Should a sitting CE be in a Committee auditing outgone boss, this seems to be a critical leadership and moral question, and not a legal one.
Recently, I sat in a national union chapter meeting where an EXCO member-elected Auditor, not by profession, agitated vehemently that he should be in the just constituted Audit Committee set up by popular demand of members via the Union’s Chairman to audit last administration. Nine things did strike my mind and marrow at that complaint cum agitation namely:
- that committee was an ad hoc (standing) committee, finished and get disbanded, not a permanent Committee, so what’s the deal?
- their chairman was empowered by their constitution to make the appointment of committee members and chairman as appropriate and as need arises, though a nomination instrument was used in that particular selection.
- the complaining elected EXCO auditor fully participated in the meeting/selection the day the committee members were selected barely two months ago but didn’t complain that he was supposed to be there to audit the past regime.
- The same EXCO auditor did not seek an audience with his chairman first perhaps requesting him that he (the auditor) be on the audit committee, hence to be considered.
- the audit committee is supposed to be independent because of the Independence of members, hence if the EXCO member is in the committee, he will dilute the Independence, hence he will be biased to/against the EXCO he’s working with.
- EXCO auditor being in the committee has empowered the person being audited with a preliminary objection to waiting for the audit committee to waste their time only to reject the outcome of the report if it doesn’t favour him. The reason could be culled from item #5.
- there will be problems of Conflicts of interest should the EXCO auditor be part of the committee because of his position (EXCO, auditor) and interest (personal thing).
- to me, most striking: what if the Union chairman on setting up the committee chose to go out and contract it to an auditing firm like Arthur Anderson, KPMG, Pricewaterhouse, Ernst & Young, or Mike Ihezuo Speaks, would the EXCO auditor resign his employment and approach AA, KPMG, PWC, E&Y or MIS for employment to be in the committee to audit the former regime?
- what is quixotic or special about being part of the panel that the EXCO auditor is making brouhaha?
These 9 questions going on in my mind those few minutes reminded me of a workshop I presented at Nigeria Institute of Management (NIM Chartered) around 2016 in which I cited case studies from the Toshiba and ExxonMobil scandals.
Join me to take you on a little journey ride trying to answer the questions asked, then and now:
+ Should outgoing CFO/FM/FD have chaired an audit committee?
+ Should a sitting Chief Accountant or Internal Auditor chair be in an Audit Committee set by his CEO/chairman?
+ Should a firm’s outgoing CFO head its audit committee, or should there be a minimal cooling-off period?
Conflict of Interest according to Merriam-Webster Dictionary (my favourite online dictionary) is a conflict between the private interests and the official responsibilities of a person in a position of trust. Note this!
Either the ExxonMobil or Toshiba accounting scandal raises important questions about the company’s corporate governance practices from 2008 through the third quarter of 2014, the period in question.
An article in Reuters describing how a $100 million loss WAS NOT CORRECTED by Toshiba sets the stage for examining one of these corporate governance practices, PREVENTING CONFLICTS OF INTEREST. In addition to providing fascinating details behind this “uncorrected misstatement,” the article reveals that Makoto Kubo was Toshiba’s chief financial officer (CFO) from June 2011 through June 2014 (a fact confirmed in Toshiba’s Investigation Report on page 48). He then became chairman of Toshiba’s audit committee that same month, presumably immediately after he left as CFO. What a corporate risk, or would you say “a blunder”?
“Based on Corporate Governance Best Practices — This is X X X”, opined Ihezuo M (2016).
Why was Kubo made chair of Toshiba’s audit committee immediately following his tenure as CFO (part of the period during which $1.2 billion in accounting misstatements occurred)? Was there no minimal cooling-off period?
Do you see why I was wondering why a sitting Union EXCO auditor was fuming to be on the audit committee to audit the last regime? But if I give them a talk on this area, can the Union afford my bill? But I gave them only 2 points free.
It is the audit committee’s responsibility to ensure that the financial information reported by the organization to shareholders/members is complete, accurate, reliable, relevant, and timely. At Toshiba, as chair of the audit committee, Mr Kubo played a key role in his oversight responsibilities with Toshiba management and the auditor, Ernst & Young ShinNihon. A point to consider here is that decisions he made as CFO affected multiple reporting periods and would therefore eventually come under his purview as chair of the audit committee. This seems to be the very definition of a conflict of interest. Recall!
This revelation provides an excellent opportunity for investors/stakeholders to revisit best practices for independent audit committees. A CFA Institute published The Corporate Governance of Listed Companies: A Manual for Investors. In this publication, CFA provides factors investors should require from audit committees (see page 14).
Very critical and by far, not the least is that all members of the committee should be independent. A sitting EXCO auditor is not an independent person. As noted in the manual, if the independence of the audit committee is compromised, there could be doubts about the integrity of the financial reporting process and the credibility of the company’s financial statements. In the same vein, if that EXCO auditor finds himself there by any means, the auditor can claim bias of the audited report if he loses out.
The same plays in our case study, Toshiba: given the size and nature of Toshiba’s reported financial irregularity, investors have every reason to doubt the integrity of its corporate governance practices.
My Candid Counsel on should a CE Be in A Committee Auditing Outgone boss?
Investors cum stakeholders should take this opportunity to identify key corporate governance practices at companies they invest in, including the responsibilities of the audit committee – my counsel to members/chairman of the Union and leaders who follow me.
Mike Ihezuo is a Leadership, Teamwork, Management, Conflicts, and Entrepreneurship expert, and can strengthen your team, union, management, and board of directors any day if sought-after. CONTACT him.
