Sky Sports Limited, Pakistan

Where is the Cash?

Case Overview:

The auditors Mr. Nisar aur Mr. Amjad Hussain of Sky Sports Limited’s Pakistan noticed
accounting irregularities of the company’s financial year 2010 noticeable the start of yet another
S-chip scandal unraveling on the Karachi Stock Exchange (KSE).

The irregularities revealed involved cash and bank balances, accounts payables, accounts
receivables and other expenses. The detection of these accounting irregularities was subsequently
followed by trading suspensions and a particular audit examination. The purpose of this case is to
permit a discussion of issues such as the result of directors holding multiple directorships,
director’s responsibilities and duties, the competence of KSE regulations in ensuring independent
directors discharge their responsibilities, poor corporate governance leading to poor supervision
of management, and the implications of a lax register narrow environment.

Background:

Pakistan Sky Sports Limited is an investment parent company in Sialkot city in 2005. It was
founded by the Bharwana family and it’s headquartered in Karachi city, Pakistan. Comparable to
many other Pakistani companies, it is also family owned business in which the founding family
dominates the management of the company. Pakistan Sky Sports Limited, along with its
subsidiaries is involved in the business of designing, producing and selling a variety of sports
apparel, accessories and footwear. Out of Pakistan Sialkot’s there are seven subsidiaries and
Bharwana Group Limited directly seized. On 15 November 2005, Pakistan Sky Sports limited
successfully registered on the main board of Karachi Stock Exchange (KSE) through initial
public offering (IPO), priced at 100 per Share. Various Investors jumped on board, at first week
its share achieved closing price of 110 per share.

Sky Sports limited manufacture approximately 23.9 million pairs of shoes annually. The firm’s
products are sold under Seven Skies. On the basis of famous brand name “Seven Skies” the
company has won many awards in Pakistan.

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Sky Sports Limited Company sold its products through set up of twenty five distributors across
Pakistan. Two export agent managing their sales to the Southeast Asia, South Africa and Middle
East. Company allow distributor to use any mode of distribution, generally set up different stores
within specific selected areas or assigning the task to third party retailer. In October 2012, Sky
Sports limited have more than 4000 store in Pakistan. In 2009 achieved Aisa’s best 200 under a
Billion. In 2010 seven skies achieved 6th time same award name as “Top 400 Most Valuable
Brand in Pakistan”. The reputation of Sky Sports Limited enhanced due to these awards.

Board of Directors:

The founding Bharwana family owns around about 35% of the total outstanding shares and the
remaining shares are held by the public. Malik Ahmed Bharwana, one of the founding members
with more than 18 years of experience in the manufacturing industry used to serve as a non-
executive Chairman and a member of the Remuneration and Nominating Committee. After he
retired on 26 April 2007, Malik Ahmed ceased to hold any position in Sky Sports.

The board of Sky Sports consisted of five directors. In Sky sports Mohsin Bharwana was
executive director. Asad Ahmed Bharwana was also the executive director. Mr. Mohsin
Bharwana became the Group’s Chairman after taking over from his father in 2007. As the
Chairman, his responsibilities included supervising the management and setting the agenda of
board meetings and operations of the group. Mr. Asad Bharwana was appointed as the Group’s
Chief Executive Officer (CEO), and was accountable for the Group’s overall management and
Production, Finance, and Administration.

The other three directors were independent directors Mr. Omar, Mr. Ali and Mr. Hassan who
respectively chair the Remuneration, Nomination and Audit Committee. Each independent
director was also a member of the other board committees. All three independent directors have
substantial accounting and finance experience, as well as certified accounting qualifications. Mr.
Omar had 12 years of finance, marketing and sales experience. Mr. Ali had 9 years of work
experience in public accounting firms. Mr. Hassan had more than 10 years of experience in the
audit and financial consulting services industry. Mr. Omar concurrently held four other
directorships in listed companies while Mr. Ali and Mr. Hassan each held five concurrent

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directorships. Both Mr. Ali and Mr. Umar sat together on the board of another company (Kobija)
Industrial Holdings Limited.

The Trouble Starts:

Sky Sports managed to achieve its annual revenue growth about 40 percent since it’s listed on
KSE in 2005. Its revenue increased from 1.41 billion in 2006 to 2.9 billion in 2008. In 2009,
however, its revenue decreased by 31 percent which is approximately 2 billion. Global financial
crisis become the cause of decline in performance and discounts given to distributors to manage
the inventory levels in their channels in the downturn economy. Earnings per share (EPS) also
dropped sharply from Rs.10.98 to 9.86. Because of uncertain economy and difficult to maintain
the cash position company had not declared its dividend for the year. On the other hand,
company reserved a huge amount of cash which was not used in investment, expansion or paid to
shareholders.
In 2008, in spite of having 1.98 billion of cash, it only paid 38 million during its mid-year. In
2009 when Sky sports had 2.9 billion cash, it paid out only 56 million of final dividends. The
total dividend payout ratio over cash was approximately 2 percent. Questions raised from
investor related to existence of the money, and also only a small amount of dividends was paid
out in comparison to the huge cash reserve and sky sports did not want to increase dividends.

Despite the uncertain economy, the amount of trade receivables increased from 363.4 million in
2009 to 684.6 million in 2010. But trade payables were lower at 174 million. Because of this
some traders are in doubt about the amount of raw materials bought did not match the amount of
goods produced.
In September 2009, Company took a five months report on a series of share sales by a large
investor, RM traders. According to Sky sports, they did not receive any fax notification about the
transaction. On the other hand, RSA traders, which owned RM traders, released evidence about
the notification that they had sent to Sky sports within two days of the sales. This event triggered
investors to question the quality of Sky sports’ corporate governance.
The Resignation of Auditors:

The sky sports businesses started to improve. In March 2010, the company’s share price
increased by 34.7% with an increase in market gain by 7%. However, company continued to face
an intense competition from the top brands struggled to expand its market.

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The situation worsened for the company when the five years old auditors of the company, Rehan
Ahmed and Ashraf Ali, suddenly resigned just two months before the end year audit begins. M
Nisar and Amjad Hussain were appointed as the new auditors in November, 2010.

The shareholders approved the renewal of auditors in a meeting conducted on 20 November,

2010 without questioning the management that why the old auditors resigned.

Irregularities Identified by New Auditors:

The auditors informed the audit committee that the irregularities had been discovered in the cash
and bank balances, accounts receivables, accounts payables, and other expenses in the audit of
two major subsidiary companies, B Square and Blue Sky, held by Sky Sports. M Nisar and
Amjad Hussain were unable to finalize the audit for the financial year ended on 31 December,
2010.

On February 2011, the company announced these irregularities in financial reporting and
requested suspension in the trade of its securities.

The board of directors hired an independent special auditor, Moh. Yousaf and Corporate
Advisory, to conduct a thorough investigation of the issues identified by external auditors, M
Nisar and Amjad Hussain.

Sky Sports audit committee said that it would try to protect the company’s assets and would
ensure the smooth operations of the company despite the suspension of trading activities.
Moreover, Sky Sports demanded time extensions from Karachi Stock Exchange to finalize and
report the financial results for the year 2010.

Minority shareholders became frustrated and concerned at the trading suspension as they were
unable to sell off or purchase more shares of the company. Therefore, they demanded that the
trade of shares should be continued. Afnan Ahmed, President of Securities Investors Association
(Karachi), agreed with the minority shareholders and said that only the short selling should be
restricted and management and the controlling shareholders should be banned for trading.

Findings of Special Auditor

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On 27 February 2012, Sky Sports limited submitted an initial proposal to Karachi Stock
exchange (KSE) to request for a resumption of trading activities. This was followed by a
submission of a fuller trading resumption proposal on 25 July 2012 after the special audit report
had been finalized and issued on 23 July 2012. The key findings of the special audit
investigations include

1. Cash and Bank Balances were 263 million instead of 1,417 million.

2. The subsidiaries paid more amount than actual amount without the Board’s approval

3. Instances of the key subsidiaries’ non compliance despite established internal control
procedures.

After the release of special auditor’s report, announced a few key changes to overcome
weaknesses in their systems and improve the management and executive functions of the
company. These include:

 Appointing a new CEO to replace Asad Bharwana

 Appointing a financial director who will supervisor the Chief Financial Officer

 Appointing the internal auditors to thoroughly review the existing internal control
procedures

 Appointing a professional firm to advise the group on listing obligations

Is Corporate Governance the Root Cause?

On 1 September 2006, KSE changed its rules. According to new rules, at least two directors
would be required to sign and declare that to the best of their knowledge, nothing has come to
their attention which may render the interim financial results to be false or misleading. Despite
changes being made to the KSE listing rules, it is arguably still easier for the companies to list
them on the KSE as violating rules will only attract light punishments, almost, the delisting of
company’s shares. Due to the relatively low listing standards and lenient selection process,
substandard firms may be attracted to list on KSE.

KSE has also been criticized for its lack of information with regards to companies that are listed
on its boards. Without this information, trading within the exchange would lack the transparency
necessary to keep the market fair. Allowing a suspended company to resume trading without

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providing any regular updates during the suspension could send the company’s share price
reducing as the market assumes the worst.

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References:

 Corporate Governance Case Studies Volume two edited Published by Mak Yuen Teen
CPA Australia Limited 1 Raffles Place #31-01 one Raffle Place Singapore 048616
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<http://investing.businessweek.com/research/stocks/private/snapshot. asp?
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 China Hongxing Sports Limited Annual Report 2007, Singapore Exchange
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 China Hongxing Sports Limited Annual Report 2009, Singapore Exchange

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 Rongzhao, Wu, Clarification to Business Times Article. 27 Febuary 2009, Singapore
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