FRC Commences Proactive Regulation to Forestall Audit Failures, Tasks Auditors on Strict Compliance

•Urges practitioners to register with NIN for proper identification

Dike Onwuamaeze

The Chief Executive Officer/Executive Secretary of the Financial Reporting Council of Nigeria (FRC), Dr. Rabiu Olowo, has tasked practitioners to ensure maximum compliance with the FRC Act 2011 and other relevant statutory instruments.

He disclosed that the Council has commenced proactive regulation that would be resolutely firm and fair to forestall audit failures. 

 Olowo, said this yesterday, in Lagos, in his keynote address on, “Proactive Regulation, A Catalyst for Preventing Audit Failure,” at the first FRC’s Audit and Other Assurance Providers Leadership Summit.

He described proactive regulation as a term used to describe approaches and programs that try to prevent regulatory and service problems from occurring by identifying harmful practices that could potentially lead to harm, rather than dealing with alleged misconduct after complaints are filed.

He said: “The bedrock of the transformation agenda of the council going forward is to ensure maximum compliance with the FRC Act 2011 (as amended), and other statutory instruments released by the Council.

“FRC intends to give full credibility to any financial statements coming out of Nigeria in a way that investors can rely on the information in the statements.

“A new FRC that will be firm and fair in carrying out her mandate; that will hold corporates and individuals accountable; and that will restore confidence in corporate reports and governance in the Nigerian economy thereby enhance the renewed hope of President Bola Ahmed Tinubu.”

Olowo, said the topic of his address was informed by the previous and ongoing scandalous audit failures around the world including Nigeria, which according to him, made it imperative that the FRC should, “weigh in with persuasive and encouraging warnings to accountants and auditors to improve themselves and complement reforms currently going on in Nigeria, in rules and best practices so that audits can deliver its affordances to the market and society, reassuringly.”

He described audit failure as a situation that arises when an auditor deviates from the applicable professional standards in such a way that the opinion contained in his or her audit report is false.

According to him, audit failures are costly to investors, the auditors themselves, and even the wider society.

He said: “Enormous sums of money are lost every year by investors to fraud and corporate collapse. Nigerian investors have lost several billions of dollars because of companies that falsified and deliberately overstated their accounts and consequently failed or got into serious trouble.

“The loss of investors’ trust and confidence in the capital market hurts the economy badly as fresh funds cannot be mustered to drive rapid economic growth and development.

“The auditors, on the other hand, have had their reputation sullied. Audit clients switch firms that have a reputation for low audit quality.”

The FRC executive secretary said some of the proactive steps being taken by the Council included the activation of registration and revalidation exercise of practitioners and, “ensuring the integrity of these processes through revalidation with the National Identity Number.”  

Olowo also stated accounting/auditing was a confident-based profession that required practitioners to have the courage to stand up for what is right even when unpopular.

This, he said, was one of the reasons why societies and markets have enduring trust in audits and auditors, though not popularly spoken about.

He said: “Since rules cannot be implemented by themselves, audit reform efforts should also consider the human elements of audit failure and how to address them, starting with separating the failings of governance and management from the failings of audit.

“Law is limited by the degree of compliance by people. If people are not going to obey laws, or are going to find ways around it, the laws will be ineffective.  “Therefore, good rules and laws must consider how to get people to be compliant, such as creating a conducive social context, for the greater good.

“According to Stout, the instrumental question is ‘how to combine law and conscience to influence behavior …law, after all, is mostly about promoting unselfish pro-social behavior. The vast majority of people are willing to sacrifice to follow ethical rules and help others, but they are only willing to do this when the social conditions are right.’” 

According to him, any reform that ignores reforming people would not be sufficiently effective.

“It is on this ground and because the council wants to be more proactive in its approach to regulation that I am calling on everyone here today (both in-person and online) to deliberate on how to prevent another audit failure in our country because prevention they say is better than cure,” he said.