Investors going bankrupt over companies’ falsified accounts, says FRCN

The Financial Reporting Council of Nigeria (FRCN) has raised concerns over the alarming rate of audit failures, including fraud and corporate collapses, which come at a high cost to investors and stockbrokers.

The Executive Secretary/Chief Executive Officer of FRCN, Dr Rabiu Olowo, highlighted the issues yesterday at the 2024 Audit Summit and Stakeholders’ Engagement held in Lagos.

Olowo said Nigerian investors have suffered significant losses due to companies falsifying and deliberately overstating their accounts, leading to serious financial trouble or even collapse.

He attributed many accounting scandals to the excessive greed of a few individuals whose actions have had disastrous consequences, leading to the collapse of entire companies and impacting millions of people.

He explained that the audit failures have exposed investors to the risk of bankruptcy, as some obtained investment and margin loans from banks, which they were subsequently unable to repay.

Oluwo explained that depositors’ funds were also severely eroded due to loans extended by banks for speculative and sometimes manipulative purposes. He added that banks became increasingly cautious about extending further credits to productive sectors of the economy due to the credit crunch. Olowo noted that as a result of the failures, the market capitalisation of the stock exchange dropped from an all-time high of N13.5 trillion to N4.6 trillion, with approximately N2 billion of pension assets lost by fund administrators in 2009 alone.

According to him, the failures led to capital flight as foreign investors sought safer environments for their investments. He noted that the loss of investors’ trust and confidence in the capital market has severely impacted the economy, making it difficult to attract fresh funds necessary for driving rapid economic growth and development.

Tracing the history of audit failures over the past four decades, Olowo cited numerous examples of corporate collapses driven by inadequate auditing practices, including the Enron scandal in the United States and the collapse of Afribank Plc in Nigeria.

The cases, he said, have exposed severe shortcomings in the auditing process, often motivated by greed and a failure to adhere to professional standards, which FRCN seeks to uphold.

In Nigeria, Olowo pointed to the collapse of Afribank in 2011 and the Cadbury saga between 2002 and 2005 as significant examples of audit failures that resulted in catastrophic financial losses and a drain of investors’ confidence.

He explained that such failures occur when auditors deviate from professional standards, leading to false opinions in audit reports that mislead financial statement users.

Olowo emphasised that despite ongoing reforms in rules and best practices, the persistent scandals in the audit profession call for a more proactive approach to regulation.

He argued that this approach is essential for restoring confidence in audits and preventing the devastating financial losses, corporate collapses, and ruined lives often associated with audit failures. He advocated for proactive regulation as a critical tool for preventing audit failures before they occur, rather than merely responding to them after the fact.

This approach, he said, includes practice inspections, understanding potential harms, vigilance for emerging issues, and education focused on avoiding identified risks.

Olowo noted that the FRCN has already taken significant steps toward proactive regulation, including a comprehensive registration and revalidation exercise for professionals involved in financial reporting, the commencement of practice reviews for audit firms, and the issuance of guidelines and rules to strengthen auditing practices in Nigeria.

The regulator emphasised that these efforts aim to identify and address potential issues before they lead to major audit failures. He called on all stakeholders to collaborate in preventing another major audit failure in Nigeria, stressing that effective regulation requires not just rules, but also a commitment to ethical behavior and professional integrity.

Olowo further urged a focus on reforming both the regulatory framework and the individuals within the profession to ensure that audits truly serve their purpose in protecting the market and society.