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ACCOUNTING REGULATION AND ECONOMIC TRANSFORMATION. by OBAZEE JIM OSAYANDE. Introduction.
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ACCOUNTING REGULATION AND ECONOMIC TRANSFORMATION byOBAZEE JIM OSAYANDE
Introduction • “No one disputes that leaders face big governance challenges in Africa. Yet in other parts of the world they are usually regarded as obstacles to be overcome, not as permanent excuses for failure.” Greg Mills (Why Africa is poor and what can Africans do about it) .
During periods of economic transformation: • Economic Institutions are strengthened and new ones created. • Economic Institutions are institutions set up to persuade the legal foundations of an economy. • They dictate what individuals must or must not do (duty), what they may do without interference from other individuals (privilege), what they can do with the aid of the collective power (right) and what they cannot expect the collective power to do in their behalf (restrictions). • These institutions are imposed but are expected to produce induced institutions as outcomes.
These institutions are under the control of those entities charged with the task of common good (Executive, Legislature and Judiciary). • The entities, themselves, issue set of rules with the object of paramentarising individual and behavior in particular realms of economic activity. • The FRC Act, 2011 is a transformation instrument while the Financial Reporting Council (FRC) is an economic institution. • Expected outcomes are change at workand correlated evolved behavioral patterns.
The Financial Reporting Council of Nigeria (FRC) is a unified independent regulatory body for Accounting, Auditing, Actuarial, Valuation and Corporate Governance practices in public and private sectors of the Nigerian economy. • The body is also to address current institutional weaknesses in regulation, compliance and enforcement of Standards and the development of robust arrangements for monitoring and enforcing compliance with financial reporting standards in Nigeria. • The implementation of the FRC Act is expected to lead to increased management credibility, more long-term investments, lower cost of capital, improved access to new capital and higher share values. • For investors and lenders, better disclosure provides more relevant information for making sound investment decisions and risk assessment respectively. This is especially so because merchants do not have a country.
NATIONAL POLICIES • Accountability. • Registration of Professionals/Entities, Inspection of Accounting firms and Assurance providers and attestation of Financial Statements and Corporate Governance reports. (The Council is currently registering professionals and issuing FRC Registration certificates to individual professionals. Organisations (including Not for Profit) are also being registered because of Sections 7, 11, 33 and 44). • Inspection of Organisations, Accounting firms and Assurance providers. • Unified Code of Corporate governance.
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The Financial Reporting Council is established to operate through Directorates; each for: • Private Sector Accounting • Public Sector Accounting • Auditing Practice Standards • Actuarial Standards • Valuation Standards • Inspection/monitoring ; and • Corporate Governance.
ISSUANCE OF REGULATIONS AND DIRECTIVES The following Sections of the FRC Act make reference to issuance of regulations and/or directives: • S. 7 (2) The Council shall have powers to do all things necessary for or in connection with the performance of its functions: (f) Require management assessment of internal controls, including Information Systems controls with independent attestation; (g) Require code of ethics for financial officers and certification of financial statements by CEOs and CFOs; (h) Require entities to provide real time disclosures on material changes in financial conditions or operations; and (i) Pronounce forfeiture, by CEOs and CFOs, of certain bonuses received from the company and profits realized from the sale of company shares owned by them, where the company is required to prepare an accounting statement.
S. 8 (1) The Council shall: (e) Advice the Federal Government on matters relating to accounting and financial reporting standards. • Monitor and promote education, research and training in the fields of accounting, auditing, financial reporting and corporate governance; (q) Develop or adopt and keep up-to-date auditing standards issued by relevant professional bodies and ensure consistency between the standards issued and the auditing standards and pronouncements of the International Auditing and Assurance Standards Board. S. 8 (n): Receive qualified reports together with detailed explanations for such qualifications within 30 days from the date of such qualification. Such reports shall not be announced to the public until all accounting issues relating to the reports are resolved by the Council. (2) The Council may issue rules and guidelines for the purpose of implementing auditing and accounting standards. (repeated verbatim in S. 53.)
Section 11 The objects of the Council shall be to: (a) protect investors and other stakeholders interest ; (b) give guidance on issues relating to financial reporting and corporate governance to bodies listed in sections 2 (2) (b), (c) and (d) of this Act; (c) ensure good corporate governance practices in the public and private sectors of the Nigerian economy ; (d) ensure accuracy and reliability of financial reports and corporate disclosures, pursuant to the various laws and regulations currently in existences ; and (e) harmonize activities of relevant professional and regulatory bodies as relating to Corporate Governance and Financial Reporting.
S. 24 The Directorate of Accounting Standards – Private Sector shall – (a) Develop accounting and financial reporting standards to be observed in the preparation of financial statements in the private sector and small and medium scale enterprises. Promote general acceptance and adoption, compliance, etc with the accounting and financial reporting standards. • S. 25 The Directorate of Accounting Standards – Public Sector shall – (a) Develop accounting and financial reporting standards for the public sector. (c), (d) - Promote general acceptance and adoption, compliance, etc with the accounting and financial reporting standards.
S. 26 Directorate of Auditing Practices Standards shall, for the Council – (a) Develop or liaise with relevant professional bodies on auditing and ethical standards set by it. (b) Promote compliance, issue guidance, establish standards and related guidance etc with the auditing standards. • S. 27 The Directorate of Actuarial Standards shall – • Develop an appropriate conceptual framework to guide the setting of relevant actuarial standards, including the explicit objectives and characteristics of such standards • Create a process; promote general acceptance and adoption, compliance, for the actuarial standards.
S. 28 The Directorate of Inspection and Monitoring shall – Monitor compliance with auditing, accounting, actuarial and valuation standards and guidelines reviewed and adopted by the Council . • S. 29 The Directorate of Valuation Standards shall – (a) Develop an appropriate conceptual framework to guide the setting of relevant valuation standards, including the explicit objectives and characteristics of such standards; (b) Create a process, promote general acceptance and adoption, compliance, for the valuation standards.
S. 30 (1) The Council shall make and issue such rules or ethical codes of practice to establish its procedures and policies for the purpose of monitoring registered auditors and other professionals rendering services to PIEs (Data Protection is under way). • S. 44 (2) A professional accountant shall not, in his report, express an opinion unless he has complied with the auditing standards that may be issued by the Council or relevant professional bodies and adopted by the Council from time to time.
Auditors: Internal and External • S. 46. A professional accountant in the exercise of his audit function shall carry out his function in full independently and shall not – • (a) Act in any manner contrary to the Code of Conduct and Ethics that may be made by the Council or under any enactment in force. (b) engage in any activity which is likely to impair his independence as a professional. • S. 61 (3) The Council shall require evidence of a second partner review and audit approach that registered professional accountants adopted on quality control.
Registration of Professionals • S. 41. (1) The Council shall maintain a register of professionals. (2) A person shall not hold any appointment or offer any services for remuneration as a professional for public interest entities, unless he is registered under this Act. (3) A person who wishes to be registered shall make a written application to the Council in a prescribed form. (4) An application made under subsection (2) of this Section shall be accompanied by such fees and such information as the Council may from time to time determine. A person who contravenes subsection(2) of this section commits an offence and is liable on conviction, to a fine not exceeding N500,000.00 or to imprisonment for a term not exceeding 6 months or both. S. 43. No registered professional shall employ a person who has been suspended from practice, unless the Council has consented to such employment.
Section 44(3) Where the directors disclose the extent of compliance with Code of Corporate Governance in the annual report, require an auditor to report separately whether the disclosure is consistent with the requirements of the Code.
S. 57 Where any Public Interest Entity is required to prepare any financial statement or report under any enactment, it shall ensure that the financial statement or report is in compliance with the accounting and financial reporting standards developed by the Council . • The Council, or any officer authorized by it, in writing may seek further information or clarification from • (d) any other person or institution with relevant information and such director, employee, professional accountant, institution and other person shall comply.
Corporate governance issues In 2000, the then Chairman of the US Securities and Exchange Commission, Arthur Levitt, said “if a country does not have a reputation for strong corporate governance practices, capital will flow elsewhere. If investors are not confident with the level of disclosure, capital will flow elsewhere. If a country opts for lax accounting and reporting standards, capital will flow elsewhere. All enterprises in that country – regardless of how steadfast a particular company’s practices may be – suffer the consequences.” (King report 2002, par. 16). In the light of this let us appreciate the requirements of Section 50 of the FRC Act, 2011. (Legality Vs. Comply/Explain OR if not, why not). The Honourable Minister of Industry, Trade and Investment recently inaugurated the Steering Committee for the development of the National Code of Corporate Governance.
Corporate governance issues. The objectives of the Directorate of Corporate Governance shall be to: (a) develop principles and practices of corporate governance ; (b) promote the highest standards of corporate governance ; (c) promote public awareness about corporate governance principles and practices ; (d) on behalf of Council, act as the national coordinating body responsible for all matters pertaining to corporate governance in Nigeria.
Collaboration and goal congruence • Section 32 The Council may enter into a Memorandum of Understanding with such professional or regulatory body as it considers appropriate in order to exchange or share information for the purpose of discharging its functions under this Act (FRC can get information on entities and also give out information). • Section 58 Where a public interest entity files any financial statements and report with any government department or authority, the entity shall also file a copy of the financial statements and reports with the Council within 30 days, in such manner as may be set out in the rules of the Council.
“Problematic laws” S. 59 –Codification and Conflict The accounts, financial reports or annual returns and other documents required under the following Acts, or amendments thereafter, shall be adopted for that purpose by the Council • Banks and other Financial Institutions (Amendment) Act CAP. B3 LFN, 2004 • Companies and Allied Matters Act Cap. C20 LFN, 2004 • Investments and Securities Act Cap. I24 LFN, 2004 • Insurance Act Cap. 117 LFN, 2004 • Pension Reform Act No. 2, 2004 • Federal Mortgage Bank of Nigeria Act, Cap. F16 LFN, 2004 • Where there is any conflict between the financial reports or annual returns and other documents required or prepared in fulfillment of the relevant Sections of the Acts listed above and other Acts which deal with financial reporting, the standards and guidelines adopted for that purpose by the Council shall to the extent of the inconsistency, prevail.
Inspection of Accounting firms and Assurance providers. • S 60: The Council, or any officer authorised by it, in writing may review the practice of an auditor and may for that purpose— (a) inspect any relevant book, document and record in the possession, or under the control of the auditor, his partner or employee and make copies of, or take any abstract of, or extract from any such book, document and record in relation to a company under investigation subject to the consent of the public interest entity ; and (b) seek information or clarification from any partner or employee of the professional. • S. 61. (1) Annual quality reviews (inspections) shall be conducted for professional accountants that audit more than 20 public interest entities; all others shall be conducted every three years and the Council may order a special inspection of any professional accountant at any time.
FRC Oversight –Other Professionals • Require all professionals who offer services to public interest entities to register with the FRC and to renew their registration every 2 years [42) • Develop appropriate conceptual framework to guide the setting of relevant standards (for actuarial and valuation), including the explicit objectives and characteristics of such standards. • Create a process for the development and adoption of standards which ensures that the objectives of the conceptual framework can be applied in practice. S27; and S.29. • Develop relevant actuarial and valuation standards, or amend existing ones, in response to evolving commercial practices, economic development and deficiencies identified in current practices.[27;29] • Issue code of corporate governance and guidelines, and develop a mechanism for periodic assessment of the codes and guidelines • Monitor compliance with the reporting requirements specified in the adopted code of corporate governance. • 7Retention of working papers for 6 years..Section 61 (2).
TREND IN ACCOUNTING • Three key objectives for financial statement presentation state that information should be presented in the financial statements in a manner that: • Portrays a cohesive financial picture of an entity’s activities the relationship between items across financial statements should be clear and that items in an entity’s financial statements complement each other as much as possible. • Disaggregates information so that it is useful in predicting an entity’s future cash flows this requires financial information that is disaggregated into reasonably homogeneous groups of items. If items differ economically, users may wish to take that into account differently in predicting future cash flows. • Helps users assess an entity’s liquidity and financial flexibility.
CONCLUSION Alternative enforcement environment and Legislative changes which are imposed and expected to produce induce actions from organisations and professional service providers include the enactment of the FRC Act No. 6, 2011. It is also a step that is capable of providing convergence benefits, enhanced Foreign Direct Investment and feelable transformation for the Nigeria people.
However…. During periods of economic transformation, management of organisations and the professionals who work for them should not give away any opportunity to demonstrate value. • Like Power players, they are expected to: • take charge; and • take initiative.
