for a ore Effective Role inCorporate Governance in Nigeria:

rI By JOSEPH IGE

he Cadbury Report (CadburyCommittee, 1992: 2.54, 4.37)defined corporate governanceas "the system by which

companies are directed and controlled",adding: "Boards of directors areresponsible for the governance of theircompanies. The shareholders' role ingovernance is to appoint the directorsand the auditors and to satisfythemselves that an appropriategovernance structure is in place."

In order to help to raise the standardsof corporate governance and the level ofconfidence in financial reporting andauditing, the Cadbury Report went on tospell out what it considered the respectiveresponsibilities of those involved - theboard of directors, the auditors and theshareholders. In particular, it stressed thecrucial role of the audit committee inenhancing the standards of corporatepractice.

In Nigeria, in view of the need for bestpractices in corporate governance if thecountry is to achieve accelerated andsustainable development, the Securitiesand Exchange Commission (SEC), incollaboration with the Corporate AffairsCommission (CAC), inaugurated aseventeen-member committee in June2000 under the chairmanship of AtedoPeterside, Managing Director of

Investment Banking and Trading Company(IBTC). The committee was mandated(ICAN, 2006: 347-348) to identifyweaknesses in the current corporategovernance practices in Nigeria andrecommend necessary changes thatwould improve corporate governance inNigeria. The committee's final report, titled"Code of Best Practice on CorporateGovernance in Nigeria", was approved byboth the SEC and the CAC in 2001.Significantly, the Code is divided into threeparts:

a. Board of Directors.b. Shareholders.c. Audit Committee.

In a nutshell, what is clear from theforegoing is that good corporategovernance (including the provision of fullfinancial information on performance andposition of affairs) is essential, not only inthe best interests of shareholders andother stake holders in a company, but alsofor the optimal development of the Nigerianeconomy and multi-national businesses inan increasingly global contemporary world.

Genesis of Audit CommitteesSpira (1999: 232) discussed the

reasons for the development of auditcommittees in Canada, the United States,the United Kingdom, Australia and New

Zealand, as reflected in the works of keyre~earchers in the field. The reasons maybe summarised thus, to:

- Reduce illegal activities and preventfraudulent financial reporting(Treadway Commission, 1987) and(Sprangler and Braiotta, 1990);

- Increase the credibility of auditedfinancial statements, help boards ofdirectors in meeting theirresponsibilities and reinforce theauditor's independence (Bradbury,1990);Strengthen the role of non-executive directors with a view toprotecting them from being misledby management (Cad buryCommittee, 1992), (Guthrie andTurnbull, 1995) and (Porter andGendall, 1998);

- Respond to unexpected corporatefailures and corporate malpractices(Porter and Gendall, 1993); and

- Deal with the proliferation ofcorporate scandals in Malaysia(Teoh and Lim, 1996).

The Emergence of Audit Committeesas a Legal/RecommendedRequirement for Listed Companies

The Securities and ExchangeCommission (SEC) in the United Statesinitiated the promotion of the audit

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ttee concept after its investigationMcKesson and Robbins fraud in

a corrupt management had claimedstence of inventory that later tumedto be false. Following itsiraqement in 1972 of thelishment of audit committeesised of independent directors, theby 1974, began to require publicsure of whether audit committeeiers were, in fact, independentist and Mason-Olsen, 2007: 1).leed, since 1978, the New York Stockange has required all listed.anies to have audit committees,~ up solely of independent non-rtive directors (Cad bury Committee,.4.33).ressing the critical role of auditnittees in the maintenance of therity of corporate financial reporting,'\merican Treadway Commissionnmended that all public companiessquired to have audit committees,posed entirely of independentctors (Treadway Commission,':12).1 its turn, the Cadbury ReportIbury Committee, 1992: Appendix 4,[ion 4) also recommended that alled companies should establish auditirnittees because they have the.ntial to:a) Improve the quality of financial

reporting by reviewing the financialstatements on behalf of the Board;

b) Create a climate of discipline andcontrol which will reduce theopportunity for fraud;

c) Enable thanon-executive directorsto contribute an independentjudgment and play a positive role;

(d) Help the finance director, byproviding a forum in which he canraise issues of concern, and whicbhe can use to get things done whichmight otherwise be difficult;

(e) Strengthen the position of theexternal auditor by providing a

channel of communication andforum for issues of concern;

(f) Provide a framework within whichthe external auditor can assert hisindependence in the event of adispute with management;

(g) Strengthen the position of theinternal audit function by providinga greater degree of independencefrom management;

(h) Increase public confidence in thecredibility and objectivity of financialstatements.

It is also worth noting that auditcommittees are a legal requirement in .J

Canada (Cadbury Committee, 1992:Appendix 4, Section 3).

Audit Committees: The NigerianExperience

Taking its cue from the worldwidedevelopments, highlighted above, theCompanies and Allied Matters Act 1990,as amended and consolidated in the 2004Act, stipulates that every public companyin Nigeria must have an audit committeeto which the external auditor must report,in addition to reporting to the shareholders(Section 359, Sub-section 3).

The functions of the audit committeeare spelt out in Section 359, Sub-section6, as follows:

(a) Ascertain whether the accountingand reporting policies of thecompany are in accordance withlegal requirements and agreedethical practices;

(b) Review the scope and planning ofaudit requirements;

(c) Review the findings onmanagement matters in conjunctionwith the external auditor anddepartmental responses thereon;

(d) Keep under review theeffectiveness of the company'ssystem of accounting and internalcontrol;

(e) Make recommendations to theBoard in regard to the appointment,removal and remuneration ofexternal auditors of the company;and

(f) Authorise the internal auditor tocarry out investigations into anyactivities of the company which maybe of interest or concern to thecommittee."

Problems Impeding the Effective Roleof Audit Committees in CorporateGovernance in Nigeria

From the intricate nature and widescope of the statutory functions of an auditcommittee in Nigeria, as presented above,to be a member of the committee is, touse the words of the Cadbury Report(Cadbury Committee, 1992: 4.37), "Ademanding task requiring commitment,training and skill. The directors concerned

need to have sufficient understanding ofthe issues to be dealt with by thecommittee to take an active part in itsproceedings. "

But what is the reality on the ground?In this connection, Akinwolemiwa (2005),a member of the Council of the Institute ofChartered Accountants of Nigeria (ICAN),with a wealth of experience in publicpractice acquired over the years,lamented:

"What we find is that directors nominatethose of their members with clout to workon other members of the audit committee.Other nominees of directors must also be'good boys' on whom the other directorscan rely. For the shareholders, it is a madscramble for nomination to serve on Juicy'audit committees ... but the stark reality isthat the vast majority of them have no clueas to how to perform their duties. If youhave seen them in action, only one or twomembers ever speak at meetings. Othersremain mute and rely on the vocalmembers to do the job. After lunch,everybody goes home - at the annualgeneral meeting, the audit committee'sreport is read, irrespective of the fact that,in most cases, commensurate work hasnot been done. "

Shonubi (2003), another Fellow ofICAN and Chairman of the AuditCommittee of Guinness Nigeria Plc, hadexpressed a similar severe criticism of thegenerally poor quality of the membershipof audit committees in Nigeriancompanies.

Another problem impeding a moreeffective role of audit committees incorporate governance in Nigeria derivesfrom the fact that CAMA (Section 350, Sub-section 4) maintains that committeemembers shall not be entitled toremuneration. In other words, they mustspend their time and money to performtheir onerous task. It would surely beunrealistic to expect optimum performancefrom them. Also, ultimately, the lack ofremuneration would be inimical to theindependence required of the members ofthe committee vis-a-vis management whoare, in the circumstance, able to ensnarethem with juicy compensation.

Moreover, CAMA merely requires thatan audit committee be made up of threeshareholders and three directors. Unlikethe New York Stock Exchange, theTreadway Commission and the Cad buryCommission, CAMA does not specifically

47THE NIGERIA~! ACCOUNTANT, October/December, 2008

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require that the directors must be trulyindependent non-executive directors whoare expected to hold the executivedirectors more accountable through aneffective contribution to the discharge ofthe committee's functions.

Finally, the high level of the nakedcorruption on the part of the politicalleadership in the wider m__Nigerian society cannot bedissociated from the problemsconfronting audit committeesof companies in the country.The point is that thecompanies do not exist in avacuum; they are bound to beinfluenced by the generallyunedifying moral values of thesociety in which they operate.It is, therefore, not a surprisethat, despite the existence ofaudit committees, high-profilecorporate scandals havebeen occurring in Nigeria. Examplesinclude those of Lever Brothers Nigeria Plcunder the managing directorship of the lateRufus Giwa in 1998, the AP Plc in 2001and the recent one at Cadbury Nigeria Plc.This was the kind of situation Spira

. (1999:240) had in mind when she soughtto demonstrate that audit committeemeetings could be described as"ceremonial performances".

IIFor corporate governance to thriveand flourish, political governance at

the mecro level in the Nigeriansociety must lead by example

through total commitment to the, democratic ~dealsof probity,transparency and accountability"

Prospects for the FutureThe future is bright in respect of the

contributions that audit committees canmake to the raising of the standards ofcorporate govemance in Nigeria. But thisis only if the measures necessary forimprovement are taken.

In his suggestions in this regard,Akinwolemiwa(2005:3) does not specifythat CAMA should be amended to ensurethat directors are represented on auditcommittees only by independent non-executive directors and that all committeemembers should be entitled to feescommensurate with the level of the seriousassignment they are burdened with.Otherwise, we agree with him when hewrites: "The number of audit committeemembers should be a minimum often, withsix representing shareholders. Allmembers of the audit committee mustfunction in accordance with agreed codeof ethics, fashioned along the lines, whichapply to extemal auditors. It is imperativethat they undergo some form of training

(no matter how short) so they know theextent of the statutory responsibilitieswhich they carry. Audit committeeresponsibilities must carry sanctionswhere they are recklessly or ineffectivelycarried out. The external auditor facessanctions from his professional body andis liable to stakeholder suits where he

performs below standard. The same, or,at least, something similar should applyto audit committee members. n

ConclusionWe have attempted to argue that audit

committee members, whether asshareholders or as independent non-executive directors, must have theknowledge, skill and training required toempower them to play a more effective rolein enhancing the quality of corporategovernance in Nigeria. But above all, wewish to conclude by stressing that, tocreate an enabling environment forcorporate governance to thrive andflourish, political governance at the macrolevel in the Nigerian society must lead byexample through total commitment to thedemocratic ideals of probity, transparencyand accountability. This is why the NationalAssembly should no longer delay thepassing of the Freedom of Information Billinto law.

REFERENCES1. Akinwolemiwa, C.F.G. (2005):

"Current Issues in Audit CommitteeFunctions and Internal ControlPrinciple in Good CorporateGovernance", The Nigerian Accountant,October/December, 2-5.

2. Bradbury, M.E. (1990): "TheIncentives for Voluntary AuditCommittee Formation", Journal ofAccounting and Public Policy, 9(i): 19-36.

3. Cadbury Committee (1992):Report of the Committee on theFinancial Aspects of CorporateGovernance, London, Gee.

4. Guthrie, J. and S. Turnbull (1995):Audit Committees: Is There a Role forCorporate Senates andlor StakeholdersCouncils?, Corporate Governance: An

International Review, 3(2): 78-89.5. Harrast, S.A. and L.

Mason-Olsen (2007): "Can AuditCommittees PreventManagement Fraud?", The CPAJournal, A Publication of the NewYork State Society of CPAs,January, 1-6, _ http://www.nysscpa.org/cpajournal/2007/107/essentials/p24.htm

6. ICAN (2006): FinancialReporting and Audit Practice.

7. Porter, B. and P.Gendall(1993): "An InternationalComparison of the

Development and Role of AuditCommittees in the Private CorporateSector," Paper presented at EuropeanAccounting Association Conference,Turku, Finland.

8. Porter, B. and P. Gendall (1998):"Audit Committees In Private andPublic Sector Corporates In NewZealand: An Empirical Investigation",International Journal of Auditing, 2:49-69.

9. Shonubi, Ayo (2003): "CorporateGovernance: An Investor'sPerspective", The Nigerian Accountant,January/March, 54-56.

10. Spangler, WO. and L. Briotta(1990): "Leadership and CorporateAudit Committee Effectiveness," Groupand Organisation Studies, 15(2): 134-57.

11. Spira, L.F. (1999): "Ceremoniesof Governance: Perspectives on theRole of the Audit Committee," Joumalof Management and Governance, 3: 231-260.

12. Teoh, HY and C.C. Um (1996):"An Empirical Study of the Effects ofAudit Committees, Disclosure of Non-audit Fees and Other Issues on AuditIndependence: Malaysian Evidence",Journal of International Accounting,Auditing and Taxation, 5(2): 231-248.

13. Treadway Commission (1987):Report of the National Commission onFraudulent Financial Reporting.

* Dr. Joseph Oluwaseun Ige is aLecturer In the Department ofAccounting, University of Lagos.

48 THE NIGERIAN ACCOUNTANT, October/December, 2008