EFFECT OF CORPORATE GOVERNANCE AND EXTERNAL AUDITOR’S REPORT IN NON-FINANCIAL INSTITUTION

CHAPTER ONE

INTRODUCTION

1. 1. Background to the Study

Auditing and corporate governance as a good tool or form of control in organizations, are gaining more recognition in Nigeria today, due to the fact that organizations are striving to achieve their vision and mission.

Auditing and corporate governance has  become action of control, that is been employed in organization and gaining more recognition due to the fact  that organization are striving to achieve their vision and mission as well as maximizing shareholders’ funds.

This cannot however be unconnected with the recent time concerning the need for strong corporate governance globally with countries around the world drawing guidance and code of practice to strengthen governance. This emphasis can be linked to increased concerns over the integrity of securities markets oversight function of control regulatory and guidance in the ways and manner business is been carried out (Eugene & Michael, 2009).

Good corporate governance by board of directors is recognized to influence the quality of financial reporting which in turn has an important impact on investor’s confidence (Levitt, 2008). It is believed and advocated that good corporate governance reduces the adverse effects of earnings management as well as the likelihood of creative financial reporting arising from fraud or errors and some cases misrepresentation of accounting financial statement.

Traditionally, the external auditor played an important role in improving the credibility of financial information so presented and published by firms, however, in recent times, series of well publicized cases of accounting improprieties in Nigeria has captured the attention of investors and regulators alike. The search for means to ensure reliable and high financial reporting has largely focused on the structure of audit report. The auditing profession has been pro-active in attempting to improve audit report by issuing standards focused on discovery and independence. As a result, there has been a control effort to advanced ways of enhancing independence of an auditor and putting in place a good corporate governance, ethics in place (Nobel, 2009).

The profession has also responded to several instructions on audit report, by emphasized that by its nature, the inherent limitations of an audit assignment make it impossible to eliminate the risk of audit and corporate governance failure. The effect on the sound corporate governance practices on the quality of financial reporting has recently received attention globally and this has lead to a change in the ways of doing business as more organized becoming socially responsible to the environment (Coarse, 2013).

The main focus on this study is the relationship between audit committees and fraudulent financial reporting, with result generally supporting a negative relationship between an active audit committee and likelihood of a company being cited fraudulent reporting. While these results provides evidence from a strong and sophisticated capital market environment, very little  research has been conducted in countries where capital markets are less developed and where corporate governance mechanisms are still evolving. However, sound corporate governance practices are equally, if not more important, in countries that are attempting to gain credibility among global investors.

This is particularly so in Nigeria as the country attempts to regain investor’s confidence, following widely reported financial crises.

1. 1. Statement of Problem

Every business organization is set up, to achieve some specific objectives. To achieve such objectives, rules and. regulations are laid down even procedures are set out which have to be complied with. No shareholder or potential investors would like to invest in a business that would not yield returns on investment. There are many factors that could cause lack of returns on investment in an organization. It can be due to improper accounting records, frauds and other internal factors. Good corporate governance and proper audit report provides for accountability and an input to management information system. Based on the problems stated above, it is very necessary for effective operations and as such the need for proper audit reporting cannot be overemphasized. This research intends to examine the role of auditor’s report in corporate governance in relations to non-financial institution in Nigeria and possible way forward.

1. 1. Research Questions

The following are the research questions of the study;

1. Is there any relationship between auditing reporting and corporate governance?
2. To what extent does auditing and corporate governance serve as a tool of control used by management to ensure achievement of organizational goals?
3. How important is corporate governance in building confidence in investors and encouraging stable investment?
4. To what extend does auditing in Nigeria give a true and fair view of companies in Nigeria?

1. 1. Objectives of the Study

The broad objective of this study is to ascertain the concept of corporate governance and external auditors report in non financial institutions. However, the following are the sub-objectives of the study are to:

1. ascertain the relationship between auditing reporting and corporate governance.
2. find out if auditing and corporate governance serve as a tool of control used by management to ensure achievement of organizational goals.
3. determine the importance of corporate governance in building confidence in investors and encouraging stable investment?
4. examine if auditing in Nigeria gives a true and fair view of companies in Nigeria.
   1. Statement of Hypothesis

A hypothesis can be seen as a claim made about a population subject to test, to determine it’s validity. It is often stated inform of a relationship between a dependent variables and independent variables.

The following hypotheses will be tested to ascertain their validity using the chi-square analysis.

Hypothesis One

H0:   There is no significant relationship between auditing quality and good corporate governance.

H1:   There is significant relationship between auditing quality and good corporate governance.

Hypothesis Two

H0:   Auditing and corporate governance does not serve as a tool of control of management to ensure organizational goals.

H1:   Auditing and corporate governance serve as a tool of control of management to ensure organizational goals.

Hypothesis Three

H0:   Good corporate governance practice is not important in building confidence in investors and encouraging stable investment.

H1:   Good corporate governance practice is important in building confidence in investors and encouraging stable investment.

Hypothesis Four

H0:   Audit in Nigeria does not give a true and fair view of companies in Nigeria.

H1:   Audit in Nigeria give a true and fair view of companies in Nigeria.

1. 1. Significance of the Study

This research attempts to identify the role of auditor’s report in corporate governance and the significance or relationship between auditing and corporate governance.

Small and Medium Enterprises: This study is aimed at helping large and medium enterprises in Nigeria where personal supervision of employees is impossible.

Managers: Managers of firms will benefit from this study as the findings will be relevant in taking steps to ensure adherence corporate governance and auditing provisions. The importance of auditing can be illustrated to under the principal-agent relationship. The demand for external auditors is directly related to the fact that it is the directors (the agents) who prepare the financial statements, which is primarily based on cost reasons.

Shareholders: This study will be useful to shareholders in the Nigeria stock exchange (NSE), as it provide evidence on the relationship between audit report and the reform instituted by them in formulating the code of corporate governance for listed companies in Nigeria.

Future Research: This study contributes to the audit literature as it provides additional empirical evidence on the impact of the size of audit firm on the level of audit report.

1. 1. Scope of the Study

This research will concern itself the programme and standards of the general auditing practice and procedures and also corporate governance techniques put in place in organizations especially non-financial institutions in Nigeria.

The sampling frame will be constructed from a list of companies obtainable from various sectors of the economy especially non-financial institutions. Using a time frame of 5 years (2011 to 2015), a sample size of 100 was used for effective result.

1. 1. Limitations of the Study

It is certain that no research work will be accurately be perfect, this research work is not exempted. Business and other social science research investigation strive to employ scientific tools and method. The problems that limit this research investigate are as follows:

1. Inability to obtain sufficient data.
2. Unwillingness of companies to give information and in cases where they do such information is highly altered.
3. Inability to actually access some organization due to undue rules and regulations.
4. Presentation of incomplete reports by the organization.
5. Weaknesses occasioned by have of non responses from the respondents and the statistical tools used in the analysis of the data presented.
   1. Definition of Terms

1. Auditing Standards: This is a standard that set the minimum level of performance and quality that auditors are expected by their clients and public to achieve.
2. Fraudulent Financial Reporting: This is when an auditor give unqualified audit opinion of financial statements that will be obtain a loan when he know they are materially misstated.
3. Audit Report: The only sanction of a auditor is his report. The issuance of a report is the final stage of audit work. The form will however, depend on the nature of the audit. The report in order to be meaningful and significant to the users must be, it must be clear and comprehensive. Honest, objectives, informed and well evidenced and understandable.
4. Financial Institution: These are these institution that are financially oriented e.g. Bank while non financial institutions are those institutions that are not financially oriented e.g. Flour Mill Nig. Plc, Guinness Nig. Plc, etc.
5. Integrity: This is required in order not a to mislead those who will have belief in and rely on the audited financial statement.
6. Shareholders Fund: This is the process whereby a shareholder of a company give right to participate in the share of profile.
7. Audit Committee: This is a committee that works closely with the external audit firm and generally influences the company’s control environment.