Hascol avoids forensic audit

Hascol, on Friday, notified Pakistan Stock Exchange (PSX) that the Sindh High Court has decided in its favor against the appointment of a forensic auditor for investigating the company’s affairs.

The Securities and Exchange Commission of Pakistan (SECP), back in January this year, had appointed Parker Russel AJS-chartered accountants as investigators for carrying out a forensic audit of Hascol.

The official notification on the PSX website read, “The company would like to apprise the high court of Sindh (vide Stay Order dated 27.04.2022) in the misc. Appeal no.32 of 2022 was pleased to suspend operations of the impugned orders dated 19.01.2022 and 12.04.22 issued by SECP concerning the appointment of an investigator for carrying out a forensic audit in terms of section 258(1) of the companies act, 2017.”

The company has been in hot waters since its alleged financial malpractices and manipulation of financial reports were unveiled back in 2020. Further, accumulating losses due to unsustainable growth strategies have moved the company to the verge of bankruptcy resulting in a default on loans in excess of Rs50 billion owed to more than 20 public and private sector financial institutions.

However, this is not the first time the company has obtained a stay order, earlier Hascol was able to successfully obtain court orders against SECP’s and Oil and Gas Regulatory Authority’s (OGRA) actions.

Section 258 & Forensic audit

Section 258 of the Companies Act 2017 deals with serious fraud investigations and allows the SECP to appoint an individual or a firm to investigate the suspicious matters of an entity. As per the aforementioned section, “Commission may authorize any one or more of its officers or appoint such number of professionals from amongst the persons of ability, integrity and having experience in the fields of corporate affairs, accountancy, taxation, forensic audit, capital market, banking, information technology, law or such other fields as may be notified, as an inspector or investigation officer to investigate such serious nature of offenses relating to a company as provided in Sixth Schedule.”

The conduct of forensic audits is inherently much more meticulous than statutory audits. As per Syed Talha Ahmed, Ex Audit Associate at PwC, “Forensic audits are more rigorous than statutory (normal) audits as instead of inspection on a sample basis, all items and financial information under suspicion are tested, and only conclusive evidence is taken into account, rather than persuasive evidence.”

Further, the companies act vests great powers with the investigators which would have led to some serious inconvenience for Hascol’s management.

“Firms/ Investigators appointed for forensic audits or investigations under the light of section 258 of Companies Act, 2017, have far greater powers at their disposal when compared to those of statutory auditors. The subsequent section of the same act vests some enforcement and production rights to the appointed officer similar to those held by a court of law.” Muhammad Havaris Arshad, Ex Audit Manager at PwC and Quality Control Inspector at Audit Oversight Board, told Profit.

The aforementioned powers include; enforcing the attendance of persons and examining them on oath or affirmation, compelling the discovery and production of books and papers and any material objects, and issuing commissions for the examination of witnesses.

Therefore, it seems like Hascol has avoided detailed and rather painful scrutiny of its financial affair for the time being.

The rise and fall of Hascol

On March 28, 2001, Hascol Petroleum Limited was established in Pakistan as a private limited company. The Corporation changed its status to that of a public unlisted company on September 12, 2007. 

The Company purchases, stores, and markets items connected to petroleum, chemicals, LPG, and other associated industries. In 2005, the firm received an oil marketing license from the Ministry of Petroleum and Natural Resources, and in 2018, it bought a company’s assets with an LPG license. Between 2010 and 2018, Hascol saw its topline surge by an astounding 52.7% per annum, from Rs7.9 billion to Rs234 billion.

However, its glory was short-lived, cutting the long story short the company was alleged to have been involved in an elaborate scam by siphoning off billions from banks through fraudulent means. Some of Pakistan’s largest public sector banks had the highest exposure in terms of credit facilities, therefore when the company defaulted on its liabilities the Federal Investigation Agency got involved.

The FIA investigation report claimed that Hascol colluded with Byco to encash Letters of Credit (LCs) which essentially are unfunded facilities rather than an instrument of lending. The transaction flow allegedly included Hascol entering into fake agreements with Byco for the purchase of Oil on the basis of which Hascol’s bankers issued LCs to Byco. They latter encashed those LCs by presenting them to its own banks which paid Byco the amount of the LCs deducting a nominal amount for essentially paying up early. Now that Byco had that money, the company transferred it back to Hascol and the cycle went on, as per the alleged scheme.

Hascol continued to open new LCs to pay up for the earlier ones until the circular debt became unmanageable and the company defaulted on the repayments. The head of the FIA Sindh dubbed it as “the country’s biggest financial fraud”.