Banks Employ External Auditors for up to 2 Successive Period

The National Bank of Ethiopia approved a new directive, effective on February 1, 2023, preventing banks from repointing external auditors for over two successive periods.

All Ethiopian banks must follow the new directive. The new directive states that all banks must choose and appoint an external auditor through a competitive bid process and according to relevant laws. If the bank fails to appoint an external auditor, the National Bank of Ethiopia will appoint an external auditor to the bank.

The Directive of External Auditors Announcement

According to the directive, without a competitive bid, a bank can appoint an external auditor again in the years after the initial appointment. However, it is only allowed for the external auditor to serve for up to three years in a row.

Any external auditor appointed through a competitive bid will serve for two terms, three years, meaning six years in a row. Suppose by any change, for whatever reason, the external audit ordered its engagement on or before the end of the three-year term. In that case, they are eligible to be retired through competitive bid prices three years after the audit engagement was terminated.

The National Bank of Ethiopia believes that auditors having a long relationship with management will open doors to compromise independence and integrity. According to Frezer Ayalew, director of banking supervision at the NBE, the lack of restrictions regarding external auditors permitted banks to use fewer external auditors for many years.

The basic concept of auditing, as defined by financial expert and lecturer at Addis Ababa University, Sewale Abate (Ph.D.), is the significance of this constraint on auditor independence in the factual presentation and appearance of their work.

In his opinion, long-term relationships would jeopardize audits’ objectivity and independence. According to him, auditors with a long history with management are more prone to get involved in situations that jeopardize their independence and integrity.

“When you consider the reality on the ground in our country and the ethics of the professionals, a long-term contract has its repercussions,” he remarked.

The more time auditors spend in an institution, the better they become to know it and function efficiently; yet, this necessitates that the auditor maintains their objectivity and professionalism, according to Sewale. He does not, however, seem optimistic that such honesty will be shown in Ethiopia.

A long-term contract has consequences when you consider the reality on the ground in our nation and the ethics of the professionals, he said.