THE OBSERVANCE OF PROFESSIONAL ETHICS BY AUDITORS IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1          BACKGROUND OF THE STUDY

In the awake of financial crises in late 1990s, the international community emphasized the major role that the observance of international standards and codes of best practices can play in strengthen national and international financial systems. The international community called for the preparation of reports in the observance of standard and codes (ROSC) an assessment of the degree to which an economic observes internationally recognized standards and codes.

Auditing, as a professional body of auditors, has its own ethics, which specify the acceptable code of conduct, behaviour or action expected of the members in their interactions and dealings with one and another and with other members of the society in which they operate.

In recent times there have been a scandalous failures of corporate giants and professional bodies which clearly shows the absence of integrity, objective and independence in the audit profession which has lead to lost confidence in the minds of the public by the true auditors function.

These failures have resulted to scrutiny of work of an auditor and the ethical issues raised concerning the work of an auditor both within and outside the profession. Following the collapse of the U.S giant company through unethical accounting practices. In the case of Enron in the United States, a top accounting firm. Andersen consulting was indicted for having contributed to the collapse of the giant company. The auditor’s themselves became subjects of audit and there were wide allegations of conflict of interest. It acquired world wide relevance in an editorial entitled “Enron’s collapse and accounting profession”. The Nigeria Tribune in its edition of February 8, 2002 and also, in the early part of 2003, the Auditor General of the Federation, Vincent Azie had released an audit report in which he indicted various departments of state for sordid financial practices. The report pointed to leakage, wide spread corruption and failure of accounting officers in reporting finacial activities. Also, in Nigeria, the African Petroleum, Union Dicon Salt and Nicon Insurance case in 2002, the Institute of Chartered Accountants of Nigeria (ICAN) had a case to query two auditors in respect of work done for these three companies namely African Petroleum (AP) Union Dicon Sale and Nicon Insurance. The privatization of the AP had generated so much public uproar when it was discovered that the company owed a debt of N26 billion which the external auditors had failed to disclose. The auditors had however sought to shift the blame to the directors of the affected company alleging that they failed to make necessary facts available to the auditors.

It is worth noting for years, accountants have been routinely held responsible for the distress in the banking and manufacturing sectors. Despite favourable reports by auditors, companies still go down, raising ethical questions about the work of accountants. The widespread downturn of fortunes within the Nigeria economy has brought the auditors under a different search light. However, ICAN’s response with condemnation of unethical practices has been to define the integrity of its members, it has had cause to argue that over 90 percent of the causes resulting in distress were outside the purview of the auditors. The challenge is for ICAN to strengthen its regulatory and disciplinary functions, and ensure adequate commitments to international accounting standards.

Auditors as professional men and women whose calling demand placing public interest above personal interest can only be achieved when auditors adhere strictly to the basic fundamental and ethical standards that regulates their relationship with the public as well as the company being reported. This will enhance public confidence in the reports given by auditors. The regulating bodies in an attempt to guarantee this, has made compliance with ethical standard compulsory and had also designed complaints and disciplinary process to deal with any errant member who violates the member codes of conduct.

All recognized professions have developed codes of professional ethics. The fundamental purpose of such codes is to provide members with guidelines for maintaining a professional attitude and conducting themselves is a manner which will enhance the profession stature of their discipline.

Professional ethics as a public accounting as in other profession has developed gradually over the years and still in a process of change as the practice of auditing itself changes. To be effective, a body of professional ethics must be attainable and enforceable. It must consist not merely of abstract ideals but of attainable goals and practical working rules which can be enforced.

 

1.2          RESEARCH QUESTIONS

This study is designed to find solutions to the following questions:

1. Are the codes of conduct for professional auditors effective?
2. How effective is the enforcement mechanism of the codes of conduct by the regulatory bodies?
3. Do pressure and undue influence undermine ethical moral value of auditors and their independence?
4. Are the audit practice in Nigeria regulated by laid down ethic rules?

 

1.3          OBJECTIVES OF STUDY

The objectives of this study is to assist us:

1. To know the effectiveness of the codes of conduct for professional auditors.
2. To know the effectiveness of the enforcement mechanism by the regulating bodies.
3. To know whether pressure and undue influence undermine ethical moral value of auditors and their independence.
4. To know whether audit practices in Nigeria is regulated by laid down ethical rules.

 

1.4          SCOPE OF THE STUDY

The study will cover five different users of audited financial report and five auditors regulating bodies. These include;

1. Government
2. Public
3. Investors
4. Shareholders
5. Management
6. Institution of Chartered Accountants of Nigeria (ICAN)\
7. Securities and Exchange Commission (SEC)
8. Central Bank of Nigeria (CBN)
9. Nigeria Accounting Standards Board (NASB)
10. National Pension Commission (NPC)

It is important to note that our research topic is indicative of our scope, because of the broadness of the concept of professional ethics, so our study would be limited to the observance of professional ethics by auditors in Nigeria only some questionnaires will be administered to the above users of audited finacial reports and the regulating bodies. The question naira will be administered on the basis of the following assumptions:

(a)           That users of audited financial reports and the regulations are aware of the existence of the professional ethics the auditors are expected to comply with.

(b)           That the users of audited financial reports and the regulators are aware of the effects of compliance and non-compliance to the existing professional ethics.

 

1.5          SIGNIFICANCE OF THE STUDY

This study is carried out to know whether auditors actually observe and comply with codes of professional ethics and also the level of compliance. It is expected that the results and recommendations from this study will assist auditors know the essence of professional ethics overbalance. Assist regulators in the profession to strengthen their compliance and enforcement mechanisms, regulatory bodies. Assist in maintaining and enforcing continuous professional education of professional ethics among members by the professional bodies.

This study will also be useful for further research.

 

1.6          STUDY CONSTRAINTS

A topic of this nature being related to audit and ethics entails a lot of work so there was time constraint and also material and financial constraint. Some other constraints include:

1. Delay response by the appropriate authorities.
2. Non disclosure of real code of conduct being use by some management of enterprise.
3. Incomplete data as kept by some organizations.
4. Geography coverage was not wide due to transportation cost.

 

1.7          THE RESEARCH HYPOTHESIS

There will be need for the collection of data and statistical test in this because all the information needed will not be available from secondary source, hence the need for statement of hypothesis.

In this research project, four hypotheses are to be tested;

H₀ –         Is the null hypothesis

H₁ –         Is the alternative hypothesis

HYPOTHESIS 1

H₀ –        The code of conduct for professional auditors are not effective.

H₁ –        The codes of conduct for professional auditors are effective.

HYPOTHESIS 2

H₀ –        The enforcement mechanism of codes of conduct by audit regulatory bodies are not effective.

H₁ –        The enforcement mechanism of codes of conduct by the audit regulatory bodies is effective.

HYPOTHESIS 3

H₀ –        Pressure and undue influence does not undermine ethical moral value of auditors and their independence.

H₁ –        Pressure and undue influence undermine the ethical moral values of auditors and their independence.

HYPOTHESIS 4

H₀ –        Audit practice in Nigeria is not regulated by laid down ethical rules.

H₁ –        Audit practice in Nigeria is regulated by laid down ethical rules.

1.8          DEFINITION OF TERMS

In this section, some terms were technically used, so below is the definition of the terms in order to have a clear meaning or interpretation of the terms.

AUDIT

An audit is an independence examination of, and expression of an opinion on the financial statement of an enterprise so as to give a true and fair view of the financial statement for the financial period.

AUDITOR

Is the independent examiner who carries out an audit activity.

ETHICS

A set of rules and standards which governs the conduct of members of a profession.

PROFESSION

A calling that requires special training or skill or a body of persons engaged in a calling.

INTEGRITY

The quality of being honest and having strong moral principles, utter sincerity, avoidance of deception.

QUESTIONNAIRE

A means in which questions are answered by the respondents and which the respondent is expected to complete.

CODES OF CONDUCT

Guidelines or a set of standards that members of a particular profession agree to follow in their work.

AUDITOR REPORT

A written document of an auditor findings together with the auditor professional opinion regarding the true and fairness of financial statement.

EFFECTIVENESS

The extent to which objectivity is achieved and the relationship between the intended impact and the actual impact of an activity.

11. CAPITAL STRUCTURE AND MARKET VALUE OF COMPANIES
12. Credit Management And Bank Lending.

CHAPTER ONE

1.0 INTRODUCTION

Financial analysis is a procedure for preparing and reporting reliable information concerning transaction.

Financial resource in any economy should be adequately mobilized, taking into consideration the crucial role of finance in the economic development.

Nwankwo (1993:p.2) stated that finance resourced have been considered a very important factor in the economy development. Consequently, the mobilization of resource has been defining a criteria in the achievement of rapid econ0mic growth in any economy. The first step for resources mobilization for the development purpose if the mobilization of financial resources, which will lead to the capital formation. Capital formation required the release for domestic goods and service for real investment or the import of resources form outside or both.

Ojo and Adewumi (1989:P.10) . They emphasized the role of financial resources and pointing out that the finical institution offers an efficient institutional mechanism through which resource can be mobilized and directed to less essential use for more productive alternatives. The writer contention here is that the efficiency of any financial system particularly in a developing economy like Nigeria depends on the extent of which the financial information role is effectively and efficiently discharge with reference to the economic good of the country and the objective of the institution itself.

According to Racheal 91984:p.478) , the primary function of the commercial bank is the extension of credit to worthy borrowers . it has been noted that commercial bank is the most important institution n the mobilization of funds.

That further more Khat Khate and Racheal (1984:p.516) , while enacting the importance of resource mobilization stated that commercial bank are the most relevant institution in the developing countries to encourage and mobilize savings and also to charnel such saving into a productive investment . First because of their network of office , second because commercial bank through normal credit operation often activate savings which are lying idle elsewhere and third because the bank are highly liquid and thus attract savers.

Oji (1984: P9), projected at Nigerian case opined that, the commercial banking system be used as a representative since it constitute the largest single component of about 85% of all the institutional savings in the system. Mayor (1982:P 13) further stressed that there are two main reasons why the commercial banking system is the most important financial intermediary.

Firstly the total amount of deposit in the commercial banking system has the capacity to create deposit demand resulting from lending activities.

Since demand deposit constitutes a large sum of the money supplied, the banking system is able to expand the nation supply of money. The consent that commercial bank need liquid asset especially the short term asset that an be converted into cash loan accordant to him constitute the largest amount of asset.

Good bank lending ensure high profit level, ensure greater return and have underscore of meeting the social responsibility to he benefit of the society while in the other way bank lending can affect the bank negatively in various way for instance, it might take a great chance of their annual profit which the bank need to stay in business with . This and the indiscriminate extension of loan although within the credit guidelines without proper supervision of such loan and account have led to an increasing tend in the existence of bad dept.

The bank has failed in the implementation of various checks against bad debt and has tended to forget every loan committed the moment the contract has been concluded. The author contention here is that the cause of bad debt is due to improper supervision and management of loan granted. Thus study is been carried with the Ecobank plc as the case of study

1.2 THE BRIEF REVIEW OF THE BANK

Ecobank plc was incorporated on the 29^th of October 1990 and was granted license to operate as a commercial bank on the second of January 1991. The bank opened for business on the 2^nd of April 1991 with and authorized and fully paid up capital of # 50 million (fifty million) . The equity based was latter increased to # 100 million and by March 1995 it has reached 200 Million Naira. It has as its headquarter and registered office at Plot BC, Okigwe Road, Ugwu Orji Owerri, Imo state Nigerian. Currently the bank has branched in the country and correspondent bank in London, Norway and United state of America

1.3 STATEMENT OF PROBLEM

The commercial banking system shares very important characteristics with other members of the financial sector and the rest of the business community. It desired to maximize profit. Clem (1994: P.4) , commercial bank are profit seeking enterprise as such it share with other business the same set of expectation concerning the health of the economy . it is on this light that it made loan available to borrowers on interest which is a source of profit to the bank. Alongside, the growth the credit sector is the increasing high incidence of bad debt due amongst others, to poor management. Ecobank plc like most commercial bank ahs recorded high incidence of bad debt and have one on the year declared losses. For instance in 1994, he bank sustained a net loss of 112, 153 Million , resulting from the fact that the bank net portfolio is [predominantly not performing ( chairman annual report 1996: P.28)

In 1995, the bank made a profit of # 87, 879,000, after the amount of # 1, 836,645 has been deducted as the provision for the bad debt. Added to 130.481, 720 revised provision in 1994 at the instance for the central bank of Nigerian and those for the proceeding years the bank provision for the bad debt rose to a staggering amount of # 134, 318, 380 (chairman report 1996, P 20 – 21).

Giving the phenomenon of bad debt and the consequent loss been declared by the bank, there is therefore a need to study the credit management of the bank with a view to attained an insight into how best to reduce the incidence of bad debt. There has been a conferrable concern showed by the management of the bank on this because the affect on the profitability of the bank and also affect and limits its expansion.

1.4 THE PURPOSE OF THE STUDY

As the bank sector expands with the growing complexity of the Nigerian Economy, it has been observed that the amount of bad and doubtful debt of the bank, which has contributed, to distress nature of some of the bank has been risen. The question that borders the mind is giving the management expertise of the bank the various guideline as regard to lending, why did such lending be regarded as bad debt..

In the light of the forgoing, the purpose specifically which are to be find out include

Does the bank has definite loan policies

Who are held responsible for making loan policies for the bank

If there is actual a significant relationship between the bank loan and profitability

To suggest likely solution to the bank poor performance

What are the cause of bad debt in the bank

1.5 RESEARCH QUESTION

In order to carry out this study, the following question are raised

Does the bank have definite loan policies

Who are held responsible for making loan policies for the bank

3. If there is actual a significant relationship between the bank

loan and profitability

4. To suggest likely solution to the bank poor performance

What is the cause of bad debt in the bank?

1.6 HYPOTHESIS

In order to find answers to the various question rose above, the author formulated four hypotheses which would be put to test

They include amongst others:

Ho: There is a significant relationship between the profit of the

bank and total loan and advance granted by it

Hi:          There is no a significant relationship between the profit of the  bank and total loan and advance granted by it

Ho;         This is a significant relationship between the level of bank

deposit and the manner of loan

Hi:          This is no a significant relationship between the level of bank

deposit and the manner of loan

Ho:         This is a significant relationship between the level of risk in

loan proposal and the loan that is granted buys the bank

Hi:          This is no a significant relationship between the level of risk

in loan proposal and the loan that is granted buy the bank

Ho:         There is a significant relationship between the banks

perception of different type of security and the amount loan granted

Hi:          There is no a significant relationship between the banks

perception of different type of security and the amount loan granted

 1.7 LIMITATION OF THE STUDY

This is studying the entirely the credit management and causes of bad debt in the bank and how it affect the performance of the bank as it a only restricted to Hallmark bank of Nigerian as the case of study. Some difficult and constrain were encountered by the researcher in the cause for obtaining necessary information. For instance in some occasion, it was impossible to get in touch with the bank officers, who should supply the information needed

1.8 DEFINITION OF TERMS

For a proper understanding of the study been carried out, the author gave the operational definition of the following terms in the study;

Debt: it can simply be said that debt is what is owned to another. It can be also describe as an obligation to make future payment. It can be define as money goods or service owning to another by nature of an agreement expressed or implied which gave rise to a capital duty to pay. Capitally put; debt is credit recovered by a borrower from a lender

Bad debt: this is the case where the debtor or the borrower fails to meet up with his matured obligation and all effort by the borrower to rescue the debt proves abortive. This give rise to bad debt

Credit: this could be said to be what is owned to another by virtue of an agreement expressed on implied, which gave rise to a legal duty to pay. Techniquecal credit is debt relieved by a borrower from a pure lender.

1.8.1 TYPE OF CREDIT

The type of facility a bank grant to its customers depends on the purpose for which the facility is going to be utilized even though they could belong to one sectoral entity or the other. Apart from the purpose of the loan. The length of time before repayment is due. it also lead to classification of finance not long, short and medium term . The type of lending done by hallmark bank limited and indeed most commercial bank include. Overdraft, loan advance, discounting, documentary letter of credit facility, trusts receipt, bands and guarantee.

1.8.2 OVERDRAFT

Adekanye (1983: P 10) opined that overdraft is the most widely use type of credit grant short term finance usually use to tied over the population cycle and finance occasional seasonal peaks. Its maturity is usually within one year but in practice, most overdrafts are reversible. This finance is most suitable for financing transaction which ahs self-liquidity over short period. Fund advance on overdraft are in theory repayable on demand while interest is payable on the outstanding balance on daily basis.

1.8.3 LOANS

Loans are usually lent by borrowing, which are secured against his asset of the borrowing company. It is duly use as part of a package of a financial facility. Repayment may either be made on one lump sum or installmentally over a period of time. The pattern of the repayment can e tailored to fit the earning capacity of the asset usually acquired or usually to the estimated cash flow of the business. Interest rate are determine by the general rate prevailing in the market, the time of loan and the sector into which the business are classified

1.8.4 ADVANCE

Nwankwo C.C (1993:P.25) stated that an advance is a type of loan that is giving to finance a specific project. The most important distinction is that repayment is to come in block or as agreed from the project financed. This type of finance is particularly suitable for product that are licensed, buying and selling and credit that are in the nature of seed time to harvesting period, though must be comparatively of short duration usually not exceeding six months is made to the exporter by which time the facility becomes explicit

1.8.5 TRUST RECEIPT

The facility is usually granted in connection with letter of credit and in most cases as supplement to document credit facility. Instead of debiting the customers accost before document is collected, the trust receipt account could reverse into account. The letter of credit needs to be of insurance type. Before collecting the chipping document the costumer must be reassure to sign a trust receipt or a promissory note or letter of hypothecation as the case may be, holding the goods in trust for the bank and promising to pay the proceed directly into the bank account. It bears the same rate of interest with overdraft.

1.8.6 BONDS AND GUARANTEE

These are clear and contingent liabilities, which will only be crystallized if the customer on whose behalf the liability was undertaken defaults.

Customers occasionally request for this type of non-cash facility contingent nature in order to facilitate their business operation. several types of bonds are issued depending on what purpose the bond is requested, this include performance bond which is an undertaking by the bank that the customer will from to specification , bid or tender bond assures the party to which they are issued to the bond of custom and exercise assuring

Discount: by drawing a built up of exchange on his customers and ensured that it is accepted on the latter behalf. The supplier has a negotiatible instrument which can be discounted however or bill broker with a small money deducted from the face value of the bill to cover the incident of risk, administrative expertise and interest from the date of discount to the due date.

Alternatively where the bill bear good and acceptors. They may be accepted by the bank to support additional bank finance usually of a bridging nature pending the maturity of the bill

1.8.7 DOCUMENTARY LETTER OF CREDIT

Adenkenye N.C (1983:p15) stated that this is similar to a guarantee in that banks undertake on the behalf of the customer to pay specific amount if certain condition stipulated in its term are met. Letter of credit is issued largely in an association with bill of exchange to which they gave added security to the financing of foreign trade. The documentary credit facility is a method of settling debt in international trade. The bank issue a letter of credit undertakes to make payment on the behalf of the imposter. Payment is made for the exporter against presentation of document specified in the credit.

If therefore a bank is issuing document specified in the credit on the behalf of the customer and have not collected the local currencies equivalent of the transaction pro to the insurance of such credit, such a bank has pondered a contingent facility to the customer up to the time when actual payment assuring the board that the duty payable on the imported and locally manufactured goods will be paid by the bank if the customers fails to pay.

A guarantee is a promise to ensure for the debt of another made to a person or the financial institution to which the borrower is already of about to become. Guarantee must be in writing signed by the guarantor or his authorized agent.