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    THE INCIDENCE OF INACCURATE CORPORATE FINANCIAL REPORTING IN ... THE INCIDENCE OF INACCURATE CORPORATE FINANCIAL REPORTING IN ... Document Transcript

    • THE INCIDENCE OF INACCURATE CORPORATE FINANCIAL REPORTING IN NIGERIAN CAPITAL MARKET: THE ROLE OF SECURITIES AND EXCHANGE COMMISSION IN PREVENTING FUTURE OCCURRENCES Introduction I am indeed delighted to be invited to this important seminar organized by the Shareholders Association, Ibadan Zone, to speak on the topic: The Incidence of Inaccurate Corporate Financial Reporting in Nigeria Capital Market: The Role of Securities and Exchange Commission in preventing future occurrences. Let me first of all commend the efforts of the organizers of this crucial seminar to discuss and proffer solutions to the prevailing incidences of false and misleading financial reporting by some corporate organizations in the country. The seminar is indeed timely and appropriate. The issue of corporate financial reporting has become a global concern particularly in recent time due to the reported cases of corporate failures arising from improper/false financial reporting in companies which hitherto had enjoyed good reputation due to the track record of great "success" in their lines of business. Financial Reporting Financial reporting essentially involves the preparation and issuing of financial statements. These are formal records of financial activities of corporate entities showing their financial condition for a given period of time. They are usually expected to comply with regulatory and professional requirements. Financial statements serve as a means for assessing management's performance in terms of how efficient and effective or otherwise it had used available resources in the course of trying to achieve corporate set goals. The degree of the usefulness of the financial statements as a tool for such assessment is dependent to a great
    • extent, on the level of accuracy and reliability of the statements. USERS OF FINANCIAL STATEMENTS The list of users of financial statements is inexhaustive. Each group examines the financial statements based on areas of their needs. The basic users include shareholders, board & management, regulatory authorities, creditors, suppliers, financial analysts, researchers, prospective investors, etc. These users expect the financial statements to contain information that would enable them among other things evaluate the performance and earning power of a business enterprise, compare its performance over time or with other enterprises within the industry, predict its future performance and continuity to enable them make investment decisions etc. QUALITIES OF FINANCIAL STATEMENTS A financial statement that will meet the needs of any category of users must have the following qualities. It must be reliable and easily understandable to serve the intended purpose of the users. The information should be presented in a simple, clear and logical manner. Ambiguous presentation of information would rob it of its usefulness. Therefore there should be proper classification of items contained in the report to guaranty proper comprehension and comparison. Since financial statements are time bound, it is necessary that they are produced timely. Undue delay in reporting of accounting or financial information can result in misleading information as to the true or current state of affairs of the reporting entity. Other qualities of good financial statements are accuracy, comparability, and compatibility with the nature of operations of the company. It should also comply with the relevant accounting standards as laid down by the Nigerian Accounting Standards Board. Misleading Financial Statements A financial statement is said to be misleading if it lacks the qualities mentioned above, it contains
    • fundamental errors or is prepared with the intention to deceive/confuse the users. Such deception can be carried out in a number of ways, among which are distortions of accounting records, falsification of transactions, omission of transactions, or misapplication of accounting principles etc. REASONS FOR ISSUING INACCURATE FINANCIAL REPORTS Many reasons can be adduced for the preparation of such misleading financial statements. One of such reasons is the demand for high returns by shareholders on their investments. This expectation of investors places Management of some companies under undue pressure that they resort to indulging in unethical forms of financial-disclosure and reporting. Another reason is the quest to maintain a "giant" corporate status in the eyes of the business community despite some crippling internal problems, odds in the business terrain or sporadic changes in competitiveness. Also, the crave to satisfy the greed of company insiders by manipulating the financials, understating or reclassifying expenses is yet another reason. These of course set the stage for the failure of the company with time. The consequences of these unethical accounting practices include, but not limited to the following: • A yawning gap between reality and the reported position of the company such that any person placing reliance on such reports for decision making will be misled. • Erosion of investor's confidence in corporate entities, • Attrition of revenue to the government via evasion or avoidance of taxes, • Reduction in the inflow of foreign direct and portfolio investment. I am sure some of you present here today can recall established cases of corporate frauds on the international scene, which led to the collapse of notable companies. A very popular example is the Enron
    • case in the US. The failure of this company had negative impact on Arthur Andersen, an auditing firm that helped it to cook its books, while some of the company’s principal officers were prosecuted, convicted and sentenced to various jail terms. Rank Xerox is another popular case. The company had to pay a fine to the tune of $10m following the US SEC investigation of its accounting practices. Other celebrated cases were the WorldCom, and Parmalat sagas. On the local scene, we also have some notable cases such as the failures of some Nigerian Banks in the early 1990's, the case of Lever Brothers Plc (Now Unilever) in 1998 where overvaluation of stocks running into billions of Naira was discovered. Another was the case of the African Petroleum (AP) Plc in which the company’s Board concealed indebtedness to the tune of about N22 billion in its year 2000 offer for sale. The current case as we all know involves Cadbury Nigeria PLC's overstatement in the current and prior years audited financial statements. This is currently under the investigation of the Commission. Let me at this juncture, assure all present, of the Commission's enthusiastic determination and unrelenting efforts at addressing this ugly menace to ensure it does not ravage the nation's corporate scene. REGULATORY REACTIONS Virtually all the reported cases of corporate failures mentioned above have been traced to poor corporate governance practices in companies. This has led countries, multilateral organizations and professional bodies to seek out ways of checkmating these unethical practices by reviewing existing laws and rules, putting in place new laws, rules and regulations, and in addition, becoming more aggressive in investigations and enforcements. The Sarbanes-Oxley Act of 2002 is a good example of an immediate response in the US. One of the salient provisions of the Act is that both corporate management
    • and independent auditors must assess the effectiveness and reliability of the controls and procedures their firms use for reporting financial results. Various penalties and sanctions which include fines and/or jail terms stipulated for violators of proper corporate financial reporting. In Nigeria, the amendment of the Nigerian Accounting Standards Board (NASB) Act in 2003 has further empowered the NASB to sanction auditors found wanting in the execution of their duties. Furthermore, the SEC in a proactive response, on observing the spate of corporate collapses in the developed economies, collaborated with the Corporate Affairs Commission (CAC) and other key institutions to prepare a Code of Corporate Governance for public limited liability companies in Nigeria. This code was launched in April 2003. The code is aimed at inculcating the principles of transparency, accountability and fairness of directors and management of corporate entities. The introduction of the Code in the market is an important milestone in the nation's quest for good corporate governance and the protection of investors. It contains extensive provisions for protecting investors, as well as measures aimed at ensuring corporate stability and sustainable growth. For instance, the Code spells out; 1. The composition of and responsibilities of the Board of Directors (The board should be composed in such a way as to ensure diversity of experience, professionalism integrity, availability etc), 2. The need to avoid dominance of the company by any individual by discouraging the holding of positions of Chairman and Managing Director by one person (The position of the Chairman and the CEO should be separated and held by different individuals).
    • 3. Prescriptions for frequency and proceedings of meetings, 4. Reporting and internal control system. The need to promote transparency in financial and non-financial reporting, requires the board to ensure there is a good and effective internal control system in an organization. 5. Composition of audit committee. The committee should be established in accordance with the Companies and Allied Matters Act (CAMA) Section 359 (3&4), which states that not more than one executive should be on the committee. 6. Shareholders rights and privileges. OTHER STRATEGIES ADOPTED BY THE COMMISSION TO REDUCE INCIDENCES OF INACCURATE CORPORATE FINANCIAL REPORTING As you are aware, the cardinal responsibilities of the Commission are the development of the capital market and the protection of investors from the unscrupulous activities of fraudsters in the market. In its responsibility of registering securities before they could be offered for sale to the public, the SEC ensures full disclosure of all relevant and material financial information from such companies. It seeks to ensure that such information is accurate and represent the true positions of the issuing entities. A committee on the review of disclosure requirements set up by the Commission came up with the following recommendations to facilitate/ enhance full disclosure by companies: a) Organizations shall file quarterly, interim financial statements and annual reports in accordance with accounting standards. b) Segmental reporting in financial statements of quoted companies that operate in different lines of business or in different jurisdictions, multinational corporations or group of companies should be adopted in line with global best practices. The Commission regards this as essential to full disclosure of companies’ activities
    • because a group when viewed from one segment may appear profitable, whereas in actual fact it is doing poorly on aggregate thereby concealing the inherent risk factor in the business from investors. c) The swearing to an oath of correctness of information contained in the Audited Accounts of a company by the Chief Executive Officer, Directors, and the Chief Financial Officer. This is to confirm that due care has been taken in the preparation of accounts and such officers would be held liable if any falsehood are later discovered in the accounts. d) The Rotation of External Auditors. Auditors should be changed every five (5) years in order not to get too friendly or compromise their position with the company being audited. PROACTIVE STEPS TAKEN BY THE COMMISSION On proper financial reporting and adherence to the Code of Corporate Governance the Commission was involved in some activities summarized as follows: a) Action plan for Compliance with the Code of Corporate Governance. The Commission’s supervision and enforcement activities reinforces the provisions of the Code of Corporate Governance. The Commission encourages compliance with the Code. All public companies have been directed to report their level of compliance with the code in their Annual Reports and Accounts and Prospectuses. Though compliance with the Code is voluntary, the Commission takes exceptions to violations of its provisions while giving due recognition to companies that readily adopt the Code. Based on SEC position, majority of quoted companies have complied with the SEC directives. b) Promoting Shareholders/Investors Rights The Commission being mindful of shareholders’ rights to the disclosure of information by, and privileges in the public liability Companies, ensures that shareholders are empowered as far as their relationship with the companies is concerned. The Commission looks into aspects relating to their participation in the
    • nomination and election of Board Members as well as the removal of board members. Pressure groups such as Shareholders Associations are encouraged to be alive to their responsibilities and to influence their companies to comply with the provisions of the Code. c) Code of Conduct for Shareholders Associations In collaboration with other financial sector regulators as well as the Corporate Affairs Commission (CAC), the Bureau of Public Enterprises (BPE), and the various shareholders associations, the Commission has formulated a set of rules to guide the conduct of shareholders associations. The code is expected to focus on the associations to promote better conduct of general meetings of members and also ensure good governance in public companies. d) Public enlightenment The Commission had also, in collaboration with the World Bank and the Nigerian Accounting Standards Board undertaken public enlightenment exercises in all the geopolitical regions of the country. This is to sensitize shareholders, corporate managers and other stakeholders on the relationship between financial reporting and the achievement of good corporate governance. The fora also provided an avenue for articulating the way forward. e) Financial Reporting and Code of Best Practice: In recognition of the roles played by Directors of Companies, the Commission designed a reporting format to test compliance with the code of Corporate Governance in line with SEC Rule 66B. This all-encompassing form meets the International Best Practice both in areas of Financial Reporting and Corporate Governance. The periodic reviews by the Commission of same ensure that observed lapses are promptly corrected. f) International Reporting Standard It will also be of interest to note that the Commission is a signatory to the International Organization of Securities Commissions (IOSCO) Regulatory Interpretation
    • and Information Decision Data Base. As a result of this status the Commission ensures that the Accounting standards used in preparing public financial statements comply strictly with International Financial Reporting Standards. g) Code of Conduct for Market operators Apart from the Code of Corporate Governance and the Code of Conduct for Shareholders Associations, the Commission has put in place a Code of Conduct for market operators. The Code is an important document for maintaining sanity in the capital market, as it stipulates the professional conduct expected by intermediaries/operators in the Nigerian capital market. CONCLUSION In conclusion, the role of regulatory agencies in forestalling incidences of corporate failures caused by improper financial records and reporting cannot be over emphasized. It must be noted that the attainment of transparent and reliable financial reporting is a collective responsibility of all stakeholders, shareholders inclusive. Hence, all must put hands together to ensure that people with criminal tendencies are not allowed to man the affairs of public companies. To further empower regulatory authorities in the financial market, there is the need to review some of the existing laws to bring them in tune with current reality and peculiarity of the market. Be assured the Commission is poised to exploit all available means at its disposal in ensuring that investors' confidence is not eroded in the capital market. To this end, our routine onsite and off site inspections have been beefed up to ensure that irregularities are spotted out and addressed quickly. The Commission will also investigate any reported case of financial impropriety it receives by way of complaint, whistle blowing, etc concerning any company
    • or management of such company, and ensure that appropriate measures are taken. June 14, 2007.