THE IMPACT OF AUDIT REPORT AND INVESTMENT DECISION IN NIGERIA(A SURVEY OF SELECTED MINISTRIES IN RIVERS STATE)

CHAPTER ONE

INTRODUCTION

1.1   BACKGROUND OF THE STUDY

Listed companies in Nigeria use financial statement such as audit report etc as one of the major medium of communication with their stakeholders. Therefore, stock market regulators and accounting standards settlers are tying to improve the quality of financial statements in order to increase the transparency level in financial reporting (Vishnani S., Shah B.K, 2008). Financial statement may consist different types of information. Which can be named as financial information/Accounting information and Non-financial information/Non Accounting Information? Accounting Information are information which describes in account for a utility. It processes financial transaction to provide external exporting to outside parties such as to stockholders investors, creditors and government agencies etc. and non accounting information are information which cannot be measured in monetary terms to make

investment decision by the investors. This type of investment is called Ethical investment.

Audit export is essential in making sound investment decisions and it will undue the informational asymmetry problem between the firm’s manager and the investors (Hossain, D.M Khan, A., Yasmins I. 2004). Though the investors use non financial information in order to make investment decision, still  conventional investors give more weight to financial information. Akintoye (2008) discovered that the quality of accounting        information     in terms   of accuracy adequacy, reliability   and  mode of disclosure   is a major determinant of the level of efficiency of the capital market and other decision tasks.

Recent happenings in the Global World however and various empirical studios imposed that accounting information in published financial statement lost their relevance over the period of time. (Ball and Brown 1968, Oyeunde D.T 2009).

The preparation of a company financial statement is regulated by the companies and Allied matter Act 1990 (CAMA 1990) as amended and the accounting standards for example, section 331 of CAMA 1990 provide procedure which management of every registered public limited liability company should follow in preparation of this financial statements. Sections 334 of CAMA 1990 also provide the duties of the directors in preparation of financial statement. In the same vein, section 342 of CAMA 1990 provide reporting standard of the directors of the financial statement prepared. On the other hand, accounting standard set the underlying standard for the preparation of financial statement. The sole aim of preparing financial statement is to report to the shareholders which are the owners of the company on the financial performance of the company. When shareholder receives financial statement of the company they have invested in, most of them simply look to see whether the business has made profit. They are aware of only one thing that is, that the company has made profit. They do not know if it was a “good” profit nor do they know whether these were any difference from the profit in the previous years.

By human initiatives these might be the tendency of the management preparing progress statement of account to suit their own interest instead of giving proper and correct information to the owners and investors. The management annual financial statement may contain error and may not disclose all information required by law. In respect to this, audit of the financial statement is therefore necessary so as to show that the financial statement shows a true and fair view.

It is quite unfortunate that a lot of companies still go into liquidation despite such clear Audit report of financial statement. This research work is designed to analyze audit report and investment decisions in Nigeria.

2.1 STATEMENT OF THE PROBLEM

In the past years, most investors and other financial statement users see the financial statement prepared by a given company and they either invest or give loan to the company and after a period of times, the company fold-up and their money is gone. This could be partly because the investor and other financial statement used do not have the knowledge of accounting which enables them to analyze and appraise the financial performance of the company through their published financial statement.

The problem therefore is the inability on’ the part of the investors, shareholder and other financial statement users to analyze the financial statement of companies, inability of the shareholders to apply ratio calculated for comparison with past ratio of the company and comparison with other similar companies, and ignorance of the shareholder, lenders, and investors in analyzing financial statement using ratio as a basic tool, as the financial performance of companies cannot be understood from their published financial statement by investors by mere looking at the financial transactions that are contained in the financial statement. This makes some investors become worried whether to invest or not in a company.

1.3   OBJECTIVE OF THE STUDY

The objective of this research work is to improve the general understanding of the shareholders and other users of financial information on the analysis of financial statement to be able to invest in companies.

1.4   SIGNIFICANCE OF THE STUDY

This study in the foremost will generate further scholarly inquiry on the subject matter. Next, it could be of immense value of shareholders, investors, government, authorities, competitors, creditors etc since financial statement of a company is what gives financial information to the users of such statement. The users can appraise and analyze the financial statement and be able to make right decision whether to continue to invest in such company or not. This research study would also contribute to the efficiency of the management of such companies in order to ensure proper internal control system that will enhance non-misleading financial statements.

1.5   RESEARCH QUESTIONS

Section 331 of CAMA, 1990 laid down the procedure which every registered limited liability company should follow in preparing their financial statement but most companies published financial statement do not reflect the actual state of affairs of such company.

Research question on this research are meant to provide dependable solutions to the following questions’.

1. a) Does the analysis of financial statement have any relevance to the users?
2. b) Do companies prepare financial statement for internal or external use?
3. c) How can ratio analysis influence a shareholder to invest in a company?
4. d) How can the performance of a company be determined?

1.6 LIMITATION AND DELIMITATION OF STUDY

This study has been undertaken in spite of cynicism that dogged the study right from conception which constituted limitation tot the researcher and these are:

❖ TIME FACTOR: As a result of other academic work coupled with shortness of time given for completion of this research work, the researcher had to battle with the limited time available to him in combining travelling to companies and attending lectures.

❖ POOR RESPONSE FROM RESPONDENTS: The attitude of some of the respondents and some library attendant probably due to ignorance also constituted its own limitation.

❖ FINANCE: Numerous expenses were involved in this work, hence the limited resources available for the research due to poor economic condition was not enough to take care of the high transportation cost, stationeries, public relations and cost of typing this work and binding it.

1.7 SCOPE OF THE STUDY

The study was restricted or confined to audit report and investment decision in Nigeria.

1.8 DEFINITION OF TERMS

The following terms were used in this study as defined to facilitate the effective communication of the study.

 AUDIT REPORT: An appraisal of a company’s financial status.

 FINANCIAL STATEMENT: Documents prepared by the management of a company to communicate its performance to the shareholder and other users.

 INVESTMENT: This means the forfeiture of the present resources for future. It is the commitment of present resources for future return.

 MANAGEMENT: These include board of directors, the general manager and divisional managers.

 RATIO: this is the term that expresses the relationship between two financial data that is useful in the assessment of a company performance.

 CAMA, 1990: These are act or statute that regulates the operational activities of companies.

 DATA:        This is an unprocessed (raw) input to the management of a company