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ISLAMABAD: The Competition Commission of Pakistan (CCP) has issued a policy note to the Securities and Exchange Commission of Pakistan (SECP) regarding its new guidelines related to making the cost audit reports as public information.
The CCP has taken notice of the SECP decision that the cost accounting results of the companies be made public on the grounds that it would lead to distortions in the competition regime and the companies would learn about each others' trade secrets, which could lead to lack of competitive growth.The CCP policy note was in response to the SECP decision to withdraw the Companies Cost Accounting Records (General Order), 2008 just prior to the Eid holidays last month.
The CCP policy note issued here on Monday also placed suggestions regarding the cost orders of the SECP.
The CCP considers that sharing detailed cost data may be problematic in a competitive business environment. The data, once shared, becomes public information, and information exchange on cost may provide patronage and facilitate companies in their coordination and monitoring of anti-competitive practices, be it dividing the markets allocating quotas, or fixing prices and hence may facilitate collusion amongst independent economic agents.
The Companies Cost Accounting Records (General Order), 2008 was applicable from the financial year commencing on or after October 1, 2008, to companies engaged in production, processing, manufacturing or mining activities, in the fertiliser, thermal energy, petroleum refining, natural gas, and polyester fibre industries.
Companies engaged in cement, vegetable ghee and sugar industries were also required to comply with the above-mentioned General Order. The SECP had earlier issued a special order for these sectors.
The General Order required companies to maintain cost accounting records, have a cost audit, and circulate and distribute the cost auditor's reports.
However, the SECP deferred the applicability of the General Order on August 23, and the CCP policy note has said, “The requirement of circulating and distributing cost audit reports amongst shareholders as prescribed in Clause 4 of the withdrawn General Order was inconsistent with the overall spirit of Chapter II of the Competition Act, 2010.”
The CCP police note stated that the maintenance of cost accounting records and cost audits may contribute towards enhancing competitiveness of the sectors, but in Pakistan, where the concept and practice of enterprise governance is developing, enterprises may not be inclined to self-regulate and conduct cost audits.
The CCP said that cost audit promotes efficiency as it may identify processes and activities where improvements can be made to enhance productivity and reduce/eliminate wastage of resources.
“In this sense, cost accounting reports are a part of the corporate support system that is for internal use, providing cost information to the management for decision making and control.”
“Generally, companies are not inclined to share detailed cost data, except with management and regulators; its availability to other market players may harm their competitive advantage,” the CCP policy note said.
The CCP has objected that the latest General Order of the SECP required companies to circulate the cost auditor's report amongst shareholders and/or to publish the report on their websites.
“In case this order was implemented, this particular requirement would have resulted in making commercially sensitive information available in the public domain. This may affect the independence with which companies make their production and pricing decisions, thus, negatively affecting competition,” the CCP has said.
The policy note said that CCP considers that commercially sensitive cost information should be kept confidential.
This spirit is embodied in the Cost Audit Rules in Pakistan, which confine the disclosure of the cost auditor's report to the SECP and the directors of the company.
Such practices are universally recognised as having detrimental effects on competition, eradicating or seriously reducing the benefits that competitive markets deliver for consumers.
When asymmetric costs are treated as private information, this hinders cartel activity. Sharing these costs may facilitate collusion. It may create a public record on which collusive schemes may be based.
Hence, publicising detailed cost data, as prescribed earlier by SECP, is harmful for competition and would be in violation of Section 4 of the Competition Act, 2010.
