Small and medium-sized practices need more financial services audits

The abridged audited financial statements of the commercial banks, credit institutions and microfinance deposit-taking institutions for the year ended 31 December 2017 have all been published in the local newspapers. The focus of this article is on the 33 institutions (falling under Tier 1,2 and 3) as per Bank of Uganda (BOU).

The net loans to customers as at end of 2017 were UGX 11.6trillion, which was a slight increase from 2016. These loans were extended to various organizations ranging from personal to businesses, and interest income remains a major source of revenue to the commercial banks, credit institutions and microfinance deposit-taking institutions.

It is a requirement under the Companies Act 2012 and the Financial Institutions Act 2004 that the financial statements of these institutions should be audited by an accounting firm accredited by the Institute of Certified Public Accountants of Uganda (ICPAU), but that firm must have been pre-qualified by BOU in the first place.

The accounting firms that were pre-qualified by BOU to audit the 2017 financial statements were 75 in total, as per BOU publication dated 7 January 2017 in line with Reg 4(2) of the Financial Institutions (External Auditors) Regulations 2010. A close examination of the audits for the year 2017 revealed that only 8 out of the 75 firms were appointed as external auditors of financial institutions.

You may recall that one of the Big-4 missed out on the BOU pre-qualification for 2017. Nonetheless, the Big-4 still garnered 24 (73%) out of the 33 audits, while the Small and Medium-sized Practices (SMPs) had 9 (27%) of them. A second dimension reveals that the Big-4 audited financial institutions had UGX 11.1trillion (92%) in net loans while those audited by SMPs had UGX 0.5trillion (8%).

This gives us an idea that SMPs could have earned much much lower audit fees. The other information is that net loans in financial institutions audited by Big-4 ranged from min=UGX27billion to max=UGX2,134billion while the SMP financial institutions ranged from min=UGX2billion to max143billion. There were 11 financial institutions that had net loans lower than UGX143billion, but were audited by the Big-4.

In July 2016, I published an article in the ICPAU magazine titled "SMPs still a long way to the top of the class" which showed that SMPs had only 2 financial institutions audits for the year 2014. The fact that the number has grown from 2 to 9 in three years is testimony that SMPs are slowly moving up the class. It is possible that all the 20 financial institutions that had net loans lower than UGX143billion could be audited by SMPs.

A total of 20 out of 33 audits would be a very big boost to SMPs confidence and revenues. Loans/interest income cycle is one of the areas that takes up a significant portion of external auditor's time and this explains why it constantly appears under the Key Audit Matters (KAM) paragraph of the independent auditor's report. In addition, the onset of International Financial Reporting Standard 9 with effect from 1 January 2018 has added more scrutiny on credit risk and expected losses.

As SMPs await to gain more share in the financial institutions audit market, there is low-hanging fruit in a subgroup of BOU regulated institutions in the form of forex bureaus and money remitters. As at end of 2016, there were 267 licensed forex bureaus in Uganda (as per BOU Annual Supervision Report, Issue No.7), although a number of them have since been unlicensed.

There were 69 money remitters. Pension funds, SACCOs, microfinance institutions, money lenders and insurance players could benefit from the services and expertise of SMPs. There were close to 220 SMPs registered by ICPAU as at March 2018, employing thousands of professional accountants.

In furtherance of the Government's local content philosophy, SMPs should be given a chance to develop more expertise in financial services audits, including the medium to large commercial banks, plus insurance companies.

SMPs may consider mergers or inter-firm collaborations to pool resources and enhance legitimacy for such audits.