ABSTRACT
This research study investigated the relationship
between auditors responsibility and business failure in Nigeria. In order to
achieve the purpose of the study, two (two) hypotheses were formulated and data
was collected primary sources through the issue of structured questionnaires to
auditors in Rivers State and its environs. Data collected was analyzed using
Pearson Coefficient of Correlation and Regression Analyses on Statistical
Package for Social Sciences (SPSS). The data analyses revealed among other
things that: there is a negative relationship between auditors performing their
duty of expressing opinion on the financial statement of companies and
deteriorating working capital and declining profits. This finding is indicative
of the fact that auditors performing their duty does not lead to business
failure in Nigeria. Our
findings also showed that the relationship between auditors performing their
duty and business failure is not only negative but also insignificant. On the
basis of the findings, we concluded that: Insufficient
and inappropriate skills of management could cause failure in a lot of
companies. Expertise in only limited areas and unwillingness of managers to
accept professional advice reduce the possibilities of the company’s chances to
survive in the medium term. The implication for policy makers are therefore as
follows: Attention needs to be focussed on internal management factors causing
business failure and also some external factors such as harsh economic
environment. Based on the conclusions above, we make the following
recommendations: users of audit information should be educated on the functions of auditors and
nature of audit service.
Users of audited
financial statements are encouraged to seek professional advice before
investing on a company. This will further assure them of the safety of their
investment.
Auditors are
encouraged to exercise due diligence and care in handling the accounts of a
company, this is because failure to do so may abruptly end the business and
increase the blame on the accounting profession.
90 Pages
Project Reference Code:
C087
CHAPTER ONE
INTRODUCTION
1.1 OVERVIEW
OF THE STUDY
Over the years, there
have been several definitions of business failure and a number of theories and
thought on what constitute a failed business. Failure include business disposed
of to prevent further loss” and failing to ‘make a go of it’( Watson and
Everett 1996). There are those who view failure as “bankruptcy” (Ugwashi B,
2009): Some symptoms of imminent business failure include deteriorating working
capital, declining profit, declining sales and higher debt ratio .Business
failure refers to a company ceasing operations following its inability to make
profit or bring in enough revenue to cover its expenses.
A study published in 2014 by the
Turnaround management society reveals that most crises are caused by the
mistakes of top management. Business failures have long been recognized as
indicators of economic trend (Simpson and Anderson 1957:153). Knowledge of
these trends enable businessmen to make better decisions. The principal source
for information about business failures during the late 19th and
early 20th centuries was R.G, Dun and company (Gary R and Michael
Gou, 2011) accordingly, Dun began publishing monthly data on business failures
tabulated by branch of business, which the company asserted, was obviously “of
the highest interest and importance to the business world” because the data
showed on what directions “misfortune was to be expected.
The abnormal behavior of firms should
serve as leading indicators of unhealthy performance which is major concern for
researchers and scholars. It has also been widely recognized that business
growth as well as survival depend on external and internal factors, while some
can be predicted some are not. Insufficient and inappropriate skills of
management could cause failure in a lot of companies. Expertise in only limited
areas and unwillingness of managers to accept professional advice, reduce
possibilities of the company’s chances to survive in the medium term (Ooghe and
De Prijecker 2008) Management qualities and skills are not the only factors
affecting the survival chances of a company.
Although the financial statements are
management’s responsibility, the auditor’s responsibility is to express an
opinion on the financial statements. Or to express an opinion on the fairness
with which they present, in all material respects, financial position, results
of operations, and its cash flow in conformity with generally accepted
accounting principles. The auditor’s report is the medium through which he
expresses his opinion or, if circumstances require, disclaim, an opinion.
Thus, the accounting profession is
under pressure due to public expectations arising from financial failure in
Nigeria (Ekwueme 2000:14). These financial failures happened too quickly after
an unqualified audit report was issued by the external auditors. Some of these
corporate collapses have been blamed on the auditors. It is expected by the
public that the unqualified report by the external auditor is an indication
that the business is solvent, liquid and has capacity to continue in a
foreseeable future.
Any subsequent failure in business
resulting from management misjudgment, fraudulent practice, economic
instability etcetera are viewed as failures of auditors (Adeniji 20014). Thus,
in most instances when business fail, the auditors duties and responsibilities
is called to question. The auditing profession in Nigeria has continued to
receive the flaks following CBN’s special Examination of banks, Stanley (2009).
CBN’s report on the audit of the banks suggests that the conceived banks’
financial statements may not have exactly represented the reality. This is
notwithstanding the fact the financial statements passed through auditors
scrutiny.
A financial statement is supposed to
reflect a “Company” true financial position and provides, shareholders and
creditors a means of ascertaining a company” financial position at any given
time. It also enables them to make informed decision on their investments. It
is in furtherance of this objective that a company’s financial statement is
required by both the companies and allied maters Act 1990 (CAMA) and the Banks
and other financial institutions Act 1991 (Bofia) to be signed off by auditors
as representing a true and fair view of a company’s affairs for the year ended,
and also whether they have been properly prepared in accordance with the law,
and to report to the members where in the auditor’s opinion, proper accounting
records have been kept.
The external auditor of one of the
banks which were recent banked out was reported to have asserted thus: we have
audited the accompanying consolidated financial statements of “the bank and its
subsidiaries (together the group”) which comprises the consolidated cash
balance sheet as at 31 December, 2008 and the consolidated profit and loss
account and consolidated cash statements for the period then ended and a
statement of significant accounting policies and explanatory notes.
In our opinion, the financial
statement gives a true and fair view of the state of the financial affairs of
the banks and group as at 31 December, 2008 and of their profits and cash flows
for the period then ended in accordance with the Nigerian statement of
accounting standards; the companies and Allied matters Act 1990 and the Banks
and other financial institutions Act 1991” (Bofia).
CBNs’ findings on these banks appear
to give life to the above assertion
and those questions on the credibly of the auditors especially on the
disclosures of debt exposures. It is understandable therefore, Why stakeholder
are asking questions about the auditors competence and integrity, while not a
few affected investors are exploring options open to seek redress against the
auditors.
The auditor has a duty to provide a professional
opinion on the relationships and those embodied by the statement of accounting
principles, (cowportrait1999). The auditors job, in a nutshell is to state
whether the financial statement tells it as it is. Where an auditor tells it as
it is in accordance with the accounting principles as contained in CAMA,
1.2 STATEMENT OF THE PROBLEM
In Nigeria, most corporate failures
have been in the banking sector (Okeke 2014: Bakre 2007, Ajibulade 2008). These
banks were certified distressed by CBN
barely few Months after auditors have issued “unqualified reports”. People
asked where were the auditors? But the most published corporate failure in
Nigeria beside the banking industries is the Cadbury (Nig) Plc which has been
dubbed Nigeria – Enron Equivalent. It is observed that when business fail, the
economy crumbles, capital flight ensued as foreign investors sought safer
climes for their investments.
The loss of investors’ trust and
confidence in the capital market hurts the economy badly as fresh funds cannot
be injected into the economy. There is
crises of confidence by the investors in the capital market. There is
continuous decline in the confidence level of the public in the duties and
responsibilities of an auditor and the relevance of the accounting profession
in general. This lack of confidence will destroy the integrity and reliability
of financial information as prepared by the accounting profession. A careful, examination of several studies on
factors influencing business failure reveal that most of them were mainly
independently conducted.
They tend to simply identity the
factors influencing business failure and attach percentage rates to the extent
at which those factors were found to influence failure. (Pun aid
|Bradstreet). There appears to be few studies
on the role of auditor in corporate business failure in non-banking sector. It
may be difficult to examine the management of these failed businesses as some
are not in existence. However this research sought to find the views of audit
firms that have audited some of the failed banks in Nigeria because most
researches on business failure concentrated on the enterprises and not
auditors. It is this gap this study intends to fill.
1.3 OBJECTIVE OF THE STUDY
1.4 RESEARCH QUESTION
1.5 RESEARCH HYPOTHESES
1.6 SIGNIFICANT OF THE STUDY
1.7 SCOPE OF THE STUDY
1.7.1 LIMITATION OF THE STUDY
1.8 ORGANIZATION OF THE STUDY
CHAPTER TWO
REVIEW OF RELATED
LITERATURE
2.1 THEORETICAL/
CONCEPTUAL FRAMEWORK
Prior studies indicate that
researchers generally test and evaluate corporate financial distress models
using two popular standard statistical techniques, logit and discriminant
analysis (DA). The volume of literature in existence in this area suggests that
it is a well-beaten part. Two-widely notable published approaches are
associated with Beaver (1966) and Altman (1968, 1977). Gupta (1979) also
developed an extensive accounting ratio model for detecting business downturns.
While
Beaver (1966) made use of traditional ratio analysis, Altman (1966) and Gupta
(1979) attempted to build a forewarning system of corporate sickness. Gupta’s
(1979) study unlike that of Beaver (1966) was based on broadly matching groups
of sick and non-sick companies. Argenti(1976) places heavy emphasis on
management style. Yet another financial expert, Osezuah (1995) provided a phase
by phase analysis of business decline. To guarantee sustainable economic growth it
is very important to control the number of firms that fail(Warner, 1977). The
abnormal behaviours of firms should serve as leading indicators of unhealthy
performances.
As a consequence, researchers,
shareholders, managers, workers, lenders, suppliers, clients, the community and
policymakers have demonstrated a great interest in the detection of corporate
distress. This is as to develop early warning systems and signals so that the
concerned firm will be able to take actions to prevent the firm failure. The
possibility of using ratios to detect problematic businesses has been vastly
explored by several academics.
Among the three existing approaches to
the problem (accounting analytical approach, option theoretical approach and
statistical approach), the statistical approach tries to assess corporate
failure risk through four widely known methods that make use of
balance-sheet-based ratios: linear or quadratic discriminant analysis, logistic
regression analysis, probit regression analysis and neural network analysis.
The balance-sheet-based ratios involve the use of certain financial information
to assess firm performance. Firm performance could be viewed in terms of
profitability, interest coverage, debt coverage, working capital and liquidity
performances.
The criticism of
auditors by society reflects in the litigious environment which characterizes
auditing today and can be traced to the audit expectation-performance gap (Boyd
et al 2001:56). The failure of business corporations and the subsequent
financial loss borne by the shareholders of the same has resulted in these
criticisms. In the '80s, the profession defined the concept of the "audit
expectation gap" and focused public criticism on that concept. This gap
exists between the expectations of the capital market investors who don't doubt
the financial reports audited by accountants, and the nature of the auditor's
task, which is concomitant with the responsibility delegated to them by set
auditing standards and the law (Eden, Ovadia and Zuckerman (2003:32).
This gap is related to issues such as
responsibilities, independence, third party liability of the auditor, reliance
on the audit report by users, meaning of the audit report as perceived by
users. Lin and Chen (2004:93) identified the audit expectation gap to be a
crucial issue associated with the independent auditing function and have
significant implications on the development of accounting standards and
practices. A major cause of this gap is that users have high expectations of the
auditor's responsibility in relation to fraud (Best, Buckby and Tan, 2001:2).
Consequently, when a company faces problems as a result of undiscovered illegal
acts either perpetrated by management, other insiders or third parties, the
external auditor is blamed.
Other reasons for this gap are
inadequate audit standards, deficient performance of auditors, unreasonable
expectations of users of audited financial statements, perception that the
audit profession can be trusted to serve public interest, inadequate education
of the public about auditing, structure and regulation of the profession and
misinterpretation of the audit report. The findings of Humphrey et al (1993),
Albrecht (2003), Lee, Gloeck and Palaniappan (2007), Best et al (2001), Lin and
Chen (2004), Saha and Baruah(2008), Ekwueme (2000), Lee and Ah (2008), Siddiqui
and Nasreen (2004), Haniffa and Hudaib (2007) and Ojo (2006) have supported
this view.
Basically, this gap has been described
to be a result of the shift in the objectives of statutory audit over the
yearsfrom mere detection of fraud and technical errors to determining whether
financial statements
The role of audit in this era is to
refocus on public interest, redefine the audit relationship, and ensure the
integrity of financial reports, separate non-audit functions and other advisory
services. Also, audit methods need to be focused on risk attention, fraud
awareness, objectivity and independence, increased attention to the needs of
financial statement users (Lee and Ali, 2008:23). Since the primary purpose of
external audit is not to detect fraud, investigating fraud requires the
combined skills of a well-trained auditor and a criminal investigator. Fraud
auditing is a relatively new discipline that emerged from the criminal and
regulatory statutes involving business, financial crimes ranging from
embezzlement, investment fraud, giving and accepting bribe and computer fraud.
2.2 THE
ROLE OF AN AUDITOR IN ASCERTAINING THE" GOING
CONCERN STATUS OF A COMPANY
2.3 RESPONSIBILITIES AND FUNCTIONS OF THE INDEPENDENT AUDITOR
2.4 DISTINCTION
BETWEEN RESPONSIBILITIES OF AUDITOR AND
MANAGEMENT.
2.5 BUSINESS FAILURE
2.5.1 CAUSES OF BUSINESS FAILURE
2.5.1.1 High
Debt Ratio
2.5.1.2
High level of mismanagement
2.5.1.3
Unexpected resignation of key staff
2.5.1.4. Inadequate Inventory
2.5.1.5. Selling products below cost price
2.5.1.6. Dwindling working capital
2.5.1.7. Consistent negative cash flow
2.5.1.8. Declining
Profit
2.5.1.9. Loss of market share
2.5.1.10.
Inability to secure operational capital
2.6 GOING
CONCERN RISK ASSESSMENT.
2.6.2 Business
Risk Assessment
CHAPTER THREE
RESEARCH METHODOLOGY
3.0
INTRODUCTION
This chapter describes the procedures for data collection
and method of data analysis that was used for this research. The section therefore,
explores the most suitable research methodology required for the collection,
presentation and analysis of data for the study with a view of reaching
objective outcome. This chapter will focus on the procedure adopted in
generating data for this research, how the data was analyzed and interpreted
and the limitations adopted in arriving at the inferences.
3.1 RESEARCH DESIGN
Research
design is a guide for data collection. This study is based on the use of survey
method through the use of questionnaire to generate data. Therefore, the case
study approach and survey research design is the method adopted by the
researcher to gather information or data from the sample drawn from the
population to the study being investigated.
The case study approach involves the study of a
specific group or unit at a time and drawing conclusions based on the
circumstances of the group, unit or organization studied.
The
study adopts the use of survey research design because it requires the
population of study selected carefully in order to ensure adequate
representation. The study therefore makes use of questionnaire research survey
method which is suitable to the study being investigated to selected staff,
customer of the bank and the general public.
3.2 POPULATION DESCRIPTION
3.3 SAMPLE AND SAMPLING TECHNIQUE
3.4 SOURCES OF DATA
3.5 METHOD AND INSTRUMENT OF DATA COLLECTION
3.6 METHOD OF DATA ANALYSIS
Data
analysis is a practice in which source data is ordered and organized so that
useful information can be extracted from it. Data for the dependent variable (i.e. impact) conforms to either
categorical or ordinal scale. Accordingly, the main analyses of our primary
data involved the use of regression analysis and correlation coefficient for
hypotheses testing.
Regression analysis
Regression analysis
expresses the relationship between two or more variables in a behavioral form.
It provides an estimating equation which expresses the functional relationship
between dependent and independent variable. On the basis of this, we can
predict the one variable as the other variable is given.
y = a + b1x1
+ ie
Where y
= the dependent or outcome variable
a = constant term
x1 = set of
independent variables or predictors
b1 = coefficients of the predictor
variables and
ie = the error term.
For the purpose of our study, we propose
that:
DecliningProfit = a + b1AuditorsDuty
+ ie
and
deterioratingWC = a
+ b2AuditorsDuty + ie
CHAPTER FOUR
DATA PRESENTATION AND
ANALYSIS
4.0 INTRODUCTION
The
previous chapter has presented the justification for undertaking the research
by employing the mixed research methodology, data collection techniques,
sampling methods used and finally the data analysis to be used in the research.
This chapter first presents the data collected by using the questionnaire, then
analyzes the data using SPSS and Microsoft Excel, and finally interprets the
implications of the result.
4.1 DATA PRESENTATION
One of
the main objectives of this research is to investigate how auditors expression
of independent opinions about the financial statement of an organisation
affects its perform better and avoid failure. The most important data sources
to this end are the survey conducted with auditors and business executives.
4.2 DATA
ANALYSES AND INTERPRETATION
4.3 HYPOTHESES TESTING
4.4 DISCUSSION
OF FINDINGS
CHAPTER
FIVE
SUMMARY
CONCLUSIONS AND RECOMMENDATIONS
5.1 SUMMARY
This research work investigated the duties of
auditors with special emphasis on auditors expressing their opinion on the
financial statement of firms. The study tried to understand how the expression
of such opinion affects the abiliy of the firm to make profit and stay in
business. Below, we discuss some of the important finding of the research.
·
First, we find that auditors in
the Nigerian business environment are independent. Thus, there is every reason
to believe that they will discharge their duties without interference from
other parties including the firm and the state. Independence also gives more
weight to the opinions they express as regards the health of the organisation.
Furthermore, our findings also showed that auditors expressing their opinion on
the financial statement of firms are a routine function which the auditor is
expected to perform.
·
Our finding also showed that
audit failure occurs due to negligence/oversight on the part of auditors and
that such lapses on the part of the auditors will likely result in failure to
discharge their duties very well. For example, through negligence and
oversight, the auditor will likely fail to discover that the financial
statement has been manipulated. Saudit failures can be catastrophic not only
for the firm but also for members of the general public who invested in the
organisation.
·
Our findings also indicated
that even though management may initiate manipulation of financial statements,
it will likely only be successful as a result of complicity of the auditor(s). We also find in the course of data analysis
that declining profits affect working capital negatively.
·
Our findings showed that there
is a negative relationship between auditors performing their duty of expressing
opinion on the financial statement of companies and deteriorating working
capital and declining profits. This finding is indicative of the fact that
auditors performing their duty does not lead to business failure in Nigeria.
·
Finally, our findings showed
that the relationship between auditors performing their duty and business
failure is not only negative but also insignificant.
5.2 CONCLUSIONS
5.3 RECOMMENDATIONS
BIBLIOGRAPHY
Adegite, E. O. (2009) ‘Our Approach to
Professionalism is Global’, The Nigerian Accountant, 42 (3): 28-32.
Adeniyi, A.A (2004). Auditing and Investigations.
Lagos: Value Analysis Consult.
Adeyemi S. B. (2004) ‘Minimisation of Financial
crime: The Role of the Accountant’, Student Accountant Journal, 1: 7-13.
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Wallace, R. S. O. And Parker, R. H. (1991)
‘Corruption, Society and Auditing’, Paper Presented at the 3rd Annual
Accounting, Business and Financial History Conference, Cardiff, 18-19
September.
Willmott, H. (1986) ‘Organising the Profession: A
Theoretical and Historical Examination of the Development of the Major
Accountancy Bodies in the U.K’, Accounting Organizations and Society, 11 (6):
555–580.
Woolf, E. (1997). Auditing Today. England: Pearson
Education Limited.
Wong, G. B. (2004) ‘Lessons from Enron: A Corporate
Governance Framework for New Zealand Petroleum’, 7-10th March 2004, Auckland,
New Zealand.
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