ABSTRACT
This research project investigated the
effect of statutory and internal audits on the performance of manufacturing
companies in Nigeria. Data for the study was collected from primary sources
through the issue of 80 structured questionnaires to accounting staff of three
quoted manufacturing companies and analyzed using Pearson Correlation Analyses.
The findings show that there is a positive and significant relationship between
statutory audit and the efficiency and effectiveness of manufacturing
companies. The findings furhter show that there is positive snd significant
relationship between internal auditing and the efficiency and effectiveness of
manufacturing companies in Nigeria. From the findings, we conclude that
statutory audits are very important determinant of the performance of
manufacturing companies in Nigeria in terms effectiveness and efficiency in
services. We also conclude that internal audits are a very important
determinant of the effectiveness and efficiency of manufacturing companies in
Nigeria. It was thus recommended that there is need for all manufacturing
companies in Nigeria to have a functional internal audit unit that is staffed
by professionals. Finally, we recommend the training of accounting and finance
officers within manufacturing companies on the importance of auditing in the
firm and also provide them with the right tools in order for them to achieve
the set objectives of the firm
79 Pages
Project Reference Code:
C054
CHAPTER
ONE
INTRODUCTION
1.1
Background to the study
The practice of auditing commenced on the day that
an individual commenced stewardship over another’s property .Stewardship refers
to the practice where productive resources owned by another person or group are
managed by another person or of persons. The providers of funds would in turn
require the stewards to give account of stewardship accordingly at the end of a
particular period of how the resources given to them were spent. The practice
of stewardship can be linked to present day limited liability companies, where
the finance for running the business are provided by the owners and managed by
directors appointed by them.
The
role of auditing in today’s organization cannot be overemphasized .Overtime,
companies have been encountering some problems like fraud, misappropriation of
funds and properties, corporate financial reporting scandals and others, thus,
we are faced with a question as to whether auditing plays any significant role
on the performance of companies? In order for us to understand the relationship
that exists between the two, it is expedient we understand the concept of
auditing. Aguolu (2002) defined auditing as the independent examination of the
financial statement of an organization with a view to express an opinion as to
whether these statements give a true and fair view and comply with relevant
statutes. An audit is also defined as
a systematic and independent examination of books, accounts, statutory records,
documents and vouchers of an organization to ascertain how far the financial
statements as well as non-financial disclosures present a true and fair view of
the concern. It also attempts to ensure that the books of accounts are properly
maintained by the concern as required by law. Auditing has become such a
ubiquitous phenomenon in the corporate and the public sector that academics
started identifying an "Audit Society.
Audit is an effective tool for a Business Management, as internal audit
is conducted in order to ensure the policies are being followed. It helps to
make valuable suggestions for improvement and to formulate future policies of a
business. Audit also helps management to review the policies from time to time.
Since audit involves a detailed
verification of accounting records, it helps greatly to discover errors or
frauds while it promotes a moral check on the employees through which their
efficiency may also be determined. To its more positive form, audit can
motivate the employee to maintain the efficiency leading to increase their
performance level. Aside from these, it is with the help of audit that
misappropriation of asset and manipulation of records may be identified.
Audit is of great importance to gain
confidence of investors of a joint stock company. Since the audited statements
are very much useful, the investors can make decision as to whether or not to
invest their funds as these audited statements give them extra re-assurance to
invest. Several studies in auditing were limited to internal audit without much
emphasis on the role of statutory audit on the performance of companies. This
study intends to contribute to the few researches on the Nigerian environment
on the role of auditing (internal audit and statutory audit) on the performance
of companies.
1.2 Statement of the problem
The problems that spurred the
interest of the researcher to carry out this research work include; Corporate
reporting scandals and loss of investor’s confidence; Corporate financial
reporting sandals have become a global phenomenon. Shareholders have been
shortchanged by corporate financial reporting malpractice throughout the 21st
century. Every time there is a major scandal, investors’ confidence is shaken
to its foundation. We cannot forget in a hurry the case of Cadbury Nigeria plc.
Who manipulated their stock position to deceive shareholders a few years ago.
Investors have lost a significant part of their wealth and confidence in
Business Corporation and their underlying financial reporting system.
Problem arising as result of
stewardship: funds and properties of individuals are entrusted to certain
individuals in the organization and in most cases, those individuals are not
brought under surveillance, and as a result, many funds are diverted to
personal use .Also related to this is the problem of fraud and misappropriation
and lack of trust on the part of the owners.
1.3 Aim and Objectives
of the study
1.4 Research question
1.5 Research hypotheses
1.6 Significance
of the study
1.7 Scope of the study
1.8 Limitation of the
study
1.9 Definition of terms
1.10 Organization of the study
CHAPTER
TWO
REVIEW OF RELATED
LITERATURE
2.1Introduction
This chapter focuses on review of related literature of past
scholars in the area of auditing and performance of companies. It is divided
into theoretical framework, conceptual framework and empirical framework.
2.2Theoretical framework.
2.2.1 The agency theory
In ‘Theory of the firm:
managerial behavior, agency costs and ownership structure’ (1976, 306), M.C.
Jensen and W.H. Meckling refer to the firm being a ‘black box’, operated so as
to meet relevant marginal conditions with respect to inputs and outputs,
thereby maximizing profits, i.e., present value.
The authors signaled that no theory exists,
explaining the way in which the conflicting objectives of individual
participants will brought into equilibrium to succeed in value
maximization.Jensen and Meckling (1976, 308) define an agency relationship as a
contract under which one or more persons (the principal(s)) engage another
person (the agent) to perform some service on their behalf which involves
delegating some decision-making authority to the agent. The authors notice that
if both parties are utility maximizers (opportunistic behavior); a good reason
exists to believe that the agent will not always act in the best interests of
the principal.
According to Jensen and
Meckling (1976, 308) divergence exists between the agent’s decisions and those
decisions which would maximize the welfare of the principal. Within this
principal-agent relationship, owners have an interest in maximizing the value
of their shares, whereas managers are more interested in ‘private consumption
of firm resources’ and firm growth.Costs that arise because of the delegation
decision-making authority from the principal to the agent, which is due to the
‘separation of ownership and control’ in modern corporations, are referred to
as ‘agency costs’. Jensen and Meckling (1976, 308) define as the sum of the
agency costs:
·
Monitoring costs:
Expenditures
by the principal to limit the agent’s aberrant activities;
·
Bonding costs:
Expenditures by the agent
to guarantee that he did not performed certain actions that would harm the
principal; and
·
The residual losses.
Agency costs (the agency loss) in
addition, has exemplified as the extent to which returns to the owners are
below what they would be if the principals, the owners, exercised direct
control of the corporation (Donaldson and Davis, 1991, 50).
K.M. Eisenhardt (Agency
theory: an assessment and review, 1989, 59) notes: “Overall, the domain of
agency theory is relationships that mirror the basic agency structure of a
principal and an agent who are engaged in cooperative behavior, but have
differing goals and differing attitudes towards risk.”
The ‘model of man’ underlying the Agency Theory is
that of a rational actor who seeks to maximize his or her utility with the
least possible expenditure. Both agents and principals seek to receive as much
possible utility with the least possible expenditure. Thus, given the choice
between two alternatives, the rational agent or principal will choose the
option that increases his or her individual utility (Davis et al., 1997). According
to Eisenhardt (1989, 60), the agent is more risk averse than the principal.
Agents,
who are unable to diversify their employment, should be risk averse and
principals, who are capable of diversifying their investments, should be risk
neutral. Eisenhardt (1989, 61) cites two main aspects of the
agency theory, that is, ‘moral hazard’ – the agent usually has more information
about his or her actions and intentions than the principal does (information
asymmetry) and ‘adverse selection’ – the principal cannot completely verify the
agent’s skills and abilities, either at the time of hiring or while the agent
is working.
Subsequent to unobservable behavior (moral hazard or
adverse selection), the principal could choose to contract on outcome
(Eisenhardt, 1989, 61). According to Eisenhardt (1989, 61) an outcome-based
contract motivates behavior by co alignment of the agent’s and principal’s
preferences, but at the price of transferring risk to the agent. Opposite, the
principal could choose to contract on behavior, i.e., investing in information
systems (reporting systems, boards of directors etc.), which reveal the agent’s
behavior to the principal.
Davis et al. (1997, 23) put forward the executive
compensation schemes, being an example of mechanisms to ensure agent-principal
interest alignment and to minimize agency costs. Those financial incentive
schemes provide rewards and punishments aiming aligning principal-agent
interests. Following Davis et al., incentive schemes are particularly desirable
when the agent has an informational advantage and monitoring is impossible.
Deegan
and Unerman (2006, 215) notice that within the agency theory literature, the
firm itself is considered to be a ‘nexus of contracts’. These contracts are
used with the intention of ensuring that all parties, acting in their own
self-interest, are at the same time motivated towards maximizing the value of
the organization. According
to Donaldson and Davis (1991, 50), a major structural mechanism to restrict
managerial opportunism is the board of directors, which provides a monitoring
of managerial actions on behalf of the shareholders. The authors assert that an
unbiased review will occur more fully, where the chairperson of the board is
independent of executive management.
Davis et al. (1997, 23) further mention that the
application of agency control does not imply that all managers’ decisions will
result in increased wealth for principals; it implies only that managers will
strive to attain outcomes favorable for the principals. According to Davis et
al., there are many reasons other than poor motivation for agents’ failing to
deliver high performance, e.g. low ability, lack of knowledge and poor
information.
2.2.2The assurance theory
Audit
of historical financial statements
Audit
of internal control over financial reporting
Review
of historical financial statements
Attestation
services on information technology
Other
attestation services that may apply to a broad range of subject matter
2.2.3 Stewardship theory
Stewardship
theory and the role of the audit
2.2.6 Limperg’s Theory of Inspired Confidence
2.3Conceptual Framework
2.3.1
Conceptual Framework of Auditing
2.3.2 Brief History of
Auditing
2.3.3 The Need for Auditing
2.3.5 Types
of Audit
2.3.6. Internal audit effectiveness
2.4
Empirical Review
CHAPTER THREE
RESEARCH METHODOLOGY
3.0 Introduction
This chapter
presents the procedures that were adopted in conducting the study. The
following will be considered in this chapter: research design, study
population, sample and sampling technique, data collection method and data
analysis method.
3.1 Research Design
The research
design encompasses the methods for the collection, measurement and analysis of
data related to the research objectives. The research design chosen for this
study is the cross-sectional survey method which is a type of the
quasi-experimental research design, this research method was chosen because the
researcher has little control over the variables.
3.2 Population of the Study
3.3 Sample Size Determination
3.4 Sources of Data Collection:
3.5 Methods of
Data Analysis
3.6 Validity of
Instrument
3.7 Reliability
of Instrument
CHAPTER FOUR
DATA PRESENTATION AND
ANALYSIS
4.1.1
Introduction
This
chapter shall deal with the presentation and analysis of data collected from
respondent in the study.
4.2 Presentation of Data
A total of 80
copies of questionnaires were distributed in the following proportion. The
number distributed in each firm and numbers returned are tabulated as follows.
4.3 TESTING OF
HYPOTHESES
Hypothesis
one
Hypothesis two
Hypothesis three
Hypothesis
four
CHAPTER
FIVE
SUMMARY
OF RESULTS, CONCLUSIONS AND RECOMMENDATIONS
5.1 Summary of Findings
In
the course of writing this research project, several findings were made. They
include the following:
i.
The findings showed
that there is a positive and statistically significant relationship between
statutory audit and the effectiveness of manufacturing companies operating in
Nigeria. This finding if firms are carrying out their statutory audits, the
effectiveness in service delivery is bound to increase.
ii.
The findings also show
that there is a positive and statistically significant relationship between
statutory audit and the efficiency of manufacturing companies in Nigeria. The
meaning of this finding is that embarking on statutory audits will have the
effect of improving the efficiency of manufacturing companies.
iii.
The findings further
show that there is positive and significant relationship between internal audit
and the efficiency of manufacturing companies in Nigeria. This finding implies
that continually carrying out internal audits in the firm will help to improve
the efficiency of the firm.
iv.
Findings, the findings show
that there is positive snd significant relationship between internal auditing
and the effectiveness of manufacturing companies in Nigeria with the
implication that impending internal auditing practices in the firm will improve
the effectiveness of the firm in its activities.
5.2 CONCLUSIONS
5.3 RECOMMENDATIONS
REFERENCES
Association
of Certified Fraud Examiners (2007). Fraud examiners manual‘, Austin, TX:
AICPA (1988) Statement on auditing standards (SAS) No. 53: The auditor‘s
responsibility to detect and report errors and irregularities‘, American
Institute of Certified Public Accountants‘.
Albrecht,
W. (2004). Fraud and corporate executives: Agency, stewardship and broken
trust‘, Journal of Forensic Accounting, pp. 109–130
.
.
Martin,
W. (2003), Business Performance Management - Efficiently Managing Business
Processes. Research Bulletin, http://www.itresearch.net.
Ogede
P. O. (1999), Undergraduate Econometrics, Lagos: Minerib, Accord Limited.
Osterle,
H. (1995), Business in the Information Age - Heading for New Processes. New
York: Springer. pp. 11
QUESTIONNAIRE
Project Reference Code: C054
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