Absence of effective anti-fraud programmes and controls and significant deficiencies in governance and internal controls have been noted in Pakistan Steel Mills Corporation (Private) Limited in the draft audit report for the year ended June 30, 2011 available here.
It was observed that the Corporation does not have effective anti-fraud programmes and controls, over and above the normal control procedures. The report considered that effective anti-fraud programmes and controls are essential to ensure prevention and early detection of frauds and irregularities on a timely basis.
Examples of such programmes and controls that would help reduce the risk of fraud have been dilated as under:
— A written policy on fraud conveying the expectation of the Board and senior management regarding managing the risk of fraud and a clear message of ‘zero tolerance for fraud’. Such a policy needs to be approved by the Board.
— Developing a culture of ethics and compliance through developing policies on ethics and establishing a compliance department to monitor implementation of Corporation’s policies and procedures.
— Establishing ‘Tone at the Top’, whereby people at the helm of the Corporation including the Board members, CEO and senior executives demonstrate their commitment to the Corporation’s policies on ethics and compliance, not only by their words, but through their actions.
— Periodic fraud risk assessment that entails identification of potential schemes of fraud and their exposure that the Corporation needs to mitigate.
— Based on the risk assessment, establishing preventive controls and steps to avoid key fraud risk events to mitigate possible impact on the Corporation.
— Establish effective detection controls and processes to uncover fraud events when preventive measures fail.
— A comprehensive fraud reporting process, including setting up some hot line, protection of whistle blowers, appointing a senior officer to whom instances of fraud and irregularities are to be reported, maintaining a proper log of complaints including anonymous complaints.
— Corporation should have comprehensive policies of reporting and managing conflict of interest situations, including a policy on conflict of interest, duly approved by the Board, and
— Establishing an effective internal audit function, that monitors on an ongoing basis efficacy of internal controls, including anti-fraud programmes and controls.
The report appreciated that some of the deficiencies related to governance and internal control in the Corporation highlighted in 2010, such as holding audit committee meetings at regular intervals to discuss the significant issues of the Corporation, and approval of internal audit manual by the audit committee were remediated in the current year. Further CEO and CFO were also appointed in May this year.
However, auditors’ observations on several other important matters remained unattended, which have been highlighted as under:
— Lack of effective budgetary control and monitoring: while there exists a system of budgeting, and budget for 2010-2011 was also prepared and approved by the Board in its meeting held on March 12 last year, auditors did not find mechanism of budget preparation and monitoring effective, as is evident from comparison of budgeted and actual results. As per the budget, the Corporation was expected to incur loss of Rs7,142 million for the year while the actual loss as per the financial statements amounted to Rs12,434 million which reflects that assumptions used for preparing the budget were not adequate.
— Further it was noted that comparison of actual results with budget was not submitted to the Board on periodic basis. The reasons for not meeting the budget were presented to the Board in a meeting subsequent to the current year end. As a result, the Board could not assess and monitor the performance of the Corporation in a timely manner.
— One of the reasons for the delays in the comparison of actual results with the budget is due to the fact that the budget was not approved in the beginning of the financial year. The auditors considered that budget estimates for the financial year should be finalised and approved in the start of the financial year so that the Board is able to exercise effective oversight over the affairs of the Corporation on at-least quarterly basis. This would also help in taking prompt actions to resolve the issues and if required revise the budgets in a timely manner.
Auditor’s observations also include on: lack of effective system of management reporting, ineffective internal audit function, lack of effective planning and risk management system, ineffective human resource function.
Other weakness on corporate governance have been mentioned as follows: adoption of corporate governance principles, orientation course for the Board, appointment of qualified company secretary, exception reporting to the audit committee.
The report also noted certain non-compliances of laws and regulations narrated under following heads: payable to Pakistan Steel Mills Corporation Employees Provident Fund Trust (EPFT), provident fund contributions, provident fund loan deductions, loan from retirement benefit plans, utilisation of Staff Welfare Fund, etc.