CHAPTER ONE

INTRODUCTION

1.1 Background To The Study

An external auditor is a professional or better still an audit professional that is mainly out to perform an independent audit in respect to stated laws or rules on financial statements of legal entities, state cooperation, government organizations, companies as well as institutions that prepare financial statements.

The auditor is completely independent of these institutions that are audited. Being independent is one of the most important points to consider when searching for an external auditor to audit the financial statements for its users. These users include shareholders, investors, foreign organizations, government agencies as well as the general public who have a great need for the external auditor’s report. The audited report is relied on and consulted before most decisions affecting the company are taken.

Looking at the roots of an external auditor, it can be traced right back to the the1850s where in Britain external audits were required to be done by companies. The companies Act (1855-1856) introduced the independent auditor (external auditor) by removing the stockholders as auditors. This was one of the first laws to establish auditors and the rules for audit reports by external auditors. An external auditor became mandatory to all Public Limited Companies in 1900 and was followed by laid downed standards and qualification of external auditors.

For public limited companies listed in the stock exchange in the USA, the Sarbones – Oxley (SOX) has imposed a stringent requirements on external auditors. This SOX was as a result of the publication of acts regulating auditors. These acts came due to collaboration between the ALCPA and the New York stock exchange with the purpose of improving auditing standards of reporting. The security Act of (1933) and the security exchange (1934) were passed which required listed companies to file audited financial statements.

The Supreme State Audit Office (SAIC) is in charge of a state audit in Cameroon which was established by the head of state of Cameroon. The SAIC is required to perform the requisitioning of auditee department records by decree No97-48 Article 7. Furthermore, Cameroon as other countries seeing the need for statutory audit recognizes the Institute of Chartered Accountants of Cameroon (ONECCA) as the professional body to carry out the external audit of companies and other institutions.

External auditors are independent assurance service providers to companies as a whole and public limited liability companies in particular. External auditors provide tremendous important information to stakeholders on the financial statement audited. The scope of the audit assignment externs to some vital sections in the internal system of the organization this includes the fact that the auditors via his report may make recommendations to the management on the loopholes found in the accounting system.

For example, not adhering to internal accounting standards (IAS), inform the directors on the general efficiency and accuracy of the accounting system put in place while recommending methods to improve the present accounting process. All this advice is provided to the company by an external auditor after conducting the audit. The OHADA law under Article 689 relating to the appointment of an external auditor provides a list of qualities to be used when appointing an auditor.

It is for the purpose of ensuring the total independence of the auditor. Still, on the quality of independence, an auditor can not give an unbiased audited report or unclean report unless he or she is independent of all parties involved.

Auditors should be independent in fact and appearance that is a relationship that can impair their objectives. This requires that the auditor when conducting an audit of the financial statements should not be related to the management, inventory organizational structure that will hinder objectiveness in the audit process and final audit report.

On the international horizon, the international standard of auditing (ISA) issued by the International Auditing and Assurance Standard Board (IAASB) is the starting point for the audit process. This process is expected to be carried out in accordance to the General Acceptable Accounting Standard (GAAS) and the General Acceptable Accounting Principle (GAAP) especially in the process of reporting on the findings of the financial statements.

The OHADA uniform act in relation to other regional organizations such as the UEMOA has to establish an accounting system referred to as SYSCOA which is under the UEMOA regulation No 4196 /CM December 1996, B.O UEMOA November 1997 which shows the need to ensure that there is full consultation and corporation on the part of auditors involved in the organization.

The main role of the auditor is to present a true and fair view of the audited company’s activities without encroaching into the management of the company. While the administration and management of the PLC is by the board of directors elected or appointed as indicated in the companies Article of association.

Hence these directors are compelled under article 702 under the OHADA act to appoint an external auditor, or two as specified under article 703 relating to subsequent auditors. All who are to be appointed during the general meeting. The external auditor is in charge of analyzing the financial statements prepared as well as participating in the adoption of the fiscal year budget.

1.2 Statement Of Problem

The auditor has the responsibility of providing an opinion on the financial statements prepared during the fiscal year that enhances the performance of a PLC. As stated in Article 106 under commercial company in line with business operation, a company may be leased out to managers who run it at his or their own risk as a legal entity. For this reason, the owner needs to be sure of the operation of the business which can be provided only by an external auditor.

However, many companies in the world are faced with financial mismanagement a case in point is Enron Company which suffered financial mismanagement due to the failure of the board of directors and the auditors to state the realities of the financial statements as well as providing balance sheet and income statements for ghost companies. It later resulted in bankruptcy. Other companies that suffered this devastating effect were WorldCom, Global Crossing Tyco, and Adelphia

The problem comes in when looking at the ongoing trend in which public limited companies in Beau such as Cofinese PLC in the year 2011 went bankrupt with the presence of an external auditor. Furthermore, financial institutions from 2012 up to 2013 have continuously had negative cash flows and finally declared insolvent such as FIFA in the year 2012 and Global Financial Trust, Security Finance all in the year 2013. Given their happenings, the researcher wonders why they happen even though external auditors were present.

1.3 Research Questions

The following research questions then came to mind:

1. How do external auditors affect the survival of PLCs?
2. What assurance do managers have from auditors’ independent reports?
3. What are the challenges faced by auditors when performing their audits in PLCs?

1.4 Objectives Of The Study

1.4.1 Main Objective

The main objective of this study is to analyze the impact of External Auditors on the performance of PLC.

1.4.2 Specific objectives are to:

1. Investigate how external auditors affect the survival of PLCs.
2. Identify the assurances managers of PLCs have from auditors’ independent reports.
3. Identify the challenges auditors face when performing their audits in PLCs.

1.5 Hypothesis

H01: External auditors have no significant impact on the performance of public limited companies.

H1: External auditors have a significant impact on the performance of public limited companies.

 

Further Readings

THE IMPACT OF AUDITING ON FINANCIAL PERFORMANCE OF MFIS IN BUEA.