Ravi Industries: A Related-Party Contract, a Vacant Audit Committee and a Backdated Decision
Ravi Industries is a listed, family-controlled company where the chairman's family holds 58%. In November the board approved, without any tender, a three-year facilities-management contract worth PKR 320 million a year with Ravi Services, a company owned by the chairman's son. The audit committee reviewed it only after signing and concluded pricing was 'within market range', relying on a single valuation obtained from a firm introduced by the chairman. The audit committee chair resigned in January citing 'time constraints', and no replacement has been appointed. Separately, the CFO has instructed the financial controller to capitalise PKR 180 million of routine plant maintenance on the grounds that it 'extends useful life', and to backdate the decision to the prior quarter. The internal audit head reports functionally to the CFO. A whistleblower email has reached the financial controller.
1. Assess the related-party transaction against the governance and regulatory requirements applicable to a Pakistani listed company, and set out the remediation plan.
Read the worked answer
Why this fails on multiple counts
- Process: no tender, no competitive process, and the audit committee reviewed the contract after signing. The committee cannot meaningfully condition a transaction it has already approved.
- Independence of the valuation: a single valuation from a firm introduced by the interested party is not an independent valuation. One data point is not a benchmark, and the valuer's appointment is compromised.
- Conflict: the interested director should have been recused from the board discussion, the vote and any subsequent contact with the valuer. There is no evidence of recusal.
- Committee composition: an audit committee with a vacant chair is not properly constituted; the code of corporate governance for listed companies requires an audit committee of independent non-executive directors. A vacancy left unfilled for a quarter is a compliance gap, not an administrative one.
- Internal audit: reporting functionally to the CFO destroys the line of independence that is the whole purpose of the function; the internal audit head cannot objectively audit a process the CFO controls.
Regulatory position The related-party provisions of the Companies Act 2017 (s.208) require board approval and, broadly, shareholder approval by special resolution where the transaction is not in the ordinary course of business or not on arm's-length terms, with the interested party abstaining; the SECP's code of corporate governance requires an independent valuation for materially significant related-party transactions and audit committee review before approval. The exact thresholds and approvals should be confirmed with legal counsel before any public statement. Separately, IAS 24 disclosure of the relationship, terms, balances and the arm's-length assertion is required regardless.
Remediation
- Appoint an independent valuer selected by the audit committee (excluding the chairman and his associates) and re-test the PKR 320m price.
- Seek retrospective shareholder approval with the family's votes excluded - the true test of whether the price is acceptable.
- Appoint an independent audit committee chair immediately; record the vacancy as a governance breach.
- Report the transaction as a material related-party transaction in the annual report.
- Restructure internal audit to report functionally to the audit committee.
- Assess whether the transaction suggests broader director duty breaches (s.183–184, duties of care and good faith) and whether the decision of the audit committee should be revisited.
2. How should the financial controller respond to the CFO's instruction and to the whistleblower email?
Read the worked answer
The capitalisation instruction Routine maintenance does not meet IAS 16 capitalisation criteria: it restores, rather than enhances, the asset's service potential, and 'extends useful life' must mean a measurable extension beyond the original assessment, not offsetting wear. PKR 180m of routine maintenance belongs in profit or loss.
Backdating is a separate and more serious matter: it misstates a prior quarter already reported, and if the year-end position is affected it is a potential misstatement of the comparative period. It also hints at a pattern - if one quarter can be backdated, others can.
Response:
- Request the instruction in writing (which usually ends the conversation).
- Write back setting out the IAS 16 analysis, the quantitative effect on profit and on any covenant or EPS-linked bonus, and the fact that backdating is not an available option for an approved prior period.
- Offer a defensible alternative: a maintenance capitalisation policy with a clear threshold and criteria, disclosed and applied prospectively.
- Escalate to the audit committee chair if the instruction stands. If the audit committee is the problem, escalate to the board and, where necessary, to the external auditors - deliberately misleading the auditors is a fraud risk under ISA 240.
The whistleblower email
- Preserve it and do not delete it; do not forward it to the person it may implicate.
- The controller has a legal and ethical duty to route it to a designated recipient - the audit committee chair (once appointed), the company secretary, or the board. Sending it to the CFO would be a breach of confidentiality and would defeat the purpose.
- Check the whistleblowing policy and whether it protects the whistleblower's identity.
- The email may cover the related-party contract or the maintenance instruction; both are within audit committee territory.
On independence The controller's own position is exposed: silence is association with a misleading statement. Document every step and the dates. The professional obligation is not to be complicit, and the practical lesson is that the record you keep when you object is the only asset you have later.