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EFFECT OF EXTERNAL AUDITING EXPENDITURE ON THE PROFITABILITY OF NIGERIAN BANKS: A STUDY OF FIRST BANK (2002-2016)

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CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The word “audit” is derived from a Latin word “audire” which means “to hear”. In the olden days, whenever the owner of a trade suspected “a foul play” by his store keeper, he sent for certain independent persons to resolve the issue. The person goes to the store keeper and “hears” whatever he has to say in regards or connection with the accounts in dispute. This person from his vast knowledge and simple experience of similar situations would be able to tell, if all the explanations given form any discrepancies in the record which were adequate and credible. These individuals of integrity are whom we today call auditors. In societies marked by divisions of expert labour, external auditing is promoted as a trust engendering technology with the capacity to promote a certain kind of social order (Power, 1999). Accountants, as auditors, have cemented their status and privileges on the basis of claims that their expertise enables them to mediate uncertainty and construct independent, objective, true and fair accounts of corporate affairs (Sikka, 2009). It has been argued, however, that such claims are not good indicators of corporate performance, because capitalist economies are inherently prone to crises (O’Connor, 1987; Sikka, 2009). Furthermore, the claims of expertise are frequently affected by unexpected corporate collapses, fraud, financial crime and the general crisis of capitalism (Baker, 2007; Sikka, 2009; Sikka et al , 2009) Since 2007, major Western economies have been experiencing a deepening banking and financial crisis arising from subprime lending practices by banks, which in turn has restricted the availability of credit and has led to what has been described as the ‘credit crunch’ (Sikka et al , 2009). Some commentators have attributed this economic crisis to the unethical practices of corporate bank managers and to the inability of auditors to expose such anti-social practices from previous audits (Broad Street Journal, 21 October 2009; Sikka, 2009). Some auditors may have failed to comply with expected standards. If a company fails shortly after being audited, the auditors may be blamed for conducting an inferior audit (Dopuch, 1988). Thus, whenever there is a financial scandal, it must be questioned whether the auditors carried out their duties and obligations with due care and diligence.

Merkling (1976) in Omokhudu & Omoye (2012) define the agency relationship as a contract under which one party (the principal) engages another party (the agent) to perform some services on their behalf with the principal delegating decision making authority to the agent.

As such the owners or share holders of most banks are not part of the daily operations of the organizational activities look forward to the realization of their goals.

There are however, other interest groups who depend on the organization to realize their own respective goal. The suppliers, stock brokers, lenders, government and so on are all part of the stakeholders, since these owners are not involved in the daily operations of the business, they may be doubtful of what the management may present to them as report of the organizations performance for the purpose of reliance on the management report, the stakeholders need confirmation report, or assurance by an independent party known as the external auditor.

In the light of this, customers need the assurance of the external auditors, who are greatly depended upon, since they are expected to adopt the attitude of professional skepticism.

This suggests that even though the auditors are not mainly, finding out fraud in the financial report, they should recognize the possibility of its existence.

This is one of the pronouncements in ISA 240 which was further made stronger and actionable by the introduction of the Sarbanes Oxley of 2002.

There are so many problems which surrounded this, on the strength of this multiple problems, it is pertinent to have proper examination of the responsibilities of the external auditors to public and private companies to know the effects of non- compliance by the auditors on the corporate performance of an organization. Unarguably, stakeholders look up to the external auditors as one who has the professional competence and whose advise or opinion is held sacrosanct for investment decision.

Though the duties of the auditor of the public companies are expressly stated, it is pertinent that an agreement letter which states the duties to be performed be given to auditor of banks;

Statutory requirement or engagement letter becomes the springboard on which the organization success or failure is viewed visa-avis the auditor’s action. More importantly is that the stakeholders especially depositors in the banks still look up to the external auditors’ reports to assure them of the safety of their deposits and answers other going concern questions on the banking industry .Because of the perception of the stakeholders on the responsibilities of external auditors in this regard, this study seeks to review the effect of external auditing on the profitability of Nigeria company in assisting banks increase their deposits thereby enhancing value creation to stakeholders.

 

1.2       Statement of the Problem

External audit functions are seen as powerful tool that could aid corporate performance. The sensitive nature of banks especially in Nigeria has put more demand on external audit reports as most depositors look up to the yearly assurance reports affirming and reaffirming the viability or otherwise of the banks. In the early 1990’s Nigeria experienced the collapse of almost 80% of her first generation banks like the Cooperative and Commerce bank(CCB), African Continental Bank (ACB), Orient Bank and a host of others (Onyekwelu &Ugwuanyi, 2014). Reports have it that a good number of depositors lost their deposits, other forms of investments in the banks and even lives. Again, between 2008 – 2009, the Central Bank of Nigeria in a bid to save the banking public floated the Asset Management Company of Nigeria (AMCON) to rescue about five banks in Nigeria which were declared weak whose assets and depositors’ funds were in the negative balance. Undoubtedly, these banks had external auditors who had conducted annual auditing on their accounts and certified the banks as being healthy. It appears that only few studies have been carried out on the effect of external expenditure on the profitability of banks especially in Nigeria. There is therefore the necessity for closing this literature gap; hence, the rationale for this study.

 

1.3       Objectives of the Study               

The cardinal objective of this work is to find out the effect of external expenditure on the profitability of Nigeria Company.

The specific objectives of this study are as follows

  • To ascertain the effect of external audit expenditure on profit after tax of First Bank of Nigeria plc.
  • To examine the effect of external audit expenditure on return on shareholders’ funds on deposit growth of First Bank of Nigeria plc.

 

  • Research Questions:

This study is guided by the following research question

  • What is the effect of external audit expenditure on profit after tax of First Bank of Nigeria plc?
  • What is the effect of external audit expenditure on return on shareholders’ funds on deposit growth of First Bank of Nigeria plc?

 

  • Research Hypotheses :

The following hypothesis will be tested during the study:

H01:    External audit expenditure does not have significant effect on profit after tax of                            First Bank of Nigeria plc.                                    .

HA:     External audit expenditure has significant effect on profit after tax of First Bank of Nigeria plc.

H02:   External audit expenditure has negative effect on Return on shareholders’ funds on                        deposit growth of First Bank of Nigeria plc.

HA:    External audit expenditure has positive effect on Return on shareholders’ funds on                        deposit growth of First Bank of Nigeria plc.

 

1.6       Significance of the study

Audits can improve a company’s efficiency and profitability by helping the management better understand their own working and financial systems. The management, as well as shareholders, suppliers and financer, is also assured of risks in their organization and effective system is put in place to handle them.

It also helps to uncover inaccuracies and discrepancies within an organization’s records which may be indications of weak financial organization or even internal fraud, although fraud detection is not the main purpose of an audit.

Other researchers, who will also want to work on the same or similar topic, might need a base from which to start their work.

 

1.7       Scope of the study:

The scope of the study centered on the effect of external auditing expenditure on the profitability of First Bank of Nigeria plc. The geographical area of the study is South East Nigeria. The study is restricted to commercial banks precisely First of bank of Nigeria plc (2002-2016).

 

 

1.8 Limitations of the study

In carrying out a research of this nature, it is not uncommon to encounter a number of constraints in the course of completion of this study. Some of the limitations of the study include;

Financial constraint: The huge cost involved in carrying out a complete study is too much and cannot be affordable by the student.

Time constraint: The time required for this research work was not enough. This is because the research was done at the same time a serious academic work was going on in school.

Attitude of respondents: Some of the respondents refuse to answer the questions asked to them while some refuse out rightly to grant interview. This poses limitation to the completion of the work.

Data gathering restriction: The difficulty of gathering data was compounded by the reluctance on the part of the respondents to divulge relevant and important information relating to the study, just like information which were available on the internet were mostly restricted to registered members.

The researcher’s inability to hold talk with all the auditors and bank managers whom she tended to have interviewed on issue relating to banks with regards to the roles of external auditors. The refusal of some university libraries and polytechnic libraries to conduct a library research on the above topic. Lastly, our ill-equipped library, which provided little or no information on this topic, is worth mentioning.

1.9 Definition of Terms

  1. Auditing: ‘The independent examination of the financial examination of the financial statements of an organization with a view to expressing an opinion as to whether these statements give a true and fair view and comply with the relevant statutes and the international financial Reporting Standards”.
  2. Auditor: This is a person appointed to examine the accuracy of the accounts and records of a business organization and to report on the financial aspect at a particular time.

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