Stanbic IBTC: The Letter that Took Winds Out of FRCN’s Sails

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As the apex regulatory body in the nation’s financial sector, Central Bank of Nigeria (CBN’s) response to the controversial sanctions meted out on the leadership of Stanbic IBTC Holding and two officials of the KPMG, over alleged irregularities in the company’s financial statements will not only douse the tension in the financial market and give the holding company a clean bill of health, but it will also underscore the need for regulators in a collegiate system like ours to embark on consultations before rushing to inflict sanctions, reports Festus Akanbi

True to the predictions of a number of financial sector analysts, last week’s sanction of some top echelons of Stanbic IBTC Holding and some officials of the company’s auditing firm, KPMG by the Financial Reporting Council of Nigeria (FRCN) over alleged infractions on the financial accounts of the holding company promises to redefine how issues of corporate governance and regulatory supervision are handled in Nigeria.

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FRCN’s Verdict

Last week, the FRCN, after concluding its investigation of NSE listed Stanbic IBTC Holdings Plc for alleged regulatory breaches, ordered the company to withdraw its financial statements for years ended December 31, 2013 and 2014 and restate them in accordance with relevant provisions of the FRC guidelines. FRCN also suspended the FRCN number of the bank’s chairman, Mr. Atedo Peterside, and its chief executive, Mrs. Sola David-Botha. The Council also barred them from vouching for the integrity of any financial statements in Nigeria.

It also suspended two other directors – Mr. Arthur Oginga and Dr. Daru Owei – for attesting to what it termed the “misleading” 2013 and 2014 financial accounts of the bank, as well as Ayodele Othihiwa of KPMG Professional Services for his firm’s alleged complicity in the infractions highlighted in the financial reports for the two-year period. Consequently, the shares of Stanbic Plc went down by 17.4 per cent to settle at N18.9 per share.

A number of financial analysts who spoke with THISDAY had called for caution, considering the implications of such a far-reaching pronouncement not only on the nation’s capital and financial markets, but also in terms of its negative signals to members of the international community.

However, Stanbic IBTC Holding last week won first round of legal bathe with the FRCN as the Federal High Court restrained the FRCN from obstructing the operations of the bank.

Balance of Power

In its response to the FRCN’s decision, the CBN last week said it was seriously concerned that the FRCN could take what it described as a drastic regulatory decision on the Stanbic IBTC holding – under its regulation and supervision- without any form of consultation with the apex bank and fair hearing to the institution. Consequently, the apex bank announced its rejection of the request by the council that it takes disciplinary action against Stanbic IBTC Holding Company Plc (SIBTCH), saying that the council failed to follow due process in the matter.

To this end, the central bank has said it does not see any reason to advise/compel SIBTCH to comply with the sanctions meted to it by FRCN.

CBN Governor, Mr. Godwin Ifeanyi Emefiele, in his response, which was addressed to the Executive Secretary, FRCN, Mr. Jim Obazee. also pointed out that as the banking sector regulator, the FRCN failed to consult with the central bank throughout the process of its investigation. According to Emefiele, the announcement by the FRCN on SIBTCH was not only capable of eroding investor confidence, but inimical to financial system stability.

CBN’s 13-Point Observation

Emefiele in the letter argued that *Contrary to the allegation of the FRCN that Stanbic IBTC (SIBTC) did not obtain approval from the National Office for Technology Acquisition and Promotion (NOTAP) for the payment of affiliate software license, our review revealed that the bank actually obtained the necessary approval from NOTAP to pay affiliate software license from the Standard Bank South Africa (SBSA), for a period of three years covering June 2012 to May 30, 2015. The remittance from June 2015 to date is still awaiting approval from NOTAP.

“With regards to the allegation of non-disclosure of intangible assets in SIBTC’s 2013 and 2014 financials, we note that the bank adequately recognised the software as an intangible asset in its 2011 financials and sufficiently disclosed the disposal of the software in the 2012 financials. Consequently, the said software could not have been reported as an intangible asset in the succeeding years 2013 and 2014.

“With respect to the allegation of lumping several expense items under “Others”, we are of the view that the items were not material enough to appear as line items in the Income Statement and that the non-disclosure of the items did not materially affect the true and fair view of the financial statements.

“We agree with FRCN that SIBTC erred in the classification of some line items. However, the identified misclassifications did not understate or overstate its assets and liabilities, neither did it increase nor decrease its income or expenditure, such as would have caused a material misrepresentation of the financials.

“SIBTC used its judgment to capture the donation of N275 million under “Others” because it was of the opinion that it was not a charitable donation but a mandatory contribution towards the victims of terrorism in the country. For the avoidance of doubt, this contribution was agreed at a Bankers’ Committee Meeting, with the share for each bank clearly spelt out. Therefore, we agree with SIBTC’ s position, as presented.

“Contrary to FRCN’s conclusions, our review of lAS 37 and lAS 32.19 indicate that SIBTC had an obligation to accrue the relevant provisions toward the settlement of the franchise and management fees as agreed between it and SBSA.

“Without prejudice to the foregoing financial issues, the CBN is concerned about the apparent failure of the FRCN to follow due process as laid down by its own FRCN Act and Regulations, in arriving at the Regulatory Decision. In this regard, the bank wishes to make the following observations:

“ln conducting investigation into possible breaches of the FRCN Act and/ or the Regulations, the FRCN is required to give the Entity concerned sixty (60) days from the service of Final Notice to restate its accounts where both the Panel and Entity agree on the need for restatement. In this case, our understanding is that FRCN called a meeting with the board of SIBTCH at 11.00 a.m on the 26th October 2015. But rather than holding the meeting, FRCN went ahead to convene a press conference at 8a.m on the same day to announce its sanctions against SIBTCH. Our review further indicates that both FRCN and SIBTCH did not agree on a need for restatement of the accounts before the sanctions were announced.

“According to the FRCN Act, an entity is only punishable under the Act upon conviction by a court of competent jurisdiction. Yet, in issuing the Final Notice, the FRCN had already meted out some punishments to the affected entity, without any conviction by a court.

“While FRCN may, following approval of the minister, review applicable fines, there is no power for compounding offences and imposing penalty in lieu of conviction as was done in this case.

“Both the FRCN Act and the Regulations provide for the outcome of the investigation to be made known to a registered professional or a public interest entity and a right of appeal to the Technical and Oversight Committee before resorting to prosecution. In this case, however, there is no evidence that time was allowed to elapse for the appeal process before the imposition of sanction.

“The Regulation provides that if the Entity fails to accept FRC’ s position at the end of a Notice period, the Council shall institute legal action against the entity, rather than mete out sanctions. Yet, in this case, sanctions have been meted out without evidence that legal action has been fully exhausted.

“A combined reading of both the Act and the Regulations shows that there are three types of sanctions that may be imposed for contraventions by Entities.

“These are: lmposition of monetary penalty/fine; Imprisonment for a term of years; Deregistration of a professional or issuance of a Warning Notice. There is however, no authority for suspension of registration of a professional as was done in this case,” Emefiele insisted.

Financial Experts Call for Caution

Watchers of the emerging scenario said a number of lessons have been learnt from the way the issue was handled by FRCN. According to a Lagos-based financial analyst, the “CBN response shows that in a collegiate regulatory framework like the financial sector, regulators need to work together rather than at cross-purpose. The way and manner FRC’s ES carries on is unbecoming of such a sensitive institution.”

Managing Director, Financial Derivatives Company Limited, Mr. Bismarck Rewane explained that the action of the FRCN was far fetched considering the enormity of the implications of the alleged hasty decisions taken against the holding company.

Rewane said he could not understand the rationale behind the condemnation of the disputed accounts despite the fact that both the CBN and NDIC had vetted the accounts. He maintained that given the level of scrutiny of the auditing firm of KPMG, it will be a surprise that such a lapse could be allowed, saying it will be a great surprise that the quality control partners of KPMG will allow the mis-representations pointed out by FRCN.

The financial analyst also raised the point that Stanbic IBTC, because of its affiliation with the Standard Bank of South Africa, enjoins dual supervision, wondering how the kind of infractions being alleged by the council could have taken place.

Rewane said there is need to avoid similar embarrassments in the future because of the implications on the nation’s economy.

Also last week, Fitch Ratings said the recent alleged irregularities raised by the FRCN into Stanbic IBTC Holdings Plc’s financial reporting for 2013 and 2014, have not affected the propensity of its South African majority shareholder – Standard Bank Group Limited (SBG), to its subsidiary if required.

The ratings agency explained in a statement that Stanbic IBTC’s and its holding company’s national ratings were based on the moderate likelihood of support that the bank and the holding company derive from SBG.

SBG has a majority 53.25 per cent stake in Stanbic IBTC Holdings. The issuer operates a holding company structure, whereby Stanbic IBTC Holdings is the holding company of Stanbic IBTC Limited, the group’s main operating company.

Fitch believes that SBG’s support would extend equally to the bank and the holding company.

“Following the allegations, the Central Bank of Nigeria (CBN) has ordered Stanbic IBTC to respond to the points raised by the FRC. Fitch understands that so far no restatement of the 2013 and 2014 financial statements have been required by CBN.

“The allegations cover several different areas of the financial statements, but centre upon alleged erroneous accruals relating to intra-group charges and license fees due to SBG for the use of banking application software- amounting to between N1 billion and N2 billion annually – as well as the alleged concealment of these expenses within the financial statements,” the ratings agency stated.

Left in the Cold

Cracks began to appear on the walls of FRCN when its legal counsel,

Professor Fabian Ajogwu (SAN), reportedly withdrew his services, alleging his client, FRCN was hasty in pronouncing sanctions against the holding company.

According to sources close to Ajogwu’s law firm, Kenna & Associates, Ajogwu was particularly concerned that immediately FRCN announced the suspension of the bank’s directors’ Financial Report Numbers on its website on Monday, on the same day, the council penalised Stanbic IBTC to the tune of N1 billion, in flagrant disregard of the Act setting it up and laid down procedures.

Ajogwu, it was gathered, had advised the council to tread cautiously on the issue by calling the bank for talks only to discover that the council had imposed a litany of sanctions on the bank.

The lawyer had also advised that it would be against the principle of fair hearing and natural justice if the council went ahead to sanction the bank.

Particularly bothersome was the fact that the council’s Act makes it clear that sanctions could only be imposed after the law courts may have found the reporting entity liable.

But this was not followed, said a source close to the law firm.

Efforts to get Kenna & Associates and Ajogwu to confirm the decision not to provide legal advisory service to FRCN any longer hit a brick wall.

But a few hours after the news of the sanctions broke, the bank issued a detailed statement pointing out that FRCN’s allegations were “inaccurate and unfortunate”, adding that the manner in which it chose to make them was “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,” Stanbic IBTC stated on Monday.

Stanbic IBTC further indicated that the matter between itself and FRCN was already in court, insisting “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 counter-party 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,” the bank added.