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
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