ADB Project TA 3696-PAK, Regulation for Corporate Governance

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REGULATION FOR

CORPORATE GOVERNANCE IN PAKISTAN

CAPITAL MARKETS

eme CONTEMPORARY ECONOMICS

ADB Project TA 3696-PAK, Regulation for Corporate Governance

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Principles for Auditor Oversight

Oversight by:– Audit firms themselves– Professional organizations– Public or private oversight bodies– SECP

Goals:– To assist SECP– Financials are fairly presented by management– Compliance with accepted accounting standards– Maintaining and enhancing investor confidence

ADB Project TA 3696-PAK, Regulation for Corporate Governance

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Principles of Auditor Oversight (continued)

• Proper qualifications and competency

• Auditors are independent (see next set of slides)

• Oversight body acting in the public interest

• Auditors subject to disciplinary measures

• Body to stipulate remedial measures

• Body to provide cross-border assistance

ADB Project TA 3696-PAK, Regulation for Corporate Governance

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Potential Threats to an Auditor’s Independence

• Self-Interest

• Self-Review

• Advocacy

• Familiarity

• Intimidation

ADB Project TA 3696-PAK, Regulation for Corporate Governance

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Standards of Auditor Independence

Auditors to:

• Establish prohibitions, restrictions, policies, procedures, and disclosures addressing threats

• Identify safeguards to lessen threats

• Ensure appropriate rotation of audit team and partners

• Identify and evaluate (potentially) significant threats

ADB Project TA 3696-PAK, Regulation for Corporate Governance

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Regulatory Concerns Re: Replacement of Auditor

• Prompt disclosure – Notification or approval?

• Reasons?– Disagreements on accounting practices– Disagreements on financial statement disclosures– Disagreements on auditing scope

• Disagreements resolved to former auditor’s satisfaction? Former auditor confirmation?

ADB Project TA 3696-PAK, Regulation for Corporate Governance

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Audit Committee Standards

• Oversee selection and appointment of auditor and conduct of auditor

• Represent shareholders’ interests re: auditors– Review audit fees– Review fees paid for other services– Meet without management presence– Discussions with auditor any contentious issues

with management; resolved?

ADB Project TA 3696-PAK, Regulation for Corporate Governance

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Audit Committee to Monitor Auditor Independence

• Must understand regulatory requirements• Consider relationships with management affecting

auditor’s ability to act objectively• Obtain from audit firm its policies and procedures

for: – maintaining independence;

– monitoring compliance for independence

• Discuss with audit firm the findings of quality control inspections for maintaining independence

ADB Project TA 3696-PAK, Regulation for Corporate Governance

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Conflicts of Interests of CIS Operators

Investment Selection Activities– Principal Transactions involving the CIS and its affiliated

parties

– Transactions using affiliated party intermediaries

– Joint transactions with affiliated parties

• CIS Management Activities– Fees and charges

– Use of CIS assets for marketing the CIS

– Employee remuneration and transactions

– Selection of non-independent directors or custodians

ADB Project TA 3696-PAK, Regulation for Corporate Governance

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Regulation of Insurance Activities

• Goal: to protect policyholders and potential policyholders

• To ensure that information is adequate for a consumer to make an informed decision on whether or not to use the services offered – Ensure principles of transparency and disclosure

are implemented

• Impose basic requirements for above

ADB Project TA 3696-PAK, Regulation for Corporate Governance

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Insurers’ Basic Information To Be Provided (On Internet)

• Address of head office and contact details of SECP

• Contact details of insurer

• Procedure for submission of claims

• Description of insurer’s claims handling procedure

• Contact information regarding the dealing of customer complaints

ADB Project TA 3696-PAK, Regulation for Corporate Governance

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Basic Information on SECP Website Re: Insurance Companies

• Structure and organization chart of SECP

• Listing and texts of Insurance Legislation and Regulations

• List of licensed insurance (re-insurance) companies

• Link to the IAIS website

• Annual insurance statistics

ADB Project TA 3696-PAK, Regulation for Corporate Governance

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Role of Insurance Supervisor (SECP)

• To investigate any (warning signs of) deterioration in the management of the insurer’s activities

• To ensure transparency and disclosure of insurance activities for policy holder decisions and actions

• To promote relevance, reliability, and timeliness of disclosed information

• To provide guidelines on investments made by insurance companies

ADB Project TA 3696-PAK, Regulation for Corporate Governance

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Detection of Potential Problems of Insurance Companies

• Obtain insurance information through on-site inspections and through external audits of insurance companies

• Implement regulatory reporting– Including ‘early warning’ reporting, e.g., regarding capital

adequacy, reports required when capital

</= 20% over minimum requirement

• Assess reporting requirements periodically to ensure relevancy or to eliminate non-essential requirements (i.e., over-regulation burdens)