Corporate Governance And Audit Quality Of Financial Report Of Financial Report Of Listed Non Financial Firms In Nigeria

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Corporate Governance And Audit Quality Of Financial Report Of Financial Report Of Listed Non Financial Firms In Nigeria

Abstract

Corporate governance and audit has an important role in assisting a firm to achieve its objective when it is implemented, operated, and managed effectively. Organizations that effectively implemented, operated, and managed Auditing were better able to identify their business risks and system inefficiencies for the sake of taking corrective actions and improvement in the process through their financial report. The overall objective of the study is to assess the Audit Practices of Non-financial firms. The study adopted a case study design and covered the head office Auditors of Non-financial firms. The study adopted a mixed research method by employing quantitative and qualitative research methods. The quantitative research method was used through 29 usable self-administered questions. These were constructed in a 5-point Likert scale, distributed to Auditors of Non-financial firms, and analyzed using Statistical Package for Social Science (SPSS) Version 20 software. The qualitative research method was used through the interview with the Audit director of Non-financial firms and selected documents review. In this regard, Audit quality of financial report, Organizational Setting, Approved Audit Charter, Management Support, and Resource Availability were the variables in use for assessing Audit quality of financial report of financial report.
According to the results of the study; the quality of financial report is as per the International Audit Standards. Non-financial firms in Nigeria have an approved Audit charter and it is reviewed regularly as required. The researcher mainly recommended; the management shall revise its organizational structure so that the Audit Department reports to the Board of Directors, the management shall give serious attention to give adequate training to the audit staff, for better audit coverage and better assurance of control, risk management and good governance, the adequate number of staff shall be fulfilled for the Audit department.

Chapter One

Introduction

1.1 Background of the Study

The recent occurrences in the international corporate environment have focused the worlds’ attention to the concerns for effective domestic corporate governance initiatives that would ensure credibility on how companies conduct business in our post-modern globalised world. The reality of corporate governance is the success or failure of incorporated companies and most importantly on the national economy vis-à-vis the increasing globalised world economy.1 The requirement for transparency is reflected on the obligation of financial reporting and auditing, narrative reporting, business review placed on the board of directors. All the same, corporate responsibility is meant to be captured under social and environmental reporting and sustainability vis-à-vis development reporting to be prepared and presented by the board of directors during company‘s general meetings. Decision making by large companies can significantly affect the environment -the local community, the livelihood of large numbers of the people who work for the company, consumer‘s choice and viability of suppliers. The various groups affected by or interested in a company are sometimes referred to as stakeholders. It is because of the clear impact the quality of corporate governance of the incorporated companies‘ business efficacy has on the economy vis-à-vis the society at large, that it becomes more imperative to x-ray the role of the legal frameworks in corporate governance.

Auditing became very important to world businesses since the industrial revolution resulted in factory systems that were financed by stockholders. This situation necessitated the need for Auditing to protect shareholders‟ best interest. The major factor that assists in the emergence of Auditing was the extended span of control systems faced by management in businesses (Institute of Auditing research foundation, 2003). Today, in businesses worldwide, internal control functioning has become very important for their operation and achieving the objective of organizations. The objective of auditing is to review and evaluate the activities of the organization to express an opinion on the efficiency and effectiveness of management, as well as the adequacy of internal control within an organization (Suleiman, 2017). The establishing of the Audit Function is important as an essential internal assurance mechanism in public financial controls and as a tool for monitoring and evaluating financial management activities in government agencies. Besides, it assists government organizations to achieve accountability and integrity, improve the implementation of government programs and develop confidence among citizens and stakeholders as well as to lead to the use of public funds efficiently, and cater any risk of mismanagement of public funds. Audit services also can help an organization for the success of better financial management in public service by playing effective and efficient roles to promote better governance in managing public money. In local government administration, this Audit Function has special importance (Temesgen & Estifanos, 2019). As per (Foster, 2019) the system of internal control comprises those elements of an organization (including its resources, systems, processes, culture, and structure) that support people in the achievement of the organization‟s objectives. They facilitate the effective and efficient operation of companies by enabling them to respond appropriately to significant business, operational, financial, compliance, and other risks. This includes safeguarding assets from inappropriate use or from loss and fraud and ensuring that liabilities are identified and managed. The importance of Audit Function within the organization can also be justified with the fact that a strong Audit Function is a preventive to financial reporting irregularity in the presence of unambiguous potential GAAP (Generally Accepted Accounting Principles).The Institutes of Auditing Standard states that the Audit Function is bringing a systematic, disciplined approach to the evaluation and improvement of the effectiveness of internal control, risk management, and governance processes. Auditors spend by ensuring that accounting records are properly maintained and reliable. Majority of Audit departments do not have a written Audit Charter. Therefore, the objectives, authority, scope, and responsibilities of Auditing are not spelled out in most organizations, and no measures exist to ensure that the Audit department is recognized as acting with the authority and support of senior management (Mohamud, 2013).

The role of auditors have been increased and dramatically changed as a result of the increased size and complexity of many corporations. The subject of governance has become a pertinent issue for business, government, politics, and the general public. In both the private and the public sectors, there is an increasing demand for good governance in terms of accountability and transparency, and Audit Function within organizations has an important role to play in the achievement of these objectives (Asaolu et al., 2016). The Audit plays an important role in the organizational process, and therefore it is not only required to perform ordinary assurance activities, but also to serve as a strategic partner of the organization and add value to its activities towards improving organizational processes and ensuring their effectiveness and efficiency (Mihret et al., 2010). Effective Audit function could be a major asset for improving public confidence in financial reporting and corporate governance if it contains these elements; organizational independence, a formal mandate, existence of approved audit charter, unrestricted access, sufficient funding, competent leadership, competent staff, existence of audit committee, stakeholder support, professional audit standards and unlimited scope (Smet et al., 2011). The empirical investigation done by (Florea&Florea, 2013)indicated for the Audit to function properly four critical factors had to be taken place.

Firstly, it had to be strategically positioned in order to contribute to increased business performance. This means the mission and role of Audit should be defined within a wider governance framework and effectively communicated. Secondly, Audit should have strong risk identification and planning methodology to deliver a high quality service and use an appropriate technology to enhance the provision of Audit Services. Thirdly, Audit must be independent from all decision factors involved in corporate governance. In this regard activities being audited must be independent from everyday internal processes, and must able to exercise its assignment on its own initiative in all departments, establishments and functions of the organization. Auditors have the right and ability to access all information in every part of the organization and their function lies at every activities of the corporate governance system. All the stakeholders will, therefore, benefit from having a strong Audit Function (IAF) which will provide value to the other cornerstone of corporate governance (Smet et al., 2011). Audit activity helps an organization by evaluating the risks whether they are under control or worth taking. In addition of this, Audit can protect an organization from the appearance of a risk and assure good things can happen (Al-Twaijry et al., 2004).

1.2 Statement of the Problem

Corporate governance in Nigeria generally reflects system governance problems, capacity constraints and ineffective implementation of laws which have led to limited economic growth. The private sector has dogged weakness inherent in its skewed structure, poor spate of infrastructure, high cost and limited access to appropriate financing, insufficient domestic demand, low level of patronage by public sector institutions, domestic policies, environmental factors and investment floors. Poor corporate governance will eventually lead to financial crises in corporate organizations. The problems associated with the failure of companies are not unconnected with dearth of the corporate risk management. Failure to manage corporate risk will eventually lead to failure of a company. The enormous problems associated with corporate governance have affected the interest of shareholders in these companies. It discourages prospective investors from investing on such companies; perverts the interest of the creditor lending financial assistance to the companies affected; it affects the interests of the consumers and other stakeholders, and eventually results in an impoverished economy in Nigeria.

Organizations deploy many layers of defense in order to insure there are enough controls to manage the adverse risk of any major hindrance. The first layer of defense is the operational management (process owner). The second is the control function such as internal control, risk management and compliance and the third is the Internal and External Audit function (Chartered Institute of Auditors, 2017).Audit plays an important role for companies that strive to achieve their objectives. Auditors are responsible to help management to demonstrate that they are managing the organization effectively and reliably on behalf of the stakeholders. Normally, Auditor will have a discussion with management and advise them on their business operations and risks associated with them. Subsequently, management would be able to reduce the company‟s risks and continue their operations with the advice of the auditors. Thus, it is viewed that management and auditors have a close relationship. However, the independence of the Auditor must also be considered in order to carry out audit responsibilities in an unbiased manner. Not only that, auditors should observe and practice audit principles at all times.

Audit principles are integrity, objectivity, competence, and confidentiality (IIA, 2017). The capability of the Audit Function (IAF) should be in line with the mandate of the organizations they serve. Auditors in the private sectors should be fully able to assist their organizations in fulfilling their main mandate, namely profit-making and increasing shareholder value. Likewise, auditors in the public sector should be able to assist their organizations in achieving their objective, namely to provide services to the public by assisting their organizations in mitigating the risk that is unique to the public sector; ultimately resulting in improvement of the performance of the public sector and increased citizens confidence (Jacobus et al., 2015). Similar to other organizations, the role of audit is equally important in Insurance Companies. Insurance plays a crucial role in fostering commercial and infrastructural businesses. The National Bank of Nigeria also indicated that the Nigerian economy had shown 9.3 percent average annual growth during the 2013/14 – 2017/18 fiscal years and the insurance market also registered an average growth of 26% during 2017/18. Therefore, economic growth is one of the prerequisites for the development of the insurance market (Wodajo, 2019). Insurance promotes financial and social stability; mobilizes and channels savings; supports trade, commerce and the overall wellbeing in a country (Malik, 2011). This implies that insurance companies are helping the economy in one way by transferring and sharing of risk which can create confidence over occurrences of uncertain event and in another way insurance companies like other financial institutions plays the role of financial intermediation so as to channel financial resources from one to the other. Audits in insurance industries should also assist the management to accomplish the company objective by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes(Chartered Institute of Auditors, 2017). Studies was conducted in Nigeria context (Hailemariam, 2014) ; ( Mebratu, 2015) (Mihret et al., 2010) ; (Mihret&Yismaw, 2007) . The studies give a great emphasis on the factors affecting the effectiveness of the audit in the public sector. Another studies (Hawa, 2016) Factors that identify the effectiveness of Audit in Oromia zone, (Berehe, 2017), Determinants of Audit effectiveness in Roads construction sector.

Previous research was conducted on what Audit practices look like: regarding existence, independence, role & responsibilities against theoretical aspect. (Fekadu Betelehem, 2009); (Welde & Senbet, 2019). As per the review literature, attempts were not made about Audit Practice in the Insurance Company with the mixed research methodology.

Audit quality of financial report. Now a days financial institutions are, according to regulations, required to develop an Information Technology Audit Program to support its information technology infrastructure, to keep non-public customer information secure, and to conduct a risk-based audit on an annual basis and to detect and prevent frauds (Harold J.Wagner, 2001).

Just to fill the literature, methodology and technology gaps the researcher establishes to Assesse Audit Practices in Non-financial firms. The study will conduct with the, questioner, interview and document review by generalizing and adding the above variables. Competency and Independency of Auditors are included in the Audit quality of financial report and Organizational Setting and Resource availability are added. After reviewing the literatures, the following factors are taken: – Audit quality of financial report, Organizational settings, Management Support, Approved Chartered and Resource availability.

1.3 Purpose of the Study

The general purpose of the study is to assess corporate governance and audit quality of financial report of listed non-financial firms in Nigeria

1.4 Objectives of the Study

In addition to the general objective of the study, the researcher was set the following specific objectives for the study:-

  1. To evaluate the Audit quality of financial report in Non-financial firms.
  2. To examine the Organizational Setting of Audit in the Non-financial firms.
  3. To assess the Approved Audit charter in the corporation.
  4. To assess the Management Support to the audit of the Non-financial firms.
  5. To evaluate the Availability of Resources to conduct the audit activities in the corporation.

1.4 Scope and Limitation of the Study

The research restricted the study area to one non-financial firm in Lagos Nigeria (Unilever). The researcher attempts to assess how the Audit Practice looks like in Non-financial firms by evaluating the Audit quality of financial report, Organizational Setting, Approved Audit Chartered, the Management Support, and the Availability of Resources in the corporation.

1.7 Research Questions

  1. What is the Audit quality of financial report in Non-financial firms?
  2. What is the Organizational Setting of Audit in the Non-financial firms?
  3. What is the Approved Audit charter in the corporation?
  4. What is the Management Support to the audit of the Non-financial firms?
  5. What is the Availability of Resources to conduct the audit activities in the corporation?

1.6 Limitation of the Study

Generalization is the limitation of case studies(Kothari, 2004). They are not generalizable in the conventional sense. By definition, case studies can make no claims to be typical. Furthermore, because the sample is small and idiosyncratic, and because data is predominantly non-numerical, there is no way to establish the probability that data is representative of some larger population (Hodkinson & Hodkinson, 2001).

In this study, the major limitation is that it is partly based on perceptions of the audit director and of auditors of the case organization. As such, individuals‟ perceptions are not claimed to accurately measure the underlying reality that they are supposed to represent. Furthermore, the interpretation of any single case study conclusion should be done with caution as replication might be required before fully-fledged conclusions are made on a population.

1.7 Significance of the Study

As a basis of good corporate governance, an Audit is conducted in diverse legal and cultural environments; organizations that vary in purpose, size, complexity, and structure. In order to achieve the objectives of the organization, it is also essential for ensuring the appropriateness and adequacy of internal control systems designed by the top management and Board of the organization. The study helps managers and the Board of Directors of the Insurance

Corporation to recognize the Audit practices and its result on the company‟s performance. The study also helps to identify areas of weaknesses with constructive recommendations. Furthermore, this study adds value to the existing Audit practice that has been conducted in Non-financial firms by viewing the above different mentioned activities.
In addition, the study has a very good source document for the potential researchers who have an interest in the area for their future study.

1.8 Hypothesis

  • H0: there is no significant relationship between audit quality and corporate governance
  • H1: there is significant relationship between audit quality and corporate governance

1.9 Organization of the Study

This research report dividing into five chapters: Chapter One deals with the Introduction of the study which includes Background of the study, Statement of problems, Objective of the study, Limitation, and scope of the study, and the Significance of the study. Chapter Two presented the related literature review regarding the research area on Audit practice in Non-financial firms and therefore sets out the theoretical and empirical grounds for the research. Chapter Three showed the Research Methodology of the study. Chapter Four reports the Analysis and Interpretation of the data. Chapter Five discussed with Summary of the study Conclusions of the study and also presented Suggestions for further research were given.

Chapter Five

Summary, Conclusions and Recommendations

5.1 Introduction

This chapter deals with the summary of the study on the Corporate governance and audit quality of financial report in Non-financial firms. Based on the major findings, some summary and conclusions have been drawn and practical recommendations have been finally forwarded.

5.2 Summary of the Study

The main purpose of this study was the corporate governance and audit quality of financial report of financial reports in Nigerian

Insurance Corporation. In particular, the study aimed to investigate the current practices of Audit in Non-financial firms. To achieve the above purposes, the following basic questions were set:-

  1. Does the Audit maintain the required Audit quality of financial report?
  2. Does the Audit structure in a good organizational setting in Nigeria Insurance Corporation?
  3. Does the Approved Audit charter in the corporation adequately prepared as per the standard?
  4. Does the management support the Audit Department?
  5. Does the management allocate adequate resources to the Audit Department to conduct audit activities in the corporation?

A mixed research approach was employed to assess the practices of the Audit Department of the Non-financial firms. From the different mixed research methods, concurrent embedded mixed research was employed. That is, both quantitative and qualitative data were collected at a time. Questionnaires and interview questions developed by the researcher were used to collect data from the respondents. The validity and reliability of questionnaires were checked using a validity test. The sources of the data for the study were 15 respondents from the Audit Department staff of the UNILEVER. Mean values and standard deviation were used for data analysis.

To assess the quality of financial report from the responses of Audit staffs in the five items Likert scale was provided to the respondents. Thus, the study showed that the overall mean score of Audit quality of financial report is 3.48.This indicated that there is a good Audit quality of financial report in the Non-financial firms.

Regarding the organizational setting, the aggregate mean result is 3.23. This reveals that in the view of respondents, there is a good organizational setting in the corporation. But the organizational chart of the Corporation shows that the Audit Directorate does not have any formal contact with the Board of Directors. Hence, it is possible to say that, the Audit is under the dependence of the management. On the other hand, the respondents disagree regarding „the Audit department is large enough to successfully carry out its duties‟ as the mean score is less than 3.00. The study concluded that the department of Audit is not large enough as required. Furthermore, the finding of the study revealed that the overall average means value of an approved Audit chart is 3.47 which imply that the presence of an approved Audit Charter is good in UNILEVER as it contains all the requirements.

To measure management support to the Audit in UNILEVER, a five-point Likert scale was distributed to the Audit staff. Accordingly, the overall mean score of management support to the Audit is 2.73. This describes that top management supports the Audit in the organization needs attention to further enhance the efficiencies of Audit. To assess the allocation of resources in the Audit Department, the study revealed that the management fairly allocates the required resources during its annual budget approval. However, the required number of Audit Staff is not adequate as compared with the audit coverage.

5.3 Conclusion

Based on the findings of the study, the following concluding remarks are drawn.

The practice of Audit of Non-financial firms is aligning with the current level of professional development. The respondents‟ of the study agreed with practices undertaken by the professional Auditors. The quality of financial report is as per the International Audit Standards. The organizational chart of the UNILEVER shows that the position of Audit Head is under the CEO and this indicates that the Audit Department is exposed to the influence of the Corporation management. This hurts the attempt to improve effectiveness of the Audit department. The findings have shown that Audit department of the Non-financial firms has an approved Audit charter and it is reviewed regularly as required. In addition, it can be concluded that there is a lesser support from the top management in providing training to the Audit staff. Furthermore, the study concluded that the Audit department has adequate budget allocation aligned with the planned audit activities regardless of the inadequate number of audit staff. Finally from the study, it was concluded that most departments of the Corporation are taking corrective actions within a reasonable period on audit findings except in few departments where there are delays in taking corrective action.

5.4 Recommendations

The overall objective of this study is to assess the Audit Practice in Non-financial firms. In this regard, the data analysis using quantitative and qualitative methods was made. According to the research objective and based on the data analysis, the researcher provides the following recommendations to the concerned bodies:-

  1. Best practices as well as the IIA standard requires that the Audit Head shall report to the board of directors and shall attend a board meeting. This is from the viewpoint of ensuring the independence to freely exercise their Audit roles. Hence, the UNILEVER management shall revise its organizational structure so that the Audit Department reports to the Board of Directors.
  2. Management support is very inevitable to the successful implementation of Audit activities. The management of the UNILEVER is indeed supporting the Audit Department in many aspects except that the support of providing the required training is not as required. Hence, for the better performance of the audit department, the management of the UNILEVER shall give serious attention to give adequate training to the Audit staff.
  3. Adequate manpower following the audit assignments to be covered is equally important with the available time and other resources. In UNILEVER, lesser attention is given to the recruitment of the required number of audit staff. Therefore, for better audit coverage and better assurance of control, risk management, and good governance, an adequate number of Auditors shall be fulfilled for the Audit department.

5.5 Suggestion for Future Research

The researcher encourages further research to extend the results of this study and improve the results by minimizing the limitation of the study.

Although the research questions developed in this paper were tested using a single organization, future research needs to be conducted with other organizations that underwent Audit Practices to validate the findings of this study. Further research also treated by using other research methodology like data collection tools and research type, by considering Audit committee member or other board of director members, regulatory bodies, external auditors, Chief Executive Officer of the company in addition to Audit Department staffs and also by adding additional variables to assess the practice of Audit in the organization. The above all mentioned will extend the conclusion of this study.

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