The global financial crisis in mid-2008, had an adverse effect on both the oil and gas sector and the Nigerian capital market. Despite the banking recapitalisation in 2004 which raised banks’ financial strength considerably, a sharp deterioration in the quality of banks’ assets followed, which immediately led to liquidity constraints across all the banks.
The Central Bank of Nigeria (CBN), concerned about the state of banks and the overall stability of the financial system, commissioned special examinations on all banks in Nigeria. These examinations highlighted significant deficiencies in capital adequacy and liquidity requirements, and illustrated major weaknesses in corporate governance and risk management practices and showed clearly that nine banks were in a ‘Grave Situation’. Immediately, the CBN swung into action and injected N620 billion as convertible loan that amounts to Tier II capital into the banks, sacking the CEOs and replacing the Chief Executives and Executive Directors of eight of the banks with competent managers among others.
It is worthy to note that it took a special examination by the apex bank to uncover the true state of affairs within the banks, despite that routine examinations were still being conducted on the banks by the CBN and NDIC officials without noticing that anything was amiss in those banks. That the routine examiners failed to detect anything amiss with the banks is indicative either of two things; that the supervisory process was faulty or that the officials were compromised and thus simply failed to report their findings.
The recent happenings in the nation’s financial sector have emphasised the need for not just increase in regulatory oversight, but also improvement in the quality of supervision through more efficient and effective procedures to ensure the sound health of the system.
Both the CBN and the Nigeria Deposit Insurance Corporation (NDIC) agree that the situation has brought to the fore the need to put in place a supervisory framework that can deal with the challenges of a more complex financial system as opposed to the compliance-based-supervisory approach of the past.
The CBN said it has adopted measures aimed at tightening the risk management framework of the industry and the way forward lies in the implementation of the globally accepted BASEL II and BASEL III. To this end, the apex bank said it completed the migration from the compliance-based-supervisory approach to risk-based supervision (RBS) in supervising the financial institutions.
Part of the apex bank’s policy guidelines for the 2012/2013 fiscal year is to continue with risk-based supervision in order to speed up the drive towards compliance with the Basel core principles on banking supervision and prepare an enabling environment for the eventual implementation of the Basel II/III Capital Accord.
Basel II is a comprehensive international set of regulations aimed at enhancing the risk management of banks. It has three pillars that focus on -minimum capital requirement; supervisory processes and market discipline, which has to do with disclosure among others.
A deadline of December 31, 2012 has also been fixed for implementation of Basel II in the country as part of efforts to mitigate any shock in the system.
“In March 2011, the CBN also took major steps in procuring support through consulting firms that would help drive the work on Basel 11 going forward. We advertised in March, in line with the procurement Act for consultants to work with us on Basel II and Basel III,” said CBN Deputy Governor, Financial System Stability, Chiedu K. Moghalu recently.
Besides the implementation of risked-based supervision, the NDIC is taking it a step further with the adoption of the Risk-Based Auditing (RBA) system to prevent banking crisis.
To this end, top executives of the corporation recently underwent a training to position them to effectively use the system to achieve the desired objective.
The Managing Director of NDIC, Alhaji Umaru Ibrahim, declaring the training open stated that risk-based audit was seeking to improve audit effectiveness and efficiency by shifting the function from a policing activity to one that contributes effectively to managing risk and achieving wider organisational goals.
He said, “The approach aims to increase responsibility and accountability by ensuring transparency, validating key systems of internal control and committing resources against key risks.”
According to him, some staff had been sent to Malaysia and Kenya to acquaint themselves with how those countries handle their audits using the RBA approach.
Umaru said that the experiences in those countries instigated the management of NDIC to organise another training for the other staff in risk-based auditing.
“The programme is aimed at exposing and equipping participants with the international best practices on enterprise risk management, internal control as well as compliance with legal requirements. We hope that the only knowledge you will acquire during this training would not only sharpen your skills in promptly identifying significant risks facing the corporation, but also enhancing your ability to recommend the mitigants for the overall attainment of the objectives of the corporation,” he said.
Explaining the rationale for RBS, Joel Aluko, the facilitator at the NDIC training said that it was superior to traditional audit approaches for two reasons. First, it focuses on risks, the underlying causes of financial surprises, not just the accounting records. Second, the Risk-based Audit shifts the focus from inspecting the quality of the financial information that is recorded in the financial statements to building quality into the financial reporting process and adding value to the bank’s operations.
By focusing on the control processes, the Risk-based Audit approach adds value to the bank by addressing risks affecting the bank and their financial reporting; providing services that help the bank manage its business and risks; communicating with the bank on important issues; Improving identification of financial statement misstatement; Improving assessment of the banks business viability; Improving identification of fraud; and Improving quality and timeliness of reporting.
According to Aluko, the main thrust of the RSB lies within the Sarbanes-Oxley (SOX) Act enacted in 2002 in the United States of America to increase regulatory visibility and accountability of public companies and their financial in the aftermath of corporate failures like Enron, Worldcom, and their accounting firms such as Arthur Anderson.
Though there are many sections to SOX, the most relevant sections include Sections 302, 303 and 404.
Section 302: Corporate Responsibility for Financial Reports - This section requires that CFOs and CEOs to personally certify and be accountable for their firms’ financial records and accounting. Section 303: Improper Influence on Conduct of Audits – This section states that it shall be unlawful for any officer or director of an issuer to take any action to fraudulently influence, coerce, manipulate or mislead any auditor, and
Section 404: Management Assessment of Internal Controls – This requires auditors to certify the underlying controls and processes that are used to compile the financial results of a company. It also directs the regulator to require banks to disclose whether it has adopted a code of ethics for its senior financial officers and the contents of that code.
The SOX makes it the express responsibility of management to design and implement a sound internal control system within an organisation to achieve its corporate objectives. It aims to hold top officials responsibility should anything go wrong. The same way the CEO signs the financial statement, he needs to prepare an independent report for internal control system in the organisation.