The Financial Reporting Council of Nigeria (FRC) Act No. 6, 2011, section 11 (d) provides that as part of objects of the Council, that the Council is to ensure accuracy and reliability of financial reports and corporate disclosures, pursuant to the various laws and regulations currently in existence. Relying on this cosmic mandate, the FRC has set out to improve on the country’s investment climate and foreign direct investment flows and enhancement of competitiveness and international perception.
This it said it would achieve by putting on the professional accounting monitoring lens to enable it properly examine financial statements of public entities and government institutions to help restore investors confidence in the economy. The country’s reputation within the global investment community was poor when firms were guided by the Statement of Accounting Standards (SAS) under the Nigerian Accounting Standards Board, which encouraged barefaced abuse of financial accounting systems leading loss of investors and shareholders’ funds after firms went under-ground.
The International Financial Reporting Standards (IFRS) which Nigeria adopted in 2010 with commencement date for companies quoted on the floor of the Nigerian Stock Exchange (NSE) being 2012.These standards replaced the SAS issued by the FRC and the first IFRS full financial statements however commenced from the period ending December 31, 2012 with 2011 as comparative year.
The agency is adopting this strict measure after it stumbled into financial statements of some public entities which revealed non-compliance with the IFRS, which suggested that the process followed a cyclical pattern of the past. Following the observation, FRC said companies with such weak financial records and without sustainability plan or sound administrative and managerial capability will not be allowed to list its shares on the exchange.
This rigid posture will further reinforce the Revised Listing Rules issued by the NSE and which came into effect on April, 1, 2012 forbidding companies that posted a loss in the last three years of their operations from seeking a listing.
Mr. Tony Chukwu, a chartered accountant applauded the FRC decision saying that previous accounting regime allowed impunity and loss of money by investors. Chukwu said he believed that the IFRS is capable of revealing fraudulent accounting mechanism adopted by firms. “As an accountant, it is very easy to doctor accounting system of my firm to make it look robust and create the impression that we are healthy, and compromise by NSE and Security and Exchange Commission (SEC) created the ugly situation in the NSE,” said.
He explained further “Let me tell you when organisations want to close their book for the financial year, so many of them will borrow and present it to the regulatory agencies but come the next day you will not find the cash in their kitty and all these activities are well known but because the standard used then was incapable of bringing out these inconsistencies investors became victims”.
End of Accounting Impunity
But the Executive Secretary/Chief Executive Officer of the Financial Reporting Council (FRC) of Nigeria, Mr. Obazee Jim Osayande while presenting the agency’s score card in Lagos recently said that the era of impunity has come to an end. Osayande said the Agency’s aptitude in dealing with the situation exposed a particular public firm which his agency has barred from approaching the market for funds and is currently placed under watch.
He said what the Council is doing is extremely apposite to the present situation that demands accurate and unambiguous financial reporting process to establish the factual financial status of organisations. “You cannot go to the market to raise money when you don’t have sustainability plan or when your account is not in tandem with IFRS to establish your correct status because we have to protect investors, clean up the system to make Nigeria investment destination for investors”, Osayande insisted.
He said in the past cynics have worked without sustainable initiatives bringing their organisations to a delirious state only to go to the market to raise funds knowing that it would not be appropriately utilized. FRC also believes that one of the ways to coordinate the process and eliminate compromise is to register professionals and make them work within the purview of the law.
The Council in exercising its powers in accordance with section 41 of the Act has opened its register of professionals and via a circular by the secretary to the federal government public interest entities have been directed to require FRC certificate of registration as one of the requirements for employment of a professional, submission of contract bid, rendering of services by contractors, consultants and other professionals doing business or seeking to do business with public interest entities.
Osayande observed that “Since we commenced the registration of professionals, we have noted that some professional bodies operate without enabling laws while some have their request for legal backing at different stages at the National Assembly. He said all these efforts are not limited to public entities but state governments should review their financial management law to ensure a seamless transition to the International Public Sector Accounting Standards (IPSAS) as well as International Valuation Standards and Actuarial Standards.
Not for Profit Organisations
The Council is also mounting pressure on the Not-for-Profit Organisations with the aim of scrutinizing their accounts not only to bring them into international reckoning but to see how that sector would bring income to government. Currently, financial statements presented by Not for Profit Organisations in Nigeria are not uniform and comparable as they differ from one type of institution to another and sometimes among institutions of a particular type thus making accountability and comparison difficult.
Osayande however explained that SAS 32 that became effective July 1, 2011 established uniform basis of accounting and reporting of activities of Not to Profit Organisations. The National Roadmap to the adoption of International Financial Reporting Standards (IFRS) categorised Not for Profit organisations in phase 2, therefore expecting them to comply with the provisions of the IFRS effective January 1, 2013.
The agency has observed that a number of entities operating on commercial lines, within charity are claiming exemption on their income on the ground that the totality of the outfits are charitable organisations, which is based on the argument that they are engaged in the advancement of an object of general public utility and classified as ‘company limited by guarantee’ as provided by Section 26 of the Companies and Allied Matters Act LFN 2004.
But the FRC argues that such claim when made in respect of an activity carried out on commercial lines is contrary to the intention of the provision and put the assets of the charitable purpose at significant risk.
“Proper financial reporting shall enhance the benefit to entities which are engaged in activities such as relief of the poor (which include relief to destitute, orphans, the handicapped, disadvantaged women/children, small and marginal farmers, indigent artisans and senior citizens in need of aid), education of members, medical relief and any other genuine charitable purpose, and to deny it to purely commercial and business entities which wear the mask of a charity” Osayande stated.
He further argued that an activity would be considered ‘business’ or ‘a trading subsidiary’ if it is undertaken with a profit motive stressing that the SAS 32 requires all accounting information that will assist users to assess the financial liquidity and viability of a reporting organisation to be disclosed and presented in a logical, clear and understandable manner. He said, “SAS 32 contains a set of illustrative financial statements to aid preparers in the application of the standard”.
If this is strictly followed, it will enhance transparency, accountability and credibility of information presented by Not for Profit entities and will ultimately lead to increased funding by donors who believe in the objectives of such entities and also prepare them for the implementation of IFRS in their reporting year, the Executive Secretary believed.
He said, “we believe that a number of Not to Profit organisations in Nigeria are well prepared for this impending financial reporting regime but, others are hereby notified to fine-tune their financial reporting and corporate governance, going forward, in the interest of accountability, probity and good governance”
Osayande informed that section 15 (8) of the FRC Act empowers the Council to appoint a standing committee to consider and report any matter, financial reporting and corporate governance with which the Council is concerned, and that it is the duty of the committee to advice the Council on the activities of Not to Profit organisations that the Council needs to bring to the attention of the federal government and also on issues bordering on their corporate governance that the Council needs to address in accordance with sections 11 (c) and section 50 and 51 of the FRC Act, 2011.
Code of Corporate Governance
He said further that a steering committee working on the National Code of Corporate Governance will be completing its assignment this August which will replace codes currently guiding corporate bodies in the country.
Osayande viewed the issuance of a National Code of Corporate Governance as a very important deliverable that can be used to enhance national competitiveness and address some socio-economic issues including corruption and lack of independence. It is also an opportunity to raise the bar in the public and private sectors and to ensure that there are stiff penalties and that directors are personally liable for their actions and inactions.
Barrister Segun Ashaye, a legal practitioner and financial expert, responding to this move said the effort by FRC would not in any way restore the investors’ confidence in the market. His position is that the Security & Exchange Commission (SEC) has been saddled with these responsibility decades of years before now, yet as a result of corruption which is eating deep into the roots of almost every organization in Nigeria if not all, the commission is now crippled.
“As provided under section 13 of Investment & Security Act 2007, the Commission functions include, to regulate investment and securities business in Nigeria, register and regulate securities exchanges, capital trading point and to regulate all efforts of securities by public companies and entities. One of the roles of the SEC is to demand for the public companies effective control of financial reporting and disclosure of quarterly earnings, as a matter of fact, the auditors of these companies are made to register with the Commission.
“It also has the right to sanction any company, officer or operator that fails to follow the standard prescribed by the Commission” he said. Ashaye noted that if the commission has been diligent in its responsibilities the capital market would not have been manipulated the way it was some years back adding that investigating the financial statement of the public quoted companies form part of the regulatory functions of the SEC, therefore the above statement made by the Financial Reporting Council of Nigeria will be over lapping on the function of the commission.
Strengthening the capital market
“In view of the above, I would rather suggest that the SEC be purged and strengthened in order to carry out its function perfectly as the apex regulatory body for the Nigerian capital market” adding that laws are meant to be improved upon that is why we have the law makers. He noted that currently the law regulating quoted companies and sanctioning fraudulent firms are robust enough but the problem is implementation of these laws.
For instance he said “Section 81,82,83,84 and 86 of Investment and Security Act 2007 are related to, false trading and market rigging transaction, securities market manipulation, false or misleading statement, fraudulently inducing person to deal in securities and dissemination of illegal information as well as prohibition of fraudulent means. The penalties attached to any of the above listed offences can be seen in section 87 and 96 of the same Act.
“If offenders are sanctioned accordingly, this will serve as deterrent to others and would bring significant improvement/confident in the stock market” he stressed. Ashaye further stated that the question as to how could investors and shareholders retrieve their investment depends on the meaning of failed companies as he stressed that “Where a company cannot stand in its own then it may be taken over by another company. In this case the shareholders and investors would be absorbed by the company who is taking over the failed company”.
“In case a company is declared bankrupt, this may result into winding up of the company and where this is done. The creditors of the failed company will be considered first, followed by other investors/shareholders depending on the kind of shares held by them” he said.
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