INFLUENCE OF PRIVATE AUDIT ON GROWTH OF SMALL AND MEDIUM ENTERPRISES (SMES) IN SOUTH-SOUTH NIGERIA

CHAPTER ONE

INTRODUCTION

1.1. BACKGROUND OF THE STUDY

Private auditors within are very significant tools that demand full consideration due to the effective role play in organizational survival, because they review the activities of organizational operation with aim of ensuring their compliance with relevant organizational policies and standard and thereby making good recommendation for their improvement (BadaraandSaidin, 2012).The presence of private auditors reduces any weakens in the accounting system and implementation of their recommendation to improve control and reduce the risk of fraud and errors (Guruswamy, 2012). Private audit is an increasing useful and important function for every organization. External auditors can rely on the work of private auditors in carrying out their external audit duties as both auditors are concerned that proper controls are in place (Guruswamy, 2012). Auditing is very essentials because it gives concerned on the evaluation of various controls, examining deviation from applicable standards and any instance or act of irregularity, inefficiency and ineffectiveness with the motive of taking corrective action (Aikins, 2011). Recently, consideration in the topic of private audit is receiving more attention especially when considering its contributions to the management of either public or private sectors in the aspect of organizational resources (Dhamankar&Khandewale, 2003), this is because private audit has become an unavoidable control mechanism in both public and private sectors (Cohen &Sayag, 2010), therefore it is the right time to seriously consider the issue of private audit (Sumritsakun&Ussahawanitchakit, 2009).The private audit department is very important inside a firm that the private audit is regarded as the key element in the application of accounting systems which in turn, helps in evaluating the work of the department. The private audit is considered as the backbone of the business accounting as it is the section that records all businesses related to the sector. The efficiency of private audit helps develop the work of the company because the financial reports reflect the private audit department’s quality. Moreover, aprivate audit is a significant part of the CG structure in an organization and CG encompasses oversight activities taken by the board of directors and audit committees to make sure that the financial reporting process is credible (Public Oversight Board, 2015). Three monitoring mechanisms have been highlighted in the CG literature, namely, external auditing, private auditing and directorship (Al Matarneh, 2011). The financial and corporate strategy of a company is underpinned by effective private systems in which the private audit has an important role in raising the reliability of the private control system, improving the process of risk management and above all, satisfying the needs of private users. The private audit support enhances the system of responsibility that the executive directors and employees have towards the owners and other stakeholders (Eighme&Cashell, 2014). Taken together, the private audit department provides a reliable, objective, and neutral service to the management, audit committee and board of directors, while stakeholders are interested in sustainable growth, return on investments, strong leadership, and reliable reporting on the financial performance and business practices of a company (Ljubisavljević&Jovanovi, 2011). Small and medium enterprises (SMEs) are much more vulnerable proportionally to losses by employees, and much less able to absorb these losses than large corporations. The entrepreneur’s principal objectives are profitability and growth, the business is characterized by innovative strategic practices, continued growth and may be seen as having a different perspective from small business owners in the actual development of their firm (Smith, 2014). Contribution from SMEs to the Nigerian economy is also very important. They provide indirect support or income to economic growth. SMEs are also able to provide goods and service the same as large companies albeit in smaller quantities. SMEs play a vital role in the Nigerian economy and are considered to be backbone of industrial development in the country (Saleh and Ndubisi, 2015). There is always an increase in number of interest to establish SMEs because of small firms generating most new employment; the public favouring on small business; knowledge on entrepreneurship at high schools and colleges; the growing towards self-employment as well as small business being attractive to people of all ages (Megginson, 2014). This research focuses on influence of private audit on SMEs growth in Nigeria.

1.2   STATEMENT OF PROBLEM

It was noted that the operating transaction used by small scale business often differ significantly from those of large companies. Some small-scale business do not keep good accounting system or records of transaction, they did it out of ignorance. Many proprietors do not know the amount of pro lit he is making and whether he could do better and by how much the problem is attributed to the qualification and exposure of the proprietors. The research has shown that only few of proprietors contribute to the fund of initial capital. Most entrepreneur of small scale business is aversive to audit their accounts because of the cost and other sees it as a way of probing into their privacy. Most of these small scale business lack controls over the running activities of their business organization. Their activities are run haphazardly. Since most of’ mall scale business do not audit their accounts they don’t pay tax to the government, even few that pay tax, pay it out their direction and not their profit. Personal interview with auditors from two accounting firms visited revealed that accounts business could be adopted, the small scale business inclusive irrespective of the non-maintenance of proper accounting records.

1.3 AIMS OF THE STUDY

The major purpose of this study is to examine influence of private audit on growth of small and medium enterprises. Other general objectives of the study are:

1. To examine the level of practice and private audit function in Small and Medium Enterprises.

2. To examine the level of improvement in the growth of Small and Medium Enterprises.

3. To examine the influence of private audit on the growth of small businesses in South-South.

4. To examine educational qualifications of the chief audit executive of small and medium Enterprises.

5. To examine the relationship between effective private audit and growth of Small and Medium Enterprises.

6. To suggest ways in which private auditing will aid in assisting the Small and Medium Enterprisesto achieve their goals and objectives.

1.4 RESEARCH QUESTIONS

1. What is the level of practice and private audit function in Small and Medium Enterprises?

2. What is the level of improvement in the growth of Small and Medium Enterprises?

3. How does private audit influence the growth of small businesses in South-South?

4. What are the educational qualifications of the chief audit executive of small and medium Enterprises?

5. What is the relationship between effective private audit and growth of Small and Medium Enterprises?

6. What are the ways in which private auditing will aid in assisting the Small and Medium Enterprises to achieve their goals and objectives?

1.5 RESEARCH HYPOTHESES

Hypothesis 1

H0: Private auditing has no impact on small and medium scale enterprises in Nigeria.

H1: Private auditing has a significant impact on small and medium scale enterprises in Nigeria

Hypothesis 2

H0: There is no significant relationship between effective private auditing and growth of Small and Medium Enterprises.

H1: There is a significant relationship between effective private auditing and growth of Small and Medium Enterprises

1.6 SIGNIFICANCE OF THE STUDY

The study is intended to benefit the following:

The study findings will be of immense importance in the sense that they will assist management of small and medium enterprises to realize how internal controls can affect its operations and growth.

Academicians and researchers- this study is intended to add knowledge to previous studies done on internal controls by primarily focusing on small and medium enterprises and growth. The study shall therefore serve as a reference for further research on the topic of relationship between internal controls and growth of Small and medium enterprises.

1.7    SCOPE OF THE STUDY 

The study is based on influence of private audit on growth of small and medium enterprises (SMEs) in south-south Nigeria.

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  

Private Auditing: it is the independent appraisal of the functions and quality of performance of an organization by a specially assigned staff as part of the private control system. It objectively examines events and reports on the adequacy of private control as a contribution to the efficient and effective use of resources

Audit: according to Taylor (1982), an audit is the independence examination of the financial statement of an organization with a view to expressing an opinion as to whether these statements give a true and faire view and comply with the relevant statutes for the period under review and of the financial state of the organization at the end date so enabling the auditor to report thereon.

SMEs: Small and medium sized enterprises are commercial business entities that are generally distinguished from large companies by their size and turn-over. Medium-sized enterprises have fewer than 250 employees and annual turnover not exceeding EUR 40 million. Small enterprises have fewer than 50 employees and an annual turnover not exceeding EUR 7 million (European Commission, 2003).

Enterprise: Enterprise refers to a unit of economic organization or activity, especially a business organization (Merriam-Webster, 2008)