THE INCIDENCE OF INACCURATE CORPORATE FINANCIAL

REPORTING IN NIGERIAN CAPITAL MARKET: THE ROLE OF

SECURITIES AND EXCHANGE COMMISSION IN PREVENTING
FUTURE OCCURRENCES

Introduction
I am indeed delighted to be invited to this important
seminar organized by the Shareholders Association,
Ibadan Zone, to speak on the topic: The Incidence of
Inaccurate Corporate Financial Reporting in Nigeria
Capital Market: The Role of Securities and Exchange
Commission in preventing future occurrences.

Let me first of all commend the efforts of the

organizers of this crucial seminar to discuss and
proffer solutions to the prevailing incidences of false
and misleading financial reporting by some corporate
organizations in the country. The seminar is indeed
timely and appropriate.

The issue of corporate financial reporting has become a

global concern particularly in recent time due to the
reported cases of corporate failures arising from
improper/false financial reporting in companies which
hitherto had enjoyed good reputation due to the track
record of great "success" in their lines of business.

Financial Reporting
Financial reporting essentially involves the preparation
and issuing of financial statements. These are formal
records of financial activities of corporate entities
showing their financial condition for a given period of
time. They are usually expected to comply with
regulatory and professional requirements.

Financial statements serve as a means for assessing

management's performance in terms of how efficient and
effective or otherwise it had used available resources
in the course of trying to achieve corporate set goals.
The degree of the usefulness of the financial statements
as a tool for such assessment is dependent to a great
extent, on the level of accuracy and reliability of the
statements.

USERS OF FINANCIAL STATEMENTS

The list of users of financial statements is
inexhaustive. Each group examines the financial
statements based on areas of their needs.
The basic users include shareholders, board &
management, regulatory authorities, creditors,
suppliers, financial analysts, researchers, prospective
investors, etc. These users expect the financial
statements to contain information that would enable them
among other things evaluate the performance and earning
power of a business enterprise, compare its performance
over time or with other enterprises within the industry,
predict its future performance and continuity to enable
them make investment decisions etc.

QUALITIES OF FINANCIAL STATEMENTS

A financial statement that will meet the needs of any
category of users must have the following qualities.
It must be reliable and easily understandable to serve
the intended purpose of the users. The information
should be presented in a simple, clear and logical
manner. Ambiguous presentation of information would rob
it of its usefulness. Therefore there should be proper
classification of items contained in the report to
guaranty proper comprehension and comparison. Since
financial statements are time bound, it is necessary
that they are produced timely. Undue delay in reporting
of accounting or financial information can result in
misleading information as to the true or current state
of affairs of the reporting entity. Other qualities of
good financial statements are accuracy, comparability,
and compatibility with the nature of operations of the
company. It should also comply with the relevant
accounting standards as laid down by the Nigerian
Accounting Standards Board.

Misleading Financial Statements

A financial statement is said to be misleading if it
lacks the qualities mentioned above, it contains
fundamental errors or is prepared with the intention to
deceive/confuse the users.
Such deception can be carried out in a number of ways,
among which are distortions of accounting records,
falsification of transactions, omission of transactions,
or misapplication of accounting principles etc.

REASONS FOR ISSUING INACCURATE FINANCIAL REPORTS

Many reasons can be adduced for the preparation of such
misleading financial statements. One of such reasons is
the demand for high returns by shareholders on their
investments. This expectation of investors places
Management of some companies under undue pressure that
they resort to indulging in unethical forms of
financial-disclosure and reporting.
Another reason is the quest to maintain a "giant"
corporate status in the eyes of the business community
despite some crippling internal problems, odds in the
business terrain or sporadic changes in competitiveness.
Also, the crave to satisfy the greed of company insiders
by manipulating the financials, understating or
reclassifying expenses is yet another reason. These of
course set the stage for the failure of the company with
time. The consequences of these unethical accounting
practices include, but not limited to the following:

• A yawning gap between reality and the reported

position of the company such that any person placing
reliance on such reports for decision making will be
misled.
• Erosion of investor's confidence in corporate
entities,
• Attrition of revenue to the government via evasion or
avoidance of taxes,
• Reduction in the inflow of foreign direct and
portfolio investment.

I am sure some of you present here today can recall

established cases of corporate frauds on the
international scene, which led to the collapse of
notable companies. A very popular example is the Enron
case in the US. The failure of this company had negative
impact on Arthur Andersen, an auditing firm that helped
it to cook its books, while some of the company’s
principal officers were prosecuted, convicted and
sentenced to various jail terms. Rank Xerox is another
popular case. The company had to pay a fine to the tune
of $10m following the US SEC investigation of its
accounting practices. Other celebrated cases were the
WorldCom, and Parmalat sagas.

On the local scene, we also have some notable cases such

as the failures of some Nigerian Banks in the early
1990's, the case of Lever Brothers Plc (Now Unilever) in
1998 where overvaluation of stocks running into billions
of Naira was discovered. Another was the case of the
African Petroleum (AP) Plc in which the company’s Board
concealed indebtedness to the tune of about N22 billion
in its year 2000 offer for sale. The current case as we
all know involves Cadbury Nigeria PLC's overstatement in
the current and prior years audited financial
statements. This is currently under the investigation of
the Commission.

Let me at this juncture, assure all present, of the

Commission's enthusiastic determination and unrelenting
efforts at addressing this ugly menace to ensure it does
not ravage the nation's corporate scene.

REGULATORY REACTIONS
Virtually all the reported cases of corporate failures
mentioned above have been traced to poor corporate
governance practices in companies. This has led
countries, multilateral organizations and professional
bodies to seek out ways of checkmating these unethical
practices by reviewing existing laws and rules, putting
in place new laws, rules and regulations, and in
addition, becoming more aggressive in investigations and
enforcements.

The Sarbanes-Oxley Act of 2002 is a good example of an

immediate response in the US. One of the salient
provisions of the Act is that both corporate management
and independent auditors must assess the effectiveness
and reliability of the controls and procedures their
firms use for reporting financial results. Various
penalties and sanctions which include fines and/or jail
terms stipulated for violators of proper corporate
financial reporting.

In Nigeria, the amendment of the Nigerian Accounting

Standards Board (NASB) Act in 2003 has further empowered
the NASB to sanction auditors found wanting in the
execution of their duties.

Furthermore, the SEC in a proactive response, on

observing the spate of corporate collapses in the
developed economies, collaborated with the Corporate
Affairs Commission (CAC) and other key institutions to
prepare a Code of Corporate Governance for public
limited liability companies in Nigeria. This code was
launched in April 2003. The code is aimed at inculcating
the principles of transparency, accountability and
fairness of directors and management of corporate
entities.

The introduction of the Code in the market is an

important milestone in the nation's quest for good
corporate governance and the protection of investors. It
contains extensive provisions for protecting investors,
as well as measures aimed at ensuring corporate
stability and sustainable growth. For instance, the Code
spells out;

1. The composition of and responsibilities of the Board

of Directors
(The board should be composed in such a way as to ensure
diversity of experience, professionalism integrity,
availability etc),
2. The need to avoid dominance of the company by any
individual by discouraging the holding of positions of
Chairman and Managing Director by one person (The
position of the Chairman and the CEO should be separated
and held by different individuals).
3. Prescriptions for frequency and proceedings of
meetings,
4. Reporting and internal control system. The need to
promote transparency in financial and non-financial
reporting, requires the board to ensure there is a good
and effective internal control system in an
organization.
5. Composition of audit committee. The committee should
be established in accordance with the Companies and
Allied Matters Act (CAMA) Section 359 (3&4), which
states that not more than one executive should be on the
committee.
6. Shareholders rights and privileges.

OTHER STRATEGIES ADOPTED BY THE COMMISSION TO REDUCE

INCIDENCES OF INACCURATE CORPORATE FINANCIAL REPORTING
As you are aware, the cardinal responsibilities of the
Commission are the development of the capital market and
the protection of investors from the unscrupulous
activities of fraudsters in the market.
In its responsibility of registering securities before
they could be offered for sale to the public, the SEC
ensures full disclosure of all relevant and material
financial information from such companies. It seeks to
ensure that such information is accurate and represent
the true positions of the issuing entities.

A committee on the review of disclosure requirements set

up by the Commission came up with the following
recommendations to facilitate/ enhance full disclosure
by companies:

a) Organizations shall file quarterly, interim financial

statements and annual reports in accordance with
accounting standards.
b) Segmental reporting in financial statements of quoted
companies that operate in different lines of business or
in different jurisdictions, multinational corporations
or group of companies should be adopted in line with
global best practices. The Commission regards this as
essential to full disclosure of companies’ activities
because a group when viewed from one segment may appear
profitable, whereas in actual fact it is doing poorly on
aggregate thereby concealing the inherent risk factor in
the business from investors.
c) The swearing to an oath of correctness of information
contained in the Audited Accounts of a company by the
Chief Executive Officer, Directors, and the Chief
Financial Officer. This is to confirm that due care has
been taken in the preparation of accounts and such
officers would be held liable if any falsehood are later
discovered in the accounts.
d) The Rotation of External Auditors. Auditors should be
changed every five (5) years in order not to get too
friendly or compromise their position with the company
being audited.

PROACTIVE STEPS TAKEN BY THE COMMISSION

On proper financial reporting and adherence to the Code
of Corporate Governance the Commission was involved in
some activities summarized as follows:

a) Action plan for Compliance with the Code of Corporate

Governance.
The Commission’s supervision and enforcement activities
reinforces the provisions of the Code of Corporate
Governance. The Commission encourages compliance with
the Code. All public companies have been directed to
report their level of compliance with the code in their
Annual Reports and Accounts and Prospectuses. Though
compliance with the Code is voluntary, the Commission
takes exceptions to violations of its provisions while
giving due recognition to companies that readily adopt
the Code. Based on SEC position, majority of quoted
companies have complied with the SEC directives.

b) Promoting Shareholders/Investors Rights

The Commission being mindful of shareholders’ rights to
the disclosure of information by, and privileges in the
public liability Companies, ensures that shareholders
are empowered as far as their relationship with the
companies is concerned. The Commission looks into
aspects relating to their participation in the
nomination and election of Board Members as well as the
removal of board members. Pressure groups such as
Shareholders Associations are encouraged to be alive to
their responsibilities and to influence their companies
to comply with the provisions of the Code.

c) Code of Conduct for Shareholders Associations

In collaboration with other financial sector regulators
as well as the Corporate Affairs Commission (CAC), the
Bureau of Public Enterprises (BPE), and the various
shareholders associations, the Commission has formulated
a set of rules to guide the conduct of shareholders
associations. The code is expected to focus on the
associations to promote better conduct of general
meetings of members and also ensure good governance in
public companies.

d) Public enlightenment
The Commission had also, in collaboration with the World
Bank and the Nigerian Accounting Standards Board
undertaken public enlightenment exercises in all the
geopolitical regions of the country. This is to
sensitize shareholders, corporate managers and other
stakeholders on the relationship between financial
reporting and the achievement of good corporate
governance. The fora also provided an avenue for
articulating the way forward.

e) Financial Reporting and Code of Best Practice:

In recognition of the roles played by Directors of
Companies, the Commission designed a reporting format to
test compliance with the code of Corporate Governance in
line with SEC Rule 66B. This all-encompassing form meets
the International Best Practice both in areas of
Financial Reporting and Corporate Governance. The
periodic reviews by the Commission of same ensure that
observed lapses are promptly corrected.

f) International Reporting Standard

It will also be of interest to note that the Commission
is a signatory to the International Organization of
Securities Commissions (IOSCO) Regulatory Interpretation
and Information Decision Data Base. As a result of this
status the Commission ensures that the Accounting
standards used in preparing public financial statements
comply strictly with International Financial Reporting
Standards.

g) Code of Conduct for Market operators

Apart from the Code of Corporate Governance and the Code
of Conduct for Shareholders Associations, the Commission
has put in place a Code of Conduct for market operators.
The Code is an important document for maintaining sanity
in the capital market, as it stipulates the professional
conduct expected by intermediaries/operators in the
Nigerian capital market.

CONCLUSION
In conclusion, the role of regulatory agencies in
forestalling incidences of corporate failures caused by
improper financial records and reporting cannot be over
emphasized.

It must be noted that the attainment of transparent and

reliable financial reporting is a collective
responsibility of all stakeholders, shareholders
inclusive. Hence, all must put hands together to ensure
that people with criminal tendencies are not allowed to
man the affairs of public companies.
To further empower regulatory authorities in the
financial market, there is the need to review some of
the existing laws to bring them in tune with current
reality and peculiarity of the market.

Be assured the Commission is poised to exploit all

available means at its disposal in ensuring that
investors' confidence is not eroded in the capital
market. To this end, our routine onsite and off site
inspections have been beefed up to ensure that
irregularities are spotted out and addressed quickly.
The Commission will also investigate any reported case
of financial impropriety it receives by way of
complaint, whistle blowing, etc concerning any company
or management of such company, and ensure that
appropriate measures are taken.

June 14, 2007.