CHAPTER 2 - THE REGULATORY ENVIRONMENT

1. What is the Regulatory Environment?

• The regulatory environment means all the laws, rules, standards, and bodies that
control how auditors and companies behave.

• Imagine football: you need FIFA rules, referees, and fair play. In business, auditors also
need rules so they don’t “play anyhow.”

2. Why is Regulation Needed?

• To protect the public interest (shareholders, investors, lenders).

• To ensure credibility of financial reporting.

• To make sure auditors do their work with quality and independence.

• To prevent scandals (like Enron or Cadbury Nigeria).

3. Key Regulators and Frameworks in Nigeria (and globally)

(a) International Level

• IFAC (International Federation of Accountants): Promotes global auditing and ethical

standards.

• IAASB (International Auditing and Assurance Standards Board): Issues ISAs

(International Standards on Auditing).

• IESBA (International Ethics Standards Board for Accountants): Issues the Code of Ethics
for auditors.

(b) Nigeria Level

• FRCN (Financial Reporting Council of Nigeria): Issues accounting and auditing standards,
promotes corporate governance.

• CAMA (Companies and Allied Matters Act, 2020): Main company law governing
businesses, directors, auditors, and reporting.

• ICAN (Institute of Chartered Accountants of Nigeria): Regulates and licenses

accountants, enforces discipline.
 • ANAN (Association of National Accountants of Nigeria): Another professional body like
ICAN.

• SEC (Securities and Exchange Commission): Regulates the capital market and quoted
companies.

• CBN (Central Bank of Nigeria): Regulates banks.

• NAICOM (National Insurance Commission): Regulates insurance companies.

4. Regulatory Framework for Auditing

Auditors must follow 3 key pillars:

1. Standards – e.g., ISAs (issued by IAASB).

2. Ethics – independence, objectivity, integrity (IESBA Code of Ethics).

3. Law – e.g., CAMA in Nigeria, FRCN Act.

5. The Role of Corporate Governance

• Corporate governance = the system of rules, practices, and processes by which

companies are directed and controlled.

• In Nigeria, the Nigerian Code of Corporate Governance (NCCG 2018) ensures

transparency, accountability, and fairness.

• Good governance → reduces fraud, increases investor confidence, and supports auditor
independence.

6. Enforcement of Regulation

• Regulators (FRCN, ICAN, SEC, CBN, etc.) can sanction, suspend, or fine companies and
auditors who break the rules.

• This ensures discipline and professional responsibility.

7. Benefits of a Strong Regulatory Environment

• Protects investors and the public.

 • Enhances reliability of financial statements.

• Promotes ethical behaviour by auditors and management.

• Prevents financial scandals.

• Builds trust in the capital market and economy.

Exam Keywords to Remember:

• “3 Pillars” → Standards, Ethics, Law.

• “Regulators in Nigeria” → FRCN, ICAN, ANAN, SEC, CBN, NAICOM.

• “Global Regulators” → IFAC, IAASB, IESBA.

In exam answers, always link regulation to why auditors must be independent and protect
the public interest.

PART A: Short Exam Questions

Q1. What is meant by the “regulatory environment” in auditing? (3 marks)

Answer:
The regulatory environment refers to the system of laws, rules, standards, and professional
bodies that govern the work of auditors and ensure quality, independence, and protection of
the public interest.

Q2. State FOUR reasons why regulation of auditors is important. (4 marks)

Answer:

1. Protects the public interest and investors.

2. Ensures credibility of financial reporting.

3. Promotes auditor independence and ethics.

4. Prevents corporate scandals and malpractice.

Q3. List THREE international bodies that influence audit regulation and their roles. (6 marks)

Answer:

1. IFAC – Promotes global professional standards.

2. IAASB – Issues International Standards on Auditing (ISAs).

3. IESBA – Issues the International Code of Ethics for auditors.

Q4. Mention any FIVE regulators of auditors in Nigeria. (5 marks)

Answer:

1. Financial Reporting Council of Nigeria (FRCN).

2. Institute of Chartered Accountants of Nigeria (ICAN).

3. Association of National Accountants of Nigeria (ANAN).

4. Securities and Exchange Commission (SEC).

5. Central Bank of Nigeria (CBN).

6. National Insurance Commission (NAICOM). (any 5 valid earns full marks)

Q5. State the three key pillars of the audit regulatory framework. (3 marks)

Answer:

1. Standards (e.g., ISAs).

2. Ethics (e.g., IESBA Code of Ethics).

3. Law (e.g., CAMA 2020, FRCN Act).

 PART B: Scenario-Based Mock Case Study Question

Case Study – GreenBank Plc

GreenBank Plc is one of Nigeria’s fast-growing commercial banks. The company recently faced
allegations of misstating its financial statements to hide bad loans. The Central Bank of Nigeria
(CBN) has ordered an investigation, while the Securities and Exchange Commission (SEC) is
concerned about the impact on shareholders.

The Board of Directors has also been warned by the Financial Reporting Council of Nigeria
(FRCN) to improve corporate governance practices. The company’s external auditors are
members of ICAN.

As a new audit trainee in your firm, you are asked to brief your manager on the regulatory
environment surrounding this case.

Required:

(a) Define the term “regulatory environment” and explain its importance in this case. (5 marks)

(b) Identify FOUR Nigerian regulatory bodies relevant in this case and state their specific roles.
(8 marks)

(c) Explain the THREE key pillars of audit regulation with examples from this scenario. (9 marks)

(d) State THREE benefits of a strong regulatory environment for stakeholders such as investors
and the public. (3 marks)

Suggested Answer

(a) Definition & importance (5 marks)

• Regulatory environment = the framework of laws, rules, and institutions that govern
auditors and financial reporting.

• Importance in this case:

1. Ensures GreenBank Plc’s financial statements are credible.

 2. Protects shareholders from misleading information.

3. Enforces auditor independence and accountability.

4. Provides confidence to regulators, investors, and the public.

(b) Nigerian regulators & their roles (8 marks)

1. CBN – Supervises banks, enforces prudential guidelines, investigates loan disclosures.

2. SEC – Protects shareholders, ensures fair disclosure in capital markets.

3. FRCN – Issues accounting/auditing standards and enforces corporate governance.

4. ICAN – Licenses and disciplines auditors, enforces ethics and professionalism.

(c) Three pillars of audit regulation (9 marks)

1. Standards – e.g., ISAs by IAASB applied in GreenBank’s audit.

2. Ethics – e.g., ICAN/IESBA Code of Ethics ensures auditor independence.

3. Law – e.g., CAMA 2020 and FRCN Act empower regulators to act.

(d) Benefits (3 marks)

1. Restores investor confidence in GreenBank Plc.

2. Protects depositors and the financial system.

3. Enhances accountability and prevents future scandals.

Exam Tip:
When answering ICAN scenario questions, always:

• Define the concept (theory).

• Apply it to the case (use the company name, regulator names, etc.).

• Conclude with benefits or implications.