CHAPTER ONE
INTRODUCTION
BACKGROUND OF THE STUDY
The preparation of stewardship report from the accounting
point of view is the role of management, who oversees the affairs of the
business organization on behalf of the owners usually the shareholders. This
stewardship report represents the financial statements covering the operating
performance and the financial position of a company. It is usually prepared by
the directors and addressed to the shareholders as a fulfilment of their agency
responsibility. Suffice to say that if all the facts concerning financial
transactions were properly and accurately recorded, and if the owners and
managers of business enterprises were entirely honest and sufficiently skilled
in matters of accounting and recording, there would be little need for
independent auditing. However, human nature being as it is, there probably will
always be a need for the auditor to ensure the provision of dependable
financial information which is essential to the very existence of our society
and the business world. The goal of the providers of accounting information runs
directly counter to those of the users of the information. Implicit in this
line of reasoning is the recognition of the social need for independent
auditors, individuals with a professional competence and integrity who can tell
whether the information on which investors can rely constitutes a fair picture
of what is really going on in an enterprise. Good accounting and financial
reporting is the basis for society to allocate its resources in the most
efficient manner. The contribution of the independent auditor is to give
credibility to financial statements for this singular fact (Oyadonghan and
Ibanichuka 2014). Credibility in this usage means that the financial statements
can be believed; that is, they can be relied upon by outsiders, such as trade
creditors, bankers, stock holders, government and other interested third
parties. Therefore Credibility is “The quality of being generally accepted and
trusted” (Oxford Advanced Learner’s Dictionary of English). Audited financial
statements are now the accepted means by which business corporations report
their operating results and financial position. The word audit when applied to
financial statements means that the statements of financial position, income
and changes in equities /retained earnings are examined with an audit report
prepared by independent public accountant, expressing a professional opinion as
to the fairness of the company’s financial statements. On the other hand,
Confidence is the feeling that you can trust, believe in and be sure about the
abilities or good qualities of something or somebody. Audit competence can only
be achieved if public confidence on audit reports can be improved
significantly. Both credibility and confidence goes hand in hand and each
variable impacts on each other to achieve the audit quality and competence the
users of financial statement desires. However, management failure arising from
co-operate governance failure over the years had contributed to the loss of
credibility in audit reports. The solution to this problem of credibility in
financial and audit reporting lies in appointing an independent person and
public confidence in audit reports is enhanced when the profession encourages
high standards of performance and conduct on the part of all practitioners‟.
According to Olagunju (2011), for an audit to be credible and reliable, it must
be performed by someone, who is independent and cannot be influenced by
position, power which will affect its own conclusion. Auditor independence
helps to ensure quality audit (Oyadonghan and Ibanichuka, 2014). The UK
financial Reporting Council (UKFRC) has undertaken an extensive reform on audit
quality and in February 2008 released the audit quality frame work to improve
i.e. the confidence and credibility in audit. They are includes the culture
within an audit firm, the skills and personal qualities of audit partners and
staff, the effectiveness of the audit process; the reliability and usefulness
of audit reporting; and factors outside the control of an auditor that affects
the audit quality (Linberg and Beck,2011). The aim of this research work is to
improve audit reliability and public confidence, by utilizing the significance
of confidence and credibility as approaches to improving audit competence. One
of the cumulative negative effects that window dressing (creative accounting)
had was the collapse of some USA giant companies such as Enron; world-com,
Global Crossing, Tyco, with a host of others in Nigeria (Linberg and Beck
2011). The outcome of the investigations on the collapse of these firms shows
that they have being window dressing their accounts with false statements of
financial positions for years. This has affected the confidence of the public
on the favourable audit reports these companies had being having for the affected
periods. Therefore it is good to determine what measures can contribute to
improving public confidence in audit reports in Nigeria, and to establish some
causes responsible for the lack of public confidence in audit report.
1.2 STATEMENT OF PROBLEM
Bushman et al., (2011) advanced that the information quality
increases with the percentage of outside directors. Similarly, (Beekes et al,
2011) noticed that the board independence allows disclosing information of good
quality by the firms in Nigeria. In other contexts, (Firth et al., 2007)
indicated that the presence of independent directors improves the earnings
quality of firms. In contrast, other studies suggested that the independent
directors are not enough competent to control the managers and their presence
in the board has no effect on the reporting quality. In addition to that, the
corporate governance literature has emphasized the need to separate the
positions of CEO (chief executive officer) and board chairman to guarantee the
board independence and improve the firm transparency (Jensen, 1993). Byard et
al., (2009) indicated that the presence of a CEO who serves also as the board
chairman is associated with poor quality of financial information.
Nevertheless, other authors did not detect a significant association between
CEO duality and information quality in various contexts of studies (Ahmed et
al., 2009; Petra 2007). (Beasley, 1996) argued that the probability of
detecting financial statement fraud in the American firms decreases with the
percentage of outside directors. (Peasnell et al., 2012) and (Klein, 2012)
revealed that the independent board mitigates earnings management. Based on the
above, this study is aiming to answer the following statement, which represents
the study question: “Do Corporate Governance Practices have impact on public
confidence in Financial Reporting Quality in Nigerian firms?Poor application of
corporate governance, which is considered one of the most important pillars to
enhance transparency , increase control and supervision on management and
reduction fraud committed by some executives and companies Boards of Directors,
which may cause damage to shareholders, investors, stakeholders, and company’s
reputation as well as. The purpose of this study is to investigate the impact
of corporate governance on public confidence in financial reporting.
1.3 AIMS OF THE STUDY
The major purpose of this study is to examine the impact of
corporate governance on public confidence in financial reporting. Other general
objectives of the study are:
To examine the importance of financial reporting in
corporate governance
To measure the effectiveness of corporate governance Code in
relation to minimization of earnings management
To examine how the impact of corporate governance on public
confidence in financial reporting.
To examine whether corporate governance help in building
public’s confidence in financial report.
To examine the relationship between corporate governance and
public confidence in financial reporting.
To examine the problems of good corporate governance in a
business firm.
1.4 RESEARCH QUESTIONS
What is the importance of financial reporting in corporate
governance?
How is the effectiveness of corporate governance Code in
relation to minimization of earnings management?
What are the impacts of corporate governance on public
confidence in financial reporting?
Does corporate governance help in building public’s
confidence in financial report?
What is the relationship between corporate governance and
public confidence in financial reporting?
What are the problems of good corporate governance in a
business firm?
1.5 RESEARCH HYPOTHESES
Hypothesis 1
H0: There is no impact of corporate governance on public
confidence in financial reporting.
H1: There is a significant impact of corporate governance on
public confidence in financial reporting.
Hypothesis 2
H0: There is no significant relationship between corporate
governance and public confidence in financial reporting.
H1: There is a significant relationship between corporate
governance and public confidence in financial reporting.
1.6 SIGNIFICANCE OF THE STUDY
The study importance stems of its attempt to highlight the
importance of corporate governance and principles, in enhancing public
confidence in financial reporting in business entities since these companies
are deemed one of the most important sectors in of capitals attracting process
that requires enhancing their position among other sectors in Nigerian market
through proving their credibility and transparency to increase shareholders
trust and other parties. Geographically, the study will cover the global view
on issues of public confidence and credibility in audit and financial
reporting. Cases of window dressing and collapse of corporate governance as it
negatively impacted on audit credibility is also covered, both in the global
and Nigerian perspective. The study would serve as reference materials to other
researchers who may want to carry out more research on this or related topic.
The study would broaden the researcher knowledge on the subject
1.7 SCOPE OF THE
STUDY
The study is based on the impact of corporate governance on
public confidence in financial reporting, a case study of Unilever plc, Lagos
state.
1.8 LIMITATION OF STUDY
Financial constraint– Insufficient fund tends to impede the
efficiency of the researcher in sourcing for the relevant materials, literature
or information and in the process of data collection (internet, questionnaire
and interview).
Time constraint– The researcher will simultaneously engage
in this study with other academic work. This consequently will cut down on the
time devoted for the research work.
1.8 DEFINITION OF TERMS
Corporate Governance: Is the system by which companies are
directed and controlled. Boards of directors are responsible for the governance
of their companies. The shareholders’ role in governance is to appoint the
directors and the auditors and to satisfy themselves that an appropriate
governance structure is in place.
Public Confidence: Trust bestowed by citizens based on
demonstrations and expectations of: (1) Their government’s ability to provide
for their common defence and economic security and behave consistent with the
interests of society; (2) Their critical infrastructures’ ability to provide
products and services at expected levels and to behave consistent with their
customers’ best interests.
Financial Reporting: Financial reporting is the process of
producing statements that disclose an organization’s financial status to
management, investors and the government.