Shareholders and Corporate Fraud Agents
March 6 (THEWILL) – Delighted shareholders of Cadbury Nigeria Plc woke up on Friday April 11, 2008 to find they had bought the company’s shares on the basis of baked-in audited financial statements. The African confectionery leader overstated its accounts by $13.25 billion through stock buybacks, cost deferrals, trade loadings and fake supplier stock certificates to manipulate its reports that were filed with the SEC (Securities and Exchange Commission) and the Nigerian Exchange (now NGX) and issued to the public.
On that fateful day, the SEC fined the company 21.2 million naira and its share price fell 68% from 57 naira before the fraud to 34 naira on The Exchange. I was the spokesperson for The Exchange at the time and the story made headlines. Cadbury Nigeria fired its respected managing director, Bunmi Oni, considered an apostle of corporate governance, shortly after it was discovered he was colluding with external auditors, the company’s registrars , some administrators and company staff to tend the account. The sordid act hurt Cadbury’s UK parent company, and there was a mass sacking up to director level. It is the result of creative accounting.
World history is filled with business failures. In October 2021, America’s seventh-largest company, Enron, suffered reputational damage due to an accounting fraud in which its shareholders lost $74 billion, leading to its bankruptcy. Its employees lost their jobs. A corporate fraud problem in Nigeria is not limited to Cadbury. In the recent past, Cresta Bank, Intercontinental Bank and Oceanic Bank, among others, have been rocked by financial scandals.
Last year, the World Bank banned nine Nigerian individuals and companies from performing any contracts with it due to corporate governance issues, including corruption, fraud and collusive practices. World Bank President David Malpass said, “The World Bank Group is strongly committed to placing governance, anti-corruption, and transparency at the heart of its work.
At a basic level, creative accounting is a practice that follows normal accounting principles, required laws, and associated regulations, but subtly presented in a clear deviation from what normal standards aim to achieve. At the center of every corporate fraud are the board of directors, management, auditors and other parties who have a role to play in a company’s financial report. A creative account is a major risk to investment decisions, especially when based on fundamental analysis which includes a close examination of a company’s financial statements, among other variables.
Globally, many companies are presenting a false trajectory of strong earnings and robust dividend payouts to attract unsuspecting shareholders, lending institutions, investment advisers and other users of financial statements, perhaps being out of government due to tax evasion. Innocent shareholders and other stakeholders are the recipients of shady accounts. Share prices of companies that have been influenced by false financial statements in the securities market fall to their normal level as soon as they are discovered. It is a market of equity, justice and fair play.
Reuters published an article headlined: “UK watchdog says all top accountants fail audit quality test”. According to the story, the UK’s Financial Reporting Council (FRC) has announced that the four major UK accountancy firms – EY, KPMG, Deloitte and PwC, as well as the next tier BDO, Grant Thornton and Mazars, have not managed to achieve a target of 90% of audits reviewed by the regulator. “Only 75% of the sample of audits among the UK’s top 350 listed companies for the year ending December 2017 met the overall target of 90% because accountants did not dispute the information clients gave them. have data,” according to Reuters.
The British experience is a wake-up call for the Financial Reporting Council of Nigeria (FRC). There is a lack of knowledge in the practice of auditing in Nigeria. Many accountants have not fully grasped the application of International Financial Reporting Standards (IFRS). Corporate governance challenges still characterize the board and management of many companies. Auditors must be diligent and professional in order to gain public confidence in the audited accounts.
Every company should change its auditors after three years to avoid great familiarity with management and to avoid collusion to falsify accounts in exchange for monetary reward. This can be resolved by revising the Companies and Related Matters Act (CAMA).
There should be stiff penalties for an audit firm involved in accounting scandals. But are the auditors independent? Are they not at the mercy of executives who can hire and fire? Often there is no linear relationship between the fees charged by an audit firm and its professional obligations? Extraordinary professional fees bind an auditing firm to the directors of the company. The FRC of Nigeria should do much more to enforce auditor codes of conduct to save the prestigious profession from integrity issues.
•Oni, an integrated communications strategist, licensed stockbroker and commodity broker, is the Managing Director of Sofunix Investment and Communications.