External auditors are one of the essential gatekeepers of every organisation. They have very important role to play in the company. Following the somewhat recent collapses of major corporate giants, it has become evident that external auditors could make or mar a company. For this reason, a reconsideration of their relationship with the companies which they audit has been initiated and the new guidelines on the circumstances under which they should operate have been emerging. In this article, we shall review issues concerning external auditors with a view to determining what reforms should be undertaken in this area either in Nigerian company law or corporate governance code so as to ensure that these essential gatekeepers are equal to the crucial task they have responsibility for.
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The Companies and Allied Matters Act, Cap. C20, Laws of the Federation of Nigeria 2004 (CAMA) makes provision for the appointment and removal of external auditors for companies. Accordingly, except in the case of the first auditors who are usually appointed by the directors, every company is required at each annual general meeting to appoint its auditors who should hold office from the conclusion of that meeting at which the appointment is made until the conclusion of the next annual general meeting, subject to a retiring auditor being re-appointed without passing any resolution unless he is not qualified for re-appointment, or a resolution has been passed at the meeting appointing some other person, or the auditor has given a written notice to the company of his unwillingness to be re-appointed.
It is instructive that the intendment of the CAMA is to vest the power to appoint auditors in the company instead of in the directors. Thus, it is provided that an auditor may be appointed by a company by an ordinary resolution.
On the flip side, an auditor may resign by depositing a notice in writing at the company’s registered office. Such notice brings the auditor’s term of office to an end on the date the notice was given or such other date as may be specified. An auditor’s notice of resignation is not effective unless it contains either a statement to the effect that there are no circumstances connected with his resignation which he considers should be brought to the notice of members or creditors of the company, or a statement of any circumstances concerning his resignation which he wishes to bring to the notice of members or creditors of the company. It is noteworthy that a resigning auditor can requisition a general meeting of the company.
Unfortunately, the issue of the independence of the external auditors of companies was not adequately addressed in the CAMA. The importance of the independence of the external auditors became evident following the global corporate failures of the not too distant past, notably the collapse of Enron and the demise of Arthur Anderson. This has occasioned the entrenchment of international best practice on auditors’ independence standards that are reasonable, robust, rigorous, comprehensive and enforceable. The standards of auditors’ independence have been encapsulated by the International Organization of Securities Commissions (IOSCO) when in its A Statement of the Technical Committee on Principles of Auditor Independence and the Role of Corporate Governance in Monitoring an Auditor’s Independence (2002) it states that “[s]tandards of auditor independence should establish a framework of principles, supported by a combination of prohibitions, restrictions, other policies and procedures and disclosures, that addresses at least the following threats to independence: self-interest, self-review, advocacy, familiarity, and intimidation.”
Furthermore, the Organisation for Economic Co-operation and Development (OECD) aptly captures the factors that could impugn an external auditor’s independence when in the OECD Principles of Corporate Governance (2004) it states that the “[p]rovision of non-audit services by the external auditor to a company can significantly impair their independence and might involve them auditing their own work. To deal with the skewed incentives which may arise, a number of countries now call for disclosure of payments to external auditors for non-audit services. Examples of other provisions to underpin auditor independence include, a total ban or severe limitation on the nature of non-audit work which can be undertaken by an auditor for their audit client, mandatory rotation of auditors (either partners or in some cases the audit partnership), a temporary ban on the employment of an ex-auditor by the audited company and prohibiting auditors or their dependents from having a financial stake or management role in the companies they audit. Some countries take a more direct regulatory approach and limit the percentage of non-audit income that the auditor can receive from a particular client or limit the total percentage of auditor income that can come from one client.”
Consequently, in contemporary times, there are six objective criteria for assessing the independence of external auditors and these are provided for in contemporary corporate governance codes. These criteria are:
- ban on the provision of non-audit services by the external auditor or limiting the percentage of non-audit income from the same client audited;
- mandatory rotation of the auditors partners;
- periodic rotation of the audit firm in charge of the audit of companies;
- ban on employment of ex-auditor by a company-client;
- prohibition of financial stake or management role in audited companies by staff/partners and the family members of partners of the audit firm; and
- limitation on the total percentage of auditor income from one client.
The above-mentioned benchmarks for establishing the external auditors’ independence are discernible from the OECD Principles of Corporate Governance (2004). They constitute established international best practices on external auditors’ independence which contemporary corporate governance codes accommodate.
Next week, we shall consider the extent to which the existing corporate governance codes in force in Nigeria sufficiently address the issue of the independence of external auditors in Nigeria. Nevertheless, should you have any comments on the issues already raised concerning external auditors, kindly share such views by using the comments area of this post below. If you are already a registered user, you will be required to log in to comment on this post; otherwise, you will have to register before posting your comment. Registration is simple and FREE.