Auditor-General’s compliance with audit of state-owned companies: Critical evaluation 4
Moreover, regulation 204 of the Public Financial Management Regulations, 2019 (L.I. 2378) clearly states that the annual financial statements of a Public Corporation or a State-Owned Enterprise shall be audited by an external auditor licensed under the Chartered Accountants Act 1963 (Act 170) and appointed by the A-G and in accordance with International Standards on Auditing.
Qualification of external auditor
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In Ghana, the Companies Act 992 (CA 992) consolidates the laws relating to companies and also establishes the Office of the Registrar of Companies whose object is to register and regulate all types of businesses in conformity with the Act and any other relevant enactments.
Section 18(1) of CA 992 states that a company shall have full capacity to carry on or undertake any business or activity, do any act, or enter into any transaction; and full rights, powers and privileges for the purposes of undertaking any business or activity.
A company is essentially an artificial person, an entity separate from the individuals who own, manage, and support its operations whether owned by a government or a private individual.
Furthermore, section 138 (1) of CA 992 specifies that, “a person is qualified for appointment as an auditor of a … company, if that person is qualified and licensed in accordance with the ICAG Act, 1963 (Act 170)” as amended. Besides, section 34(1) of ICAG Act 1058 which currently regulates the accountancy profession and practice in Ghana, stipulates that a person may engage in public practice of accountancy if that person is a full member of the institute and has been issued with a public practice licence … by the institute.
Section 35(1) of the same CA 992 clarifies that “a person is engaged in public practice of accountancy if that person in consideration of remuneration received or to be received offers or performs a service involving auditing or verification of financial transactions...”
Section (43) of the ICAG Act 1058 also requires a firm registered under the Act to obtain professional indemnity insurance in the prescribed manner, to cover any liability which may be incurred as a result of the negligence or recklessness in the conduct of the practice of the firm.
This requirement is in accordance with section 142(2) of Act 992 which states that the auditor of a company shall not be relieved from the fiduciary duty and the liability incurred as a result of a breach of that duty.
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Review
A review of firms that have fulfilled all the prescribed requirements of ICAG with licences valid until 31 December 2022 available at https://icagh.org/wp-content/uploads/2022/07/2022-List-of-Licensed-Firms-in-Good-Standing-W.pdf indicates that the Ghana Audit Service (GAS) is excluded from the 333 firms licensed by the ICAG to engage in the public practice of auditing limited liability companies including state owned companies (SOCs).
Moreover, neither the A-G nor the Deputy A-G who heads the Commercial Audits Department (CAD) that is responsible for the audit of Public Boards, Corporations, … and other Statutory Institutions now including SOCs as indicated earlier, has not been issued with a public practice licence to engage in the public practice of accountancy.
Inquiries from the ICAG’s Quality Assurance and Monitoring Department confirm that the Institute cannot issue practising licence and certificates to GAS and its staff because they do not apply the International Standards on Auditing (ISA) and the staff do not have four years of practice experience in a private audit firm in accordance with section 30(1) of Act 1058 that states that, “A Chartered Accountant shall perform an audit in accordance with (a) the requirements of the international auditing standards issued by the International Auditing and Assurance Standards Board and adopted by the Institute; and agreed procedures specified in a client contract.”
The objectives of government auditing for Parliament’s use per the International Standards of Supreme Audit Institutions (ISSAI) comprise the proper use of public funds; the development of sound financial management; the proper execution of administrative activities; and the communication of information to public authorities and the general public through publication of objective reports.
These objectives are not the same as those of independent auditing required by the Companies Act.
A-G’s appointment
As discussed earlier, the GAS currently audits most large SOCs and charge amounts similar to previous fees charged by the independent auditors appointed for the SOEs.
Interestingly, GAS requests the SOCs to pay specified amounts for incidental expenses into an account entitled “Director of Audit, Finance & Administration” opened with the Bank of Ghana.
The charging of SOCs for audit incidentals is also in contravention Article 187 (11) and (14) of the 1992 Constitution and section 26 of the Audit Service Act, 2000 (Act 584).
Read also: A-G’s audit, its compliance with Financial Management Rules: A Critical Evaluation
Auditor-General’s compliance in audit of state-owned companies: Critical evaluation
Auditor-General’s compliance with audit of state-owned companies: Critical evaluation 3
In spite of regulation 204 of the Public Financial Management (PFM) Regulations 2016 requirement for the Auditor-General to appoint external auditors licensed under the Chartered Accountants Act 1963 (Act 170). The following are the SOCs listed in the 2020 State Ownership Report (SOR) as audited by GAS:
• Bulk Oil Storage Transport Company Ltd
• Electricity Company of Ghana Ltd
• Ghana Water Company Ltd
• Graphic Communications Company Ltd
• Ghana Post Company Ltd
• Ghana Fair Trade Ltd
• Ghana Cylinder Manufacturing Company Ltd
• PSC Tema Shipyard Ltd
Technically, the selection and appointment of independent auditors for SOCs should be made by an ICAG licensed auditor.
Implication, GAS’ appointment as statutory auditor of SOCs
Contravention of CA992 and PFM ACT 921: Section 139 (1) of CA 992 stipulates that “A person shall not be appointed as an auditor of a company unless, that person is duly qualified in accordance with section 138,” and “where a company contravenes a provision of this section or describes as auditor of the company a person who has not been duly appointed, the company and an officer of the company that is in default are liable each to pay to the Registrar an administrative penalty of two hundred and fifty penalty units.”
It is important for the A-G to note that the Registrar of Companies could enforce the power to impose the above sanction. Furthermore, the ICAG could also impose sanctions on the A-G for carrying out an independence audit of a company without an ICAG valid practising licence.
Late submission of audited financial statements by SOCs
Financial reporting requirements for SOEs are specified in the PFM Act, 2016 (Act 921), PFM Regulations, 2019 (L.I. 2378), and State Interests and Governance Authority (SIGA) Act, 2019 (Act 990). Particularly, section 95 of the Act 921 requires the governing body of an SOE or SOC to cause to be prepared and submitted accounts and audited financial statements to the Finance Minister in respect of that financial year, not later than two or four months respectively after the end of each financial year.
In partnership with the Ministry of Finance (MOF), SIGA prepares annual SORs as part of the key tools to ensure effective oversight of Government’s equity investments.
The report includes a section on financial reporting and compliance to provide detailed insight into how SOEs are responding to their reporting and disclosure obligations under the PFM Act 921.
A review of the SORs issued to date indicates low compliance by the SOEs with the reporting and disclosure provisions governing their operations including CA 992, PFM Act 921 and its associated Regulations (L.I. 2378).
For instance, it is reported in the 2020 SOR that only (79) Specified Entities out of 177 submitted audited FS for the financial year 2020 to SIGA and the MOF.
The low compliance of the SOEs has been ascribed to the untimely appointment of their external auditors by the A-G, resulting in their inability to meet the deadlines for submission of audited financial statements, as the appointments are mostly done well beyond the deadline for submission of audited financial statements by SOEs (2018 SOR).
In response to questions posed by the editorial team, the A-G maintained that “the mandate of the Auditor-General is not affected by the status of some SOEs as LLCs” and also explained among other reasons that “unforeseen delays in the procurement process for appointing auditors under the Public Procurement Act” and “a level of misconception among certain SOEs as [Limited Liability Companies] LLCs concerning the Auditor General’s mandate to audit them, notable among them VALCO and Tema Oil Refinery (ToR)” (2018 SOR).”
The writer is an auditor.