CSR e-bulletin October 2011 - Financial Reporting Council of Nigeria Act 2011

The Financial Reporting Council of Nigeria Act 2011:
an improvement in corporate governance compliance in Nigeria’s banking industry?

Nkiru Okobi
British American Tobacco, Lagos

The institutional and regulatory framework of a country is generally hinged on its accounting and disclosure system which also forms an integral part of its financial system.1 Thus, the role of regulation of accounting and auditing standards in corporate governance, particularly with regards to the depth of financial disclosures, cannot be overemphasised. According to the 2004 World Bank Report on the Observance of Standards and Codes, though the Statement of Accounting Standards issued by the Nigerian Accounting Standards Board is based on International Financial Reporting Standards (IFRS), it is not specific and updated enough to eliminate or sufficiently deter corporate governance abuses or serve as guide for improved disclosure.2 This was due to the fact that Nigeria had not adopted the most recent IFRS and thus operated weak accounting and auditing practices.

The recent events involving the much publicised corporate governance failure in Nigeria’s banking sector reveal common trends in the affected institutions. The conspicuous trends involved poor corporate governance culture, exemplified in poor management which led to fraud, insider abuse by management and board members, poor asset and liability management, poor regulation, weak internal controls and supervision, among other things. This crisis brought corporate governance issues to the fore of government policy agenda; intensifying the debate on the efficacy of current corporate governance mechanisms as a means of improving reliance on the financial information contained in the financial statements thereby increasing investor confidence. As part of the efforts towards strengthening the Nigerian financial landscape, the Nigerian Government has, since 2008, embarked on extensive legal reform of corporate governance for public companies.3

The pertinent question is: will the mere passage of the Financial Reporting Council of Nigeria Act (2011) and compulsion to report financial information based on IFRS automatically lead to more credible corporate governance compliance in Nigeria’s banking industry? In answering this question, the corporate governance environment for the banking industry that existed will be looked at within this article to ascertain what the new law is set to correct.

Corporate governance regulatory environment: the immediate past

Central Bank of Nigeria

The Central Bank of Nigeria (CBN) is the apex bank that regulates the activities of all banks and financial institutions in Nigeria. In 2006, the CBN issued the Corporate Governance Code for Banks. Key issues addressed in the Code included:

  • restriction of government total equity holding in banks to a maximum of ten per cent;
  • distinction between the chairman of the board and the chief executive officer for banks;
  • stipulation of minimum number of board committees and prescribing minimum qualification for board members;
  • strict disciplinary action and sanctions for making false returns in order to improve industry transparency, due process, data integrity and information disclosure;
  • establishment of compulsory whistle blowing procedures to encourage confidential information volunteering by banks; and
  • elevation of risk management function to board and top management responsibility with emphasis on the role of internal control system and audit.

The 2006 Corporate Governance Code for banks was followed by the issuance of the 2007 CBN guidelines for the development of risk management systems in Nigerian banks. Banks were required to establish risk management structures emphasising the roles of the board, board risk management committee, senior management and risk management committee as well as establish risk management processes for individual risk elements. The banks were also directed to comply immediately with the provisions of the Code stipulating a maximum tenure of ten years for external auditors

Nigerian Accounting Standards Board

The Nigerian Accounting Standards Board Act (2003) charges the Nigerian Accounting Standards Board (NASB) with the primary function of developing, publishing, updating, promoting and enforcing Statements of Accounting Standards (SAS) to be followed by all Nigerian companies when preparing financial statements. The Act also contains several omnibus clauses that give NASB and its inspectors wide powers in ensuring compliance and enforcement of SAS. Failure to comply with any SAS, when brought to the notice of NASB, attracts imprisonment or a fine on each of the principal officers of the company and also the external auditors. However, a 2010 report commissioned by the International Monetary Fund found that the NASB was starved of funds to achieve its statutory role and lacked personnel that would actually carry out the statutory mandate; a situation that was exacerbated by an uncompetitive payment package. This pointed at the need for a new independent body to set accounting and auditing standards for Nigeria ensuring cost efficiency and consistency.

Corporate Affairs Commission

The Companies & Allied Matters Act (CAMA) Cap C20 Laws of the Federation of Nigeria (2004) (as amended) mandates all companies to provide financial disclosures to members in general meetings, debt-holders and the regulator which is the Corporate Affairs Commission. Pursuant to section 335 of CAMA, all companies in Nigeria are required to comply with accounting standards issued by NASB provided that these standards do not conflict with the provisions of CAMA. There is, however, no specific provision in CAMA for monitoring and enforcement of financial disclosures other than the penalty stipulations for general non-compliance.

Irrespective of the existing regulations on corporate governance and risk management, the recent banking industry corporate governance crisis traced its root cause to among other things flawed implementation of good governance principles, ignoring risk management policies, ineffective board oversight, asset striping, non-compliance with laid down procedures, power tussles among board members, lack of transparency, weak regulatory oversight, and inadequate and false disclosure of information to regulatory authorities. Key information was inaccessible, untimely and of poor decision-making quality. Without transparent and reliable rendition of financial returns, the supervisory process that facilitates market sector discipline was eroded and actors in the financial market were unable to form a fair view of a bank’s value and could therefore not develop sufficient trust in it. Stakeholders were therefore starved of the necessary information to judge if their interests were being properly served by the company agents (the directors).

Corporate governance regulatory environment: the present

The state of the financial industry and the urgent need to promote cross-border listings, harmonisation of regulatory capacities and consolidation of economic reforms hastened the decision of the Nigerian Government in July 2010 to unveil the roadmap for Nigeria’s adoption of IFRS with effect from January 2012. This was done with a view to enhancing reliable financial information and audit quality assurance thereby boosting confidence in the corporate governance compliance in Nigeria. The roadmap was followed by the repeal of the NASB Act (2003) and the passing of the Financial Reporting Council of Nigeria Act (FRCN Act) in July 2011. The FRCN Act is to foster the creation of an enabling environment for the implementation of the IFRS, facilitate a credible financial reporting regime for all business entities in Nigeria and standardise public sector accounting. Generally, the Act seeks to:

  • establish a financial reporting council which would be responsible for ensuring the accuracy and reliability of companies financial disclosures;
  • harmonise regulatory and professional bodies responsible for corporate governance and financial reporting; and
  • ensure the accuracy, veracity and fairness of accounting and financial reports of publicly traded companies.

The Financial Reporting Council (the Council) is the first unified independent regulatory body in Nigeria to oversee corporate reporting, actuarial practice, monitoring of accounting and auditing standards, valuation and corporate governance. Thus, compliance monitoring in these areas will be addressed from the platform of professionalism and legislation. The passage of the FRCN Act enables the Council to undertake responsibilities which were previously unavailable to other regulators. The Council is expected to act through its eight directorates, that is, directorates for accounting standards (private sector), accounting standards (public sector), audit practices standards, inspection and monitoring, auditing practices standards, actuarial standards, valuation standards and corporate governance. The Council’s Committee on Corporate Governance is expected to issue a Code of Corporate Governance and some guidelines.

Also in line with the new corporate governance regime, the CBN now insists that banks must comply with the accounting principles, standards and frameworks, as enumerated in the IFRS codes of the International Accounting Standards Board (IASB). This is because the underlying accounting assumptions of going concern and accrual concept were thoroughly abused by the rescued banks in Nigeria. These banks accrued unrealistic paper profits from shares bought with funds obtained from non-performing loans in moribund entities that, unfortunately, were irresponsibly listed on the Nigerian Stock Exchange. The information disclosure requirements in the financial statements were grossly inadequate to effectively bridge the information asymmetry between banks and investing public money in a consolidated banking system. The introduction of IFRS will therefore go a long way in ensuring transparent reporting of financial industries’ activities with a framework for effective contingency plans to manage systemic distress. The more transparent the internal workings of the bank, the more difficult it will be for managers and controlling equity holders to expropriate or mismanage bank assets. Also, implementing the IFRS through the Council will ensure that the major objective of financial statements, which is to show a true and fair view of the activities of a company or business, is achieved. This will allow investors and other stakeholders to place more reliance on the information contained in the financial statements for decision-making purposes.

Other advantages of adopting IFRS and implementation by the Council include:

  • increased potential for foreign direct investment and easier access to external capital;
  • inclusion in third country auditors’ lists, allowing professional accountants from Nigeria to audit companies that have subsidiaries in the European Union without limit;
  • correction of current institutional weaknesses in regulation, compliance and enforcement of standards in accounting practice in Nigeria;
  • foreign investor confidence in the quality assurance systems.


Nigeria is moving in the right direction with the FRCN Act and IFRS adoption which would solve the multiplicity of contradictory regulation by including all the regulators in the accounting and financial sector. The question that remains is: will the passage of the FRCN Act and adoption of IFRS automatically ensure better implementation of corporate governance principles by Nigerian banks? The answer depends on how strictly the rules will be applied by regulators.

As mentioned previously, it was not the absence of corporate governance codes that triggered the banking industry crisis. Rather it was to a large extent the flawed implementation of corporate governance codes, information asymmetry between relevant regulators and codes which are not holistic. For example, the Securities and Exchange Commission 2011 Code of Corporate Governance suggests that CAMA’s provisions would be fully enforceable but only encourages, not mandates, companies to adopt its provisions where applicable. It therefore does not require strict compliance with CAMA. This could encourage regulatory laxity and may offer a loophole through which some companies may successfully flaunt corporate governance codes. Another governance issue is the ability to find suitably qualified and experienced individuals to serve as non-executive directors in a transparent manner. This goes to the heart of credible corporate governance implementation. CAMA and other codes provide guidance on the structure and composition of board committees. However, shortage of adequately qualified and experienced non-executive directors will continue to impact overall levels of corporate governance in the near future since they are to constitute a check on the activities of the executive directors. Also, the actuarial, valuation and corporate governance compliance monitoring would continue to be addressed from the platform of professionalism and codes. The FRCN Act and adoption of IFRS no doubt ushers in a new era that should promote high quality corporate governance and reporting in Nigeria. Whether this would actually increase investor confidence and boost foreign investment in Nigeria is surely a matter which only time and consistent implementation will answer.


  1. J O Obazee, Country Practice at: http://aaahq.org/international/Forum/ForumFall07/Country%20Practice%20-%20Nigeria.pdf.
  2. World Bank, Report on the Observance Of Standards and Codes (ROSC): Nigeria at: www.worldbank.org/ifa/rosc_aa_nga.pdf.
  3. See: www.iflr.com/Article/2818282/The-Financial-Reporting-Council-of-Nigeria-Bill.html.