21010033

Lahore University of Management Sciences

Financial Accounting‐II
Spring Semester 2020

Submitted to: Ms. Atifa Arif Dar

Farhan Khan
21010033
 21010033

Assessing Accounting Risk: Pioneer Cement Limited

(PCL)

1. Institutional Context
Whether the system of the regulatory bodies, regulations, policies, procedures, and processes
that characterize the environment in which PCL operates lie on a higher (or) a lower end of the
spectrum in supporting accounting misstatements can be assessed by analyzing the following
points:
a. There are 18 regulatory bodies in Pakistan across all industries such as SBP, SECP,
PEMRA, NEPRA, OGRA etc. but the problem is that these institutions are not able to
function in a fair (or) or truly independent way because they are controlled
(administratively) by the same ministries of government that they are supposed to
regulate (overlook).

b. The fact that Press in Pakistan generally has always faced difficulties in being
independent and the government has always used force to hide actual facts from public
makes us realize that Financial press, newspapers and other media specialized in
financial news will be no different in terms of independence. Also, 60% of advertisement
revenue in newspapers from government can result in loss of autonomy for this
segment.

c. The Transparency International’s report 2019 Corruption Perception Index ranks

Pakistan 120 out of 180 countries, and furthermore this ranking has slipped from 116 th
in the year 2016 is an alarming indication that corruption is on the rise

d. Whistleblowing is a concept unknown in Pakistan and the fact that until 2019’s
Whistleblower Protection and Vigilance Commission Act, there was no specific
legislation on protecting whistleblower at a federal level, and without protection why
anyone would put themselves, their family, their jobs etc. at risk.

After analyzing the mentioned facts, the institutional context for PCL can be placed at the
higher end of the scale for assisting accounting misstatements. Thus, as an analyst I would want
to undertake a more thorough assessment of the financial statements of PCL.
 21010033

2. Opportunity
As of yet we have only analyzed the business environment of PCL and its potential to support
accounting misstatements. Let us now analyze whether any opportunity exists for the
management to engage in any sort of improper accounting.
As an analyst, I notice that there is a potential for improper accounting in terms of acquisition
accounting because if we analyze the current condition of Cement industry in Pakistan and its
business model for growth, we notice that expansion, mergers & acquisitions, consolidation has
been frequently utilized in this sector of industry. The reason could be that cement sector has
suffered considerably due to economic slowdown which has resulted in reduced demand
domestically and thus these firms are sitting on enormous unutilized capacities and incurring
overhead costs, therefore these firms employ mergers to take advantage of post-merger
synergies and stay afloat in the market, some firms in the sector are also investing in other
business to diversify their risk component and be able to fulfil their financial obligation from
other means. From APCMA, we note that exports have been declining for years now,
furthermore the currency devaluation has resulted in expensive imports as this sector imported
$1.35 billion worth of raw materials in 2019. From CCP (competition commission of Pakistan)
we can see some of the mergers and acquisitions in the last seven years.

a. Bestway Cement Limited takes over Lafarge Pakistan

b. Lucky Cement led group buys ICI Pakistan for $152m
c. Acquisition of 50% shares of Ecocem (Private) Limited by Bestway Cement Limited.
d. Mustehkam Cement and Bestway Cement to merge, Pakistan
e. Lucky Cement Merge with Dadabhoy Cement

Similarly, if we analyze the business transactions of PCL and even other cement firms in
Pakistan, we will find that major demand is from housing and commercial plotting (40%) and
government projects. Now, these entities are either very rarely audited (or) the regulators are
themselves involved in business transaction with them, thus creating a potential for inaccurate
accounting statements.

3. Incentives
Although limited data is available in regards to how remuneration packages (or) incentives are
tied to sales targets for PCL (or) for cement sector in Pakistan. But the current poor economic
condition of cement sector will surely result in pressure on top management to involve in
improper accounting actions in order to look stable for current and potential equity investors.
 21010033

Similarly, managers can also be involved in such unethical practices in trying to save their
employment by meeting their sales targets.
The overall profitability of cement industry dropped by 80% during FY19 compared to previous
year mainly due to drop in sales growth. In terms of decline in profitability: (FY19)
 DG Khan Cement: 82%
 Kohat Cement: 17%
 Bestway cement :23%
 Cherat cement :17%

Furthermore, from PACRA’s study on cement industry we note that the demand for its product
is highly seasonal and cyclical. The demand is low during monsoon and winter seasons due to
unfavorable working conditions, and high during summer, this seasonal pattern can give rise to
improper accounting entries to manipulate and meet their seasonal sales targets.

4. Behavior
A financial analyst will look into past instances where either the corporation (or) or any of its
management member is involved in any questionable (or) fraudulent accounting practices. If
we analyze the board of directors section of PCL’s financial report, we notice that detailed
profiles and whether or not these board members also serve on other companies’ boards is not
provided, furthermore i searched for few members and did not found their LinkedIn profiles,
which in contemporary times is a must to have for professionals. But if we analyze the cement
industry as a whole, we find that it in the past it has been involved in several legal litigations
and lawsuits, which give us an idea of the standard of business practices that these firms
practice.
In 2009, Competition Commission of Pakistan imposed a fine of about $77 million (Rs. 6.35
billion) on 20 cement companies which were found guilty of operating as a cartel and were
raising prices in mutual cooperation to artificially limit production and drive out the small
players in the value chain. Pioneer cement was also involved, and on analyzing the financial
report, I found that it was mentioned in Notes 26.1.14 that a fine of Rs. 364 million was
imposed on PCL by CCP.
Given these practices, it gives an analyst a reason to stay alert when analyzing a financial report
of a cement firm that if management can be involved in such grave ethical misconduct, it would
not be a surprise that it approves and is involved in an accounting fraud.
 21010033

Lucky 1 (month)
5. Taking Stock Cement
Current Context: After analyzing the above mentioned risk Bestway 1.5
factors and in the context of Pakistan business environment, Askari 2
DG Cement 2.5
the preliminary assessment has revealed that the potential
for accounting misstatement is relatively high for PCL.

6. Evidence
Given that we will be it is highly improbable to uncover an accounting misstatement using the
publically provided report by PCL itself. We can however assess the evidential risk factors,
which will raise our suspicion regarding the presence of misstatements, and force us to
investigate further. We can do this by comparing PCL to similar firms in the cement industry,
and notice drastic deviations in financial ratios, cost structure, earning figures etc. delayed
issuance of financial statements.
If we analyze the time span for filing annual reports after the accounting period, we notice that
in 2019 PCL took 3 months to issue the statements, whereas after analysis of other firms in the
cement sector we find that PCL is taking much longer time to file its reports with SECP than
other firms in the industry.

Similarly, in comparing the cost of sales of PCL with Lucky cement, keeping in mind that in 2019
the fluctuation in coal price of PKR 100 per ton and in Pakistani rupee against the dollar. The
cost of sales (as a %age of revenue) for PCL is 78%, whereas for Lucky cement it is 70%. Also,
PCL has not mentioned any sensitivity analysis regarding cost of raw materials unlike Lucky
cement.
Furthermore, analyzing the report for any change in accounting standards, we find that it has
adopted certain new standards such as: IFRS 9, IFRS 15 etc. but on analyzing the financial
statement of Lucky cement, we notice that it has also adopted same standards.

7. Likelihood
Based on the assessment of risk factors given in the framework, an analyst will still be not sure
if any material misstatements exist or not, but he can at this point pass a sound judgment
regarding the probability(or) likelihood that any such misstatements exist. The first part of this
framework (before evidence) gives us an idea if there is high or low potential for any
misstatements to occur. The Evidence step, although contains circumstantial evidence, will be
crucial for our final judgement because it will give us indications of atypical financial data inside
financial reports either when compared to other firms in the industry (or) unusual financial
figures in accordance with economy state.
 21010033

If I were to pass a rough judgment for PCL based on my analysis, the likelihood for existence of
any material misstates in PCL reports would be about 20%.

References:

 https://tradingeconomics.com/pakistan/corruption-rank
 https://www.app.com.pk/about-us/
 http://courtingthelaw.com/2016/11/15/commentary/laws-for-protection-of-
whistleblowers-in-pakistan/
 https://www.cc.gov.pk/index.php?
option=com_content&view=article&id=501&Itemid=125&lang=en
 https://fp.brecorder.com/2016/06/2016061456595/
 https://www.thenews.com.pk/print/592638-cement-sector-expects-supply-glut-this-
fiscal-despite-7pc-rise-in-december-sales
 http://www.pacra.com.pk/uploads/doc_report/Cement_Study.pdf
 https://www.cc.gov.pk/index.php?
option=com_content&view=article&id=501&Itemid=125&lang=en
 https://www.apcma.com/
 https://defence.pk/pdf/threads/raw-materials-for-cement-middle-eastern-suppliers-
eye-bangladesh.646289/
 http://lucky-cement.com/wp-content/uploads/2019/09/luckycementar2019.pdf