ADB Project TA 3696-PAK, Regulation for Corporate Governance 1 REGULATION FOR CORPORATE GOVERNANCE IN PAKISTAN CAPITAL MARKETS

ADB Project TA 3696-PAK, Regulation for Corporate Governance 2 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 3 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 4 Potential Threats to an Auditor’s Independence Self-Interest Self-Review Advocacy Familiarity Intimidation

ADB Project TA 3696-PAK, Regulation for Corporate Governance 5 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 6 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 7 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 8 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 9 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 10 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 11 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 12 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 13 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 14 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)