Corporate Governance: Financial Statements, Audits, and Annual Returns

CORPORATE GOVERNANCE IV 1. FINANCIAL STATEMENT 2. AUDITS 3. ANNUAL RETURNS

IF YOU BELIEVE IN YOURSELF, ONE DAY, OTHERS WILL HAVE NO CHOICE THAN TO BELIEVE IN YOU.

LESSON OUTCOMES Identify various aspects of financial statements Identify persons entitled to receive/consequences/remedies for breach Identify the procedure for appointment, duties and liabilities, resignation and removal of auditors. Who can be an auditor? Composition and function of audit committee Annual Return, forms, details Consequences for failure to file A/R

DUTY TO KEEP ACCOUNTING RECORDS Se 331 (1) CAMA Every company shall cause accounting records to be kept in accordance with this section

What must accounting records show? The accounting records shall be sufficient: 1. To show and explain the transaction of the company 2. Disclose with reasonable accuracy, at any time, the financial position of the company; and Nigerian Wire Industries PLC v. European Trade & Finance PLC (1997) 6NWLR (Pt. 510) 632 3. Enable the directors to ensure that financial statements, comply with the requirements of CAMA in forms and contents. S.331 (2

THE ESSENCE of Accounting Records Accounting records forms the basic of relevant information and data to be used in preparing financial statements and audited account of the company. Per Uwaifo JCA African Continental Bank Ltd v. Dominico Builders Co. Ltd (1992) 2 NWLR (Pt. 223) 296 @ 302

CONTENTS OF ACCOUNTING RECORDS The accounting records shall, in particular, contain Entries from day of all sum of money received and expended by the company, and the matters in respect of the receipt & expenditure took place; and A record of the assets and liability of the company S.331 (3)

The accounting records of a company dealing in goods contains Stmts of stocks held at the end of the year of the company; Stmts of stocks from which the annual stmts of stocks in (a) above are prepared; and Stmts of all goods sold and purchased other than by retail trade

Location and presentation of accounting records The accounting records of a company shall be kept at its registered office or such other place in Nigeria as the director think fit, and shall at all time be open for inspecting by the officers of the company S.332 (1) Accounting records of a company is mandatorily required to be preserved for a period of 6 yrs from the date on which they were made, after which the company is free to destroy it. S.332 (2)

DIRECTORS POWER TO FIX FINANCIAL YEAR FOR COMPANY Section 334 (1) CAMA states that for every company, the BOD shall in respect of each year of the company, prepare financial statements for the year. At the first meeting of the board after incorporation, the BOD must determine what date in each year the financial Stmts shall be made up.CBN/ BANKS IN NIG. 1STJAN. to 31 DEC. CAC must be notified within 14 days of such determination. S.534 (4)

CBN/BANKS/CORP. GOVERNANCE However, the CBN acting pursuant to it regulatory power may direct Banks to fix a period to make financial Stmts which may not accord with the period agreed by board resolution of the Bank. In that instance, the banks are bound to comply despite the inconsistency with the powers conferred on the board Banks are usually 31stDecember

FINANCIAL STATEMENTS By S334(2) (3) CAMA, The following constitute the financial statement of a Nigerian company: Statement of the accounting policies [not compulsory for private company] The balance sheet as at the last day of the year A profit and loss (NGO/GTE: Income & expendit.) Notes on the account The Auditor s reports The director s report

A statement of the source and application of fund (not compulsory for private company) A value added statement for the year (not compulsory for private company) A five years financial summary; (not compulsory for private company) In the case of a holding company, the group financial statement.

Form and content of Financial Statements The combination of provisions of Ss 335, 336, 337,340 & 341 CAMA stipulate the contents of a financial statement of a Nigerian company

Nig. Accounting Standard Board By S.335 (1) the financial statement of a company shall comply in form and content with the accounting statements laid down in the statements of accounting standards issued from time by the Nig. Accounting Standard Board

S.335 (2) requires that the balance sheet shall give a true and fair view of the state of affairs of the company as at the end of the year; and the profit and loss account shall give a true and fair view of the profit or loss of the company for the year. S.335 (3) CAMA stipulates that the statement of the source of application funds shall provide information on the generating and utilization of funds by the company during the year

S.335 (4) CAMA providers that the value added statement shall report the wealth created by the company during the year and its distribution among various interest groups such as the employees, the Government, creditors, proprietors & the company S .335 (5) CAMA requires that the five years financial summary shall provide a report for a comparison over a period of five years or more of vital financial information

GROUP FINANCIAL STATEMENT Where a company (holding company) has subsidiaries, the directors shall prepare their individual accounts for the year as well as a group financial statement which deals with the stte of affairs and profit or loss of the company and the subsidiaries. See exceptions to the above in S336(3)

MEANING OF HOLDING COMPANY AND SUBSIDIARIES See section 338 CAMA

Persons Entitled to receive financial statement All members of the company Debenture holders Other person apart from members/debenture holders, that may be entitled The financial stms for each year [copies there to] shall be sent to the above person not less than 21 days before the date of the meeting at which they are to be laid

Failure to deliver copy TO those entitled Any person entitled but not given can demand for it and the company is obliged to give him a copy within 7 days of demand otherwise the company and every officer in default is guilty of an offence S.349 CAMA NB= failure to deliver financial stmt only attracts penalty but does not affect the validity of the meeting or resolution reached thereat. WHAT OF NOTICE OF MEETING?

Directors Duty to Deliver Financial Statement at AGM In respect of each year, the director shall at a date not later than 18 months after incorporation and subsequently, once at least in every year, lay before the company in general meeting copies of the financial stems of the company made up to a date not exceeding nine months prevails to the date of the meeting S 345

False or defective Financial Statement By 348 CAMA, it is an offence to lay defective of false financial Statement before the share holders or have its delivered to CAC

AUDIT IN CORPORATE GOVERNANCE Audit deals with the examination of the books of accounts of the company by external experts with a view to ascertaining its compliance with the accounting policy of a company and accounting standard rules It is a process of ensuring that a company accounting records, financial statements and practice comply with the law. The audited account must also show the financial status of the company Audited statement of account of a company is the best way of showing the financial position of the company at any given time.

APPOINTMENT OF AUDITORS Section 357 (1) CAMA Every company must at each AGM appoint an auditor or auditors to audit the financial statement of the company. Such auditors hold office from the conclusion of that meeting, until the conclusion of the next AGM

INTERNAL AND EXTERNAL AUDITORS An auditor, is an external person who verifies the company s internal record of account to ensure they are properly harmonized. They are distinct from the internal auditors who regularly work for the company Thus, a company has internal and external auditors

Who appoints first auditors? The first auditors of a company may be appointed by the BOD at any time before the company commences business and such auditors shall hold office until the conclusion of the next AGM Section 357 (5) However, such auditors appointed by the BOD may be removed by the members at General Meeting.

The members can replace the affected auditor with any other person who has been nominated for appointment by any member of the company and Notice of his nomination must have been given to the members not less than 14 days before the date of the meetingS.357 (5) (a)

Failure of the directors to appoint first auditors Where the BOD fail to appoint first auditors, the members may in a General Meeting convened for that purpose appoint first auditors. Such appointment of the auditor by the General Meeting, terminates the powers of the BOD to appoint auditor S.357 (5) (b)

Re-Appointment of Auditors. S 357 (2) At any AGM a retiring auditor however appointed shall be re-appointed without any resolution being passed unless 1. he is not qualified for re-appointment; or 2. A resolution has been passed at that meeting that some other person instead of him has been nominated; or 3. The resolution expressly bars him from re- appointment; or 4. He has given the company notice in writing of his unwillingness to be re-appointed

Vacancy based on non-appointment of auditor Where at an AGM the auditors are not appointed or re-appointed the BOD may appoint a person to fill the vacancy. S.357 (3) However, the company shall within one week of such vacancy notify the CAC of that fact and then proceed to fill the vacancy S.357 (4)

QUALIFICATION OF AUDITORS Auditors are essentially qualified accountants since auditing is a specialized branch of accounting. There is no specific qualification of an auditor in term of the professional accounting body he should belong. However, any audit or investigation being carried out pursuant to the provision of CAMA must be carried out in accordance with the provision of the Institute of Chartered Accounting of Nigeria (ICAN).

PROHIBITED PERSONS Section 358 (1), 2, 5, CAMA has made provisions prohibiting the following persons: An officer or servant of the company; A person who is a partner of or in the employment of an officer or servant of the company A body corporate

An auditor must be a person who is independent of the company, such that any officer, employee or person connected with the company in any manner or former employee connected with audit while in the employment is disqualified. NB: BANKS IN NIGERIA: para. 8 (2) CCG for Banks 2010 = 10 years . Until another ten years.

A Disqualified Auditor in Appointment? NB= A FIRM is qualified for employment as auditor of a company if, but only if, all the partners are qualified for appointment as auditors .S. 358 (4) It is an offence to take appointment or fail to vacate office as auditor when disqualified S. 358 (5) (6)

AUDITORS RIGHT TO ATTEND COMPANY MEETING Although an auditor is not a member of the company and must be truly independent of the company; the auditor has right to attend company s meeting . S 363 (1) CAMA An auditor of a company who has been removed shall be entitled to attend the GM at which his term of office would otherwise have expired and any GM at which it is proposed to fill the vacancy caused by his removal and to receive all notice communications as stated above S.363 (2)

RESIGNATION OF AUDITORS S 365 An auditor of a company may resign his office by depositing a notice in writing to that effect at the company s registered office. Such notice shall bring his office to an end on the date of which the notice is deposited or a later date specified in it. S.365 (1) A copy of the notice must be submitted at CAC within 14 days of the deposit S.365 (3) An auditor may state the reason for his resignation in the notice for resignation

READ SECTION.S.365 (2)

Where the auditors notice of resignation contains a stmt as mentioned above, the notice & stmt shall be sent to CAC and every person entitled to receive financial stmt of the company within 14 days S.365 (3)

Defamatory Notice of Resignation? The company or any other person aggrieved over the statement made by the resigning auditor, may in 14 days of the receipt of the notice, apply to the Fed. High on the ground that the auditor is using the resignation notice to source 4 needless publicity/ it is defamatory. The court where satisfied may order that copies of the notice should not be sent out and that the cost of the application be borne by the auditor - S.365 (4) (5)

Requisition for Extra Ordinary Meeting NB= Where an auditor indicates the statement of a Circumstances which will be of interest to the creditor or member in Notice of resignation: he may accompany the notice with a requisition calling on the directors to convene an Extra-ordinary general meeting for the purpose of attending and considering the explanation of these circumstances connected with his resignation.

AUDITORS REPORT OR LIABILITIES OF AUDITOR The auditor of a company shall make a report to the members on the account examined by him, and on every balance sheet, and profit or loss account and on all group financial statements. Copies of these reports are to be laid before the company in GM during the auditor s tenure of office. Se 359 (1) CAMA In addition; an auditor shall in the case of a PLC also make a report to an audit committee established by S.359 (3)

On LIABILITY OF AUDITORS Section 368 CAMA provides that a company s Auditor in the performance of his duties must exercise all such care and skill as is reasonably necessary in the circumstance. Where a company suffers damage or loss because of auditor s breach of fiduciary duty, the auditors shall be liable for negligence. The director may institute action for negligence against him. S.368 (2)

What if the BOD FAILS TO INSTITUTE ACTION? Where the directors fail to institute the action against the auditor, any member may do so after the expiration of 30days notice to the company of his intention to institute such action S.368 (8)

FALSE STATEMENT TO AUDITORS An officer of a company who conveys information which is misleading, false or deceptive in a material particular to an auditor knowingly or recklessly, shall be guilty of an offence and liable to imprisonment for one year or to a fine of N500 or both S 369 CAMA

AUDIT COMMITTEE Every public company should have audit committee, audit committee should be formally constituted and have written terms of reference. Sec 359(3 & 4) CCGN 2003 1939 McKesson & Robbins was under investigation AICPA 1967 Canada Business Corporation Act 1973

Membership of audit committee Section 359 (4) CAMA Audit committee shall consist of an equal number of directors and representatives of the share holders of the company subject to a maximum of six Nomination of a shareholder as a member of the audit committee may be made by a member giving notice of such nomination to the company secretary at least 21 days before the AGM. S.357 (5)

REAPPOINTMENT/REMUNERATION/ QUALIFICATIONS A member appointed to the committee may be re-elected annually. Members shall not be entitled to remuneration-S.359 (4) Members shall have Skills, integrity, willingness to accept accountability, objectively and intellectual honesty.

Objectives and functions of the audit committee Subject to other additional functions and power that the company s articles of association may stipulate, the objectives and functions of the audit committee shall be to- Examine the auditor s report and make recommendation there on S-359 (4) Ascertain that the accounting and reporting policies of the company is in accordance with legal requirement and agreed ethical practices.

Review the scope and planning of audit requirements Review findings on management matters in conjunction with the external and departmental responses Make recommendation to the BOD in regard to appointment, removal and remuneration of external auditors