14010094 Corporate Governance Assignment no.

Implementation of various aspects of SOX into Pakistans Code of Governance

Overall, the quick implementation of SOX in US and later the modified version in Canada, ensured investors confidence in listed companies. Implementing it here in Pakistans code of governance, as it is, would be cumbersome and may not bring the expected fruitful results. Besides, quite a number of aspects have been already covered by Code of Governance of Pakistan, 2012. Before going further on what aspects of SOX can be implemented here, we shall focus our attention on the following points keeping Pakistans unique business market in our minds: Just like Canada, who understood that their business market was different than US, so they refrained themselves from implementing all aspects of SOX straight away. Rather they abandoned SOX 404 section (in their code it was M1 52-111) which deals with management assessment of internal controls so that costs could be controlled. Similarly, in Pakistan, the investment climate is quite depressing. Reasons for that being, Pakistans international image, Scarcity of useful natural resources (natural gas, coal etc.), electricity shortage, and internal political turmoil, to name a few. So the cost and benefit analysis should be kept in mind before implementing any aspect of SOX in Pakistans current CoG ( Code of Governance ) At present, only few businesses are running smoothly ( Engro, Fatima Group, ICI are suffering due to lack of natural resources, as I have worked in there ). Implementing SOX in Pakistan may divert the attention of management from running companies to ensuring compliance with the regulations. As already, many businesses have been shifted to other countries due to higher raw material costs and above reasons, implementation of SOX and the costs associated with it may discourage business market in Pakistan more. As Calvin Coolidge said: We do not need more intellectual power, we need more moral power. We do not need more knowledge, we need more character. We do not need more government, we need more culture. We do not need more law, we need more religion. We do not need more of

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The things that are seen, we need more of the things that are unseen... If the foundation is firm, the superstructure will stand. Pakistan being a religious state, can have better business market if people remain ethical as the religion asks them to be rather than forcing them to abide by laws. But thats just an oversimplified generalization. Implementing some aspects of SOX in Pakistans CoG: 1. Avoid the use of jargon and technical wording so that a not-so-educated investor could understand the companys financial standing. 2. As per section 101 of SOX, An independent non-governmental organization like PCAOB should be founded and it should be given autonomy of implementing their customized Pakistan-oriented accounting and financial laws and ensure that auditors work is properly checked. Although SECPs independent role cannot be challenged but it seems that SECP is carrying out the roles of both SEC and PCAOB. Also the NICL scam, failure of Innovative Investment Bank and stock exchange crashes of 2005 and 2006 demand for an independent , dedicated and nongovernmental institute for better regulatory supervision, control and punition (punishment). 3. Life security and job availability should be ensured for a whistleblower. This should be the responsibility of PCAOB like organization here in Pakistan. Although the code of Governance talks about whistleblower but not to this extent. 4. If SECP finds that any public company is violating certain CoG rules, it can file a case against the BoD or the respective personnel in courts and upon finding the culprit being guilty, the court can either order separation of those personnel from the company or the de-listing of the company at max. CoG does not talk about strict punishments to be given to such culprits, be in terms of imprisonment or heavy fines. I think such strict punishments are compulsory to ensure that good corporate practices are followed.

5. The Manner of Enforcement for SECP to ensure Representation of independent non-executive directors is just Voluntary. It should be Mandatory so that all public companies ensure availability of independent directors (minimum one and maximum one third).

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Note : CoG, 2012 considers it mandatory for a public company to appoint independent director in its BoD, minimum one and maximum one third, but SECP does not ensure it as its Manner of Enforcement is just Voluntary ( as mentioned in Appendix ). So it again puts stress on the development of an independent and dedicated institute for this purpose. 6. Besides, implementing any other aspect of SOX, a cost benefit analyses should be done for that particular aspect. If results are extremely promising, only then a particular section of SOX should be implemented here. For example, section 404 can be left out as its benefits are less than the costs it carries.

Reference: The information in this paragraph is taken from The News newspapers Saturday June 25, 2011 edition. http://www.thenews.com.pk/TodaysPrintDetail.aspx?ID=54439&Cat=2