Awoyemi weighs in on the FRC rule on Chartered Accountants in Audit Committees

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Wednesday, June 08, 2016 06.15AM / @WebTvNG


As the debate over the recent draft rule by the Financial Reporting Council of Nigeria(FRCN) spelling out the qualification individuals aspiring to the position of audit committee chairmen of quoted companies must possess takes on a heightened pace, professionals and market analysts have opined that the rule, probably well intentioned does not match the guidance as intended from the FRC UK it is copying the provisions from.


The FRCN had premised its argument on the affirmation that professional accountants are more reliable, saying that their education and training allow for their judgment to be relied upon. 

The draft rule was contained in a circular titled “Transitional Concessions Agreed between the NSE & the FRC Regarding Rules 1 and 2 of the FRC’s Rules” published by the NSE on March 29, 2016, with reference No: NSE/LARD/LRD/CIR5/16/03/29, which stated that: “The Chairman of audit committee, to annual report, financial statements, accounts, financial report, returns and other documents of a financial nature, shall be a professional member of an accounting body established by Act of the National Assembly in Nigeria.” And in other parts of the circular noted that “……Every subsequent annual report, financial statements, accounts, financial report, returns and other documents of a financial nature of the audit committee shall be attested to by a chairman who is a professional member of an accounting body established by Act of National Assembly in Nigeria in compliance with FRC Rule 2.” 

This appears to be an additional requirement on person type in the corporate governance space defined by relevant sections of the Companies and Allied Matters Act (CAMA), particularly Section 359 on the qualification and experience of audit committee members, including the chairman which provides that: The chairman of the audit committee should be a non-executive director, to be nominated by the members of the audit committee. Basically, members of the committee should be able to read and understand basic financial statements, and should be capable of making valuable contributions to the committee. 

In the absence of evidence based indicators, analysts are divided over just what significant improvement this will deliver given that the responsibility for financial statements lies with the Board of Directors and indeed the Finance Director and Management Director to whom the auditors relate with. The examples of Cadbury Plc which had a Chartered Accountant as the Chairman of its audit committee and yet fiddled with the financial reports readily comes to mind. 

At the Radio Continental 102.3FM “Business Program” powered by Financial Edge on Monday, June 6, 2016 at 9.30am; notable Nigerian financial analyst Mr. Olufemi Awoyemi who was a guest speaker, however towed a different line altogether even as he described the rule as “a bit curious” and he remains “unconvinced about the evidence and justification”.


Mr. Awoyemi, a fellow of the Institute of Chartered Accountants and MD/CEO of Proshare Nigeria asserted that the primary purpose of an audit committee is to provide oversight of the financial reporting process, the audit process, the system of internal controls and compliance with laws and regulations. Obviously these are issues which will require knowledge in delivering the oversight function intended, but that remains a board decision.


He added that while it is desirable to have professionals on the board and indeed in technical-biased committees, the person criteria for serving in such a committee has more to do with skills such as knowledge of business, of risk, process and laws (which the company secretariat should provide guidance on) and inquisitiveness; the willingness to ask in simple terms what is going on, why things are done the way it is, what will happen if, and to satisfy themselves that they have received satisfactory response to their concerns.


Directors of a board must meet the “fit and proper” criteria, from which the board must now identify suitably skilled and qualified individuals to nominate for appointment to the audit committee; whose responsibility it is to to create an environment that accommodates an open discussion in a culture of integrity, respect and transparency between management and auditors. It has nothing to do with a technical qualification and this discretionary criteria distinguishes one board from the other.


Speaking further on the issue yesterday to our news desk, Mr. Awoyemi said that “for guidance, I commend to you Provision C.3.1 of the UK Corporate Governance Code which provides that listed company boards in the UK should establish an audit committee of at least three, or in the case of smaller companies two, independent non-executive directors. This governance code went on to state that “The board should satisfy itself that at least one member of the audit committee has recent and relevant financial experience”…note the key word ‘experience’ not qualification.


Indeed, sections 1.8 and 1.9 of the advisory issued by the Financial Reporting Council of the United Kingdom “Guidance on Audit Committees (September 2012)” is instructive here. It states that .




Many of the core functions of audit committees set out in this guidance are expressed in terms of ‘oversight’, ‘assessment’ and ‘review’ of a particular function. It is not the duty of audit committees to carry out functions that properly belong to others, such as the company’s management in the preparation of the financial statements or the auditors in the planning or conducting of audits. To do so could undermine the responsibility of management and auditors. Audit committees should, for example, satisfy themselves that there is a proper system and allocation of responsibilities for the day-to-day monitoring of financial controls but they should not seek to do the monitoring themselves.




However, the high-level oversight function may lead to detailed work. The audit committee must intervene if there are signs that something may be seriously amiss. For example, if the audit committee is uneasy about the explanations of management and auditors about a particular financial reporting policy decision, there may be no alternative but to grapple with the detail and perhaps to seek independent advice.


According to Mr. Awoyemi, the natural intendment of an audit committee in providing an oversight function was not to turn it into what it was not meant to do……it is prudent of them therefore, where possible or/and needed to use their powers to seek for an “independent advice”themselves. They are not expected to know it all…..


The Proshare CEO insisted that “I am all for improving governance processes, introduction of a uniform code that distinguishes between small business and big business and especially for raising standards. The audit committee is a good place to see this done especially given the significance of the financial statements. Indeed the Institute of Directors (IoD) has been doing a lot of work in helping Directors gain the skills and knowledge required to discharge the fiduciary duty as a director, board member or board committee member through formal learning programs, experience sharing sessions and benchmarking reports. We can take a proper cue from how the UK Corporate Governance Code forms the bedrock of this shift towards quality boards, especially with regards to audit committee membership and the soft and hard skills needed in the role”


He drew attention to the “Guidance on Audit Committees” issued by the Financial Reporting Council (FRC) United Kingdom which he finds clear, unambiguous and designed to assist company boards in making suitable arrangements for their audit committees, and to assist directors serving on audit committees in carrying out their role(s).


Here, he explained, “.. the FRC ‘rule’ is a guidance on best practice that aligns with and works well with a corporate governance code. While boards are not required to follow the FRC UK guidance, they need it as it was intended to assist them implement the relevant provisions of the UK Corporate Governance Code. That is the direction we should be headed….. this issue must not be about the FRCN but about the Nigerian Corporate Governance Code. 


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