It’s time for forensic audits of all Nigerian states

It’s time for forensic audits of all Nigerian states

Friday, June 24, 2016 9:21 am

David O. Kuranga

David O. Kuranga

By David O. Kuranga

In the past several months both Fitch and Moodys downgraded Nigeria’s credit worthiness a significant notch, citing increased investor concern about the ability for the Federal Government to service its debt obligations. High on the list of concerns are cash-strapped Nigerian states who across the federation have issued large amounts of external debt and engaged in rampant borrowing with the backing of the Nigerian Federal Government.

By virtue of the constitution each state receives a portion of the national oil revenues, that is paid out periodically to state governments and shared with the local governments in each respective state. Once the money leaves the federal treasury and is handed over to the state governments there is no accountability to the federal government whatsoever in what each states’ officials’ do with its share of the oil revenue. Further, when these same states make applications to issue bonds backed by the federal government, or borrow directly with federal government backing, they also provide little to no accountability to the federal government as to how those funds are used and spent.

Over the past year, under the leadership of President Buhari and his Finance Minister, Kemi Adeosun, the federal government has cleaned up mismanagement and waste in the federal bureaucracy by establishing a single account for the treasury (TSA) to track revenue generating agencies and the usage of funds by all ministries and agencies of the federal government. They also removed ghost workers and identified areas for consolidation of tasks to reduce the number of federal employees and other overhead expenses deemed wasteful.

They have also phased-out cash allowances, forcing federal officials to use bank cards to track how money is spent. Despite this, given that much of the national treasury is handed over to states and local governments, and a large portion of Nigeria’s external debt is actually held by Nigerian state governments including several states holding hundreds of millions in debt, and Lagos State holding over 1 billion in external debt; it is not enough for the finance ministry to track the usage of funds for the federal government only. The time is long overdue for the Federal government and the Ministry of Finance to put in place compulsory world-class standards for all states holding external debt backed by the federal government.

Not a day goes by in Nigeria where there is not a major revelation in the press that a state or local government official diverted money it received from the federal government into their private account to use for non-state expenditures. To make matters worse, many of the states in Nigeria are so heavily indebted that they have not been able to pay salaries to state employees for months. Some require bailouts from the federal government just to continue functioning. For the administration of President Buhari, the self-styled “corruption eradicator and chief”, to continue to allow state and local governments to mismanage the handouts given to them by the federal government or debt received backed by the federal government is a gross dereliction of duty on the part of the administration and the Ministry of Finance.

All revenue handed over to states and local governments, either their share of oil revenue, bailout funds, or proceeds of loans or bonds backed by the federal government, should be accounted for in order for them to continue receiving support and cooperation from the federal government. The Ministry of Finance should require each state with external debt to undergo third-party forensic audits of the usage of all funds received from the federal government or from debt backed by the federal government. Given that they are in debt to the federal government, they are legally no longer entitled to receive their allotment of federation oil revenue sharing, because their external debts backed by the federal government means they have already received that money in advance. If any indebted state refuses to comply with the requirement of forensic audits of their usage of federal government funds, their share of the oil revenue should be withheld by the federal government and eventually diverted to service their external debt.

President Muhammadu Buhari

President Muhammadu Buhari

Each state that holds external debt, places their debts against the entire nation, not just their particular state. If any state defaults on that debt, it becomes the responsibility of the entire nation to carry and repay the debt on behalf of that state. Therefore it is the responsibility and the duty of the federal government to monitor any and every state that holds external debts that it backs. Receiving external debt backed by the federal government is not a right of any state in Nigeria, it is a privilege. Once they accent to receiving the proceeds of those debts, they must adhere to federal government standards of accountability and reporting until those debts are repaid. They also forfeit their right to receive oil revenue payments should they refuse to adhere federal government standards.

The federal government in Nigeria is far too lax in monitoring heavily indebted state and local governments, and credit rating agencies and investors in fixed-income debt around the world are fully aware of this pathetic juvenile deficiency in governance at the level of the federal government in Nigeria. Before oil revenue sharing proceeds are handed out or more bailouts given, each state in the federation that holds external debt should undergo a forensic third-party audit detailing what they did with the money it received from the federal government up to that point. If Nigeria were to default as a result of the debts of its states and local governments, the structural adjustment policies of the IMF and creditors would implement these very measures that the federal government in Nigeria has failed to do up till now.

States in Nigeria raise their own money through internally generated revenue (IGR). With the collapse of oil revenue, many states and local governments in Nigeria have finally started doing their jobs and providing services and collecting taxes through which they can generate revenue to fund the affairs of the state. There are limits on the federal government tracking how much revenue states generate from these schemes and what they do with revenue they raise locally. Despite this, there is no legal rational that prevents the federal government from requiring all states holding external debt backed by the federal government from reporting to it how it used the money given to it by the same federal government through the means of annual forensic audits of all states and local governments on their usage of those funds.

Failure enact stricter standards for heavily indebted states by now is casting serious doubt and questions as to how serious the administration of President Buhari is about stopping gross mismanagement and corruption in the public sector in Nigeria. International observers have every reason to laugh at Nigeria and the administration of President Buhari’s so-called “fight on corruption”, which more or less resembles a partisan selective campaign to undermine political opponents. Some of the most corrupt officials in Nigeria are members of the President’s cabinet, including former Rivers State governor, Rotimi Amaechi. Further the administration seems hesitant to enact simple sweeping measures, like require all states who hold external debt backed by the federal government, whether they are run by APC or PDP, to submit annual forensic audits of their usage of federal money.

In short, Nigerians should understand, that the reason their state and local government officials are allowed to this day to divert money given to them by the federal government into their private accounts is because the administration of President Buhari and his Finance Minister is continuing to allowing it. If they did not, they would require all states with external debt to submit forensic audits for the usage of those funds annually. Any state that refuses to comply could see delays in receiving their allotment of federal oil revenue, and eventually compulsory repayment of their external debt deducted directly from their allotment of federal government oil revenue.

Corrupt state governors and local government chiefs in Nigeria of all political stripes cannot continue to run mafia-style fiefdoms, diverting federal government allocations and receipts of debt, backed by the federal government into their pockets. Any state that refuses to certify their use of federal government funds with an annual forensic audit by an accredited third-party auditor, should have their share of oil revenue withheld and eventually diverted to service their external debts if they refuse to comply. By global standards, the administration of President Buhari and Ministry of Finance under Kemi Adeosun are not that tough on corruption because they continue to sit on their hands and allow state and local governments to undermine the entire nation and make a mockery of their corruption crusade.

David O. Kuranga, Ph.D., the author is the Managing Director and Principal of Kuranga and Associates, a full-service investment, political and economic risk consultancy, and asset management firm that specializes in Africa. He is also the author of The Power of Interdependence with Palgrave Macmillan Press.

Also, Kuranga and Associates Limited is an investment management advisory firm and an asset manager with a principle practice area of Africa. To learn more about Kuranga and Associates go to © Copyright 2016 David Kuranga. All rights reserved. This material may not be published, broadcast, rewritten or redistributed

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