It has been about 20 years since the introduction of audit committees in public companies in Nigeria. Before the promulgation of the then Companies and Allied Matters Decree No. 1 of 1990, audit committees were not part of corporate administration. However, in 1990, the situation changed in respect of public companies as the said enactment made it mandatory for public companies to have audit committees. It would appear that the idea was borrowed from the practice overseas, but the concept was not implemented hook, line and sinker in Nigeria. The structure of audit committees in Nigeria is unique; it is markedly different from the practice in any other part of the world. Apart from the scope of the remit of audit committees and their authority, a fundamental area of difference between the practice in Nigeria and what obtains elsewhere relates to the membership of audit committees. This paper is a critical inquiry into the utilisation of audit committees in corporate administration in Nigeria. Two decades after their introduction, it is appropriate to undertake such an exercise with a view to assessing the performance of the committee and highlighting areas for improvement to ensure that the desired and desirable benefits expected of audit committees are not rendered illusory and shambolic.
Keywords: Corporate Governance, Corporate Governance Codes, Board Committee, Audit Committee, Board of Directors, Independent Directors, Non-Executive Directors, Securities and Exchange Commission
It was not until the enactment of the Companies and Allied Matters Act in 1990 that public companies in Nigeria were required to establish audit committees as part of their corporate administrative structure. The audit committee concept was not original as such committees were, before then, already in operation in the more advanced economies. The origin of audit committees has been linked to the endorsement by the New York Stock Exchange in 1939. Also, on 20th July 1967, the Executive Committee of the American Institute of Certified Public Accountants issued a statement recommending:
“. . . that publicly owned corporations appoint committees composed of outside directors (those who are not officers or employees) to nominate the independent directors of the corporations’ financial statements and to discuss the auditors’ work with them.”
It has been reported that “in a landmark study based on survey research published in 1970, Mautz and Neumann presciently observed” as follows:
“Corporate audit committees, in practice, can contribute significantly to corporate governance and discipline, but their mere establishment by board resolution does not guarantee any significant degree of success.”
Furthermore, in 1972 the Securities and Exchange Commission of the United States of America recommended that publicly held companies should establish audit committees composed of outside (non-management) directors. In 1977, the New York Stock Exchange adopted a listing requirement that audit committees be composed entirely of independent directors. In fact, it has been contended that audit committees were established in the United States of America before 1978. The importance attached to audit committees in the United States of America was further strengthened in 1988 when the American Institute of Certified Public Accountants issued SAS 61 on “Communication with Audit Committees” which addressed communications between the external auditor, audit committee and management of reporting companies in the United States of America.
In other countries, an audit committee has always been a committee of the board of directors of the company, composed of members of the board of the company; albeit, only non-executive members. However, in the Nigerian situation, the membership of the committee is made up of equal representation of members of the board of directors of the company and shareholders’ representatives respectively and the maximum number of members of audit committees shall not exceed six by virtue of section 359(4) of the CAMA.
It is now about two decades since the introduction of audit committees in corporate administration in Nigeria. This paper evaluates the operation of audit committees in public companies in Nigeria with a view to establishing their success or otherwise in corporate governance and proffers suggestions on how to improve the effectiveness of audit committees.
B. LEGAL FRAMEWORK FOR AUDIT COMMITTEES IN NIGERIA
Section 359(3) of the CAMA provides for the establishment of Audit Committees in public companies in Nigeria thus:
“The auditor shall in the case of a public company also make a report to an audit committee which shall be established by the public company.”
This provision was further fortified by section 359(4) which provides that the membership of the committee be composed of equal number of directors and shareholders’ representatives so however that the maximum number of members of the committee shall not exceed six.
The provision on the establishment of audit committees in public companies in Nigeria was further boosted in 2003 by the Code of Best Practices of Corporate Governance in Nigeria, issued by the Securities and Exchange Commission, which was applicable to all public companies in Nigeria. The 2003 SEC Code in section 11(a) enjoined companies to have audit committees. It further indicated that directors’ representatives in the audit committee should mainly be non-executive directors. It also provided for the terms of reference for the committee.
Perhaps, taking a cue from the provisions of the 2003 SEC Code, the Code of Corporate Governance for Banks in Nigeria Post-Consolidation 2006, issued by the Central Bank of Nigeria and mandatory for all banks operating in Nigeria also made provision for the establishment of audit committees in all banks operating in Nigeria.
Furthermore, the Code of Corporate Governance for Insurance Companies in Nigeria 2009 issued by the regulator of the insurance industry in Nigeria, National Insurance Commission (NAICOM), similarly provided for the establishment of audit committees in insurance and re-insurance companies operating in Nigeria. However, in the Code of Corporate Governance for Licensed Pension Operators 2008 issued by the National Pension Commission (PENCOM), the audit committee only received a mere mention in two provisions; the first provision, recognises the audit committee as one of the committees the board of directors of a relevant company can establish to facilitate its work and the second provision stipulates that the corporate governance report to be prepared by a relevant company for submission to PENCOM should contain the composition of the audit committee of the company and the details of the committee’s activities. Also, the 2011 SEC Code which emanated from the Draft Revised Code of Corporate Governance, made available to the general public for comments by the Securities and Exchange Commission of Nigeria, through its website, made extensive provisions concerning the audit committee.
There has thus been no doubt about the legality of the existence of audit committees in public companies in Nigeria. The composition and use of the committees in the different companies though raise some concerns.
C. COMPOSITION OF AUDIT COMMITTEES
The audit committee, as previously observed, is composed of equal representatives of shareholders and the board of directors of the company. The representatives of the board on the audit committee are mainly non-executive directors. The shareholders are to elect their representatives. According to section 359(5) of the CAMA, a shareholder must be nominated by another member not later than 21 days before the date for an annual general meeting to be eligible for election in that annual general meeting. In view of the nature of the role of the audit committee, there are complementary provisions in the different corporate governance codes for some members of the committee to be financially literate. Also, in the case of an insurance company, at least a member of its audit committee is required to “have a good understanding of the business of insurance.” As we shall see later, the nature and quality of membership of the audit committees are currently a major constraint on the performance of audit committees. Suffice it to state that in the more advanced economies, audit committee membership is strictly a board affair. It is made up of only board members; even then, the current trend is that the members of the board who are in the audit committee are not just non-executive directors, but independent non-executive directors. This quality of membership is absent in the audit committees of public companies in Nigeria.
There are basically two officers of the audit committee: the chairman and secretary. In spite of the absence of any provision in the CAMA to that effect, in practice generally, the chairman of the audit committee is usually a shareholders’ representative. This practice is consistent with the provision of section 8.1.4 of the 2006 CBN Code, but inconsistent with the provisions of section 7.02(iii) of the 2009 NAICOM Code which stipulate that the audit committee should be chaired by a director. It is noteworthy that the 2011 SEC Code is silent on the issue of the audit committee’s chairmanship. In a similar vein, as a matter of practice, the Company Secretary is usually the Secretary to the audit committee. This is not statutorily provided for in the CAMA.
It must be pointed out that membership of the committee is essentially gratuitous as members are not to be paid any remuneration for their services. In practice though, they receive allowances for attending meetings, transportation and accommodation expenses.
D. FUNCTIONS OF AUDIT COMMITTEES
The statutory functions of audit committees are as stipulated in section 359(6) of the CAMA which provides as follows:
“Subject to such other additional functions and powers that the company’s articles of association may stipulate, the objectives and functions of the audit committee shall be to:
(a) ascertain whether the accounting and reporting policies of the company are in accordance with legal requirements and agreed ethical practices;
(b) review the scope and planning of audit requirements;
(c) review the findings on management matters in conjunction with the external auditor and departmental responses thereon;
(d) keep under review the effectiveness of the company’s system of accounting and internal control;
(e) make recommendations to the Board in regard to the appointment, removal and remuneration of the external auditors of the company; and
(f) authorise the internal auditor to carry out investigations into any activities of the company which may be of interest or concern to the committee.”
The above provision is in addition to the provision of section 359(4) which authorises the audit committee to “examine the auditors’ report and make recommendations thereon to the annual general meeting as it may think fit.”
The above statutory provisions are complemented by the provisions in some corporate governance codes. Admittedly, some of the functions of the audit committee stated in the corporate governance codes are a recast of extant statutory provisions, there are some stipulated functions in the corporate governance codes which expand and expound the statutory provisions. In some cases, the corporate governance codes stipulate new functions for the audit committee outside the provisions of the CAMA. Generally, the functions of the audit committee as stipulated in corporate governance codes include assisting in the oversight of the integrity of the company’s financial statements, review the terms of engagement and recommend the appointment or re‐appointment and compensation of external auditors to the Board and the shareholders, risk assessment and management, ensure the development of a comprehensive internal control framework for the company, review and ensure that adequate whistle-blowing procedures are in place, and monitoring of corrections by management of reported deficiencies in the running of the company as identified in the external auditor’s management letter.
On the surface, the provisions of the corporate governance codes are in tandem with the provisions of the CAMA on the subject-matter. One wonders why the corporate governance codes had to repeat a compulsory statutory provision. The statement of the functions of the audit committee in the corporate governance codes is unnecessary and repetitive.
It is noteworthy that the codes made provisions for regular meetings of the audit committee to enable them discharge their enormous functions. In addition, there are provisions for periodic evaluation of the performance of the audit committee and its members.
E. AUDIT COMMITTEES: THE JOURNEY SO FAR
The existence of audit committees in public companies in Nigeria following the enactment of the CAMA about two decades ago has been uneventful. Following the failures of some public-quoted companies in Nigeria, it is obvious that some gate-keepers (including the audit committees of such companies) were caught napping.
A review of the reports of the audit committees of some listed companies, including those with financial misstatement issues, indicates that the audit committees have not been alive to their responsibilities. It can, thus, be concluded that the meetings of the audit committees in most companies are rather routine and not sufficiently scrutinising. This conclusion is underscored by the fact that the reports issued by some audit committees over the years have consistently remained exactly the same, year on year.
What further underscores the little importance attached to audit committees in some companies is the fact that some companies have two audit committees: one named Shareholders/Statutory Audit Committee and the other named Board Audit Committee. The 2009 Annual Reports and Accounts of one of such companies, audaciously stated that the Shareholders Audit Committee “has six (6) members and the membership is split evenly between three (3) members of the Board Audit Committee and three (3) members nominated annually by shareholders at the Annual General Meeting.” Furthermore, the said Annual Reports and Accounts tersely and with finality declared that “the Shareholders Audit Committee reviews and approves the Bank's financial statements before publication.” In relation to the so-called Board Audit Committee, the Annual Reports and Accounts stated that the terms of reference of the committee include receiving internal and external audit reports periodically; periodically review and recommend for full Board approval accounting, operations and procedural policies and controls for the Bank; evaluating the performance and effectiveness of the Bank’s External Auditors and make recommendations to the full Board as to their retention or change; reviewing major expense lines periodically; and reviewing the Bank’s accounts before presentation and/or publication in all instances.
What is evident from the above is that the audit committee established under the CAMA is of little significance in relation to financial control testing in most companies. As can be seen from the above, key functions ordinarily reserved for the audit committee in the CAMA have, by internal arrangement, been assigned to the so-called Board Audit Committee. It is even doubtful if the so-called Shareholders/Statutory Audit Committee can challenge the figures in the bank's financial statements they are required to approve before publication.
The emasculation of audit committees is not peculiar to the particular bank under reference. In relation to other public companies, the difference relates only to the degree of emasculation and, perhaps, style. For example, where a company's audited results are presented to members of the audit committee after the board of directors has approved same, what value could the audit committee possibly add to the results? None, of course! The presentation of the audited results to the audit committee is a mere formality that serves no purpose as regards the protection of shareholders' interests.
It is contended that if an audit of audit committees of public companies in Nigeria is conducted by the Securities and Exchange Commission, the revelations from such audit exercise would be mind-boggling. As tasking as this might seem, it is desirable that such practice should be undertaken by the Securities and Exchange Commission as part of its routine assignments in the regulation of corporate organisations and entrenchment of sound corporate governance practice in Nigeria. Of what use are such lofty provisions in the law if they are neither observed nor enforced? A law is law to the extent to which it is enforced because enforcement engenders observance. A law that is obeyed largely in breach thereof, and no sanction is applied, is not law. It is a useless provision in the statute book, occupying vital space. It is at best a dead-letter law; and utterly useless!
There exists a real need to review the structure, format and operations of the audit committees of public companies in Nigeria to make them effective and well-suited to achieve the aims for which they were established.
F. ENHANCING AUDIT COMMITTEES’ EFFECTIVENESS
The audit committee, in this day and age, is a vital element in an effective corporate governance framework. There is a crucial urgency in institutionalising solid and deep-rooted corporate governance mechanisms in organisations because the recent experience from corporate failures has shown that the consequence of such failures can be extremely grave for both the shareholders and the economy. Several areas where lapses exist in the present structure of the audit committee system will be examined with a view to proffering necessary suggestions towards an effective and value-adding audit committee framework in Nigeria.
1. Membership of Audit Committees
This is perhaps the most important factor in the effectiveness or otherwise of audit committees. It, therefore, deserves great attention. A committee is as good as the people it is composed of. There are several aspects of membership impacting on the effectiveness of audit committees. These would be considered hereunder with vital suggestions for strengthening such committees.
a) Nature of Membership
The audit committee, in concept and practice, should be a committee of the board. Rightly, this is the practice in the more advanced economies. Accordingly, audit committees are those bodies which “assume the important responsibility of representing boards of directors on oversight matters related to financial reporting, auditing and overall corporate governance.” Thus, audit committees have the responsibility of facilitating the work of the board. They probe deeper into the financial aspects of the boards’ responsibilities and make recommendations to their boards for approval. Due to the fact that an audit committee is a board committee, its membership is entirely board members; albeit, non-executive directors.
However, the audit committee model practised in Nigeria has a dual membership. The committee in Nigeria is made up of an even number of representatives of shareholders and directors. It is difficult to appreciate the value of having shareholders’ representatives in the audit committee. It may be contended that by having shareholders’ representatives in the audit committee, the interests of shareholders would be better protected by the committee. This contention can hardly be substantiated. With the “rubber-stamp” and “figure-head” role the audit committees have undeniably but reprehensibly carved for themselves, one wonders what shareholders' interests could possibly be so protected. The committee does not take any decision on any matter of importance. In fact, no matter of importance is brought before the committee for consideration and decision. The audit committee meeting practice among some few companies sampled shows that audit committee meetings are usually held on the same day as board meetings, with board meetings taking place before audit committee meetings. In some companies, the board meeting is held in the morning while the meeting of the audit committee is held in the afternoon of the same day. Where financial results are to be considered, they would have been approved by the board in their meeting earlier on. At the subsequent audit committee meeting, the audit committee members would then be informed of the performance of the company. They can ask questions and make comments on the results, and no more. They cannot test the veracity of the results and certainly cannot stop the publication of the results. The members of the board of directors who are also members of the audit committee and are part of the meeting would have been part of the board meeting that approved the results earlier on and would possibly have no questions on the results. This procedure clearly underscores the irrelevance of audit committees in the scheme of things in corporate administration in spite of all the good intentions and grand posturing. In the right order of events, the audit committee should have considered and approved the result before it is presented to the board for consideration and final approval.
Another factor that belies the interest-of-shareholders argument as justification for the dual membership composition of audit committees is the fact that shareholders of public companies in Nigeria are largely disparate. This is even more pronounced in the case of large multinationals with very large shareholder base. The shareholders’ representatives are nothing but figurative representatives. They do not formally report the outcomes of their audit committee meetings to other shareholders. Even where the shareholders’ representatives belong to the same shareholders’ association, they, at best, will inform only some influential members of that association of the outcomes of their meetings. This does not cascade down to the totality, or even majority, of shareholders of the company. Other shareholders will still rely on the company's shareholders communication channel to get information about the company.
The only conceivable advantage of having shareholders represented in audit committees is that the tussle by shareholders’ associations to have their members elected into audit committees ensures that they mobilise their members to attend annual general meetings where shareholders’ representatives are usually elected. This invariably boosts shareholders attendance at annual general meetings. Nevertheless, since the shareholders representing shareholders in the audit committee enjoy the opportunity of having closer rapport with directors of the company concerned, any attempt to exclude shareholders from the membership of audit committees will certainly be fiercely resisted by shareholders.
Arguably, it is the presence of shareholders’ representatives in audit committees that has made most companies reluctant, if not unwilling, to table before the committee for deliberation, price-sensitive information that is not yet in the public domain. In reality, the shareholders’ representatives in the audit committee do not owe the same degree of duties to the company and its shareholders as do the directors under the CAMA and case law. Thus, they would neither be obliged nor expected to maintain the same level of confidentiality in the handling of company information as would the directors. Also, since they are said to be representing shareholders, they may be required to report the outcomes of their meetings to those shareholders, especially the leaders of the shareholders’ association they belong to, even if the matters deliberated on at the said meetings are confidential and/or price-sensitive. A refusal to disclose such outcomes of audit committee meetings could be termed to be acts of disloyalty, ingratitude and insubordination which could have adverse effect on their relationship with other shareholders in that association, their continued membership of the shareholders’ association and the possibility of being re-nominated and/or re-elected as members of the audit committee in future. The situation of shareholders’ representatives in audit committees is, therefore, different from that of directors. Thus, it would be inconceivable, if not downright imprudent, to expect the management of a company to share sensitive information with shareholders’ representatives in audit committees who do not owe the same stringent duties as the directors to the company and the totality of its shareholders.
Another crucial aspect of the nature of the membership of audit committees relates to directors who are members of audit committees. The CAMA merely stipulates that there should be equal number of shareholders’ representatives and directors in audit committees. As a complement to the provisions of the CAMA, section 7.02 of the 2009 NAICOM Code provides that not more than one of the directors who is a member of an audit committee should be an executive director. This contrasts with the section 8.1.4 of the 2006 CBN Code which requires all directors in audit committees to be non-executive directors. The provision in the 2006 CBN Code, though commendable, still falls far short of international best practice on the nature of membership of audit committees. Rightly, audit committees are populated by non-executive directors, but these must also be independent non-executive directors. This is the practice in more advanced economies such as the United Kingdom, United States of America and even South Africa as already observed. The drive towards having independent directors (as opposed to mere non-executive directors) populate audit committees is due to the independence in character and judgment that independent directors are deemed to possess which are supposedly lacking in other non-executive directors due to their attachment to either the management or other employees of the company concerned.
Two reasons can be adduced for the lack of congruence between the composition of audit committees in Nigeria and international best practice. In the first place, the practice of having audit committees being composed entirely of independent non-executive directors is a current trend. In the past, it was sufficient to just have non-executive directors in audit committees. Secondly, the independent directorship concept is yet to be fully appreciated and implemented in Nigeria. The phrase “independent director” is not used in the CAMA. It is a concept that has not yet been firmly rooted in Nigeria. The term seemed to have been first recognised in Nigeria by sections 2(c) and 7(b) of the 2003 SEC Code. Even then, the 2003 SEC Code provided no definition for the term. It was not until 2006, with the coming into force of the 2006 CBN Code, that a feeble attempt was made to define the term. Section 5.3.6 of the 2006 CBN Code provides that at least two non-executive board members should be independent directors appointed by the bank on merit and it defined “independent directors” as those directors “who do not represent any particular shareholder interest and hold no special business interest with the bank”. The 2008 PENCOM Code takes the credit for being the first legal instrument to furnish a comprehensive definition for the term when it provided in section 4.1.3 as follows:
“An Independent Director shall be one who has no relationship with the company, its related companies (i.e. subsidiary, associate or parent) or officers that could interfere, or be reasonably perceived to interfere, with the exercise of his independent business judgment, which is in the best interests of the company.”
It further provided in section 4.1.4 that:
“A director shall not be considered to be independent if he:
(a) is being employed for any form of service by the company or any of its related companies for the current year or any of the past three (3) financial years;
(b) has an immediate family member (i.e. spouse, child, adopted child, step-child, brother, sister and parent) who is, or has been employed by the company or any of its related companies at least in the last three (3) years;
(c) is accepting any compensation from the company or any of its related companies other than compensation for Board service for the current or past three (3) financial years; or
(d) is a substantial shareholder of, or a partner in (with 5% or more equity interest), or an executive officer of any profit-making organization to which the company made, or from which the company received significant payments, in the current or past three (3) financial years.”
The 2009 NAICOM Code, in spite of its copious provisions on independent directors, failed to define the term. Nevertheless, the concept of independent directorship has come to stay. This fact can be gleaned from the elaborate definition of the term in the 2011 SEC Code.
What remains is to properly harmonise the definition of the term in the different corporate governance codes. The present disparity in the definition of the term in the different corporate governance codes seems to be a manifestation of confusion which is unduly complicating the corporate sphere and thereby creating avoidable difficulty in compliance.
Chairmanship of the committee is another issue prone to confusion due to the dissimilarity in the provisions of the corporate governance codes. The CAMA rather surprisingly was mute on the chairmanship of audit committees. With the exception of the 2006 CBN Code and the 2009 NAICOM Code, the corporate governance codes are silent on the issue of the chairmanship of audit committees. Even the 2006 CBN Code and the 2009 NAICOM Code do not seem to offer meaningful and clear guideline on the matter. While the 2009 NAICOM Code provides that the chairman of audit committees should be an independent director, the 2006 CBN Code provides that “one of such appointed ordinary shareholders should serve as the Chairman of the Committee.”
b) Mode of Appointment of Members
The other factor that militates against the derivation of value from shareholders representation in audit committees is the mode of appointment of the shareholders’ representatives. The current practice is to conduct the election for shareholders’ representatives on the floor of the annual general meeting. The justification for this is that since an annual general meeting is a meeting of shareholders, then it is a proper forum for such election. In further support of this contention, it can be argued that directors who are members of the audit committee are usually selected/elected by members of the board of directors during one of their board meetings. Nevertheless, this justification is weakened by the fact that it is not only shareholders who attend annual general meetings. There are other persons who attend annual general meetings without the express consent or prior approval of shareholders. In fact, in most public companies, not all the directors are shareholders as share qualification for directorship has been abolished by section 251(1) of the CAMA.
Another flaw in the method employed in the election of shareholders’ representatives in the audit committee is the permission of proxy members to vote during such elections. Where the number of proxy members who took part during the election is huge, chances are that the election process was abused and/or manipulated.
c) Tenure of Membership
There is no limitation on the tenure of members of the audit committee. Once a member gets elected annually at the annual general meeting, in the case of shareholders’ representatives, he continues to be a member of the committee. Over time, these shareholders would become too familiar with the directors of the company. This could have adverse impact on the committee’s effectiveness. Consequently, it is proposed that to enhance the effectiveness of audit committees, there should be a tenure limit for members, especially shareholders’ representatives. A period of 3 to 5 years would be appropriate. After the stipulated tenure, the member would have to undergo a “rest period” of the same length of time before being eligible to seek re-election into the committee subsequently.
d) Quality of Membership
The quality of membership is arguably the most vexed issue concerning membership of audit committees. There have been reports in the past of shareholders’ representatives in audit committees not being financially literate. In such circumstance, it is not difficult to imagine the quality of contribution such financially illiterate member could make at audit committee meetings. This unfortunate situation arose because the CAMA is silent on the educational qualification of members of audit committees. It is in an attempt to fill this disastrous gap in the law that section 13(a) of the 2003 SEC Code required members of audit committees to be able to read and understand basic financial statements and should be capable of making valuable contributions at the committee’s deliberations. This position has been maintained by section 30.2 of the 2011 SEC Code. In addition, in the case of audit committees of insurance companies, section 7.02(iv) of the 2009 NAICOM Code requires that “at least one member shall have good understanding of the business of insurance.”
Generally, members of audit committees should possess the qualities of integrity, dedication, a thorough understanding of the business of the company on whose audit committee they sit, the company’s products and services, a reasonable knowledge of the risks facing the company and the essential controls the company has in place. Also, they should be inquisitive and capable of exercising dependable and independent judgment, have the ability to offer new or different perspectives and offer constructive suggestions during deliberations.
The success or failure of the audit committee in its assignment depends to a large extent on the chairman of the committee in co-ordinating the committee’s tasks. Consequently, the chairman should have the additional quality of having a broad understanding of the committee’s responsibilities, authority and powers; be able to plan the committee’s agenda and ensure that documentations are distributed to members of the committee timely; be able to sustain the interest of members of the committee on the work of the committee; be able to secure the willingness of members to work toward the committee achieving its objectives; and be able to stimulate discussions among members during meetings without dominating discussions at such meetings. Therefore, it is obvious that extra care should be taken in deciding who is appointed to be the chairman of an audit committee. Unfortunately, in Nigeria, in view of the silence of the CAMA on which of the two groups of members should produce the chairman of the audit committee, there appears to be some discordant tunes from the corporate governance codes on which group should produce the chairman of the audit committee. As has been noted elsewhere:
“The confusion concerning audit committees is further compounded by inconsistent stipulations in corporate governance codes concerning their chairmanship. While some codes provide that the chairman of audit committee should be a board member some others stipulate that the audit committee should be chaired by a shareholder representative. Surprisingly, the draft Revised Code is silent on what category of membership should produce the chairman of audit committee in spite of the fact that it has some roles specifically assigned to the chairman of the audit committee.”
2. Meetings of Audit Committees
There is a lot of room for improvement in audit committee meetings. While it is advisable that audit committees should hold frequent meetings, it is important to stress that the matters discussed at audit committee meetings go a long way in enhancing the effectiveness of audit committees. As noted earlier on, some companies have adopted the practice of referring somewhat inconsequential matters to audit committees while reserving important matters which could have been handled by audit committees to the so-called “Board Audit Committee”. Unless audit committees are allowed to perform their functions as stipulated in the CAMA and the corporate governance codes, their impact on the effective administration of public companies would be negligible.
Also, the timing and frequency of audit committee meetings are relevant matters for consideration. It is difficult to prescribe the number of meetings in a year that would be appropriate for an audit committee. This should be dependent on the task before the committee. But given the expanded role contemplated for audit committees as can be gleaned from the provisions of the 2011 SEC Code, it is certain that a lot more meetings of the committee would have to be held if all the issues that would be brought to the committee are to be adequately resolved. In the more advanced economies, of all the committees of the board of directors having direct, crucial relevance to corporate governance practice, the audit committee holds the largest number of meetings in any given year. Consequently, members of the audit committee get larger allowance than members of the other board committees. It follows, therefore, that audit committee meeting days need not coincide with board meeting days as is presently the general practice among corporate organisations in the country.
3. Access to Company's Information or Employees
One other major flaw in the provision of the law relating to audit committees concerns the accessibility of members of the committee to company information for the performance of their duties as audit committee members. The directors on the committee might not have much difficulties accessing company information, being members of the board of directors. The situation would not likely be the same with shareholders’ representatives. There is the need to establish a clearly defined framework by which members of audit committees could be availed with company information relevant to any assignment they are carrying out. In the same vein, there should be a similar structure in relation to accessibility to relevant company employees for the same purpose. The 20111 SEC Code appears to have taken this matter into consideration in sections 31.4, 31.5 and 32.4. With due respect, it is submitted that the provisions on this matter in the 2011 SEC Code are not far-reaching enough. Without doubt, it is important that management is made aware that it has a duty “to take the initiative in providing information to the committee, rather than waiting to be asked for it, and to make clear to all directors and employees that they must cooperate with the audit committee and provide any information requested.”
4. Relationship with External Auditors
Section 359(6) of the CAMA has some pivotal provisions relating to the relationship between the audit committee and external auditors. First, it empowers the audit committee to review the scope and planning of audit requirements. In the exercise of this authority, the audit committee is entitled to be briefed by the external auditors on their audit programme for the year before commencing the audit exercise. Second, the audit committee is required to “review the findings on management matters in conjunction with the external auditor and departmental responses thereon.” This is the basis for the external auditor’s discussion with the audit committee of the so-called management report of the external auditors usually issued to the management of the company after an audit exercise. Any practice of keeping the post-audit management report away from members of the audit committee is clearly a violation of the unambiguous provision of the CAMA. Third, the audit committee has a major role to play in the appointment, removal and remuneration of external auditors. This lucid provision is consistent with international best practice on this matter. Its main shortcoming lies in its silence on the audit committee evaluation of the independence of the external auditors. The independence of the external auditor is fundamental in ensuring the protection of investors, creditors, employees and other stakeholders of public companies. This point is well understood and implemented in the United States of America through the Sarbanes-Oxley Act 2002 and in the European Union through Directive 2006/43/EC of 17 May 2006. The regulation of external auditor’s independence is an important issue.
The specific provision of the CAMA is not intended to be and cannot be said to be exhaustive on the relationship between the audit committee and the external auditors. This conclusion is founded on the authoritative stipulation that section 359(6) is subject to other provisions in the articles of association on the powers and function of the audit committee. The resultant effect of this is that the articles of association of a company could expand the scope of the powers and functions of the audit committee. Further support for this position can be gleaned from the provision of section 359(6)(a) of the CAMA which enjoins the audit committee to ascertain “whether the accounting and reporting policies of the company are in accordance with legal requirements and agreed ethical practices”. The audit committee, it is contended therefore, has wide latitude under which to operate. It is arguable though that these provisions are the basis for the additional powers given to audit committees in the different corporate governance codes in operation in the country, including the 2011 SEC Code.
5. Relationship with Internal Auditor
There are statutory provisions concerning the relationship between audit committees and internal auditors. The first provision in this regard is section 359(6)(d) of the CAMA which requires audit committees to keep under review the effectiveness of companies’ system of accounting and internal controls. It must be pointed out that the monitoring and fine-tuning of internal control systems are principal responsibilities of the internal auditor. Again, section 359(6)(f) of the CAMA permits audit committees to authorise the internal auditor to carry out investigations into any activities of the company which may be of interest or concern to the committee. In this wise, audit committees could direct the internal auditor to focus attention on some specific areas.
A natural complementary relationship should exist between the audit committee and the internal audit function of public companies. Thus, the audit committee should ensure that the internal audit function is well-resourced. This point is provided for in section 31.3 of the 2011 SEC Code. The audit committee and the internal audit function have uniformity in their goals in relation to the organisation.
6. Role in Whistle-blowing Procedure
Transparency is at the core of corporate governance. It is crucial in ensuring financial reporting quality. To enhance transparency, there must be a reliable system for ensuring that breaches of the law, codes of corporate governance and business ethics of public companies are reported and followed up. There should also be adequate education to all employees and other stakeholders, such as, contractors, customers, service providers, shareholders, job applicants, etc, on the existence of whistle-blowing procedure and the adequacy of protection afforded to those who use the whistle-blowing mechanism in the organisation to report breaches.
The effectiveness of whistle-blowing provisions would be greatly whittled down in the absence of credible and realistic protection for whistle-blowers. To this end, there is Bill before the National Assembly to actualise such protection. When the Safeguarded Disclosure (Whistle Blowers, Special Provisions, etc) Bill is passed into law, it would be said that there exists the omnibus whistleblowers statute which “should operate to give anti-retaliation protection the maximum extent of protection from special interest limitations.”
The 2011 SEC Code seems to recognise the important role of the audit committee in whistle-blowing. It makes a comprehensive provision for it in section 32. It is instructive to note that it provides that the chairman of the audit committee should be furnished with a summary of reported cases, cases investigated, the process of investigation and the result of the investigation.
7. Annual Performance Evaluation
There is no clear-cut provision on the assessment of the performance of the chairmen and members of audit committees in such capacities. It is imperative that the performance of members of audit committees are undertaken to ensure that they are assessed in line with the duties expected of them. It is common knowledge that things that are not assessed end up not being properly done, if done at all. It may be argued that in respect of the shareholders’ representatives in the audit committees their poor performance as audit committee members could result in their not being re-elected the subsequent year. Such argument manifests an inexcusable ignorance of the working of corporate organisations and its committees. In view of the points made above on the effectiveness or otherwise of audit committees, it is futile to imply that any rigorous assessment of potential members of the audit committees is undertaken prior to audit committee elections during annual general meetings of companies.
The situation is not particularly different in the case of directors who are members of audit committees. The minor dissimilarity in the case of directors is that they are subjected to some performance evaluation, usually on an annual basis. Even then, the reliability of such evaluations have by implication been called to question as a result of recent corporate failures arising from serious infraction of corporate governance codes in the full glare of the board.
8. Induction, Training and Re-training of Audit Committee Members
Every new member of audit committees should be put through a formal induction process which will cover such matters as the role of the audit committee, the expected time commitment from audit committee members and an overview of the business of the company, its major challenges, strengths and weaknesses, its future plans and financial risks. Similarly, there exists a real need to subject members of audit committees of companies to regular, planned and compulsory training and re-training. The training should create the awareness in them of the magnitude of their responsibility and the depth of the powers conferred on them to achieve set objectives. Section 359(6) of the CAMA has elaborate responsibilities set for audit committees, but regrettably, these committees are falling far short of delivering on these targets. The Securities and Exchange Commission should take the lead in either organising the training sessions or partnering with relevant training outfits in offering such training programmes. In both cases, the Securities and Exchange Commission should ensure that the training sessions meet certain specified standards and that the contents of the training programmes are appropriate and adequate. It may be necessary for training programmes to be made compulsory for audit committee members and reports of such training for audit committee members to be filed with the Securities and Exchange Commission. The cost of the training programme should be borne by the companies concerned.
The need for constant and planned training programme for audit committee members cannot be over-emphasised. Audit committees are crucial committees in corporate governance practice. If they play their role very well, they could prevent financial disasters from occurring in their companies. Given the confused nature of audit committees in Nigeria, the need for the training and re-training programmes as proposed herein becomes even more apposite and urgent.
9. Dual Audit Committees
It may be thought that a dual audit committee structure should be formally and legally ratified by amending the CAMA as necessary to sanction such practice. The major support for such a proposal would be the fact that shareholders are now accustomed to the rapport they have with directors of their companies occasioned by their being members of audit committees. It has been observed that “membership of an audit committee is seen as a plum job and so many shareholders scramble” to be elected into such committees. Thus, as considerate as such a proposal may seem, it is certainly unhelpful to companies and clearly destructive in the long run to all stakeholders. It is inconceivable that a company should carry an unnecessary and burdensome administrative structure simply for the ego-massaging of some shareholders who have over the years benefitted from some awkward and inappropriate statutory provisions. As the saying goes, no matter how far one has been on the wrong road, the moment one comes to the realisation that he is on the wrong route, the journey should be aborted as no amount of further trek on the wrong route will lead the traveller to the right destination. Having realised the incorrectness in the composition of audit committees in Nigeria, the right thing to do is to courageously take the necessary and appropriate action to correct the inappropriate composition of audit committees.
10. Auditing of Audit Committees
The need to ensure that companies do not impede the proper functioning of audit committees is evident. An annual audit of audit committees by the Securities and Exchange Commission would certainly channel efforts towards the realisation of such goals.
In terms of structure, the proposed Securities and Exchange Commission annual audit of audit committees will entail the Securities and Exchange Commission, on an annual basis, reviewing the audit committee practice of each company required to have an audit committee. The affected companies should be made to file with the Securities and Exchange Commission an audit committee report which should give details of the composition of the audit committee of the company, its schedule of audit committee meetings (including time, date and venue of such meetings) for the current year, the number of meetings (including dates and venues) of meetings held in the last preceding year. The report should be submitted not later than 30 days after the last meeting of the committee in a given year. Copies of the minutes of meetings of the committee in the last preceding year should be attached to the report being filed with the Securities and Exchange Commission. With this report, the Securities and Exchange Commission could be able to examine the documents with a view to determining whether the company has an active and functional audit committee.
Also, officials of the Securities and Exchange Commission should randomly attend audit committees’ meetings as observers following the meeting schedule already filed with the Commission. The decision to send its officials to attend a company’s audit committee meeting should be solely at the absolute discretion of the Securities and Exchange Commission.
G. CONCLUDING REMARKS
After 20 years of the existence of audit committees in corporate administrative structure in Nigeria, it is arguable whether audit committees have merited good cheers for any meaningful contributions to their respective organisations. It is doubtful if it can be asserted with confident assurance that the impact of audit committees has been huge, positive and commendable. In terms of corporate administration, audit committees have carried themselves like an unnecessary burden imposed on companies. Certainly, the management of most companies do not trust the audit committees enough to disclose crucial corporate matters at their meetings. Thus, companies have continued to tag along with audit committees simply because they are a creation of law, not necessary because they are seen to be value-adding or helpful in the management of the companies. This has led to the unfortunate situation of some companies establishing parallel Board Audit Committees to undertake such aspect of the functions of the audit committees considered too crucial and sensitive to be exposed to shareholders’ representatives who do not have the same level of responsibilities as the directors of companies and do not owe the companies or its shareholders the same level of duties as imposed on company directors. It is instructive that members of audit committees are not encapsulated in the definition of officers of a company in section 567 of the CAMA.
The principal factor responsible for this negative state of affairs concerning audit committees is the composition of the committees. This has, contrary to international best practice, removed audit committees established pursuant to the CAMA from being a board committee in the mould of, for example, the remuneration and nomination committees. The inclusion of shareholders’ representatives in audit committees has by far, been the most offending provision in the statute that has made companies to treat audit committees with trivial trust, reduced responsibilities and reluctant respect. Another negative aspect of the membership of audit committee relates to the absence of statutory provisions concerning the professional qualification of members of audit committees. Some of the corporate governance codes have tried to fill this lacuna in the CAMA by providing that members should have basic financial literacy with at least one member being a financial expert, and empowering audit committees to seek outside professional assistance if they require same in the course of their assignment. Another aspect of membership with negative impact on audit committees is members not having adequate time and companies not encouraging the availability of employees for the works of audit committees. If audit committees are to truly and fully carry out their functions as stipulated in the CAMA and the several corporate governance codes, it is better left to the imagination how busy members of audit committees would be. But poor membership and cringing tendencies have made members of audit committees not to be alive to their responsibilities.
Consequently, over two decades after the establishment of audit committees in Nigerian public companies, the only real beneficiaries are those shareholders who have had the opportunity to be members of those committees as that has granted them the privilege of one-on-one rapport with the management of their companies with all the attendant unofficial benefits emanating from such fraternity. There is, therefore, an urgent need to rethink the structure of audit committees in Nigeria if the committees are to deliver the essential corporate governance benefits that necessitated their introduction into the corporate administrative structure of public companies. Needless to say that the regulators, especially the Securities and Exchange Commission, have enormous responsibility to ensure the realisation of this fundamental paradigm shift.
 Then known as Companies and Allied Matters Decree No. 1 of 1990; but is now known as Companies and Allied Matters Act, Cap. C20, Laws of the Federation of Nigeria 2004. This statute will hereinafter be referred to as “the CAMA”.
 See http://en.wikipedia.org/wiki/Audit_committee [Accessed on 20 August 2011].
 American Institute of Certified Public Accountants, “Executive Committee Statement on Audit Committees of Boards of Directors.” (1967) 124 Journal of Accountancy 10.
 L Braiotta, Jnr, RT Gazzaway, RH Colson and S Ramamoorti, The Audit Committee Handbook, (5th edition, New Jersey, John Wiley & Sons, Inc., 2010), at p.46.
 RK Mautz and FL Neumann, Corporate Audit Committees (Illinois, University of Illinois, 1970). Cited in L Braiotta, Jnr. et al, supra, note 4, 46.
 See http://en.wikipedia.org/wiki/Audit_committee [Accessed on 20 August 2011].
 FLS Spira, “Audit committees: beginning the question?” (2003) 15(3) Corporate Governance, pp.180 - 188, cited in Y Hrichi, “The efficiency of the audit committee in enhancing the financial reporting quality: study of 20 Tunisian firms listed in Tunis Stock Exchange”. Available online at: http://ssrn.com/abstract=1487525 [Accessed on 20 August 2011].
 See http://en.wikipedia.org/wiki/Audit_committee [Accessed on 20 August 2011].
 Hereinafter referred to as “2003 SEC Code”.
 The 2003 SEC Code has now been replaced by the Code of Corporate Governance in Nigeria 2011 issued by the Securities and Exchange Commission and which became effective on 1st April 2011. This code shall hereinafter be referred to as the “2011 SEC Code”.
 2003 SEC Code, s 12(a).
 2003 SEC Code, s 15(d) and Schedule 1 thereof.
 Hereinafter referred to as “2006 CBN Code”.
 2006 CBN Code, s 17.
 2006 CBN Code, s 5.3.12.
 Hereinafter referred to as “2009 NAICOM Code”.
 2009 NAICOM Code, s 7.01
 Hereinafter referred to as “2008 PENCOM Code”.
 2008 PENCOM Code, s 4.4.4.
 Ibid., s 5.4.3(l).
 Hereinafter referred to as “Draft Revised Code”. It has been contended that though the Draft Revised Code was a bold step in the right direction as far as corporate governance is concerned, it was not quite there. For a critical review of the Draft Revised Code, see Nat Ofo, “Securities and Exchange Commission of Nigeria’s Draft Revised Code of Corporate Governance: An Appraisal” (2011) 55 Journal of African Law, pp.280-299.
 The draft revised Code of Corporate Governance is downloadable from the Securities and Exchange Commission’s website at: <http://www.sec.gov.ng/uploads/notices/20091008215709Review of Code Corporate Governance (Amended) - EKA.doc> (last accessed 22 August 2010). It was also widely published in national newspapers. See (29 September 2009) THISDAY (Lagos, Nigeria) at i to 49 and (30 September 2009) THE GUARDIAN (Lagos, Nigeria) at 47 – 55.
 2011 SEC Code, s 30.
 2009 NAICOM Code, s 7.02(iv)
 It is noteworthy that section 12(e) of the 2003 SEC Code provided that “the Secretary of the Audit Committee should be the Company Secretary, Auditor or such other person nominated by the Committee.”
 2006 CBN Code, s 8.1.5; 2009 NAICOM Code, s 7.03(iii); and 2011 SEC Code, s 30.4(a).
 2006 CBN Code, ss 8.1.5 and 8.1.6; 2009 NAICOM Code, s 7.03(v); and 2011 SEC Code, s 30.4(a), (j), (k) and (l).
 2009 NAICOM Code, s 7.03(iii); and 2011 SEC Code, s 30.4(g). Contrast 2006 CBN Code, s 7.1.1 which enjoins the Board or Board Risk Management Committee to establish policies on risk oversight and management. See also s 7.1.3 thereof.
 2009 NAICOM Code, s 7.03(iii); and 2011 SEC Code, s 30.4(a). Contrast 2006 CBN Code, s 8.1.3 which requires the Internal Auditor to report directly to the chairman of the Audit Committee but forward a copy of the report to the MD/CEO of the bank.
 2009 NAICOM Code, s 7.03(vi) and 2011 SEC Code, s 30.4(i). Contrast 2006 CBN Code, s 6.1.12 which merely compels banks to have a whistle-blowing procedure in place.
 2011 SEC Code, s 30.4(j).
 2009 NAICOM Code, s 7.03(vii). This can also be inferred from ss. 30.4(h), 31.5 and 34.4(h) of the 2011 SEC Code.
 2006 CBN Code, s 8.1.5; 2009 NAICOM Code, s 7.03(viii); and 2011 SEC Code, ss. 11.2(h), 15.1, 19.1, and 34.4(d).
 FTD Dezoort, “An Investigation of Audit Committee’s Oversight Responsibilities”, (1997) 33 ABACUS 209 - 227. Cited in Y Hrichi, “The Efficiency of the Audit Committee in enhancing the Financial Reporting Quality: Study of 20 Tunisian Firms Listed in Tunis Stock Exchange”. Available online at: http://ssrn.com/abstract=1487525 [Accessed on 20 August 2011].
 UK Corporate Governance Code 2010, s C.3.1; Public Company Accounting Reform and Investor Protection Act 2002 (otherwise known as Sarbanes-Oxley Act 2002) of the US, s 301(3)(A); NYSE Listed Company Manual, s 303A.07(b); and King III Report of South Africa, s 3.2.1.
 Nigerian Law Reform Commission, Report on the Reform of Nigerian Company Law, (Lagos, Nigerian Law Reform Commission, 1991), 212.
 It is noteworthy that section 12(a) of the 2003 SEC Code had a similar provision.
 See note 37 above.
 2011 SEC Code, s 5.5.
 NAICOM Code, s.7.02(iii). See also ss..6.0(iv) and 7.01 thereof. Interestingly, section 12(c) of the 2003 SEC Code provided that the chairman of an audit committee should be a non-executive director nominated by the members of the audit committee.
 2006 CBN Code, s 8.1.4.
 2003 SEC Code, s 13(c). See also 2009 NAICOM Code, s 7.01 and 7.02(iii).
 Nat Ofo, “Corporate Governance in Nigeria: Prospects and Problems” (2010) 1(4) Apogee Journal of Business, Property and Constitutional Law pp.15-22. Available online at http://ssrn.com/abstract=1618600 [Accessed on 20 August 2011].
 See ss. 30.4, 31.2, 31.4, 31.5, 31.9 and 32.4.
 These committees are usually the nomination committee, remuneration (or compensation) committee and audit committee.
 GD Morris, Finance Director’s Handbook, (5th edition, Oxford: Elsevier Limited, 2009), 104-5.
 CAMA, s 359(6)(b).
 Ibid, s 359(6)(c).
 Ibid, s 359(6)(e).
 See s C.3.2 and C.3.6 of the UK Corporate Governance Code 2010 and s 3.9 of the King III Report of South Africa.
 Z Sener, “Effect of the Sarbanes-Oxley Act of 2002 on the EU Law regarding Auditors and Auditors' Independence”, (2010) 11 Business Law Journal, 133 at p.143.
 MK Ramirez, “Blowing the Whistle on Whistleblower Protection: A Tale of Reform Versus Power”, (2007) 76 University of Cincinnati Law Review, 183 at p.233.
 2011 SEC Code, s 15. Also, section 11.2(h) of the 2011 SEC Code mandates the Governance/Remuneration Committee to ensure that “the Board conducts a Board evaluation on an annual basis”.
 Nigerian Law Reform Commission, Workshop Papers on the Review of the Companies and Allied Matters Act 1990, (Abuja: Nigerian Law Reform Commission, 2007), at p.26.