Since January 1 2018, all Nigerian banks had adopted the International Financial Reporting Standards (IFRS), which is believed to have negatively impacted lenders’ performance. But in this interview with Tony Chukwunyem, partner at Ernst & Young (EY) and Head of the firm’s Assurance business in Nigeria, Mr. Jamiu Olakisan, who specialises in the audit of financial service institutions and IFRS, thinks otherwise. He speaks on the banking sector’s implementation of IFRS 9 and other topical financial issues. Excerpts:
Has Nigerian banks started full implementation of the IFRS 9?
Mandatorily, all entities with year end of 31 December must adopt IFRS 9 in their 2018 financial statements. Thus, all Nigerian banks must have adopted IFRS 9 with effect from January 1, 2018. For those that have published interim audited financial statements, you can clearly see in their interim financial statements that they have done so. However, for those that are yet to publish audited interim financial statements, it will be seen when they publish their 2018 full year financial statements that they have adopted IFRS 9.
What has been the impact of IFRS 9 implementation on banks?
The general expectation of stakeholders is that IFRS 9 will increase the amount of impairment in the financial statements of banks. It is also expected that there will be significant volatility in the amount of impairment, given that impairment will usually vary with expected changes in forward-looking macro-economic variables. However, the impact of impairment on the financial statements of banks may not be as high as stakeholders have envisaged. If you look at the half year results of those banks that published interim financial statements for the six months ended June 30, 2018, the impairment figures this period were not as high as what they had in the prior period. The reason for this is that all of them recorded huge impairment figures at January 1, 2018, which is the date of initial application of IFRS 9. This is in line with the requirement of the standard.
How can IFRS 9 help in curbing the recurring problem of bad debts in the banking industry?
It should be noted that IFRS 9 is not a regulatory tool by the banking regulator to achieve prudential objectives and, as such, may not necessarily curb recurring problem of bad debts in the banking industry. However, given that the credit risk of each loan will significantly influence the amount of impairment to be recorded, it is expected that the banks will focus more on credit rating of loans and lending decisions will be made on the basis of detailed and objective assessment of credit risk of the obligors. This may help, in the long run, in reducing bad debts issue in the banking industry.
How would you react to the view that IFRS 9 implementation is negatively affecting banks’ performance?
I do not believe IFRS 9 implementation is negatively affecting banks performance. One of the reasons why IFRS 9 was issued to replace IAS 39 is to ensure that we do not witness the type of collapse or near collapse of banks as we witnessed during the global credit crisis in 2007 and 2008. IFRS 9 is meant to ensure that adequate impairment loss is recognised on time. I do not see how this will negatively affect the performance of banks. Rather, it helps the banks to be more proactive and more forward looking in their impairment approach and in their lending decisions generally.
Does the country have adequate number of professionals that are sufficiently knowledgeable about IFRS 9?
IFRS 9 is one of the most challenging accounting standards ever issued by the International Accounting Standards Board (IASB). The application of the standard, especially the impairment aspect of it, requires effective combination of multiple skills. For us as auditors, a number of specialists are used in auditing IFRS 9. These specialists include risk specialist for credit models, IT auditors for systems changes, economists for forward looking scenarios, real estate valuation specialist for collaterals and Financial Reporting Group (FRG) members for the interpretation and application of the standard. Huge investments have been made and are still being made to ensure we have these specialists readily available on every IFRS 9 audit. As a global professional service firm, we have these professionals within our network to support in auditing IFRS 9.
However, from my interaction with a lot of stakeholders in Nigeria, many people are yet to come to the reality of the fact that the effective application of the standard requires the combination of multiple skills, which are not widely available currently in Nigeria.
What measures are financial organisations like EY doing to help boost knowledge of IFRS among bankers and professionals in the industry?
EY has worked with a lot of banks in Nigeria to implement IFRS 9. In all those engagements, IFRS 9 training was one of the key deliverables. Where we act as the auditor to a bank, we have always emphasised the importance of IFRS 9 training across different levels of staff, including the board of directors. In
addition, we have quite a number of leading publications on practical aspects of IFRS 9, which can be obtained from our website.
Can you throw some light on IFRS 10, 11 and 12 and when will Nigeria be ready to implement these standards?
IFRS 10, IFRS 11 and IFRS 12 are not new accounting standards. These are accounting standards that have become effective since January 1, 2013 and have been adopted by Nigerian entities since then.
Can IFRS 9 implementation help to curb fraud in the banking industry?
As previously mentioned, IFRS 9 is neither a regulatory tool by the banking regulator to achieve any prudential objective nor a tool for curbing fraud in the banking industry. That is not the intention of the IASB that issued the standard. It is a financial reporting tool to achieve transparent and consistent accounting and reporting by entities.
What impact would IFRS 9 implementation have on the amount of taxes that banks pay?
An accounting standard like IFRS 9 is completely different from tax rules. The tax laws and regulations issued by the tax authority are usually followed in computing income taxes payable by reporting entities. While accounting profits shown in the financial statements of banks are based on IFRS, the taxable profits on which tax calculation is based are determined in accordance with tax laws and regulations. Ordinarily, the tax laws and regulations should be clear and give no room for any ambiguity or uncertainty in terms of how to arrive at taxable profits. However, the existing regulations by the Federal Inland Revenue Services (FIRS) are not adequate to deal with a number of accounting issues highlighted in IFRS 9. This will give room for judgement and subjectivity in applying the regulation/guidance issued by the tax authority unless a comprehensive review of this regulation/guideline is done.
Over the years, many banks have failed due to corporate governance failures on the part of their management. In fact, there are allegations that the former management of a bank that CBN intervened in hid information from auditors by keeping two sets of books. Can’t auditors curb this problem?
There is a difference between external audit and investigative forensic audit. The issue you referred to concerning the former management of a bank is something we have seen, not only in the private sector, but also in the public sector. A new management comes in and they want to really find out what is the true state of the accounts. What they usually tend to do is to conduct an extensive forensic audit, which is very detailed in scope, unlike external audit, which is limited in scope. The forensic audit will usually reveal so many things that the auditors might not have seen. So, as auditors, when you go out to perform your audit work, you are not going there to really carry out forensic audit. Imagine transactions that have taken place in a period of 365 days, who is going to audit and finalise within the limited period that is available? There is no way you will see everything.
So, definitely, that expectation gap is what we need to continuously educate members of the public on in terms of what the role of external auditors is and what people perceive the role to be. But notwithstanding, when something comes to the attention of external auditors that something is not going on well, we are not going to close our eyes to it. We make sure that we follow the matter to the end and that is what we call professionalism. As a professional, if something has aroused your scepticism, you make sure you follow it to the letter.
Also, under the new regulation issued by the International ethics standards board, there is an aspect that deals with non-compliance with laws and regulations. This means that in the course of your audit, when you come across areas in which the entity has not complied with laws and regulations, you should do reporting of that kind of audit as well. So, generally as auditors, we try as much as possible; we know that in the digital world, audit has gone beyond what it used to be. As auditors, if you don’t have the tools to audit, you will discover that you are not going to do a good job.
So, as auditors, given that we are auditing financial institutions, we have tools that we develop to do virtually everything. You know the volume of transactions that take place in banks, it is so huge that if you want to do the traditional audit, there is no way you can cover everything. But we have tools that can help us to achieve 100 per cent coverage of everything that has taken place. Be it interest revenue, that is, you want to assess whether the way the interest income has been captured is okay or not? Whether there is any wrong thing that has been done there? We have tools that can help us to achieve these.
But if an entity, it may not necessarily be a bank, if any entity has the intention of cooking the books, keeping two sets of books and the only book they want to make available to the auditor is the one that they want you to audit, if truly that is happening, that means that the one that they are not making available to you, there is no way you are going to access it.
Again, on the part of regulators, the regulators need to do more because regulators have the powers to do so many things that auditors ordinarily cannot do. Regulators look at the books of some of these companies much more than we the auditors do. So I believe that on the part of the regulators they equally need to go the extra mile to acquire some of the tools and make use of them. This is because for some of these institutions such as banks, they report to the Central Bank of Nigeria (CBN) on a daily basis; there are some reports that have to be sent on monthly basis and some on half yearly basis. So from all those things they (regulators) are seeing they could discover so many things. As one of my bosses, used to say, ‘there is no way you could be greater than your creator (regulator).
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