Exciting times

The Big Four are playing an increasingly important role in the
development of Pakistan’s profession. David Hayes
speaks to KPMG Pakistan senior partner Masoud Ali Naqvi about the
state of Pakistan’s economy and how it is benefiting the nation’s
second-largest firm.

Pakistan’s accounting market has enjoyed strong growth for the
past five years, buoyed by the expanding industrial and financial
services sectors. While the country’s complicated political and
security situation continues to dominate the international media,
its economy continues to grow on the back of the recent wave of
privatisation and increased professional management in the state

“Business is very good. It’s a very exciting time for accounting
firms in Pakistan,” comments Masoud Ali Naqvi, KPMG’s Karachi-based
senior partner. “Despite problems with democracy, there have been a
lot of good things happening in the corporate sector and through
consistency of government policy. The economy has been growing by
more than 7 percent for the past five years. Financial services are
contributing about 60 percent of the growth.

Naqvi continues: “There has been large growth during the past five
years and financial year 2006/2007 was very good. There is more
recognition of using quality services. The Big Four have done well
as there is a lot of activity in the market. Initial public
offerings, privatisations and mergers have all required accountant
services. There is very good co-operation in the accounting market
but we also are competitors.”

No fee income data

Professional services firms do not publish their fee
income figures in Pakistan, but are understood to share information
informally. KPMG claims to be in second place in terms of fee
income and close to first-placed PricewaterhouseCoopers (PwC).
Ernst & Young is understood to occupy third place, followed by
Deloitte in fourth.

KPMG offers a full scope of services in Pakistan, with the audit
share representing almost 45 percent of total business. Financial
advisory services, including corporate restructuring, transactions
and corporate finance, represent a further 25 percent of revenue,
while tax work, compliance and advisory services make up 15

“Risk advisory, which divides into nine categories, is about 15
percent of revenue and is increasing because there is a lot of
Basel II [EC regulation on capital adequacy for banking] work for
internal controls,” Naqvi notes. “Most revenue growth will be in
non-audit work. By 2012, audit will be 40 percent of our practice
revenue and 60 percent from services – financial and risk

Growing foreign investment in Pakistan is providing a new source of
clients, including inward KPMG referrals. “We get reasonably good
business through the KPMG network, while for existing audit clients
we are looking now at providing other services,” Naqvi says.
“Multinationals may use a different Big Four [firm] for their
non-audit services and make an independent choice. We are picking
up Japanese business as some Japanese head offices want to use the
same accountants. Chinese companies are the same.

“China Mobile Communications Company has bought the former Paktel
mobile phone company and is expanding here. They use KPMG in China
and came to us here as a referral. Global consistency is growing in
reporting so reliance can be placed on financial reports.”


Investment in the financial services and telecommunications
sectors, including privatisation deals, in Pakistan totalled $5.7
billion in financial year 2006/2007. Oil and gas sector investment
opportunities are due to be announced, including the proposed
privatisation of state-owned Pakistan State Oil Company and Sui
Southern Gas Company, which supplies gas in Karachi and the south
of Pakistan.

“I don’t think there is a day when we are not getting a foreign
inquiry. Previously, it was US and European companies, now China is
coming in a big way. Also, Middle East countries with petrodollars,
Malaysia, Indonesia and others. Government investment policy here
is the most aggressive in South Asia. Pakistan is more open than
India. Financial services, manufacturing and other sectors are
open,” Naqvi says.

“The Middle East is looking here as we are nearby and they think
the market is safe. Middle Eastern companies are building office
and apartment blocks. China is looking to invest in major
industries in Karachi and Gwador Port.”

KPMG employs a total of 1,200 staff in its three offices in
Karachi, Lahore and Islamabad, including 400 trainees and 200
qualified accountants of whom 160 are chartered accountants. The
firm has 22 partners – 14 at the Karachi head office, five in
Lahore and three in the capital Islamabad. Naqvi points out that
the firm also has IT and legal partners, although, under the
Institute of Chartered Accountants of Pakistan (ICAP) rules, these
cannot be called partners at present because they are not ICAP
members. However, this situation could change, he says, if the ICAP
decides to amend its rules.

Naqvi says: “Karachi is Pakistan’s business centre. Some 66 percent
of our fees arise in Karachi. Banks and financial services company
head offices are in Karachi and most of them use the Big Four
firms. Last year, financial services companies, including mutual
trust funds, were listed on the Karachi Stock Exchange but industry
and the manufacturing sector were quiet.”

Naqvi says Pakistan’s Big Three – PwC, KPMG and Ernst & Young –
have started offering Association of Chartered Certified
Accountants (ACCA) training which provides exemption from ICAP’s
first four examinations. KPMG has 40 accountants with ACCA
qualifications. ACCA-qualified trainees employed by firms undertake
two years of accountancy training before sitting their final

“After passing the final three papers they will be UK qualified.
It’s a big incentive to recruitment and will help us with staff
retention. They stay with us an extra two years,” Naqvi explains.
“Accountant salaries are growing more than our revenue growth and
staff are difficult to retain. We are sacrificing profit to retain

Skills shortage

Staffing is an important issue for accounting firms
in Pakistan, as it is elsewhere in the world. Entry standards and
requirements have risen significantly since the early 1990s. One
result is that higher calibre candidates are entering the
accounting profession and the professional examination pass rate is
much higher than previously.
“In my opinion, the profession has changed tremendously in the past
15 years. The quality of the people in the profession has changed.
In the late 1980s the ICAP launched a new educational scheme to get
the right quality entrant. We were getting graduates and their
qualifications were terrible. There was no check on entry and they
were failing in their professional exams,” Naqvi says.

“We started entry aptitude tests and other procedures. Trainees now
take A, B, C and D modules before they can join a professional firm
so we get them at intermediate level. Then they do E and F exams.
This has changed the accounting entrant quality and the
acceptability of qualified Pakistani accountants in the Middle East
and Far East. There is Big Four seconding the world over from

KPMG recruits trainees twice a year. About 225 trainees are taken
on by the firm’s Karachi office and another 40 to 50 by the firm’s
Islamabad and Lahore offices. “This number has increased during the
past three years because of overseas secondment opportunities, for
which we receive a fee. Peak overseas secondment demand can
coincide with the slow period here sometimes,” Naqvi says.

During the past decade, KPMG has seconded about 100 accountants to
KPMG member firms in Ireland, the UK, the Channel Islands, the
Cayman Islands, Persian Gulf countries and Saudi Arabia.

“These were three- to six-month peak-period secondments. Now we
have seven people in London for two-year periods, three people in
the US and two in Singapore,” Naqvi says. “KPMG Ireland recruited
27 accountants from Pakistan last year – some came from us and some
from other accounting practices in Pakistan. KPMG Vietnam and KPMG
Thailand also are looking here.”

Management development and retention is a growing issue as the
number of local and foreign clients seeking Big Four services
increases. Senior management development is a pressing issue in
view of KPMG’s business growth projections.

“We feel a resource constraint from assistant managers upwards –
all accounting firms do. Managers get attractive outside offers.
People only leave to join a client or to go abroad,” Naqvi remarks.
“Future challenges are senior level resource retention and
sustaining the revenue growth of the past five years. It has
doubled and we expect it to double again.”

Pakistan’s Big Four are among those firms that believe the present
structure of the accounting profession needs to be altered to serve
Pakistan’s rapidly developing accounting needs. The country’s
professional services market is divided between the Big Four and a
large number of smaller firms.

About 650 registered companies are listed on the Karachi Stock
Exchange, of which about 240 are audited by the Big Four. The rest
of the listed companies appoint small accounting firms. Of the 170
or so listed textile and garment companies, for example, fewer than
ten are audited by Pakistan’s three largest firms.

As part of ongoing efforts to improve corporate governance and
financial reporting, the Securities Exchange Commission of Pakistan
(SECP) is reviewing the situation whereby almost two-thirds of
listed companies use the services of small accounting firms.

“There are very few mid-tier firms here. Maybe their clientele is
not here so the choice for most companies is a Big Four firm or a
small accounting firm,” Naqvi says. “The Big Four are encouraging
small accounting firms to grow to mid-size. For the accounting
profession it is important that the weakest link is strong as well.
The only way for them to grow is through mergers.”

A substantial number of small accounting firms are sole proprietor
operations with limited resources. The smallest firms comprise one
accountant and a trainee. Sole proprietors do a substantial amount
of work in the listed company sector and their fee levels are low.
ICAP has set the minimum chargeable rate for the past seven years
as this helps small firms in negotiating fees with clients.

“The problem is that textile companies are looking for a cheap
price. They are family firms that technically are listed. Audit
fees are still a problem, but there has been a reasonable increase
during the past four to five years. We are able to convince clients
of the need for an increase. Our staff are qualified and clients
appreciate that,” Naqvi says.

“The idea originally was that audit was statutory and companies
want to do it for cheap. But standards and other things are more
complicated now, so clients need more support from accountants.
Apart from audit, other service skills are limited to fewer firms,
but we are restricted in what services we can provide.”

Economic development

Government policies designed to tackle corruption, increase tax
collection and reduce the parallel grey economy underpin Pakistan’s
recent economic development. The accounting profession also
provides important advice and assistance to the government and key
economic institutions.

“The Federal Board of Revenue and the Security Exchange Commission
of Pakistan, which is under the Ministry of Finance, rely on the
larger firms and the Institute of Chartered Accountants of Pakistan
(ICAP) for accounting standards,” Naqvi says.

“When SECP and the Federal Board of Revenue are drafting laws they
send them to the larger firms and ICAP for comments. The Code of
Corporate Governance was initiated by ICAP and then SECP included
it with regulations for all listed companies which has helped
disclosure and users of financial statements.”

Pakistan’s adoption of international accounting standards is
generating more work for accounting firms. Currently, Pakistan has
adopted International Accounting Standard (IAS) 39 for all sectors
except banking, although the central bank is moving to adopt IAS 39
in future.

“IAS 40 has not been adopted, while the rest of IFRS has been
adopted as is,” Naqvi says. “All listed companies in Pakistan have
to undertake a mandatory audit. SME standards, which are
substantially IFRS standards, have been adopted for smaller
companies. The net is increasing here.”

Another recent trend that is benefiting the profession is a shift
by business away from Pakistan’s grey economy, which fuels the
demand for tax services.