FRC Revised Guidelines/Regulations 2014

The Honourable Minister of Commerce, on 3rd October, 2014 approved the Financial Reporting Council of Nigeria (FRC) – Guidelines/Regulations for Inspection and Monitoring of Reporting  Entities. The guidelines/regulations is contained in the Federal Government of Nigeria official gazette FGP152/122014/3.200 and available for download on the Council's website, www.financialreportingcouncil.gov.ng

The aim of the guideline/regulation as contained in the gazette is “the effective implementation of Nigeria's Accounting, Auditing, Actuarial and Valuation Standards and Code of Corporate Governance” In paragraph 2 of the gazette, the authority of the Directorate of Inspections and Monitoring extends to the accounts, financials reports, returns and other documents of all entities pursuant to the various laws and/or regulations in existence in Nigeria in accordance with section 11 of the FRC Act 2011. This means that all entities that apply any financial reporting standards in the preparation and presentation of its financial statements, accounts, financial reports, returns and other documents are within the ambit of the authority of the Directorate of Inspections and Monitoring.

By implication, the authority of the Directorate of Inspections and Monitoring of the Financial Reporting Council extends to returns to other regulatory agencies like the Securities and Exchange Commission, Central Bank of Nigeria, National Insurance Commission, National Pensions Commission, and all other government agencies that receives financial returns from the business sectors. Other regulatory agencies may have to dialogue with the FRC to harmonise all regulatory rules so as to prevent a state of over-regulation of the business environment.

In paragraph 3, it is stated that investigation will be prompted by matters brought to the attention of the Council due to any of the following:

• A review of financial statements, accounts, financial reports, returns and other documents selected for that purpose by the inspectors, an officer or agent of the Council
• A complaint from individual, entity, regulator, or otherwise; any breach of the code of conduct and ethics by a registered professional
• Any material irregularity notified to it
• A qualified report
• Public comments (such as press commentary); and
• Any other matter on financial reporting and corporate governance that may come to the attention of the council.

The last bullet point seems open-ended and may imply that a whistle blower may also prompt investigation into any entity. How desirable is this for our delicate business environment? This is another point for dialogue with stakeholders for further clarity.

In paragraph 7, it is stated that where the Council decides to conduct an investigation, a Panel of Inspectors shall be constituted and an Inspector, Officer or Agent of the Council shall inform in writing the Chief Executive Officer of the entity concerned, copying its auditors. There is need for clarity on the phrase “Agent of the Council”. This phrase is also contained in paragraph 9 of the gazette.

Stakeholders may have to dialogue on the appropriateness of the use of Agents (Independent Consultants) and how the Council intends to manage confidentiality of corporate information since the Agents are not officers of the Council. Paragraph 17 of the gazette states that when the panel decides that any matter is material but not misleading, the entity, the external auditor/audit firm and other relevant professionals /professional firms shall be penalised and the materiality shall determine the penalty. There is need for another stakeholder’s engagement here because the words “material” and “materiality” are relative, subjective and usually not definite in quantitative terms. A clearer guidance is needed at the dialogue.

The gazette spelt out five categories of non-compliance situations that may be material without rendering the ' financial statement ' totally misleading as specified in an attached schedule. In such situations, the council shall impose sanctions as follows:

• Type 1 non-compliance (N5million);
• Type 2 non-compliance (N5million);
• Type 3 non-compliance (N25million);
• Type 4 non-compliance (N50million); and
• Type 5 non-compliance (N100million);
• Type 6: Withdrawal of financial statements leading to restatement – Not less than N500 million but not more than N5 billion for each year requiring such restatement. The range is based on Market Capitalization /Turnover as distinguished by section 33 of the Act and in multiples of N500million.

In paragraph 20, the time spent in discovering the errors on non-compliance will be charged to the entity by way of management time at N250,000 (Two Hundred and Fifty Thousand Naira) only per hour. The hours are calculated at the Inspection meeting. However, if the Inspectors have to carry out on-site inspection. The entity shall pay Inspection fee of N1million (One Million Naira) only per day.

Following through to paragraphs 24 and 25, the gazette states that “In all circumstances, the panel shall communicate to the entity the imposed penalty, which must be paid within fourteen (14) days, failing which an additional penalty of 0.1% of the imposed penalty shall accrue for each day of default. An entity may appeal against the panel's decision to the Technical and Oversight Committee (TOC) of the Council within fourteen (14) days with a non-refundable application fee of N1million.”

If at the end of the notice period, the entity still fails to accept the Council's position, the Council shall institute a legal action against the entity. The Council shall notify all relevant regulatory agencies of the pending action, and subsequently, of the outcome of the case. The Council shall also make a public announcement on its website and such other media, as it may deem necessary, of the pending action.

Definitely, this gazette on the Guidelines/Regulations for Inspection and Monitoring of Reporting Entities have very daunting provisions with far reaching implications on the business and professional services environment.

The clauses in paragraphs 17-25 in the gazette and the appendices will definitely be debated for a very long time. The Council may have to enlighten all stakeholders on the spirit behind the letters so as to manage stakeholders' perception. What should be avoided is a perception that the gazette is another “Law of sin and death”. This is the time for stakeholders to dialogue, dialogue and dialogue with the FRC.