FRC Reveals How Stanbic IBTC Misreported Its Expenses

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According to the FRC, Stanbic IBTC misreported its operations expenses, by concealing vital and material expenses under ‘Other Operational Expenses’.

The Council stated, “Upon a preliminary review of the financial statements of Stanbic IBTC, the Council discovered that the group’s “Other Operating Expenses” contained line items that required further explanation. Consequently, the bank was directed to provide schedules showing the composition of each of the line items in Other Operating Expenses for all financial years from 2011 to 2014. Notable among these was the line item “professional fees”. Professional Fees As disclosed in the group’s financial statements, professional fees were incurred as follows: – 2014: N6,083,000,000; 2013: N4,467,000,000; – 2012: N6,057,000,000; 2011: N4,041,000,000.

“The schedule submitted to our Council by Stanbic IBTC revealed that professional fees which was simply a line in the financial statements contained several expenses that are unrelated to professional fees and which required separate disclosures on their own to give users of the financial statements good understand on the transactions and events of the bank.

These include: Franchise Fee – Included in professional fees for 2014 and 2013 were franchise fees of N2.3 billion and N1.9 billion respectively which were provisions made for franchise fee to be paid to Standard Bank of South Africa. See section below for more discussion of this matter. ii. Tax advisory fee and provision for tax liability assessment –

Also Included in the 2014 professional fees figure was N711million for “tax advisory fee and provision for tax liability assessment”. The Council was concerned that provisions for tax liability were included in professional fee. iii. Provision for litigation –In 2014, the sum of N752 million which the schedule revealed included “provision for litigations” was also included in professional fees when there is a financial reporting standard which requires separate disclosures of issues relating to litigations. Provision for Contingent and Other Known Losses.

Another major line item under “Other Operating Expenses” was provision for contingent and other known losses of N972m. Included in this amount was another N340.8 million also described as “provision for litigation”. The Council is concerned that the group did not seem to have a systematic method of recognizing and classifying its expenses as similar and related items were found under several expense categories.

“Others” in Other operating expenses: The Council has always made it stance known to reporting entities and their external auditors that descriptions in the financial statements such as “others”, “sundries” and “miscellaneous”, especially when these were substantial and material, was poor disclosure and should be avoided at all cost.

“Others” in Other Operating Expenses of Stanbic IBTC were as follows: 2014: N1,907,951,000; 2013: N2,477,201,000; 2012: N1,632,000,000; (whereas N1,946,000,000 was disclosed in the 2013 financial statements as 2012 comparative) 2011: N2,685,000,000.

The Council therefore investigated the balances further and discovered the following: Donations – Several donations were concealed in “Others”. The group disclosed its donations in the annual report in compliance with the requirement of CAMA CAP C20 LFN. However, just one line item of donations in “Others”, N275,000,000, far exceeded the aggregate donations disclosed in the annual report (N162,468,098).

They also could not confirm the entity that this amount was donated to when questioned further at the meeting of 16th October 2015. Directors’ fees and expenses – Also concealed within “OTHERS” was directors’ fees and expenses of N223,000,000 (2013: N218,000,000). This is aside the directors’ fees and emoluments disclosed in a separate note in the financial statements.

All fees, remuneration and emoluments of directors should have been disclosed as part of related party disclosures in the group’s financial statements. This is the only way users of general purpose financial statements who are unable to demand for additional information (schedules, analysis etc) can have relevant and reliable information for decision making. Several expenses with their individual and separate classifications in the financial statements were also found within “OTHERS”.

“Pension administration expenses – 2013: N227,000,000Ø Penalties and fines – 2014: 34,000,000; 2103: 29,000,000Ø Pension commission paid to agentsØ & sales executives– 2014: N99,000,000; 2013: N514,000,000. VAT- 2014: N308,000,000; 2013: N148,000,000Ø Loss on disposal of fixed assets – 2014: N42,000,000; 2013:Ø
N33,000,000.

“Transaction with holding company – misleading disclosure: One of the “transactions with holding company” was simply disclosed in the financial statements as “information technology and professional fee”. Stanbic IBTC’s submissions to our Council however revealed that these are franchise fees and royalties paid to Standard Bank of South Africa.

The Council is concerned about the group’s disclosure to users of the Financial Statements in this regard as it does not reflect fairness and faithful representation of the transactions to stakeholders.

“Intangible assets: The Council is concerned that the group does not recognise intangible assets like computer software in its financial statements despite the technology driven banking business that its runs and the huge IT infrastructure that drives it and the fact that Stanbic IBTC Bank Plc, Nigeria, developed a banking Application Software. This may not be unconnected to the issue of franchise fees and royalties paid to the South African parent. The bank, rather than own its software, pays royalties to Standard Bank South Africa perpetually.

Questions for management of Stanbic IBTC
Why is the company concealing the management/franchise fees under professional fees and royalty fees under information technology?

Why was it not properly disclosed in the financial statements for users to be well informed of the transaction between the Nigerian subsidiary and its South African parent?
Why is there no distinct and clear information whatsoever (yearly) charge, accrued liability, beneficiary, basis for computations etc.), disclosed anywhere in the annual reports since 2011 when provisions started?. Not even in the “Business Review Section” of
the annual report.

Why is Stanbic IBTC not complying with the disclosure requirements of International Financial Reporting Standards on provisions and extant laws and regulations applicable in Nigeria?

Regulatory Breaches: The Council observed that Stanbic IBTC regularly flouts CBN regulations. In 2014 for instance, a total penalty of N28,000,000 was imposed on the group.

Among the contraventions was improper disclosure of public sector deposits in 2014.
Stanbic IBTC seems to have a penchant for poor disclosures which further corroborates
the findings in this report.”

Stanbic IBTC debunks allegations
In a swift reaction yesterday, the management of Stanbic IBTC dismissed the allegations of improper disclosures, and accused FRC of breaching its enabling law. A statement by the bank stated, “Our attention has been drawn to the media statements by the Financial Reporting Council of Nigeria (FRCN) in which several inaccurate and unseemly allegations were made against Stanbic IBTC Holdings PLC (“Stanbic IBTC”). Although the matter is in court, we are constrained to respond to certain aspects of the report for the benefit of our stakeholders and the general public.

“FRCN’s allegations are inaccurate and unfortunate, and the manner in which it has chosen to make them is procedurally defective. Whilst FRCN takes refuge in Regulation 21 of the Directorate of Inspection and Monitoring Guidelines Regulations 2014 for the wide publicity that it has given to its regulatory decision, Regulation 21 only applies “Where the Panel and the entity agree that accounts are to be rectified by way of revision or restatement”. That is not the case here, because Stanbic IBTC does not agree that its accounts are defective or require rectification. Moreover, Regulation 27 makes clear that where a reporting entity does not accept FRCN’s position, FRCN “shall institute a legal action against the entity”.

“FRCN has ignored this laid down process in preference for self-help and media publicity.
The matters that FRCN alleges to be wrong are not wrong in any material respect and many are in any event not matters of financial reporting at all, but matters of business decision and judgment for Stanbic IBTC and its board of directors. For example, the decision whether to enter into a sale and lease back, whether in relation to intellectual property or any other asset, is a business decision and entirely a matter for the board of directors of Stanbic IBTC and certainly not a matter for FRCN.

“In the same vein, NOTAP’s refusal to register a franchise agreement does not render the agreement null or void, or indeed relieve Stanbic IBTC of its liability. It merely means that any foreign currency payment due to the foreign counterparty under the unregistered agreement cannot be remitted. Stanbic IBTC has not and will not make any remittance which is subject to NOTAP approval without obtaining such approval.”