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AUDITORS: WOLVES IN THE BALANCE SHEET

By NBF News

For many years until recently, only a privileged few knew exactly the vast scale of financial scandals and outright falsification of profits in the banking and other financial services sector of our economy. Many of the corporate organizations, especially the banks, but not limited to the industry alone, were so adept (and some still are) in dressing up their financials in such a profound way that, on the surface, you are taken in as guest in a corporate garden party. But beyond the corporate veil, all that glitters are not gold, you feel bounced off without even being placated with a drink on your way out.

That was how most Nigerian banks had conducted their affairs for many years. Everyone was outdoing each other in posting astounding profits that proved to be nothing but paper profits, fake. But you won't know the colour of a fake unless you fully understand a bank's financial statement or balance sheet. A better and simpler way to know this is to peruse through its average daily balances, rather than the half yearly or end-of-your statement of Accounts that you often read in the newspapers.

Nonetheless, many banks have mastered the art of deception, especially with regard to their true financial statements or profitability. They do this through their appointed external auditors that they engage over a specified period of years. They pay them hefty quid for their services.

Though the code of corporate governance provides for a ten year tenure for external auditors, over these years, no one, not even the chief regulatory authority, the Central Bank of Nigeria (CBN had done anything to ensure compliance with the law. If you don't know, corporate auditing arena is one particularly fertile ground for self-serving biases. And the banking sector is that breeding ground to perfect all the tricks in the books. And cooking the books became the buzzword. Not any more, it seems.

External auditors are the partners-in-crime in fudging the facts. It's a marriage of convenience because both auditors and the banks have considerable freedom of action in determining how their balance sheets are prepared.

As a result, answering any or all of these questions don't really add up to the sum. For example, when should revenue be recognized in a bank's financial statement? What really constitutes an expense or income? And, what is an investment in a bank's financial portfolio? Answering these questions is not as simple as they look.

To tell how the sum cannot, most times, add up to the whole, Joseph Berardino, erstwhile CEO of Arthur Andersen consulting, one of the world's foremost auditors implicated in the notorious Enron scandal, the American energy giant, had this to say during congressional hearing on the affairs of Enron. 'Many people', he said, 'think accounting is a science, where one number, namely, earnings per share is the number and it's such a precise number that it could be two pennies higher or two pennies lower, (but) I come from a school that says it's really much more than an art'. Over the years, self-serving bias, close relationship or attachment and distorted judgment make auditors' report on their clients more incredulous than credible.

Now enters the CBN: more than ever before, the apex bank has in the last one year rolled out so many intervention measures in the banking sector. The stakes for the CBN and its Governor have been much higher now than at any time since its history. Anxiety has been mounting for over a year now after the financial meltdown that hit hard on the banking sector. Insider abuses, insolvency, covered up by spurious profit claims were parts of the intricate stories of the banking sector.

The CBN audit on the banks in the wake of the financial crises revealed that the external auditors were part of these crises that littered the corporate corridors of the banking industry. And the CBN has been doing quite a remarkable job to check some of these abuses. When the CBN makes a policy decision, such decision should be a tool to help support economic activities. The benefit of such a tool, must, of necessity, outweigh the associated cost, or risk of using such a tool. Policy decision initiated by the CBN can therefore be beneficial if it balances needs with concerns in that particular sector where the policy is directed.

It is in this connection that the recent measure by CBN mandating all banks in the country, to replace their external auditors that have stayed beyond ten years, is a laudable decision. Although this directive is provided for in the Code of Corporate Governance that guides the processes of auditing, it has remained supine until now. At best, it has been ignored by the banks. Some auditors almost always, have been in the payroll of some banks for almost two decades without a break. The implication of such long association is that the auditors, see no evil and report no evil in the financials of their client banks. Worst of all, is the entrenched and conflict of interests of such attachment and approval by the auditors. This often culminates in falsification of profits of the banks.

The banks, by CBN directive, have been given till the end of the year to comply with this new order. For now, only First City Monument Bank (FCMB) is known to have disengaged the services of its external auditors KPMG for Pricewaterhouse. The CBN directive however says that the banks can, if they wish, re-appoint the same auditors after a period of another ten years. This, I must say, should not be the ideal thing to do. It's like CBN wants to use the same yardstick for the tenure of banks' CEO's. It should have a re-think on re-engagement of erstwhile auditors. Indeed, ten years is enough to say a long goodbye, and let a new set of auditors take charge. A period of five years, in the first instance based on untainted performance would have been appropriate.

One appreciates what CBN plans to achieve by this measure- putting the accounting industry under tightened oversight and bring to a possible end, the era of false profits declaration. Five years ago, the Nigeria corporate industry was brought under a blanket of public shame when the lid on the financial books of Cadbury Nigeria Plc, once the most admired corporate organization was blown open, revealing an astonishing falsification of profits. Cadbury, had, in 2005 posted an impressive turnover of N29.4bn, representing 32.9 percent over the previous year (2004).

It was on the crest of that amazing result that its MD/CEO then, Mr. Bunmi Oni was selected as the 'most respected and admired Corporate CEO in Nigeria in 2005'. As it turned out, it was all 'cooked'. Whistle blowers had alerted the regulators that it was all lies. It was a trinity of corruption and criminality that involved its former CEO, the Finance Director, Mr. Ayo Akadiri, and the external auditors, an indigenous and well- respected accounting firm. It became a classical case of how good accountants become auditors. Or, is it the case of unconscious bias?

All of this was confirmed by an independent audit in the name, PrincewaterHouse Coopers. The firm reported to the shock of many that Cadbury had, at least, for three years running (2002-2005) inflated its financial records to the tune of between N13bn and N15bn. That, in practical terms, was a hefty amount, a deception and a huge dent its corporate image and loss of investors' confidence. Not even the disgrace of Oni and Akadiri could remove the shame on Cadbury. It still rankles. Or, have we forgotten how the then CEO of Lever brothers (now Unilever), Chief Rufus Giwa masterminded the inflation of the company's financial statement? It only came to light long after his exit.

What CBN intends to achieve by limiting the tenure of banks' auditors to ten years is like what the U.S government did with the Sarbanes-Oxley Act of 2002 with emphasis on corporate accountability. But CBN's directive doesn't go for enough. The banks must in addition be prohibited from re-hiring the auditors at the end of the ten-year period. Also, the auditors must be prohibited from hiring individual accountants away from their audit firms.

The Enron case in USA typifies this when the staff of the auditing firm, Arthur Andersen took sides with Enron, instead of standing by the ethics of their profession. Overall, though it is hard to imagine any practical system that can totally eliminate auditors' bias, public confidence will be restored to the beleaguered banking sector if the CBN can devise a more robust separation of the auditor and client relationship. This requires the apex bank to hang on firmly to its every word. Assurance and re-assurance need to be provided by the regulator that what is worth doing at all, is worth doing, not just well, but excellently.