IMPACT OF EXTERNAL AUDITORS REPORT ON CORPORATE GOVERNMENT PRACTICE IN NIGERIA (A CASE STUDY OF LAFARGE CEMENT COMPANY)

CHAPTER ONE

INTRODUCTION

1. 1. BACKGROUND OF THE STUDY

Corporate governance and external audit report have in recent time attracted researchers’ attention and this has influenced lots of empirical researches. The rationale for the unending empirical investigations on these areas of study was opined by Ilaboya and Obaretin (2015) to have been justified and sustained as a result of incessant and high profile corporate failure, financial scandal, global financial meltdown leading to loss of public confidence and the need to address audit failure (Okaro, Okafor &Okoye, 2015). Global business development, as well as the emergence of joint stock companies, has created an agency relationship between business owners and managers. In practice, management of corporate entities are divorced from ownership and this warrants corporate owners to entrust management with resources and permit them to act on their behalf with the expectation of the adoption of strategies, policies and actions among others that will enhance shareholders value creation and wealth maximization. Corporate governance means acceptance of management as trustees on behalf of the stakeholders and should maintain commitments to the ethics and values in organization. Lately, a view has coming that external auditors should play a very important role in establishing good governance. This should, or not, mean to expect them to cross the established borders of original audit functions. The idea is to make the auditors much more conscientious of their responsibilities and, in consequence, to be more effective while restricting themselves to their term of reference. As the overall management strategies are evaluated for their effectiveness by their ability to maximize shareholders wealth Pattanayak, 2014). The extent to which the appointed managers meet up with this expectation is measured through annual financial reports. The financial report is the prime means through which the degree of managers stewardship shareholders who own the company can be reliably measured and communicated as the information contained therein measures the performance of managers as to the utilization of resources at their disposal in a way and manner that is compatible with shareholders’ wealth creation and maximization. It measures and communicates vital economic information of an entity to its users over the reporting period to facilitate informed decision making. The barrier created by the separation of management from ownership further reiterated the need for assurance service to be made on the financial statements to ensure its accuracy, transparency, faithful representation of items therein; and as well as to measure the degree of accountability of the managers to the shareholders. At the thrust of the need for this assurance, service is the role of external audit as both owners (shareholders) and the professional appointed managers would want to rely on the report of the external auditor in furthering their often conflicting interest arising from agency relationship that exists (Barbadillo & Aguilar, 2008). An audit is an independent examination and expression of opinion on the true and fair view of the financial statements prepared and presented by the management to serve the information need of its users. Audit certification by a professional audit firm is considered by Akingunola, Soyemi and Okunuga (2018) to be prerequisites for enhancing the credibility of financial reporting before final presentation and disclosure to its users. Its qualitative and enhanced attributes determine a quality financial statement. Understandability, reliability, comparability and relevance are the prime measures of the qualitative characteristics of financial reports as it must possess these attributes before it can be relied upon for making an informed economic decision by its users. The most important role of external auditors in corporate governance should be to protect the interests of shareholders. The external audits are done independent of the organization’s influence. External auditors report the state of a company's financial situation and certify the validity of financial reports that may have been released. All the information must be accurate and reliable. The accounting principles used by the firm should be appropriate. Another role of external auditor is to introduce policies to ensure accountability in the company. For example, external auditors may recommend penalties for officers who manipulate financial statements by cooking accounting numbers or inflating figures. External auditors review the security measures that a firm has in place against corporate fraud or corruption. Besides assessing potential risks, auditors also analyze the overall risk tolerance of the firm, as well as, all the initiatives the company has made toward mitigating risks. In addition, external auditors help promote corporate governance by conducting period risk assessment. External auditors can help ensure good corporate governance by developing efficient crisis-management plans to be used in the event of allegations of corruption or fraud. A plan of this type, involves assigning responsibilities to all administrative officials. Thus, if the company becomes involved in a crisis, officials have a plan to keep confidence among investors. Crisis-management plans may also include control indicators that are to be used with the media and law-enforcement officials. In addition, an external auditor should always have a good relationship with regulators. Most regulators are in a good relation with firms that appear to have clear operations. External auditors evaluate the organization of a company for compliance with regulations. Most regulators always trust company disclosures after an auditor attests to them. The essence of good corporate governance is to do right things and to do them in the right way. Everyone involved in corporate governance, i.e. board of directors, shareholders and auditors, should work together to run efficiently the organizations for interest of all. In addition, good corporate governance implies strong internal control systems, procedures and policies. Therefore, the study examines the impact of external auditors report on corporate government practice in Nigeria (a case study of Lafarge cement Company)

1. 1. STATEMENT OF PROBLEM

Generally, most business failures in the recent past have been attributed to failure in corporate governance such as insider related credit abuse, poor risk appreciation and internal control system credit failure. The impact of external auditor, particularly with regard to corporate governance, can only be fully appreciated if the external auditing function within the profession is properly understood. The principle authority and responsibility of the external audit activity must be formally defined in an external audit charter, consistent with the definition of external auditing, the Code of Ethics, and the Standard. External auditors report has become one of the means of enhancing corporate governance in organizations. This implied that the corporate governance performance cannot be effective without effective external auditors report. The civil liability of fraud and economic crime of the company, when it is not due to the incorrect audit review, in principle, falls on the internal organs of the company. As a result, the civil liability of the external auditor is safeguarded vis-àvis the company's bodies by means of signature by the person in charge of the Management Body and the Supervisory Body of the "Statement of the Management Body" of the work of the external auditor. It is against this backdrop that the study examines, the impact of external auditors report on corporate government practice in Nigeria (a case study of Lafarage cement Company)

1.3 AIMS OF THE STUDY

The major aim of the study is to examine impact of external auditors report on corporate government practice in Nigeria (a case study of Lafarage cement Company). Other specific objectives of the study include;

1. To examine corporate governance practices in Lafarage cement company.
2. To examine the measure of external audit in Lafarage cement company.
3. To examine impact of external auditors report on corporate governance practices in Lafarage cement company.
4. To examine the role of the external auditors in Lafarage cement company.
5. To examine the relationship between external auditors report and corporate governance practices in Lafarage cement company.
6. To examine the problems frustrating effective role of external auditor in Lafarage cement company.

1.4 RESEARCH QUESTIONS

1. What are the corporate governance practices in Lafarage cement Company?
2. What are the measures of external audit in Lafarage cement Company?
3. What is the impact of external auditors report on corporate governance practices in Lafarage cement Company?
4. What is the role of the external auditors in Lafarage cement Company?
5. What is the relationship between external auditors report and corporate governance practices in Lafarage cement Company?
6. What is the problems frustrating effective role of external auditor in Lafarage cement Company?

1.5 RESEARCH HYPOTHESES            

Hypothesis 1

H0: There are is no significant impact of external auditors report on corporate governance practices in Lafarage cement Company.

H1: There is a significant impact of external auditors report on corporate governance practices in Lafarage cement Company.

Hypothesis 2

H0: There is no significant relationship between external auditors report and corporate governance practices in Lafarage cement Company.

H1: There is a significant relationship between external auditors report and corporate governance practices in Lafarage cement Company.

1.5 SIGNIFICANCE OF THE STUDY

The study will be of profound benefits to enlighten the management of Lafarage cement Company on the importance of external audit report in an organization. This study would also be of immense benefit to students and scholars who are interested in developing further studies on the subject matter.

1.7 SCOPE AND LIMITATION OF THE STUDY

The study is restricted to impact of external auditors report on corporate government practice in Nigeria (a case study of Lafarage cement Company).

LIMITATION OF THE STUDY

Financial constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview)

Time constraint: The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8 OPERATIONAL DEFINITION OF TERMS

Corporate governance: is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders' role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place.

Auditors report: is an independent external auditor as a result of an internal or external audit, as an assurance service in order for the user to make decisions based on the results of the audit. An auditor's report is considered an essential tool when reporting financial information to users, particularly in business.