Again, CBN Regulates Banks Through Rotatory Auditors
By Emma Ujah
 13th NOV 2006

Following the consolidation of the banking sector of the economy, mandated by the nation’s apex bank - Central Bank of Nigeria, CBN, more regulators, aimed at sanitising the sector, are being articulated by the CBN. Now, the 25 banks of the 89 banks that survived the consolidation acid test are to comply with a new directive that mandates external auditors to be rotated in order to give the true reports about banks’ financial positions.  Experts speak on the new challenge. Excerpts:

BANKS must rotate external auditors to comply with international standards—Shamsuddeen Usman (CBN Deputy Gov. Operations)   

With the greater use of IT and the development of new and more complicated products, with this background, there is a greater need for the roles of external auditors. To confirm and validate that all the operations being done are in accordance with international financial standards.
Another focus will be on producing financial industry auditor’s and other reports that will be credible, reliable and are perceived to be so, because it is very important. They may be credible and reliable. If there is a public perception that these are not so, then, there is still a problem both for the auditors and those of us on this side of the industry that have to work on the auditors’ report and arrive at some conclusions from them.

Another important thing is the recent experiences with fraudulent presentation of figures by corporations, internationally, especially the celebrated cases such as Enron, which, in the United States, has led to the issuance of the statement of auditing standards 99 on consideration of fraud in financial audit. Which has charged the auditor to proceed on the assumption that material mistakes made due to fraud could be present in any institution that is examined. And which, obviously, confers on the auditors greater responsibilities and liabilities at the same time. I think this obviously will change the work of auditing. 
The auditor cannot assume that the management has integrity and, therefore, it has to start work on the assumption that there could be material misstatement, deliberately or otherwise, and, therefore, the whole focus and attitude to audit must change and has to change. 

Poor corporate governance responsible for most bank failures —Nigeria Deposit Insurance Corporation, NDIC MD, Ganiyu Ogunleye Ensuring sound corporate governance of financial institutions remains a major issue of concern. In this regard, the CBN has taken commendable initiatives which included the issuance of a new Corporate Governance code, introduction of mandatory Refresher Courses for Bank Directors, certification of prudential returns by CEOs, affirmation of non-payment of brokerage for deposit mobilization and adoption of a zero tolerance policy for financial misreporting.
Another issue of concern is the integration process in some of the consolidating banks. While a lot of efforts had been made in the integration of IT systems, not much has been achieved in human capital integration. As a result, employees from the constituent banks either have different remuneration packages or employees from the weaker members were placed on probation while some employees saw their placements as demotion.

With the emergence of large banks of comparable sizes, competition has been keener than hitherto. Therefore, curtailing unhealthy competition has become a major issue. In this regard, severe sanctions have been prescribed for banks which engage in the unwholesome-some practices of de-marketing their competitors.

Recent developments in the banking system underscore the need for effective risk management in banks. Without any doubt, the size, speed and complexity of financial transactions are bound to increase. For a bank to efficiently and effectively operate in the new environment, it must deploy an effective risk-management system with active board and senior management oversight, adequate risk management policies, procedures and exposure limits Mandatory rotation of external auditors not solution— ICAN President, Mrs Catherine Okpareke.

Mandatory rotation of external auditors introduced by the Central Bank of Nigeria (CBN) in its efforts to promote compliance to code of best practices by all players in the financial sector is a matter of interest to the U.S. As you know, the debate on the propriety of mandatory rotation of external auditors by companies assumed greater prominence following the Enron saga and the enactment of the Sarbanes-Oxley Act 2003 by the USA Congress.

Incidentally, the Sarbanes-Oxley Act only provides that” both the lead and reviewing audit partners must be rotated, at least, every five years". The Act did not provide for statutory rotation of audit firms, but requires a change in personnel within the firm to ensure quality control and enhance independence and objectivity of external auditors.

Any advantages which rotation of auditors could bring would be more than outweighed by the loss of the trust and experience which are built up when the relationships are sound. Based on this premise, Lord Cadbury recommended, very persuasively, that the accountancy profession should work out appropriate guidelines that will facilitate periodic rotation of audit partners and personnel by audit firms.

Accordingly, we find it wise to recommend that the status quo should remain. As it is common knowledge, shareholders are required by law to choose external auditors for their companies. The retention of such auditors ought to and should be based on performance rather than the need to just satisfy a legal requirement. If an audit firm consistently delivers value to its client through effective audit, such a client should be in a position to decide whether to retain the audit firm or not.

In our view, mandatory rotation cannot be the reward for the auditor’s good work or performance.  Indeed, mandatory rotation of the audit firms is not the solution to the observed ineffectiveness in corporate governance practices in Nigeria.

Instead, we recommend the strengthening of the various corporate governance mechanisms, for example, audit committees, compliance to standards, annual general meeting and internal control in an effort to achieve the desired goal as well as our Institute’s Peer Review mechanism. If this initiative is explored appropriately, the desired goal would be achieved.

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