… Audit committee chair must be professional accountant — FRC
… It’s not necessary, shareholders declare, demand reversal

By Nkiruka Nnorom

Trouble is brewing between the Financial Reporting Council (FRC) and notable shareholder groups in the country over a draft rule by FRC spelling out the qualification individuals aspiring to the position of audit committee chairmen of quoted companies must possess.

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FRC in the draft rule directed that such persons must be members of certified professional accounting body in the country. The Council based its argument on the premise that professional accountants are more reliable, saying that their education and training allow for their judgment to be relied upon.

However, leaders of renowned shareholder groups have frowned at the guideline, which they describe as unnecessary and called for immediate reversal. According to them, the FRC rules is in contravention of section 359(3) and (6) of Companies and Allied Matters Act, Cap. C20.

Controversial rule/guideline
The draft rule contained in a circular titled “Transitional Concessions Agreed between the Nigerian Stock Exchange (NSE) and the Financial Reporting Council of Nigeria (FRC) regarding Rules 1& 2 of the FRC’s Rules” published by the NSE on March 29, 2016, with reference no:NSE/LARD/LRD/CIR5/16/03/29, states thus: “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.”

It, however, states that current chairman of the audit committee shall be permitted to attest to accounts of financial nature regardless of whether he is a professional member of an accounting body or not for the current financial year only.

The FRC added in the circular that “The foregoing concessionary arrangement shall apply only to entities which in the case of a holding company shall include its subsidiaries): (i) Which are not currently in court with the FRC and/or having any of its director(s) currently holding FRCN numbers that have been suspended by the FRC. 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.”

Again, the FRC in its ACT No. 6 2011 expressly reaffirmed the above position on qualification of audit committee chairman, warning that certifications that do not comply with the Council’s pronouncement shall be deemed as non-compliance with its rule and capable of rendering the financial statements misleading. “Appropriate penalties as provided for in the FRC Act, 2011 and the FRC Guidelines/Regulations for Inspection and Monitoring of Reporting Entities 2014 shall apply,” it warned.

Provisions of CAMA
Relevant sections of Companies and Allied Matters Act – Section 359 (3 & 4), that relate to qualification and experience of audit committee members, including the chairman provide 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.

Moreso, members of the committee should possess a thorough understanding of the company’s business, its products and services, a reasonable knowledge of the risks facing the company and the essential controls the company has in place, inquisitiveness and dependable judgment and ability to offer new or different perspectives and constructive suggestions.

Like any non-executive director, audit committee members should (at least as a group) possess a wide range of knowledge, skills and personal attributes: sound judgment; integrity and high ethical standards; strong interpersonal skills; and the ability and willingness to challenge and probe. Specifically, audit committee members must be able to understand the rules and, more importantly, the principles that underpin the preparation of financial statements.

Shareholders agitate
In his reaction, Mr. Boniface Okezie, Chairman, Progressive Shareholders Association of Nigeria (PSAN) insisted that a shareholder need not possess any accounting qualification as adduced by FRC to sit as chairman of audit committee, arguing that no requirement like being an ICAN member was attached as pre-conditions to buy shares.

He said: “FRC has no legal backing to say that shareholders should not be audit committee except they are ICAN qualified. That means you must be chartered accountant before you can serve in audit committee. We say no because that law is alien as far we are concerned. Nobody told shareholders that before you buy can shares, you must possess a degree; you must be an accountant or an engineer before you buy into a company.

“The law says that shareholders should nominate two or three members to contest in audit committee in any quoted company, while the directors should nominate their own members. And all the directors nominated in the committee must not be chartered accountants. They can be from any profession.

The requirement is that audit committee members should be able to read and write. The audit committee is not auditing account; they are looking at what the auditors, who are accountants, have done. They are reviewing what the auditors have done; they are looking at reports written by management.

It is the audit committee that ensures that the recommendations made by the auditors to the management team are enforced; that is basically what they do. In terms of looking at figures, they can liaise with the auditors who are paid to audit the figures.”

Continuing, he said: “So, what kind of law is Financial Reporting Council making. We rely on CAMA and FRC cannot make any law for us. Any law today governing shareholders activity is made by CAMA. The law of CAMA stipulates that if you can read and write and interpret figure, you can be audit committee members. That’s all!
So, this law that is being proposed by the FRC should be discarded; we will fight it at the court of law. It has no power.” He, therefore, called on the presidency to reconstitute the Board of FRC, saying that it cannot continue to be run as a one-man-show.

Corroborating his views, Sir Sunny Nwosu, National Coordinator, Independent shareholders Association of Nigeria (ISAN) said that the rule is uncalled for and threatened to sue the Council at the expiration of two weeks ultimatum already handed out to it.

“There is difference between rules and laws and where there is clash, the law overrides the rule,” he said, adding that provisions of the Companies and Allied Matters Act (CAMA) supersede FRC regulation and as such the Council should reverse the regulation which he said runs contrary to CAMA requirements.

“Audit committee is a law by CAMA; therefore, they should allow the audit committee to appoint its own chairman. We will take action. Already, we have written them and we have given them 14 days to rescind that. If they don’t, we shall be in court,” he declared.

He added: “If accountants in Nigeria have become jobless and need job, they should look elsewhere and not audit committee job.”

Contributing, DR. Farouk Umar, President, Association for the Advancement of the Rights of Nigerian Shareholders, regretted that FRC recently rejected the appointment of very knowledgeable shareholder (who can dissect financial accounts) from serving as chairman of an audit committee on account of the new rule.

Expressing disappointment with the rule, Umar said: “you don’t need to be an accountant to read and understand a financial statement. We reject the rule in its entirety and will head to court if the rule is not changed.”