management was found mixed results
due to less sample size and observations of only one sector. The
6 Change in Property, plant &
R² may improve by taking more samples from different sectors
Equipment (e.g. 2010-2009)
for comparative study.
7 Result 6/ Assets(t-1)
Table-2 Descriptive Statistics
Variables Mean Median Maximum Minimum Std. Dev. Jarque-Bera Probability
Audit_Ind 80.268 100.000 100.000 0.000 23.606 60.109 0.000
B_Ind 55.916 57.143 75.000 22.222 15.763 7.346 0.025
B_Size 7.536 7.000 9.000 6.000 0.654 9.456 0.009
Liquidity 115.030 106.020 402.160 32.160 50.514 489.663 0.000
C_Comp 6.430 6.509 7.399 5.132 0.469 8.469 0.014
C_Tenure 0.160 0.000 1.000 0.000 0.368 82.484 0.000
C_Dual 0.920 1.000 1.000 0.000 0.272 499.530 0.000
EM 0.000 -0.011 0.361 -0.281 0.107 14.445 0.001
F_Size 9.430 9.261 10.907 7.687 0.617 0.796 0.672
LEV 2.821 0.446 454.809 -68.328 41.521 66695.530 0.000
ROE 0.062 0.064 0.705 -0.241 0.093 1738.391 0.000

24 ICMA Pakistan’s Management Accountant, September-October, 2017

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Estd. 1951

According to table 3, there is a negative significant Table-3 Panel Data Model Results
relationship with earnings management. The results
indicate that with the larger board size the better Dependent Variable: EM
they restrain earnings management. This result is Method: Panel EGLS (Cross-section random effects)
consistent with Xie et al. (2003). There is significant Sample: 2009- 2013
negative relationship between board independence Periods included: 5
and discretionary accruals. The resulted Cross-sections included: 25
relationship is consistent with prior studies, which Total panel (balanced) observations: 125
supported the hypothesis that board composition Swamy and Arora estimator of component variances
and discretionary accruals have either a negative or Variable Coefficient Std. Error t-Statistic Prob.
no significant relationship. The results are in
contrast with the results declared by Klein (2002), C_EM 0.147797 0.226379 0.652873 0.5152
Peasnell et al. (2000) and Xie et al. (2003) where BS -0.014698 0.015308 -0.960130 0.3391
independent directors are negatively related to B_Ind -0.001654 0.000663 -2.495814 0.0141
discretionary accruals. The audit committee
Audit_Ind 0.000433 0.000430 1.005237 0.3170
composition has shown positive relationship with
the earnings management by rejecting the C_Tenure 1.69E-05 0.032111 0.000527 0.9996
hypothesis of negative relationship between C_Comp -0.025417 0.027764 -0.915465 0.3620
independence of audit committee and discretionary C_Dual -0.036277 0.039254 -0.924179 0.3574
accruals (earnings management). CEO tenure was
ROE 0.144673 0.134562 1.075146 0.2847
found to have a significant positive relationship
with discretionary accruals as proved in prior F_Size 0.024183 0.021317 1.134465 0.2591
literature. Results proved that longer the tenure of Liquidity -0.000164 0.000287 -0.571253 0.5690
CEO increase the chances of managing LEV -7.36E-05 0.000239 -0.308454 0.7583
discretionary accruals (earnings management).
CEO compensation has shown significantly Effects Specification
negative relationship with earnings management. S.D. Rho
Results of this study are supporting the hypothesis Cross-section random 0.000000 0.0000
as CEO compensation and benefits reduces the
chances of manipulating accounting statements Period fixed (dummy variables)
(discretionary accruals). CEO duality has shown Idiosyncratic random 0.105432 1.0000
insignificant negative relationship with Weighted Statistics
discretionary accruals (earnings management). We
can find out that separation of the CEO from R-squared 0.209170 Mean dependent var -1.11E-18
chairman position of the board is not effective in Adjusted R-squared 0.100340 S.D. dependent var 0.106635
restraining earnings management. Therefore, it is S.E. of regression 0.101144 Sum squared resid 1.115078
possible explanation for the negative relationship
may be due to cultural factors that have not been F-statistic 1.921993 Durbin-Watson stat 2.129399
considered in this study, which opens a new area of Prob(F-statistic) 0.028282
future research. Return of equity is also showing Unweighted Statistics
positive relationship with earnings management in
our results. Management of the firm may increase R-squared 0.209170 Mean dependent var -1.11E-18
the management of discretionary accruals to Sum squared resid 1.115078 Durbin-Watson stat 2.129399
increase return on equity to get short term incentives
for personal benefits. Prior studies also found 4 Conclusions & Recommendations
negative relationship between ROE and EM but most of the
studies proved that ROE has positive relationship with The objective of this study was to examine the relationship
discretionary accruals. between corporate governance practices and earnings
management activities for companies listed on the Karachi
Out of the three control variables, Leverage and Liquidity Stock Exchange (KSE) for the period 2009-2013. In particular,
variables have negative impact over earnings management. This this study examines the impact of the independent variables,
finding is inconsistent with Healy and Palepu (1990) and Board Independence, Board Size, Audit Committee
Sweeney (1994) who found that leverage is included as control composition, CEO Tenure, CEO Compensation, CEO duality
variable as it is more likely of violating debt agreements to have and Return of Equity, on Earnings Management, the dependent
an incentive to engage in earnings management to increase variable. The purpose of this study is to contribute to literature
earnings. The study conducted by Hashim and Devi (2008) the associations that exist between corporate governance
found leverage to be negatively significant relationship when characteristics and earnings management, within the Pakistani
unmanaged earnings are higher than or equal to zero. Firm's size context. For measuring such a relationship Earnings
has shown a significant positive relationship with earnings Management, has been quantified by discretionary accruals,
management. This indicates that the larger the Pakistani firms, using Modified Cross Sectional Jones Model. Control variables,
the more likely they are involved in earnings management than including Firm Size, Liquidity and Leverage were used in the
smaller firms. Another possible explanation is that large firms model in order to decrease the biasness of the independent
have lesser chances to engage in earnings management due to variables. Panel data cross sectional random effect model
more controls in scrutiny from financial analysts and investors indicates the presence of a significant overall relationship
(Zhou and Elder, 2003).
ICMA Pakistan’s Management Accountant, September-October, 2017 25
 ICMAP
Estd. 1951
between corporate governance and earnings management. This
finding may be explained in reference to the study done by Bar-
Yosef and Prencipe (2009), who argue even if formally
independent, board members may have implicit ties to the
controlling-family; therefore, these board members may not be
effectively independent. Board size had a positively significant
relationship with earnings management. Further research
should be conducted, whether corporate governance practices
reduces the level of management's manipulation of transfer
pricing, which is focusing on the non-operating accruals
through related-party transactions. Furthermore, another
alternative to measure discretionary accruals is through current
accruals because current accruals are easier for managers to
manipulate. Moreover, independent variables that were not
included in the study as a determinant of corporate governance,
such as the percentage of shares held by the board of directors or
institutional investors can be included in future research.
Furthermore, the nature of the sample used in this study was
limited to non-financial listed companies at KSE; therefore,
other samples can be investigated; such as financial listed
companies (banks and insurance companies) or other sectors for
comparative analysis.
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This research study prepared by Muhammad Hussain, National University of
Modern Languages, Lahore Campus in supervision of Saif Ullah, Ph.D. Scholar,
Incharge Research Committee of MSBA, National University of Modern
Languages, Lahore Campus

IT Governance Leads to
Corporate Governance
By Arshad Masood, FCMA
Introduction
T he concept of corporate governance was intended as a way of
realigning management objective with increased shareholders
value. The idea that emerged at the beginning of the 1990s has
now become a financial reporting topic. The basic principle of
Corporate Governance states “Companies' management must
seek a balance between the interest of the investors and other
stakeholders”.
IT governance is now made to increase value of all the
stakeholders
such as employees, customers, suppliers, and government etc
but originally it was devised to increase the value for the
shareholders. It is therefore the strategic alignment of
Information and Communication Technologies [ICT] with
corporate objectives.
IT governance is an inclusive term which encompasses
information systems, technology and communication;
business, legal and other issues; and all concerned stakeholders,
directors, senior management, process owners, IT suppliers,
users and auditors. Governance helps ensure the alignment of
IT and enterprise objectives.
With this concept, top-level management, finance and
information services departments can work together. Applying
the IT governance concept entails:
o Moving information technology to the centre of the
corporate strategy
o Managing expenditure like investment
o Recentralizing certain IT activities
o Promoting new information technologies in the company
and with customers
o Improving information management practices
o Implementing a genuine information system architecture
function
o Giving information services business status and
considering the user as a customer
o Strengthening the cross-disciplinary management
approach for each project
o Making every possible effort to capitalize on know-how
o Developing the managerial skills of information
technicians to a level commensurate with their technical
know how
Background
Information technology, long considered only an enabler of an
organization's strategy, is now regarded as integral part of that
strategy. CEOs, CFOs, and CIOs agree that strategic alignment
ICMA Pakistan’s Management Accountant, September-October, 2017
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between IT and enterprise objective is a critical success factor.
IT governance helps achieve this critical success factor by
efficiently and effectively deploying secure, reliable
information and applied technology.
In many countries, the IT Manager is now a de facto part of the
main board. Therefore, the board of directors elected by the
shareholders and entrusted the responsibility for corporate
governance and managing affairs of the business and should
ensure to achieve the company's objective given in its business
model.
Companies have realized the value represented by the
information they hold on customers, markets, processes or
technologies. Information services are growing fast and
information economy and technological expertise have become
a prime means of leveraging value. It is worth noting that if the
company decides to open up its information system to its
customers, typically by offering them online services via the
Internet, the user help function must be extended to the
customers because they then also become users of the corporate
information system.
An IT control objective is defined as a statement of the desired
result or purpose to be achieved by implementing control
procedures in a particular IT activity. General IT controls are
controls that apply to all functions within an organization.
Control procedures include policies and practices established
by management to provide reasonable assurance that specific
objective will be achieved.
Corporate governance requires enterprise
governance
Most sources agree that strengthening corporate governance
dictates improved accountability and transparency. Board
independence means directors will need better information and
methods to adequately assess and oversea the activities of their
firms or companies. A coordinated framework of enterprises
governance can help boards and executive management teams
streamline and focus their organization's strategy as well as its
internal system of controls.
The expanding role of technology has caused IT governance to
become a critical component of enterprise governance.
Information technology and IT departments today provide the
tools to:
o Enable many strategic initiatives that generate competitive
edge
o Provide analytical and executive decision support
information (including governance measures)
o Track the organization's performance in nonfinantial as
well as financial system
27
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Route Map of IT to Corporate Via Enterprise Governance
Top 5
IT Issues
IT GOVERNANCE
o Monitor internal control systems
o Capture and store the organization's intellectual capital
o Oversee corporate information policies such as security,
privacy, continuity and disaster recovery
To assess levels of enterprise governance, the organization can
be broken down in the following areas:
o Strategic planning
o Financial management
o Operations
o Control framework
IT governance as one of the domains of the enterprise
governance comprises the body of issues addressed in
considering how IT is applied within the enterprise. IT is now
intrinsic and pervasive within enterprises, rather than being a
separate function marginalized from the rest of the enterprises.
How IT is applied within the enterprise will have an immense
effect on whether the enterprise will attain its mission, vision, or
strategic goals.
IT governance as part of enterprise governance should be driven
by business goals and objectives.
IT is one of the most significant functions within an
organization. Companies that have been successful with their
IT often share a common theme the business side is involved
and committed to what IT does. If IT is to deliver the services
that a business needs now and in the future, it has to be managed
by the business as a whole. This is what IT governance is about.
Board of directors responsible for running an organization, are
able to exercise effectively responsibility over the use of
information technology just like any other part of the business
so that risk on management and the interests of all stakeholders
are covered.
History and Significance of the Subject in
Pakistan
A great deal of debate of corporate governance being seen
nowadays started in UK and USA many years ago. Since 1978,
the New York Stock Exchange has required all listed companies
to have audit committees composed solely of independent
directors. The “Sarbanes-Oxley Act” enacted in USA last year,
affecting Corporate Governance and Disclosure, includes far
reaching changes in federal securities regulations that could
represent the most significant overhaul since the enactment of
the Securities Exchange Act 1934. It is in response to a series of
corporate collapses, disasters and scandals, from Enron Corp to
WorldCom Inc etc.
Good governance ensures stakeholders' interest in the
company's business. It promotes corporate culture and suggests
such corporate structure, which can preempt in prevention of
malpractice and fraud. Good corporate governance leads to
business prosperity and accountability.
28 ICMA Pakistan’s Management Accountant, September-October, 2017
Visualizing the importance of Corporate Governance as
experiencing in the West, America and other parts of the world,
the Institute of Chartered Accountants of Pakistan resolved in
1998 to evolve and recommend a “Code of Good Corporate
Governance” for the corporate sector of the country and formed
a committed consisting of its Past Presidents and the Presidents
of Karachi Stock Exchange and Institute of Cost and
Management Accountants of Pakistan.
Pakistan having a substantial capital market but did not have any
code of corporate governance till March 2002 when owing to
efforts of the above institutions came into being and Securities
and Exchange Commission of Pakistan announced the Code of
Corporate Governance to foster the public sector for
accountability and responsibility.
In year 2002, President of Pakistan also promulgated
“Electronic Transaction Ordinance 2002” to treat all
communications in electronic form as accepted in all official
and business recording and exempted it from the Notarization
and Stamp Duty for two years.
Relevant Laws/Rules and other Statutes,
which may be Studied
1. Copy Rights and Intellectual Property Laws
2. Electronic Transact
3. IT Rules by Provincial/Federal
Govts / World Organization
Corporate governance guidelines and codes of best practice
arise in the context of and are affected by, differing national
formworks of law, regulation and stock exchange list rules, and
differing societal values. Al though boards of directors provide
an important internal mechanism for holding management
accountable, effective corporate governance is supported by
and dependent on the market for corporate control, securities
regulation, company law, accounting and auditing standards,
bankruptcy laws, judicial enforcement, copy rights and
intellectual property laws, electronic transaction laws and IT
governance guidelines
The President of the World Bank, Jim Wolfensohn has point out
“the proper governance of companies will become as crucial
to the world economy as the proper governance of the
countries”
Information Technology enablers which facilitate good
enterprise governance and corporate governance provides the
structure through which the objective of an organization are set,
and the means of attaining those objectives, and determines
monitoring performance guidelines. Good corporate
governance should provide proper incentives for board and
management to pursue objectives that are in the interests of the
company and stakeholders and should facilitate effective
monitoring, thereby encouraging forms to use resources more
efficiently.

Revisiting the Corporate
Governance Regulations
R egulation is a key instrument
through which the governments
achieve social and economic
policy objectives. In this context, the
regulators have a significant and
increasingly complex role to transform
the socio-economic goals of policymakers
and to deliver regulatory regimes in an
efficient manner. It is the prime
responsibility of regulators to align
balance for safeguarding interests of all
stakeholders and protect private and
public investment. A Financial regulator
supervises and controls a financial system
and guarantees fair and efficient markets
and financial stability.
The Securities and Exchange
Commission of Pakistan (SECP) notified
on 31st August 2017 for public comments
a draft Listed Companies (Code of
Corporate Governance) 2017, under the
newly promulgated Companies Act, 2017.
Through these regulations, the regulator
has attempted to align the code with
emerging challenges; however, the
proposed draft is compromising the
principles of Code of Corporate
Governance, 2012 and maintains the
status quo in the areas of corporate
governance.
It may be noted that draft CCG regulations
were to become effective within 14 days
of date of notification, however on the
demand of ICMA Pakistan, the SECP
extended the deadline upto 30th
September 2017. The Institute's stance
was quite justified as sufficient time was
not provided by the SECP to elicit the
views of all stakeholders, especially the
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professional accounting bodies. The draft
rules seemed ambiguous and unclear at
many places that could lead to
misinterpretation and misunderstanding
of rules. Proper references of the
Companies Act, 2017 were also not
provided which is the main source of
corporate law. It contained undesirable
provisions against the interests of
stakeholders, including the minority
shareholders. Specifically, Section 24 of
said regulation is quite adverse through
which foreign qualified accountants have
been allowed to become the head of
internal audit of listed companies in
Pakistan. Such kind of provision
tantamount to encroaching upon the Mohammad Iqbal Ghori, FCMA
President, ICMA Pakistan
jurisdiction of the recognized professional
bodies and limiting employment
opportunities for Pakistani qualified ICMA Pakistan, in line with
professionals.
ICMA Pakistan, in line with its policy its policy advisory role to the
advisory role to the government, government, organized three
organized three stakeholders' conferences
at Karachi, Lahore and Islamabad which stakeholders' conferences at
were largely participated by professionals
including CAs, CMAs etc; financial Karachi, Lahore and Islamabad
experts; audit practitioners, lawyers; which were largely participated
consultants, industry and business
representatives. There was a general by professionals including CAs,
consensus at these conferences that draft
CCG Regulation did not adequately CMAs etc; financial experts;
safeguard their interests and is full of audit practitioners, lawyers;
ambiguities that need to be removed for
better understanding and interpretation. consultants, industry and
ICMA Pakistan submitted its comments
and recommendations on the said draft business representatives. There
regulations to the SECP and hoping that was a general consensus at
the same would be duly considered for
incorporation in the final version of these conferences that draft
legislation.
CCG Regulation did not
The draft regulations also invade the
jurisdictions of recognized bodies of adequately safeguard their
professional accountants in Pakistan. By
incorporating Section 24(2) allowing
interests and is full of ambiguities
members of global accounting bodies to that need to be removed for
become eligible for the position of Head
of Internal Audit of Listed companies, the better understanding and
regulator has provided a gateway to
foreign qualifications to enter the interpretation
ICMA Pakistan’s Management Accountant, September-October, 2017 29
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Pakistani market at the cost of local professionals. The regulator

seems to be swayed by some external influence to incorporate
this undesirable provision in the draft law which tends to
negatively impact the accounting profession. It is recommended
that Section 24(2) should be completely excluded from the final
version; otherwise it would cast a bad image on integrity and
independence of the regulator.
Let's analyse some of the major provisions of draft regulations
which require revisit by the regulator in terms of its relevancy,
rephrasing, referencing and applicability.
Chapter II of draft CCG Regulations deals with composition of
the Board. The proviso related to listed subsidiaries must be
deleted. If a Director is on the Board of a listed company, he has
to attend at least two meetings in general on a quarterly basis i.e.
Audit Committee and the Board and three meetings per quarter
in particular, if he is a member of HR Committee as well. This
comes to 15 meetings per quarter (5 Committees x 3) for a
director. If we exclude listed subsidiaries from this counting
then this figure will be at higher side and one may not be able to
concentrate on agenda and working papers of meetings as
required by the Code under directors’ role and responsibilities.
The listed subsidiary may be considered a full listed company
In line with CG Code 2012, the Section 20 of Listed Companies
requiring the same attention on Corporate Governance matters
CCG Regulations, 2017 also mentions about mandatory
as required for a listed holding company.
requirement for all directors of listed companies to have
The inclusion of two Independent directors on the board is a certification by June 30, 2020 under any director training
welcome step, however, this need to be referenced with Section program offered by any local or foreign institution. ICMA
166 of Companies Act, 2017 which outlines the selection Pakistan strongly recommends that the SECP should allow only
criteria and maintenance of data bank of independent directors. recognized professional accounting bodies in Pakistan to
Until such time the databank is notified by SECP, listed provide DTP and discourage mushroom growth of other
companies may be allowed to appoint those professionals as institutions otherwise it would affect the quality of training. It

The position of CFO is of specialized nature, only those persons

having professional qualification like CAs and CMAs from any
recognized body of professional accountants in Pakistan should be
allowed to become CFO of any listed company. Foreign qualified
accountants may be considered if they have completed their
qualification through Pakistan Tax and corporate laws
independent directors who are 'Certified Directors' under any is further proposed that persons holding professional
SECP-approved directors training program. The procedure to qualification from recognized professional accounting bodies
fill up casual vacancy of independent directors needs to be may be exempt from mandatory Directors training program.
provided. Through Section 23 of draft regulations, in addition to qualified
The mandatory provision for having one female director on professional accountants, post-graduate degree holders with
boards of listed companies is also an appreciable initiative to five years experience have been allowed to become the CFO of
synchronize with global practice of gender diversity on boards. listed companies. This is against the norms of justice and
Female representation can bring a different perspective, equality as a post graduate cannot be equivalent to a member of
intuitiveness and a more collaborative style of leadership into professional accounting body in terms of required qualification
corporate boardrooms. However, there is an element of concern and skills to perform the role of a CFO. This is the exclusive
that companies will comply by appointing female relatives of domain of professional accountants. It is therefore suggested
incumbent board members. In India and UAE, there is a that since the position of CFO is of specialized nature, only
compulsory requirement for one female director on board those persons having professional qualification like CAs and
whereas in EU countries the threshold is even higher i.e. 40% in CMAs from any recognized body of professional accountants in
Norway, Spain, Denmark and France and 30% in Germany, Pakistan should be allowed to become CFO of any listed
Malaysia and Italy. It is suggested that qualification criteria and company. Foreign qualified accountants may be considered if
appointment procedure for female directors should be defined they have completed their qualification through Pakistan Tax
in draft regulations. and corporate laws. In case of any code of conduct issue, they
30 ICMA Pakistan’s Management Accountant, September-October, 2017
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should be subject to Pakistani legal framework for disciplinary audit need to be reviewed in a more transparent manner and
action as per applicable code of conduct. equal opportunity may be provided to professionals from other
recognized professional accounting bodies who study audit and
Another flaw in draft legislation is that under Section 24 the
assurance. The management accountants are performing
experience requirement for an Internal Auditor has been
remarkable role in financial management affairs and internal
proposed to be three years, whereas for CFO the required
audit and they have turned around many organizations, both in
experience is five years. Logically, the internal auditor must be
private and public sector. If they are trusted for statutory audit
'smarter' than the CEO and CFO as he is responsible to examine
rights along with cost audit, they can perform much better.
their performances as well as identify fraudulent transactions
and non-compliances of reporting procedures within the In the perspective of external audit provision, it is to be pointed
organization. As such, the experience requirement for Head of out that the existing Audit Oversight Board lacks independence
Internal Audit should be increased to at least 5 years. and under influence of one profession. An Independent
Financial reporting Council (FRC) may be established in its
The draft rules, in Chapter VIII, do not define the required
place as per global practice having representation from all
qualification for a 'Company Secretary' whereas the required
recognized bodies of professional accountants, academia, law,
qualifications of CFO and Head of Internal Audit have been
industry and other stakeholders.
duly mentioned. This omission need to be addressed otherwise
it would lead to confusion in appointment of company secretary Section # 33 under Chapter XII on ‘External Audit’ is missing.
in listed companies. It is proposed that a Company Secretary This need to be clarified by the Commission if this is a
should be a person holding the qualification from any typographical error or else omission of a complete Section
recognized body of professional accountants or the Institute of which inadvertently is not part of circulated draft.
Corporate Secretaries of Pakistan (ICSP) with minimum 3 years
Section 34 refers to the rotation of external auditors after every
experience as a Company Secretary of any other company. The
five years in all listed companies in the financial sector. In
Company Secretary should also be made responsible for
proviso to this section it is stated that all inter related companies/
Corporate Compliance of the listed company.
institutions, engaged in business of providing financial services
It is further proposed that in addition to Audit Committee; shall appoint the same firm of auditors to conduct the audit of
Human and Remuneration Committee and Nomination their account. As per Internal Control principles, rotation of five
Committee, a Risk Management Committee and “ Procurement years is on a higher side and it must be lowered to three years to
Committee may also be formed by the Board in view of its provide opportunity to other firm to review/ audit financial
significance for the listed companies. Accordingly, a new statements from different aspect. Further, change of partner
Section on Procurement Committee may be added in Chapter X does not fall rotation of auditors at international level even. This
of the said Regulations. will create a conflict of interest of audit firm.
One important provision is External Audit under Section 32
which says that every listed company shall appoint only those
audit firms which have satisfactory QCR rating from ICAP and
registered with Audit Oversight Board (AOB) of Pakistan. This
provision need to be overhauled as CMAs qualified from ICMA
Pakistan has been altogether ignored despite being entitled
under Section 247 of the Companies Act, 2017 to conduct audit
of accounts of companies having paid up capital of less than
Rupees three million. This provision is not based on principles
of equality and justice as well as ensuring a level playing field
and competition.
It is the duty of regulator to take along all the stakeholders and
safeguard everyone's interests instead of espousing the interest
of only one profession. The conventional rights of statutory

ICMA Pakistan’s Management Accountant, September-October, 2017 31

 ICMAP
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Global Corporate
Governance Landscape
I n recent year, corporate governance
has emerged out to be an important
regime in the backdrop of intense
debate among investors, corporate leaders
and other stakeholders to find the best
system through which companies could
be directed and controlled in larger
interests of shareholders and other
stakeholders. Corporate Governance, in
fact, is based on separation of ownership
and control. The shareholders are the
owner or principal who employ agent
directors, having fiduciary responsibility,
to work in the best interest of principal.
The corporate governance failures in USA
were a pointer towards the fact that the
Muhammad Abbas, ACMA internal checks and balances being used
by these companies at that time were not
sufficient. Today, the shareholders and
There are two investors are extra-cautious and demand
better and tighter corporate governance
approaches to corporate structures. These changes have led to
much stricter scrutiny of the composition
and structure of the board. There is now
governance viz. Rule- greater attention towards directors'
independence; board diversity and board
based approach and performance evaluation.
One major challenge in corporate
Principal-based approach. governance is lack of proper
implementation of the governance codes
In the Rule-based in corporations and this fact is also
acknowledged by the studies carried out
by the OECD and UK Financial Reporting
approach, it is mandatory Council. It was concluded by them that
lack of corporate governance codes and
upon companies to follow principles by policy makers and
corporations was the main reason for the
financial crisis in 2008. The same issues
the code through Act, still persist and need to be rectified
otherwise it could pose a serious
rules and regulations or challenges for another such financial
crisis in future.
pay the penalties. Approaches to Corporate
Governance
There are two approaches to corporate
governance viz. Rule-based approach and
Principal-based approach. In the Rule-
based approach, it is mandatory upon
companies to follow the code through Act,
32 ICMA Pakistan’s Management Accountant, September-October, 2017
rules and regulations or pay the penalties.
In the principle-based approach or system,
the companies adhere to the 'spirit' of the
rule or explain in annual reports as to why
they are not complying with the
requirements of the code. This will leave
shareholders to draw their conclusion
about the governance of the company. The
Principal-based system has been adopted
by FRC of United Kingdom.
The Rule-based approach is followed in
USA where the US companies must have
to comply with Sarbanes Oxley Act.
Considering the changing dynamic of
business activities today, right balance
between "Comply or Explain" or
Regulations may emerge over time. Some
shifts have already occurred. For
Example, Turkey shifted towards a
mandatory approach in 2011 by requiring
large listed companies to comply with
some of the provisions recommended by
the corporate governance principles
published by the capital markets board of
Turkey. Portugal introduced in 2013 an
additional code prepared by a private
Institute besides the existing code
prepared by the regulator. Japan (in 2015)
and Brazil (2016) also recently
introduced corporate governance codes.
Australia, Ireland, UK and USA has
predominantly 'dispersed' ownership
structures where listed companies are
rarely under the control of a major
shareholder but subject to managerial
control.
Boards Accountability
An important challenge in corporate
governance is that the company boards
should be made accountable for all the bad
decisions they make. It has been observed
that board normally follow procedures
under corporate governance practices and
do not give adequate significance to the
substance, which often leads to foolish
decisions. Let's take the example of Enron
Board which was highly rated for
corporate governance but it made foolish
decision that led to the ultimate closure of
this top-ranking corporation. It is

therefore important that independent directors on the board
should prefer substance over procedure.
Boards Gender Diversity
The corporate boards have historically been male dominated,
however, in recent years; there has been conspicuous change in
boards' gender diversity to bring on board female directors so as
to have a gender-balanced boardroom concept. The benefits as it
is recognized, gender board diversity brings are effective
decision making; better utilization of talent pool and
enhancement of corporate reputation and investors relations.
The female representation on boards worldwide has increased
substantially during the last decade and even in many EU
countries, there are fixed quotas of female directors on board.
For instance, in Germany, there is mandatory requirement for
atleast 30 percent representation of both genders on the
supervisory boards. In USA, large capital firms have highest
proportion of women on boards.
Independent Directors on Boards
All Codes recommend that the Boards should have majority of
Independent Non-Executive directors (INEDs). INEDs need to
be independent in letter and spirit and play a vital role by
bringing the 'external perspective' on the board.INEDs have
especially a more significant role in Asia which is marked by
concentrated ownership structures and weak legal. INEDs
should have high ethical standards, with the ability to act
objectively to ensure that minority shareholders' rights are not
exploited.
In almost all Asian economies, there is requirement of at least
1/3rd INEDs on the Board to be independent. The 2012
Singapore corporate governance code recommends a majority
of Independent Directors when the chairman of the Board is not
independent. In US, there is requirement for at least 2/3rd of the
directors whereas in EU countries there in obligation on
companies to have sufficient number of independent non-
executive or supervisory directors on Board. The Hong Kong
Monetary Authority (HKMA) via letter # B9/149C dated 14
December, 2016 intimated the Chief Executive of all
Authorized Institutions and Directors of the Board of all
Locally-Incorporated Authorized Institutions (AI) to consider
following factors in assessing the independence of a director.
Presence of any one or more factors is considered to be a
"Threat to Independence".
Where he or she:
o Holds more than 1% of the share.
o Has been an employee within three years before the
appointment to the board.
o Receives any significant compensation except for
remuneration for services as an INED.
o Has any material business relationship.
o Close family ties with directors.
o Cross directorship in other companies.
o Served on board for more than 9 years.
The above factors are not intended to be exhaustive. The fact
that a person falls within one of the above cases may not
automatically disqualify him for serving as an INED but will
indicate a need for care consideration, and the boards of AIs
should establish and oversee policies to identify actual and
potential conflict of interest so that they can be appropriately
managed.
ICMA Pakistan’s Management Accountant, September-October, 2017
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Resultantly, today most of these emerging nations, including
Pakistan, have adopted explicit codes of corporate governance
for their listed companies with focus on independent directors
and audit committees. The listing requirements of stock
exchanges and securities laws have been strengthened and
regulatory authorities enjoy enhanced powers to take action
against companies failing to implement corporate governance.
However, the progress in uneven and a lot more is to be done to
meet the future challenges in corporate governance.
Director's Tenure and Independence:
A topic that is increasingly in discussions is the impact director's
tenure has on performance. Indeed, a number of countries have
introduced tenure related guidelines or restrictions for
independent directors.
o In Australia "Comply or Explain" model prevails and the
recommended maximum tenure for a non-executive
director to be considered is between 9 and 12 years.
o The European Commission recommends that
independent directors should serve on board for a
maximum of three terms or twelve years.
o The UK Corporate Governance Code provides that the
board should explain in its annual report, reasons to
determine that a director who served more than nine years
qualifies as independent.
o In other countries like Singapore, South Africa and Hong
Kong, nine years has been adopted as appropriate limit for
director's tenure on the board.
This focus on board tenure is further supported by research of
Huang, which is summarized in Figure 2. Figure 2 plots Tobin's
Q against board tenure using coefficient estimates from the
regressions. The empirically observed peak value in Tobin's Q is
around board tenure of nine years. As the figure illustrate, a
small change in board tenure does not have a uniform impact on
firm value. For example, with all the control variables held at
their respective mean, for an average board tenure of three
years, an additional year of tenure increases firm value by an
average of 0.45% while for an average board tenure of 15 years,
adding one year to board tenure decreases firm value by an
average of 0.52%. These results are consistent with the
interpretations that the marginal value of learning exceeds the
marginal cost of entrenchment when board tenure is shorter, but
that the entrenchment effect dominates the learning effect as
board tenure continues to increase.
It can be concluded that
weak and insufficient
corporate governance
systems and practices
poses a serious threat to
economies. The key
challenge today is not to
develop better corporate
governance laws, rules
or regulations as these
are already available in
[Source: Huang, 2012, figure 2, page 51)
shape of legislations on
the statute books, but the
real problem is how to
enforce them effectively and in true spirit.
About the Author: The writer is an Associate member of ICMA Pakistan
and CEO of M. A. Sandhu & Company. He can be contacted on
mabbas.sandhu@gmail.com
33
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Fine Tuning the Philosophy of
Corporate Governance
Sayyid Mansoob Hasan, FCMA
SECP issued "Listed
Companies Code of
Corporate Governance
Regulations, 2017" for public
comments. The draft code, at
the philosophical level, is not
different from the past code
as it misses the very
fundamental focus that needs
to be there to address the core
question. And before putting
the core question forth I
would like to give some hints
from the past which highlight
the need to correct the focus.
34 ICMA Pakistan’s Management Accountant, September-October, 2017
I t is now about 15 years that we have a code of corporate governance for good
governance primarily in listed companies. This code has come to Pakistan as
a result of a global move towards good governance after the fall of some big
corporations and Arther Anderson, a global audit firm. Since the apex law to
regulate the companies in Pakistan i.e. Companies Ordinance, 1984 did not have
the provision therefore Securities and Exchange Commission of Pakistan
(SECP) had this enforced by incorporating it within the listing regulations of the
then Stock Exchanges of Pakistan.
Now the Companies Act, 2017, that has been enacted and promulgated, contain
section 156 which empowers the SECP to provide "framework to ensure good
corporate governance practices, compliance and matters incidental and axillary
for companies or class of companies in a manner as may be specified".
So, the SECP issued "Listed Companies Code of Corporate Governance
Regulations, 2017" for public comments. The draft code, at the philosophical
level, is not different from the past code as it misses the very fundamental focus
that needs to be there to address the core question. And before putting the core
question forth I would like to give some hints from the past which highlight the
need to correct the focus.
In the 1980s there were Samad Dadabhoy, Alliance Motors, Taj Company,
Cooperatives and many other big and small swindlers who robbed the masses of
their billions of rupees at that time. Then there was loot and plunder going on in
the state owned and nationalized financial institutions including NDFC, PICIC.
Then we saw a wave of incorporation and listing of private banking and non-
banking financial institutions around the year 2000, and we also saw the same
loot and plunder in these institutions. And the general public was deprived of
their money. And regulatory bodies came into action after much of the disaster
had taken place; and yet justice needs to be served.
With the abovementioned references the core question is highlighted i.e.
"Protection and safeguarding of public money". Before moving on to the
discussion let this term "Public Money" be clear. Public money includes equity
investment (by people other than majority shareholders) also known as minority
shareholders; investments in quasi equity instruments, mutual funds and
insurance companies; and deposits with financial institution under various
nomenclatures and titles.
Why public money in totality is important because the majority shareholders
have at their disposal the sum of the public money "collected" under various
heads of equity, investments and deposits, which happens to be a good number of
times the investment of the majority shareholders. And in the wrong hands and
under an ineffective governance mechanism there are fair chances and proven
history of corruption, frauds, loot and plunder.
The early codes of corporate governance were successful to the extent of
introduction of a governance mechanism in the listed and some other classes of

companies. However, the benefit did not reach the intended
audience as the focus to protect and safeguard the public money
was missing. The new code also misses the same focus.
Let us see how this core question can be addressed:
Board's commitment
The code should require the board to demonstrate their
commitment to protect and safeguard public money through
their policies and procedures. This policy should be translated
from board through the various levels of management to the
workers so that each and every person working in the
organization knows the responsibility towards the trusted
money of the general public.
Selection and role of independent directors
With public money trusted with the company the selection as
well as the role of independent director becomes all the more
important. Considering this importance and looking at the
failure of Pakistan Institute of Corporate Governance, I
suggested to the SECP, while the company law was in the
formation phase, to develop and maintain a list of qualified,
experienced and competent people who could serve as
independent directors from where interested companies could
find suitable independent directors. The suggestion was
accepted by SECP and section "166 Manner of selection of
independent directors and maintenance of databank of
independent directors" has been made part of the Companies
Act, 2017.
Protection to independent directors
As independent directors are not involved in the day to day
business of the company and they do not have the same access to
people and information as the executive directors have,
therefore their reliance is on the information and documents that
they receive at the time of the meetings. With sophisticated
corporate frauds and connivance of the executives it becomes
quite difficult for the independent directors to form their opinion
and make reasonably informed decisions. That creates chances
of undue responsibilities and burden on the independent
directors. Seeing that I suggested SECP to limit the
responsibilities of the intendent directors which was done
through "section 181 Protection to independent and non-
ICMA Pakistan’s Management Accountant, September-October, 2017
ICMAP
Estd. 1951
executive directors". This needs to be further strengthened by
protecting their representation at the board through
whistleblowing regulations as they are in a good position to
assess the situation and make a responsible decision to inform
SECP or SBP (State Bank of Pakistan) for any major suspected
corruption or fraud or mismanagement.
Board committees
The draft code suggests two mandatory committees audit and
human resource, and two optional nomination and risk
management committees. As many of the listed companies
include financial institutions both banking and non-banking
which have significant amount of public money at their disposal
and since the board is now being suggested to be made
responsible for protecting and safeguarding of public money
and as significant risks are involved in the transactions of
financial institutions therefore risk management committee
should be made mandatory for all financial institutions whether
banking or non-banking.
Statutory officers
Other than the directors, chairman and CEO three statutory
officers have been defined i.e. Chief Financial Officer - CFO,
Head of Internal Audit HIA and Company Secretary - CS.
The responsibilities, qualifications, experience requirements
and competencies of these officers should be aligned with the
policy to protect and safeguard public money. That translates
into a CFO competent enough to make financial decisions and
should be independent enough to stand for the protection and
safeguarding of public money in case of apparent fraud and
mismanagement. In the case of HIA to be smarter enough to
check the works of the CEO, CFO and other department heads.
35
 ICMAP
Estd. 1951
The present experience requirements suggested by the draft
code does not fulfil this criterion. This needs to be increased to at
least 5 years.
The inclusion of academic qualifications in the eligibility
criteria for the positions of CFO and HIA is without any
rationale as:
o No university in Pakistan is providing quality education
and training in accounting, auditing, taxation and corporate
laws to the level of education and training provided by
Institute of Cost and Management Accountants of Pakistan
and Institute of Chartered Accountants of Pakistan.
o No university has professional code of conduct for its
graduates and nor are the graduates accountable to the
universities.
o No university conducts Continued Professional
Development Programs which are done by ICMAP and
ICAP.
So, post graduates of any university do not stand anywhere in
terms of professional knowledge, training and updated in the
fields of accounting, audit, taxation and corporate laws.
Further, recognizing foreign qualifications for the statutory
positions also need to be reviewed as:
o No foreign professional body or country provides
reciprocal and similar recognition to Pakistani
professionals.
o Foreign qualified persons are not subject to any code of
ethics within Pakistan so in case of any violation of ethics
there is no professional body to hold that professional
accountable.
o This would provide room to foreign professional bodies to
gain ground in Pakistan at the cost of local professional
bodies.
o This would discourage development of local intellectual
capital.
And in the case of the CS no qualification or experience
requirement has been defined. This is another highly technical
area neglected by both the SECP and the companies. Members
of Institute of Corporate Secretaries of Pakistan having 5 years
of experience should be defined as persons eligible for
appointment as company secretaries of the listed company.
Strengthening statutory officers' role
Since, CEO, CFO, HIA and CS are the top executives of the
company and legally responsible for various duties and it is also
a reality that they remain under pressure of their employers, not
the company but the majority shareholders, and under this
36 ICMA Pakistan’s Management Accountant, September-October, 2017
pressure they are made to compromise on ethics and integrity
resulting in loss of public money and false reporting. To protect
and safeguard the public money these statutory officers need
protection of their employment if they stand in the way of
corruption and fraud and mismanagement. This can be done
through the whistleblowing regulations. The promulgation of
Whistleblowing Regulations, 2017 has been deferred by SECP
on September 6, 2017, these regulations need to be reviewed
and promulgated at the earliest possible.
Outsourcing of internal audit
The decision to outsource internal audit function is subjective as
internal audit comprise of two segments pre-audit and post-
audit. About 80% of the internal audit function is pre-audit
meaning all payments above a certain threshold or all certain
types of transactions must pass through pre-audit before
payment or investment or disbursement. The post audit is left
with smaller volume as major chuck is taken care of by pre-
audit. For pre-audit function companies need a full-time
resource available within the company and thus cannot be
outsourced. For post audit outsourcing can be considered.
However, for financial institutions outsourcing of internal audit
function should not be allowed.
Responsibility of external auditors
The stakeholders rely on external auditors' report and have the
impression that audit reports everything and they make
decisions accordingly. Their impression is wrong and is against
the reality. External auditors have accepted limited scope and
assume no responsibilities. Whereas, external auditors cannot
be absolved of their principal responsibility on giving their
opinion on the financial statements that they are free from
material frauds and financial mismanagement to make the audit
report trustworthy. This statement should be made part of the
standard audit report. In order to improve the quality of audit
monopoly in audit profession needs to be eliminated and
competition should be introduced. This will ultimately benefit
the business & industry and economy of Pakistan.
Conclusion
By focusing the regulations on protection and safeguarding of
public money the corporate governance regulations can be
strengthened and made more effective to develop public
confidence which will ultimately result in more corporatization
and growth of Pakistan's economy.
The author is Managing Partner of MANSOOB & CO., Vice President of
Pakistan Institute of Public Finance Accountants, Chairman SME Board
of ICMA Pakistan, Chairman Dispute Resolution Committee Karachi
(established under Insurance Ordinance 2000) and Member Permanent
Panel of Arbitrators of Pakistan Stock Exchange.
 ICMAP

Articles Section Estd. 1951

Measuring the Success

of the Board
How do you measure your board's performance? Sir Andrew Likierman describes the 10 key
qualities every board needs for success, and explains how to measure them
By Sir Andrew Likierman
This is one of the Articles of Merit, judged as such under Professional Accountants in Business - Articles of Merit
Programme for distinguished contributions to Management Accounting, established by the Professional Accountants in
Business Committee (PAIB), (under its former name of FMAC) of IFAC.

H ow would you rate your own board of executive and

non-executive directors? High, because the
organisation is doing well? Low, because you can't
fathom how such a bunch (other than you) could have been
appointed? At 6 out of 10, because it's a complicated
judgement? None of the above bears close examination.
So, in common with many bodies who find it difficult to
measure performance, boards may be tempted to fall back on
the measurable. But numbers - whether showing activity
(number of meetings) or even outcomes (company profitability)
- can't possibly capture the essence of how a board functions.
This is why it's false, indeed dangerous, for board members to
assume that the organisation's success reflects the success of the
board.
The formal requirements
The combined code, which gives corporate governance
requirements for listed companies, is clear: “Every company
should be headed by an effective board, which is collectively
responsible for the success of the company.” And paragraph A6
of the code specifies that “the board should undertake a formal
and rigorous annual evaluation of its own performance and that
of its committees and individual directors.”
10 KEY MEASURES FOR BOARD
The starting point
1. Ability to choose the right members.

Today's success may well originate from decisions taken years 2. Agreement about priorities in its role.
ago by a previous board, or from other factors that have little to 3. Agreement about how to achieve company strategy.
do with the current board's efforts. For the same reason,
currently unsuccessful companies can have successful boards - Process and relationships
in that they are keeping those companies going while 4. Effective in dispatching business in and between
competitors are going bust, and laying down the basis for future meetings.
success. 5. Good internal board dynamics.
Nor is the performance of individual members the same as 6. Good key relationships.
performance of the board as a whole. There may be excellent
individuals in a dysfunctional team. Conversely, a great team Coverage
could be far more than the sum of its parts, with the chairman 7. Focuses on key issues and risks.
playing a key role in making it happen.
8. Initiative-taking, dealing with crises and identifying
This article sets out how to measure board success. Really emerging issues.
discussing how fully your board demonstrates the 10 abilities
set out in the box (see Box 1) will provide the basis for an Impact
assessment, rather than just adding up numbers or ticking 9. Contributes to the company's performance.*
boxes. The list of abilities relates to UK listed companies, but
the principles are just as applicable to unlisted companies Sustainability
seeking long-term shareholder value. Most also apply (though
10. Aware of, and interested in, good practice.
in different institutional contexts) to non-UK companies and to
public sector organisations. * the crucial factor

ICMA Pakistan’s Management Accountant, September-October, 2017 37

 ICMAP
Estd. 1951
There is certainly evidence that such evaluation is happening.
But the main focus of paragraph A6 is on individuals, not the
board as a whole. Also, 'performance' is a less ambitious goal
than 'success' - a board could be effective if it simply kept to the
rules.
Doing the right thing in corporate governance terms is an
important, but not a sufficient, condition of success. And doing
the wrong thing (e.g. an ineffective audit committee, or lack of
independence among the non-executives) will make it more
difficult to succeed but is not a measure of success (or lack of it).
Anyway, being successful means being more than just effective.
It means making a significant contribution to the long term
interests of the shareholders by adding value in excess of
competitors.
The starting point
The starting point for measuring board effectiveness is to
consider how it rates on the first three measures, i.e:
THE DISCUSSION FOLLOWING
BOARD APPRAISAL
Board appraisal usually involves a set of questions to each
board member (face-to-face or through a questionnaire),
discussion of the completed form with each member
individually (if a questionnaire), collation of the findings
and discussion of them by the board as a whole. The
chairman may then take up points with members
individually, perhaps as part of their individual annual
appraisal
If possible, feedback should be from face-to-face
interviews to supplement questionnaires, with the
emphasis on nuanced responses. It may only be possible to
tackle sensitive issues when outsiders are used: relying on
anonymous responses given to other employees isn't
realistic, and internal reviews will probably need to be less
ambitious.
Adequate time must be allowed to discuss the results from
questionnaires in depth. The discussion needs to be about
significant issues arising from comments about outlying
scores and views on board priorities, processes and
relationships. It should not be a cosy chat or have a focus
on small movements in numbers.
The discussion should take into account developments
from previous years, to clarify whether lessons can be
learned about the choice of key issues and decisions and
how they were handled. Nevertheless the discussion will
add value by focusing on specific examples and
suggestions to shape the agenda for next year rather than
being a post-mortem.
The form of the review needs to reflect the internal
dynamics of the board. If there can't be candour in open
session, the chairman should orchestrate a combination of
private and open meetings. If issues to be discussed
include the role of the chair, the senior independent
director should take the lead.
38 ICMA Pakistan’s Management Accountant, September-October, 2017
1. Does the board have the ability to choose members with the
right balance of qualities and skills, particularly the right
chief executive officer (CEO)?
2. Is it agreed about priorities in its role?
3. Is it agreed about how to achieve the company's strategy?
Board membership needs will evolve constantly with the needs
of the business, for example when moving from national to
international operations, or from family control to wider
ownership. To meet constantly evolving challenges, the board
needs the right combination of qualities and knowledge, with an
ability to renew and refresh its own membership and their skills.
So 'right', here, means appropriate for this stage of the
company's development.
It's difficult for any group to recognize the need to change its
own composition and provide for succession, but this is
essential for a board. And among these appointments, that of the
CEO is critical. Indeed, it's arguable that this is the single most
important decision a board can make.
Success also means the board having a common understanding
about the priorities in its role. All boards fulfill the same formal
purposes, but these don't capture the real agenda. For example,
does the board need to encourage the executive directors to take
initiatives? Or does it need to restrain them from taking too
many? Is it about adding skills (say communication) or
experience (say doing business in China) to complement those
of the executive directors? With a common understanding of
these priorities, the board will get the best out of its members
and board discussions. Without it, opportunities will be lost.
A separate issue is basic agreement about how the company's
strategy is to be achieved. This does not mean agreeing on all
aspects of what to do and how to do it (there is a danger of
'groupthink'). But if the board is hopelessly divided on basic
assumptions about whether to grow organically or
inorganically, and about the appetite for risk, the chances of
being successful are slim.
Appropriate measurement: board appraisal (see Box 2) and
annual personal feedback procedures need to pick up what
board members think about their colleagues, about the role of
the board and about delivering the company's strategy. The
chairman is key to turning the potential for disagreement into
creative discussion and to defusing any potentially harmful
personal differences.
Process and relationships
The subsequent three qualities required for board success
concern process and relationships, the key questions being:
4. How effective is the board in dispatching business (including
through effective board committees in and between
meetings) and following up on decisions?
5. How good are internal board dynamics and culture (handling
dissent, the relationship between executives and non-
executives etc)?
6. How good are the board's key relationships with major
stakeholders, and is there respect for what it does?
Effective processes, including persistence and resilience in
making sure things happen, not just talking about them, are a
prerequisite for board success. An open culture, with the board
 ICMAP

Estd. 1951

involved early and fully in key decisions and board members

comfortable about challenging in meetings, is crucial. So, too, is
the ability to communicate effectively inside the company and
with other stakeholders. And respect (not popularity) is an
important signal, both inside and outside the company.
Appropriate measurement: since the code became a
requirement for listed companies, increasingly sophisticated
questionnaires for board members have been developed.
Discussing the answers is the golden opportunity to improve
result, the less plausible the connection. Even for events with a
board performance. There will be feedback on respect for the
short lead time, quality of execution and overall stock market
board - and therefore its communication skills from employee
trends often mask the board's particular role.
surveys and the opinions of major shareholders.
Appropriate measurement: the answer will be qualitative and
Coverage will come from a combination of questions in the annual board
The questions relating to coverage are: appraisal and feedback from key interlocutors inside and
outside the organisation. Again the chairman has a key role in
7. Does the board identify and focus on key (not just a long list using the results of the feedback to discuss members'
of) issues and risks facing the organisation? understanding of how exactly the board currently adds value
8. Is the board able to take initiatives, deal with crises and and what it can do to improve.
identify emerging issues?
Sustainability
These may look like factual questions, but both are matters of
Finally, comes the over-arching question:
judgement. They apply as much to interpreting the past as
hypothesising about the future, since usually only after an 10. Is the board aware of, and interested in, good practice?
extended period is it possible to know whether the board has
Left to themselves, boards tend to become insular. Working
dealt with the right issues, how well it has done so, and which
methods become “the way we do things round here”. So even if
issues have not been addressed. Thus failing to ensure
the board comes out well from questions 1-9, there's still the
succession or invest in new technology is just as much about
issue of whether it is committed to sustaining good practice.
performance as successful talent management or systems
Non-executive directors can be very helpful here in giving
investment. And boards can be really helpful in identifying risks
context and helping with best practice.
that executive directors alone, sometimes preoccupied with
current challenges, may not have spotted. Appropriate measurement: executive directors may not have a
basis for comparison and even non-executives may have limited
There are two questions rather than one here because a history
experience of other boards. But there is a huge amount of
of dealing with key issues as they arise is not enough. The
information around about good practice, including increasing
ability to take initiatives, deal with crises and identify issues that
amounts of detailed information in annual reports. This is not
are not part of 'normal business' is a crucial differentiator
about grasping every passing fad, but about always being
between a good and an adequate board. For the same reason
willing to learn.
'meeting board objectives' isn't included as a success measure,
since it runs the risk of being too inward-looking and passively Conclusion
taking things too much as they are.
A successful board cannot guarantee that a company will be
Appropriate measurement: the board needs to take stock of the successful, but can make a huge contribution to it being so. An
answers to these questions as part of its annual appraisal unsuccessful board will mean that at best the company does not
process. reach its potential, and at worst it is destroyed. So there's plenty
at stake here, and not only for the investors and other
Impact stakeholders who want reassurance about investments or
If there had to be a single question about the success of the relationships.
board, it would be:
Board members as individuals have a great deal to gain from an
9. What is the board's contribution to the company's answer to the question, “is the board successful?” All will want
performance? to know about the results of their efforts and, on the downside,
about any danger of personal liability or to their reputations.
Boards will understandably want to take credit for things that go
Executive directors (and indeed all other employees) will want
well. This inclination applies not only to the success of visible
to know that their company is getting the best direction possible
initiatives (new ventures, new people etc) but also to actions
and that their futures are secure.
resulting in the absence of problems normally indicating board
failure (e.g. deciding against an unfortunate acquisition, Answers to the above questions will mean that the successful
recording fewer bad debts than competitors). board does not have to guess whether it is successful, and the
unsuccessful one will possess information providing the basis
But making either connection isn't easy, particularly for
for improvement. Continuing success will mean continuing to
contributions such as establishing ethical standards. So while it
ask for answers to the questions. F&M
may be possible for major individual events, such as
acquisitions, to be linked to board decisions, the larger the Sir Andrew Likierman is professor of management practice at the London Business
School and a past president of the Chartered Institute of Management Accountants.
organisation and the longer the lead time between decision and

ICMA Pakistan’s Management Accountant, September-October, 2017 39

 ICMAP
Estd. 1951
SAFA Index on Public
Financial Management
By: Mohammad Iqbal Ghori, President ICMA Pakistan and Chairman, Research and Publications Committee
Preamble
Public Financial Management (PFM) is crucial to any country's
economic development and helps in achieving aggregate fiscal
discipline; strategic resource allocation and efficient public
service delivery. According to the World Bank, a good financial
management is important to a country's development because it
gives assurance to citizens that their taxes are being used
appropriately; to donors and lenders that funds provided are
being used appropriately; and to the private sector that there is
an appropriate environment for investment and growth.
The changing global scenario demands that both the developed
and emerging economies must strive for putting in place a sound
performance assessment framework for public financial
management that could lead to ensure good governance,
transparency and accountability in the state owned and public
services organizations. The international and regional alliances,
especially in the field of accounting and finance, need to adopt a
proactive role in consolidating efforts of their members in
developing and implementing a harmonized and integrated
framework for PFM to strengthen financial management
practices.
“With the adoption of proposal by SAFA Board, ICMA Pakistan has become the first
professional Institute in South Asia chosen to lead a significant project on SAFA Index. This is
a milestone and an honour for ICMA Pakistan which would have far reaching benefits to
public sector organizations in SAARC”
A Milestone for ICMA Pakistan
ICMA Pakistan has taken the lead by initiating the idea to
develop a SAFA Index on Public Financial Management. Mr.
Mohammad Iqbal Ghori, President ICMA Pakistan who is also
Chairman of Governmental and Public Sector Enterprises
Accounting (GPSEA) Committee of South Asian Federation of
Accountants (SAFA) presented a proposal for developing a
SAFA Index on PFM which was welcomed and appreciated by
GPSEA committee. This proposal was recommended to the
SAFA Board which, in its meeting held on November 02, 2017
at Colombo, Sri Lanka approved the proposal formed a Task
Force, headed by President ICMA Pakistan, to undertake the
project.
With the adoption of proposal by SAFA Board, ICMA Pakistan
has become the first professional Institute in South Asia chosen
to lead a significant project on SAFA Index. This is a milestone
and an honour for ICMA Pakistan which would have far
reaching benefits to public sector organizations in SAARC.
This would also lead to strengthening public financial
management to improve good governance, transparency and
accountability in SAARC countries.
40 ICMA Pakistan’s Management Accountant, September-October, 2017
ICMA Pakistan is embarking on an emerging regional role that
would lead to wider recognition of its contributions towards the
regional economic development, in general and improving
public financial management, in particular.
Why Need for SAFA Index on PFM?
A sound public financial management (PFM) system is
essential for better governance that allows the government to
achieve macro-economic sustainability, developmental
objectives and pro-poor economic growth.
The implementation of SAFA Index on public financial
management practices would therefore be quite beneficial for
the SAARC region as it would enhance transparency,
accountability and good governance in public sector
organizations and stimulate regional economic growth which
would ultimately benefit the common man and the business
enterprises in the SAARC countries.
Basis of SAFA Index on PFM
The SAFA Index on PFM is proposed to be based on broad
framework followed under 'PEFA Program' which is globally
accepted as the basis for evidence-based measurement of PFM
systems in different countries. PEFA stands for 'Public
Expenditure and Financial Accountability' and it was launched
in 2001 in joint partnership between the World Bank, EC, IMF,
DFID-UK, SECO-Switzerland and Ministry of Foreign Affairs
of France and Norway, respectively. PEFA helps government to
improve PFM systems to achieve their development goals.
'PEFA Framework' launched in 2005 signifies a diagnostic tool
to assess PFM performance in different countries. It provides
set of 31 indicators for PFM performance measurement system.
These 31 indicators are further categorized into seven 'Pillars' of
performance' under PEFA framework.
Proposed SAFA PFM Index - 7 Pillars of Performance
o Transparency of Public Finances
o Budgeting and Policy-based Fiscal Strategy
o Budget Reliability
o Budget Execution and Control
o Accounting and Reporting
o Management of Assets and Liabilities
o External Scrutiny and Audit
 ICMAP

Estd. 1951

Index 1: Transparency of Public Finances

Goal Measurement
Information on PFM Detailed budget classification;
is comprehensive, transparency of all government
consistent and revenue and expenditure i.e. inter-
accessible to users governmental transfers; published
information on service delivery
performance and ready access to fiscal
and budget documentation
Sub-Index
l Budget classification
l Budget documentation
l Central government operations outside financial reports
l Transfers to sub-national governments
l Performance information for service delivery
l Public access to fiscal information

Index 2: Budgeting and Policy-based Fiscal Strategy

Goal Measurement Sub-Index
Budget and Fiscal Fiscal strategy and budget are prepared l Macroeconomic and fiscal forecasting
strategy are based on with due regard to government fiscal l Fiscal strategy
fiscal policies policies, strategic plans, and adequate l Medium-term perspective in
macroeconomic and fiscal projections
l Expenditure budgeting
l Legislative scrutiny of budgets

Index 3: Budget Reliability

Goal Measurement Sub-Index
Budget is realistic Comparison of actual revenues and l Aggregate expenditure out-turn
and implemented as expenditures with the original l Expenditure composition out-turn
intended approved budget l Revenue out-turn
Index 4: Budget Execution and Control
Goal Measurement Sub-Index
Resources are being The budget is implemented within a l Revenue administration
obtained and used as system of effective standards, l Accounting for Revenue
intended processes and internal controls.
l Predictability of in-year resource allocation
l Expenditure arrears
l Payroll controls
l Procurement
l Internal control on non-salary expenditures
l Internal audit
Index 5: Accounting and Reporting
Goal Measurement Sub-Index
Accurate and reliable The accounting information is l Financial data integrity
records are produced and timely disseminated to
l In-year budget reports
maintained the concerned quarters for decision-
making, management and reporting l Annual financial reports
needs.
Index 6: Management of Assets and Liabilities
Goal Measurement Sub-Index
Effective Assets are recorded and managed; l Fiscal risk reporting
management of fiscal risks are identified; and debts and l Public investment management
assets and liabilities guarantees are prudently planned, l Public asset management
approved, and monitored.
l Debt management
Index 7: External Scrutiny and Audit
Goal Measurement Sub-Index
Public finances are External follow-up on implementing l External audit
being independently recommendations for improvement by l Legislative scrutiny of audit reports
reviewed executive

ICMA Pakistan’s Management Accountant, September-October, 2017 41

 ICMAP
Estd. 1951
Status of PFM in SAFA Countries
Let's have a brief look at the status of initiatives taken in the SAARC countries for public financial management.
Bangladesh
Since 1990s, public financial reform
programs were undertaken in Bangladesh
which has improved the management of
public resource. PEFA 2016 concluded
that Bangladesh has made positive strides
in developing its PFM systems since
2010; however there are still areas for improvement. A new
PFM Strategy 2016-21 with following goals has been initiated
to build on past reforms and strengthen the basics required for
achieving overarching national goals:
a) Raise revenue, especially through new VAT law and
broadened direct tax base
b) Implement a new financial management information
system (IBAS++) based on the new chart of accounts
c) Implement reforms to strengthen public investment
management and planning-budgeting linkages
d) Strengthen PFM skills and staff retention
e) Improve the timeliness of publication of audited financial
statements
f) Roll out e-procurement across government
India
Over the year, the PFM reforms in India
have focused on bringing innovations in
PFM systems, especially budget
management, accounts and audit,
institutional strengthening for financial
management and capacity building. In
2004, preparation of medium term fiscal policies was
introduced through a Fiscal Responsibility and Budget
Management Act (FRBM). PEFA 2010 concluded that PFM
reforms yielded results in areas of fiscal discipline, strategic
resource allocation and efficient service delivery; however,
fundamental changes to PFM systems were not achieved as
expected. The following areas remain crucial in strengthening
PFM system in India:
a) Producing suitable performance measures to influence
budgetary decisions
b) Continuing with existing efforts to expand accrual
accounting
c) Modernizing internal audit and control
d) Improving the effectiveness of external audit, and
e) Introducing an exclusive procurement law.
Nepal
A stability program funded by IMF in 1987 and a
Structural Adjustment program in 1989 financed
by World Bank were initiated. An Immediate
Action Plan (IAP) was initiated in 2002 to
expedite reforms in three critical areas i.e.
prioritizing public expenditures; improving
service delivery and strengthening anti-corruption and
accountability measures. A Medium Term Expenditure
42 ICMA Pakistan’s Management Accountant, September-October, 2017
Framework (MTEF) was started in FY 2002-2003. PEFA 2007
indicated a high risk environment in financial management in
Nepal after which a PFM Reform Program (PFMRP) has been
initiated. The four main weaknesses in PFM systems as
identified by PEFA in its report are:
a) lack of monitoring fiscal risks
b) poor capital budget preparation and implementation
c) weak sector strategies and
d) weak reconciliation of revenue accounts
Pakistan
Key milestones achieved in PFM
reforms in Pakistan. The Government
of Pakistan has continuing agenda of
PFM Reforms. A centralized and
advanced financial reporting system
i.e. PIFRA funded by World Bank has
been initiated by AGP which is
working efficiently. In 2003, a Medium-Term Budgetary
Framework (MTBF) was initiated which aims at enhancing
fiscal discipline; improving linkages between government's
strategic policy priorities and budget, and enhancing
operational efficiency. Restructuring of PSEs is initiated as
roadmap for improved economic governance. Current
programs are focused on areas of weakness in PFM
administration with special focus on achieving the following
goals:
a) Establish an effective system for financial management,
reporting and audit
b) Implement a medium-term budget framework
c) Strengthen the capacity of the public sector in key areas
(including PFM)
d) Reform tax administration and strengthen the FBR; and
e) Consolidate and strengthen the country's public
procurement system
Sri Lanka
Sri Lanka has taken PFM reform
initiatives to ensure transparency and
a c c o u n t a b i l i t y, p a r t i c u l a r l y i n
procurement, public assets management
and other public resources. As per
USAID PFM Report 2015, PFM in Sri Lanka is fragmented and
unable to ensure adequate and efficient use of public resources.
The PFM objectives viz. fiscal policy, strategic allocation and
operational efficiency are not integrated. A 'National Asset
Register' is prepared to highlight government's commitment to
transparency, accountability and proper asset management. A
'Public Finance Act' is being drafted to bring improvements in
areas of budget formulation, public debt management, financial
management and financial reporting. A National Procurement
Commission has been set up to improve procurement
regulations. Other reforms in PFM include bringing a National
Audit Bill; Right to Information (RTI) bill; Code of Conduct for
Civil Service; Budget Regulations bill etc.
 ICMAP

Estd. 1951

Special Feature

ICMA Pakistan adopts

NOCLAR
Dear Member,

I am pleased to inform you that the ICMA Pakistan has adopted the International Ethics Standards Board of
Accountants (IESBA) Code of Ethics in relation to responding to Non-Compliance with Laws and Regulations
(NOCLAR). This Code is effective from 15th July 2017 and countries around the world are presently in the
adoption process.

The proposal for adoption of NOCLAR was unanimously approved by the National Council held on Saturday,
11th of November, 2017. The IESBA Code on NOCLAR would become applicable on the members of the
Institute with immediate effect.

The standard sets out a framework to guide auditors and professional accountants in public practice and in
organizations, as to what actions they are required to take in public interest when they become aware of a
potential illegal act or NOCLAR committed by a client or employer. In fact, it enables accountants to set aside
the principle of confidentiality when there is a strong public interest reason. The standard addresses
breaches of laws and regulations that deal with matters such as tax and securities frauds, corruption and
bribery, money laundering, tax payments, financial products and services, environmental protection, and
public health and safety. It provides a clear pathway for auditors and other professional accountants to
disclose potential non-compliance situations firstly to the management and the people in governance and
in case they do not respond effectively, to the appropriate public authorities without being constrained by
the ethical duty of confidentiality. It also places renewed emphasis on the role of senior-level accountants in
business in promoting a culture of compliance with laws and regulations and prevention of non-compliance
within their organizations.

The Institute will soon organize awareness seminars across Pakistan about NOCLAR for the benefit of
Members of ICMA Pakistan.

With kind regards,

Mohammad Iqbal Ghori, FCMA

President

ICMA Pakistan’s Management Accountant, September-October, 2017 43

NOCLAR
ICMAP

AT A GLANCE
Estd. 1951

July 2016
IESBA
Final Pronouncement: Responding to Non-Compliance
with Laws and Regulations
This summary provides an What was the The objective of the project was to develop a framework to guide
overview of the International objective of this auditors, other professional accountants (PAs) in public practice,
project? and PAs in business (PAIBs) in deciding how best to act in the public
Ethics Standards Board for interest when they become aware of non-compliance or suspected
Accountants (IESBA)'s non-compliance with laws and regulations (NOCLAR).
pronouncement,
Responding to Non- What was the It was about what is reasonable to ask of PAs, given their responsibility to
heart of the act in the public interest when they encounter or are made aware of
Compliance with Laws and
debate? NOCLAR or suspected NOCLAR, when providing a professional service
Regulations. to their clients or carrying out their duties for their employer.

The pronouncement
When is the The pronouncement is effective July 15, 2017. Early adoption is
contains consequential and pronouncement permitted.
conforming amendments to effective?
a number of sections in the
IESBA Code of Ethics for Where can I find For more information, including implementation support materials,
Professional Accountants more visit the IESBA NOCLAR web page or www.ethicsboard.org.
(the Code). information?

This At-a-Glance publication has been prepared by IESBA staff for information purposes only. It does not form part of the pronouncement, the IESBA Code of Ethics
for Professional Accountants (the Code), or other authoritative publications of IESBA. It has not been reviewed, approved, or otherwise acted upon by the IESBA.

IESBA
Why Was the Project Started and How Was It Informed?
The IESBA believes Why was the project started? How were the IESBA deliberations
that the NOCLAR informed?
The project was started to address concerns
response framework is from the regulatory community and other The development of the pronouncement over
stakeholders about: more than six years was informed by research
in the public interest.
and extensive public consultation and
l The duty of confidentiality under the Code
The development of the stakeholder outreach, including:
acting as a barrier to timely disclosure by
framework was auditors of fraud and other NOCLAR to l Gathering data on regulatory approaches
informed by appropriate regulatory and enforcement authorities in to reporting NOCLAR in a number of
the public interest jurisdictions around the world
research, two formal
public consultations, l Auditors simply resigning from the client l Two exposure drafts
relationship because of identified or
three global l Three global roundtables in Hong Kong
suspected NOCLAR without the matter
roundtables, and SAR; Brussels, Belgium; and Washington
being appropriately addressed
DC, USA
extensive stakeholder l A lack of guidance in the Code about the
l Discussions with the IESBA Consultative
outreach, including thought process and relevant factors to
Advisory Group on 12 separate occasions
discussions with the take into account in determining an
IESBA Consultative appropriate course of action in responding l Numerous meetings with the international
to the matter in the public interest and national regulatory community
Advisory Group. including audit oversight bodies,
The scope of the project was subsequently
international policymakers, investors,
broadened to cover not just auditors but also
those charged with governance,
other PAs in public practice and PAIBs.
preparers, national standards setters,
professional accountancy organizations,
representatives of large and small
accounting firms, and other stakeholders

44 ICMA Pakistan’s Management Accountant, September-October, 2017


IESBA
Key Elements of the Response Framework and Key Intended Outcomes
The framework focuses
on the desired
outcomes in the public
interest, i.e., that PAs
do not turn a blind eye
to the matter, that
NOCLAR
consequences are
addressed or that
NOCLAR be deterred,
and that further action
be taken as appropriate
in the public interest.
IESBA
What Is Required of Auditors under the Framework?
The framework specifies a Raise the identified or suspected NOCLAR
differential approach to with management/TCWG
l To clarify their understanding of the
responding to identified or
suspected NOCLAR:
l Auditors vs. other PAs
in public practice
l Senior-level PAIBs vs.
other PAIBs
This approach recognizes
the different remits of the
different categories of
PAs, the different spheres l
of influence, the different
levels of authority,
responsibility and decision
making, and the different
levels of public
expectations. l Communicate the matter appropriately in
l Assess appropriateness of the response
What is NOCLAR under the framework?
Any act of omission or commission, intentional
or unintentional, committed by a client or Laws and regulations that have a nexus to PAs'
employer, or by those charged with governance professional training and expertise, i.e.:
(TCWG), by management or by other
individuals working for or under the direction of
a client or employer which is contrary to the
prevailing laws or regulations.
What are the key intended outcomes?
Key intended outcomes in the public interest
include:
l Ensuring that PAs respond in a timely way
to identified or suspected NOCLAR
l Rectifying, remediating, or mitigating the What is not in the scope?
adverse consequences of identified or
suspected NOCLAR to stakeholders and
the general public
l Deterring the commission of NOCLAR
l Stimulating increased reporting of
identified or suspected NOCLAR where
required by law or regulation, or where
determined appropriate under the Code in
the public interest
matter, to substantiate/dispel their
concerns, and to enable management/
TCWG to investigate it
l To advise management/TCWG to:
o Address the consequences
o Deter the NOCLAR
o Disclose the matter to an appropriate
authority where required by law or
regulation or where necessary in the
public interest
Fulfill professional responsibilities
Understand and comply with applicable
laws and regulations, including
requirements regarding reporting to an
appropriate authority and prohibitions
against “tipping off”
l Comply with applicable auditing
standards
the context of a group
Determine if further action is needed
of management/TCWG
ICMA Pakistan’s Management Accountant, September-October, 2017
ICMAP
Estd. 1951
What is the scope of laws and regulations
covered?
l Laws and regulations that have a direct
effect on the determination of material
amounts and disclosures in the financial
statements
l Other laws and regulations, compliance
with which may be fundamental to the
entity's business and operations, or to
avoid material penalties
l Matters that are clearly inconsequential
l Personal misconduct unrelated to the
business activities of the client or employer
l Non-compliance other than by the client or
employer, or TCWG, management or
other individuals working for or under the
direction of the client or employer
l In light of that response, determine
objectively if further action needed in the
public interest
The nature and extent of further action needed
will depend on various factors, e.g.:
l Credible evidence of substantial harm to
the entity or stakeholders
l Any law prohibiting disclosure of
confidential information to an outside
party
Courses of further action may include:
l Disclosing the matter to an appropriate
authority even if not required by law
l Withdrawing from the engagement and
client relationship
o If withdrawing, inform proposed
successor of the NOCLAR
Imminent breach
In exceptional circumstances, may
immediately disclose the matter to an
appropriate authority if imminent breach of a
law or regulation that would cause substantial
harm to stakeholders
Document, among other matters, courses
of action considered, judgments made, and
decisions taken
45
 ICMAP

Estd. 1951

IESBA
What Is Required of Senior-Level PAIBs under the Framework?
The framework describes Overarching expectations l In light of that response, determine
a senior-level PAIB l
Set the right tone at the top within the objectively if further action needed in the
(“senior PAIB”) as a organization public interest
director, officer, or senior l Establish appropriate policies and The nature and extent of further action needed
procedures to prevent NOCLAR, will depend on various factors, e.g.:
employee able to exert
significant influence over, including whistleblowing procedures as a l Credible evidence of substantial harm to
necessary part of good internal the organization or stakeholders
and make decisions governance
regarding, the acquisition, l Any law prohibiting disclosure of
Fulfill professional responsibilities confidential information to an outside
deployment, and control party
Take appropriate steps to:
of the organization's
l Raise the identified or suspected Courses of further action may include:
human, financial,
NOCLAR with a superior/TCWG l Informing management of the parent
technological, physical, entity in the case of a member of a group
and intangible resources. l Understand and comply with applicable
laws and regulations, including l Disclosing the matter to an appropriate
Senior PAIBs can play an requirements to report the matter to an authority even if not required by law
appropriate authority l Resigning from the employment
important role within their
organizations in promoting l R e c t i f y, r e m e d i a t e , o r m i t i g a t e relationship
consequences Imminent breach
an ethics-based culture,
including taking l Reduce the risk of re-occurrence l In exceptional circumstances, may
appropriate steps to l Seek to deter the NOCLAR immediately disclose the matter to an
Also determine whether disclosure to the appropriate authority if imminent breach
implement internal
external auditor, if any, is needed. of a law or regulation that would cause
systems, policies, and substantial harm to stakeholders
procedures to prevent Determine if further action is needed
Documentation is encouraged
NOCLAR. l Assess appropriateness of the response
of superiors, if any, and TCWG

IESBA
What Is Required of Other PAs in Public Practice and Other PAIBs under the
Framework?
The basic ethical PAs in public practice other than auditors Courses of further action may include:
principles are the same l Discuss the identified or suspected l Disclosing the matter to an appropriate
for all PAs, i.e., they NOCLAR with management and, if they authority even if not required by law
should respond to the have access to them and where l Withdrawing from the engagement and
appropriate, TCWG client relationship
issue and not turn a blind
eye. However, the l If the client is also an audit client of the The nature and extent of further action will
firm, or a component of an audit client of depend on various factors.
implementation of those
the firm, communicate the matter within
principles will differ Imminent breach
the firm so that the audit engagement
depending on their roles, partner is informed about it In exceptional circumstances, may
levels of seniority, and immediately disclose the matter to an
l If the client is an audit client of a network appropriate authority if imminent breach of a
spheres of influence. firm, or a component of an audit client of a law or regulation that would cause substantial
network firm, consider communicating harm to stakeholders
the matter to the network firm so that the
audit engagement partner is informed PAIBs who are not senior PAIBs
about it l Escalate the identified or suspected
l For any other client, consider NOCLAR to the immediate superior or
next higher level of authority; or
communicating the matter to the firm that
is the external auditor, if any l Use established internal whistle-blowing
mechanism
Stand back
Documentation is encouraged for both PAs
l Consider whether further action is needed in public practice other than auditors, and
in the public interest PAIBs who are not senior PAIBs

46 ICMA Pakistan’s Management Accountant, September-October, 2017


IESBA
What Are the Strengths of the Framework?
The Code alone cannot
address issues of non-
compliance. There also
needs to be strong
corporate governance
systems; robust, trusted,
and effective legal and
regulatory regimes; and
ongoing efforts by
accounting firms,
professional accountancy
organizations, academic
institutions and others to
assist PAs in becoming
more aware of and in
better understanding their
legal, regulatory, and
ethical responsibilities l It emphasizes the importance of senior-
regarding responding to
NOCLAR.
IESB
A holistic and balanced model
l It focuses on the desired outcomes in the
public interest.
l It places appropriate and necessary
emphasis on the actions of auditors and
other PAs vis-à-vis the responsibilities of
management and TCWG.
l It balances in a robust way the need for
PAs to act in the public interest against
considerations of global operability.
A proportionate approach
l It recognizes the different capacities and
spheres of influence, and the different
levels of public expectations, for the
different categories of PAs, and scales the
responsibilities accordingly.
A renewed emphasis on tone at the top
level PAIBs promoting a culture of
compliance with laws and regulations and
prevention of NOCLAR within their
organizations.
d ate
A Up
ICMA Pakistan’s Management Accountant, September-October, 2017
ICMAP
Estd. 1951
Expanded auditors' “toolkit”
l It provides a pathway to disclosure of
serious identified or suspected NOCLAR
to an appropriate authority in the
appropriate circumstances, without the
ethical duty of confidentiality standing in
the way.
l If an auditor has chosen to resign from the
client relationship as a result of taking this
course of action in following the
framework, the predecessor auditor, on
being approached by a proposed
successor auditor, is required to
communicate information concerning the
identified or suspected NOCLAR to the
proposed successor without needing to
obtain client consent.
Complementing laws and regulations
l It fills a gap where laws and regulations do
not address PAs' responsibilities
regarding responding to NOCLAR; and in
jurisdictions that do, it may well
complement the legal and regulatory
framework by providing necessary
guidance to PAs in complying with the
legal or regulatory requirements.
47
 ICMAP

ICMA Pakistan’s Global Management

Accountants Conference Estd. 1951

Pakistan, India and Sri Lanka join hands to form a

Global Forum of Management Accountants
The foundation of a Global Forum of Management Accountants
has been laid down by ICMA Pakistan. The professional
management accounting bodies of Pakistan, India and Sri Lanka
have joined hands to form a 'Global Forum of Management
Accountants (GFoMA) to reinvigorate the management
accounting profession to play a more proactive role in assisting
global businesses in achieving cost efficiency and value
optimization and to adopt a unified stand to meet current
global challenges facing profession.
A Joint Declaration to this effect was announced by the
Presidents of the three management accounting bodies viz. Mr.
Mohammad Iqbal Ghori, President ICMA Pakistan; CMA Sanjay
Gupta, President, Institute of Cost Accountants of India and
Prof. Lakshman R. Watawala, President of Institute of Certified
Management Accountants of Sri Lanka at ICMAP's first Global
Management Accountants Conference held at Dubai, UAE.
The Global Forum for Management Accountants is also supported by Bangladesh however; President of Institute of Cost and
Management Accountants of Bangladesh (ICMAB), Mr. Jamal Ahmed Choudhury FCMA, could not make up to attend GMAC due to his
pre-commitment. The two other management accounting bodies namely CIMA UK and IMA USA will also be invited to join the Global
Forum. The Presidents of all professional bodies of management accountants will be invited to become the 'Chairs' of the proposed Global
Forum.
The second Global Management Accountants Conference (GMAC) will be organized in India in May 2018. The President, Institute of Cost
Accountants of India has announced to host the next GMAC.

The Leaders of Professional

Bodies of Management
Accountants in SAARC Region
who assembled in Dubai, UAE to
take stock of current challenges
facing the management
accounting profession has
decided in principle to form a
'Global Forum of Management
Accountants (GFOMA)' to set the
right direction and revitalize the
profession
(Left to Right) CMA Sanjay Gupta, President, Institute of Cost Accountants of India (ICAI),
Mohammad Iqbal Ghori, President, ICMA Pakistan and Prof. Lakshman R. Watawala,
President, Institute of Certified Management Accountants of Sri Lanka (ICMA SL)

A LANDMARK EVENT OF ICMA PAKISTAN

GMAC signify a landmark event for ICMA Pakistan as it was the first-ever international mega event organized overseas. The theme
selected for GMAC was 'Costing and Pricing A Competitive Edge'. The special focus of GMAC was also on Value Added Tax (VAT)
introduced in UAE recently to enlighten participants about its impact on businesses in Gulf and Middle East and possible role that can be
played by professional accountants, especially management accountants. The conference was a resounding success, despite being the
first international venture of the Institute and appreciations are continuously pouring in from CMAs all around the world on organizing
such an important conference in Dubai.
 ICMAP

ICMAP Estd. 1951

ICMA Pakistan’s Global Management

Accountants Conference Estd. 1951

Glimpses of GMAC

Welcome Address:
Mohammad Iqbal Ghori, President ICMA Pakistan

Anis ur Rehman, Vice President & Khawaja Ehrar ul Hassan, Conference Moderator: Waqar Ali Khan,
Chairman CPD, ICMAP Honorary Secretary, ICMAP Member National Council ICMA Pakistan

A Better Way - The Accountant as a Driver of Innovation Cyber Security – The Essentiality Today: Q & A Session
Daniel Monehin, PAIB Committee Member, IFAC H. L. Kumar, Vice President, Klystron Global DMCC

Group Photo

ICMA Pakistan’s Management Accountant, September-October, 2017 49

 ICMAP

ICMAP
Estd. 1951

ICMA Pakistan’s Global Management

Accountants Conference Estd. 1951

Technical Session 1: Understanding VAT

Pricing Strategies with particular reference to Healthcare Impact of VAT on pricing in UAE
Srinivas Achar, CFO, National Hospital Mian Mohammmad Ramzan, CEO, TMRC Consulting

Accountants' Perception on VAT Challenges of Management Accounting:

Syed Asif Zaman, President, ICAP President, Dubai Chap. Faisal Anwer, Financial Controller, Getz Pharma

Group Photo

50 ICMA Pakistan’s Management Accountant, September-October, 2017

 ICMAP

ICMAP Estd. 1951

ICMA Pakistan’s Global Management

Accountants Conference Estd. 1951

Technical Session 2: Role of Professional Accountants

In Economic Value Addition Through Costing and Pricing
Integrated Reporting - Role of Cost and Role of professional accountants in
Management Accountants CMA Sanjay Gupta, Economic Value Addition Prof. Lakhsman
President, ICoAI Watawala, President, CMASL

Performance of Pakistan Association of Mr. Muhammad Abbas Sandhu, Activity Based Costing – As a tool for
Dubai (PAD) in UAE CEO, M. A. & Co. Pricing: Abdul Qayyum, Financial
Dr. Faisal Ikram, President, PAD Controller, Anglo Eastern Industries

Group Photo

Panel Discussion Audience

ICMA Pakistan’s Management Accountant, September-October, 2017 51

 ICMAP
Estd. 1951
Economy Watch
Compiled by Research and Publications Directorate, ICMA Pakistan
SECP notifies Draft Companies (Compliance
and Reporting) Regulations
T he Securities and Exchange Commission of Pakistan
(SECP) has notified the draft Companies (Compliance and
Reporting) Regulations, 2017, to obtain public opinion. The
draft regulations have been placed on the SECP’s website.
The regulations primarily specify the form and manner of filing
of various statutory returns as required under the provisions of
the Companies Act, 2017, as well as the standardized formats
for filing of applications under the various provisions of the Act.
The statutory forms specified under the draft regulations
pertains to commencement of business, registration of altered
articles of association, change of principal line of business,
returns concerning registration, modification and satisfaction of
charge, return for transfer of shares and further allotment of
shares, notice of alteration of share capital, special return for
change in shareholding of more than 25%, annual returns,
returns pertaining to global register of beneficial ownership,
filing of special resolution, consent to act as director etc. The
formats of applications specified under the draft regulations
include change of name, rectification of name, conversion of
status of company, alteration in memorandum of association,
issue of shares otherwise than right, issue of shares at discount,
extension in annual general meeting and laying of financial
statements, relaxations concerning financial statements,
approval of loan to directors etc.
China-Pakistan Economic Corridor (CPEC)
Italian Investors Keen to Benefit from
Opportunities Stemming from CPEC: Envoy
I talian Ambassador to Pakistan Stefano Pontecorvo said there
was growing interest among Italian business community to
explore investment opportunities in Pakistan, specially in view
of the new possibilities opening up under the China Pakistan
Economic Corridor (CPEC).
He was talking to Deputy Chairman, Planning Commission
Sartaj Aziz who called on him here along with Roberto Puddu,
Commercial Counsellor of the Italian Embassy.
Sartaj Aziz on the occasion expressed his satisfaction at the
recent 46 per cent increase in bilateral trade between the two
countries from $1.3 billion in 2015-16 to $2 billion in 2016-17.
52 ICMA Pakistan’s Management Accountant, September-October, 2017
The regulations also specify the particulars for the registers of
members, debenture-holders, directors, and officers etc. to be
kept by the companies. In addition to that the mechanism of
price determination for transfer of shares of a private company,
conduct of shareholders in the meeting, qualification of
company secretary, manner of selection of independent director
on databank, mechanism for easy exit of defunct company and
provisions relating to inactive company have been specified in
the draft regulations. The regulations will replace Companies
(General Provisions and Forms) Rules, 1985, and Companies (Easy
Exit Scheme) Regulations 2014. They have been notified with the
objective of ease of doing business. The public is requested to send
their comments by email at commission.secretariat@secp.gov.pk.
SECP approves US equity index futures
contracts for trading through PMEX
T he Securities and Exchange Commission of Pakistan
(SECP), having notified the ‘International Equity Index’ as
a financial instrument for the purposes of Futures Market Act,
2016, has accorded approval for trading of US equity index
futures contracts through the platform of PMEX. These futures
contracts shall further enrich the existing product portfolio of
PMEX, which includes commodities such as gold, silver, crude
oil, international cotton, platinum, natural gas, copper, red
chilli, paddy rice, wheat, etc. Trading of international equity
index futures contracts through PMEX is envisaged to create
awareness among investing public about US equity indices such
as Dow, NASDAQ, and S&P.
Stefano said the heads of
many large Italian companies
had visited Pakistan in recent
months to meet officials and
potential business partners
specially in fields such as
natural gas, liquefied natural
gas, automotive industry,
agricultural machinery,
textile machinery and the
construction sector.
The ambassador invited the
Deputy Chairman to visit Italy at a mutually convenient time to
further strengthen economic cooperation between the two
countries.
 ICMAP

Estd. 1951

ECONOMIC INDICATORS
EXPORTS IMPORTS
US$ 3.93 Billion US$ 8.99 Billion
July-August 2017-18 July - August 2017-18
Showing 17.7% growth during same Showing 7.6 % decrease over preceding
period last year (US$ 3.34 billion) two months (US$ 9.74 billion)

REMITTANCES CURRENT ACCOUNT DEFICIT

US$ 6444.46 Million US$ 2.60 Billion
July - October 2017-18 July - August 2017-18
Current Account Deficit was US$ 3.10 billion
Remittances were US$ 6301.39
during May-June 2017, showing
during same period last year
improvement of 16.2 percent

TRADE DEFICIT FISCAL DEFICIT

US$ 12.1 Billion 6.1% of GDP
July - October 2017-18 (Rs. 2.2 Trillion)
Government target is 4.1% or Rs. 1.5 Trillion
(Source: World Bank Pakistan Development Update November 2017)

TOTAL DEBTS & LIABILITIES FOREIGN DIRECT INVESTMENT

78.7 % of GDP US$ 939.7 Million
July - October 2017-18
The ratio of Revenue to Debt is over 700 times
FDI was74.4% higher than same period last year
(Source: World Bank Pakistan Development Update November 2017)
(Source: State Bank of Pakistan)

FOREX RESERVES AVERAGE INFLATION

US$ 19.7 Billion 3.5%
As on 10th November 2017 July- October 2017
This includes Forex held by SBP @ US$ 13.7 billion Average inflation stood at 3.95%
and held by commercial banks @ US$ 6 billion during same period last year
(Source: State Bank of Pakistan) (Source: Daily Business Recorder)

ICMA Pakistan’s Management Accountant, September-October, 2017 53

 ICMAP

Estd. 1951

Management
Accounting Terms
Activity attributes Nonfinancial and financial information items that describe individual activities.

Benchmarking An approach that uses best practices as the standard for evaluating activity performance.

Certified Management A person who has passed a rigorous qualifying examination, has met an experience requirement, and
Accountant (CMA) participates in continuing education.

Discount factor The factor used to convert a future cash flow to its present value.

Environmental costs Costs that are incurred because poor environmental quality exists or may exist.

A balanced scorecard viewpoint that describes the financial consequences of actions taken in the other
Financial perspective three perspectives.

Goal congruence The alignment of a manager’s personal goals with those of the organization.

Hybrid product-costing A system that incorporates features from two or more alternative product-costing systems, such as job-order and process costing
system
The positive or negative measures taken by an organization to induce a manager to exert effort toward
Incentives achieving the organization’s goals.
Just-In-Time (JIT) A purchasing method that requires suppliers to deliver parts and materials just in time to be used in production.
purchasing
Keep-or-drop decisions Relevant costing analyses that focus on keeping or dropping a segment of business.

Labor-intensive A production process accomplished largely by manual labor.

Manufacturing cycle Time The total amount of production time (or throughput time) required per unit.

An approach that assigns the actual costs of direct materials and direct labor to products but uses a
Normal costing predetermined rate to assign overhead costs.

Operating expenses The money an organization spends in turning inventories into throughput.

Perquisites A type of fringe benefit over and above salary, which is received by managers.

Quality of conformance Conforming to the design requirements of the product.

A transfer price acceptable to the Internal Revenue Service under Section 482. The resale price method computes
Resale price method a transfer price equal to the sales price received by the reseller less an appropriate markup.

Scatter diagram A set of plotted cost observations at various activity levels.

The average amount of time required to convert raw materials into finished goods ready to be shipped
Throughput time to customers.

Under-applied overhead The amount by which actual overhead exceeds applied overhead.

Variable cost Costs that, in total, vary in direct proportion to changes in a cost diver.

Waiting time The time during which partially completed products wait for the next phase of production.

An alternative approach to budgeting in which the prior year’s budgeted level is not taken for granted. Instead,
Zero based budgeting the existing operations are analyzed, and continuance of the activity or operation must be justified on the basis
of its need or usefulness to the organization.

54 ICMA Pakistan’s Management Accountant, September-October, 2017

 ICMAP

Estd. 1951

Letter to the Editor

Reader's
Dear Mr. Iqbal Ghori

An article ‘Business Entrepreneurship’ published in

Management Accountant is very interesting. It
provides history of successful entrepreneurs, gives
statistical data, motivation and shows steps to start
new business. It highlights the associated risks and
suggests precautionary measures and transition
from job to a successful entrepreneurship in
Comments
We believe that the readers are the best judge to highlight
the areas where improvement in 'Management
Accountant Journal' can be made. The Research and
Publications Committee invites your valuable comments
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ICMA Pakistan’s Management Accountant, September-October, 2017 55
 ICMAP

Estd. 1951

National Council
2015-17

OFFICE BEARERS MEMBERS

PRESIDENT
Mohammad Iqbal Ghori, FCMA

Raheel Asghar Ginai, FCMA Kashif Mateen Ansari, FCMA Zia ul Mustafa Awan, FCMA Waqar Ali khan, FCMA

MEMBERS - GOVERNMENT NOMINEES

VICE PRESIDENT
Anis-ur-Rehman, FCMA

Jameel Ahmad Tahir Mahmood , FCMA Dr.Talat Imtiaz Sumaira K. Aslam

Deputy Governor Securities and Exchange Deputy Auditor General of Pakistan Ministry of Finance
State Bank of Pakistan Commission of Pakistan (SECP)

HONORARY SECRETARY
EXECUTIVE DIRECTOR (Acting)
Khawaja Ehrar ul Hassan, FCMA

HONORARY TREASURER
Saghir ul Hassan Khan, FCMA Mushtaq Ahmed Madraswala, FCMA

Research & Publications Committee

Chairman Members

Mohammad Iqbal Mian Nisar Ahmad, FCMA Hamad Rasool Bhullar, FCMA Faisal Shafique, FCMA Syed Hassan Ahmed Al-Ahdal, FCMA Syed Babar Ali, FCMA

Ghori, FCMA

Syed Zulfiqar Ali Shah, FCMA Shoaib A. Tirmazi, ACMA Zulfiqar Ali Mehto Jawad Hamid Malik Tanvir Shahzad

56 ICMA Pakistan’s Management Accountant, July-August, 2017