The Financial Reporting Council of Nigeria (“FRCN”) on the 22nd of January 2025, announced the introduction of Rule 14 on Non-Compliance with Laws and Regulation (“Rule 14”).¹ This announcement is further to its mandate to develop and publish accounting and financial reporting standards to be observed in the preparation of financial statements in Nigeria.

Background

Generally, Rule 14 provides additional responsibilities to the role of accountants and external auditors under Rule 2. The FRCN introduced Rule 14 to ensure that external auditors support corporate entities to promote a culture of compliance with laws, regulations, codes, rules and guidelines that may have direct or indirect impact on the financial statements and operations of these entities. Rule 14 aims to foster integrity and transparency in financial reporting, which is beneficial to a company’s stakeholders particularly, investors.

Compliance with Rule 14 is a mandatory requirement for external auditors engaged in the audit of the financial statements of public interest entities.²

External Auditors’ Duty to Enforce Compliance with Rule 14

In the exercise of their audit functions, external auditors are now obligated to confirm the compliance of corporate entities with relevant laws, rules and regulations that guide their business operations. In practice, this means that external auditors will be required to notify management and the audit committee of any suspected case of non-compliance with regulatory provisions, in order for management to take proactive steps to mitigate potential risk.

The implementation of Rule 14 is a welcome development that will undoubtedly improve the governance of corporate entities in Nigeria by restoring integrity in the financial reporting process. It is expected that investor’s confidence will improve as companies now have an obligation to report on their compliance with the laws and regulations that have a material impact on in their financial statements.

In addition to the above, external auditors are now required to confirm that all signatories to financial statements i.e. directors, company secretaries and financial officers maintain a valid registration with the FRCN and that the financial statements produced from the audit process depicts a true and fair view of the state of affairs of the entity to which they relate.

Rule 14 adds an extra layer of responsibilities for the external auditors, as they are now required to send a confirmation request to the FRCN, prior to providing their audit opinion on a public interest entity’s financial statement. In practice, the External Auditor submits a confirmation request to FRCN on behalf of a company following which, the FRCN provides an assessment of the company's compliance with its applicable rules and regulations. Upon receipt of a positive compliance confirmation from the FRCN, the External Auditor proceeds to issue their audit opinion on the company's financial statements. In the event of a negative compliance confirmation, the company is required to rectify the identified non-compliance issue(s) before the External Auditor can resubmit a confirmation request. While the typical processing time frame for this procedure is two weeks, it may vary depending on the volume of requests received by FRCN. To mitigate potential delays, it is recommended that both External Auditors and Management should factor in the timeline for obtaining a confirmation request from the FRCN, into their audit planning.

Consequences of Non-Compliance with Rule 14

Any auditor that fails to confirm an entity’s compliance with material facts that may directly or indirectly affect the financial statements before signing audit opinions contravenes Rule 14 and shall be sanctioned in line with the FRCN’s Operational Guidelines for Inspection and Monitoring of Auditors, Other Assurance Providers and Audit Committee Members, 2020.

Conclusion

In conclusion, the introduction of FRCN Rule 14 is a significant step towards strengthening the integrity of the financial reporting system in Nigeria. Mandating auditors to report on compliance with laws and regulations, underscores the FRCN's commitment to promoting the credibility of financial information thereby restoring investor confidence.

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1. FRC-releases-rule-14-on-non-compliance-with-laws-and-regulations, 22 January 2025.
2. Section 24 of the Financial Reporting Council of Nigeria (Amendment) Act, 2023 defines public interest entities as governments and government organizations; listed entities in any recognized exchange in Nigeria; non-listed entities that are regulated; public limited companies; private companies that are holding companies of public or regulated entities; concession entities and privatized entities in which government retains an interest.