Principle 20 of the Nigerian Code of Corporate Governance 2018 (NCCG) provides that “An external auditor is appointed to provide an independent opinion on the true and fair view of the financial statements of the Company to give assurance to stakeholders on the reliability of the financial statements.”
The External Auditor is widely regarded as a key player in the contemporary Corporate Governance structure and is expected to provide independent and objective assurance on the financial health of the company. Section 357(1) of Companies and Allied Matters Act (CAMA) provides that “Every company shall at each Annual General Meeting appoint an auditor or auditors to audit the financial statement of the company and to hold office from the conclusions of that, until the conclusion of the next Annual General Meeting”
By the provisions of Section 360 of CAMA, the primary function of an Auditor Firm is to carry out such investigation as may enable them form an opinion as to whether proper accounting records have been kept by the company and whether the company’s balance sheet as well as the profit and loss account are in agreement with the accounting records and returns.
The Auditor’s duty of skill, care and caution in performing the Audit was succinctly articulated in RE: London & General Bank [1895] Ch.D 673 @ 683 as follows:
“It is the duty of an Auditor to bear on the work he had to perform that skill, care and caution which a reasonably competent, careful, and cautious Auditor would use. What is reasonable skill, care and caution must depend on the particular circumstances of each case. An Auditor…is not bound to do more than exercise reasonable care and skill in making inquiries…He is not an insurer; he does not guarantee that the books do correctly show the true position of the company’s affairs;…He must be honest – i.e., he must not certify what he does not believe to be true and he must take reasonable care and skill before he believes that what he certifies is true…Where there is nothing to excite suspicion very little inquiring will be reasonably sufficient…Where suspicion is aroused, more care is obviously necessary; but still, an Auditor is not bound to exercise more than reasonable care and skill, even in a case of suspicion…”
Auditors are required to be independent in the performance of audit activities, such that their professional judgement is unbiased and in such manner that will give the assurance of independence and objectivity to a third party having knowledge of all relevant information. Auditor Independence refers to “the independence of the Internal Auditor or of the External Auditors from influence by any party that may have a financial interest in the business being audited. Independence requires integrity and an objective approach to the audit process” – Wikipedia.
An Auditor’s independence is impaired if the Auditor is not capable of exercising objective and impartial judgment on all issues encompassed within the audit engagement.
According to the Institute of Chartered Accountants in England and Wales (ICAEW) the most effective way to guarantee the independence of the auditor is to provide guidance centered on a framework of principles rather than a detailed set of rules that can be complied with to the letter but circumvented in practice.
The NCCG provides that External audit firms may be retained for no longer than ten years continuously and may not be considered for reappointment until after a seven-year cool-off period. Where an external auditor’s tenure has already exceeded ten years at commencement of the Code, such auditor should cease to hold office at the next Annual General Meeting.
To further preserve the External Auditor’s independence, the Code provides that there should be a rotation of the audit engagement partner every five years. Also, a cool- off period of a minimum of three (3) years is required between the retirement of a partner from an audit firm and his/her appointment to the Board of a company which is a client of the audit firm. Similarly, a cool- off period is required before a company engages a member of the audit team as a staff performing financial reporting function.
Additional measures for safeguarding the independence of the external auditor is the prohibition of the provision of certain non-audit services to the company. According to the NCCG, an external auditor may provide only such other services as are approved by the Board on the recommendation of the Audit Committee. The Board must however ensure that these other services do not create a self-review threat.
The CBN Code of Corporate Governance for Banks and other Financial Institutions is more explicit in this regard as it expressly prohibits external auditors to banks from providing services that will amount to a conflict of interest such as book-keeping; services related to accounting records or financial statements of the Bank; appraisal or valuation services, fairness opinion or contribution-in-kind reports; actuarial services; internal audit outsourcing services; management or human resource functions including broker or dealer, investment banking services and legal or expert services.
To ensure quality audit outcomes, the Code provides that the engagement partner and audit team should possess the knowledge, relevant skills and experience. Additionally, they should demonstrate a good understanding of the Company’s business, be independent of the Company and approach their work with a high level of objectivity and professionalism, including applying internationally accepted audit standards in their work.
Where the Board or a Regulator is satisfied that the external auditor has abused its office, acted in a fraudulent manner, colluded in any fraud or engaged in any unethical practice, it may recommend the removal of such external auditor in accordance with the provisions of extant laws. Concomitantly the Code provides that where External Auditors discover information during the audit that leads them to believe that the Company or anyone associated with it has committed an indictable offence under any law, they should report this to the Regulator, whether or not such matter is or will be included in the Management Letter issued to the committee responsible for audit and/or the Board.
The responsibility for monitoring and assessing the independence of the external audit function rests with the Audit Committee. As a key organ within the corporate governance framework, the Audit Committee has oversight over the integrity of financial reports. The Committee should therefore take necessary measures to ensure that the audit process is evaluated for effectiveness and integrity as well as satisfy itself that the independence of the auditors has not been compromised. The Audit Committee should regularly review all of the relationships between the Auditor and the company’s management and directors. All potential independence impairments and related issues should be thoroughly investigated by the Audit Committee and discussed with the Board of Directors. The Committee should also consider seeking guidance from legal counsel, or other professional where it has any cause for concern with respect to the independence of the External Auditor. It is recommended that the Board should codify a policy to provide some guidance to the Audit Committee in this regard. The policy should specify required disclosures to be made by the Audit Firm, contain a non-exhaustive list of prohibited non-audit services as well as prohibited services. The Policy should also provide the procedure for pre-approving non-prohibited services.
The responsibility for ensuring auditor independence should however not rest solely with the Audit Committee. Auditors have a significant role to play in safeguarding their independence and should be guided always by the principles of integrity and objectivity as well as exercise professional judgement.