IT is often difficult to discern the truism in the words of the 35th President of the United States of America, John F. Kennedy, on the need to be careful in embracing new opportunities, especially when the opportunities seem perfect and have universal assent. According to him, “the Chinese use two brush strokes to write the word, crisis. One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger, but recognise the opportunity”.
However, to the foremost African Philosopher, Amilcar Cabral, the beauty of theories is not in the inherent benefits that adopters stand to gain, rather, the application of such theories to suit the contexts and perspectives of a society’s particular problem.
In a country where corporate entities find it difficult to adhere to corporate governance ethics without the watchful and supervisory eye of regulatory agencies, the decision to align banks’ financial reports as well as quoted equities to the International Financial Reporting Standard (IFRS) by 2012 calls for concern from various quarters considering the financial and business impacts of the adoption in the country.
With less than a month away from the commencement of the IFRS opening balance sheet date –that is the IFRS comparative period year ended December 31, 2011, there is a need for Nigerian financial institutions and corporate entities alike to begin an early transition programme in order to have the first IFRS annual report in the country.
In the Nigerian context, the question is not just the conversion to the IFRS, as many Nigerian firms can easily employ the services of an auditing firm, especially now that many are used to the Nigerian factor of embracing new ideas and fads, rather the question is about the early adoption and adaptability of the IFRS to the organisation’s systems and processes.
Statistics from KPMG Professional Services reveal that over the years, the use of IFRS has increased throughout the world. More than 100 countries now require or allow the use of IFRS, while many other countries are replacing their national standards with IFRS. These developments mark an important turning point in global financial reporting and standard-setting and are important steps to the ultimate objective of several standard-setters, to have a single globally accepted financial reporting system, which most likely would be IFRS. Nigeria cannot live in isolation of the world.
To a Partner at KPMG Professional Services, Mr. Ayodele Othihiwa, “Based on the IFRS Roadmap released by the NASB, all quoted companies and all financial institutions in Nigeria should be preparing for the transition to IFRS now. The IFRS Roadmap requires all quoted companies and all significant public interest entities to adopt IFRS by 1 January 2012. That is just about 14 months away. So we don’t have all the time in the world. Also, it is very easy for organizations to see the migration to IFRS as another accounting exercise. Experience from other countries has shown that the transition to IFRS has far reaching implications on four key areas of any organisation. These are: accounting and financial reporting, systems and process, business and; people and change management”.
“Conversion to IFRS is a major change programme. It requires senior management to take responsibility for the project and to demonstrate clear leadership and sponsorship throughout its implementation. The Board must own the project. The decision to convert to IFRS needs to be communicated to all those who will be affected by it. This is an essential task in mobilising the whole organisation behind conversion to IFRS. Effective communication of the conversion project’s different elements internally and externally is essential”, Othihiwa urged.
The collapse of some renowned multinational corporations in the United States of America and Europe in the 1990s and the early 2000s, and more recently, the global financial crisis have brought to the fore the need for good corporate governance and financial reporting in financial institutions in order to foster public confidence in the financial services industry.
Often times, it is difficult to discern the responsibility of both internal and external auditors as key players in financial reporting considering the roles many prestigious auditing firms have played in endangering the financial industry in the country through approval of phony account balance sheets as revealed in recent investigation of activities in the financial market.
Hitherto the recent reforms in the financial sector of the Nigerian economy, it was a norm for many financial institutions to deceive investors and customers alike with their false good performance financial reports, which they published in their annual reports. They concealed their huge non-performing loans to the capital market, which had been hit by massive divestments by foreign investors who withdrew their investments to their home economies from the aftermath of the global financial crisis, thus leaving local and small scale investors to suffer the effect of other people’s greed and mismanagement.
Apparently triggered by the need to maintain a competitive advantage after the post-consolidation era, many mega banks that emerged from the exercise felt the need to task the skills and competencies of Boards and managements in improving shareholder values and balance same against other stakeholder interests, not minding the additional corporate governance challenges arising from integration of processes, Information Technology and culture.
To the financial experts at Proshare Nigeria, “The culture of corporate governance was evidently not something the CBN itself imbibed very early on; yet it published one for others to comply with. I strongly believe that undue advantage is created in the market place, that is, competitive advantage is ‘informally’ granted to those closer to regulators. This is the trigger or incentive that lies at the heart of the very problem we face regarding the market meltdown and by extension, corporate governance in Nigeria.”
Not restricted to the financial industry alone, the Cadbury Nigeria Plc saga, which ought to serve as deterrence for many financial institutions in the country rather promoted such anomaly especially when most chief executives of banks and other financial institutions could boast of support from the inner caucus of people in government.
The inability of many quoted firms to present their periodic results to the council of the Nigerian Stock Exchange and other regulators have earned many varying sanctions from suspension to delisting from the official list of the Exchange in order to protect investors in staking money on equities that are not accountable.
The proposed IFRS conversion presents challenges to several levels of an organisation. The stakeholders at each level need a way to understand what issues IFRS conversion presents to financial reporting and financial systems. They need a way to assess the implications of conversion on their organisation, its operating units, and their business processes; and they need to learn about the steps to effecting such conversion. They also need to learn from external perspectives that offer insights on what to plan for and what to avoid.
In sum, the key audiences in accounting like the tax accounting and tax professionals, executives, board members, and operational managers need adequate understanding about the conversion to IFRS for financial institutions and listed equities.
The IFRS is aimed at full disclose and transparency in the financial reporting of banks and other quoted equities in the country. It is the collection of financial reporting standards developed by the International Accounting Standards Board (IASB), an independent, international standard setting organisation, of which the Nigerian Accounting Standard Board (NASB) is a member. The IFRS further seeks to provide a single set of high quality, global accounting standards that require transparent and comparable information in general purpose financial statements.
Furthermore, the IFRS regime, some have argued, requires more detailed disclosures on risk management, insider-related transactions and changes in accounting policies than what obtains under the local SAS.
“Under IFRS, the manner in which accounting transactions are recognised, measured and disclosed will drastically change for Nigerian financial institutions. This in itself begs the question of whether their current accounting systems and IT processes can handle such a change in recognition, measurement and disclosure. As an entity understands the accounting and financial reporting implications of IFRS on many of its transactions, it may have to change the way it runs its business in order to remain competitive and profitable because some business models or the terms of business agreements may no longer make economic sense, prompting the need to renegotiate such contracts. And of course, the people who will implement IFRS need to understand the framework and how it will affect them. Therefore, IFRS is likely to have significant impact on the entire organisation and not just the finance or accounting function”, Othihiwa added.
Corroborating Othihiwa’s views, a Partner with PricewaterhouseCoopers United Kingdom, Simon Gealy explained that adopting the IFRS will not only have an impact on banks’ data and systems, but also on the processes and controls, as well as the people and their performance. It will also help to improve corporate governance practice and entrench transparency in many corporate organisation.
Speaking on the reservations about the IFRS adaptation to the Nigerian financial markets, Othihiwa noted that the adoption of IFRS in Nigeria would be a wholesome adoption of the standards. To him, “This is not an adaptation or a convergence exercise. The standards will have to be applied by Nigerian entities in their entirety. IFRS is a globally accepted body of standards. There is no IFRS for the Nigerian financial environment. Relevant regulatory bodies such as the NASB, SEC, CBN, NAICOM, and PENCOM need to be involved in the journey to IFRS and in sustaining IFRS reporting”.
He however explained that as much as adaptation seems appropriate, the process of adaptation will require some effort and time, which the government and regulatory bodies may not be ready to cope with. “This is not to say that convergence cannot be achieved through adaptation, which essentially means that the country will maintain its national accounting standard but migrate them to comply with IFRS based principles or issue the IFRS standards after adjusting for principles they disagree with or the way they are, as local standards. The drawback of this approach is that, given the complexities of the IFRS standards and spate of changes made to the underlying principles, this approach will be a cumbersome process and will require a lot effort, resources, and skills for a country like ours. Our approach of wholesale adoption in my view is the way to go”, he added.
In his view, a director at PricewaterhouseCoopers, Nicholas Ganz believes that although Nigeria is leading the way for the next wave of countries moving to IFRS, it cannot have a Nigerian IFRS, rather, the conversion process should be robust.
Speaking on how to handle the conversion without complications, Othihiwa said that the migration of an entity’s financial reporting to IFRS must be seen as a project, which requires proper leadership and ownership, planning, execution and monitoring, noting: “All entities need to plan for the conversion. They need to develop their own specific roadmap. The impact of migration to IFRS would not be the same for everybody. So all organisations must understand the key standards that will affect their business, understand the key gaps that exists in the organisation relating to measurement, recognition and disclosure requirements of the IFRS and work out a plan to bridge the gaps identified. Issues of regulatory reporting and taxation must also be considered”.
“The Committee on the Roadmap to the Adoption of IFRS in Nigeria recognised this need and set out the guidelines for effective transition in its report. The guidelines as regards business entities basically involves the following: Understand the issues in Accounting and Reporting by identifying key gaps between current national GAAP and IFRS and considering possible impact on regulatory/statutory and tax reporting; Understand the financial and business impacts of IFRS conversion and then determine possible actions to mitigate volatility of results under IFRS; Make systems and processes amenable and sustainable to IFRS environment by assessing the systems and process impacts on financial reporting and consolidation systems, and thereafter determining changes required to source systems to provide additional data requirements; Implement new procedures to support the business under IFRS reporting; Skill up employees in IFRS knowledge through continuous relevant training”, he added.
He then stressed the need for organisations to provide the right leadership in the conversion process, by making the conversion process a board level decision.
On the benefits accruable to organisations that adopt the IFRS, experts noted that IFRS will improve the quality and consistency of information, avoid multiple reporting and reduce cost of the finance function. Currently, different entities within the group, that reside in different jurisdictions may be required to prepare a dual set of financial statements for external financial reporting; one for local statutory financial reporting in the home country and second for reporting to the parent company (assuming that the parent company reports under IFRS). This increases the efforts of the finance function, introduces complexity in financial reporting and increases costs of the finance function. Group-wide adoption of IFRS will eliminate the need for such multiple reporting, if IFRS is accepted or required in all countries of operation.
IFRS provides more comparability among sectors, countries and companies. Due to its universal appeal, it can both improve and initiate new relationships with investors, customers and suppliers across the globe, since financial statements in accordance with IFRS cut across borders. IFRS will facilitate better comparability of performance with other businesses and reporting under IFRS may also result in greater transparency about a company’s activities to outsiders such as investors, customers and other business partners. As Nigerian businesses become more global in terms of their operations and investor base, IFRS would enable a comparison of Nigerian companies with global peers.
SOURCE:ngrguardiannews.com
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