Shareholders and Agents of Corporate Frauds, by Sola Oni

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Shareholders and Agents of Corporate Frauds,                      by Sola Oni

When the  bubble bursts on Cadbury Nigeria
Elated Shareholders of Cadbury Nigeria PLC woke up on Friday, April 11, 2008 to discover that they had bought the company’s shares on the basis of cooked audited financial statement. The African leading maker of confectionery overstated its accounts by a whopping 13.25 billion through stock buyback, cost deferrals, trade loading and false stock certificates of suppliers to manipulate its reports that were filed with SEC and The Nigerian Exchange (now NGX) and issued to the public. On that fateful day, SEC fined the company, 21. 2 million Naira and its share price tumbled by 68 percent, from 57 Naira before the fraud to 34 Naira on The Exchange. I was then The Exchange’s Spokesman and the story made headlines. Cadbury Nigeria fired its respected Managing Director, Bunmi Oni, regarded as an apostle of corporate governance, shortly after it was discovered that he connived with the external auditors, the company registrars, some directors and staff of the company to doctor the account. The sordid deed hurt Cadbury’s British parent Company, and there was mass sack up to directors’ level. This is the outcome of creative accounting.

Remembering the fall of Enron
Global history is replete with corporate failures. In October 2021, America’s seventh largest company, Enron, suffered reputational damage through accounting fraud in which its shareholders lost $74 billion, leading up to its bankruptcy. It’s employees lost their jobs. An issue of corporate fraud in Nigeria is not limited to Cadbury. In the recent past, Cresta Bank, Intercontinental Bank and Oceanic Bank among others were rocked by financial scandals. Last year, the World Bank debarred nine Nigerian individuals and firms from executing any contract with it due to corporate governance issues, including corruption, fraud and collusive practices. World Bank’s President, David Malpass, said: “The World Bank Group is firmly committed to placing governance, anti-corruption, and transparency front and centre in our work.”

Top line of Creative Accounting
At the 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 the normal standards intend to achieve. At the centre of every corporate fraud are the board, management, auditors and other parties that have some roles to play in a company’s financial report. A creative account is a major risk to investment decision, especially when it is based on fundamental analysis which includes a thorough review of a company’s financial statement among other variables. Globally, many companies present false trajectory of strong earnings and robust dividend payout to attract unsuspecting shareholders, lending institutions, investment advisers and other users of financial statement, perhaps apart from government because of tax evasion. Innocent shareholders and other stakeholders are at the receiving end fishy accounts. Companies’ share prices that were driven by phony financial statements on the securities market fall to their normal level upon discovery. It is a market of equity, justice and fair play.

The Verdict of FRC in Britain 
Reuters published a story, entitled: “UK watchdog says all top accountants fail audit quality test “. By the story, the financial reporting council (FRC) of United Kingdom announced that all the Britain’s leading four accounting firms- EY, KPMG, Deloitte, and PwC alongside with BDO, Grant Thornton and Mazars from the next tier down, failed to hit a target of 90 percent of audits reviewed by the regulator. “Only 75 % of the sample of audits from among Britain’s 350 top listed companies for the year ending December 2017 met the 90 % target overall as accountants failed to challenge information clients gave to them “, according to Reuters.

The burden of FRC in Nigeria 
The Britain’s experience is a wakeup call for the financial reporting council of Nigeria (FRC). There is a knowledge gap in the practice of audit in Nigeria. Many accountants have not fully grasped the application of International Financial Reporting standards (IFRS). Corporate governance challenges still characterize many companies’ board and management. Auditors should exercise diligence and professionalism to win public confidence in the audited accounts. Every company should change its auditors after three years to avert much familiarity with the management to avert connivance to falsify accounts for monetary reward. This can be addressed through a review of the Companies and Allied Matters Act (CAMA). There should be stiff penalties for an audit firm involved in accounts scandals. But are auditors independent? Are they not at the mercy of the executives who can hire and fire? Often, there is no linear relationship between the fees charged by an audit firm and its professional duties? An extra-ordinary professional fee makes an audit firm subservient to the company’s executives. Nigeria’s FRC, should do a lot more to enforce the codes of conducts on the auditors to save the prestigious profession from integrity issue.

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