Chartered accountants have questioned the wisdom of Securities and Exchange Commission of Pakistan (SECP) in assigning 80 percent weight to auditing experience of banking and non-banking institutions as compared to 20 percent weight assigned to auditing experience of listed companies such as OGDC, PPL, PSO, Shell etc for selection as the SECP's panel of auditors.
They told Business Recorder on Thursday that it seemed as if the Security and Exchange Commission of Pakistan had assigned 20 percent weight to auditing experience of those companies, which had 80 percent share on the stock market. The chartered accountants termed these weight assignment criteria as "funny".
They were talking about the January 8, 2008 letter from SECP Director (CS) Syed Fayyaz Mahmud addressed to the Secretary of the Institute of Chartered Accountant (ICAP) asking him to provide information for classification of firms for the SECP Panel of Auditors.
The letter is accompanied by instructions on the criterion and scores assigned to different aspects of a firm - from the setting up of practice, to the number of employees, their educational qualifications and their exposure to different business.
The Classification Criterion of Chartered Accountant Firms has mainly divided into nine sections, where each information is assigned scores. The number of year in the business from less than three to 15 and above years carries 1 to 5 marks. Number of partners in a firm from less than three to more than 20 carry 1 to 10 marks. Full time chartered accountant from less than 3 to more than 15 numbers carry 1 to 10 marks.
If CPAs are employed, their number, less than three to more than 15 carry 1 to 10 marks. Employees having other professional qualifications such as ACCAs, F/ACMA, CIAs etc, add more marks to the firm's classification. If the number of such employees is less than 6 and more than 15, the score will be 1 to 5. If the firm has ICAP Module E qualified people, less than 3 and more than 15, the firm will be assigned 1 to 5 marks, depending upon the number of the employees.
Where there is staff with IT audit experience is less than 20 and more than 30, the score will range between 1 to 5. The number of years of audit experience, ranging from five to more than 15 years, is assigned 0 to 10 marks. The banking sector audit experience, less than 2 years and more than 6 years will carry between 2 to 6 marks; NBFCs audit 4 marks; insurance companies 4 marks; Modaraba 4 marks; listed companies 4 marks; and, audit of other than these entities 2 marks.
The firms having foreign affiliations will score 10 marks. Firms, having quality control, review reports, on its working, will score 5 marks, and QCR rating by ICAP in the last three years is assigned 5 marks.
Five marks will be deducted from the total score of a firm if the audit report of an applicant firm has been questioned by a regulatory authority in the last three years. If this has not happened, 5 marks will be added to its total score.
A firm having any of its partner ever penalised by the SECP or any other regulatory authority in the last three years, will loose 10 marks from its total, and if it has not happened, 10 marks will be added to its total. On the basis of scores, the firms will be categorised as "A" (total score 75), "B" (score in between 60-75), "C" (score in between 50-60), and "D" below 50.
The chartered accountants said that the scoring criterion had created suspicion in the minds of the chartered accountants that had small firms and good auditing practices. They said that going strictly by the criteria for registration on the SECP panel of auditors, only a few big firms would emerge as beneficiaries of this classification scheme.