| New accounting standards has contributed
to consolidation in the banking industry
By AMECHI OGBONNA
Monday, September 25, 2006
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• Godson Nnadi, CEO, NASB
Photo: Sun News Publishing |
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Compliance to financial and accounting standards remains
one of the sore points of most managers of corporate Nigeria.
In both the public and private sectors of the economy, many
would wish that the rules of corporate governance be bent
for them as much as possible if given the chance.
But the man at the helm of affairs at the Nigerian Accounting
Standards Board (NASB), Mr. Godson S. Nnadi, believes that
having joined the race for global economic convergence, Nigerian
managers should be prepared to play by the rules.
He insists that leadership of the public and private sectors
entities should be ready to set the tone for accounting compliance.
He spoke recently with Daily Sun. Excerpts:
Background
My name is Godson Nnadi, the executive secretary of Nigerian
Accounting Standards Board, a Federal Government parastatal
company responsible for setting private sector accounting
standards.
I did my secondary school at Nsukka where I did Principles
of Accounts and fell in love with accounting. From there,
I went to the University of Nigeria, Nsukka to do BSc. in
Accounting.
I started my working career at the Central Bank of Nigeria
where I had a brief stint before leaving to take up a teaching
appointment at the Univeristy of Maiduguri.
Within these years, I travelled to the United States of America
to read Master’s in Business Administration at the University
of Washington in Ciato. I also did a Master’s in Professional
Accounting, qualifying as a Certified Public Accountant, which
is equivalent to a Chartered Accountant in Nigeria.
I am a member of the American Institute of Professional Public
Accountants and a member of American Accounting Association,
an association of American Accounting Professors.
However, after 10 years as a teacher in the university, I
moved over to the Nigerian Accounting Standards Board (NASB).
Management style
My management style has been participatory. I hardly take
any decision on my own.
When I came to the NASB, we were only 4 staffers and that
enabled us blend well as a team and even with about 50 members
of staff now, it is not difficult for me to meet every staffer
at NASB face-to-face to seek their opinion before taking any
decision.
I always like my staffers to make contribution to decision-making
process, because I think it is better to carry everybody along
in management. Again, before I make any decision, I try to
check how it will affect members of my staff as well as the
Nigerian people we are working for, because for any success
we have achieved here, they have made it possible. I get my
staffers involved in decision-making.
Vision
NASB must be one of the best standards-setting bodies in the
world. Even now, we are doing remarkably well compared to
other countries in the western world.
Our standards-setting records beat, for instance, the standards-setting
record in France and Germany, because standards-setting in
these countries are basically part of law-making, except now
that they have all started to adopt the international accounting
standards. Otherwise, NASB has been ahead of these countries
in terms of developing our own indigenous standards.
Our standards for the banks is still unequalled all over the
world as at today because we looked at our local problems
and we fashioned out standards that will take care of our
perculiar local needs.
For instance, we noticed that before SAS 10, banks were recording
interest on non-performing loans as part of their profit,
thereby declaring paper profit.
So, we then came out with an accounting standard that actually
defined how you should make provisions for non-performing
loans. If you give a loan and after 90 days the beneficiary
is servicing neither interest nor principal as they fall due,
you provide 10 per cent.
After 180 days and they are not paying, you provide 50 per
cent, and after 365 days, you write off the entire 100 per
cent, as having been lost.
That was facing local reality without looking at what somebody
was doing in America or London. This was a remarkable policy
that sanitised our banking industry then.
So, you can see that NASB is one of the strongest standards-setting
bodies in the world and we are working very hard towards sustaining
it.
The Financial Reporting Council Act, which the National Assembly
is trying to pass and which we are supporting very actively,
may rescind the NASB Act. But that is not our worry now.
Our concern primarily, is about what will benefit the country
and its economy. If when the Act is passed and it is discovered
we still have a role to play, so be it. If it said we have
made our contributions, so be it. But this body, which probably
can transform into a Financial Reporting Council, must be
one of the best standards-setting bodies in the whole world.
That is my vision for NASB.
Motivation
The biggest motivator I have had since I came to NASB is seeing
the result of the work we are doing.
When I joined the organisation, the problem we had in the
banking industry then was that of paper profit. A bank executive
will give loan to his own brother, who will not repay interest
or principal and the money is lost. But every year, the bank
chief takes interest on that loan which he has not received,
and puts it in his income statement to declare huge profit.
He pays huge tax, dividend and as the managing director, he
takes fat salaries all to the detriment of the investors.
After the standards was issued in 1990, we did not have power
to enforce it and that was why we went to the CBN to make
an extract of the most important provisions and issue it as
prudential guidelines which they did, and it worked.
After the prudential guidelines were introduced, we discovered
that First Bank, of all banks, reported a loss for one year,
because it had to write off all bad and non-performing loans
.
But when they cleaned up the stable, till today, that bank
has remained absolutely solid ever, because all the ridiculous
debts it was carrying which were throwing interest income
that were not real into the profit and loss account were all
wiped out.
Something very interesting happened because in those years,
we were relying on donations to run NASB and banks were about
the largest donors.
We were hoping that the donations from banks would drop after
the standards were released.
Surprisingly, the donation we were getting from the banks
jumped many fold because there were so many powerful people
who were owing the banks that did not want to pay.
Armed with this guidelines, the banks approached them to show
them what the regulatory authorities were saying and most
of the debtors paid and the banks were very happy.
Again, when I joined NASB, I was the only technical member,
but today, I can count over 20 people in our technical team
and these are very outstanding professionals.
The board is growing and I am very happy about it.
As am telling you, these are some of the things that make
me happy.
When I came in, I met only 3 staffers at NASB and I was the
4th person. Then also, we were staying in 2-room office at
ICAN secretariat.
Today, this organisation has grown to a staff strength of
about 50, and we have two wings in this building and another
wing on the 4th floor. Moreover, we are thinking that it is
now time for us to build our own permanent office and we are
going to do it very soon.
Challenges
The challenges are so many. For instance, when I first joined
the board, our annual budget was just N509,000 and we were
depending entirely on donations, because we decided that member
oganisations should not pay so much money otherwise, they
will start controlling the board.
Some members, like the CBN, were paying N20,000 as annual
subscription and other members were paying amounts like N10,000
per annum and all these were not coming to anything. So, the
biggest challenges for us was like if you want to move this
organisation forward, how do we generate funds to do that.
We were lucky that the government stepped in and provided
us some resources which helped us, a great deal.
But even now as am talking to you, our total annual allocation
from government is less than N50 million a year, despite having
expanded our operations and staff strength. So, finance is
still a problem.
Interestingly, we have managed to develop some internal sources
of revenue. We do some consultancy and we also get some income
from fines on companies for non-compliance to the provisions
of accounting standards.
Generally, we offer consultancy services to some companies
and we generate some money from there. So, financial resources
obviously is a big challenge. For instance, given the level
we have reached, I would not wish to continue to stay in a
rented office complex.
Therefore, building our own headquarters is obviously our
dream. It is a dream we are pursuing very seriously and we
are happy that our governing council has bought into that
dream, and soon, I believe we are going to realise it.
The next challenge is the issue of technical staff. Nigerian
Accounting Standards Board is a very technical organisation
and our dream is to hire graduates with First Class or Second
Class upper degrees. That desire pitches us with the likes
of Akintola Williams, KPMG, Pricewater House Coopers, Oil
Companies and the banks all of which are scrambling for this
class of graduates.
As a government parastatal company, our remuneration is not
as attractive as these other private sector organisations.
So, attracting high calibre professionals is another big challenge.
The present governing council we have has promised to improve
our remuneration scale. But it has to go through the due process
of getting approvals from relevant government agencies. That
will help us in attracting the level of staff we need. For
now, what is sustaining our staffers is the joy of working
in a challenging and state-of-the-art organisation.
We do not operate like a government agency or parastatal company.
If you come here by 8a.m., NASB staff are on their seats,
and by 7p.m., you will still see them on duty, even though
the board does not pay over time.
This is because we select our members of staff very carefully
and they have bought into our vision of running this place
like any standards-setting body in the world. We have been
able to do that very successfully.
Our operating environment was modelled after the American
International Accounting Standards Board in Milwarke, New
Jersey which we visited early in the life of NASB.
Therefore, maintaining this operating environment is another
big challenge. One of the things still sustaining our staffers
is the work environment, and the extreme challenge, which
often involves facing the best of accountants from big organisations
like banks and oil companies and argue out technical issues
during inspections. That is quite challenging and exciting
for any young man who wants to move his career forward.
So, these are some of the challenges we go through all the
time.
Nigerian environment.
When I left the university environment as a senior lecturer,
my take home pay after tax deductions was a little less than
N1,000. So, I came from an environment that is not known for
opulence and extravagance.
Even when I was in the university, I was very happy, even
though the salary was poor, the life style was quite good
and the challenge of working with students, was also there.
Now that I am here, my remuneration is a significant improvement
and I can say I am reasonably comfortable.
Now I know the consequences of derailing. If one person comes
in here and gives me money to bend the rule, he is going to
tell his friends about me, and that is not what I want my
children to hear about me when am dead. I am reasonably comfortable
with my remuneration and if I derail and make a lot of money,
I destroy my name, which is what I want to leave for my children.
Apart from that, if you derail, when you are retiring, instead
of going to your village straight, you may have to go through
Alagbon Close and I don’t want that.
For my technical staff, I have told them that it is a no go
area. If I get you on it, I will use everything within my
power to ensure that you pay direly for it.
So, it is well known to all of them that it is a no go area.
All these period, some of our clients will call and complain
that my staffers are being unnecessarily difficult and each
time they say it, I feel very proud, because I know they are
doing the right thing.
But if they call me tomorrow and start commending them as
being very co-operative, and very reasonable guys, then I
will know that there is a problem.
For us at NASB, we believe that the tone must always be set
at the top.
There was a particular government in this country, that was
not popular, but throughout its tenure, when you are going
on the road, you will not see any Nigerian urinating on the
road. It was in this country that we also saw that people
were not struggling to jump into a bus because everybody would
queue up to enter a bus. It goes to show you that the tone
must be set at the top. What we need is leadership because
followership would follow if leadership sets good precedent.
If I go to preach to members of my staff that they should
not take bribe and later they see me taking bribe, driving
jeep and living above my means, there is nothing I can tell
them that will convince them not to take bribes.
But if they look at you and believe that you mean what you
are telling them, that is when they will grow with you. For
this reason, I have done everything possible within my power
to ensure that my staffers are comfortable within the resources
available.
In adopting any international standard, we must look at our
cultural situation, our political situation, legal and economic
situation.
Since NASB was established, we have insisted on issuing standards
that are relevant and applicable to our economy. And that
is why when no other country had an accounting standard for
the banks, NASB issued a very far-reaching standard for banks
and we got commendation from the then International Accounting
Standard Committee.
Up till now, there is no equivalent of our SAC No. 10 anywhere
in the world, because at the time we issued that standard,
the international body was working just on disclosure issues
for the financial institutions and that is what they have
uptill now.
But our standards went far ahead to discuss issues like asset
recognition, loss recognition and income recognition, including
balance sheet classification, which are all far-reaching issues.
NASB has made it a priority right from the beginning that
it will only issue standards that are relevant, useful and
applicable to our economy, because we do not intend to swallow
International Standards hook, line and sinker. We are planning
to look at each of them critically, we don’t want to
reinvent the wheel.
If they are relevant and applicable, we are going to adopt
them as part of our national standard after going through
our due process. We must also get comments from our stakeholders
and have steering committees to evaluate all these submission
in order to adopt the ones that are necessary.
New accounting reform and public
sector expenditure
I think that is one of the major reasons the reform is being
done. The process is actually being driven by the Federal
Government, because even though, World Bank is sponsoring
it, it is the Federal Government that is directing affairs.
The World Bank is not giving the Federal Government free money
to undertake the economic reform and governance project.
The institution at the driver’s seat is the Federal
Government of Nigeria and I think, it is a very important
thing. One important pillar of the new law we are envisaging
is a body that will set accounting standards for the public
sector. And as soon as these standards come out, every agency
of the Federal Government and all segments of the government
must follow them in preparing their financial statements.
By that, we will be able to appraise government spending,
look at it and comment on it, unlike now that probably even
if they give you such accounts, you may not understand what
they are saying there. So, I think it is very important that
the law is going to address the issue of public spending in
Nigeria.
World Bank partnership
The World Bank came to Nigeria last year and decided that
NASB is the institution that should implement the financial
management component of the economic reforms and governance
project in Nigeria.
The bank took that decision and has continued to support us
tremendously and very soon they are going to change all our
ICT facilities to bring it to global standard.
At the risk of being immodest, I think NASB has made great
progress from the day I met it and that is enough motivation
for me. I think we have made some contributions and can still
make more either here or some other places.
Government interference
I think it goes back to the tone being set at the top. I don’t
think President Obasanjo tells Dora Akunyili which fake drug
dealer to arrest and which one not to arrest. If you are doing
your work to the best of your ability and what you are doing
is for the benefit of the people, chances are that they will
leave you alone.
If any powerful person in one organisation decides to exert
some influence on behalf of his friends, I think that the
duty of a man who wants to set the tone for exemplary leadership
would be to alert the individual involved of the dangers of
bending the rules for one person.
Because once you set the precedent and bend the rule for one
person, there is every tendency that the news will spread
and you will not have any reason not to do same for others.
I think the issue is that you must present your case logically,
because I know no minister would want to mess up his career
or his personality. I want to tell you that since I came on
board, no minister has interfered with the technical duties
of the Nigerian Accounting Standards Board. We have worked
with about 11 to 12 ministers so far, and none of them has
interfered with our duties.
Assessment of NASB
Generally, my job at NASB has been a very exciting one. It
has been a new challenge everyday. One of my chairmen once
said that you not only need to be a good manager, you also
need to be a lucky manager. I have been a lucky manager at
NASB. I was hired here when NASB was a private sector initiative
and so, I was hired into a full time pensionable job not necessarily
by appointment but a full time job and I have worked with
about 4 board chairmen in the governing council who have imparted
a lot on me and I have gained so much working with them.
Each person has seen the importance of this place and they
have shown determination and dedication to move the place
forward.
Even when they leave the board, they still assist us one way
or the other to do our work. I think, my experience at NASB
has been very exciting and very rewarding.
Discipline of erring companies
Unlike CBN or other organisations, we don’t look at
your financials before you publish them. The financial statement
is a product of a company’s board and management.
So, we only look at the document after you have published
and made it available to the shareholders.
If we look at the document and discover you have not complied
with standards we will look at the gravity of non-compliance
and if this shows that you have misled the investors, then
we might have to force you to withdraw the statement and issue
a corrected one at your own expense.
But if it is something that will not necessarily mislead the
investing public, we insist you correct it in your next year’s
annual reports and state it very clearly that last year, you
did not comply with this or that standard and that you have
corrected it.
One other thing we do is that the law setting up NASB stated
that we can sanction, so, we impose penalties for non-compliance.
The last thing we do is to take them to court.
We have engaged some very prominent lawyers to handle our
litigations. If any company breaches our standards and we
impose penalties and they fail to pay, then we go to court.
Luckily so far, we have not had any cause to go to court,
because we have tried arbitration and it has always worked
for us.
We have a standing committee of board that handles arbitration
issues which would normally include the managing director
of the company, managing partner of the audit firm and NASB.
It is only after that process fails that we can think of going
to the court. At the moment, the highest level we have gone
to is arbitration.
For instance, on the 19th of this month, we will be having
an arbitration committee meeting to trash out some issues
that our lawyers have been handling for some times. If that
process fails, then we go to court.
Prospects of NASB
All I want to see in the future is a standards-setting body
that sets accounting standards not only for the private sector
but also for the public sector. I want to see a standards-setting
body that has the muscle to penalise any company that fails
to comply with the accounting standard issued by the board.
I want to see a standards-setting body that will converge
to meet the international expectations of the international
standards board. But at the same time, I want to see a standards-setting
body that will take the local environment - the local economy,
the local laws, the local politics - into consideration.
I want to see a standards-setting body that can stand its
own among standards-setting bodies in the world, playing a
pivotal role in the activities of international standards
board.
That is the kind of organisation I dream of. From what is
happening now, the World Bank looked around Nigeria and said
this is the body we want to implement the reform programmes.
Out of eleven organisations in Nigeria, NASB was chosen as
the best performing hence the mandate to implement the economic
reform and governance project funded by the World Bank.
With the kind of leverage and resources the World Bank and
Federal Government have brought into the board for the success
of the project, I believe we are going to get there. It is
an achievable dream.
NASB and proposed FRC
Well, the lawmakers will have to make their decisions. But
I believe there are two ways to do it. It is either you upgrade
the NASB to become the Financial Reporting Council and you
set up all other structures, or you set up the FRC structures
and leave NASB to continue to set private sector accounting
standards. I don’t think it is a complicated process
but again, it is the role of the lawmakers.
Any time they call for public hearing and if am invited, I
will present a memo to them on how they can go about it. They
could either upgrade NASB, and put other structures or put
a super structure and put this as one of the substructures
to continue to set private sector standard, put another one
for the public sector; another one for small and medium scale
enterprises, another one for enforcement, and another for
overseeing the audit practice to ensure that auditors do their
work very well and are truly independent of the companies
they are auditing ;and to bring all aspects of financial reporting
under one umbrella. That is the kind of reform Federal Government
and the World Bank are looking at the moment.
Auditing practices in Nigeria
With the Financial Reporting Council, we are going to have
an Accounting Practices Board which will be looking at what
the auditors are doing. When you publish your audit report,
this body will write once every year and another, every three
years and demand that you present your working papers to determine
how you arrived at the opinions you expressed in the audit
report.
Banking consolidation
I am an apostle of consolidation. I believe in the merits
of consolidation. Before now, we had 89 banks that were not
doing banking, but were selling foreign exchange, buying and
selling cement, and doing everything except banking.
We have only started seeing the gains of consolidation, because
banks now come to me, a civil servant, to come and take consumer
loan without collateral. Some of them say they don’t
even want to know what I wish to do with the money since I
have an income.
I think now that they have a lot of resources from consolidation,
they can now begin to lend to the productive sector and not
just the service sector of the economy. That will be very
good.
As for the problems we are seeing now, they are not unexpected,
perhaps due to the duration of the programme.
I think we probably did not have enough time to evaluate what
each consolidating bank was bringing to the table. But all
the same we cannot wait forever, because even if you had given
banks 10 years to recapitalise, some would still not have
met the deadline.
The only thing is that we the regulators really have a tough
job on our hands to see that the proceeds of this consolidation
are put to very good use.
The CBN has fired the first shot, and a very good one at that.
All the banks in the rush to meet the N25 billion capitalisation
created fictitious goodwill. Well you created the goodwill
and the goodwill will bring in money, but until your write
off the goodwill you will not pay dividend. That is one way
of checking some of the abuses we saw during the consolidation.
As part of the regulatory agencies NASB will play its own
part to ensure Nigeria gets full benefit from this consolidation
programme which is a very good thing.
State of acquired banks
The issue pertaining to how they treat acquired banks and
their staff I may not be able to comment on now, because it
depends on the agreement they reached before the merger.
But the cost of consolidation must be amortised. When you
amortise, you must have to write it off from your profit because
there is no short cut about it.
There is this general impression that a lot of them created
fictitious assets, inflated goodwill leading to the creation
of share premium accounts, which they are now using to kill
the fictitious goodwill created.
If the Central Bank had not taken the bold move of insisting
that except they finished writing off the fictitious assets,
they would not be allowed to pay dividend, nobody would have
been any wiser.
They created these fictitious goodwill, probably to be able
to meet the N25 billion mark, then they must have to live
with it. They must be prepared to write it off.
On the part of the Nigerian Accounting Standards Board, we
are not going to allow anybody, any short cut to write off
these goodwill, except through the normal process which allows
you to amortise and take it out of your profit.
If that results in your making a loss, sorry for you, that
is your luck.
Even the Companies and Allied Matters Act, is very clear on
it, you can only amortise over 3-5 years period. So if the
banks are saying, let us amortise over 10 to 20 years, this
may not be allowed, and the law is clear on that because amortisation
of goodwill is over a 5-year period, not more than that.
It is a developing issue which NASB is monitoring very carefully.
Components of goodwill
The components of goodwill entails that when bank A is buying
banks BCD, it looks the assets BCD have.
For instance B may have N500 million, C has asset of N200
million and D has N100 million asset. But D with N100 million
asset says because of our name, our branch network, we think
we are worth N200 million. So the A bank says, yes we agree.
The only physical asset you can bring into your book in the
process of consolidation is that if you have building, you
add it to your own existing building, your motor, cars, computers
and after adding these net asset you have N100 million setting
there, you put it as an asset, but it is fictitious asset,
you can’t see it, you can’t touch it, you can’t
use it.
So Companies and Allied Matter Act says, goodwill must be
written off in not more than 5 years, but some of the banks
are saying they want to write goodwill off in 10-20 years
in obvious violation of CAMA.
The CBN stepped in to tell the banks that even if it took
20 years to write off the goodwill, they would not be allowed
to pay dividend to shareholders within those years.
I think the reform process is working. All we need to do now
is to ensure that banks finance the productive sector now
that they have the resources.
I think that this idea of providing only consumer loans will
not help our economy in a significant manner.
As it is done all over the world, we have to come in to encourage
the banks to lend to the productive sector.
We also have to encourage companies to borrow, and upgrade
the productive sector activities. Government can give tax
holiday.
Elsewhere governments give money to entrepreneurs. If you
are setting up factories in some remote places, government
will assist you by providing electricity into your factory.
So all you need to do is to pay for your energy consumption.
Government needs to encourage the banks to lend to the private
sector to boost productive base. Of course, the interest rate
needs to come down.
If any private sector company borrows money at 20 per cent
to produce, that company is dead, because some of these companies
profit in a year is about 5 per cent and you are going to
borrow at 20 per cent. It is not profitable so interest rate
must come down and government is doing a good job of controlling
interest rate now.
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