INVESTIGATION OF PUBLIC INDUSTRIES WITH A FRAMEWORK OF MEASURES WHICH WILL ENHANCE PUBLIC CONFIDENCE IN AUDIT REPORTING OF FINANCIAL INSTITUTIONS
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INVESTIGATION OF
PUBLIC INDUSTRIES WITH A FRAMEWORK OF
MEASURES WHICH WILL ENHANCE PUBLIC CONFIDENCE IN AUDIT REPORTING OF FINANCIAL
INSTITUTIONS
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
As long as corporate form of business entity exists, audit
reporting is necessary if not mandatory.
Prior to regulation of financial reporting, managers provide stewardship
report to the owners to fulfill agency relationship (Coughlin, 1999). The content and style of the report depends
upon the owner’s needs. The diversities
of accounting treatment force authorities to intervene by regulating financial
report (Bird, 2004).
Over the past decade, increased instigation as well as
criticism of auditors has left little room for doubt that auditors are facing a
liability and credibility crises in their profession. The reputation of
accountancy profession comes under question for the reliability of their
services (Adhikari, 2011). Similarly, failure of business in which deficiencies
of financial reporting and corporate disclosure have figured prominently are
not new phenomena however, high profile cases of recent past such as Enron,
Worldcom, Global crossing, Adelphia communication and most recently, Royal
Ahold and Health South together with a host of small-scale example worldwide
such as Cadbury, Oceanic bank and Intercontinental Bank Plc. in Nigeria, have
drawn for greater attention to this area.
At the same, there has been evidence of an increased
frequency of re-stated financial statements. All these have had a negative
cumulative impact on the way informed opinions views the quality of financial
reporting. This loss of credibility has been wide spread across capital market.
A key factor in the scale of the problems was the unprecedented high level of
share price in many markets. Maintaining these price levels was a top
management objective and when it became clear that the supposed level and trend
of profitability justifying the level has not existed, the fall in share prices
was accentuated by a major re-rating of the shares.This impacted share in
similar companies (ICAN Study Pack, 2009). Be that as it may, the quest over
the year has been how confidence and credibility in audit and financial
reporting (both in internal and external auditing) can be improved and
sustained.
Adequate literature review has shown that effectives of the
audit process, the auditor’s personal qualities and skills as well as the
discipline from the audit profession have significant relationship with the
achievement of public confidence and credibility. For instance, independence is
fundamental to the credibility of auditors’ reports. Those reports would not be
credible, and investors and creditors would have little confidence in them, if
auditors were not independent in both fact and appearance. To be credible, an
audit opinion must be based on an objective and disintegrated assessment
(Olagungu, 2011).
In Nigeria, financial information is required by law (for
public companies) and by owners (private companies) to facilitate various economic
decisions among variety of users. The accessibility of financial information
and consumption of it depends upon the market of the information, likewise, the
cost burden. While firms bear the cost of information in free (regulated)
market, as result of mandatory disclosure requirement, in free market the users
are required to subscribe for their information need.
The financial reporting environment in Nigeria like many
other countries in the world is a regulated one. Securities and Exchange Commission makes it
mandatory for public companies to publish and make available to the public
their audited financial statements annually.
Furthermore, this statement must conform to the guidelines, formats, and
regulations issued by the apex accounting institution in the country; Nigeria
Accounting Standards Board (NASB). In addition to that, the statements must
also conform and comply with releases and guidelines issued by other special
regulatory and supervisory agencies namely; Nigerian Deposit Insurance Corporation
(NDIC), National Insurance Commission (NAICOM), and Central Bank of Nigeria(
CBN) for those organizations operating in the financial sector of the economy.
The evolution of auditing can be traced back to ancient time
when landowner allowed tenant to work on their land while the land owners
relied upon an overseer who listen to accounts of stewardship given by the
tenants. In view of this, audit is meant to attest to whether the information
given shows a true and fair view of the situation on ground. The act of
exercising the audit function is referred to as auditing.
Woolf (1999) defines auditing in the modern sense as a
process carried out by suitably qualified auditors whereby the account of
business entities including limited companies, charters, truer and professional
firms are subjected to scrutiny in such details as will enable the auditors to
form an opinion as to the accuracy of the truth and fairness.
However, this exercise by professional accountants, who have
gone through the training and obtained the requisite certificate from a
recognized professional accounting body
and possess a practice license as in the case of Nigeria was describe by Okolo
(1989) as conscientious, objective examination and inquiry into a given
statement of account relating to money or money’s worth. It also entails the
examination of the underlying documents and possible physical assets to enable
the auditor to form an opinion as to whether or not the statement of account
presents a true and fair view of what it purports to present.
Historically, annual reports and accounts of companies are
produced by the directors to the shareholders and other interested users; who
better refer to as the stakeholders. However, today a much wider range of
people are interested in the annual report and accounts of companies and other
organizations Millichamp (2002) further adds that modern companies could be
very large with multinational activities. The preparation of the accounts of
such groups is a very complex operation involving the compilation and analysis
of accounting and control systems. This assumption has led to much public
criticism of an auditor especially when cases are instituted against him for
perceived negligence in the performance of his duties.
The financial statement as prepared by company directors is a
statutory report, conveying both qualitative and quantitative information to
assist users of accounting information in making informed decisions. As a
statement that serves multiplicity of users, the financial statement meets the
general needs of users (Enofe Aronmwan & Abadua, 2013). Prior to companies
and Allied Matters Acts, 1990, there were no statutory provisions for the
compulsory Audit of a company’s financial statement. As many companies,
realizing the necessity for protecting the interest of the investing public,
they inserted a clause in their Article of Association, for the preparation of
Annual audit by an independent persons. In the light of this, auditing can be
defined as; “The independent critical examination of, and an expression of
opinion on, the financial statement and underlying records of an enterprise by
an appointed Auditor. In pursuance of the Audit objective, the preparation of
the financial statements is the responsibility of the management. The
responsibility of the auditor is to report on the financial statement as
presented by the management.
Most importantly audit is planned so that there is a
reasonable expectation of detecting material misstatement in the accounts
resulting from fraud or error or breach of regulations. Section 360 (1) of the
Companies and Allied Matters Act of 1990 provides that “it shall be the duty of
the company’s auditors in preparing their report to carry out such
investigations as may enable them to form an opinion as to whether the company
has kept proper accounting records and proper returns adequate for their audit,
having being received from branches not visited by them; the company’s balance
sheet and profit and loss account are in agreement with the accounting records
and returns. If this is not the case, the auditors must state so in their
report.
It shall be the auditors duties to consider whether the
information given in the directors report for the year for which the accounts
are prepared are consistent with their accounts and if not he must state so in
his report. The issue which has always existed when manager’s report to owners
is should the owners believe the report? This report may contain errors, not
disclosed, fraud, be inadvertently misleading because it fails to disclose
relevant information and fails to conform to regulations. The solution to this
problem of credibility in reports and account lies in appointing an independent
person called an auditor to investigate the report. After the auditor has
examined the organization records and financial statements he produces a report
addressed to the owners on the truth and fairness of the statements.
Therefore, public confidence in the quality of audit works is
enhanced when the profession encourages high standards of performance and
conduct on the part of all practitioners. It can therefore be seen that the
issue of public confidence in audit report is a serious matter. It is on the
basis of the issue raised above that this research work aims act presenting
confidence and credibility in audit report as reliable approaches to
maintaining and improving audit competence.
1.2 Statement of the Problem
Audited report is of no doubt a great influence on the users
of the report. In the midst of the seemly ill-conducive environment the
question arises, is to what extent users of this information can rely on the
reported information as a basis for their decision.
Financial reports as stated in Igben (1999) are meant to be a
formal record of business activities and these reports are meant to provide an
overview of the financial position and profitability in both short and long
term of companies to the users of these financial statements such as
shareholders, managers, employees, tax analyst, banks, etc. But in recent
times, the financial manipulations, weak internal control systems, ignorance on
the part of the board of directors and audit committee, manipulation on the
part of the reporting auditor and other fraudulent activities that occur within
companies, creating a negative goodwill to the general public.
Failures of businesses in which deficiencies of financial
reporting and corporate disclosure have figured prominently are not new
phenomena. However, high-profile cases of the recent past, such as Enron,
WorldCom, Global Crossing, Adelphia Communications, HIH, Tyco, and Vivendi, and
most recently, Royal Ahold and HealthSouth, together with a host of
smaller-scale examples worldwide, have drawn far greater attention to this
area. At the same time, there has been evidence of an increased frequency of
restated financial statements. All of this has had a negative and cumulative
impact on the way informed opinion views financial reporting.
Cases like Enron, WorldCom, Global Crossing have cumulatively
and negatively impact the credibility in financial reporting. Loss of
confidence in public towards financial reporting and corporate disclosure
resulted in less investment from the investors and the incremental in cost of
capital. The economy’s productivity has reduced. To improve the credibility in
financial reporting, the companies are encouraged to reinforce governance and
reporting practices. However, the action cannot abolish the business’s failure;
it will only reduce the likelihood of fraud. Many reports said that the reason
of the arising of fraud is the failure of corporate governance.
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