EXTERNAL AUDIT FUNCTION AND FRAUD MANAGEMENT

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EXTERNAL AUDIT FUNCTION AND FRAUD MANAGEMENT

CHAPTER ONE

INTRODUCTION

Background of the Study

Management of most banks is detached from owners (Principal-Agency Theory). Merkling(1976) in Omokhudu and Omoye (2012) define the agency relationship as a contract under which one party (the principal) engages another party(the agent) to perform some services on their behalf with the principal delegating decision making authority to the agent. As such the owners or shareholders of most banks are not part of the daily operations of the organizational activities look forward to the realization of their goals.

There are however, other interest groups who depend on the organization to realize their own respective goal. The suppliers, stock brokers, lenders, government and so on are all part of the stakeholders, since these owners are not involved in the daily operations of the business, they may be doubtful of what the management may present to them as report of the organizations performance for the purpose of reliance on the management report, the stakeholders need confirmation report, the stake holders need confirmation or assurance by an independent party known as the external auditor. In the light of this, customers need the assurance of the external auditors, who are greatly depended upon, since they are expected to adopt the attitude of professional skepticism. This suggests that even though the auditors are not mainly, finding out fraud in the financial report, they should recognize the possibility of its existence. This is one of the pronouncements in ISA 240 which was further made stronger and actionable by the introduction of the Sarbanes Oxley of 2002.

The Act was introduced in 2002 following the failure of Enron, scandal which was cleverly hidden from the external auditors of Anderson, leading to colossal losses by the stakeholders, all over the world. However not all the stakeholders expects from the external auditors could be legally enforceable as in the case of Re-Kingston cotton mill of 1896 in which the external auditors were adjusted as watchdog and not blood bound (Millichap, 2008). Thus, auditors are bound or liable within the limits of the statutory requirements contrary to the perception of the stakeholders. The divergence between stakeholder’s perceptions of the auditor and the statutory requirement is the expectation gap.

There are so many problems which surrounded this, on the strength of this multiple problems, it is pertinent to have proper examination of the responsibilities of the external auditors to public and private companies to know the effects of non- compliance by the auditors on the corporate performance of an organization. Unarguably, stakeholders look up to the external auditors as one who has the professional competence and whose advise or opinion is held sacrosanct for investment decision.

Though the duties of the auditor of the public companies are expressly stated, it is pertinent that an agreement letter which states the duties to be performed be given to auditor of banks; statutory requirement or engagement letter becomes the springboard on which the organization success or failure is viewed visa-avis the auditor’s action. More importantly is that the stakeholders especially depositors in the banks still look up to the external auditors’ reports to assure them of the safety of their deposits and answers other going concern questions on the banking industry. Because of the perception of the stakeholders on the responsibilities of external auditors in this regard, this paper seeks to review the roles of external auditing in assisting banks increase their deposits thereby enhancing value creation to stakeholders.

Statement of the Problem:

External auditing functions are seen as powerful tool that could aid corporate performance and infact existence. The sensitive nature of the banks especially in Nigeria has put more demand on external auditing reports as most depositors look up to the yearly assurance reports affirming and reaffirming the viability or otherwise of the banks. In the early 1990’s Nigeria experience the collapse of almost eighty (80%) of her first generation banks like the Cooperative and Commerce bank(CCB), African Continental Bank(ACB), Orient Bank and a host of others. Reports have it that a good number of depositors lost their deposits, other forms of investments in the banks and even lives. Again, between 2008-2009, the Central Bank of Nigeria in a bid to save the banking public floated the Asset Management Company of Nigeria (AMCON) to rescue about five banks in Nigeria which were declared weak whose assets and depositors’ funds were in the negative balance. Undoubtedly, these banks had external auditors who had conducted annual auditing on their accounts and certified the banks as being healthy. Studies have been carried out on the general role of the external auditing in areas of fraud prevention in the banking industry but few or none has been conducted on the role of external auditing on encouraging the growth of banking business in Nigeria with specific interest on deposit mobilization and hence this study. Other matters that could arise remains:

• Whether the perceptions of the stakeholders are in line with the statutory responsibility of the external auditor and how could the auditor reposition himself to address this issue.

• Whether the directors actually prepared and presented the true financial statement or whether certain materials facts were hidden from the external auditors on which he bases his opinion.

• Whether the auditor has exercised enough due diligence that could support his quality assurance reports.

Objectives of the Study:

The primary objective of the study is to examine the roles of external auditors in the growth of banking business in Nigeria with special emphasis on deposits mobilization.

Specifically, the paper will:

a. Ascertain the level of liability of the external auditors to third parties and how his role can influence deposit growth.

b. Examine the degree of responsibility of external auditors as specified in the relevant statutes and how it can affect the quality of financial reports.

Research Questions:

 How are the external auditors liable to third parties and how can the roles influence deposit growth?

 What is the degree of responsibility of the external auditors as specified by statues and how can these affect the quality of financial reports?

Research Hypotheses (Null):

 External auditor’s liability to third parties does not influence deposit growth.

 The responsibility of the external auditors does not affect the quality of financial reports.

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