AUDIT PRICE STRATEGY, EXECUTIVE COMPENSATION AND CORPORATE GOVERNANCE OF LISTED BANKS IN NIGERIA (A CASE STUDY OF LAGOS STATE)

CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

The banking industry is extremely important to the operation of Nigerian economy, because of the roles it performs. The sector acts as depository establishment and lends to numerous businesses, individual and various level of government. The banking sector equity capitalization make up of over 40% of Nigerian Stock Exchange (NSE) total equity capitalization as end of 2009, according to (NSE) report for that year. In addition to these, listed banks in Nigeria have in their employment a significant numbers of Nigerians assisting in ameliorating the high chronic unemployment situation in Nigeria. Notwithstanding these important roles being played by banks, not only in Nigeria but globally accounting researchers have done little worldwide to investigate the various relationships that exist between the banks and their auditors particularly relating to the factors that influences pricing of audit engagement. Knowledge of determinants of audit fees should be of interest and importance to suppliers and users of the audit services as well as the regulators, because this would assist the auditors to examine their cost structure, predicting future fees and measure audit efficiency (Firth, 2015). The code of corporate governance issued by the Central Bank of Nigeria (CBN) states that auditors of financial institutions which engage in cover up would be blacklisted by the CBN for a period to be determined by the apex bank.  It is because of this that Fields et al., (2012) suggested that it is in the interest of many different parties that bank auditors should emphasis factors that are important to regulators. Unlike, industrial companies, the litigations risk associated with bank audits in U.S. stemmed from action brought by both shareholders and the Federal Government. For example in November of 2011 Ernest and Young was asked to pay US government a sum of $400 million to settle claims related to thrift failures. The liquidator of Barrings Bank, KPMG blamed the former auditors, Coopers and Lybrands and Delotte and Touche for negligence in their professional work. The separation of ownership and control in the firm generate the agency problems. The owners of the principals make a contract to the managers as the agent to act on behalf of the owner. Then, the problem is the agent cannot always be guaranteed to act in the best interests of the principal. To maintain the agent do in the best interest of principal, the shareholders need to spend the agency cost. There are three components of agency cost: the monitoring cost by the principal to limit not good act by the agent, the bonding cost for the agent to guarantee the agent will not do act that harm the principal, and residual cost due to some divergence between the decision made by the agent with the best decision which will maximize the wealthier of the principal (Jensen and Meckling, 1976). In addition, two important categories of governance mechanisms in agency theory that the firm can align the interests of managers with the interests of owners are organizational monitoring mechanisms, including board structure and leadership structure; and executive incentive alignment mechanisms, including executive compensation and ownership structure (Coles, McWilliams and Sen, 2013). In term of executive compensation, audit pricing and corporate governance research, some scholars examine the pay on performance, while the others study the performance on pay. The agency theory suggests the performance to pay relationship. In this term compensation is the reward of prior performance. In addition, scholars indicate that the influence of pay for performance as a motivational tool (Devers et al., 2007). In Nigeria, the regulation regarding the good corporate governance (GCG) in banking industry begins with the development of Nigerian Banking Architecture (API) in 2012. Then, the central bank released the regulation no.4/8/PBI/2006 regarding the implementation of the GCG practices in the banking industry. The last updated regulation was released in 2013 (Chou and Buchdadi, 2017). Briefly, the regulation asked the bank to hire at least 50% of the independent board of director. In addition, the regulation asked the formation of the audit committee, risk monitoring committee, and the remuneration and nomination committee under the board of director’s supervision. The bank also has to make an annual report which summarizing the number of meeting and attendance report in the annual report it is mentioned that executive compensation is an important corporate mechanism to align the interest of managers and shareholders by increasing their working incentives and efforts (Tan, 2014). The bank has to build the remuneration and nomination committee under the board of director supervision which provides the recommendation about the remuneration for both boards of directors and executives in general meeting of shareholders. The recommendation of remuneration policy need to consider on the financial performance and reserve formation of the bank, individual work performance, fairness compared to the peer group, and bank long term goal and strategic policy (Bank Nigeria, 2006). Perhaps, polemics on the argument regarding the executives’ compensation needs more research on different condition to confirm the previous results. One argument stated that executives’ compensation should be linked to past performance. In contrast, there is also the argument that the reward of the executive is for the action will benefit the firm in the long run that is not always reflected in currently observable performance (Balafas and Florackis, 2014).

1.2 STATEMENT OF PROBLEM

In Nigeria, financial statements are prepared with the objective that they present a true and fair view of the state of affairs of the entity and of the profit or loss for that period, and comply with the Companies and Allied Matters Act, CAP C20, LFN 2012. The Banks and Other Financial Institutions Act 2011(enhance forth, BOFIA) regulates the operations of banks and other financial institutions in Nigeria. It makes it mandatory for every commercial bank in Nigeria to audit their accounts which have a profound effect on the reliability and availability of financial information or financial report. Section 357 of the Companies and Allied Matters Act provides for the appointment of auditors which states that every company shall at each annual general meeting appoint an auditor or auditors to audit the financial statements of the company, and to hold office from the conclusion of that, until the conclusion of the next, annual general meeting. It follows that every corporation registered with the corporate Affairs Commission; however, a public corporate body in Nigeria needs to undergo an annual audit of its financial statements by an independent registered public accounting firm (CAMA, 2012). The BOFIA as amended to date also further states that every bank shall appoint annually a person approved by the Central Bank of Nigeria, referred to as “approved auditor”, whose duties shall be to make to the shareholders a report upon the annual statement of financial positions and comprehensive income statements of the bank and every such report shall contain statements as to the matters and such other information as may be prescribed, from time to time, by the Central Bank. And, that any bank fails to appoint an approved auditor, the Central Bank shall appoint a suitable person for that purpose and shall fix the remuneration to be paid by the bank to such auditor (BOFIA, 2011). These audited financial statements are important because they serve as the source of financial measures used by stockbrokers, financial analysts and other stakeholders to evaluate financial performance. Swanson (2008) stated that audited financial statements give analysts and investors greater faith in the validity of the financial statements. The importance of the statements suggests that measures of size and financial performance will affect the audit fees charged to clients of the audit firms (Swanson, 2008). To supplement the above points, some views state that audit fees charged by audit firms can also increase with an increase in the risk to which a client is exposed to, its complexity and financial performances (Stice, 2011). However, audit company attributes are also considered important drivers of audit fees. Size, reputation, experience, competition, industry specialization and whether it is from the Big Four are aspects of the audit company attributes that influence audit fees (Francis, 2016).

1.3 AIMS OF THE STUDY

The major purpose of this study is to examine audit price strategy, executive compensation and corporate governance of listed banks in Nigeria. Other general objectives of the study are:

1. To examine the pricing of audit services in listed Nigerian Banks.
2. To measure the factors influencing audit prices, executive compensation and corporate governance of listed financial companies
3. To examine the impact of audit price strategy, executive compensation and corporate governance on the performance of listed banks in Nigeria.
4. To examine the effort of corporate governance on the performance of listed banks.
5. To examine the relationship between audit price strategy, executive compensation and corporate governance of listed banks in Nigeria.
6. To examine the problems of audit pricing, executive compensation and corporate governance in listed banks in Nigeria.

1.4 RESEARCH QUESTIONS

1. How is the pricing of audit services in listed Nigerian Banks?
2. What are the factors influencing audit prices, executive compensation and corporate governance of listed financial companies?
3. What is the impact of audit price strategy, executive compensation and corporate governance on the performance of listed banks in Nigeria?
4. What is the effort of corporate governance on the performance of listed banks?
5. What is the relationship between audit price strategy, executive compensation and corporate governance of listed banks in Nigeria?
6. What are the problems of audit pricing, executive compensation and corporate governance in listed banks in Nigeria?

1.5 RESEARCH HYPOTHESES

Hypothesis 1

H0: There is no impact of audit price strategy, executive compensation and corporate governance on the performance of listed banks in Nigeria.

H1: There is a significant impact of audit price strategy, executive compensation and corporate governance on the performance of listed banks in Nigeria.

Hypothesis 2

H0: There is no significant relationship between audit price strategy, executive compensation and corporate governance of listed banks in Nigeria.

H1: There is a significant relationship between audit price strategy, executive compensation and corporate governance of listed banks in Nigeria.

1.6 SIGNIFICANCE OF THE STUDY

This study would contribute to knowledge because, it would add to scanty works on audit price strategy, executive compensation and corporate governance in the banking sector globally and would also give an insight to pricing of audit in financial industry.  The study importance stems of its attempt to highlight the importance of corporate governance and principles, in enhancing public confidence in financial reporting in business entities since these companies are deemed one of the most important sectors in of capitals attracting process that requires enhancing their position among other sectors in Nigerian market through proving their credibility and transparency to increase shareholders trust and other parties. Geographically, the study will cover the global view on issues of public confidence and credibility in audit and financial reporting. The study would serve as reference materials to other researchers who may want to carry out more research on this or related topic. The study would broaden the researcher knowledge on the subject

1.7    SCOPE OF THE STUDY 

The study is based on audit price strategy, executive compensation and corporate governance of listed banks in Nigeria, a case study of Lagos state.

1.8 LIMITATION OF STUDY

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8 DEFINITION OF TERMS

Corporate Governance: Is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders' role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place.

Audit pricing strategy: Price auditing consists in reviewing the information contained in the documents submitted by firms with respect to their pricing, referring either to estimated costs and proposed profit, or to the costs incurred in executing the contract, in order to issue a professional opinion as to whether this information complies with the rules or agreements applicable.