Court stops further processes relating to FRC new draft code

The Federal High Court, Ikoyi, on Thursday stopped further processes relating to the new draft code by the Financial Reporting Council of Nigeria (FRCN).

FRCN had released a draft corporate governance code on April 15, 2015 with a 30-day window for stakeholders to comment on the 133-page document, ahead of a planned public hearing on May 19, 2015.

Justice O.E Abang, the presiding judge, at the hearing of the ex parte application for injunction brought by Timothy Adesiyan  and nine others against the minister of trade and investment and three others, granted the applicants’ ex parte application and ordered that the defendants should maintain status quo and suspend further deliberations, considerations, proceedings, processes and all actions relating to the draft/proposed National Code of Corporate Governance (NCCG) 2015, pending the hearing of the motion on notice for injunction.

The judge heard the arguments of the plaintiffs’ counsel, Kemi Pinheiro (SAN) in favour of the ex parte application and thereafter gave a well-considered bench ruling wherein he granted the applicants’ ex parte application.

Subsequently, the suit was adjourned to May 20, 2015, for hearing of the plaintiffs’ motion on notice for injunction.

The originating processes were filed on Monday, May 11, 2015 in respect of the above suit.

BusinessDay had exclusively reported last week about the fears being expressed by business leaders and investors that the policy document could wield excessive powers over Nigeria’s already challenged private sector, following the deadline for public comments which expired yesterday.

According to comments received exclusively by BusinessDay on conditions of anonymity, the NCCG, according to them, may swing the country from one extreme of weak corporate governance to another extreme of excessive regulation.

The NCCG is the government’s comprehensive response to the weak corporate governance environment in Africa’s largest economy, identified as a main cause of the 2008/2009 banking sector crisis.

The document promises to harmonise existing codes in the banking, pension, insurance and other sectors into a unified code of rules for board compositions, audit processes, and shareholder protection, among others, which will be regulated by the Financial Reporting Council of Nigeria (FRC).

But  the business leaders say the convergence of the codes into a one-size-fits-all would miss out on industry specific details or contradict existing industry policies.

For instance, the draft code prescribes a mandatory rotation for company external auditors every five years, which shortens the existing 10-year rule adopted by the Central Bank of Nigeria (CBN) for the banking system.

More so, the mandatory rule would diminish audit quality, make financial reporting less reliable, and add costs for investors arising from the loss at fixed intervals of an auditor’s cumulative knowledge of the companies they audit.

On board compositions, investors and business leaders are of the view that a minimum eight-member board may be onerous, especially for smaller private companies who would find it difficult to comply.

In addition, they further argue that the code may be impractical in its requirement for directors not to sit on boards of more than one company in the same industry, given the typical case of business groups having more than one operating company in the same industry.

“This is unreflective of the business environment in Nigeria”, says the CEO of a business consultancy who declined to be named, suggesting that the draft NCCG largely mirrored after the UK’s FRC rules, did not fully capture the peculiarities of the Nigerian business environment.

The NCCG also rules for joint audit of public listed companies, in a bid to enforce patronage of indigenous audit firms in line with Nigeria’s local content policy.

But the big four audit firms in Nigeria say this is a “non-issue”, suggesting that the draft rule is an attempt to break an oligopoly that audits approximately 90 percent of listed companies in Nigeria – according to UK-based NEXUS Strategic Partnerships.

“The big four audit firms in Nigeria are locally registered and are 100 percent owned and managed by Nigerians”, says a reliable audit industry source.

“Due to the international nature of accounting, these firms are affiliated to international networks and bring this to bear for the benefit of the Nigerian economy.”

However, stakeholders have said this is putting the cart before the horse, suggesting that the policy document is a unilateral product of the FRC, void of sufficient contributions and engagements with the business community.

Furthermore, with the coming of a new government on May 29, 2015, it would appear that the FRC is seeking to hurriedly enact the regulation.

Business leaders and other stakeholders are now seeking a six-month period for adequate engagement to “achieve the right level of discourse for such a far-reaching document.”