A new directive approved by the National Bank of Ethiopia (NBE) prohibits commercial banks in Ethiopia from employing an external auditor for more than two consecutive terms. Every term lasts for a full three years. The directive repeals a quarter-century-old rule that governed the appointment of external auditors by banks.
It is a major departure from current practice, in which banks can renew the contracts of external auditors as long as their shareholders approve. The new directive, which came into effect on February 1, 2023, restricts the duration to six years.
However, the directive states that if banks consider reappointing an external auditor after working for two contracts, the auditors will be able to compete again and be appointed “after a lapse of three consecutive years from the last date of engagement of the external auditor.”
The absence of such limits, according to Frezer Ayalew, banking supervision director at the NBE, allowed banks to work with fewer external auditors for several years.
“The requirement for banks to work with auditors in rotation is necessary now. Banks have to change the auditors after a certain period of time,” Frezer said.
Private banks should undergo selection and appointment of external auditors through a competitive bid, and in times of failure to appoint auditors through a competitive bid “due to any compelling circumstances,” the NBE will appoint the external auditor for the bank, the directive says.
The Office of the Auditor General conducts audits for the government-owned banks.
The directive, signed by the new governor, Mamo Mihretu, also lists cautions to be taken when hiring the auditor in accordance with the principles of conflict of interest. Shareholders, current or former employees (unless they resigned three years prior), and spouses or relatives of the shareholder or management of the bank cannot be employed as external auditors of the bank.
“Clearly state in the audit contract that the contract with the audit firm may be cancelled if an audit firm fails to fulfill the criteria set out due to changes in its ownership, directors, and managers…” reads the directive.
Sewale Abate (PhD), financial expert and lecturer at Addis Ababa University, explains the importance of this restriction on auditor independence in the factual presentation and appearance of their efforts, which he describes as “the main principle of auditing.”
He believed long-term partnerships would compromise audit independence and accuracy. “When auditors have a long relationship with management, they are more likely to be involved in circumstances that compromise their independence and integrity,” he said.
“The longer auditors work in an institution, the more they learn to know the institution and work effectively; however, this requires the auditor to remain objective and very professional,” Sewale said. However, he does not appear hopeful that such integrity will be demonstrated in Ethiopia.
“When you consider the reality on the ground in our country and the ethics of the professionals, a long-term contract has its own repercussions,” he remarked.