CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

In the past, auditing had played a great role in ensuring that there is transparency in financial statements. Organisations requests for correcting non-conformities or findings are very common. Hence, correcting actions are taking to eliminate the causes of an existing nonconformity, defects, or other undesirable situations in order to prevent a recurrence.

Organisations in the world like the World Bank, Central banks, Commercial banks, and micro finances have to demonstrate accountability in the use of government money as well as shareholders money and efficiency in the delivery of services. Organisations now demand great competence and professionalism from auditors and scarce resources must be employed to be more efficient to minimize and manage risks.

Technological advancement has made it easier for organisations to track and analyse data continually with increasing speed. The transactions from merely ensuring compliance rules and to truly deliver adding value require more than just organisational changes. In most organisations staff is poorly paid and unmotivated, ethical standards are weak and governance practices are ineffective leading to assets mismanagement Ramamorti (2000), Ekaterina (2007) observed that auditing played an important role in serving the public interest in order to strengthen accountability and reinforce trust and confidence in the financial report.

Otieno (2012) research the effects of corporate governance on the financial performance of commercial banks. He concluded that corporate governance plays an important role in banks’ stability, performance, and banks’ ability to provide liquidity in difficult market situations. Also, organizations like the European Investment Bank (EIB) have gone in for more accountability recently.

There exist an audit committee that ensures the accuracy of financial reporting and the confirmation of financial reporting, and the confirmation of the effectiveness of the internal control processes and procedures and also boosts up the financial performance of the institution. The auditing firm ensuring reliability in its institution’s financial statement is the KPMG firm.

They are appointed and reported to the AUDIT COMMITTEE. Internal control to is strictly being monitored by managers and other people with authority in specific positions all in a bit to ensure that the financial performance of the institutions is steady and improving.

Also, as concerns auditing, the Islamic development bank (ISDB) has put in lead auditing activities to determine whether the risk management processes are adequately identified and managed. This role ensures compliance with Islamic Development Bank Group policies and procedures. The internal control systems are strictly implemented and properly evaluated to ensure accountability and functions are properly delegated to respective persons depending on the departments in which they are found. Due to this it has been considered as one of the fasted growing and expanding institutions.

Hudgins and Rose (2013) claim that in recent years financial institutions have experienced vibrant and extensive changes which have rapidly and revolutionize these sectors. These key trends include government deregulations, service proliferation, geographic expansion an increasing interest-sensitive mix of funds, and many others. One of the most enormous transformations in the field was the initiation of a new prototype for the sectors. The Islamic Bank has gained the attention of both Islamic and non-Islamic economies worldwide.

All over the world, there is the realization that auditing has the potential to provide unparalleled to management in the contact of their duties. This potential has been turned into a challenge and embodied in the new definition of auditing. Financial institutions have come to the realization that auditing is essential in improving the management of assets in financial institutions like the bank leading to improved financial performance (Basel Committee, 2012).

The impact of auditing has been found to mitigate risks of improper reporting by enhancing quality financial reporting, minimizing losses, and eventually improving financial performance (vafeas, 1999). Well runned financial institutions make better use of scarce funds by providing better financial services and reaching more poor clients. Auditing is an effective external mechanism because it signals to potential investors and donors whether the manager confirmed the accounting practices and did not misrepresent financial information.

The quality of auditing reports matters as evidence suggests that it is usually driven by active shareholders (Ashbaugh and Warfield, 2003). In addition, there is evidence that financial institutions that voluntarily adopt the international accounting standards or US General Acceptable Accounting practices (GAPP) have lower costs of debt (Leutze and Verrecchia, 2000)

The degree of transparency of financial institutions helps to impose market discipline because more transparent financial institutions will attract more investors, creditors, and donors. Increased concerns regarding corporate accountability in various developed nations had been associated with the need for appropriate audits which involve internal control systems (Beekes and Brown,  2006).

For an organisation to gain a competitive advantage, financial institutions in developing countries like Cameroon requires to improve corporate governance to promote governance and accountability for the purpose of attracting capital, gain sustainability, and curb vices such as corruption.

An internal audit function could be viewed as the first-line defense against inadequate corporate governance and financial reporting. With appropriate support from the Board of Directors, audit committee, the internal audit staff is in the best position to gather intelligence on inappropriate Accounting practices, inadequate internal controls, and inefficient corporate governance (Vafeas, 1999).

In recent years in Cameroon, with the expansion of financial institutions, there has been increasing in a large number of deposits into these institutions. These financial institutions usually require fresh capital from outside investors and improved governance plus internal control.

The need for accountability is inevitable. Hence, financial institutions are putting in a lot of effort if not their best to ensure that the internal control is strictly respected, accountants and other personnel responsible for accounting and documentation of transactions are done following stated standards, internal audits to are not left out.

They do the necessary checks to ensure compliance with the recording principle. External auditors who are independent of these institutions come in to ensure that these financial statements which have gone through the hands of the accountants, checked by the internal auditors show a true and fair view. With all these properly done as it should be, the financial performance of the company is one that encourages investors to come in their numbers.

1.2 Problem Statement

Recently, accounting standards and the cry for transparency and honesty in reporting have given rise to two disparate yet logical outcomes. First, auditing skills have become crucial in untangling the complicated accounting maneuvers that have obfuscated financial statements.

Secondly, public demand for change and subsequent regulatory actions has transformed corporate governance increasingly, company offers and directors are under ethical and legal unity. Both trends have the common goal of responsibly addressing investors’ concerns about the financial reporting systems. However, there has been laxity in the implementation of auditing findings and recommendations.

Cameroonian banks have not been without crisis, the shortcomings of the banking sector prior to the banking crisis of the late 1980s, and then the effects of measures subsequently introduced by the central bank. Banks could be established by any investor almost at will, shareholders and directors escaped any vetting procedure, the role of external auditors was poorly defined and due diligence and banking supervisions were inadequate.

Local studies on related topics include Mutua (2012) carried out in Kenya reached on the impact of risk-based audit on the financial performance required appropriate risk-based audit practices, hence effective and efficient audit. From the findings, the study concluded that risk-based auditing through risk assessment, risk management, annual risk-based planning, auditing standard, and internal auditing staffing should be enhanced.

The various financial institutions in Cameroon such as banks, microfinance have greatly and actively been used in almost all these institutions (financial institutions). Internal checks are being made at all the respective levels of these institutions to ensure that these institutions like Kimbo police credit union have experienced drastic success in their financial performance as they carry out audits regularly (twice a year). All this stands as evidence that this financial institution is functioning properly when it concerns auditing and its finances.

Financial institutions spend a lot to ensure accountability with the aim of making these financial institutions stable through the achievement of their organisational goals. They spend a lot in ensuring good internal governance and have introduced transparency and accountability into its decision-making processes and operations. This is a critical step taken by FIFA to become a sustainable, and transparent organisation.

Despite all the efforts put in by these financial institutions, recurrent problems are still being faced by these financial institutions such as FIFA, hence this initiated me to find out if auditing has an impact on the performance of financial institutions.

1.3 Research Questions

1. How does external audit influence the financial performance of MFIs
2. What is the impact of internal audit on the financial performance of MFIs

1.4 Objectives of the Study

1.4.1 Main Objective

The main objective of this study is to examine the impact of auditing on the financial performance of an organisation.

1.4.2 Specific Objectives

The specific objectives include:

1. To assess the influence of external audit on financial performance
2. To examine the impact of internal audits on financial performance.
3. To make the necessary recommendations based on the findings

1.5 Research Hypothesis

The research hypothesis for the study are:

Ho: internal audit has no impact on financial performance

H1: external audit does not influence financial performance

 

Further Readings

THE ROLE OF INTERNAL AUDIT IN THE DETECTION AND PREVENTION OF FRAUD IN PUBLIC INSTITUTIONS: CASE STUDY BUEA COUNCIL

THE IMPACT OF EXTERNAL AUDITORS ON THE PERFORMANCE OF PUBLIC LIMITED COMPANIES IN BUEA