The Role of the Auditor and His Influence on the Decisions Made by Users of Financial Statement

The Role of the Auditor and His Influence on the Decisions Made by Users of Financial Statement

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Chapter One of The Role of the Auditor and His Influence on the Decisions Made by Users of Financial Statement

INTRODUCTION

BACKGROUND OF THE STUDY

            One of the primary reasons for an independent audit is the inherent potential conflict between an entity’s management and users of its financial statements. Management has an incentive to the information presented in financial statements since it is the means used to evaluate management’s performance. Management exercises a great deal of discretion in preparing financial statements and in using resources entrusted in it’s operating the entity. An audit provides reasonable assurance that management’s representations on these activities are liable. Thus, audit has value because management’s representatives on its performance and stewardship are examined and reported or by expert outside management’s control. The purpose of audit therefore, is to provide assurance to the shareholders’, bankers, creditors, government agencies and authorities, investors, and the public at large. These people need confidence that the picture of the company as given by the

directors to obtain a second opinion from an expert (the auditor). Other than exposing errors and fraud and testing the reliability of a firm’s controls financial audits can alert management to weaknesses in the firm’s control as well as suggest operational improvements that could be undertaken. These are highlighted in the management letter from the auditors. Strategic systems auditors provide a top down approach to auditing by first examining a firm’s business strategy and keys to competitive advantage.

            Financial audits may be performed for private companies, registered charities, some governmental and public entities certain forms of private companies are required to have an external audit. Private companies typically request financial audits year after year because lenders may have required an audit or owned may want to have external unbiased eyes look at the financial statements to determine if the company is complying with all the required accounting principles charities would require a financial audit to show the financial status of the organization to potential donors. Private businesses are required to be audited by status to determine if all the money budgeted has been properly spent. Government financial reports are not always audited by outside auditor, but private companies are. It is the duty of the auditor to examine the financial statement and consequently form an opinion of their fairness in conformity with generally accepted accounting principles. As a secondary function, it is also his duty to uncover any act of omission, which in view is fraudulent in nature. It is alarming to state here that private liability companies have become a target of the fraudsters who take advantage of the irregularities and professionalism of the private companies to perpetrate their nefarious deeds. There is a long list of private companies with publicized fraud cases in various degrees which are hundreds of millions, they include uni-petrol and Agip Company now known as Oando Company, Total company Swallowed ELF, Oceanic bank and intercontinental bank e.t.c. Even the government ministries and parastals are not spared. Auditing has over the years gone considerably to a commendable length to expose various fraudulent practices both in private and public sector.

            It has become inevitably necessary to critically evaluate the role of auditors in fraud prevention particularly in the private companies. It is not misleading to categorically say here that the cause of the companies’ woes and problem has its roots from the numerous fraudulent activities perpetuated by so many of the shareholders and mangers. These managers accounted for the unimaginable amount of money running into billions of naira squandered and stored away in foreign bank accounts. The most vocal of such recent cases of fraudulent acts by banks is that of five (5) bank CEO’S operated without identified values and they are Mrs. Cecilia Ibru of oceanic bank accrued 278.20 billion, Mr. Erastus Akingbola of intercontinental bank with N210.9 billion, Mr. Sebastian Adigwe of Afri bank owes N141.86 billion, Barth Ebong of Union bank owes N73.58 billion and Mr. Okey Nwosu of Fin bank recorded N42.45 billion, who had to face the music for their appropriating temporarily bank funds.

            Since 357 of the companies and Allied matter Decree of 1990 (CAMD) requires that out registered limited liability companies both private and public must have their financial records audited annually by external auditors so appointed. It is the duty of the auditors in the cause of their work to uncover any fraudulent practice either by omission or commission.

STATEMENT OF PROBLEMS

            Since the early 80’s the country has been experiencing increase fraudulent practices in private companies despite the fact that these companies are annually subjected to audit. The bureaucratic nature of private companies causes a lot of unnecessary delays, which allows enough space and time for fraud to be conceived and perpetrated. Some of the fraudsters take advantages of this set back to explore all avenues that will help them succeed in their shameful acts. Inefficiency of company staff results in improper book- keeping system and in cases where they refuse to co-operate fully with the auditor’s, vital information may elude him and consequently he is left cross road.

            One cannot also ignore the great threat posed to be the auditor by the manipulation of money as a form of “settlement”. Nigeria’s banking sector was rocked in August, when the regulatory bank initially injected over N400 to bail out five (5) banks considered distressed. Unfortunately, MTN convocation and bank managements are generally unwilling to release details of fraud that may have been perpetrated for fear of losing their corporate image.

OBJECTIVES OF THE STUDY

       This research work is aimed at achieving the following:-

1.  To identify the causes of fraud in private enterprises.

2.  To examine the statutory principle of auditors in relation to fraud.

3. To seek how the scope of present day audits can be entered to include prevention and not only discovery of fraud.

4. To suggest solution for combating fraud in private companies.

SIGNIFICANCE OF THE STUDY

            The role of the auditor and his influence on the decisions made by users of financial statement cannot be over emphasized. Shareholders, bankers, creditors, government agencies, and private investors’ e.t.c all rely on the auditor’s report to base their investment decisions. They require that they are not being mislead by the financial statements and this assurance be provided by the auditor (external) who in his capacity is viewed to be an expert in the impartial and above all independent. The big question remains, why is fraud on the increase in private companies despite the continuous audit of financial statements? The contribution of this study is to the improvement of the role of auditor’s in the prevention and total eradication of fraud in private companies. Audit will no longer be a periodic affair but a routine exercise which will keep every employee, not only financial staff as in case of normal audit aware that any deed within and outside the working environment is being monitored.

            It is placed that at the end of this study, the following resultant benefits will accrue to companies, shareholders, other researchers and the Nigerian economy at large.

(i)   Further classification on the role of auditors in fraud prevention and detection as these had been a prolonged mis conception by many that is the duty of the auditors to prevent and detect fraud.

(ii)       Users of financial statement will after the study know whom to hold responsible for any loss/losses incurred upon reliance on audited financial statements.

(iii)      Suggest ways to make auditors more relevant in fraud prevention and detection.

(iv)      Further encirclement of available literature on the subject matter and other related works.

RESEARCH HYPOTHESES

            The following hypotheses were postulated as a guide to the researcher

Hypothesis one

Ho: Auditing cannot truly prevent fraud in public enterprises

Hi: Auditing can prevent fraud in private enterprises

            Hypothesis two

Ho: Effective auditing does not control fraud.

Hi: Effective Auditing controls fraud.

THE SCOPE AND LIMITATION OF THE STUDY

            Fraud occurs in private companies with reckless abandon. This study is to cover areas as it concerns auditors (both internal and external) and fraud prevention. The case study for this research has also been confined to the MTN communication Nigeria. MTN, whose image and status as one of the main strength of the communication in Nigerian economy has made it target point for numerous fraudster.

            From the indication the research anticipates some principal limitations to the study. Some of these limitations are:-

Time

       The time required for the completion of the study is limited and not long enough to enable the researcher carryout an elaborate study on the topic

Finance

      The researcher has limited financial resources to enable him expand the area of the study.

DEFINITION OF TERMS

Audit

             Official examination of books of records to see that they are in order

Auditing

        A process of examination of accounts of books of records of an organization/entity in order to express an opinion as to whether the records or the accounts so prepared by the organization show a true and fair view about the company’s position.

Bureaucratic

       A situation whereby employees stick to much rules, carried on according to official roles and habits. Negating tactical decisions that would have enhance organization overall performance.

Book keeping

       This is the book whereby an organization record all the transactions of the company upon which the auditors check to evaluate her performance.

Creditors

       These are set of people who lend money/fund to an organization for the purpose of running such an organization and are to be settled immediately after mortgage assets in terms of liquidation

Directors

       A director is defined by section 650 as including any person occupying the position of director by whatever name called. He is the highest body of people governing a company.

Exploit

       Use available loopholes discovered selfishly to the detriment of the entity of organizational resources

Share holders

       This means a holder of share in a company. However, in a company having share capital members generally will be allotted shares, which is to measure the financial interest such as member as in the company.

Fraud

       Irregularities involving criminal deception to gain an unjust or illegal advantage. It may be perpetrated with the intention of making money or obtaining good for it maybe perpetrated when a person deceive others by pretending to have abilities or skills that he does not really have.    

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