The importance of the external auditors seems to be well-appreciated in Nigeria. Of the four corporate governance codes presently in force in Nigeria, three of them have provisions regarding external auditors. The only corporate governance code without any provision on external auditors is the Code of Corporate Governance for Licensed Pension Operators 2008. Interestingly, the provisions of the other corporate governance codes regarding external auditors are not on exactly the same issues. In this article, we shall review the provisions of the Code of Corporate Governance in Nigeria 2011 (2011 SEC Code), the Code of Corporate Governance for Insurance Industry in Nigeria 2009 (2009 NAICOM Code), and the Code of Corporate Governance for Banks in Nigeria Post-Consolidation 2006 (2006 CBN Code) on external auditors. In the process, we shall benchmark the provisions against international best practice on external auditors which we considered last week [see here] with a view to pointing out whatever shortcomings exist in the present regulatory framework regarding external auditors in Nigeria.
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Beyond the provisions of the Companies and Allied Matters Act, Cap C20, Laws of the Federation of Nigeria 2004 (CAMA) on external auditors, there exists regulatory framework for external auditors in Nigeria. In the case of banks, the regulatory framework for external auditors is contained in section 8.2.0 – 8.2.6 of the 2006 CBN Code. Section 8.0 of the 2009 NAICOM Code provides for external auditors in insurance and re-insurance companies operating in Nigeria. In respect of all public companies generally, the main regulatory framework for external auditors is contained in section 33 of the 2011 SEC Code.
The three identified codes of corporate governance in Nigeria with provisions on external auditors are not uniform in their provisions regarding external auditors. They covered different situations in most cases. Even in some cases where they provided for the same situations, the specific provisions of the different codes are different; in fact, there are instances when their provisions are inconsistent.
Most of the codes of corporate governance in force in Nigeria are silent on the appointment of external auditors. Perhaps, the appointment was taken for granted being that there is a statutory framework for the appointment of external auditors for companies in Nigeria. Nevertheless, the 2006 CBN Code and the 2009 NAICOM Code made provision for the approval of the appointment of external auditors for banks and insurance companies by the different regulators of the respective industries (that is, the Central Bank of Nigeria and the National Insurance Commission respectively).
Dealing with audited company
The semblance of a formal stipulation in the codes of corporate governance in Nigeria regarding the mode of the external auditor dealing with the audited company can be found in the 2006 CBN Code which stipulates that the auditor should “maintain arms-length relationship with the banks they audit.” In the case of the 2009 NAICOM Code, it is provided that the external auditor is answerable to the boards of insurance and re-insurance companies.
Rendering of non-audit services
The 2006 CBN Code and the 2011 SEC Code have provisions regarding this issue. In the case of the 2006 CBN Code, it provides that the external auditors of banks should not render listed non-audit services to the bank audited. The non-audit services listed in the 2006 CBN Code are bookkeeping or other services related to the accounting records or financial statements of the audit client; appraisal or valuation services, fairness opinion or contribution-in-kind reports; actuarial services; internal audit outsourcing services; management or human resource functions including broker or dealer, investment banking services and legal or expert services unrelated to the audit contract.
In the case of the 2011 SEC Code, it provides that the Audit Committee of the concerned company should review the independence of the external auditors and ensure that where non-audit services are provided by the external auditors there is no conflict of interest.
The 2006 CBN Code and the 2011 SEC Code have provisions regarding employment restrictions. In the case of the 2006 CBN Code, it stipulates that an audit firm should not provide audit services to a bank if one of bank’s top officials (such as, directors, Chief Financial Officer, etc) was employed by the firm and worked on the bank’s audit during the previous year. On the other hand, the 2011 SEC Code merely requires the Audit Committee to preserve the independence of external auditors by setting clear hiring policies for employees or former employees of external auditors.
Tenure of audit firms
This is an area where the inconsistency in the provisions of the codes of corporate governance in Nigeria is quite obvious. All the three codes of corporate governance have provisions regarding the tenure of external auditors. Thus, they are compliant with the best practice that audit firms should be rotated on periodic basis. However, the codes stipulate different tenures for external auditors. While the 2006 CBN Code and the 2011 SEC Code stipulate tenure of 10 years, the 2009 NAICOM Code stipulates a period of five years.
Another point of divergence is that whereas the 2006 CBN Code and the 2011 SEC Code provides for a cooling-off period after which the same external audit firm may be re-appointed by the company, the 2009 NAICOM Code has no provision in that regard. Thus, it can be contended that an external audit firm engaged by an insurance or re-insurance company can only serve a company for a maximum of five years only without the option of re-appointment in future. That is to say, after the expiration of the five years, the audit firm has no chance of serving as the external auditor of the insurance or re-insurance company again.
In respect of the cooling-off period, the 2006 CBN Code prescribes a period of 10 years while the 2011 SEC Code prescribes a period of seven years. It is better left to the imagination the grave dilemma this inconsistency would occasion a bank that is listed on the Nigerian Stock Exchange and is therefore subject to both the 2006 CBN Code (being a bank) and the 2011 SEC Code (being a public company).
Rotation of audit partners
Only the 2011 SEC Code has provision regarding this matter. Accordingly, it provides that in order to safeguard the integrity of the external audit process and guarantee the independence of the external auditors, companies should rotate audit partners. It further requires companies to demand that external audit firms rotate the audit partners assigned to undertake the external audit of the companies from time to time to guarantee independence. In fact, beyond the audit partner, even the audit personnel is required to be “regularly changed without compromising continuity of the external audit process”. The major flaw with this provision is the absence of any provision on the periodicity of the rotation of the external audit partner. A period of three years seems adequate.
Evaluation of auditors’ performance
It is strange that nearly all the codes of corporate governance are silent on the performance appraisal of external auditors. Only the 2009 NAICOM Code provides for this by stipulating that the performance of the external auditor “shall be reviewed periodically”. Unfortunately, no indication is given on the frequency of this review.
Other supervisory powers of regulators
There is a specific provision in the 2006 CBN Code which empowers the Central Bank of Nigeria (CBN) to initiate a quality assurance audit of a bank whenever it “suspects a cover-up by auditors”. Where the external audit firm is established to be culpable, the Central Bank of Nigeria is empowered to blacklist the erring firm from being the external auditor of banks and other financial institutions for a length of time to be determined by the CBN.
Involvement of Audit Committee
Each of the three relevant codes of corporate governance in force in Nigeria has additional provisions regarding the additional involvement of Audit Committees in relation to the external auditors of companies. The 2009 NAICOM Code provides that the Audit Committee shall “review the terms of engagement and recommend the appointment or re-appointment and compensation of external auditors to the board and the shareholders.” The provision of the 2006 CBN Code in this regard, even though it did not cover the issues provided for by the 2009 NAICOM Code, is somewhat more extensive. It stipulates that the Audit Committee shall be responsible for overseeing the independence and objectivity of the external auditors. Also, it stipulates that the Audit Committee should have access to the external auditors, without the presence of any member of management, to seek for further explanations and/or additional information. The 2011 SEC Code stipulates that the Audit Committee should meet separately and periodically with the external auditors. Also, it provides that Audit Committee should discuss the annual audited financial statements and half-yearly unaudited financial statements with management and external auditors. Finally, the Audit Committee is required to review, with the external auditor, any audit scope limitations or problems encountered and management’s responses to same.
There are some gaps in the provisions of the codes of corporate governance in force in Nigeria as far as external auditors are concerned. These lacunae are evident when the provisions of the codes of corporate governance are benchmarked against international best practices on external auditors [see here]. In the first place, there is no provision regarding the determination of the remuneration of the external auditors. If this practice is juxtaposed against the usual practice of listed companies securing the permission of the shareholders are companies’ annual general meetings to fix the remuneration of auditors, it leads to the irresistible conclusion that the external auditors fee is dependent on the relationship the auditors have with the Finance Directors and the Managing Directors/Chief Executive Officers of the companies concerned. The crucial questions are: who determines the remuneration of the external auditors? And at what point in time is the determination made?
Secondly, there should be a formal process for the annual review of the performance of the external auditor. The outcome of this performance review should be the basis for deciding to retain the external auditor or otherwise.
Thirdly, the codes are silent on the prohibition of any financial stake in the audit client. It is important that external auditors, as a firm, and their partners and key personnel declare their stake in the audit client and all companies which have material business relationships with the audit client, such as the audit client’s customers, suppliers, distributors, agencies, etc.
If these gaps are taken care of in the codes of corporate governance in force in Nigeria, then the codes would be sufficiently compliant with international best practices on external auditors.
Evidently, the codes of corporate governance in force in Nigeria do not adequately provide for external auditors. Some of the weaknesses in the provisions of the extant codes of corporate governance have been highlighted in this article for attention and further action by the concerned parties.
Next week, we shall appraise the adequacy or otherwise of the provisions of the codes of corporate governance in force in Nigeria as far as internal auditors are concerned. Meanwhile, should you have any comments on the issues raised concerning external auditors above, kindly share them 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.