THE IMPACT OF INTERNAL AUDITING ON THE PROFITABILITY OF MONEY DEPOSIT BANK (A CASE STUDY OF FIRST BANK NIG PLC)

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

In our society where the business culture has been overridden in recent times with fraudulent practices penetrated by management and employees, the lack of clear understanding of the duties of an auditor in relation to fraud detection has often led to unjustifiable criticisms of his role. Auditors are known to be competent, honest and independent professionals who express unbiased opinion on the truth and fairness of the financial statement as presented by management to members of the company. The accounting profession has over the years built a reputation, which encourages others to rely upon the opinions auditors express. If these opinions are unclear or even unreliable, serious consequences may and indeed have resulted.

The auditor’s duty is to examine the financial records of the company and to take reasonable care to ascertain that the financial records show the company’s true position. The auditor is expected to prepare a detailed report to the company members and the report shall state the matters set out in schedule six to this act. The auditor is also to consider whether the information given in the director’s report for the year for which the accounts are prepared is consistent with those accounts; and if they are of opinion that it is not, they shall state that fact in their report. If the subsiding company and its auditors fail to provide this information, every other officer who is in default shall be guilty of an offence and liable to fine. That an auditor has the responsibility for the prevention, detection and reporting of fraud, other illegal acts and errors is one of the most controversial issues in auditing, and has been one of the most frequently debated areas amongst auditors, politicians, media, regulators and the public (Gay et al 1997). This debate has been especially highlighted by the collapse of both small and big corporations across the globe. The auditing profession in Nigeria has caught the media’s attention following financial scandals in some of the Nigerian banks such as Intercontinental Bank, Oceanic Bank, Afribank, and Bank PHB among others.

There seems presently to be a misconception that auditors’ duties are largely the preventing, detecting and reporting of fraud, for example, Idris (2009). Financial report users’ perceptions of the extent of fraud in Nigeria, and to determine their perceptions of the auditor’s responsibilities in detecting fraud and the performance of related audit procedures. The paper also aims to ascertain whether the report users’ perceptions of auditors’ responsibilities on fraud are consistent with those of the auditing profession as expressed in auditing standards in Nigeria.

Fraud, according to Adeniji (2004:354) and ICAN (2006:206), is an intentional act by one or more individuals among management, employees or third parties, which results in a misrepresentation of financial statements. Fraud can also be seen as the intentional misrepresentation, concealment, or omission of the truth for the purpose of deception/manipulation to the financial detriment of an individual or an organization which also includes embezzlement, theft or any attempt to steal or unlawfully obtain, misuse or harm the asset of the organization, (Adeduro, 1998 and, Bostley and Drover 1972). Fraud has increased considerably over the recent years and professionals believe this trend is likely to continue. According to Brink and Witt (1982), fraud is an ever present threat to the effective utilization of resources and it will always be an important concern of management. ISA 240 ‘The Auditor’s Responsibilities to Consider Fraud in an Audit of Financial Statement (Revised)’ refers to fraud as “an intentional act by one or more individuals among management, those charged with governance, employees or third parties, involving the use of deception to obtain an unjust or illegal advantage”. Aderibigbe and Dada (2007) define fraud as a deliberate deceit planned and executed with the intent to deprive another person of his property or rights directly or indirectly, regardless of whether the perpetrator benefits from his/her actions.

Weirich and Reinstein (2000 cited in Allyne & Howard 2005), define fraud as “intentional deception, cheating and stealing”. Some common types of fraud include creating fictitious creditors, “ghosts” on the payroll, falsifying cash sales, undeclared stock, making unauthorized “write-offs”, and claiming excessive or never-incurred expenses. Pollick (2006) regards fraud as a “deliberate misrepresentation, which causes one to suffer damages, usually monetary losses”. Albrecht et al (1995 cited in Allyne & Howard, 2005:287) classified fraud into employee embezzlement, management fraud, investment scams, vendor fraud, customer fraud, and miscellaneous fraud. Fraud also involves complicated financial transactions conducted by white collar criminals, business professionals with specialized knowledge and criminal intent (Pollick 2006).

The terms fraud, waste and abuse are often used interchangeably, even though they are conceptually and legally distinct. They nevertheless often coexist, frequently arise from the

same underlying factors, and, in terms of prevention, they are often amenable to the same countermeasures. Fraud against the government is more easily accomplished in an environment of administrative and fiscal laxity. Indeed, it may well be that a significant proportion of revenue loss flows less from deceit than from careless or inefficient management of public resources. In any event, the appearance of carelessness and inefficiency can be an invitation to perpetrators of fraud.

1.2 Statement Of The Problem

Internal audit is an integral part of the finance structure of public organizations. A constant complaint in the sector is that internal audit department is too understaffed and under resourced generally to be fully effective. There exist a lot of arrears of work due to inadequate staffing of Internal Audit Departments. There is inadequate knowledge of Electronic Data Processing (EDP) and Computer for efficient auditing of computerized systems. Most of the public sector management working papers do not provide adequate documentation because of this problem. Staff of the internal audit department is not well remunerated and it makes them to lack interest in their work. Many adduce the argument that internal auditors, being employees in public sector do not have the liberty to exercise the unbiased and independent attitude so necessary to an auditor. In the heat of the controversies for inept public sector performances, Nigeria as a developing economics and Kano State in particular has to garner her resources for effective developmental utilization and the need for the services of Internal Auditors in the Public Sector becomes more imperative, hence this research into the effectiveness of using Internal audits as instrument of improving Public Sector Management.

1.3 Objective of the study

The aim of this research work is to examine the impact of internal auditing on the profitability of money deposit bank with particular reference to First Bank Nig Plc. The specific objectives of this research work includes the following;

1. To evaluate the impact of internal auditor on the profitability of First Bank Nig Plc.
2. To determine the types and causes of fraudulent practices in First Bank Nig Plc.
3. To determine the impact of internal auditor in the development of Nigerian banking industry.
4. To examine the problems hindering the service provided by internal auditors in Nigeria Banking industry.

1.4 Research Question

The researcher formulated the following research questions;

1. What are the impacts of internal auditor on the profitability of First Bank Nig Plc?
2. What are the types and causes of fraudulent practices in First Bank Nig Plc?
3. What are the impacts of internal auditor in the development of Nigerian banking industry?
4. What are the possible problems hindering the service provided by internal auditors in Nigeria Banking industry?

1.5 Research Hypothesis

For the researcher to carryout extensive study on the impact of internal auditing on the profitability of money deposit bank with particular reference to First Bank Nig Plc, she developed the following research hypothesis;

Hypothesis I

Ho: Internal auditors do not have any impact on the profitability of First Bank Nig Plc.

H1: Internal auditors have significant impact on the profitability of First Bank Nig Plc.

Hypothesis II

Ho: Poor management is not the cause of fraudulent practices in First Bank Nig Plc.

H1: Poor management is one of the causes of fraudulent practices in First Bank Nig Plc.

Hypothesis III

Ho: Internal auditor does not have any impact on the development of Nigerian banking industry.

H1: Internal auditors has significant impact on the development of Nigerian banking industry.

Hypothesis IV

Ho: There are no problems hindering the service provided by internal auditors in Nigeria Banking industry.

H1: There are so many problems hindering the service provided by internal auditors in Nigeria Banking industry.

1.5 Significance Of The Study

        It is hope that this study will enable the management of the First bank and other similar companies that requires an effective internal audit such as Research institute, business organizations and the General Investigating public be guided adequately in the pursuit of the realization of their own objectives. It will enable them manage the increasing fraud and wastages, cases of sophistication of crimes, Irregularities and their implications

          Finally, it will be of immense benefit to the practicing accountants in their audit works, there would be accountants, legal practitioners who need them as a Good reference guide for their legal duties.

1.6 SCOPE OF THE STUDY

         The scope of this study focuses on the impact of internal auditing on the profitability of money deposit bank with particular reference to First Bank Nig Plc. The reason is to enable the Researcher have a enough time o carry out an Indept study of the subject matter with regards to its operations in the institution. It is important to state that in spite of the sensitive Nature of the issue, the quality of work was neither delineated nor lacked substance and as such should be reliable in Establishing comparative standards of performance.

1.7 LIMITATION TO THE STUDY

       The major limitation to this study is Essentially Time. The fact that one does his job or she is Expected to perform her full-time official duty as a worker from Monday through Friday’s and still carries on with this project work is energy –whelming.

In addition, the time presently allotted to the study of research documentation/project writing is quite insufficient. On a suggestion that student should be groomed and grounded in the areas of research of work right from their 2nd year of the four years programmes. This will enable them to operate matters rather than the new famous crash.

1.8 DEFINITION OF TERMS

AN AUDIT: Nwabueze C.C (1997) Defined an audit as an independent Examination by a statutory appointed person called the auditor  to investigate, an organization, it’s records and the financial statements prepared from them, and thus. Form an opinion on the accuracy and correctness of the financial statement.

•  J.C Eze Defines auditing as an activity carried on by the auditor when he verifies or Examines accounting information, Determine the accuracy and reliability of accounting statement and reports, and then Express his opinion.

INTERNAL AUDIT: An independent appraisal function Established by the management for the review of the internal control system as a service to the organization. (J.C EZE)

The institute of chartered accountants of England and Wales (ICAE&W) also defines internal auditing as:- “ A Review of operation and records, sometimes continuous undertaking within a business by specially assigned staff ”

INTERNAL CONTROL SYSTEM:   Auditing standard and guide line (ASG) define the system as ’’ the whole system of controls, financial & otherwise established by the management in order to:

1. Carry on the business of the enterprise in an orderly and efficient manner ;
2. Ensure adherence to management polices ;
3. Secure as far as possible the completeness and accuracy of the records.

MANAGEMENT AUDIT: According to mayo associates limited (1988) management audit is an independent Examination of the quality and polices of the management of an organization as well as the level of their execution against the background of relevant environmental factors and condition. It could cover any aspect of an organization activities such as : corporate planning, marketing, finance and accounting, production research and development, or other aspect of its corporate affairs . the objective is to produce a report which will form a basis for the review and amendment of the organization policies and procedures.

AUDITING STANDARD: Auditing practice committee (APC) defined Auditing standard as those principles which the members of the profession should use as guide line whenever they are discharging an auditing responsibility.