Why Kenyan firms should share more in finance reports

Corporate News

Nairobi Securities Exchange CEO Geoffrey Odundo. PHOTO | DIANA NGILA 

By BUSINESS DAILY

Corporate Kenya will later this month (October 23) gather in Nairobi to honour those among them who have excelled in financial reporting, commonly known as FiRe Awards.

The awards, which enter the 14th edition this year, seek to promote and institutionalise transparency, integrity, and accountability in financial reporting in both private and public companies by bench-marking against international standards of corporate governance.

Claims of “cooking” of accounts by private companies and queries raised by the auditor -general on the state of public sector accounting have put financial reporting in the spotlight.

The Business Daily spoke to Geoffrey Odundo, the chief executive of the Nairobi Securities Exchange (NSE), which is one of the sponsors of the FiRe Awards on the state of financial reporting and expectations for this year’s awards.

It is now about six months since you took charge at the exchange. What has been your focus and what challenges have you encountered so far?

It has been an interesting time. My predecessor’s focus was demutualisation of the exchange – the process that turned the market into a public company and which culminated in self-listing last year.

My focus is to deliver new products, making it (the exchange) more commercial, broadening its visibility, making it international and more accessible.

But we also found an elephant in the room – the capital gains tax introduced on traded securities. It has now been expunged and the proposal to introduce a 0.3 per cent commission on all transactions was also shelved.

What this means is that any securities that trade on the exchange are exempt (from the additional tax).

Gains from anything that continues to trade outside the exchange, such as over-the-counter, however are still taxed at five per cent.

That means any acquisition transaction outside the exchange is taxed as opposed to those that happen on the exchange which are tax-exempt. This is meant to encourage people to list.

Will there be a refund for those who had submitted the tax?

No. I highly doubt because that law was applicable at the time so it was collected legally.

What is unique about the FiRe awards and what do you look out for during adjudication?

FiRe awards recognise excellence in financial reporting – it

The disclosures are a reflection of the state of corporate governance in the company. This is because they offer insights into key areas such as the composition of key committees, presence of independent directors, meeting attendance levels and shareholding by directors.

Basically, the more the details, the higher the recognition.

Besides, environmental reporting, social responsibility and sustainability reports also tend to boost performance. The awards are a way of telling the public that a particular company is well run, that it is actually in compliance with international financial practices.

That gives the company a higher profile among peers and helps them attract investors. In the past lack of open and proper disclosure has affected many companies – so being awarded is prestigious.

The abridged financial reports posted in newspapers by listed companies have different structures with some firms disclosing little information. Are their plans to standardise the reporting?

All financial sector companies adhere to international financial standards so how they account for their financials are pretty similar. You may have issues with their notes but in terms of layout – consolidated balance sheet, income and cash-flow statements- everything is pretty much similar. That is why the FiRe awards recognise disclosures in notes.

The minimum expectation for the abridged version is to have the balance sheet, income statement and cash-flow – some meet the minimum requirement, but others go beyond and include the chairman’s statement and much more which is a better way to do it.

I think the Institute of Certified Public Accountants of Kenya (ICPAK) needs to push for disclosure of more information, including key highlights in abridged version to allow the public to make comparisons.

Recently questions were raised over the accuracy of some audited reports. How is the accounting profession handling this?

ICPAK has a lot of work there. First we must appreciate that auditors give an opinion based on management disclosures – unless the auditors do a forensic audit.

I know auditors have been given a hard time so ICPAK needs to be more vigilant in terms of monitoring them but you cannot fault the auditors because management can lead them to a certain conclusion.

The auditors also have to play a bigger role; more than just auditing the numbers but try to understand the business and eventually give their advisory.

There have been reports of low participation in the awards especially from the public sector. Is this the case and how do you explain that?

The reports are incorrect. The level of participation has been encouraging. This year for instance, we have to date received 215 entries from the public sector and 120 from the private sector.

There has been robust participation from the public sector, including some county governments. The thing is that FiRe awards are not just about recognition, but also the feedback from the evaluation.

looks at how a company’s statements are processed, laid out and the levels of disclosure provided.

You have people scrutinise your statement, see how you have presented them and reported on various issues and then you get a feedback report that helps you improve in subsequent years.

Last year during the debate on the code of corporate governance, most of the recommendations that were seen as seeking to deepen disclosures, for example, in the area of executive remuneration were opposed and subsequently dropped. Is there hope for more disclosure in this market that would take us closer to the global standards?

What the code intends to achieve is to help provide more disclosures from companies on aspects that concern governance issues. What we are seeing is transitory and you don’t expect people to plug in immediately but in time we will see that happening