NSE: DAMNING FORENSIC REPORT, HOW EXCHANGE BLEW N1.9BN ON A TRIP

Ndi Okereke
In what could be seen as a post-mortem of Madam Okereke-Onyiuke's sack, the storm that swept away the former Director-General of the Nigerian Stock Exchange (NSE), snowballed into a hurricane last week as long shadows of old sins rear their ugly heads in the forensic report prepared by the independent auditors of the capital market's apex regulator.

The independent auditors, Aluko & Oyebode law firm and KPMG accounting firm, were appointed by the Securities and Exchange Commission (SEC) to investigate the allegations which suggested that the affairs of the Exchange may have been managed in a manner detrimental to the interest of the investing public.

Aluko & Oyebode provides specialized legal services to a diversified client base , while KPMG is the Nigerian arm of KPMG International, a full professional services firm, whose forensic practice provides specialised investigative services for the conduct of investigations and inquiries.

Based on this, the auditors narrowed down the allegations requiring further investigation to more than 20 items which include: Memorandum and Article of Association of NSE was altered by resolution of November 11, 2006, the alteration was not approved by the SEC and the copy cited was not certified by Corporate Affairs Commission (CAC);

All the contributions to Investors' Protection Fund were placed in fixed deposit account with FBN with average interest rate of 8 per cent annum;

•Exorbitant charges in the form of 10 per cent management fees; professional audit fees of the Exchange were also too high;

•Total expenses of the NSE are too high as 2006 to 2008 expenses consumed more than 80 per cent of income/undisciplined spending and financial imprudence;

•Present share capital of the exchange is not in tandem with SEC requirement of N500 million as the share capital of the Stock Exchange.

•Wrong classification of Assets in the financial statement. For example, there was no distinction among office equipment, plant and computer/software. These classes of assets were lumped together into one class of assets;

•Despite the fact that the N1.615 billion has been expended on the Coral Properties Project, the project has come to a halt;

•Failure to implement an effective succession plan for the senior management team of the NSE;

•Failure of NSE to present audited accounts for the year ended December 2009 and failure to produce interim and financial statements for the first and second quarters of 2010 for consideration of the Finance and General Purpose Committee;

•That NSE has substantial liability in its pension scheme;

•That there has been sharing of money among council members;

•That false returns have been made to SEC;
•That N400 million was paid to the past president of the Council;

•That members of the council were receiving money from companies for listing;

•That there was an illegal requirement by the Exchange that certain specific companies must be used for printing of listing documents; and

•That wages, training and IT expenses were overstated.

And following the financial records review , they came out with their findings:

a) There were questionable payments of productivity bonuses to council members and members of staff.

b) There were questionable business travel expenses which were in some instances reclassified to other expense lines;

c) There were questionable staff training expenses which were in some instances reclassified to other expense lines;

d) There were questionable market development and public enlightenment expenses which were in some instances reclassified to other expense lines;

e) There were questionable contracts awarded to companies owned by members of staff (or companies in which members of staff owned shares);

f) There were duplication of payments;
g) There were purchase of assets by the NSE which either disappeared from the books of 'the company or were subsequently written off the books under questionable circumstances;

h) The use of NSE funds for the personal use/ maintenance of staff members and their residences.

Under questionable transactions, it was discovered that close to N398 million was reported as the actual expenditure in respect of the Long Service award, which did not appear as a budget item in 2007 and 2009. The documents reviewed indicate that the Long Service award took place in the year 2008.

Under market development, about N593 million was discovered to have actually expended contrary to NSE's report that reclassified N195 million to market development expenses.

Also a boat (yacht) shown in the accounts of the NSE to have been purchased for N37 million for the Exchange in early 2008 was written off the books at the end of the same year by its allocation to the Long Service award account as a gift.

The auditors state:
'Currently, we have not seen any documentation which shows who was presented with the said boat. Our review of the award ceremony documents shows no boat presentation'.

At the beginning of 2008, it was discovered that the Exchange expended N45 million in purchasing 64 Rolex watches for presentation to employees who had served the NSE for 10 years, that later in the same year, Candy Floss Limited was given N95 million for an additional purchase of 91 Rolex watches and subsequently after the ceremony, another 10 Rolex watches at the cost of N46 million were purchased.

'We observed that the award ceremony document shows that only 73 out of the 165 Rolex watches purchased were actually presented to the awardees which means that 92 Rolex watches valued at N99.5 million are unaccounted for. We further observed that the 'schedule containing the list of staff members eligible for long service awards only contains 63 names' suggesting that 10 additional and unauthorized people received presentations,' the report added.

Also, Candy Floss Limited was said to have been given N100 million for the purchase of 14 cars to be presented to employees who had served the NSE for 25- 30 years, at the same time, three cars purchased by the NSE in January and March 2008 for the total sum of N59 million ( one Land cruiser Jeep purchased for N30 million and two Lexus cars purchased for N29 million were written off the books at the end of the same year by their allocation to the Long Service Award account as part of the gifts given during the ceremony.

The report states further:
'However, the award ceremony document shows that only seven people were presented with cars compared to the 14 cars which were to be purchased by Candy Floss Limited and the three additional cars written off, meaning that 10 cars valued at approximately sixty six million, one hundred and forty two thousand, eight hundred and fifty seven Naira are unaccounted for.

'It was again noted that although Candy Floss Limited was given the sum of N50million for the special presentation to employees who had worked with the NSE for 25 – 30 years, another sum of N55 million was again disbursed in respect of the special presentation which was to include a luxurious jeep and a special gift of the former Director-General's choice.

'This suggests that there was a duplication of payment and a double purchase of a luxury car of the former Director-General's choice.

' Also noted is the fact that Articles 52 of the Employee Handbook for Management and Senior Staff as well Article 55 of the Employee Handbook for Junior staff limits the value of gifts/cash that can be given to employees for the long service award.

'We observed that the gifts awarded/presented far exceeded the value stated in these handbooks.These Articles further stated that these awards should be presented to only members of staff, but we observed that former members of staff were also given awards,' said the report.

In 2007, the reported expenditure for the expense classification, Business Travels Overseas (BTO) was N450million as against an annual budget of N60 million, indicating that the sum of N390 million i.e. 650 per cent was expended in excess of the annual budget. 'We were unable to verify the actual expenditure reported for 2007 as we were informed by officers of the IT department that the ledger accounts had not been computerized in 2007.'

In 2008, the reported expenditure for BTO was stated to be over N615.7million after reclassification.

'Our investigations revealed that the total sum expended on BTO in 2008 prior to reclassification was N1.9 billion. The sum of N l.3 billion was reclassified under different expense description/classes. For instance, the sum of N953 million was moved to the expense classification 'Software Upgrade' and immediately expensed as opposed to being capitalized. In the year 2009, the reported expenditure for BTO was stated to be N297 million after reclassification as against the actual budget of N321 million.

'Our investigations revealed that the total sum expended on BTO in that year prior to reclassification was N782, 135,835.40.The sum of N485, 034,833.74 was reclassified under different expense heads.'

One of the questionable transactions we observed in the 2008 ledger was that the lump sum of N65,670,360.00 (Sixty Five million, Six Hundred and Seventy Thousand, Three Hundred and Sixty Naira) was paid out from NSE's First Bank of Nigeria account on two separate occasions but in respect of the same purpose.

'In 2007, the reported expenditure for Maintenance of Staff Quarters (MSQ) was N127 million as against an annual budget of N126 million indicating that the sum expended was one million Naira below the annual budget. 'We were unable to verify the actual expenditure reported under the expense classification in 2007 for the same reason stated in respect of the BTO in 2007.'

In 2008, the reported expenditure for MSQ was reported to be N239,521,403.16. In 2009, the reported expenditure for MSQ was stated as N70,781,874.79 after reclassification as against the actual budget of N113 million suggesting that actual expenses were N39 million below budget.

'Our investigations reveal that the total sum expended on maintenance of staff quarters in that year prior to reclassification was N 135, 067,773.39,the sum of N64,285,898.60 was reclassified under different expense heads. For instance, the sum of N45.25 million was reclassified to website hosting expenses ledger.

Contrary to the title of this ledger, expenses recorded in this ledger relate to private residences of the DG, ADG and senior management; Sometimes, the expenses (especially in respect of diesel supplies) were for houses of persons who were not officers of the NSE. Several supplies were made to houses of former staff of the NSE.'

In 2007, the reported expenditure on staff training was N463million as against a budget of N80 million indicating that the sum of N383million was expended in excess of the annual budget.

In 2008, the reported expenditure for staff training was stated to be N523, 864, 125.30 after reclassification as against the actual budget of N123,864,165.30 indicating that the sum of N400 million was expended in excess of budget.

'In 2009, the reported expenditure for staff training was stated to be N283 million after reclassification as against the actual budget of N212 million indicating that the sum of N71 million was expended above budget.

Surplus Sharing
'In 2006, a total sum of N402 million was paid, out of which both staff and management were paid N241.2 million while Council members were paid N160.8million.

Reacting to this mind boggling revelations, Mazi Okechukwu Unegbu, the Chief Executive of MaxiFunds Limted , said that the greatest of the problems is late intervention by SEC as the apex capital market regulator. He recalled that the same KPMG was commissioned to audit the Cadbury accounts, regretting that after the Cadbury audit, those who were investigated were not called and the problems persisted.

According to him, the report that has flooded pages of newspapers is really not forensic at all. He noted that if is really forensic, it is subject to further study. He said that since it did not emanate from SEC, it has not been accepted as a working document which anybody can tie to anything. 'By the time the report is studied, the main facts and real truth will emerge. But in the final analysis and study, if the result tallies with what the press fed the public, then it is disastrous,' he said.

Although, the report in parts made mention of asking some staffers of the NSE, Unegbu is of the opinion that those investigated ought to have been invited to explain some of the tight issues in the books

'SEC is guilty because the commission has been there all this while and did not remember to do that earlier. Since they have noticed this, they should do much to avoid such occurrence in the future,' he concluded.

On the stupendous amount claimed to have been spent on the purchase of bullet-proof cars at the rate of N67 million each. Daily Sun investigation reveal that there was no bullet-proof car as at 2007/2008 that cost as much as N50 million, let alone N67 million.

The most expensive bullet-proof car as at the time could go for N50 million. A high profile automobile dealer who did not want his name in print disclosed that the most expensive bullet-proof cars in the country presently is the Range Rover Super Charge 2011 model which, he said , costs about N60 million. He argued that the model costs that much because its Super Charge accessory alone without bullet proofing costs about N27 million. With the bullet-proofing, the price of the car doubles.

He added that bullet proofing has grades depending on the thickness of the glass and the accessories the car comes with. 'That is what makes some costlier than others. About two years ago, depending on the accessories the bullet proof cars came with, it was still the North Atlantic Treaty Organisation (NATO) type used in Afghanistan which America manufactured that sold for about N50 million', said the automobile dealer.

Reacting to the forensic report, Dr. Walker Ogogo, the Chief Executive and Registrar of Institute of Capital Market Registrars, described it as unfortunate, especially now that the market is trying to stabilise. Nevertheless, he believed that it is also a good thing that the report is released so that the appropriate authorities would take appropriate action.

'My reaction basically is that all those found responsible for the malpractices should not be left to stroll away without punishment. They should be punished according to the law, and then be made to restore part or whole of what they have taken so that those coming behind will not toe the lines of their predecessors', Ogogo said.

As to how to forestall similar development in the future, he suggested that the audit reports of such organization should be submitted as and when due. And when they are not submitted promptly, the regulatory authorities should wade in instead of waiting for too long until it becomes too late.

'Besides, the auditors that we are talking about should be external. There should be an external auditor who is not involved in consultancy arrangement with NSE. If they have link with NSE, then it is not in line with corporate governance principles. So they should be purely external auditors to guide against criminal complicity'.

He said there was room to suspect some level of complicity with the auditors that were auditing the accounts of NSE. 'The auditors are supposed to be external auditors and they must have seen the kind of money that was shared out among themselves.

'All these atrocities were in the accounts. The forensic auditors did not get these issues from the blues; they got them from the NSE accounts which had been there all along. So just like the case of Enron where the auditors were found to be culpable, I think the auditors involved should be asked some questions why they did not report some of these anomalies', Ogogo stated.

As a sanction, he recommended that the auditors be suspended from the financial markets. Any auditing firm involved in the scandal should be appropriately disciplined. In its rules and regulations, SEC has appropriate sanctions for anomalies such as these. To serve as a deterrent to other firms, the auditors must be appropriately sanctioned. They are not playing the role of gatekeepers appropriately. If gate-keepers are not weak, thieves cannot operate.

So, in corporate governance parlance, gate-keepers are supposed to be up and doing so that nothing will go wrong. And if anything goes wrong they will blow the whistle. But here is a case where the gatekeepers were aiding and abetting the anomalies happening. So it will be difficult for the regulatory authorities to notice on time because the regulators cannot do everything.

He disagreed with those who linked the profligacy at the Exchange with the fact that it is a non-profit organization. He said that even as a non-profit organization, the NSE is still a going concern. According to him, a going concern principle is that you don't blow away all that you make so that the organisation will be in position to render the services for which it is set up.

'So that kind of spending spree was uncalled for. My thinking is that if there is Council Policy that guides their sharing of money and they have done their sharing in line with those rules, so be it. But if the DG has decided to do these things as a way of compensating some members, then it is wrong. So it depends on whether it is Council decision or not', Ogogo concluded.

Also commenting, the Chief Executive Officer and Managing Director, ValueFronteira Limited, Dr. Martin Oluba, described the revelations as shocking, adding it was difficult to believe that the Exchange presided over by Prof. Ndi Okereke-Onyiuke could indulge in that level of spending.

He said that what made the spending spree criminal was the underlying intention to defraud. According to him, the situation where invoice of a particular expenditure was duplicated in the accounts underscores fraud.

'The reckless expenditures are simply questionable. It was clear from the report that the amounts involved were not only deliberately over-bloated but also duplicated as in the series of training the Exchange claimed to have organized for its staff', Oluba said.

He urged SEC to hand over all those involved to the EFCC or take them to court to defend themselves.

He said that the SEC should have a mechanism in place for regularly conducting forensic audit of NSE and some other organizations operating at the capital market. But he is not in support of arrangement to have resident internal auditors, saying they could be bought over:

'I think that was actually what had been happening at the Exchange over the years. They hired auditors who did what the Exchange wanted them to do. The money so taken by those involved should be recovered. They must restore all those monies. I don't think SEC has the power to sanction the auditors. The most appropriate place is to send them to EFCC because it is an economic crime. They can as well take them to court to defend themselves.'

He noted that a certain amount of money be made available by operators within the market to enable SEC to organize regular forensic audit of NSE and other organizations operating in the market.

Also commenting on the reckless award of bonuses, the former boss of Financial Institution, Training Centre (FITC), Dr. Oladimeji Alo, drew a distinction between the staff of NSE including the DG and the non-executive directors who are board members. According to him, executive compensation allows for some performance bonus for those who are staff but added that this must be approved by the board, in this case, the NSE Council.

'And if such approval was given in terms of the principles of earning it, then those who are board members can reasonably expect such bonuses based on board approval. The same is not true of non-executive directors who are not staff because they can only earn sitting allowance, particularly when NSE is a non-profit organization', Alo explained.

He said: 'The other issue is that the figures being published appear outrageous when compared with their remuneration because when you design performance bonus for a staff who is not a CEO, it should bear some resemblance to the total package. But in a situation where a General Manager is earning 20 times his annual package as bonus in a non-profit organization, then something is wrong with it.

'It is difficult for council members to decide on what productivity they are talking about. Staff can earn productivity bonus as part of their remuneration approved by the Governing Council, and the CEO can earn performance bonus if it is part of her employment contract. But even at that what she earns must be reasonable. The kind of figures they published, for me, is outrageous.

The double invoicing of payments uncovered by the forensic auditors are blatant fraud, blatant abuse of office where you find a staff also being a contractor to the organisation. A staff who uses the name of her company or relation to grab contract from the same organization he is serving amounts to blatant abuse of office. This is unethical; it is criminal activities, and the individual concerned should defend themselves. The individuals should be given the opportunity to defend themselves. I believe that by now the ones who are staff among them must have been served query by now.

And those of them who are no longer there, the EFCC should go after them to explain what they have done. Part of the issue the report has thrown up is doubtful competence of the external auditors. As we can not yet prove complicity of the external auditors, we cannot rule out negligence on their part. What could explain their failure not to see all the anomalies in the accounts over the years.

The SEC therefore should query the external auditors, and they should also be charged and brought to book because they were paid for their work. Since they didn't do what they were supposed to do, let them explain. They need to explain why they missed all those material issues in the accounts.'