*Economics/2.Finance and Banking

BABALOLA, Yisau Abiodun (PhD student)

East Ukrainian National University, Lugansk, Ukraine

THE AUDITED ACCOUNTING REPORTS AND CORPORATE INVESTMENT DECISIONS IN NIGERIA

Auditors are Chartered Accountants saddled with the responsibility of expressing an opinion on a financial statement prepared by an entity. The auditors are expected to see to how well the financial statement is in conformity with the management’s policies, accounting standards, rules, laws, regulations, principles, etc. have been prepared. There are some ethical standards expected of an Auditor in the course of performing his duty. The International Auditing Standards (IAS) stipulates the following: independence, objectivity and competence. Audit report is formed at the end of an audit work. This sends signals to the users of such financial report and the type of decision(s) to be made. The problem associated with the capital market of each country is peculiar to it. The financial accounting information system most often is snubbed by the preparers to mislead and misinform the potential investors and all other users of the financial system. The capital market witnessed some itch when some companies such as Cadbury and Unilever engage in some financial misalignments that were so costly to its corporate heritage and undermine its overall existence. The most recent of Nigeria’s case was in the Central Bank’s Audit carried out in the Banking sector. The Audit exposed about five (5) banks of which their non performing loan was N1.2 trillion Naira out of the total banking system’s loan of N2.4 trillion (US $15.6bN).

The audit programme set up by the Central Bank of Nigeria has gone a long way in revealing the inconsistencies of the financial system in applying the required accounting system. One also wonders how effective the Corporate Governance is in the Nigerian banking Sector in particular and the Nigeria corporate firms in general. Virtually all the sectors are blushing at the audited financial reports which supposed to be a guide to all transactions. The bedrock of Accounting (Dr & Cr) seems to be fading away in the system. The investors find it difficult to work by the analysts comment and are afraid of what the financial reports are portraying. The current CBN’s Governor in respect of Sanusi Lamido Sanusi is unveiling all the accounting frauds being perpetrated in order to maintain: a good liquidity position; Protect investors /shareholders fund; Maintain Corporate Governance; Restore investors lost confidence in the financial system; Restore reliance on financial reporting; Maintain and sustain good accounting information system in the banking sector; Sustain ethical professional standards (Audit).

Despite all the above, a quest for questions such as: Did these banks not submit their financial reports to the Central Bank of Nigeria before issuing it to the public? Why did the Central bank of Nigeria approve their statements and on what ground was it approved? Why are Auditors not qualifying as appropriate? Is Corporate Governance in place at all and if yes, how effective and efficient is it? From a theoretical standpoint however, the posistive accounting theory will suffice. ‘Positive’ Agency theory was developed and utilized by Jensen and Meckling (1976:306) to analyze the relationship between the owners of the organization and the managers within the nexus of contract. Prior to this period, Italian Professor Aldo Amaduzzi in 1949 published a book entitled, Conflitto ed equilibrio di interessi nel bilancio dell’impresa’ (translated in English it means, Conflict and Equilibrium of Interests in Corporate Financial Statements), in which he analyzed financial statements (and their content) as the equilibrium outcome of a conflict of interests between different corporate stakeholders. Due to language barrier, his work was not considered as mainstream (Melis, 2007: 55). ‘Positive’ Agency theory is concerned with resolving the problems that can occur in agency relationships (Jensen and Meckling, 1976:306). They define agency relationship as a contract under which the owners of the organization (principal(s)) engage the manager (agent) to perform some service on their behalf. Under this arrangement, the owners delegate some decision making authority to the manager. It is presumed that both parties are utility maximizers, with varying philosophies and this could result in divergent and misaligned interest between them. Owners’ would want to maximize net present value of firm while the managers would want to maximize utility, of which income is part. Most cases, the agent will not always act in the best interests of the principal. The agents could also hide information for selfish purpose by non-disclosure of important facts about the organization (Barako et al., 2006: 5). Owners face moral dilemmas because most times they cannot ascertain or evaluate the decision made by their agents (Barako, 2007:114). This conflict of interest results to “agency problem” a.k.a. “principal-agent problem” whose resolution incurs agency costs (Al-Shammari, 2005:36).

On December 2, 2001 Enron Corporation of Houston filed for bankruptcy code. An earthquake rumbled through U.S and global stock market as the shares of what had been one of the hottest companies around the seventh largest U. S. firm dropped like a stone. By mid- January of 2002 the New York Exchange Stock had initiated steps to de-list Enron form its trading floor as its shares which only a year before had traded in excess of $80 per share, later sank below a dollar The saga is as a result of asymmetric information that led to window dressing which was unknown to the shareholders. Besides, the world is facing a down turn which could have been avoided just by allowing relevant information to be made known to the users through the financial statements. The United States of America financial institution suffered a great collapse. The three major financial institutions which were heavily relied upon by investors are: Merrill Lynch; Lehman Brothers and AIG. Merrill Lynch happened to be one of the Wall Street Pillars who encouraged both the rich and poor to invest in the financial market. Merrill Lynch as a brokerage firm reported four straight quarterly losses. The firm battled to meet up with its credit market which was tied to mortgages that had lost tremendous values. On September 14, 2008, it was purchased by the Bank of America so as to salvage the crises. It was thereafter reported that the U.S Attorney general Eliot Spitzer described what was found in the company as a “shocking betrayal” and “a major breakdown in the supposed separation between the banking and research divisions (FOCUS, 2008). It should be noted that had it been that the firm’s financial report was not misleading; it would not have been a shock to the Attorney General and the investors. The above revelation led to a great panic which led to a great fall in the securities prices.

Lehman Brother: This firm was not as lucky as Merrill Lynch which was bought over by the bank of America on February 1, 2007 Lehman announced a repurchase of 100,000,000 shares representing one fifth of all shares outstanding. This however led to a fall in its share market price value. At a point, shareholders held stocks which had depreciated for more than eighty percent (80%). While the top insiders in the company who knew what was happening walked away with their winnings. The company went down the drain without remedy. Insider Dealings which is an element that makes a capital market inefficient existed. Also the American International Group (AIG) also had its roots in the mortgage market. It was the world’s largest Insurance Company and a leading stock in Dow Jones Industrial Average. The distress in the mortgage institution caused AIG to manipulate its financial statement. The dubious transactions and improper accounting report earned it an evident payment of $126 million fine to Securities and Exchange Commission and Justice Department for deals that allegedly violated insurance accounting rules. There were many other offences committed by AIG as against principles and standards. Despite all the disclosure requirements by International Accounting Standards (IAS) as published by the Boards established for the purpose the impact of information on capital investors has been either positively or negatively felt. As regards the above it could be seen that window dressing and asymmetric information was the order of the day. The accounting information system instituted was not followed neither was their compliance with the accounting standards. At it is often said that information is a tool used in investment decision. Various countries in the world had their experience of financial misstatement of which Nigeria is not an exception. This Day paper (2002) had a caption “Union Deceives investors, overstates profit”. The company is a listed company on the Nigerian Stock Exchange (NSE) that overstated its profit in year 2000 by N317.1 million, a development similar to what happened to Lever Brothers Nigeria Plc (now Unilever Nigeria Plc) in 1997. The company actually recorded a pre-tax loss of N104.83 million in 2000 but deceived its shareholders and investors by reporting a pretax profit of N244.38 million, a profit overstatement of N349.21 million.

From the review of the literatures so far, it would be discovered that there is a vacuum yet to be covered as far as Accounting Information System is concerned in the Global Capital Market which is also the focus of this research work. Despite laws, policies, conventions, standards ethical codes of conduct put in place, the preparers of financial statements in the capital market seems to be blushing or rather not conforming or complying with the Accounting information in existence and therefore affecting either positively or negatively the decisions the capital market.

References

Nigerian Exchange News Central Bank of Nigeria Sacks 5 Banks CEO’s appoints replacement. August 17, 2009 http://www.nex.com/bd/; Vanguard CBN hammers 3 more banks http://allafrica.com/ stories/201003241118.html; This Day: Nigeria: A Review of CBN’s Financial Reform Bamidele Adekunle 9^th of May 2010 http://allafrica. com/stories/ 201005100563.html

Divid N. Ricchivte Fig. 1.5 Pg 21 Auditing Concepts and Standardswww.guardiannewsngr.com

ICAN (2009), “Advanced Auditing and Assurances Examination Study Pack” Institute of Chartered Accountants of Nigeria, Lagos.