2.5 Corporate governance codes
2.5.6 Comparative analysis of codes of corporate governance in Nigeria
2.5.6.2 Issues on audit
a) Codes’ provisions on the audit committee
An audit committee is a significant mechanism meant to support the board in promoting a reliable and upright financial reporting process (BRC, 1999; SOX, 2002; Treadway Commission, 1987) and firms form audit committee within the corporate board to oversee the firm’s accounting policies and practices, and to ensure that the financial reporting processes are upright (Whittington & Pany, 2015). All the codes recommend the establishment of an audit committee in line with the recommendation in CAMA, except for the CBN code and NCCG which recommends a dual audit committee. They both recommend the establishment of a board audit committee (BAC) separate from that which is required by CAMA (which they referred to as a statutory audit committee and not a board committee). This recommendation of a dual audit committee has its consequences, which include the cost of running the two committees and the clash in responsibilities. In the NCCG, the board audit committee also performs all the responsibilities of the statutory audit committee (Sections 11.4.6 & 11.4.7). The CBN code is even more critical about this as it mentioned “statutory audit committee” in connection to its establishment only in Section 2.5.1 (i). Sections 5.2.1 to 5.2.6 are all recommendations concerning the board audit committee, its responsibilities, and attributes.
The PenCom code is silent on the responsibilities and attributes of the audit committee.
It recommends the establishment of the audit committee in line with CAMA but allows each board to issue a term of reference that will guide and spell out the limit of the
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committee’s authority. The PFA/PFC boards have the option of being guided by SEC code recommendations on audit committees as an alternative.
Given that the audit committee is responsible for oversight on financial reporting, internal control and good governance, members of the audit committee should have a certain number of competencies (Chtourou, Bedard, & Courteau, 2001). There should be at least an individual on the audit committee who is considered an expert in finance or accounting. All the committee members need not be financial experts, but be knowledgeable on financial matters and they should possess a basic understanding of the principles of accounting, auditing and financial terms and definitions (Chtourou et al., 2001). Most of the codes align with this recommendation except for the NCC code which is stricter on this. It recommends that all the committee members must belong to a recognised body of professional accountants in Nigeria. The NAICOM and SEC codes require that at least two must be accounting experts. In line with the SEC code, one of the accounting experts must be from the shareholders’ nominees and the other from the board. The CBN code and the NCCG both recommend at least one accounting expert on the committee.
In Nigeria, boards of directors are now placing increasing reliance on audit committees to oversee reporting and internal controls (Akinsulire, 2011). In line with SOX (2002), all committee members must be independent in order to preserve the integrity of the auditing process. The audit process is an interactive session between the committee, auditors, and management. Ensuring that all the committee members are independent is meant to protect investors and afford the shareholders trust and assurance in the company’s published financial reports. The NAICOM and CBN codes are particular about the chairman of the committee being an INED, while NCCG only recommends for the statutory audit committee to have a chairman elected amongst them. In terms of composition, NAICOM code allows one executive director and the rest should be NED.
This is contrary to international best practices that emphasise an entire independent membership of the audit committee. The SEC code recommends that majority shall be NEDs which creates a loophole for infiltrating the audit committee with executive directors. It is a shadow of the NAICOM code recommendation. The CBN code recommends all members to be NEDs but headed by an INED; this recommendation conforms in a way with international best practice. The flaw in the CBN code recommendation is that it is to be observed by the BAC, this is one of the spill-over
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effects of the dual audit committee, and the NCCG recommendation for private companies to have a mix of NEDs and INED, but that the majority should be INED.
While this looks attractive on the surface, it is similar to the CBN code’s recommendation because NCCG also recognises and recommends dual audit committee. Specifically, this NCCG recommendation is for private companies, and this makes the intention of the recommendation unclear. The NCC code is not specific about the composition of the audit committee members but recommends that whatever is the composition, it should be in the corporate governance report. The NCC code allows the board of directors a free hand in determining what it deems right in terms of the audit committee composition. To recap, international best practice on this is that all members of the audit committee be independent (SOX, 2002).
The CAMA (2004) as amended recommends an equal number of directors and shareholders subject to a maximum of six members. SOX (2002) and the UK Code (2010) both recommend a minimum of three members. All the codes that establish its audit committee in line with CAMA (including CBN code and NCCG that recommends dual audit committees) adopt its recommendation on size and the equal mix of directors and shareholders. The CBN code recommends at least three members for BAC while NCCG remains silent about the BAC size.
An audit committee should facilitate communication between the board, internal and external auditors alike. The frequency of meetings indicates diligence in resolving any immediate issues that might arise in audit engagements including the accounting internal systems and controls and offers a better oversight environment, which may assist in detecting financial statements errors (Habbash, 2010). The CBN code and NCCG recommend quarterly meetings for the audit committee, but the NCCG extends its recommendation to cover at least a yearly meeting with the head of the internal audit function and the external auditors without the management. The NAICOM code recommends that the committee meet three times, and at least once with the external auditors. The NCC code’s recommendation is like that of NCCG in terms of meeting yearly with the external auditors and the internal audit head but differs in recommending two committee meetings in a year. The SEC code is not specific on the number of the meetings when it recommends that the committee shall meet with the management, external auditors, and internal auditors separately, and periodically. It gives the committee the discretion to meet as it deems fit.
55 b) Codes’ provisions on external audit
Baxter (2007) observed that external auditor also plays a vital task in ensuring the effectiveness of the audit committee attributes and quality financial reporting. Auditors should be motivated to engage with their clients’ board of directors to ensure better expertise and independence of audit committee members. External auditors are crucial to the governance quality and stakeholders’ trust of any firm. However, some sectoral codes do not mention anything on the external audit. The PenCom (2008) and NCC (2016) codes, for example, have no recommendations or provisions concerning an external audit. The NAICOM, SEC, CBN codes, and the NCCG have provisions and recommendations relating to the external audit.
These codes also vary in their recommendations, especially on audit firm tenure. The NAICOM code recommends a maximum of five years and is silent about the condition for re-engaging the same audit firm, although it recommends the periodic performance appraisal of the external auditor. The SEC and CBN codes recommend ten years maximum tenure but differ on the condition for re-engaging the same audit firm. The SEC code recommends a seven years cooling-off period while the CBN code recommends a ten year cooling off period. The NCCG has the same recommendation with the SEC code on tenure and re-engagement, but it extends it to include the rotation of the audit engagement partner every five years. To appoint a retired audit partner to the client’s board, NCCG recommends an appropriate cooling-off period of at least three years. The CBN code forbids the engagement of an audit firm if one of the bank’s top officials was an employee of the firm and worked on the bank’s audit during the past two years. The NAICOM code is stricter in terms of tenure which is five years, while the SEC code is stricter in terms of audit partner rotation where it recommends three years against five years of NCCG. All these are measures to safeguard the external auditors’ independence and avoid conflict of interest in their duties. The provisions are to limit familiarity which could prevent auditors from performing their responsibilities diligently and independently. The NCCG sees an external auditor as one who gives an independent opinion on the veracity or otherwise of the financial statements while assuring stakeholders of its reliability.
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