Name

Roll Number

Shuja Ahmad
15121003

Callmate Telips (A) - Choice of Accounting Policy

Executive Summary
Callmate Telips Telecom Limited (Callmate) was in the telecommunications business in which
the regulatory controls were gradually being undone by the government of Pakistan as part of an
economic deregulation program. Callmate was the pioneer in the pay phones and prepaid calling
card industries in Pakistan and had significant opportunity to develop into a major business
entity. The events in the case demonstrate that the company strategy, as well as aggressive share
price management, could be dangerous if there were no checks on the directors. All the directors
of Callmate were close family members and the audit committee consisted of three of the
directors. The external audit firm that audited Callmate was A.F. Ferguson & Co. (Ferguson) and
they were an affiliate of Price Waterhouse Coopers International. Ferguson was regarded among
the top professional accounting firms in Pakistan. A disagreement arose between the auditors and
the company on the accounting policy related to revenue recognition used in the financials of the
half year ended December 2005. This dispute and the company trying to manage its share price
led to a number of problems that became public knowledge as the company tried to malign the
auditors. The case examines corporate governance by examining the role of the external auditor,
the conduct of the board of directors and the regulator of public listed companies. There were a
series of events that caused a profitable company to rapidly become a pariah on the stock
exchange and be suspended from the exchange.
Problem Statement

1) There was dispute among Ferguson auditing company and Callmate regarding the
revenue recognition policy.
2) There was corporate governance issues in the company which was causing many
problems.
3) Callmate took the issue very publically which caused the image of Callmate and
Ferguson to deteriorate.
4) It was also revealed that the various investors and brokers were also indulging in the
fraudulent activities.
Causes of Problems
When a company is listed in KSE, it requires that the company should publish audited reports of
the company. A.F Ferguson was not satisfied with the revenue recognition policy of the
Callmate. As callmate was recording the revenue at the time of sales of the card. On the other
hand Ferguson was having issues with that and they insisted that the revenue should be
recognized after the card had been used. Analysts pointed out that Callmate had depicted growth
in all key indicators over the past five years. Whereas the revenue increased at a five-year
combined annual growth rate (CAGR) of 62 per cent to Rs3040m in FY05 from Rs273m in
FY00, gross profits surged at a CAGR of 84 per cent. The company also turned to a profit of
Rs432 million for FY05, from a loss of Rs30 million in FY'00. During the first nine months of
the fiscal year ending June 30, 2006, profitability of the company had climbed by 230 per cent to
Rs716m, translating in diluted earnings per share (eps) of Rs10.95. The companys several years
of affable relationship with auditors soured when disagreements became intense on whether it
was appropriate to recognise revenue when the cards were actually utilised by customers (usagebased policy recommended by the auditors) or at the time of sale to dealers (despatch base policy
followed by the company). From the unsavoury communication between the two that followed, it

appeared that auditors believed that certain other pending matters also warranted a qualified
audit report. The company would accept nothing but a clean report. Two investigations had
been done into the abnormal rise of the market. One of these investigation reports had identified
OIBPL as a key player in the speculative dealings that were financed through the overnight
financing system known as 'badla'. Another investigation by the NBFI regulator, Securities
Exchange Commission of Pakistan (SECP), had examined the abnormally large volume of CTTL
share trades on the KSE and found the directors of Callmate involved in manipulating the
company share price. The directors were prosecuted and the judge had issued warrants for their
arrests. The directors, faced with a difficult situation of a very large loss, decided to delay
disclosing the loss by six months. There was circumstantial evidence in the case that would
suggest that the directors should have known about the conviction of the directors of Callmate
and that this would have an adverse effect on the share price of the company. The auditor's report
also was the standard clean report, in spite of the seriousness of the court decision, as it made the
shares of Callmate worthless.
Decision Criteria and Alternative Solution

Convert from IFRS to US GAAP to avoid these kind of issues due to standards of IFRS
Follow the same audit while solving the internal issues in the company.
Talk with Ferguson regarding change in the auditing behavior and make them accept the
revenue recognition policy that is set by Callmate

Decision and Recommendation

Callmate should talk with Ferguson and make them accept that the policy is set by international
standard and we should not disregard the international standards. By doing this the image which
was lost in public allegation will be resumed to good again.