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When last week the
Central Bank of Nigeria (CBN) announced changes to the relationship
between banks and their external auditors, the best interpretation of
this development was that the apex bank was continuing its re-design of
the nation’s financial system. By requiring banks to replace external
auditors that have been with them for more than 10 years (“including
years spent with constituent legacy banks”), the CBN aims to upset the
cosy relationship built up over the years between the banks and their
auditors. On any account, it is safe to assume that the familiarity
that would have arisen because of such long-term relationships would
engender levels of complacency inconsistent with the need for banks’
books to truly and fairly reflect the state of their operations.

By compelling banks
to regularly change their external auditors, hope is that the
industry’s statements of its activities will be useful inputs into
policy-making, and that we may be spared a repeat of the shock that
attended the result last year of the CBN’s special audit of the
industry. As part of the process of strengthening corporate governance
practices elsewhere, other authorities further require that external
auditors may not provide, contemporaneously, with their audit
assignments any non-audit services. The idea being that considerations
of the larger fees from this non-audit work may not blind the audit
function to its need to be fair to investors in these businesses.
Indeed, in the United States, it is unlawful for the lead (or
coordinating) partner in an audit firm (i.e. one responsible for the
audit) to remain in this role with respect any one client for more than
five years.

Arguably, practice
in matters of this nature (laws/regulations and the enforcement
mechanisms designed to guard the electorate/consumers/shareholders
against abuse by their respective agents) will depend on local
constraints. Nevertheless, it is a great advance that local statutes,
rules, and regulations are being elevated to the levels obtainable in
other places where things appear to work better. This is important,
because rule-governed behaviour, together with efficient enforcement
structures will be indispensable to the collective efforts at moving
this economy forward.

Or isn’t it?
Something about the CBN’s directive on external auditors raised
hackles. It matters that the directive was made consistent with the
“provisions of paragraph 8.2.3 of the CBN Code of Corporate Governance
for Banks”. This code, which came into effect on April 3 2006, provides
that “The tenure of the auditors in a given bank shall be for a maximum
period of ten years after which the audit firm shall not be reappointed
in the bank until after a period of another 10 years.” The key question
is why it has taken the apex bank the better part of four years to
implement a sub-section of what was then considered a key advance in
the nation’s corporate governance space.

Those who are
familiar with the evolution of this code might find an answer of sorts
in section 5.3.10 of the code. When this code first came out as an
exposure draft on January 5 2006, this section read thus: “The tenor
for directors should be defined. In order to ensure
continuity/injection of fresh ideas, it is recommended that no director
should remain on the board of a bank continuously for more than 3 terms
of 4 years each, i.e. 12 years”. Within the context of the central
bank’s argument, in the same document, that the overbearing influence
of chairmen or MD/CEOs (especially in family-controlled banks), and
sit-tight directors (even where such directors fail to make meaningful
contributions to the growth and development of the bank) was a major
corporate governance worry, this was considered a useful provision.

However, by the
final incarnation of the code, this provision had mutated to read: “In
order to ensure both continuity and injection of fresh ideas,
non-executive directors should not remain on the board of a bank
continuously for more than 3 terms of 4 years each, i.e. 12 years”.
Obviously then, some directors were able to persuade the central bank,
that at the root of this particular problem were the non-executive
directors, and not the fat cats of the executive variety.

How much of enforcement in this country is the result of such
special interest advocacy? And how many other provisions of the code
(the need for two independent directors, for instance) has the CBN been
remiss in enforcing?