CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
In any business entity, whether profit or non-profit, it has set of objective. It mobilizes resources from various sources to achieve set goal at the end of the period. This is necessary to determine how well these resources have been utilized.Where there is separation of ownership from management, the owners will want to know how judiciously these resources have been used. This is the stewardship function of accounting.The function is discharged by the presentation of a report of the activities to owners by management; such report are usually conveyed by means of financial statement (Schipper and Vincent, 2003).
The following objective of financial reporting information concerning economic entities, primary financial report is useful for economic decision making (FACB, 1999, IAEE, 2008).Providing high financial reporting information is important because it will positively influence capital provider and other stakeholders in making investment credit and similar resources. Allocation decision enhancing overall market efficiency (IASB, 2006; IASB, 2008).Although both FASB and IASB stress the importance of corporate financial reporting, it is how over affected by the quality of auditing. This is due to its context specifically, empirical assessment of financial reporting inevitably including preference among myriad of constituent (Dechow and Dishes, 2002).Statement of accounting Standard (information to be disclosed in financial statement) and section 334(2) of Companies and Allied Matters Act (CAMA), provides that financial obstacle shall include; the mission of statement comprehensive income policies, statement of financial income, note to the account, auditor’s report, directors report, value added statement of five years financial summary.
The financial statement must accurately represent the underlying economic activities of the organization. It is possible to have a discontinuity between induce doubt and the organization. When this occurs, the creditability such statement induces doubt and uncertainty in the mind of the various users of the financial statement. These, therefore means there is lack of uniformity between information available to the management and information available to the investing public (Bostosan, 2004).
There are two sources of information as regard financial statement, in the book keeping (financial report) these process include:
1. Management understanding of underlying activities may not be accurately represented in financial statement and
2. Investing public understanding or perception of information represented in financial statement may be different from that which has been documented.
Corporate financial reporting is aided by auditing stem from the fact that a lot of person’s requires corporate financial reports for different legitimacy and enhance companies images lack of proper audit or carelessness on the part of the auditors in auditing financial statement of companies, have led to investors making wrong decision, as well as closure of companies, who otherwise were thought to be doing well such as Enron in the United State as well as some companies and banks in Nigeria.Corporate financial reporting is a communication of relevant qualitative and quantitative information for decision making. Management is entrusted with the legal responsibility of preparing and communicating such relevant information to the users.
However, the management does not independently carry this task, but it is the joint effort by account researchers, management auditors and the government.Financial statements make a case for reporting entity in their guest for indivisible funds.Where a reporting unit creates uncertainty in the minds of investors, it is perceived as risky.The effect is that investors demand a compensation for a perceived level of risk. This result to an increase in cost of capital of such economic unit. This is known as “capitals need hypothesis” (Choi, 1973) suggested that a prime mature for disclosure as to raise capital at the lowest cost (Cooke, 1991) posit that “a number of explanations can be advanced for the hypothesis”. In order to raise capital from the financial institutions, he says that the companies must increase their compliance with disclosure.Disclosure in financial statement determine the level of transparency of such entities.
Hitherto poor response of international investors has been adduced to lack of transparency not only of government but also of private economic sectors.Regulatory agencies such as Central Bank of Nigeria (CBN) and Securities and Exchange Commission (SEC), has been perceived as ineffective.This perception has been accentuated especially in situations where such banks have been given a clean bill of health by auditors. What this translates to be an economic environment characterized by lack of trust.In the last decade, studies have shown that the auditing profession has had to deal with a lot of challenges than it has done in its lengthy history which spans over one hundred years (Smith, Machosh et al, 2010).
1.2 Statement of Problems
Principally, management activates are conveyed by means of financial statements. Where these financial statements introduced elements of doubts in the minds with the effect that the continued survival of the firm is threatened as it is starved by needed funds.
1.3 Research Questions
a. What is the relationship between internal control system and corporate financial reporting?
b. What is the relationship between board size and corporate financial reporting?
c. What is the relationship between audit committee and corporate financial reporting?
d. What if there is relationship between auditor’s independence and corporate financial reporting?
1.4 Objectives of the Study
Any organization that seeks to be successful must take pains to present a financial report devoid of fraudulent practices, as this improves the credibility of the company.Any effort aimed at improving corporate reporting activities with has effect of enhance investors’ confidence as well as increase economic resources.The key object of this study is to evaluate corporate financial reporting, how it has been affected by auditing as well as challenges of auditing practices over the years.
Other objective includes:
1. To ascertain if there is a relationship between internal control system and corporate financial reporting.
2. To ascertain if there is a significant impact of board size on corporate financial reporting.
3. To enquire out if there is a significant relationship between audit committee and corporate financial reporting.
4. To examine the relationship between auditor’s independence and corporate financial reporting.
1.5 Statement of Hypotheses
Hypothesis OneHo: There is no significant relationship between external control system and corporate financial reporting.
Hi: There is a significant relationship between external control system and corporate financial reporting.
Hypothesis TwoHo: There is no positive relationship between board size and corporate financial reporting.
Hi: There is a positive relationship between board size and corporate financial reporting.
Hypothesis ThreeHo: There is no significant impact of audit committee on corporate financial reporting.
Hi: There is a significant impact of audit committee on corporate financial reporting.
Hypothesis FourHo: There is no significant relationship between auditor’s independence and corporate financial reporting.
Hi: There is a significant relationship between auditor’s independence and corporate financial reporting.
1.6 Significance of the Study
The trust worthiness “of the research depend in what the counts as knowledge” (Lincoln and Guba, 1985). This research work on its conclusion together with solution of finding may arise. This will prove useful to some particular group of persons of otherwise for various needs some of the beneficiaries are shareholders. The shareholders are interested in affairs of the company. They want to know what the affair of the organization owns which are called asset, what the organization owes is called liabilities. They are which guarantees the dividend at the end of the financial year.
- Public: The public have interest, particularly those resident in the immediate business environment they use accounting information to known the rate of profit, the organization is making by exploiting information to negotiate with the company to provide welfare facilities like school, hospital, scholarship and employment to their youth.
- Potential Investors: Some business men have millions of naira to invest. Such investors in accounting information are to determine the most profitable organization. Where they will invest their money and get good returns.It would also be useful for auditors in the sense that it would expose some of the issues that have to divided the auditing profession over time, and to provide answer to some pertinent question as regards auditing practice in Nigeria.
1.7 Scope of the Study
The scope of this study focuses on corporate reports on manufacturing companies and other financial institution in Nigeria. The subject matter of the study is corporate financial reporting and challenges of auditing practice; corporate of interest in the will of those item in sections 334(2) of CAMA 2004.The time period for this study is between the period of pre-consolidation and post consolidation. Geographically, this study will be limited to Benin metropolis in Edo State capital.
1.8 Limitations of the Study
A subject of the nature entails a lot of work, however, the researcher’s limitation were low respondent, found it difficult to spare the researcher their time was also the problem of interest material as most of its required to be downloaded. The website were requesting for membership code as they were only available to existing members of their book. This proves to be a major constraint to the study.
