RESEARCH PAPER

Evaluation of the Effectiveness of Auditing in

Pakistan’s Hotel Business

ADVANCED AUDIT & ASSURANCE

ARSAL NAVEED BAJWA
FA20-BSAF-0002
COURSE INSTRUCTOR: MR ASIM MEHBOOB
 ABSTRACT
There is currently considerable interest in the topic of internal audit and its contribution to
exact management of any business economic resources. Within this framework of extremely
fluid business environment, the research tested the hypothesis about the role of internal
auditing for the business success. The main purpose of the present paper is not only to examine
the issue in a theoretical level, but also to present empirical evidence for the interaction
between components of internal control system and performance of internal auditing in Greek
hotel business. According to up-to-date theoretical and empirical literature, the results point
out that all components of internal audit are vital for the effectiveness of internal audit and
consequently in the business survival and success.

INTRODUCTION
The globalization of economy, technological advancements, complexity of business and
allegations of fraudulent financial reporting have recently sharpened the ever-increasing
attention to internal controls and internal auditing. This developing role of the internal auditing
is also reflected in its current definition, i.e., “internal auditing is an independent, objective
assurance and consulting activity designed to add value and improve a company’s operations. It
helps an organization accomplish its objectives by bringing a systematic, disciplined approach to
evaluate and improve the effectiveness of risk management, control and governance
processes”. The Pakistani hotel industry provides the context for this research as it constitutes
the basic factor of Pakistan’s economic growth and has important contribution in the overall
balance of exterior transactions. Tourism is one of Pakistan’s three biggest industries, along
with construction and shipping.

The Tourism and Hotel Industry in Pakistan is segmented by Type of Tourism (Inbound Tourism
and Outbound Tourism) and Type of Hotel (Economy and Budget Hotels, Mid-scale Hotels,
Upper-scale Hotels, Premium, and Luxury Hotels and Other Types of Hotels (Shared Living
Spaces, Rented Apartments, Service Apartments, etc.)). The report offers market size and
forecasts for Pakistan's tourism and hotel industry in Value (USD million) for all the above
segments.

Pakistan recorded a total of 966,000 tourists in 2012, ranking 99th in the world in absolute
terms.
The fact that larger countries regularly perform better in a comparison of the absolute number
of guests is obvious. By putting the tourist numbers in relation to the population of Pakistan,
the result is much more comparable picture: With 0.0043 tourists per resident, Pakistan ranked
195th in the world. In South Asia, it ranked 7th.
In 2020, Pakistan generated around 765.00 million US dollars in the tourism sector alone. This
corresponds to 0.22 percent of its the gross domestic product and approximately 4 percent of
all international tourism receipts in South Asia.

Despite the aforementioned perspectives of the researchers regarding the crucial role of
internal auditing for the business success and the growing importance of hotel sector in Greece,
there is no such a study examining the factors that improve internal audit performance in hotel
businesses

In this context, the purpose of this paper is to highlight the interaction between elements of
internal audit and effectiveness of internal auditing in Pakistan’s hotel business, in particular. To
accomplish its goal, the study uses survey data from chief internal auditors. The remainder of
the paper is organized as follows. The next section reviews the related literature and provides
the focus of the study by examining the conceptual framework of internal auditing and its
effectiveness. The third section presents the research design by providing information on the
sample, the development of the survey and the methodology for data analysis.

LITERATURE REVIEW
Theoretical Framework of Internal Auditing
In order to determine internal audit efficiency evaluation principles, it is important to analyze
the concept of internal audit. Undoubtedly, the large number of definitions that is given by
many researchers depicts the great importance of internal auditing. More specifically, the
Institute of Internal Auditors, defined internal auditing as “an independent appraisal function,
established within an organization to examine and evaluate its activities as a service to the
organization”. By measuring and evaluating the effectiveness of organizational controls,
internal auditing, itself, becomes an important managerial control device, which is directly
linked to the organizational structure and the general rules of the business.

Effectiveness Of Internal Auditing

The growing importance of internal auditing as an economic factor has led to systematic
research into the factors that improve the performance of internal auditing. In line with this,
Albercht et al. (1988) investigated a theoretical framework in regard with the effectiveness of
internal audit. Basic output was the existence of four areas that the directors of internal audit
departments could develop to enhance effectiveness: an appropriate corporate environment,
top management support, high quality internal audit staff and high-quality internal audit work.

Hence, Asairy (1993) evaluated the effectiveness of internal audit in Saudi joint stock
companies. The researcher used a questionnaire, which he sent to the directors of internal
audit departments, senior company management and external auditors from 38 companies.
The author argued that internal audit was affected by the support they received by the external
auditors. Regarding the effectiveness of internal audit, Asairy stated that education, training,
experience and professional qualifications of internal auditors influenced the effectiveness of
internal audit

Similar to other studies, Van Gansberghe (2005) also examined the effectiveness of internal
audit. According to his perspective, perceptions and ownership, organization and governance
framework, legislation, improved professionalism, conceptual framework and resources are
revealed as basic factors influencing internal audit effectiveness

PAKISTAN HOTELS ASSOCIATION

Pakistan Hotels Association was established in 1963 under Section 3 of the Trade Organizations
Ordinance, 1961 and the license was granted by the Ministry of Commerce. All the compliance
of the required law are being fulfilled till to date and according to the Ministry of Tourism, this
body is the only representative body of hotel industry in Pakistan. All the leading hotels in
Pakistan from One to Five Star are the members of this Association. It is nevertheless to
mention that what is the contribution of hotel industry towards national exchequer. Just to give
an idea, only hotel industry in Pakistan is contributing remarkable amount on account of
different taxes and revenues to the government. The purpose of this Association is to
strengthen, promote and work with Ministry of Tourism for the development of tourism and to
give advice to the government to promote Tourism in Pakistan. To more focus on specific,
Association changed its name from Pakistan Hotels, Restaurants and Clubs Association to
Pakistan Hotels Association to have a clearer and true representation of this industry.

On the other hand, it is the platform, where PHA communicates between the stake holders and
the government, if there is any situation relating to tax, infrastructure and policies etc. etc.
There are so many cases to quote whereby in past, this Association played a vital role in
advising the Ministry of Tourism as well as the Government of Pakistan and the Governments of
respective provinces to resolve the matters pertaining to the hotel industry. The Executive
Committee of the Association since from the beginning has had all the professional hoteliers of
Pakistan on board.

The Pakistan Hotel Association (PHA) is the representative body of the hotel industry in
Pakistan. PHA Member Hotels account for about 90% of the total inventory of gazette hotel
rooms in the country. PHA's Associate Members represent a cross section of related businesses
including hotel product/equipment and services providers, restaurants, clubs and convention
and exhibition organizers.

As the apex body of the hotel industry in Pakistan, PHA plays an important role in the
development and growth of the tourism and hospitality industries in Pakistan. In addition to
promoting the business interests of its membership, the PHA lends strong support to the
Ministry of Tourism, Government of Pakistan in ensuring continuing tourism growth through
marketing and promotions, product development, manpower training, productivity
improvements and quality assurance.

Role Of Pakistan Hotels Association

 Interaction with Members
 Dissemination of information
 Circulation of newsletters and other literature concerning the hospitality industry
 Organizing conventions, seminars, and symposia
 Conducting research on hotel and restaurant industry and updating members on latest
developments
 Training of human resource in different spheres of hotel and restaurant activity
 Taking legal action in favor of members when member's interest and thereby the interest of the
industry is at stake
 Help in expansion and development of existing projects
 Being the authentic voice of the hospitality industry and lobbying for all relevant matters before
the state and central government
 PHA has become recommending body to the State Bank of Pakistan for issuance of Foreign
License to member Hotels
 Representation to the Ministry of Commerce, Tourism and Finance for implementation of
industrial status of Hotel Industry

A COMPARATIVE STUDY ON FINANCIAL

PERFORMANCE OF HOTEL INDUSTRY IN
 PAKISTAN (SARENA HOTEL & MARRIOTT
HOTEL)
Analysis Of Financial Performance

Serena hotel:

The Serena Group comprises a collection of 32 luxury resorts, safari lodges and hotels,
which are located in East Africa (Kenya, Tanzania, Rwanda, Uganda and Mozambique) and
Southern Asia (Pakistan, Afghanistan and Tajikistan). The Serena service profile guarantees
unprecedented luxury, extensive amenities and unrivalled warmth of personal attention
(Official Website).
Table 4.1. Structure of Balance Sheet of Serena Hotel as at 31st December, 2012.
2011 2012 Change in
Value
Shs’000 Shs’000 %
CURRENT ASSETS
Cash & Cash Equivalent 403,114 257,205
Inventories 375,588 369,306
Receivables 1,636,227 1,443,766
TOTAL CURRENT ASSETS 2,414,929 2,070,277
NON-CURRENT ASSETS
Fixed Assets 8,829,042 9,090,486
Intangible Assets 1,057,861 1,057,861
Investment in Associates 687,008 933,202
Non-Current Receivables - 115,497
Deferred Income Tax Asset 143,000 216,753
TOTAL NON-CURRENT ASSETS 10,716,911 11,413,799
TOTAL ASSETS 13,131,840 13,484,076 3

TOTAL EQUITY 8,046,824 8,181,410 2

NON-CURRENT LIABILITIES
Borrowings 1,659,372 1,326,720
 Deferred Income Tax Liability 1,678,659 1,783,363
Retirement Benefit Obligations 131,689 146,622
TOTAL NON-CURRENT LIABILITIES 3,469,720 3,256,705
CURRENT LIABILITIES
Payable & Accrued Expenses 1,139,017 1,258,031
Current Income Tax 9,585 16,010
Borrowings 466,694 771,920
TOTAL CURRENT LIABILITIES 1,615,296 2,045,961
TOTAL LIABILITIES 5,085,016 5,302,666 4
TOTAL EQUITY & LIABILITIES 13,131,840 13,484,076 3

Assessment of Financial Performance

Balance Sheet of Serena Hotel shows the current assets over total assets are 18% in 2011, and
15% in 2012. Serena’s current assets decreased 14% in these two years.
Figure 4.1. Current & Non – Current Assets of Serena Hotel

Whether their current liabilities over total liabilities and equity are 12% in 2011, 15% in
2012. Their current liabilities increased 27% in two years. There is also an increase of 2% in
shareholder’s equity from 2011 to 2012.
Figure 4.2. Current & Non – Current Lab. & Total Equity of Serena Hotel
 Total Equity Current Liabilities, Non – Current Liabilities

Within Serena’s current assets cash and cash equivalent decreased 36% from 2011 to 2012.
On the other hand, the investments in associates increased 36%, and their fixed assets
increased 3% in these two years.

The following diagram showed the changes in the main balance sheet accounts of Serena
Hotel.

Figure 4.3. The changes in the main balance sheet accounts of Serena Hotel
MARRIOTT HOTEL:
Since 1927, Marriott has established a culture and a tradition of innovation, service and
leadership. Marriott’s network of 3,800+ hotels and brands across the globe leverages a
proven model of managing and franchising hotels, providing vast opportunities for
worldwide growth and development. Marriott offers owner and franchisee opportunities
across the globe: regions include the U.S. and Canada, Europe, the Caribbean & Latin
America, the Middle East & Africa and Asia Pacific (Official Website).

TABLE 4.2. Structure of Balance Sheet of Marriott Hotel as at 31st December, 2012
Value 2011 2012 Change in
%
$ in $ in
Millions Millions
CURRENT ASSETS

Cash & Equivalents 102 88

Accounts & Notes Receivables 875 1,028
Inventory 11 10
Current Deferred Taxes, net 282 280
Prepaid Expenses 54 57
Other - 12
TOTAL CURRENT ASSETS 1,324 1,475
NON-CURRENT ASSETS

Property & Equipment 1,168 1,539

Goodwill 875 874
Contract acquisition costs & Other 846 1,115
Equity & Cost Method Investments 265 216
Notes Receivable 298 180
Deferred Taxes, net 873 676
Other 261 267

TOTAL NON-CURRENT ASSETS 4,586 4,867

TOTAL ASSETS 5,910 6,342 7
 SHAREHOLDER'S DEFICIT (781) (1,285) 65
NON-CURRENT LIABILITIES

Long-Term Debt 1,816 2,528

Liability for Guest Loyalty Programs 1,434 1,428
Other Long-Term Liabilities 883 898
TOTAL NON-CURRENT LIABILITIES 4,133 4,854
CURRENT LIABILITIES

Current Portion of Long-Term Debt 355 407

Accounts Payable 548 569
Accrued Payroll & Benefits 650 745
Liability for Guest Loyalty Programs 514 593
Other 491 459
TOTAL CURRENT LIABILITIES 2,558 2,773
TOTAL LIABILITIES 6,691 7,627 14
TOTAL EQUITY & LIABILITIES 5,910 6,342 7
Assessment of Financial Performance

Balance Sheet of Marriott Hotel shows the current assets over total assets are 22% in 2011, and
23% in 2012.
Figure 4.4. Current & Non – Current Assets of Marriott Hotel

Marri
ott’s current liabilities over total liabilities and equity are 34% in 2011, 31% in 2012.
 Figure 4.5. Current & Non – Current Liab. & Shareholder’s Deficit of Marriott

Marriott’s current assets and current liabilities both are increased from 2011 to 2012, but their
current assets increased at a faster rate than current liabilities. Marriott’s current assets
increased 11% from 2011 – 2012, but their current liabilities increased 8% in two years. Within
Marriott’s current assets cash and cash equivalent decreased 14% from 2011 to 2012. Their
cost method investments also decreased with 18%, but there is an increase of 32% in the fixed
assets from 2011 to 2012.
The following diagram showed the changes in the main balance sheet accounts of Marriott
Hotel.

Figure 4.6. The changes in the main balance sheet accounts of Marriott Hotel

RATIO ANALYSIS OF FINANCIAL STATEMENTS

Table 5.1. Results of Ratio Analysis of Balance Sheet & Income Statement
Serena Hotel Marriott Hotel

2011 2012 2011 2012

Liquidity Ratios

Current Ratio 1.50 1.01 0.52 0.53

Quick Ratio (Acid Test Ratio) 1.26 0.83 0.51 0.53

Accounts Receivable Turnover 3.34 3.70 14.08 11.49

0.10 0.00 1.58 1.01

Net Working Capital Ratio
Profitability Ratios

Net Profit Margin % 11 9 2 5

Return on Assets % 5 4 3 9

Activity Ratios

Inventory Turnover (times) 14.55 14.47 1119.73 1181.40

Fixed Asset Turnover (times) 1.37 1.27 10.55 7.68

Leverage Ratios

Equity to Debt Ratio 1.58 1.54 -0.12 -0.17

Debt to Equity Ratio 0.63 0.65 -8.57 -5.94

0.39 0.39 1.13 1.20

Debt Ratio
1.63 1.65 -7.57 -4.94
Financial Leverage
6.21 5.19 3.17 7.20
Coverage Ratio

Assessment of Financial Ratios:

As it mentioned above that to evaluate the strength and weakness of company and to evaluate the
trend of business the ratios are very helpful.
Financial Liquidity:
Current Ratio matches current assets with current liabilities of the studied hotels and the
values showed whether the current assets are enough to settle current liabilities. If the
value of current ratio is below 1 then it means that current liabilities exceed current assets
and this shows critical liquidity problems. The above table shows the abilities of the studied
hotels. Serena Hotel had value 1.5 in 2011, but in 2012 their cash asset ratio decreases to
1.01. This means that Serena Hotel able that its current assets cover all obligations
immediately. But on the other hand, Marriott Hotel had value 0.52 in 2011 and 0.53 in
2012. This means that the Marriott showed critical liquidity problems due to exceed of
current liabilities over current assets.

Quick Ratio value describe that how well the studied hotels can meet their short-term
financial liabilities. A common rule of thumb is that companies with a quick ratio of greater
than 1.0 are sufficiently able to meet their short-term liabilities. In 2011 Serena’s quick ratio
was 1.262 it means that last year they are sufficiently able to meet their short-term
liabilities because a common rule of thumb is that companies with a quick ratio of greater
than 1 are sufficiently able to meet their short-term liabilities. but now in 2012 Serena’s
quick ratio falls down to 0.831 it means that a company is over-leveraged means the
company is taking too much debt, or they are struggling to grow their sales, paying bills too
quickly or collecting receivables too slowly. In 2011 Marriott’s quick ratio was 0.513 it
means last year they are not sufficiently able to meet their short-term liabilities because
their quick ratio was less than 1, it means they was facing difficulties like too much debt was
taken or low sales last year, paying bills too quickly or collecting receivables too slowly. In
2012 Marriott’s quick ratio is 0.528 means slightly better than the previous year but still
they are not able to meet their short-term liabilities because their quick ratio is less than 1
means still, they are facing problems like low sales, paying bills too quickly and collect
receivables too slowly and taking too much debt for their business.
 Figure 5.1. Current Ratio and Quick Ratio

Net Working Capital characterizes amount of capital in a company’s turnover. If current

assets of a business at the point in time are more than its current liabilities the working
capital is positive, and this tells that the company is not expected to suffer from liquidity
crunch in near future. However, if current assets are less than current liabilities the working
capital is negative, and this communicates that the business may not be able to pay off its
current liabilities when due.

Profitability Ratio:
Net Profit Margin point outs that after subtracting out all the expenses how well the
studied hotels convert their sales into profits. The value of net profit margin is very much
important for the shareholders because it shows them that how good a company is
converting its revenue into profits available for shareholders. In 2011 Serena’s net profit
margin was 11%, which means the company has $0.11 of net income for every dollar of
sales. In 2012 Serena’s net profit margin was 9% means lower than the previous year; this
shows that the company has $0.09 of net income for every dollar of sales. In 2011
Marriott’s net profit margin was 2% which means the company has $0.02 of net income for
every dollar of sales. In 2012 Marriott’s net profit margin was 5% which means the company
has $0.05 of net income for every dollar of sales that year.

Return on Assets helps to measures efficiency of both hotels that how these hotels
efficiently used their assets to generate net income. Return on assets indicates the number
of cents earned on each dollar of assets. In 2011 Serena’s ROA was 5% means low ROA
ratio, this ratio indicates that 0.05 number of cents earned on each dollar of assets. In 2012
Serena’s ROA was 4% means low ratio from the previous year also, this ratio indicates that
0.04 number of cents earned on each dollar of assets. In 2011 Marriott’s ROA was 3%
means low ROA ratio, this ratio shows that 0.03 numbers of cents earned on each dollar of
 assets by the company. In 2012 Marriott’s ROA ratio was 9% means high ratio and this high
ratio indicates that business is more profitable and ratio indicates that 0.09 number of cents
earned on each dollar of assets.

Figure 5.2. Net Profit Margin and Return on Assets

Activity Ratio:
Inventory Turnover helps to measure the efficiency of managing and selling of inventories
of these hotels. In 2011 Serena’s inventory turnover ratio was 14.55 times which show high
inventory turnover means the company is efficiently managing and selling its inventory and
it also shows that the company’s funds are less tied up. But company has to be careful if
they have a high inventory turnover as they are subject to stock outs. In 2012 Serena’s
inventory turnover ratio was 14.47 times which was slightly lesser than the previous year
but still shows high inventory ratio and the company is efficiently managing and selling its
inventory fewer funds are tied up. In 2011 Marriott’s inventory turnover was 1119.73 times
which show very high inventory turnover means the company is efficiently managing and
selling its inventory so that fewer funds are tied up but they also facing the problem of
stock outs. In 2012 Marriott’s inventory turnover was 1181.4 times which shows higher
ratio than the previous year so it means they were facing the problem of stock outs and
high ratio also implies either strong sales or ineffective buying or they represent an
investment with a rate of return of zero.

Fixed Asset Turnover Ratio tells that how the studied hotels using their fixed assets to
generate revenues. Fixed assets are important because they usually represent the largest
component of total assets. So, the use of fixed assets in generating of revenues must be
effectively and efficiently. There is no standard guideline found during research about the
 best level of asset turnover ratio. In 2011 Serena’s fixed asset turnover was 1.37 times
means low turnover which means the company is over investing in the property, plant and
equipment. In 2012 fixed asset turnover was 1.27 times means lower than the previous year
which shows declining trend in fixed asset turnover and it may mean that the company is
over investing in property, plant and equipment. In 2011 Marriott’s fixed asset turnover was
10.55 times means higher turnover ratio which shows that the company is efficiently
managing its fixed assets. Fixed assets are important because they usually represent the
largest component of total assets and it also shows that company has less money tied up in
fixed assets for each unit of sales. In 2012 Marriott’s fixed asset turnover was 7.68 times
means lower than the previous year but still high turnover. As the turnover is lesser than
the previous year than it means that the company is not managing their fixed assets
efficiently and more money is tied up in fixed assets for each unit of sales than the previous
year and the declining trend also shows that the company is over investing in property,
plant and equipment.

Figure 5.3. Fixed Asset Turnover

Leverage Ratio:
Debt to Equity Ratio helps to indicate that how much assets of these hotels are financed by
debt. In 2011 Serena’s debt to equity ratio was 0.63 means approx. low and considered
well, the companies which has a low amount of debt and is therefore exposed to less risk in
terms of interest rate increasing or credit rating. In 2012 Serena’s debt to equity ratio was
0.64 slightly high from the previous year but low and considered good so that the company
was exposed to less risk in terms of interest rate increasing or credit rating.

Debt Ratio evaluates the studied hotel’s total debt to its total asset. Debt ratio range is
from 0.00 to 1.00. In 2011 Serena’s debt ratio was 0.38 means lower debt ratio means low
risk which is favorable for the company because the company is less dependent on leverage
and the company has stronger equity position. In 2012 debt ration increases to 0.39 but still
low debt ratio means low risk which is favorable for the company because the company is
less dependent on lending money from others means leverage and still company has strong
equity position. In 2011 Marriott’s debt ratio was 1.13 means higher debt ratio means the
company is taking high risk, higher value indicates that higher portion of company’s assets
are claimed by its creditors which means higher risk in operation since the business would
find it difficult to obtain loans for new projects. In 2012 debt ratio was 1.20 means higher
than the previous year. higher debt ratio means the company is taking high risk, higher
value indicates that higher portion of company’s assets are claimed by its creditors which
means higher risk in operation since the business would find it difficult to obtain loans for
new projects.

Financial Leverage Ratio shows that how much assets of the studied hotels holds relative to
its equity. In 2011 Serena’s financial leverage ratio was 1.63 means low leverage ratio which
shows that company was not at risk and not using its debts and other liabilities to finance its
assets. In 2012 Serena’s leverage ratio was 1.64, slightly higher from the previous year but
still low leverage ratio which shows that the company was not at risk. In 2011 Marriott’s
leverage ratio was -7.56 which shows very low leverage ratio means the company was not
at risk. In 2012 Marriott’s leverage ratio was -4.9 means higher than the previous year but
still low leverage ratio and this shows that the company was not at risk.

Coverage Ratio value shows the both hotel’s ability to meet its financial obligations. In 2011
Serena’s coverage ratio was 6.20 means high coverage ratio so it means that the company
was able to fulfill its obligations to its lenders to pay the interest expense on its debts. In
2012 coverage ratio was 5.19 means below from the last year but still high to means the
company easily fulfills its obligations to pay the interest expense on its debts. In 2011
Marriott’s coverage ratio was 3.17 means high coverage ratio so it shows that the company
pays the interest expense on its debts easily. In 2012 the coverage ratio was 7.19 much
higher from the previous year so it shows that company was able to fulfills its obligations to
pay the interest expense on its debts to lenders.
Figure 5.4. Equity to Debt Ratio, Debt to Equity Ratio, Debt Ratio, Financial Leverage and
Coverage Ratio
 PERFORMANCE AUDIT ON SKYROOMS (PVT.)
LTD (AIRPORT HOTEL)
A SUBSIDIARY OF PIAC
FOR THE PERIOD 2012-16

Directorate General of Commercial Audit& Evaluation (South) Karachi conducted performance

audit of Skyrooms (Pvt.) Limited to examine the overall performance of the company managing
airport hotel for five financial/calendar years i.e., 2012 to 2016. This audit was included in the
Audit Plan 2016-17.

PIA established a subsidiary company Skyrooms (Pvt.) Limited in 2012 to 2016 for managing
the Airport Hotel. The prime objectives of hotel were providing hotel accommodation to
PIAC and other airlines transit passengers, crew/staff and walk in passengers.

The hotel has an area of 30,468 square yards comprising open space of 21,442 square yards
and covered area of 9,026 sq. yards. In the year 198384 four new blocks comprising 244
Rooms, Reception, Shops and Dining Hall facilities were added to the hotel. In the same
year, the then management of the hotel decided to close down the old wing consisting of
100 rooms due to their dilapidated condition and unsafe accommodation. Subsequently out
of 100 closed rooms, 67 rooms were renovated and opened for business. At present, the
hotel has 310 rooms having 538 beds.

The management provided the audited accounts for the year 2012 and unaudited accounts
for the years 2013, 2014 & 2015 and account for the years 2016 & 2017 was not provided.
The comparison of assets, expenses and accumulated losses for the year 2011and 2015 as
under:

Sr. 2011 2015 %

Description Increase/
No.
 (Decrease)
(Rs. in million)
1. Property Plant & 61.144 44.364 (27.44)
Equipment
2. Trade debts of the hotel 49.431 95.669 93.54
3. Staff retirement gratuity 64.956 155.688 62.14
4. Accumulated loss 133.080 155.688 16.99

AUDIT OBJECTIVES

Audit objectives were to:

 Examine the performance of the company with a view to ensure the effectiveness, economy and
efficiency in the operations of the Company.
 Review compliance with the objectives for establishing the Company.
 Examine the adequacy of internal controls.
 Review compliance with the applicable laws for procurement.
 Examine the functioning of company (Airport Hotel) in compliance with rules and regulations.

AUDIT FINDINGS AND RECOMMENDATIONS

Organization and Management

Irregular payment of salaries & remuneration to officers & staff of
Airport Hotel in absence of sanctioned strength and recruitment rules -
Rs. 843.137 million

Establishment Division’s O.M. No.11/1/81-R.5 dated 20-8-1981 says that (i) Appointments (by
promotion, transfer or direct recruitment) to the posts for which recruitment rules do not exist
or have not been finalized in consultation with Establishment Division/FPSC, may not be made
in the absence of recruitment rules. (ii) Recruitment rules for all posts sanctioned with the
concurrence of the competent authority, if not in existence, should be framed/ finalized within
three months of the issue of this circular. Further, Sl. No. 76 (i) of Establishment Division OM.
No. 3/1/92-R.2, dated 2-1-1992 states that Booklet of vacancies, other than those falling in the
purview of the FPSC, will be printed by the concerned Ministries/Divisions in respect of their
Departments/ Subordinate Offices/Autonomous Bodies/Corporations in December and June
each year and will be made available on payment.
During Performance Audit of Skyrooms (Pvt.) Limited Karachi for the years 2012 to 2016, it was
observed that the organization does not have approved recruitment rules and sanctioned
strength of posts. Presently, the Skyrooms (Pvt.) Limited has one Chief Executive Officer, one
Executive Director, one General Manager, one Deputy General Manager, nine Managers and
two in charges of the departments. Similarly, there are other posts of Deputy Managers,
Assistant Mangers, Guest Relation Officers (GSO), In charge Shift Officer. Besides, there are
staffs employed on contract by the hotel as well as through third party contract (Annex-1).
Moreover, the Skyrooms (Pvt.) Limited does not have a 'Booklet of Vacancies' printed by its
controlling ministry/division. It manifests that management has the freedom to run affairs at its
sweet will.

Audit is of the view that in absence of sanctioned strength of officers & staff and recruitment
rules, the salaries & remuneration from 2012 to 2016 amounting to Rs. 843,137,148 of Airport
Hotel stood as irregular.

Matter was reported to the management in June 2017. The management in its reply dated
January 29, 2018 stated that SRL has its own approved sanctioned strength of 483 number of
employees, but no documentary evidence was provided to audit in support of reply. DAC
meeting was not convened by PAO despite request by audit dated August 04, December 07
and December 19, 2017.

Audit recommends fixing of responsibility on the person(s) at fault.

Irregular composition of Board of Directors of Skyrooms (Pvt.) Ltd

As per clause-4(4) of the Corporate Governance Rules 2013the Board shall elect its chairman
from amongst the independent directors so as to achieve an appropriate balance of power,
increasing accountability, and improving the Board's capacity for exercising independent
judgment. Clause 4(1) the office of the chairman shall be separate, and his responsibilities
distinct, from those of the chief executive. Clause 5(2) says that Board shall evaluate the
candidates based on the fit and proper criteria and the guidelines specified by the
Commission for appointment to the position of the chief executive, and recommend at least
three individuals to the Government for appointment as chief executive of the Public Sector
Company. Further, as per clause-3, the Board shall consist of executive and non-executive
directors, including independent directors.
During Performance Audit of Skyrooms (Pvt.) Limited (SRL) Karachi for the years 2012 to 2016,
following irregularities were observed in composition of Board which was against the
Corporate Governance Rules 2013.

• The last re-composition of board was made on 25.03.2015 whereby the CFO-PIA
was nominated as Chairman as well as the CEO of Skyrooms (Pvt.) Limited, which
was in violation of above rules.
• The board remained non-functional for more than three years. Since Board’s 55 th
meeting was held on 10-03-2010 and the next meeting on 19-06-2013. Hence, the
Directors also expressed their displeasure in 56 th meeting on lack of interest shown
by the PIAC management and over the non-appointment of CEO of Skyrooms (Pvt.)
Limited.
• The Board of Directors of SRL were not independent as well. The composition of
directors was not maintained as per the rules, which stated that there should be
more than half independent directors in the Board.
• The post of Chairman has been held by a non-independent Director. Annual
General Meeting has not so far been held, in violation of company's Articles of
Association.
• The annual report of the entity did not specify the Non-executive, Executive and
Independent directors as required by the rules.

The matter was reported to the management in June 2017. The management in its reply dated
January 29, 2018, stated that composition of Board of Directors and nomination of its directors
was approved by PIA Board, but no documents were provided in support of reply. DAC meeting
was not convened by PAO despite request by audit dated August 04, December 07 and
December 19, 2017.

Non-availability of Business Plan, Human Resource and

Promotion Policy, Service Rules and SOPs
Board of Director in its 58th, 61st and 64thmeetings held on January 03, 2014, May 28, 2015 and
June 30, 2016 respectively directed the management of SRL to develop business plan to make
SRL profitable by analyzing the possibility to enter into Joint Venture by hiring the best human
resource and industry experts and also decided that the company should have its own service
rules like other organizations.

During Performance Audit of Skyrooms (Pvt.) Limited Karachi for the years 2012 to 2016, it was
observed that hotel management did not formulate Business Plan, Human Resource Policy and
Standard Operating Procedures. There were no service rules and job descriptions of
officers/officials of Airport Hotel were also not available. The whole entity is running on the
Schedule of Administrative, Financial, Miscellaneous and Standing Committee's Powers 2013
which only describe the limits of sanction to authorized persons.

Audit is of the view that the management’s failure to implement Body’s decision as per above
directives show weak and in effective internal control.

The matter was reported to the management in June 2017. The management in its reply dated
January 29, 2018, stated that business plan was being prepared and would be provided to
audit. However, no progress was made till finalization of this report. DAC meeting was not
convened by PAO despite request by audit dated August 04, December 07 and December 19,
2017.

Audit recommends fixing of responsibility on the person(s) at fault, besides ensuring

compliance with the BoD’s decision.
Financial Management

Non-recovery of huge receivables - Rs. 92.73 million

Rule-5 of Public Sector Companies (Corporate Governance), 2013 states that the Board shall
exercise its powers and carry out its fiduciary duties with a sense of objective judgment and
independence in the best interest of the company.

During Performance Audit of Skyrooms (Pvt.) Limited Karachi for the years 2012 to 2016, it was
observed that an amount Rs.93.00 million was lying outstanding on account of receivable, as
per details Annex-2.

Audit is of the view that the management failed to recover huge amount Rs.92.729 million
since 2014 which shows inefficiency and weak internal controls.

Matter was reported to the management in June 2017. The management in its reply dated
January 29, 2018 stated that major part of receivable had been received. However, no
documentary evidence was produced to audit. DAC meeting was not convened by PAO despite
request by audit dated August 04, December 07 and December 19, 2017.

Audit recommends efforts may be made for earlier recovery besides fixing of responsibility on
the person(s) at fault.

Non-finalization of annual accounts by the management since

2013
According to Section-233 of the Companies Ordinance, 1984 the company shall prepare the
annual accounts within four months after closing the date of accounts for the specific year.

During Performance Audit of Skyrooms (Pvt.) Limited Karachi for the years 2012 to 2016, it was
observed that Skyrooms did not finalize and provide the audited accounts for the years 2014 to
2016 till the finalization of this report in violation of above rules.

Audit is of the view that non-implementation of above referred directives is a sheer violation of
framed rules.
The matter was reported to the management in June 2017. The management in its reply dated
January 29, 2018, stated that accounts of 2013 were under process of signature of Chartered
Accountants and would be submitted after due signature. However, no progress was reported
till finalization of this report. DAC meeting was not convened by PAO despite request by audit
dated August 04, December 07 and December 19, 2017.

Business loss due to less receipt of revenue - Rs.552.714

million
Rule-5 of Public Sector Companies (Corporate Governance), 2013 states that the Board shall
exercise its powers and carry out its fiduciary duties with a sense of objective judgment and
independence in the best interest of the company.

During Performance Audit of Skyrooms (Pvt.) Limited Karachi for the years 2012 to 2016, it was
observed that management incurred huge business loss of Rs.552.714 million on account of
less charging of room rent from passengers. The management did not provide the detail of
revenue earned during 2012. However, other years’ detail is as under:

(Amount in Rupees)
No. of Room Rent Rate Room Rent
Year Loss
Passengers Received Due
1 2 3 (1 x 3) =4 5
2013 149,005 163,251,007 2,169 323,191,845 (159,940,838)
2014 146,675 182,841,691 2,350 344,686,250 (161,844,559)
2015 133,953 177,686,773 2,350 314,789,550 (137,102,777)
2016 106,645 156,789,766 2,350 250,615,750 (93,825,984)
Total 536,278 680,569,237 - 1,233,283,39 (552,714,158)
5

The matter was reported to the management in June 2017. The management in its reply dated
January 29, 2018, stated that amount calculated @ Rs. 3,000 was not correct and we have
different rates of PIA transit and other passengers as per agreement. In the light of reply, the
para was revised and the amount was reduced as per rate of agreement. DAC meeting was not
convened by PAO despite request by audit dated August 04, December 07 and December 19,
2017.
 Loss to government on account of less deduction of sales tax
from transit passengers -Rs. 13.458 million
Rule-5 of Public Sector Companies (Corporate Governance), 2013 states that the Board shall
exercise its powers and carry out its fiduciary duties with a sense of objective judgment and
independence in the best interest of the company.

During Performance Audit of Skyrooms (Pvt.) Limited Karachi for the years 2012 to 2016, it was
observed that government suffered losses during the years 2013 to 2016 on account of less
deduction of sales tax on room rent from transit passengers. The management did not provide
detail of revenue earned during 2012. However, other years’ detail is as under:

(Amount in Rupees)
Sales Tax
Passenger
Room Rent Room Rent deducted Sales Tax
Year s in Loss of Tax
Received Due by Due
Numbers
SRL
201 149,005 163,251,00 323,190,300 53,564,24 54,942,35 (1,378,108)
3 7 3 1
201 146,675 182,841,69 344,686,250 54,429,57 58,596,66 (4,167,093)
4 1 0 3
201 133,953 177,686,77 314,789,550 49,360,12 53,514,22 (4,154,103)
5 3 1 4
201 106,645 156,789,76 250,615,750 38,846,32 42,604,67 (3,758,356)
6 6 2 8
Tota 536,278 680,569,23 1,233,281,85 196,200,25 209,657,91 (13,457,660
l 7 0 6 6 )

Matter was reported to the management in June 2017. The management in its reply dated
January 29, 2018 stated that tax was calculated as per rules, but the reply was not supported
with documentary evidence. DAC meeting was not convened by PAO despite request of audit
dated August 04, December 07 and December 19, 2017.

Non-production of record
Section-14 (2) of the Auditor General’s (Functions, Powers and Terms and Conditions of
Service) Ordinance 2001 states that the officer in-charge of any office or department shall
afford all facilities and provide record for audit inspection and comply with requests for
information in as complete form as possible and with all reasonable expedition. Further the
Public Accounts
Committee directives, issued vide OM No. F-10(1)/2000/2004-PAC dated Jun 03, 2004 requires
all PAOs Ministry/Divisions to make available all information/record to Audit as and when
required by them, otherwise disciplinary action will be initiated against person(s) responsible
for the delay under Section14(2) of the Auditor General’s Ordinance No. XXIII of 2001.

During Performance Audit of Skyrooms (Pvt.) Limited Karachi for the years 2012 to 2016, it was
observed that the record as mentioned was not produced to audit despite repeated requests.
The detail is at (Annex-3).

Audit was of the view that non-production of record was a violation of

Section-14 (2) of the Auditor General’s Ordinance, 2001 and the directives of PAC.

This attitude of the management tantamount to concealment of facts and figures from
government audit.

The matter was reported to the management in June 2017, but no reply was received. DAC
meeting was not convened by PAO despite request by audit dated August 04, December 07 and
December 19, 2017.

Audit recommends fixing of responsibility on the person(s) at fault.

 RESEARCH METHODOLOGY:
In this study the approach used for the analysis have following steps;
Sample Identification and Data Collection,
Categorization
and Selection of Financial Ratios

Sample Identification:
Serena Hotel and Marriott Hotel are the samples which were used in this study for the analysis.
The primary factor of using these hotels for analysis as sample is that these hotels are the main
and well reputed hotels in Pakistan. These hotels covered a broad spectrum of the hospitality
industry.

Data Collection:
To have a best result the Quantitative method and Qualitative method have been used. As a
secondary data the financial data of these hotels is used and this financial data later calculated
with the help of MS Excel. To know about the performance of these hotels a comparative study
is done, here the study also identified the performance of an individual hotel. As a financial
data the income statement and Balance sheet is used to compute the different financial ratios.
 CONCLUSION
Pakistan’s hotel industry can potentially increase foreign direct investment, employment
opportunities and skills, improving economic growth. The obstacles that hinder growth are a
shortage of skilled labour, increased technological demand, lack of infrastructure, climate
change events and economic crises. Government should take steps to improve the
whereabouts of the hotel industry, reduce taxes, make strategies for combating natural
disasters, increase awareness, introduce courses in universities etc.  These steps will ensure
growth in the hotel industry resulting in an economic boom in the long run.

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