LPC Solicitors

Financial Reporting Council Of Nigeria – Overview Of Its Regulatory Framework As It Relates To Companies

Financial Reporting Council
The Financial Reporting Council Act, 2011 (FRC Act) which was signed into law in July, 2011 established the Financial Reporting Council of Nigeria (the FRC). Amongst its functions, it was charged with the responsibility to:

• to develop and publish accounting and financial reporting standards to be observed in the preparation of financial statements of public interest entities in Nigeria;
• to review, promote and enforce compliance with the accounting and financial reporting standards adopted by it;
• Enforce compliance with the Act and its rules  on registered professionals and the affected public interest entities.

Prior to the establishment of the FRC, the Nigeria Accounting Standards Board (NASB) was the body charged with the responsibility to regulate financial reporting and accounting standards in Nigeria. NASB was established in 1982 as a private sector initiative closely associated with the Institute of Chartered Accountants of Nigeria. It became a government agency in 1992, reporting to the Federal Minister of Commerce. Over the years, and with the pursuit of reforms, the provisions of the Act establishing the NASB were considered obsolete and insufficient to reassure investors and other stakeholders that the country’s corporate reporting and governance frameworks were strong.To make the investment environment safe, it was considered necessary to bridge the gap that existed in financial reporting statements and reshape national risk management. Consequently, the FRC was set up to replace the NASB.

The FRC exercises its regulatory functions over companies in the manner provided in the following enabling laws and regulations:

• The FRC Act
• The Financial Reporting Council of Nigeria Guidelines/Regulations, 2014

1. THE FRC ACT, 2011:
   The FRC Act repealed the Nigerian Accounting Standards Board Act No. 22 of 2003 (“NASB Act”) and established the FRC. Basically, the general mandate of the FRC is to ensure that financial statements of Public Interest Entities are prepared to reflect a true and fair representation of the business affairs and financial position of the relevant organization to which they apply, for the benefit of existing and potential investors and the general public. Public Interest Entities was defined in the Act to mean governments, government organizations, quoted and unquoted companies and all other organizations that are required by law to file returns with regulatory authorities and this excludes private companies that routinely file returns only with the Corporate Affairs Commission and the Federal Inland Revenue Service.
   Highlights of the Act as it affects companies:

   All Public Interest Entities are required by the Act to:

   • Submit copies of annual reports and accounts with the FRC within 60 days of the approval of its Board[1].
   • Pay annual levies to the FRC[2]. These levies are usually calculated either based on a percentage of the market capitalization of the Company or annual turnover of the Company. A failure to pay the levy as charged will attract a penalty equivalent to 10% of the amount for every month of default. In addition, the CEO of the Company shall be liable to a fine of not more than N500, 000 or imprisonment not exceeding 6 months.
   • ensure that the preparation of its financial statements or report is in compliance with accounting and financial reporting standards developed by FRC[3], failing which a fine of an amount not exceeding N10,000,000  or imprisonment or both will accrue.
   • Submit within 30 days, copies of any financial statements or reports filed with any government department or authority with the council.

    

2. THE FINANCIAL REPORTING COUNCIL OF NIGERIA GUIDELINES/REGULATIONS 2014

   In the exercise of the powers conferred by Section 73 of the FRC Act, the Minister of Industry, Trade and Investment made the following guidelines/regulations which came into force on October 3, 2014.
   Some of the highlights of the guidelines vis a viz the FRC Act will be discussed hereunder;

   • Applicability of the Guidelines:

   Section 2 of the Guidelines provides that the authority of the Directorate of Inspections and Monitoring of the FRC extends to the accounts, financial reports, returns and other documents of all entities pursuant to the various laws and/or regulations in existence in Nigeria. This means thatall 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.

   This appears contrary to the provisions of the FRC Act which applies to only Public Interest Entities.  By implication, the guidelines attempts to expand its applicability to include private companies that routinely file returns only with the Corporate Affairs Commission and the Federal Inland Revenue Service. These groups of companies were expressly excluded in the interpretation of the meaning of public interest entities in the FRC Act.

   This interpretation has also been upheld in a recent decision of the Federal High Court of Nigeria in the case of Eko Hotels Ltd and the Financial Reporting Council of Nigeria[1]. In the suit, Eko Hotels challenged the power of the FRC to demand the registration of private companies with it. In its decision, the Court held that there was no legal authority vesting FRC with powers to regulate the affairs of a private company and as such Eko Hotels was not liable to register with FRC or pay any statutory renewal dues to FRC. The FRC has however, appealed against the decision to the Court of Appeal. Pending the outcome of the appeal, the decision of the Federal High Court being a court of competent jurisdiction remains the law until the decision is reversed.

   • Procedure for investigations:

   The detailed procedure for investigating reports of non-compliance with financial reporting standards was provided in the Guidelines.

   It may be pertinent at this point to note that entities will be charged on an hourly basis for time spent by the FRC in discovering errors on non-compliance. This fee is fixed at N250,000 per hour.  Where an inspector of FRC is required to carry out-onsite inspection due to the fact that a matter was not resolved at a meeting between FRC and representatives of an entity, the entity shall pay an inspection fee of N1,000,000 per day.

   It may be worthy of note that the decision on whether or not a matter of non-compliance could not be resolved at a meeting or the issue requires in-depth inspection or enquiry, lies with the FRC. It may be right to wonder whether this power cannot be unduly exploited or abused thereby exposing entities to unnecessary payments.  In addition, given the fact that complaints may be filed by 3rd parties or even public comments (such as a press commentary), frivolous and unsubstantiated claims may be brought against an entity for which the entity may expend the company’s funds defending.

   • Sanctions/Penalties:

   The Guidelines provides for sanctions/penalties that may be imposed by the FRC for non-compliance with its Act, Guidelines and financial reporting standards. The appropriate sanctions for each case of non-compliance is determined after due considerations of the nature and materiality of the contraventions of the applicable financial reporting standard, code of corporate governance or requirements Act.  These sanctions could be to the entity, its external auditors or other relevant professionals that were involved.

   The Guidelines classified the categories of non-compliance into 6 types[2]. Types 1 – 5 cover non-compliance situations that may be material without rendering the financial statements of the entity totally misleading and the penalties range from N5 million to N100m.  The classification of the level of non-compliance of an entity under Type 6 will require the withdrawal of the financial statements of the entity and an additional penalty of between N500 million and N5 Billion for each year requiring restatement. The actual figure is determined by the market capitalization/turnover of the entity.

   In addition, penalties imposed on entities must be settled within 14 days failing which an additional penalty of 0.1% of the imposed penalty shall accrue for each day of default.

   One of the objects of the FRCN is to protect investors and other stake holders’ interest[3] in these public interest entities. However, the extent to which this object will be achieved in the face of the stringent penalties imposed by its Guidelines is open to question as most of the penalties are substantial and may end up stifling the growth of a Company.

   In addition, the sheer volume of compulsory levies/fees, penalties and sanctions imposed by the FRC therefore appears to the independent reviewer that one of the primary goals of the FRC is to collect levies, rather than perform its mandatory function of regulating.

   • Appeal Procedure:

   The Guidelines makes provision for an appeal procedure to be followed by an entity to the Technical and Oversight Committee (TOC) of the FRC against any decision reached by the Directorate of Inspections and Monitoring. The appeal must be made to the TOC within 14 days with a non-refundable application fee of N1m. This requirement for the payment of a non-refundable fee for appeals was not mentioned in the enabling FRC Act.

3. EXPOSURE DRAFT ON THE NATIONAL CODE OF CORPORATE GOVERNANCE FOR THE PRIVATE SECTOR IN NIGERIA, 2015:

   Pursuant to the objectives and functions of the directorate of corporate governance of the FRC as stipulated in section 50 and 51 of the FRC Act, the FRC on April 15, 2015 released an exposure draft of the National Code of Corporate Governance, 2015 for comments from stakeholders.  Comments were expected to be received from April 15, 2015 to May 14, 2015 and June 11, 2015 to June 25, 2015.  The purpose of the code is to harmonize and unify all the existing sectoral corporate governance codes in Nigeria. The sectoral corporate governance codes considered in drafting the national code were the following:

   • Code of Corporate Governance for Banks in Nigeria Post-Consolidation 2006,
   • Code of Corporate Governance for Licensed Pensions Operators 2008,
   • Code of Corporate Governance for Insurance Industry in Nigeria 2009,
   • Securities & Exchange Commission’s Code of Corporate Governance for Public Companies in Nigeria 2011 and;
   • Exposure Draft of the Revised Code of Corporate Governance for Banks in Nigeria 2012.

The draft Code upon finalization shall be applicable to the following:

1.  All public companies (whether listed or not);
2. All private companies that are holding companies or subsidiaries of public companies; and

All “Public Interest Entities” as defined by section 77 of the Financial Reporting Council of Nigeria Act 2011.

From the date of commencement of this Code, it shall supersede any corporate governance code in force in Nigeria before that date.

Conclusion:

The provisions of the FRC guidelines vis a vis the FRC Act will be debated for a long time as it has daunting provisions with far reaching implications on the business and professional services environment. The Council may have to enlighten all stakeholders on the spirit behind the letters to manage stakeholders’ perception and avoid series of litigations that may be instituted against it by various stakeholders which may scare away the much needed inflow of FDI into the country or result in embarrassing public squabbles with other regulatory authorities as in the recent case with the Central Bank of Nigeria on Stanbic IBTC Bank’s Financial Statements.
In the same vein, whilst some companies may find the provisions of the FRC Guidelines punitive rather than regulatory in some aspects, companies are encouraged to comply with the rules and the FRC Act to avoid attracting avoidable penalties pending clarifications on the gray areas.
Notwithstanding the foregoing, on the basis of High Court decision in the Eko Hotel case, for the time being, private companies who only file returns routinely with the CAC and FIRS can carry on their business activities without the additional administrative burden of registration or payment of fees to the FRC.
 By Adaobi Anikwe (Mrs.)

[1] Section 8d of the FRC Act
[2] Section 33 of the FRC Act

[3] Presently, it is the International Financial Reporting Standards (IFRS) that has been adopted by the FRC

[4] FHC/L/CS/1430/12

[5] See the Appendix to the Guidelines for a detailed breakdown of the Accounting and Disclosure Anomalies distinguished by type.

[6] Sec. 11(a) of the FRC Act