Compliance Report On Aftab Automobiles Ltd. (report On Sec Compliance)

COMPLIANCE REPORT ON AFTAB AUTOMOBILES LTD. Executive Summary The purpose of the report is to identify the objective of each and every condition of the Securities and Exchange Commission notification, the impacts of the notification in the annual report of Aftab Automobiles Ltd. etc. As mentioned in the SEC notification the objective of the notification is to enhance the corporate governance. We have identified that the objective of the SEC notification is to ensure the interest of the shareholders and other stakeholders especially the interest of the minority shareholders, by insuring the efficient internal and external control. (employing independent director, audit committee etc). Insuring the accountability of the board of director, true and fair view of books and accounts and the independence of the external auditors. Aftab’s compliance report and annual report shows that Aftab complied all the requirements. But it is difficult to identify the actual impacts of the notification i.e. whether actually corporate governance is insured. For example, we cannot know whether the independent director was independent in his minds and activities. Most of the cases we have to rely on Aftab’s declaration. For example, Aftab’s board report declares that financial report prevented fairly and proper books and accounts have been maintained. We cannot cheque all the necessary documents. We have to rely on board and the auditors report. However, if all the requirements are complied such as independent director & audit committee appointed, audit committee report to the SEC if necessary; external auditors are really independent of the company, then it is expected that corporate governance have been improved in a company like Aftab Automobiles Ltd. We have analyzed each and every points of SEC notification company act 1994 and IAS-1 relating to the requirements if the notification, Aftab’s annual report and compliance report. We think in addition to the compliance report disclosed in the annual report, SEC, should require to be submitted in the SEC, elaborate compliance report with enough explanation of the impacts of compliance or non compliance in the compliance details duties and responsibilities to the directors and executives etc. Moreover independent

director should not be appointed by the board, it should be nominated by SEC or register of joint stock company or in other ways. Introduction: The Securities and Exchange Commission Act 1993 provides that, the commission is responsible for assuring the purpose insurance of securities, protection of the rights of the investors and the development and regulation of capital and securities market. In fact the ultimate objective of the commission is to create a organizational and disciplined instrument in the investment and corporate sector. As part of the SEC role SEC issued a modification in 2006 where it mentioned that the objective of the notification is to enhance corporate governance listed with any stock exchange in Bangladesh shall comply with the conditions of the notification or shall explain the season for non compliances. Nature of the Business: The principal activities of the Company throughout the period were assembling of Toyota Land Cruiser soft top/ Pick-up, Land Cruiser Prado, Hino Bus, Hino Mini Bus/ Truck Chassis with a production Capacity of 2400 units of vehicles in 3 shifts in ASSEMBLING UNIT. But since inception, the Plant is running single shift considering the market demand. The Company has added four units namely BODY BUILDING UNIT, PAINT UNIT, BATTERY UNIT & FURNITURE UNIT commercial production of which started w. e. f. May 5, 1997, November 01, 1999, January 03, 2002 and May 01, 2002 respectively. The main function of Aftab was it’s automobile assembly unit. But the production in the assembling unit has declined due to discontinuation of Toyota Land Cruiser Prado in CKD condition by Toyota Motor Corporation, Japan. You are also aware that DGDP has been importing Toyota vehicles in CKD condition and assembling those at their own facilities at BMTF, Gazipur since long. However, the Company has assembled a total of 167 units of vehicles consisting of 101 units Hino Bus Chassis, 30 units CNG Hino Bus Chassis and 36 units Hino Mini Bus Chassis. An amount of Tk. 65.32 crore has been contributed as net sales from this Unit to Company’s turnover.

The Bus Body Building Unit of the company has completed fabrication of 128 units of Hino Bus body and 23 units of Hino Mini Bus body, the net sales value of which stood at Tk. 10.74 crore. In the Paint Manufacturing Unit Paint” has produced 7.40 lac litres of paint products and delivered to the dealers. An amount of Tk. 8.67 crore has been added to net sales of this Unit. From the Battery Manufacturing Unit of the Plant under the Brand name of “Navana Battery” has produced atotal of 52,924 pcs. of Batteries for domestic and export market. The Company sold 48,880 pcs. batteries which consists of Automotive, Inverteraps and Solar Batteries. This Unit has contributed an amount of Tk. 21.20 crore of Company’s sales. The Furniture Unit of the Company under the brand name of “Navana Furniture” has produced office, home, industrial and medical furniture. From this Unit, an amount of Tk. 24.64 crore has been added to Company’s turnover.

Corporate governance: In the recent periods, corporate governance is the widely emphasized control mechanism used for efficient utilization of corporate resources. It is a hybrid of internal and external control mechanisms. Corporate governance involves monitoring, evaluation and control of organizational agents to ensure that they behave in the internal of the shareholders and other stakeholders. Presently it focused on matters like the composition of board of directors, the duties and responsibilities of executives and non executives directors, regular monitoring by shareholders voting rights of shareholders minority shareholders interest and detailed disclose of company information that are material for making decision by interested parties. Board composition in concerned with board size, separation of Chairman and CEO’s responsibilities of inside and outside director and independence of outside director etc.

SEC

Reasons/Objective

of

the Finding

Requirements

requirements

1.1 Board Size:

The Directors of a company are Aftab’s

/Explanation board

size

interested by law with the management consists of 6 member. of the business of the company. To direct the company and make effective, efficient and timely decision there need several diversified brains to think and act. To less numerous may not tackle all aspects and too many number may create conflicts and costly. so, SEC specified a range of number of board size i.e. 5 to 20. 1.2

Independent Impendent director is expected to play

Directors:

Aftab’s

board

an important role to ensure corporate

includes

one

governance minority interest etc. as he

independent

is supposed to be unbarred because of

directors.

his independence i.e. he has no interest

cannot be understood

(or less than 1%) of ownership or he

from

has no otherwise linkage with the

report whether he is

company or its subsidiary or with the

actually

stock exchange. Independent director is

substantially

But

the

it

annual or

supposed to have core competences and independent in mind he will give independent opinion, new

and

activities

and

or different ideas etc.

how much interest or linkage he has or not with the company. Our personal opinion is

independent

director

should

be

elected by SEC or minority shareholders

or by govt. or in some other ways. 1.3 Chairman of Chairman give the conclusive or final They the

Board

are

differed

and decision and CEO is responsible to individuals

but

chief Executive

execute it. So they should be different whether

roles

and

individuals. If they are same person, responsibilities

of

power can be misused by him/her and chairman and CEO in accountability can be lost.

Aftab is not clearly defined

or

is

not

found in their annual report. 1.4 The Directors

The directors of a company are Aftab

Report to

entrusted by law with the management annual report include

Shareholders:

of the business. The principle of directors separation

of

ownership

automobiles

and compelling

report all

the

management underlies this provision. requirements of SEC. According to the agency or stewardship But

whatever they

theory directors are responsible or include in directors liable to ensure all the well being of the report it is another shareholders. Directors take crucial question of inquiry decisions and most of the day to day whether operational function are delegated by inclusion

their are

the directors to the management. They substantially true and can delegate authority but cannot fair. delegate responsibility. So SEC as well as company act 1994 u/s 184 require that

directors

will

provide

some

additional statement as directors report to

ensure

that

directors

have

accomplished all the responsibility. It is the written declaration of the director who are the ultimate responsible person to the shareholders. As they have to

declare explicitly they are assumed that they have done as per declaration. 2.1 Appointment:

Financing

is

one

of

the

crucial Aftab declares in its

activities of business. To perform these compliance

report

activities efficiently and to emphasize that, it has appointed the function of finance SEC require to CFO, head of internal appoint separate chief financial officer audit and company (CFO). Effective internal control & secretary.

But

it

internal audit is also necessary to cannot be understood ensure whether all activities are going from

the

annual

on the right way. So head of internal report whether each audit is also necessary to lead the of internal

audit

system.

their

roles

Company responsibilities

secretary is also needed to assist the duties

are

and clearly

board to play the spoken person role of defined. the board. 2.2 Requirement

CFO is appointed to run the finance Aftab gave the tick

to Attend Board

activities. In the board meeting he has mark

Meetings:

to get direction, approval as well as he with this requirement

as

complied

has to inform his activities. Secretary but it is not clear that has to attend in the board meeting to whether assist the board as well as to play the company spoken person role of the board.

CFO

and

secretary

attended all the board meetings, because it is not mentioned in the

meetings

attendance report. 3. Audit

An effective board of directors is

Committee:

independent of management and its members are involved in and scrutinize management activities. To assist the board in it’s over right the board

and

created an audit committee that is charged with over right responsibility for the financing reporting process, the audit committee is also responsible for maintaining ongoing communication with both external and internal auditor. This allows the auditors and directors to discuss matters that might relate to such things as the integrity or actions of management. 3.1 (i) Constitution The objective of this requirement is Aftab automobile has of Audit

that at least three members are required complied

Committee

to

perform

the

duties

of

this

audit requirement.

committee efficiently and effectively. 3.1 (ii)

The objective of this requirement is Aftab automobile has that the audit committee should include complied

this

at least one impendent director so that requirement. the committee can be free from business. 3.1 (iii)

The objective of this requirement is Aftab automobile has that any vacancy in the audit committee complied should be filled up immediately or not requirement. later than one month from the date of vacancy (ies) in the committee to ensure continuity of performance of work of the audit committee.

this

3.2 (i) Chairman

The objective of this requirement is Aftab

automobiles

of the Audit

that the Board of Directors should Ltd.

Committee

select one member of the Audit that it has complied

has

disclosed

Committee to be chairman of the Audit this requirement, but Committee so that he can lead the it is not possible to committee. 3.2 (ii)

know

about

the

The objective of this requirement is professional that the chairman of the audit qualification

on

committee should have a professional knowledge, qualification or knowledge, understanding

and

in in experience Accounting and finance because of accounting or finance most of the tasks of audit committee is of the chairman of accounting and finance related. To lead the Audit committee understanding

and

experience

the audit committee the chairman of from the this committee should possess these report.

annual

qualities. 3.3.1 (i) Reporting

The importance or necessity of audit Aftab declares that it

to the Board of

committee is mentioned in section 3 has complied with all

Directors

what 3.3.1 requires are just the audit the requirement of committees duties and responsibilities 3.3.1. But we cannot for which the committee is established. know what was the So they should report to the board.

conflicts of interest, suspected

fraud or

irregularity

or

infringement of law that

the

committee

audit has

reported to the board. 3.3.1 (ii)

Committees management financial

intendance and

knowledge

reporting

issues

from Aftab has 3 members of audit

committee.

are They declares

that

considered important determinants in audit committee has their ability to effectively evaluate performed it’s duties. internal

controls

and

financial

statements prepared by management. For this reason SEC requires to have an audit committee. 3.3.2 Reporting to

If audit committee reports to the board Aftab disclosed that,

the Authorities:

that has material impact and board audit committee has ignores it, it means that, board has not not understood

the

significance

or

faced

such

it situation.

intentionally ignores it. But material impact must be considered or rectified. So audit committee should report it to the SEC so that the board is bound to take the necessary corrective action. 3.4 Reporting to

SEC requires that audit committee’s Aftab declares that,

Shareholders and

activities and reports to board should this requirement is

General Investors

be disclosed in the annual report with complied. signature of the chairman of the audit actually

But audit

committee. The objective is to disclose committee’s report is to

the

shareholders

and

general not disclosed in the

investors whether and what the audit annual report. committee has done actually, to know the transparency and effectiveness of the audit committees work. 4. External/

The Principal statements that are Aftab has complied

Statutory Auditors distributed to external users are usually this requirements of accompanied by a signed auditor’s SEC i.e. it engages an report. The SEC, for example, requires external

auditor

that all publicity owned companies file whether its financial an audited annual financial statement statement is free from with the agency. Moreover, since most all material fraud &

financial statement uses have come to biasness. view the auditors opinion as an essential component of the financial report. The purpose of the external auditors report in to inform financial statement users about whether the statements

were

generally

prepared

accepted

using

accounting

principles and whether the reported results fairly present the company’s financial positions results of operation & cash flows. As a consequence, the auditors report represent an objective assessment of the fairness of the financial information contained in the financial statement not to perform valuation services of fairness opinions, financial information system design and implementation. Book-keeping and accounting records service, broker dealer, services, secretarial service, internal audit services & any other services that the audit committee determines. External auditor normally addressed

to

the

shareholders

&

directors of the client company through its report that an expression of opinion about

the

statements management.

fairness prepared

of

financial by

the

Company Act 1994 Sec-90: Number of director minimum 3 in public Ltd. Co. 2 in private Ltd. company no upper limit. Independent director is not required by co. Act 1994. IAS-1: Directors report is not required by IAS-1 as part by annual report but if the firm depart from any standard management shall disclose it in the annual report as specified by IAS-1, Pec-18.

Conclusion: SEC deems to ensure corporate governance and create a congenial and disciplined environment in the investment and corporate sector. So SEC issue the notification that is required to comply or give explanation if not complied by the stock listed companies. Now SEC should observe assess and evaluate the present situation whether companies are complying merely the forms of the notification or there are significant and substantial positive changes to ensure the SEC objective. SEC should rethink how real independence and effectiveness of independent director, audit committee and internal auditors are ensured.