Editor’s note: SNGPL has sent this clarification on the news below:
“It is clarified that this news has commented but did not adequately explain the reasons for qualification for the year ended June 30, 2018. It is informed that during FY 2017-18 certain Take-or-Pay Revenues were recognized and substantially realized were contested by the concerned consumers. Due to litigation surrounding the matter, Auditors issued a qualified opinion.
Subsequently, the auditors of the company M/s EY Ford Rhodes accepted the company’s stance and did not issue a qualified opinion on half-yearly accounts for December 31, 2018. Later expert determination announced by an honourable retired justice of the Supreme Court of Pakistan confirmed the view taken by the company and announced a favourable decision.
The qualification for the year ended June 30, 2019, is based on the interpretation of IFRS-15 new accounting pronouncement applicable in Pakistan since July 1, 2018. It is reiterated that the company has duly recognized the impact of IFRS-15 from July 1, 2018, strictly in accordance with the opinion/interpretation of Accounting Standard Board (ASB) of ICAP.”
Sui Northern Gas Pipelines Limited (SNGPL) informed the Pakistan Stock Exchange (PSX) on Friday that its new auditor, EY Ford Rhodes has issued a revised qualified audit report for SNGPL’s financial statements for the year ended June 30, 2019.
A qualified audit report by an auditor means that most matters have been dealt with adequately, except for a few issues. Such issues include a limitation of scope in the auditor’s work, a disagreement with management regarding application, acceptability or adequacy of accounting policies, misrepresentation of factual financial position by the company among other issues.
SNGPL had faced a similar crisis when its financial statements for the year ended June 30, 2018 were deemed as qualified by A.F.Ferguson & Co.
In its audit report A.F.Ferguson & Co had cited that the revenue recognition procedure of the company had been clearly a departure from the accounting and reporting standards applicable in Pakistan.
EY cited a similar reason this year, as it objected to the revenue recognition procedures while providing an elaborate basis for the qualification.
According to EY, application of IFRS 15, “Revenue from Contracts with Customers”, by SNGP has been undertaken on a prospective basis as opposed to a retrospective basis during the financial year.
The auditor said that it viewed the company’s treatment of revenues as being non-compliant with the mandatory requirements established by IFRS 15, which had superseded IFRIC 18 in January 2018.
The auditor further determined that the retrospective impact of the new standard would augment the quantum of contract liabilities by Rs6,835 million, differential margin recoverable by Rs1,225 million and income tax recoverable by Rs1,627 million.
On the other hand, unappropriated profits and deferred tax liability would decrease by Rs2,001 million and Rs1,982 million respectively. Consequently, profit for the period would have decreased by Rs169 million, translating to Rs0.27 per share.
The SNGPL management has been proactive in its stance relating to the audit statement. The management disclosed that the draft audit report (issued on July 17, 2020) did not qualify the accounts ending June 30, 2019 with respect to the adoption of IFRS 15.
According to the management, the auditor’s letter to the Board of Directors (BoD) accompanying the aforementioned report did not state any reservations about IFRS 15. The letter merely stated that the company has obtained interpretation of the new standard from the Accounting Standard Board (ASB), and “requested the BoD to ratify the assertions in respect of adoption of IFRS-15 by the company.”
Following this, the Board Audit Committee (BAC) on July 21 met with the auditors, who are now also demanding an endorsement of the interpretation of the ASB from the Securities and Exchange Commission of Pakistan (SECP), contrary to the earlier requirement of endorsement by the board only.
The BAC agreed to the interpretation of the ASB as the final authority on the matter, and deemed additional requirements of the auditors as invalid but advised the management to obtain endorsement from the SECP.
The BAC also recommended approval of the financial statement alongside an unqualified draft audit report. The board met the same day and approved the accounts which were released to the PSX.
The SECP was also approached by BAC. The SECP composed a letter in response to the company, as requested by the auditor.
“The commission, under the provisions of Section 225 of the Companies Act 2017, notifies financial reporting standards for different class or classes of companies as contained in the third schedule of Companies Act 2017 on recommendations of ASB, ICAP. The Company may resolve the matter with the Auditor and ASB, ICAP accordingly,” read the letter.
The management has claimed that despite SECP’s response, the auditors expressed disagreement, resulting in the issuance of a qualified report.
The SNGPL board said that it believes it is fully compliant with the new standard. It also said that it has used the endorsement by SECP and ASB to support its argument.
“Disagreement by the auditors in their revised report is misconceived,” said the BoD.
