CORPORATE FAILURES IN GHANA: THE ROLES OF AUDITORS AND ACCOUNTANTS? - PowerPoint Presentation

CORPORATE FAILURES IN GHANA: THE ROLES OF AUDITORS AND ACCOUNTANTS? Name: K.O.Appiah, PhD, FCCA, ICA, MScDepartment: Accounting and FinanceFaculty & College: School of Business/Humanities & Social Sciences 6/27/2018 1

ICAG PUBLIC FORUM CORPORATE FAILURES IN GHANA: THE ROLES OF AUDITORS AND ACCOUNTANTS? 6/27/2018 koappiah.ksb@knust.edu.gh 2

WHAT ARE THE COMMON BUSINESS AREAS THAT CAUSE A CORPORATE CRISIS OR CONTRIBUTE SIGNIFICANTLY TO IT? 6/27/2018 koappiah.ksb@knust.edu.gh 3

6/27/2018 koappiah.ksb@knust.edu.gh4 WHAT ARE THE COMMON BUSINESS AREAS THAT CAUSE A CORPORATE CRISIS OR CONTRIBUTE SIGNIFICANTLY TO IT?

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WHAT ARE THE MOST INTERNAL CAUSES FOR A CORPORATE CRISIS THAT YOU HAVE EXPERIENCED? 6/27/2018 koappiah.ksb@knust.edu.gh 6

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CAN WE PREDICT THE SUCCESS OF SMALL BUSINESSES IN GHANA? 6/27/2018 koappiah.ksb@knust.edu.gh 9

Ghana Model for predicting of small business success, N=208 β Sig. 1. Start-up Capital -0.942 0.000 2. Record keeping of financial transactions 0.138 0.056 3. No. of years of Industry experience by CEO 0.022 0.869 4. No. of years of Management experience of CEO 0.011 0.945 5. Startup Plan 0.124 0.329 6. Professional Advise -0.074 0.432 7. Education level of CEO -0.079 0.638 8. level of difficulty in recruitment and retaining Staff 0.027 0.797 9. Stage of product/services at start-up 0.001 0.997 10. Stage of Economy at Start-up -0.208 0.014 11. Age of CEO at Start-up 0.019 0.709 12. Firm started by Owner or more than one Owner 0.301 0.537 13.CEO’s parents own their own business -0.567 0.263 14. Minority or Majority CEO 0.997 0.161 15. Level of Marketing skills at start-up 0.514 0.000 Constant  -0.977Model Test Results-N 101 Failed and 107 Success  Model Significance0.000Classification Results-overall 86.5, Success 88%, Failure 85%  6/27/2018 koappiah.ksb@knust.edu.gh 10

WHAT IS THE ROLE OF AUDITORS AND ACCOUNTANTS IN CORPORATE FAILURES IN GHANA? 6/27/2018 koappiah.ksb@knust.edu.gh 11

Argenti (1976) 6/27/2018 koappiah.ksb@knust.edu.gh 12

DEFECTS MANAGEMENT ACCOUNTING SYSTEMS REPONSE TO CHANGE 6/27/2018 koappiah.ksb@knust.edu.gh 13

MANAGEMENT DEFECTS Management: autocratic chief executive chief executive is also chairman unbalanced skill &knowledge on the board passive board weak finance director lack of professional managers below the board 8 4 2 2 2 1 6/27/2018 koappiah.ksb@knust.edu.gh 14

MANAGEMENT DEFECTS Management: unbalanced skill &knowledge on the board passive board weak finance director lack of professional managers below the board 2 2 2 1 6/27/2018 koappiah.ksb@knust.edu.gh 15

Re Management Defects : UT and CAPITAL BANK Collapse“ Let me be upfront and say that though the failure of the two banks was due to significant capital deficiencies, the underlying reason was poor corporate governance practices within these institutions. “ Dr Ernest Addison, Governor December, 2, 2017 6/27/2018 koappiah.ksb@knust.edu.gh 16

Re Weak Finance Director: UT and CAPITAL BANK Collapse “ The dominant role of shareholders who exerted undue influence on management of the banks, leading to poor lending practices. This was also reinforced by weak risk management systems and poor oversight responsibility by the boards of directors . “ Dr Ernest Addison, Governor December, 2, 20176/27/2018 koappiah.ksb@knust.edu.gh17

Re: UT and CAPITAL BANK Collapse Non-executive directors of the banks compromised their independence and fiduciary duties to serve as checks on executive directors. This was because rewards such as business class air tickets were being granted to them annually . Dr Ernest Addison, Governor December, 2, 2017 6/27/2018koappiah.ksb@knust.edu.gh 18

Re Passive Board: UT and CAPITAL BANK Collapse Interference by non-executive directors in the day-to-day administration of the banks weakened the management oversight function of executive directors. Some non-executive directors were also acting as consultants to the same banks with no clear mandate, which gave rise to conflict of interest situations . Dr Ernest Addison, Governor December, 2, 20176/27/2018koappiah.ksb@knust.edu.gh 19

Re Passive Board: UT and CAPITAL BANK Collapse • Irregular board meeting also accounted for the weaknesses in the board oversight. 6/27/2018 koappiah.ksb@knust.edu.gh 20

DEFECTS IN ACCOUNTING SYSTEMS Budgetary control Cash flow plans Costing systems 3 3 3 6/27/2018 koappiah.ksb@knust.edu.gh 21

Re Accounting Systems Defects: UT and CAPITAL BANK Collapse “ …The poor lending practices was also reinforced by weak risk management systems and poor oversight responsibility by the boards of directors” Addison (December 2, 2017) 6/27/2018 koappiah.ksb@knust.edu.gh 22

Re: UT and CAPITAL BANK Collapse • Also, very high executive compensation schemes were being operated by the affected banks which were not commensurate with their operations. The risk and earnings profile of the banks could not support the compensation schemes 6/27/2018 koappiah.ksb@knust.edu.gh 23

Re: UT and CAPITAL BANK Collapse Non-adherence to credit management principles and procedures as the banks were heavily exposed to insiders and related parties. There was also no evidence of interest payments on these investments . The investments were, therefore, impaired, but some members of the board at the time accepted the responsibility to pay off the said amount through a board resolution. 6/27/2018 koappiah.ksb@knust.edu.gh 24

DEFECTS IN REPONSE TO CHANGE Products, Processes, Markets, Employee Practice, etc. 15 Total possible (Danger mark = 10) 43 6/27/2018 koappiah.ksb@knust.edu.gh 25

Re Response to change: UT and CAPITAL BANK Collapse The banks could not delineate themselves from their past practices as finance houses. They followed the same practice of borrowing from high net worth persons at very high costs, without any plans to bring themselves in line with the industry norm.Addison (December 2, 2017)6/27/2018 koappiah.ksb@knust.edu.gh 26

Re Practices: UT and CAPITAL BANK Collapse • Diversion of funds to holding companies and their related parties was widespread. In the case of one bank, placements could not be traced to the bank’s records though some customers showed proof of their investments with the bank. Addison (December 2, 2017) 6/27/2018 koappiah.ksb@knust.edu.gh 27

Argenti (1976) 6/27/2018 koappiah.ksb@knust.edu.gh 28

MISTAKES Overtrading: expanding faster than cash funding Gearing: bank overdrafts (loans) imprudently high Big project: project failure jeopardising company 15 15 15 Total possible (Danger mark = 15) 45 6/27/2018 koappiah.ksb@knust.edu.gh 29

Indicators of Overtrading (see Addo 286) Current ratio Acid test ratio Average settlement period for trade receivables Average inventories turnover period Overtrading may lead to a lower than expected: Average settlement period for trade payables Sales to capital employed ratio Overtrading may lead to a higher than expected: 6/27/2018 koappiah.ksb@knust.edu.gh 30

Indicators of overtrading YEAR ACID TEST INTEREST/CE Gearing Ratio-Debt/equity UT UNI SG-S UNI-BA UT SG-SS UT UNIB SG-SS 2011 0.10 0.16 0.18 34.24 137.3 41.06 18.81 76.59 0 2012 0.11 0.13 0.20 105.9 87.3 35.69 19.66 70.93 0 2013 0.10 0.11 0.14 126.8 67.3 84.59 117.10 726.4 020140.100.06 0.12 126.8147.3111.50157.4498.2300.00-0.10-0.0692.56+10.0+70.44+138.63+21.606/27/2018koappiah.ksb@knust.edu.gh31

Gearing ratios -how risky a business is perceived? -what are the implications of high gearing? -what are the limitations of gearing? 6/27/2018 koappiah.ksb@knust.edu.gh 32

Re: UT and CAPITAL BANK Collapse Examples of recklessness that led to the failure of the two banks include:• Co-mingling of the banks’ activities with their related holding companies. For instance, one bank was paying royalties for the brand name, even at the time that the bank’s financial performance was abysmal and could not pay dividends. Interestingly, the royalties were approved by four out of seven members of the board without the consent of the other significant minority shareholders, including an International Financial Institution. Dr Ernest Addison, Governor December, 2, 2017 6/27/2018 koappiah.ksb@knust.edu.gh 33

Big project: project failure jeopardising company who is responsible for project appraisal? 6/27/2018 koappiah.ksb@knust.edu.gh 34

UT BANK –BIG PROJECT 2011 Borrowed $10M and $5m from IFC to finance SMEs 2012 Raised GHS 46m from equity placement in order to meet the minimum capital requirement. 2013 The bank purchase mobile breast cancer screening van costing $65000 and screened 8000 people As part of the chairman's Christmas Day, UT distributed 2000 pieces of food to the needy. Sponsored Amidaus Professional Football Club at Tema   2014 Established UT care foundation . Continuous sponsoring for breast awareness campaign . 6/27/2018 koappiah.ksb@knust.edu.gh 35

UNIBANK –BIG PROJECT 2011 Agreed to open more branches across the country   2012 The Head Office was relocated to World trade Centre (WTC). Commission Kasoa , Koforidua, Central and Eastern region.   Renovate GIMPA branch and open an agency office in Brong Ahafo . Purchased properties in Madina and Kejetia   2013  Completed the construction of Tamale and Techiman branches 6/27/2018 koappiah.ksb@knust.edu.gh 36

Re Big project:-UNIBANK 2014 8 branches were opened. 3 in Kumasi, 4 in Accra and 1 in Tema   Plus 4 others to be completed with the same year     Meter card was also operationalised   Sponsored Black Stars for 2014 Brazil world cup   Lunch a promotion called 'Dash for 200K'     Completed the disaster recovery site at Tema 6/27/2018 koappiah.ksb@knust.edu.gh 37

SYMPTOMS SYMPTOMS Financial: deteriorating ratios Creative accounting: signs of window dressing Non-financial signs: declining quality, morale, market share, etc. Terminal signs: writs, rumours, resignations 4 4 3 1 Total possible 12 Total overall possible score (Danger mark = 25) 100 6/27/2018 koappiah.ksb@knust.edu.gh 38

Re Symptoms: UT and CAPITAL BANK Collapse Co-mingling of the banks’ activities with their related holding companies. ….. As a result, the international institution placed a notice on its website abrogating all relationships with the bank , and this led to most of the foreign lenders cutting off their credit lines to the bank and recalling their credits; thereby creating serious liquidity squeeze to the bank. 6/27/2018 koappiah.ksb@knust.edu.gh 39

TAKE HOME One of the more significant earlier works was by Ross and Kami (1973); they gave ‘Ten Commandments’ which, if broken, could lead to failure: 6/27/2018 koappiah.ksb@knust.edu.gh 40

Ross and Kami (1973) 1. You must have a strategy. 2. You must have controls. 3. The Board must participate.4. You must avoid one-man-rule. 6/27/2018 koappiah.ksb@knust.edu.gh 41

Ross and Kami (1973) 5. There must be management in depth. 6. Keep informed of, and react to, change. 7. The customer is king. 6/27/2018 koappiah.ksb@knust.edu.gh 42

Ross and Kami (1973) 8. Do not misuse computers. 9.Do not manipulate your accounts. 10. Organize to meet employees’ needs . 6/27/2018koappiah.ksb@knust.edu.gh 43

ConclusionThe fact is that UT Bank, CAPITAL Bank, Nobel Dream, Ghana Airways have collapse. We can for example point out the Ghana Airways in 2004, which is (maybe) accidently very similar to UT Bank and Capital Bank cases. But why we have the old pattern here again? 6/27/2018 koappiah.ksb@knust.edu.gh 44

Conclusion cont.My personal opinion is that the reason is in the weak corporate governance arrangements in the company and in the fact that corporate governance principles are not under the root of law. In the UT and Capital weak corporate governance arrangements allowed officers to find the way how to accumulate unearned profit and specifically increase their personal wealth. 6/27/2018 koappiah.ksb@knust.edu.gh 45

Conclusion cont In my opinion, there is no problem in the context of BoG corporate governance directives (Act 930) since they arch over all problems discussed in this presentation. 6/27/2018 koappiah.ksb@knust.edu.gh 46

The BOG Directives on corporate governance ACT 930 specifically say that the corporate governance framework should ensure: s23. The board of directors shall have overall responsibility for the regulated financial institution, including approving and overseeing the implementation of the institution’s strategic objectives, risk strategy, corporate governance and corporate values . 6/27/2018koappiah.ksb@knust.edu.gh 47

The BOG Directives on corporate governance ACT 930 S24. Board Nomination Committee S20 Board Audit Committee S63 Board Risk Committee S71: Remuneration committee S82: Internal and External Audit Functions 6/27/2018 koappiah.ksb@knust.edu.gh48

Will these committees reduce the Bank failures? 6/27/2018 koappiah.ksb@knust.edu.gh 49

Empirical studies in the UK Appiah et al (2015) "Remuneration committee and corporate failure", Corporate Governance, Vol. 15 Issue: 5, pp.623-640, Appiah et al (2016) "The impact of board quality and nomination committee on corporate bankruptcy." Advances in Accounting 35 (2016): 75-81. Appiah et al (2016) Audit Committee and Corporate Insolvency, Journal of Applied Accounting Research, 18 (3), 298-316 6/27/2018 koappiah.ksb@knust.edu.gh 50

The BOG Directives on corporate governance ACT 930 Independence 36 times in the 31 page Act 930 6/27/2018 koappiah.ksb@knust.edu.gh 51

DEPENDS ON INDEPENDENCEOF MEMBERS, ESPECIALLY THE FINANCIAL EXPERTSINCLUDING ACCOUNTANTS AND AUDITORS. Will these committees reduce the Bank failures? 6/27/2018 koappiah.ksb@knust.edu.gh 52

THANK YOU END OF PRESENTATION6/27/2018 53