Mar 5 , 2022

Close to two-thirds of audit teams hired by commercial banks must hold credentials from the Association of Chartered Certified Accountants (ACCA), a directive in the making by regulatory authorities prescribes. The head of an audit team should have five years of experience in auditing banking, and half of the team members have three years of experience.

Regulators at the National Bank of Ethiopia (NBE) say the amendment aims at ensuring auditing standards are enhanced. But industry practitioners fear that this may cause syndicates to emerge.

The draft will replace a directive that has been enforced for over a quarter of a century. It is outdated and does not recognise the roles played by the Accounting & Auditing Board of Ethiopia (AABE), according to Solomon Desta, a vice governor of the NBE.

Based in London, the ACCA is among the largest accredited professional associations in the world. Its qualifications can be attained through ACCA-Ethiopia, which has over 1,000 trainees and over 560 certified members.

There are around 150 audit firms in Ethiopia, registered under and accredited by the Board. Firms providing auditing services to financial institutions are few, with a handful dominating the market. Many banks and insurance firms hire one of the big five, including A. A. Bromhead & Co, Degefa & Tewodros, Getachew Kassaye & Simon, and TAY Authorised Accountants & Auditors.

Forty-five years in the audit service, A. A. Bromhead & Co serves institutions such as Dashen Bank. Last year, the firm charged Dashen 1.7 million Br in audit fees. Getachew Kassaye & Simon, whose founder passed away a couple of years ago, has been auditing the Bank of Abyssinia (BoA). It was paid 684,000 Br last year. The other player, TAY, audits several financial institutions, including Berhan and Bunna banks. Incorporated in 2005, TAY has 50 employees, of which about 40 are auditors who have experience in auditing banks. Ten of them are ACCA-certified accountants and auditors.

“Candidates must be ACCA members at the very least to be hired as an auditing manager at our firm," said Tesfa Tadesse, managing partner at TAY.

He is bullish that his firm will meet the requirement the national bank will impose on the industry. Tesfa believes the changes proposed by the regulators for the selection of external auditors will have a positive impact.

"However, it'll be difficult for firms that haven't been in the business long," he said.

TAY has a consulting wing helping companies comply with International Financial Reporting Standards (IFRS), module preparation and capacity building.

Tesfa's observation is reflected in the views of Tensae Nebiye, a managing partner of Tinsae & Zelalem (TZ) Audit Partnership, established last year. The partners have 15 years of experience in auditing.

Tensae foresees the certification requirements as "unrealistic" for few ACCA-certified auditors are in the labour market. He argues conducting a bank audit would require a team of 10 members, and more than 100 qualified professionals would be required to meet the auditing needs of the banking industry.

"Only a few companies would be able to work in rotation," said Tensae. "The rationale behind introducing a new directive isn't clear.”

There are few audit firms competent in handling the demand of the banking industry, according to Desalegn Fissehatsion, director of finance and treasury at Berhan Bank.

“Some firms provide their services to more than five banks," he said.

Berhan Bank selects an auditing firm through a bidding process held every three years.

Given its short-lived existence in Ethiopia, Tensae is baffled by the requirement that compels audit teams to have comprehensive IFRS knowledge.

In 2014, parliament enacted a proclamation that required close to 18,000 private companies, state-owned enterprises and public institutions to comply with IFRS. It is a financial reporting standard that provides a common global language for business and makes a company's accounts understandable and comparable across the world. The state-owned Commercial Bank of Ethiopia (CBE) was the first financial institution to convert its reporting to IFRS in 2017, a year before the initial deadline set for financial entities. All commercial banks have since complied with the reporting standard.

Previously, banks used IAS 39, an accounting standard used by the International Accounting Standards Board.

The draft directive also changes banks' practice of hiring auditors during shareholders' meetings without a competitive bidding process. They will be required to float bids to hire auditors for longer than a three-year term.

Dessalegn Yizengaw, vice president for financial management at the Bank of Abyssinia, says the requirement will not impact his Bank.

"We hire auditing firms through competitive bids every year,” he told Fortune. “This is in the Bank’s memorandum of association.”

The proposed alteration does, however, ring alarm bells for Tensae. He fears the limited number of qualified firms would pave the way for banks to depend on an auditing firm if the competitive bidding process becomes a norm. Those in the banking industry share this as a legitimate concern.

"Only a few firms participate in the bids floated by the Bank each year," said Dessalegn of BoA.

However, the Vice President argues the requirements would enable capable audit firms to come forward and enhance the overall quality of audit services. Desalegn of Berhan Bank says there is already a shortage of qualified auditors that meet the criteria.

“Although the draft might help to improve the level of auditing service, it will lead to a market syndicate," he warned.

Syndication would also have negative consequences for banks, which would be forced to increase fees paid to auditors or source the services from foreign firms, which would require payment in hard currency, according to Desalegn.

Finance experts, too, have doubts about who stands to benefit from the stricter requirements.

Abdulmenan Mohammed, a financial analyst and certified accountant, says the directive would boost only to the few experienced firms in the market. He rejects the idea that 60pc of an audit team needs to hold ACCA accreditation and disagrees with the banking audit experience clause.

"Does this mean audit experience from other sectors is not valued?" Abdulmenan asks.

He argued that audit experience from other sectors brings a diversified perspective and should be valued.

Sintayehu Demisse, a member of ACCA and lecturer in the accounting and finance department at Addis Abeba University, disagrees. According to him, only the audit manager must have five-year experience in the banking industry.

“It's good that all members of the audit team are not required to have banking audit experience,” Sintayehu told Fortune.

PUBLISHED ON Mar 05,2022 [ VOL 22 , NO 1140]

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