Karachi Electric: Financial misstatements?

On January 10 this year, the Pakistan Stock Exchange (PSX) received a letter from one Asad Ali Shah. The letter alleged that Karachi Electric (KE), the company that holds a virtual monopoly over Karachi’s electricity generation, transmission and distribution, has been fudging their numbers. 

“There are material misstatements in the financial statements of KE, which render them misleading,” reads the letter that has stirred up quite the storm in Pakistan's energy sector. What kind of misstatements in the financials is Shah alleging? In his letter he states that in financial statements for the period ending September last year, “the aggregate amount of revenue and receivables recognised in respect of write-offs amounted to Rs 53.5 billion.”

These “write-offs” are the tariff differentials that the government of Pakistan pays to companies like KE. Since there is a difference between the electricity tariff paid by consumers and the allowable costs of electricity utilities determined by the regulator, NEPRA, the centre ends up paying back this tariff differential. 

In short: the letter is claiming that KE has written up a higher bill for the federal government than is due and has also overstated cumulative profits by a massive amount of Rs 53.5 billion. What makes the letter so deadly? For starters, Shah formerly sat as director on the board of KE and his concerns have been seconded by another board member by the name of Naveed Ismail. On top of that, Shah is former president of the Institute of Chartered Accountants Pakistan (ICAP) and managing partner at Deloitte Pakistan — meaning he has a professional understanding of the numbers and balance sheet.