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Should a sitting CE Be in an Committee Auditing Outgone Boss?

Recently, I sat in a national union chapter meeting that 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 complain cum agitation namely:

  1. that committee was ad hoc (standing) committee, finish and get disbanded, not a permanent Committee, so what’s the deal?
  2. their chairman was empowered by their constitution to make the appointment of committee members and chairman as seem appropriately and as need arises, though nomination instrument was used in that particular selection.
  3. 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 supposed to be there to audit the past regime.
  4. same EXCO auditor did not seek audience with his chairman first perhaps requesting him that he (auditor) wants to be in the audit committee, hence to be considered.
  5. audit committee supposed to be independent by reason of 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.
  6. EXCO auditor been in the committee has empowered the person been audited with preliminary objection to wait for the audit committee waste their time only to reject the outcome of the report if it doesn’t favour him. Reason could be culled from item #5.
  7. there will be problems of Conflicts of interest should EXCO auditor be part of the committee by reason of his position (EXCO, auditor) and interest (personal thing).
  8. to me, most striking: what if the Union chairman on setting up the committee chose to go out and contract it to 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 so as to be in the committee to audit the former regime?
  9. what is quixotic or special been 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 in Nigeria Institute of Management (NIM Chartered) around 2016 in which I cited case studies from 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 or 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 time 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”?

“On basis of 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?

Are you seeing why I was wondering why a sitting Union EXCO auditor was fuming to be in audit committee to audit last regime? But if I give them 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 shareowners/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 about the credibility of the company’s financial statements. In same vein, if that EXCO auditor finds himself there by any means, the audited can claim bias of the audited report if he loss out.

Same played 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

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.

#MikeIhezuoSpeaks

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Dr Mike Ihezuo

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Mike is a leader and leader’s developer, a speaker, an author and a prolific writer, a researcher and consultant. He invests life, time, energy, resources and money to empowering organizations desiring upward dive to top performance and individuals desirous of fulfilling their destinies, discovering purpose and seeking success towards significance. Mike, as a life coach, team builder, conflict resolutions exponent, motivational maestro, negotiation experts, corporate strategist, an entrepreneur and entrepreneurial developer, invites you to this LeadershipRoundTableHQ. Let’s talk and discuss so as to learn and GROW…

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