Investigation of Public Industries With a Framework of Measures Which Will Enhance Public Confidence in Audit Reporting of Financial Institutions

Chapter One of Investigation of Public Industries With a Framework of Measures Which Will Enhance Public Confidence in Audit Reporting of Financial Institutions

INTRODUCTION

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.

 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.