By Ndubuisi Ekekwe
THE Great Recession revealed a weak link in Africa’s quest to build strong capital markets—bogus audited statements. Some public companies and auditing firms committed monumental misdeeds, and regulators failed the markets.
Investors are concerned that regulators can’t ensure that companies’ published financial statements accurately reflect their operating positions. Regulatory reform is urgently needed for Africa’s capital market to blossom.
But reform must go beyond simply replicating processes used by, for example, the US Securities and Exchange Commission, Nasdaq and the New York Stock Exchange. Africa must pioneer new ways to address problems in places with fledgling legal systems and criminal justice institutions. This means establishing a regulatory system based on the understanding that punishing a crime is less desirable than preventing it—especially when pensions are risked on equities.
A key step will be for regulators to change the relationships that exist among auditors, public companies and the exchanges. Specialty insurance companies may need to be created to protect investors from audit-fueled risks.
Companies should be required to buy special insurance policies (audited statement insurance, as I call it) to compensate investors if audited financials are found to be deceptive. If existing insurance companies can’t handle this risk, African governments and regulators should create opportunities for new ones.
These firms should be built for the digital age, requiring public companies to link business data to insurers in real time to help them assess risks. In addition, African exchanges need to revamp the process whereby auditors are retained and compensated by traded companies. Public companies in Africa shouldn’t be allowed to hire their external auditors; the exchanges should do so for them. Such measures will fix the biggest flaw in the current model—the conflict of interest that occurs when auditors are financially dependent on the companies they audit.
Ndubuisi Ekekwe is a founder of the nonprofit African Institution of Technology and the chairman of Fasmicro Group.