Dysfunctional predatory governance at FRC (1)

Professional accountants all over the world are familiar with the risk of predatory employees who join an organization with premeditated intentions that are often not wholesome – remember the crime movie ‘The Departed’. When they get in, they manipulate the structures and processes to help them achieve their goals.

Looking at the governance and control structure of the Financial Reporting Council of Nigeria, an agency charged with promoting good governance and accountability, one is only convinced that there is something predatory about the state of governance and control in that agency. So, is the FRC a mafia organization with single-cell management team? And what are the implications for corporate governance leadership in corporate Nigeria? Who is regulating the FRC? Is the regulator watching?

The websites of regulators and government agencies such as the Central Bank of Nigeria (CBN), the Corporate Affairs Commission (CAC), the Nigerian Customs Services (NCS), the Stock Exchange, Securities and Exchange Commission (SEC), etc show their management team to include departmental directors, deputy directors, and assistant directors. In that order, they exert a measure of governance and control influence. But in the case of the FRC, the website shows only Jim Obazee as “Management Team”. This raises a big question as to why FRC should operate for five years under Obazee without directors, deputy directors and assistant directors for the eight directorates established by the Financial Reporting Council of Nigeria Act 2011. A management team of only one member is only a predatory setup. It only weakens governance and control for the purpose of ensuring that deviant actions are not questioned.

Instead of taking steps to improve the situation by empowering and promoting staff to fill the longstanding managerial vacuums, the chief executive officer allegedly manipulated the staff structure with the help of external consultants to demote FRC staff to lower levels thereby widening the already dangerous governance and control chasm. Any professional accountant of substance would identify this control chasm as a high risk for fraud, and of course, not exemplary for the financial reporting community that depends on the governance leadership of the FRC.

Observers are worried that all this seems to be happening under the watch of a Board of Directors populated by professional accountants and lawyers, and with financial statements of FRC being audited by a big international accounting firm. Such boards and audit firms are known to have best practice standard governance and control procedures that identify risks to the assets and systems of the organization. Is this a governance failure on the part of the Board of Directors, or audit failure by the external auditors, or both, that they did not characterize this risk appropriately? Is it inadvertence or acquiescence?

Governance is about oversight. Who oversees the FRC? And why would the overseer watch for five years as the CEO ran the FRC without a management team? Why didn’t the auditors identify the absence of a management team as a serious risk to the integrity of financial management and reporting at the agency since such weakness predisposes an organization to financial impropriety and fraud as seen at Enron and other financial scandals in recent history? Why did the supervising Ministry of Industry, Trade and Investment, headed by a brilliant and astute minister, Olusegun Aganga, a chartered accountant of international repute himself, fail to impose a management team on an important government agency for five years? Who benefitted from this predatory laxity? The losers are well known: the public and financial reporting community who are often intimidated with extortionate fines for minor infractions and even typographical errors in their financial statements, the FRC employees who have been harassed variously, cowered and weakened, and the capital market for loss of investor confidence. The travesty of promoting governance and control in financial reporting and attracting foreign direct investment that the CEO has apparently been hiding behind is coming to light now.

An example of the possible adverse consequence of a one-man management team, with no other person with sufficient managerial authority to ask courageous question, is the alleged failure of Obazee to comply with the Board’s directive that the N853 million IFRS Academy fund be put in a fixed deposit account to earn income. By failing to comply with this directive for three years, the agency lost over N250 million income with the possibility (not definite accusation) that someone is taking the interest income behind the scenes.

It is scandalous to note that the internal auditor at the FRC is not a director of audit but a lowly, beggarly staff with the deceptive title “Head of Internal Audit” but truly only a management assistant at which level he lacks the moral courage, economic security, and hierarchical authority and independence to question the CEO’s indiscipline. In auditing, such low level for the position of the head of internal audit function (a criti        cal pillar of control) is considered a serious fraud risk factor and when condoned by the board and management for this long, it is also considered a predatory practice. By this alone, the FRC loses the moral authority to regulate any legitimate organization in Nigeria except organizations where governance is equivalent to what FRC is practising.

Compare the management team of FRC with other government agencies. In CAC, the audit function is headed by a director. So also in CBN, SEC, Nigerian Customs, and even the Police Department and the Army. The FRC website (http://www.financialreportingcouncil.gov.ng/index.php/about-us/management-information) shows only Obazee as management team. Compare this to CAC website (http://new.cac.gov.ng/home/management-team/), Nigerian Customs (https://www.customs.gov.ng/About/management_team.php), and Nigerian Deposit Insurance Corporation (http://ndic.gov.ng/about-ndic/departments-their-directors/). All these have directors heading important departments and functions.

Olu Abiodun