Recently, K-Electric found itself in the middle of another controversy and this time around, it wasn’t regarding its sale or extended hours of load-shedding, but for a rather unique instance, where one of its former directors, Asad Ali Shah, issued an official complaint against the misstatements in the company’s financial statements.
Shah, in a letter dated January 10, 2023 to the Pakistan Stock Exchange, claimed, “As per latest quarterly financial statements issued by KE for the period ended September 30, 2022, the aggregate amount of revenue and receivables recognised in respect of write-offs (tariff differential claim receivable from GoP) amounted to Rs. 53.5 billion. A prudent approach in accordance with applicable accounting standards should have been not to recognise such claims, unless and until NEPRA [National Electric Power Regulatory Authority] had specifically approved such amounts after due process.”
Note 14.1 of financial statement explains that tariff adjustment includes “Rs. 51.6 billion recorded as claims for write off of trade debts. The claims submitted by KE for the years ended June 30, 2017, June 30, 2018, June 30, 2019, June 30, 2020 and June 30, 2021 aggregating to Rs. 37,148 million have been pending for determination by NEPRA for which NEPRA through its letters dated December 31, 2019, March 10, 2021, March 30, 2022 and June 8, 2022 stated that further deliberation is required in respect of the above-mentioned claims before these can be allowed as an adjustment in tariff,” he further added.
To substantiate his claim, Shah quoted provisions from the International Financial Reporting Standard 15 (IFRS-15) which prohibits the recognition of revenue without ascertaining the customer’s ability and intention to pay the dues.
After evaluating the basis of assumptions used by the company’s management, and ascertaining compliance with legal requirements, the auditors gave assurance that the financial statements were not materially misstated.
Therefore, the bone of contention is the recognition of an amount that is due from the government of Pakistan under the Tariff Differential Subsidy. As per the Pakistan Institute of Development Economics (PIDE), “The TDS is the difference between the electricity tariff (plus certain surcharges) paid by consumers and the allowable costs of electricity utilities determined by the regulator, NEPRA.”
Moreover, the complainant pointed out that claims in respect of hook connections shouldn’t have been billed to NEPRA as it was against the regulator’s directions.
Further, Shah has challenged the billing of claims (to NEPRA) for which the power company has no ID cards, agreements with customers and related documents as specified in the company’s consumer service manual. Citing the fact that, “there cannot be enforceable contracts in connection with such claims, when even the customer is not identifiable, a basic requirement of the consumer service manual & IFRS 15.”
K-Electric has been in headlines. Ex-Director of the Company has conveyed his concerns to @pakstockexgltd. So far, neither the Company @KElectricPk nor PSX @pakstockexgltd have made any announcement. Shareholders don't have any right to be informed on timely basis? Wake up!
— Motasim Bajwa (@motasim) January 16, 2023
The letter also stated that the auditors failed to correct the management’s flawed accounting treatment of revenue. The reason behind this, as indicated in the official communication, could possibly have been the fact that the audit firm was also involved in providing advisory services to K-Electric including representing the company before NEPRA.
“A review of the last six year’s financial statements indicates that AFF’s audit fees was Rs. 28.5 million whereas its aggregate fees for verification of write-offs amounted to Rs. 765 million, or 27 times of normal audit fees. Aggregate fees for audit, write-off verification and other certifications/work during last six years comes to Rs. 831 million,” wrote Asad Ali Shah.
However, this is a dilemma of large accounting firms across the globe. In Pakistan for instance, the Big 4 (now Big 3) accounting firms make most of their revenues through the provision of taxation and legal services to companies that, in many cases, are audit clients as well. This creates an inherent self-interest threat to the auditor’s objectivity as its financial well-being is directly linked to the entity, they are responsible for scrutinising.
Yet, as per K-Electric’s audit report, the matter of recoverability of tariff adjustment amounts was a “Key Audit Matter”, depicting its significance to the overall audit of K-Electric. However, after evaluating the basis of assumptions used by the company’s management, and ascertaining compliance with legal requirements, the auditors gave assurance that the financial statements were not materially misstated.
On January 13, K-Electric called the letter defamatory and a misrepresenting one. While Shabbar Zaidi, former Managing Partner of AF. Ferguson & Co. Chartered Accountants (AFF), has deemed his peer’s comments uncalled for.
“Our accounts are fully compliant with all the relevant rules and regulations including the International Financial Reporting and Accounting Standards,” said Chief Marketing and Communications Officer K-Electric, Sadia Dada, in a reply to Business Recorder. “We disagree with the author’s claim of them not being compliant. In fact, the author himself mentions many times that these are his ‘own’ views while continuing to make far-fetched and ill connected arguments.”
Sources, working with AFF stated, “There is a lot of subjectivity involved when it comes to application of certain provisions of financial reporting standards. Therefore, it is understandable that Mr. Asad Ali Shah’s has a difference of opinion but to malign the company in public is a breach of ICAP’s code of ethics.”
However, Asad Ali Shah, in the letter, stated that it was his fiduciary responsibility to disclose major financial irregularities to all shareholders and stakeholders.
As per the company’s act 2017, “An independent director; and a non-executive director; shall be held liable, only in respect of such acts of omission or commission by a listed company or a public sector company which had occurred with his knowledge, attributable through board processes, and with his consent or connivance or where he had not acted diligently.”