MASERU August 04, (The Night’s Watch) – An investigation by the International Monetary Fund (IMF) mission that was in the country in March 2019, has revealed a malpractice in the local banking industry, which has seemingly been concealed by the Central Bank of Lesotho (CBL) knowingly.
The mission found that there seemed to be a local banking practice of having a foreign audit firm which is not registered in Lesotho and with no offices in the country, doing audit work for the banks but a small, domestic audit firm issuing and signing the auditor’s report.
The mission said in its report published on July 22, that such practice did not comply with both the International Financial Reporting Standards (IFRS) and International Standards of Auditing (ISA).
Banks are required by law to prepare their financial statements as per full IFRS.
December 31, is the uniform year-end date for all four banks – Standard Lesotho Bank, Nedbank Lesotho, First National Bank (FNB) Lesotho and Post Bank – to prepare and submit to the CBL their audited annual consolidated financial statements.
But the IMF mission found that despite mandated to do so, the financial statements were not published in full by the banks, in their – or in the CBL’s – websites.
“Banks must have their annual financial statements audited in accordance with ISA, however, and despite not in the scope of this mission, while reviewing the financials of some banks, the mission found that there seems to be a local banking practice of having a Big 4 audit firm doing audit work for the bank but a small, domestic audit firm issuing and signing the Auditor’s report,” the mission noted in its report.
It added that: “While it is clear for the mission that such audits have not been conducted in accordance with ISAs, and that the audited financial statements are not IFRS-compliant, the situation reveals a malpractice that consist of having Big 4 audit firm with no offices in Lesotho using a small Lesotho firm, which – otherwise – would not likely be able to perform as the auditor of a bank, to take full legal responsibility for the auditor’s opinion expressing compliance with IFRS and ISAs on financial statements that do not comply with these international standards.”
The mission said it flagged this situation to the CBL’s Banking Supervision Division (BSD), “who knew about it”, highlighting its implications.
The Big 4 is the nickname used to refer collectively to the four largest professional services networks in the world, consisting of Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers.
The Big 4 each offer audit, assurance, taxation, management consulting, actuarial corporate finance and legal services to their clients. A majority of the audits of public companies, as well as many audits of private companies, are conducted by these four networks.
The IMF’s Regional Technical Assistance Centre for Southern Africa (AFRITAC) mission, visited Maseru on March 4–14, at the request of CBL, to provide technical assistance on the implementation of Basel II.
Basel II is an international business standard that requires financial institutions to maintain enough cash reserves to cover risks incurred by operations.
The Basel accords are a series of recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision (BSBS).
The name of the accords is derived from Basel, Switzerland, where the committee that maintains the accords meets.
The IMF mission said it conducted a series of focused training sessions with the staff of the CBL’s BSD covering relevant areas such as risks, risk management and governance, among others.
The mission also noted in its report that Lesotho’s banking sector was largely foreign-owned and stressed that the significant foreign presence presented a systematic vulnerability from external shocks that “necessitates CBL attention”.
“The banking sector remains small and comprises four commercial banks offering traditional and corporate banking services through branches around the country. Three banks are subsidiaries of South African banks and the fourth, Lesotho PostBank, is the only domestic bank, fully owned by the Government of Lesotho,” it said.
This makes Lesotho’s banking sector effectively an oligopoly.
“Foreign banks do not operate as branches but are incorporated as full subsidiaries. Typically, they use their parents’ expertise where local expertise is not available, and are subject to their reporting requirements. Assessing the effectiveness and soundness of the local boards and senior management remains a challenge for the BSD,” the mission added.
As at December 2018, according to the CBL 2018 Financial Stability Report, the four banks had a total of 50 branches across the country and the foreign-owned banks controlled about 90.0 percent of the banking industry assets, revenue and deposits.
In its July 22 report, the IMF mission said the total assets of the four banks about $1.2 billion as of December 2018, representing 48 percent of the country’s Gross Domestic Product as of that date.
It said the total staff complement of the four banks remained at the December 2016 level of around 1700.
“The three foreign banks together accounted for 92 percent of the banking sector assets and 91 percent of total deposits, as of December 2018,” it said.
It added that during the period December 2016 – December 2018, the total banking assets increased by about 33 percent and loans and advances by 17 percent, however, “exposures of foreign subsidiaries to South African banks, by way of balances held with them, went up by about 70 percent”. NW