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April 30, 2008

Exciting times ahead

Exciting times ahead

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 sector.

“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Professional services firms do not publish their fee income figures in Pakistan, but are understood to share information informally.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 percent.

“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 advisory.”

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.”

Privatisation 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 exams.

“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 staff.”

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 here.”

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.

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