UNIVERSITY OF LAGOSSCHOOL OF POSTGRADUATE STUDIES

MASTER OF SCIENCE IN ACCOUNTING

A

TERM PAPER

ON

THE IMPACT OF AUDIT COMMITTEE ON INTERNAL AUDIT & CONTROL OF WEMA

BANK PLC

PREPARED BY:

NAME: OGUNDIRAN ADEJOKE THERESA

MATRIC NUMBER: 129021088

LECTURER: ASS. PROF. ADEYEMI S.B.

COURSE TITLE: DEVELOPMENT IN AUDITING

COURSE CODE: ACC 803

FEBURARY, 2014

ABSTRACT

In this paper, we shall discuss the impact of Audit Committee on

internal audit in Nigeria Banks with a case study of Wema Bank

plc. However, a literature review of framework, composition,

terms of reference, functions, responsibilities, and challenges

of Audit committee and the Development of corporate governance

provisions relating to audit committees as well as internal audit

and control concepts shall be examined. In essence, the primary

source of data collection shall be secondary data out of which we

shall draw the significant impact of audit committee on internal

audit and control in Nigerian banks.

1.0 INTRODUCTION

In accordance with the Company and allied Matters Act 1990 (as

amended), Section 359(2) provides that in addition to the report

made to the members of the company on its accounts, the auditors

shall in case of a public company also make reports to an audit

committee which shall be established by the public company. Audit

committee is new in company management. In Nigeria, it is the

company and allied matters Act, 1990 that has made such committee

mandatory by virtue of section 359(3).

The principal duty of the committee is to examine the auditor’s

report and make recommendations thereon to the annual general

meetings as it may think fit by virtue of section 359 (4).

Section 359(6) set out more clearly the objectives and functions

of the audit committee as follows;

Ascertain whether the accounting and reporting policies of

the company is in accordance with legal requirements and

agreed ethical practices;

Review the scope and planning of the audit requirements;

Review the findings on management matters in conjunction

with external auditor and departmental response thereon;

Keep under review the effectiveness of the company’s systems

of accounting and internal control;

Make recommendations to the board as regards the auditors of

the company; and

Authorize the internal auditor to carryout investigation

into any activities of the company which may be of interest

or concern to the committee.

However, the audit committee should not be set as a barrier

between the auditors and the executive directors on the board or

encourage the board to abdicate its responsibility in reviewing

and approving the financial statements. It should not be under

the influence of any dominant personality on the board, neither

should it get in the way of executive management.

FINDINGS

1.1 WEMA BANK PLC AUDIT COMMITTEE FRAMEWORK, COMPOSITION AND

MEETINGS.

In line with global best practice and the code of corporate

governance, the audit committee of Wema Bank Plc., the audit

committee of Wema bank Plc. consists of the Board of Directors as

appointed by the major shareholders in fulfilling its oversight

responsibilities such as the Executive director, Enterprise risk

management, chief inspector, business area, risk management,

internal control, representatives of operations, IT and legal

department. In accordance with Section 359(4) provides that the

committee. The Audit Committee consists of no less than three

members of the Board of Directors, all of whom shall in the

judgment of the Board of Directors be independent in accordance

with applicable Securities and Exchange Commission (“SEC”) rules,

Nigeria Stock Exchange (NSE) listing standards and the Company’s

Corporate Governance Guidelines. Each member of the Audit

Committee shall in the judgment of the Board of Directors be

financially literate, as such qualification is interpreted by the

Company’s Board in its business judgment, have a basic

understanding of finance and accounting and be able to read and

understand the Company’s fundamental financial statements.

At least one member of the Committee shall in the judgment of the

Board of Directors be an audit committee financial expert in

accordance with the rules and regulations of the SEC, and at

least one member (who may also serve as the Audit Committee

financial expert) shall in the judgment of the Board of Directors

have accounting or related financial management expertise in

accordance with the NSE listing standards. Any director who

satisfies the SEC’s “audit committee financial expert” definition

will be deemed to satisfy the NSE’s “accounting or related

financial management expertise” requirement, although the

opposite may not be true.

The members of the Audit Committee and the Chairman of the

Committee were appointed by the Board on the recommendation of

the Nominating and Governance Committee. The Board may, upon

recommendation by the Nominating and Governance Committee, remove

any Audit Committee member at any time, with or without cause.

The Audit Committee meets at least five times annually, or more

frequently as circumstances dictate. Meetings may be called by

the Chairman of the Committee, the Chairman of the Board or Chief

Executive Officer, or a majority of the Committee. The Committee

shall operate pursuant to the Bylaws of the Company, including

Bylaw provisions governing notice of meetings and waivers of

notice, the number of Committee members required to take actions

at meetings and by written consent, and other related matters.

The Committee shall meet privately in executive session at least

annually with the General Counsel, the Chief Operating Officer,

the Chief Financial Officer or Corporate Controller, the Chief

Compliance and Ethics Officer, and periodically with any other

member of management the Committee believes necessary, and at

least quarterly meets privately with the Senior Vice President of

the Company’s internal auditing function and also privately with

the Company’s independent auditor.

The Committee shall maintain minutes of its meetings at least

three times a year and report its findings to the Board after

each Committee meeting but not later than the next quarterly

Board meeting.

According to The Act146 defines audit committee as meaning a body

which performs the functions and the Audit Committee’s primary

purpose is to:

A. Assist the Board in its oversight responsibilities to

shareholders, specifically with respect to:

1. The integrity of the Company’s financial statements,

2. The Company’s compliance with legal and regulatory

requirements

3. The qualifications and independence of the independent auditor

and internal auditing function,

4. The performance of the Company’s internal audit function and

independent auditor, and

5. The risks associated with the foregoing; and

B. Prepare the audit committee report required by the SEC’s proxy

rules to be included in the Company’s annual proxy statement.

1.2 TERMS OF REFERENCE

The committee should be given written terms of reference in

accordance with section 359(6) of the Act. It is its function to:

Review the financial reporting process

Review the system of internal control and management of

financial risks

Review the audit process and the company’s process for

monitoring compliance with laws and regulations.

1.3 PRIMARY DUTIES AND RESPONSIBILITIES

The Audit Committee’s primary duties and responsibilities are to:

A. Monitor the integrity of the Company’s internal controls over

financial reporting.

B. Monitor the qualifications, independence and performance of

the Company’s independent auditor and internal auditing function.

C. Provide a channel of communication among the Board, the

independent auditor, internal auditing function, management and

other concerned individuals.

D. As a committee of the Board of Directors, assist the Board in

meeting its fiduciary duties to shareholders and the Company.

The Audit Committee may conduct or authorize investigations into

any matters within the Committee’s scope of responsibilities, as

defined by this Charter, and shall have direct access to the

independent auditor as well as anyone in the Company.

SPECIFIC RESPONSIBILITIES AND DUTIES OF AUDIT COMMITTEE

The specific responsibilities and duties of the Audit Committee

are as follows:

A. Oversight of Financial Reporting Process

1. In consultation with management, the independent auditor and

the internal auditing function, review the integrity of the

Company’s internal controls over financial reporting, including

the process for assessing risk of fraudulent financial reporting

and detection of material control weaknesses. Review significant

financial risk exposures, including off-balance sheet financing,

if any, and the steps management has taken to monitor and report

such exposures. Review with the independent auditor any audit

problems or difficulties, or significant findings prepared by the

independent auditor, together with management’s responses.

2. Meet to review and discuss the Company’s annual audited

financial statements, including reviewing the Company’s specific

disclosures under “Management’s Discussion and Analysis of

Financial Condition and Results of Operations,” prior to filing

or distribution, and discuss the same with management and the

independent auditor. Recommend to the Board whether the audited

financial statements should be included in the Annual Report on

Form 10-K. Review should include discussion with management and

independent auditors of significant issues regarding accounting

principles, practices and judgments. The Audit Committee should

consider the independent auditor’s judgments about the quality

and appropriateness of the Company’s accounting principles as

applied in its financial reporting.

3. Review with financial management and the independent auditor

the Company’s quarterly and year-end financial results prior to

the public release of earnings. The Audit Committee will discuss

earnings press releases, as well as financial information and

earnings guidance provided to analysts and rating agencies. The

discussion may be done generally by discussion of the types of

information to be disclosed.

4. Meet to review and discuss the quarterly financial statements

with management and the independent auditor, including reviewing

the Company’s specific disclosures under “Management’s Discussion

and Analysis of Financial Condition and Results of Operations,”

prior to filing or distribution.

5. Review major issues regarding accounting principles and

financial statement presentations, including any significant

changes in the Company’s selection or application of accounting

principles, and major issues as to the adequacy of the Company’s

internal controls over financial reporting and any special audit

steps adopted in light of material control deficiencies.

6. Review analyses prepared by management or the independent

auditor identifying significant financial reporting issues and

judgments made in connection with the preparation of the

financial statements, including analyses of the effects of

alternative GAAP methods on the financial statements.

7. Review the effect of regulatory and accounting initiatives, as

well as off-balance sheet structures, on the Company’s financial

statements.

8. Review and ratify the charter of the Company’s Disclosure

Committee, and review the adequacy of the Company’s Disclosure

Controls and Procedures.

9. Review and discuss with management SEC comment letters or

other communications regarding the Company’s public filings and

the Company’s responses thereto.

B. Appointment and Oversight of Independent Auditor

1. Directly appoint, retain, compensate, oversee, evaluate and

terminate the Company’s independent auditor. The Audit Committee

shall confirm with the independent auditor that it must report

directly to the Audit Committee. The Audit Committee may obtain

input from management, but is directly responsible for oversight

of the independent auditor, including resolution of disagreements

between management and the independent auditor. Although not

required, the Audit Committee may, at its option, recommend that

the Board submit the appointment of the independent auditor to

the shareholders of the Company for ratification at the annual

meeting in order to obtain the views of the shareholders. If the

appointment is not ratified by the shareholders, the Audit

Committee will reconsider its selection.

2. Pre-approve all non-audit services to be performed by the

independent auditor in accordance with the Company’s CM-9 policy.

3. At least annually, consider the independence of the

independent auditor, including a review of any significant

engagements of the independent auditor and all other significant

relationships with the auditor that could impair its

independence.

4. Set clear hiring policies for employees or former employees of

the independent auditor.

5. Approve all audit engagement fees and terms, as well as all

significant non-audit engagements with the independent auditor.

Review the amounts of fees paid to the independent auditor for

audit and non-audit services.

6. Review with the independent auditor its audit plan, including

the scope of its audit and general audit approach. The Committee

may request or recommend supplemental review or other audit

procedures as the Committee deems necessary.

7. Meet periodically, at least quarterly, without management

present, with the Company’s independent auditor to discuss the

Company’s cooperation with the independent auditor and other

matters as deemed appropriate.

8. Prior to releasing year-end earnings, discuss with the

independent auditor the results of the audit and certain other

matters required to be communicated to audit committees in

accordance with AICPA SAS 114 and CAMA Company and Allied matters

act 1990 (as amended).

9. At least annually, obtain and review a report by the

independent auditor describing: the firm’s internal quality-

control procedures; any material issues raised by the most recent

internal quality control review, or peer review, of the firm, or

by any inquiry or investigation by governmental or professional

authorities, within the preceding five years, respecting one or

more independent audits carried out by the firm, and any steps

taken to deal with any such issues; and (to assess the auditor’s

independence) all relationships between the independent auditor

and the Company.

10. After reviewing the foregoing report and the independent

auditor’s work throughout the year, evaluate the independent

auditor’s qualifications, performance and independence, including

the performance of the lead partner of the independent auditor.

The Audit Committee shall assure regular rotation of the lead

audit partner as required by law, and further consider whether,

in order to assure continuing auditor independence, there should

be regular rotation of the audit firm itself. The Audit Committee

shall present its conclusions with respect to the independent

auditor to the full Board.

C. Oversight of Internal Audit Function

1. Make certain the Company maintains an internal audit function

that provides management and the Audit Committee with ongoing

assessments of the Company’s risk management process and system

of internal control. Review the budget, plan, organizational

structure, staffing and qualifications of the internal audit

function.

2. Review any significant reports prepared by the internal audit

function, including those involving the internal audit function’s

investigation of fraud, complaints or internal control matters,

together with management’s response and follow-up to these

reports.

D. Other Audit Committee Responsibilities

1. Review the policies and practices developed and implemented by

management with respect to risk assessment and risk management.

The Committee shall not be required to duplicate the review of

risk management or risk assessment processes that are performed

by the full Board of Directors, other Committees of the Board,

and/or through mechanisms other than the Audit Committee, which

mechanisms are established by Company practice or policy. These

processes, reviews and mechanisms, however, should be reviewed by

the Committee in a general manner.

2. Establish procedures for the receipt, retention and treatment

of complaints received by the Company on accounting, internal

controls over financial reporting or auditing matters, as well as

for confidential, anonymous submissions by Company employees of

concerns regarding questionable accounting or auditing matters.

3. Review the scope, coverage and results of employee benefit

plan or other audits with management.

4. Review the quality and depth of staffing in the Company’s

accounting, finance and information technology departments, as

needed.

5. Review the expenses of Company directors and the perquisites

of executive officers.

6. Review any significant internal controls over financial

reporting improvements recommended by the independent auditor or

internal audit function.

7. Annually prepare a report to shareholders as required by the

SEC, covering the findings and recommendations of the Committee,

and include the report in the Company’s annual proxy statement.

8. oversee the Company’s policies and procedures regarding

compliance with applicable laws and regulations and the Company’s

Code of Business Conduct and Ethics, and receive reports from the

General Counsel and Chief Compliance and Ethics Officer as

needed, but not less than annually.

9. Carry out any other specific assignment or activity consistent

with this Charter, the Company’s By-laws and governing law as the

Board of Directors or the Committee deems necessary or

appropriate.

10. Conduct an annual performance evaluation of the Audit

Committee.

11. Review and reassess the adequacy of this Charter at least

annually. Recommend any changes to the Charter to the Board of

Directors for approval and have the Charter published in

accordance with SEC regulations.

E. Funding and Additional Resources Functions

The Company shall provide appropriate funding, as determined by

the Audit Committee, for payment of compensation to any

registered public accounting firm engaged for the purpose of

preparing or issuing an audit report or performing other audit,

review or attest services for the Company. The Audit Committee

may also retain, at the Company’s expense, and without seeking

Board or Company approval, outside legal, accounting or other

advisors it deems necessary to carry out its duties. The Audit

Committee shall receive appropriate funding, as determined by the

Audit Committee, from the Company for payment of compensation to

the outside advisors employed by the Audit Committee, and for

other ordinary administrative expenses of the Committee that are

necessary or appropriate in carrying out its duties.

The Committee shall keep the Chairman of the Board advised as to

the general range of anticipated expenses for outside consultants

or ordinary administrative expenses.

2.0 DISCUSSION OF FINDINGS

Development of corporate governance provisions relating to audit

committees

In line with global best practice and the code of corporate

governance, the audit committee of Wema Bank Plc. was constituted

to carefully plan, review and give necessary recommendation as it

relates to Internal Auditing and Control processes and practices

in the bank.

Besides, Audit Committees were first proposed by the Cadbury

Report on corporate governance in 1992. Since 1994, the Nigeria

Stock Exchange Listing Rules have required companies that do not

have an audit committee to explain to the stock market why they

do not have one.

In 1998, the Hampel report reviewed and revised the Cadbury and

Greenbury reports. 152It proposed principles of good governance

rather than explicit rules, in order to reduce the regulatory

burden on companies and avoid ‘box ticking’ so as to be flexible

enough to be applicable to all companies.

In 1998, the Combined Code on Corporate Governance was created to

consolidate the principles and recommendations of the Cadbury,

Greenbury and Hampel reports. Compliance with the Code was not

mandatory, but the Code was appended to the London Stock Exchange

Listing Rules.

In 2003, the Smith report developed and codified the role of

audit committees. It recommended that: (a) audit committees should

include at least three members, all of them to be independent

non-executive directors, and at least one of them to have

significant, recent and relevant financial experience, with

suitable training to be provided to all of them; and (b) That the

role of the audit committee should be:

— To monitor the integrity of the financial statements of the

company, reviewing significant financial reporting judgments;

— to review the company’s internal financial control system and,

unless expressly addressed by a separate risk committee or by the

board itself, risk management systems;

— to monitor and review the effectiveness of the company’s

internal audit function;

— to make recommendations to the board in relation to the

external auditor’s appointment; and in the event of the board’s

rejecting the recommendation, the committee and the board should

explain their respective positions in the annual report;

— to monitor and review the external auditor’s independence,

objectivity and effectiveness, taking into consideration relevant

UK professional and regulat-ory requirements; and

— to develop and implement policy on the engagement of the

external auditor to supply non-audit services, taking into

account relevant ethical guidance regarding the provision of non-

audit services by the external audit firm. 6.10 These

recommendations were incorporated into the Combined Code in 2003,

which also required that the audit committee should be provided

with sufficient resources, that its activities should be reported

in a separate section of the directors’ report (within the annual

report) and that the chairman of the committee should be present

to answer questions at the AGM.

In 2010, following a review by the FRC, 154 the code was renamed

The UK Corporate Governance Code (the Code). The Code requires

that the company’s statutory auditor must make a report to the

audit committee that includes:

(a) a statement in writing confirming the person’s independence

from the public interest entity; (b) a description of any

services provided by the person to the public interest entity

other than in his capacity as statutory auditor;

(c) a description of any significant threats to the person’s

independence;

(d) an explanation of the steps taken by the person to safeguard

his independence from those threats;

(e) a description of any material weaknesses arising from the

statutory audit in the public interest entity’s internal control

in relation to the preparation of accounts; and

(f) any other significant matters arising from the statutory

audit.

SUMMARY AND CONCLUSION

From above discussion of findings, it is apparent that there is a

high significant impact of audit committee on internal audit and

control of Wema bank and these can never be over emphasized or

undermined as discovered in the course of our data gathering and

findings discussions. However, due to some challenges encountered

by the audit committee such as impairment of independence over

the year’s confidentiality as a result of engagement of family

members and relatives as internal and external auditors of the

bank. It is highly suggested that the audit committee should be

composed of strong and independent persons with not more than one

executive. A member of the committee should have basic financial

and accounting knowledge full of integrity, dedication,

inquisitive, objective and of dependable unbiased judgment.

Also, the majority of nonexecutives on the committee should be

independent of the company. The chairman should be a nonexecutive

director, to be nominated by members of the company. The terms of

the audit committee should be fixed and definite but a member may

be re-elected. The company secretary shall be the secretary of

the committee and the members of committee should not be entitled

to remuneration of any form to avoid conflict of interest.

REFERENCES

Auditors Regulations Journal 2007 SI 2007/3494, regulation 21.

Directive 2006/43/EC.75

Darden company, United Kingdom, Adopted by the Board of Directors

April 12, 2012 Amended and restated:

Darden company, united kingdom, Financial Aspects of Corporate

Governance (December 1992).

E.A Adesina, B.O Ogundiran, M.K. Ajala, G.A Arowolo, Company Law

made simple, volume two, 2010.

The Greenbury report (1995) led to a Code of Best Practice on

Directors’ Remuneration.

The Smith report, USA, Audit committees: Combined Code guidance

(2003).77 Schedule 10, paragraph 10B of the Act (inserted by

Statutory Auditors and Third Country

Wema bank Plc. annual report & accounts 2012