| Content | THIS RESEARCH WORK IS ON THE IMPACT OF FEDERALLY COLLECTED TAXES ON ECONOMIC GROWTH.
ABSTRACT
This study has investigated the impact of tax revenue on economic growth. The study relied primarily on secondary data from journals, textbooks, magazines, newspapers and internet sources. The study made use of the judgmental sampling technique. The Central Bank of Nigeria (CBN) and Federal Inland Revenue Service (FIRS) was chosen for the study.
This study adopted both descriptive and inferential statistical analyses, the data were analyzed using SPSS v22, the statistical tools adopted was the Ordinary Least Square (OLS) regression technique.
The result of the regression analysis reveals petroleum profit tax and capital income tax were not statistically significant at 5% level of significance, this means that irregular fluctuation in this revenue could not permit the level of economic growth required from it, in the same vein value added tax and customs and excise duties has significant impact on economic growth during the period under review.
The study concludes that federally collected revenue has significant impact on economic growth. The study recommends tat; There should be stringent penalty imposed on any individual or corporate body who indulge in any form of tax malpractices irrespective of states; Efforts should be intensified by the government towards increased collection of tax revenue this is due to the low contribution of tax revenue to GDP over the period of study; Government through Federal Inland Revenue Service should create an effective and reliable data base for every vatable persons to minimize (if not eliminate) the incidence of tax evasion and there should be constant training and re-training of VAT administrators through seminars, conference to keep them abreast with the modern trend in tax administration; Government should also be able to use taxpayers’ monies in the provision of infrastructural facilities.
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Income tax is one of the major sources of revenue for the federal government. The taxes collected come back to the tax payers in form of social amenities such as pipe-borne water, electricity, health centers, good roads, schools, building of market etc. all these are what they benefit from the tax pay.
Nightingale (1997) describes tax as a compulsory contribution imposed by the government and concludes that even though tax payers may receive nothing identifiable in return for their contributions, they nevertheless have the benefit of living in a relatively educated, healthy and safe society.
According to Soyode & Kajola (2006:4), taxation is defined as “the process of levying and collection of tax from taxable persons”. Taxation has been one of the ways in which government is able to finance its activities. Government imposes levies on individuals, companies; organizations in the form of tax so government, namely the federal government, state government and the local government. The role of tax cannot be underestimated at all. In some developed economies, that has no mineral resources to which they can tap into and make considerable gains. However, in less developed economies like Nigeria the tax system keeps getting reviewed from time to time and keeps getting updated. Some of these reviews include the introduction Tax Identification Number (TIN) in 2008.
Taxes are generally grouped into two, direct and indirect taxes. Direct taxes are taxes from income and wealth rather than consumption and expenditure. Income tax is payable by both physical persons and legal entities (companies) including associations of persons, etc. The rates payable are determined for each year of assessment and are prescribed in the yearly budgets. A company, being a legal entity with management distinct and separate from individual shareholders that own it, also pays income tax called company income tax. Other direct taxes include provisions for taxation of capital gains and gifts, an annual tax on wealth and estate duties. These taxes are subject to evasion and avoidance than indirect tax. This is one of the reasons for looking for the optimal structure of taxation that will raise the highest amount of revenue without distorting the ability to pay.
The earliest trace of any form of direct taxation in Nigeria even before the British administration was in the northern Nigeria. The north was favored for this because it had a form of organized central administration under the emirs unlike the south which except in few places in the west was not organized. In 1904, Late Lord Lugard introduced income tax in Nigeria. It started as a community tax which later culminated in the Native Revenue Ordinance in 1917. In 1918, an amended ordinance extended the provisions of 1917 Ordinance to Southern Nigeria. The first Ordinance applied to Abeokuta in Ogun state and to Benin City in Edo state and in 1928, it was extended to the Eastern Nigeria. The Nigeria income taxation did not start until 1940 when the Native Revenue Ordinances of 1917, 1918 and 1928 were incorporated in the direct taxation
Under Ordinance No 4 of 1940 cap. 54, (hereinafter referred to as the Ordinance) which repealed the Native Ordinance, cap 74 in the 1923 edition and the Native Direct Taxation (Colony) – Ordinance No. 41 of 1937. This Ordinance was however discriminatory as it applied to natives in Nigeria elsewhere, that is, other than in the township of Lagos. However, a more comprehensive Income Tax Ordinance No. 29 of 1943 which came into effect on 1st April 1943 governed the assessment of the income of non-Africans resident outside Lagos as well as Africans and non-Africans resident in Lagos. After the Income Tax Ordinance of 1943, there was no significant change in the tax system until 1956.
However, the Northern Region did not pass its own personal income tax law until 1962. All the regional tax laws later formed the basis of personal income taxation in all the states that were created out of the Regions. In the Federal Territory of Lagos, the Income Tax Ordinance, 1943, remained in force until the Personal Income Tax (Lagos) Act 1961 enacted by the Federal Government. It was the 1961 enactment that gave birth to separate laws on income and profit of both individuals and companies namely Income Tax Management Act (ITMA); and Companies Income Tax Act (CITA). The Petroleum Profit Ordinance was passed in 1959 but took effect from 1st January 1958. So many laws have been passed to date on taxation in Nigeria.
Economic growth occurs where there is an increase in the productive potential of the economy and is the best measured by the increase in a country’s real level of output over a period of time, i.e. the increase in real Gross Domestic Product. Economic Development is a process where there is an improvement in the lives of all people in the country. This involves not only the standard of living, such as greater availability of goods and services (and also ability to purchase them) but also the promotion of attributes such as self-esteem, dignity and respect, and to take control of their own lives. Nigeria is the biggest economy in Africa. Services are the largest sector of the economy, accounting for about 50 percent of total GDP. One of the fastest growing segments in Services is Information and Communication, which together account for about 10 percent of the total output. Agriculture, which in the past was the biggest sector, now weights around 23 percent. Crude Petroleum and Natural Gas constitute only 11 percent of total GDP, while being the main exports. Industry and Construction account for the remaining 16 percent of GDP.
According to Olashore (1999), the Nigerian economy has remained in a deep slumber with macroeconomic indicators reflecting an economy in dire need of rejuvenation, revival and indeed radical reform.
1.2 Statement of the Problem
There is a general lack of consensus among scholars on the contribution of Federal tax revenue to the economic growth of nations. For instance, whereas Ariyo (1997) in his study of the Nigerian tax system documented a satisfactory level of productivity of the tax system before the oil boom, Festus and Samuel (2007) established that the role of Federal tax revenue in promoting economic activities and growth is not felt in Nigeria. The two studies reflect that the oil boom has not improved the economic state of the country since before the boom; there was a level of satisfactory and after the boom, the growth and economic activities deteriorated.
It has been observed that federally collected taxes have not really achieved the objective of contributing to the economic development and growth of Nigeria, which has been attributed by the government and practitioners to poor tax administration, tax evasion and non-compliance with tax laws by the tax payers. These therefore make it imperative to carry out this research.
1.3 Objectives of the Study:
The main objective of this research was to evaluate the impact of federally collected taxes on the Nigerian economy with a view to determining their contribution to the growth and development of the national economy.
The specific objectives are to:
- Evaluate if Petroleum Profit tax is contributing positively to the growth and development of Nigerian economy.
- Access if Company Income Tax is contributing positively to the growth and development of the Nigeria economy.
- Determine if Value Added Tax is contributing positively to the growth and development of Nigerian economy.
- Access the impact of Customs and Excise duty on the growth and development of Nigerian economy.
1.4 Research Questions:
- To what extent does Petroleum Profit Tax contribute to the economic growth and development of the Nigerian economy?
- How does Company Income Tax contribute to the growth and development of Nigerian economy?
- In what way does Value Added Tax contribute to the growth and development of Nigerian economy?
- What impact does Customs and Excise duty have on growth and development of the Nigerian economy?
1.5 Research Hypothesis:
Hypothesis 1: H0= Petroleum Profit Tax does not have a significant relationship with the growth and development (GDP) of Nigerian economy.
Hypothesis 2: H0= There is no significant relationship between Company Income Tax and the growth and development (GDP) of Nigerian economy.
Hypothesis 3: H0= Value Added tax has no significant relationship with the growth and development (GDP) of Nigerian economy.
Hypothesis 4: H0=There is no strong relationship between Custom and excise duty and the growth and development (GDP) of Nigerian economy.
1.6 Significance of Study
Tax revenue is one of the sources of revenue to the government. This can be used to achieve economic growth, maintain equilibrium in the economy by combating elements of depression, inflation, or deflation, achieve equity in income and wealth distribution and address issues of poverty and promote socioeconomic development, hence the need to find out the extent Federal tax revenue impacts on Nigeria’s economic growth.
This study will enlighten individuals, organizations; government on the impact of federal income taxes to the economic growth and development of Nigeria. The findings of the research may also serve as reference for policy lines to the Nigerian government and policy makers. This topic can also provide a guide for further researches to academicians, students and researchers.
1.7 Scope of the Study
The scope of this study covered the impact of federally collected taxes on economic growth and development over a period of seventeen years (from 2000-2017). The trend of the Company Income tax, Petroleum Profit tax, Customs and Excise duty and valued added tax are examined for the period to determine their correlation with the Nigerian economy which will be captured as Gross Domestic Product (GDP). The focus was based on the data obtained at the Federal Inland Revenue Service (FIRS).
The three major tiers of government: Federal Government, State Government and Local Government have been saddled with the responsibility of collecting taxes in Nigeria. The Federal Government uses the Federal Inland Revenue Service (FIRS) to deal with taxes that are paid by companies and Federal Capital Territory. Under this research, we examined the federal taxes collected by the government and its contribution to the Nigerian economy.
1.8 Operationalization of Variables
The purpose of this study was to examine the impact of tax revenue collected by Federal Government on economic growth in Nigeria.
To achieve this, two variables were identified in the study; these are Independent and dependent variables. The independent variables are the federally Collected Taxes generated in Nigeria in the following dimensions as surrogates: Companies Income Tax (CIT), Petroleum Profit Tax (PPT), Custom and Excise Duties (CED), and Value Added Tax (VAT). The dependent variable on the other hand is Economic Growth (EG) measured by Gross Domestic Product (GDP) of Nigeria.
The following models have been adopted
Y=f(X)
Y= y1
X=x1, x2, x3, x4
Where;
Y= Economic Growth (EG)
y1= Gross Domestic Product (GDP)
X= Federally Collected Taxes (FCT)
x1= Companies Income Tax (CIT)
x2= Petroleum Profit Tax (PPT)
x3= Customs and Excise Duties (CED)
x4= Value Added Tax
Functional Relationships
GDP=f (CIT)………………..1
GDP=f (PPT)………………..2
GDP=f (CED)……………….3
GDP=f (VAT)……………….4
GDP= f (CIT, PPT, CED, VAT)…………5
The above functional relationships are the underlying functions of the impact of federal collected taxes on the economic growth of Nigeria.
1.9 Operational Definition of Terms
- Tax:
Nightingale (1997) describes tax as a compulsory contribution imposed by the government and concludes that even though tax payers may receive nothing identifiable in return for their contributions, they nevertheless have the benefit of living in a relatively educated, healthy and safe society
- Taxation:
Taxation is defined as the process of levying and collection of tax from taxable persons.
- Economic Growth:
This occurs where there is an increase in the productive potential of the economy and is the best measured by the increase in a country’s real level of output over a period of time, i.e. the increase in real Gross Domestic Product.
- Economic Development:
This is a process where there is an improvement in the lives of all people in the country. This involves not only the standard of living, such as greater availability of goods and services (and also ability to purchase them) but also the promotion of attributes such as self-esteem, dignity and respect, and to take control of their own lives.
- Value Added Tax:
It can also be defined as a tax on spending/consumption levied at every stage of a transaction but eventually borne by the final consumer of such goods and services. It is
levied at the rate of 5%.
- Nigeria Tax Authorities:
This refers to the revenue collection, agencies of the federal government represented by the Federal Inland Revenue service (FIRS), State Inland Revenue Service (SIRS) and Local Government Revenue Committee. | THE ROLE OF FINANCIAL CONTROL INSTITUTIONS IN PROMOTING FINANCIAL ACCOUNTABILITY IN THE PUBLIC SECTOR: A STUDY OF PLATEAU STATE NIGERIA UNDER DEMOCRATIC REGIMES
CHAPTER ONE
INTRODUCTION
This project focuses on the role of financial control on selected institutions in promoting financial accountability in the public sector with a study of plateau state under democratic regimes. Nigeria, a federation of thirty-six States and Seven Hundred and seventy-four local governments, was a colony of Britain but became an independent State in 1960. It has a population of nearly one hundred and twenty million people and the dominant source of income is oil (Oladosu and Oyelakin 2003:1).
Nigeria has been divided into six geo-political zones - South-South, South-West, South- East, North- East, North -West and North- Central. Plateau State falls within the geo-political zone of North-Central. The State was first created as Benue-Plateau in 1967. It later became Plateau State with the creation of Benue State in 1976. Nassarawa State was also created out of Plateau State in 1996.
The Nigerian public sector consists of the governments at the Federal, States, Federal Capital Territory, Local Governments and all government parastatals. The public sector plays an important role in economic development. It provides services which the private sector may not be willing or able to provide. Chan (1988:15) argues that
the public sector provides many essential services to society. It plays an essentially compensatory function; that is, it performs those functions that the market economy does not do efficiently or lacks the incentive to do at all.
Musgrave and Musgrave (1976) classify these functions as
- Resource Allocation - the provision of public goods and services.
- Income Distribution - the adjustment of the distribution of wealth or income in the society to conform to some principle of fairness.
- Stabilization - the use of fiscal policies to achieve high employment, price stability and economic growth.
In a Federal system like Nigeria, the different tiers of government perform these functions in varying degrees. Governments at all levels desire to deliver good governance to all their citizens. This is because “good governance is central to creating and sustaining an enabling environment for development” (Asselin, 1995:3). A strong link exists between economic development and good governance, and between good governance and fiscal transparency.
The importance of good financial management in achieving the objectives of government has not lost its relevance. Because of this, the financial accountability of most countries is enshrined in the Constitution to facilitate the discharge of financial accountability. Oshisami and Dean (1984:36) remark that in recognition of the importance of finance as a basis for political power, and the opportunities which absolute control offers for its abuse, power over finance is divided, the division being formally recognized Constitutionally in virtually all countries.
Global practice shows that power over finance is shared between the Executive and the legislature and in some cases with an independent body - the Supreme Audit Institution. Has this Constitutional sharing of power over finance achieved the desired result?
In view of the enormous responsibilities placed on government for the welfare of its citizens, the public sector needs a lot of resources. In pursuit of this, the government needs to put up a framework for the management and control of the public purse. The formalities established in relation to accounting and financial control support the process of governance
The term ‘control’ has long been recognized as one of the principles of management. Control exists in most human endeavors. Most authorities agree on what constitutes control. Lucey (1996:137) states that control is concerned ‘with the efficient use of resources to achieve a previously determined objective, or set of objectives, contained within a plan’. Similarly, Koontz, Donnel and Wiehrick (1980:81) define control as the measurement and correcting of activities of subordinates to assure that events conform to plans. Ekwonu (1996:35) states that control ‘is the measurement of the performance of the activities of subordinates in order to make sure that objectives and plans devised to attain them are being accomplished’. All these definitions point to the fact that control exists to ensure that organizational objectives are met through measurement of performance. The control process according to (Koontz et al 1980:722) involves three steps:
- Establishing standards
- Measuring performance against these standards and
- Correcting deviations from standards and plans
Finance occupies a special place in the conduct of government business. Public finance has been defined by Buhari (1993:66) as ‘a branch of economics concerned with the finance and economic activities of the public sector’.
From these definitions, we can state that public finance not just deal with the ways government raises money, but also the manner such money is expended with the aim of achieving economic growth.
In Nigeria, the Federal government raises money through the following major sources: Petroleum profit tax, Mining, Company income tax, Import duties, Export duties, Excise duties, Interest and repayment of loans granted by the government (Buhari, 1993:169).
Others include; Education tax, Value added tax, Pay-as-you-earn, Fees and charges, Royalties, Rent of government property, Grants, aids and loans.
The money raised through the above sources is expended on the following items: Administration, Infrastructural services, Productive services, Defense, Interest on internal and external loans, and Diplomatic missions (Buhari, 1993:168)
In connection with government finance, we can identify two basic groups of control- administrative and financial control; the former referring to those techniques which have indirect bearing upon expenditure operation while the latter denote techniques of control relating to fiscal control. The emphasis of this study is on financial control.
Financial control is a very important type of control in the management of government finance. Oshisami (1992:29) defines it as the process which ensures that financial resources are obtained at cost considered to be economical and utilized efficiently and effectively for the attainment of established objectives.
A comprehensive definition of financial or fiscal control is given by Ekwonu (1996:33) as the sum total of the work, which guides, directs and interprets the budget cycle. It covers the activities of the Executive branch, involving finance and the ministries... the audit department and the legislature...
In a democratic era, financial control may operate internally and externally.
Within the Executive arm of government control by the finance ministry is internal while audit by the Auditor-General and legislative oversight constitute external control.
- Institutions of Financial Control in the Public Sector
There are formal and informal institutions of financial control over public revenue and expenditure. The formal institutions of financial control include the Executive arm of government, Legislature and Office of the Auditor-General or Supreme Audit Institution. The informal institutions of financial control include; the media, the organised civil society and donor agencies.
With respect to the formal institutions of financial control, the Constitution of the Federal Republic of Nigeria, 1999, establishes a cycle of financial accountability for public funds. The cycle provides that:
- Legislature authorizes expenditure
- The Executive controls the collection and issue of funds. In addition, it prepares the accounts.
- The prepared accounts are audited by the Auditor-General and
- The Auditor-General submits the results of his audit to the Legislature through its Public Accounts Committee (PAC). PAC acts on the report by inviting accounting officers to appear before it where need be.
The wisdom in sharing these responsibilities is that absolute conferment of this power on one arm of government can create abuses in financial administration. In other words, financial administration requires a series of checks and balances so that public funds are not wasted or misapplied. But, is this what we find in practice? Are these checks and balances observed?
The financial accountability cycle provides that the Executive arm of government collects, disburses and prepares the accounts of government. The other formal institutions of financial control are excluded from this very vital stages. Their involvement in public sector financial control is only visible when funds have been expended. Is this not the same as calling a medical doctor to give an autopsy report? What guarantee do we have that this sharing of financial responsibilities promote sound financial management in the public sector? Haven been excluded from the critical stages of collection and disbursement of public funds, can the Legislature and State Audit significantly influence public finance?
In the cycle of financial accountability established by the Constitution, the budget is a legislative instrument of financial control over the Executive. Funds should be expended according to legislative intent as expressed in the budget. Has the Legislature been able to control public expenditure using the budget?
The Office of the Auditor-General is a creation of the Constitution. Therefore his status and duties are constitutionally determined. His basic duty is to report on the accounts prepared by the Executive. In his report to the Legislature he states whether the Executive has complied with legislative approval in its execution of the budget. For the Auditor-General to be able to play this important role he has to rely on the financial data supplied by the Executive. He also needs a strong Legislature to help implement his findings. In practice, does the Auditor-General derive the required support from the Executive and Legislature to perform his Constitutional duty? Has he been able to discharge the functions of his office as stipulated by the Constitution?
Informal institutions of financial control may promote financial accountability over public finance and these include; the mass media, the organized civil society, the World Bank and other international donors.
A vibrant media may promote financial accountability by reporting the findings of the Auditor-General. By exposing wrong doings the media may influence the behavior of public officials who may not want to be publicly exposed.
The organized civil society too, may play a significant role in promoting financial accountability in the public sector. This can be achieved by an active inter-reaction between them and the legislature. Krafchick and Wehner (2002:1) argue that inter-reaction between legislatures and civil society organizations is increasing in many countries... From the legislature’s perspective, the input of civil society can help to make the legislature’s engagement with the budget more effective.
The donor community today is an important institution that promotes financial accountability in recipient countries. They encourage borrowers to strengthen domestic institutions of financial control. Sahgal (2001:1) states that “most donors are now looking for ways to improve their performance in terms of promoting good governance and accountability.”
While these informal institutions may also promote financial accountability, however, it is the formal institutions that are the focus of this research.
Researches targeted at strengthening the institutions of financial control over public funds have ignored the influence of the link between the institutions of control, especially the influence of the Legislature on State Audit performance. For example the researches of Ball et al (1999); Bartel (1996); Asselin (1995); Premchand (1989); Hogy (2004); Dye and Stapenhurst (1998); Martinez-Soliman (2003); Krafchik (2002); Sahgal (2001) and Ahsan (1994) emphasize strengthening the institutions of financial control over public funds in isolation, without establishing the interaction between them.
These researches address the problem of public sector financial accountability arrangements on institutional basis only. They fail to identify the shortcomings of the present cycle of financial accountability over public funds in Nigeria. This research intends to address these shortcomings in the context of Plateau State of Nigeria.
Control of public finance is very important to public governance. That is why power over public finance is enshrined in the Nigerian Constitution. To promote financial accountability in Plateau State, power over finance is shared between the Executive, Legislature and the Supreme Audit Institution or the Office of the Auditor General. Have these institutions been able to play the roles assigned to them?
It is observed that there is the problem of non or partial implementation of the budget by the Executive arm of government in Plateau State. The budget is the legislative instrument of control over public finance.
Related to the issue just raised above, is the problem of spending without legislative authority. The checks and balances on public finance requires that the Executive cannot spend without legislative approval. Even where voted funds fall short of requirements, the spending agency must apply for supplementary appropriations provisions and obtain legislative approval for such additional expenditure before incurring them. It has been alleged that this requirement of the law is not usually followed.
The Executive arm of government which implements budgets is required to ensure that expenditures are properly covered in the relevant Appropriation Acts. Funds are supposed to be apportioned to spending departments in line with the approved budget. It has been noted that public expenditure are frequently made on items not budgeted for, which of course means that such expenditure have no legislative approval. Once the budget has been approved, it is alleged that funds are shifted to purposes other than those for which they were meant.
Limits of expenditure are imposed by the budget. However, spending agencies do not observe these limits when incurring expenditure. In the course of budget implementation, a vote book is maintained to ensure that approved budgetary limits are not exceeded. This aspect of expenditure control is often abused. We may ask, why should spending agencies not respect limits when incurring expenditure? With all these abuses, what has happened to the legislative oversight function?
The performance of the Auditor General in Plateau State has been called to question. It is alleged that the Auditor General is incapable of discharging the functions of his office which is constitutionally prescribed. If this is true, why?
The Plateau State Legislature is seen to be weak and unable to discharge its constitutional responsibility of exercising its power of financial oversight on the
Executive arm of government. This problem is alleged to have adverse effects on the performance of the State Auditor General.
Public financial control in Plateau State also suffers from poor financial record keeping. Where financial records are poorly maintained, can the reliance of the Auditor General on these records adversely affect his performance? In addition, if it is true that financial records are poorly maintained in Plateau State, is this a function of the qualification of those who keep these records? How do these problems listed above impact on financial accountability in Plateau State?
The questions of this research are as follows:
- Is the Budget a significant instrument of Legislative control over public finance in Plateau State?
- Are the rules and regulations governing the use of public funds being observed in Plateau State?
- Does the quality of legislative financial oversight enhance the performance of State Auditors?
- Does the reliance of the Auditor-General on financial statements prepared by the Executive enhance his performance?
- Is there any relationship between educational/professional qualification and the number of financial records kept in Plateau State?
- Do the formal institutions of financial control play their roles as spelt out by the Constitution?
This research sets out to evaluate the role of the formal institutions of financial control over public finance in Plateau State. Specifically the research has the following objectives:
- To evaluate the significance of the public budget as an instrument of legislative control over public finance in Plateau State.
- To determine whether the reliance of the Auditor-General on the financial data supplied by the Executive enhances his audit work.
- To examine the quality of legislative oversight function on State Audit performance.
- To investigate the significance of the qualification of Treasury staff on the number of financial records kept.
- To recommend measures on how to improve financial accountability in Plateau State.
Hypothesis One
Ho The public budget is not a significant instrument of Legislative control over
public finance in Plateau State.
H1 The public budget is a significant instrument of Legislative control over
public finance in Plateau State.
RATIONALE/JUSTIFICATION
The budget is an expression of legislative approval on how public funds should be disbursed. Budget implementation is used to judge the Executive’s conformance to this legislative approval.
This hypothesis is formulated to find out whether or not the Executive complies significantly with Legislative approval during budget implementation.
Hypothesis Two
Ho The performance of the Auditor-General is not significantly dependent on the
financial statements prepared by the Executive arm of government.
H1 The performance of the Auditor-General is significantly dependent on the
financial statements prepared by the Executive arm of government.
RATIONALE/JUSTIFICATION
The Auditor-General is an agent of the Legislature. The Auditor-General has the duty of overseeing the management of public funds and the quality and credibility of governments’ reported financial data. The Auditor-General ensures that the budget is implemented according to legislative approval. This hypothesis will reveal whether or not the Auditor-General is able to exercise his duties inspite of his reliance on the financial statements prepared by the Executive.
Hypothesis Three
Ho State Audit performance is not significantly dependent on the quality of
legislative financial oversight.
H1 State Audit performance is significantly dependent on the quality of
legislative financial oversight.
RATIONALE/JUSTIFICATION
This hypothesis seeks to establish whether the quality of legislative oversight (through its public accounts committee) has any influence on State Audit work. Does the quality of legislative financial oversight influence the work of State Auditors?
Hypothesis Four
Ho: There is no significant difference between the qualification of treasury
operating staff and the number of financial records kept.
H1: There is significant difference between the qualification of treasury staff and
the number of financial records kept.
RATIONALE/JUSTIFICATION
Where there is a culture of poor financial record keeping, no meaningful control can be exercised. Good financial record keeping is a necessary condition for the production of auditable financial statement. The aim of this hypothesis is to evaluate whether qualification has a significant effect on financial record keeping in Plateau State.
- SIGNIFICANCE OF THE RESEARCH
A research on the public sector, especially on financial control is very important. This research is significant in a number of ways.
The research will assist financial policy makers in Plateau State and indeed other States in Nigeria formulate policies that will promote financial accountability. The academic community will benefit tremendously from this research. Other researchers may use this research to investigate further issues on public finance control.
The three formal institutions of financial control in Plateau State, that is, the Executive, the Legislature and the Auditor General will discharge their financial responsibilities effectively if the recommendations of this research are implemented.
This research evaluates the role of the formal institutions of financial control over public finance under a democratic setting. This is because the institutions of financial control are fully operational only during democratic dispensations. The Legislature does not exist during military rule.
The role of the informal institutions of financial control such as the media, the organised civil society and international donor agencies though important are not the immediate focus of this research.
Plateau State which is chosen as the case study is an old State - first created as Benue-Plateau State in 1967. The State has witnessed flashes of democratic rule from 1979 to date.
The research period covers years under democratic regimes. These are 19791983; 1991-1992; and 1999-2003. The research period covers ten years of democratic rule. The broken periods are periods of military rule.
The research covers only ministries. Parastatals are excluded because the 1999 Constitution S. 85 (3) does not authorize the Auditor-General to audit or appoint external auditors for government parastatals. Local governments are also excluded since they are guided by a different financial rule called the financial memoranda.
A number of limitations were encountered in this research. The major ones included:
- Literature Review - Getting materials for literature review was difficult - An extensive search for literature took over one year. The cost incurred in obtaining the relevant materials was also enormous.
- Questionnaire Administration - During the main research, we had to deal with an enlarged number of participants in the research. Since the questions were randomly administered, many of the participants were seeing the questions for the first time. Many of them felt that participating in this research would amount to “leaking of government secret”. They were visibly uncomfortable - that was even in spite of assurances given by research assistants that the information required was strictly for research purposes. Some of them asked for time to make up their minds as to whether to complete the questionnaires. For this category of respondents, research assistants had to plead and make repeated visits before the questionnaires were completed and returned.
- Secondary Data Collection - Getting information on public sector activity is difficult. But it is even more difficult getting information on financial activities. Information that is supposed to be publicly available is treated as confidential. Enquiries for financial information are viewed with suspicion. A very high official must authorize the release of such financial information. But getting such an official to authorize the release of the information is pretty difficult. The research assistants were suspected to be agents of opposing political parties. They were thus to be kept at arms’ length. It took a long time to convince the custodians of the required information to release the information.
- State of Emergency - The state of emergency declared in Plateau State on the 18th of May 2004 adversely affected this research. The Plateau State House of Assembly, it will be recalled was also suspended during the period. Reaching out to the suspended members to participate in the research was difficult. Even where contacts were established eventually, completing the questionnaire was not seen to be of any immediate importance. Some of the lawmakers told me that their immediate concern was whether they would be reinstated. They eventually participated. Democratic structures were restored at the end of the state of emergency in November 2004. To God be the glory.
| CORPORATE GOVERNANCE AND FINANCIAL PERFORMANCE OF BANKS: A STUDY OF LISTED BANKS IN NIGERIA
CHAPTER ONE
INTRODUCTION
1.0 Background to the Study
This project is on Corporate governance and financial performance of banks: a study of listed banks in Nigeria. Globalization and technology have continuing speed which makes the financial arena to become more open to new products and services invented. However, financial regulators everywhere are scrambling to assess the changes and master the turbulence (Sandeep, Patel and Lilicare, 2002:9). An international wave of mergers and acquisitions has also swept the banking industry. In line with these changes, the fact remains unchanged that there is the need for countries to have sound resilient banking systems with good corporate governance. This will strengthen and upgrade the institution to survive in an increasingly open environment (Qi, Wu and Zhang, 2000; Köke and Renneboog, 2002 and Kashif, 2008).
Given the fury of activities that have affected the efforts of banks to comply with the various consolidation policies and the antecedents of some operators in the system, there are concerns on the need to strengthen corporate governance in banks. This will boost public confidence and ensure efficient and effective functioning of the banking system (Soludo, 2004a). According to Heidi and Marleen (2003:4), banking supervision cannot function well if sound corporate governance is not in place. Consequently, banking supervisors have strong interest in ensuring that there is effective corporate governance at every banking organization. As opined by Mayes, Halme and Aarno (2001), changes in bank ownership during the 1990s and early 2000s substantially altered governance of the world’s banking organization. These changes in the corporate governance of banks raised very important policy research questions. The fundamental question is how do these changes affect bank performance?
It is therefore necessary to point out that the concept of corporate governance of banks and very large firms have been a priority on the policy agenda in developed market economies for over a decade. Further to that, the concept is gradually warming itself as a priority in the African continent. Indeed, it is believed that the Asian crisis and the relative poor performance of the corporate sector in Africa have made the issue of corporate governance a catchphrase in the development debate (Berglof and Von -Thadden, 1999).
Several events are therefore responsible for the heightened interest in corporate governance especially in both developed and developing countries. The subject of corporate governance leapt to global business limelight from relative obscurity after a string of collapses of high profile companies. Enron, the Houston, Texas based energy giant and WorldCom the telecom behemoth, shocked the business world with both the scale and age of their unethical and illegal operations. These organizations seemed to indicate only the tip of a dangerous iceberg. While corporate practices in the US companies came under attack, it appeared that the problem was far more widespread. Large and trusted companies from Parmalat in Italy to the multinational newspaper group Hollinger Inc., Adephia Communications Company, Global Crossing Limited and Tyco International Limited, revealed significant and deep-rooted problems in their corporate governance. Even the prestigious New York Stock Exchange had to remove its director (Dick Grasso) amidst public outcry over excessive compensation (La Porta, Lopez and Shleifer 1999).
In developing economies, the banking sector among other sectors has also witnessed several cases of collapses, some of which include the Alpha Merchant Bank Ltd, Savannah Bank Plc, Societe Generale Bank Ltd (all in Nigeria), The Continental Bank of Kenya Ltd, Capital Finance Ltd, Consolidated Bank of Kenya Ltd and Trust Bank of Kenya among others (Akpan, 2007).
In Nigeria, the issue of corporate governance has been given the front burner status by all sectors of the economy. For instance, the Securities and Exchange Commission (SEC) set up the Peterside Committee on corporate governance in public companies. The Bankers’ Committee also set up a sub-committee on corporate governance for banks and other financial institutions in Nigeria. This is in recognition of the critical role of corporate governance in the success or failure of companies (Ogbechie, 2006:6). Corporate governance therefore refers to the processes and structures by which the business and affairs of institutions are directed and managed, in order to improve long term share holders’ value by enhancing corporate performance and accountability, while taking into account the interest of other stakeholders (Jenkinson and Mayer, 1992). Corporate governance is therefore, about building credibility, ensuring transparency and accountability as well as maintaining an effective channel of information disclosure that will foster good corporate performance.
Jensen and Meckling (1976) acknowledged that the principal-agent theory which was also adopted in this study is generally considered as the starting point for any debate on the issue of corporate governance. A number of corporate governance mechanisms have been proposed to ameliorate the principal-agent problem between managers and their shareholders. These governance mechanisms as identified in agency theory include board size, board composition, CEO pay performance sensitivity, directors’ ownership and share holder right (Gomper, Ishii and Metrick, 2003). They further suggest that changing these governance mechanisms would cause managers to better align their interests with that of the shareholders thereby resulting in higher firm value.
Although corporate governance in developing economies has recently received a lot of attention in the literature (Lin (2000); Goswami (2001); Oman (2001); Malherbe and Segal (2001); Carter, Colin and Lorsch (2004); Staikouras, Maria-Eleni, Agoraki, Manthos and Panagiotis (2007); McConnell, Servaes and Lins (2008) and Bebchuk, Cohen and Ferrell (2009), yet corporate governance of banks in developing economies as it relates to their financial performance has almost been ignored by researchers (Caprio and Levine (2002); Ntim (2009). Even in developed economies, the corporate governance of banks and their financial performance has only been discussed recently in the literature (Macey and O’Hara, 2001).
The few studies on bank corporate governance narrowly focused on a single aspect of governance, such as the role of directors or that of stock holders, while omitting other factors and interactions that may be important within the governance framework. Feasible among these few studies is the one by Adams and Mehran (2002) for a sample of US companies, where they examined the effects of board size and composition on value. Another weakness is that such research is often limited to the largest, actively traded organizations- many of which show little variation in their ownership, management and board structure and also measure performance as market value.
In Nigeria, among the few empirically feasible studies on corporate governance are the studies by Sanda and Mukailu and Garba (2005) and Ogbechie (2006) that studied the corporate governance mechanisms and firms’ performance. In order to address these deficiencies, this study examined the role of corporate governance in the financial performance of Nigerian banks. Unlike other prior studies, this study is not restricted to the framework of the Organization for Economic Cooperation and Development principles, which is based primarily on shareholder sovereignty. It analyzed the level of compliance of code of corporate governance in Nigerian banks with the Central Bank’s post consolidated code of corporate governance. Finally, while other studies on corporate governance neglected the operating performance variable as proxies for performance, this study employed the accounting operating performance variables to investigate the relationship if any, that exists between corporate governance and performance of banks in Nigeria.
1.1 Statement of Research Problem
Banks and other financial intermediaries are at the heart of the world’s recent financial crisis. The deterioration of their asset portfolios, largely due to distorted credit management, was one of the main structural sources of the crisis (Fries, Neven and Seabright, 2002; Kashif, 2008 and Sanusi, 2010). To a large extent, this problem was the result of poor corporate governance in countries’ banking institutions and industrial groups. Schjoedt (2000) observed that this poor corporate governance, in turn, was very much attributable to the relationships among the government, banks and big businesses as well as the organizational structure of businesses.
In some countries (for example Iran and Kuwait), banks were part of larger family-controlled business groups and are abused as a tool of maximizing the family interests rather than the interests of all shareholders and other stakeholders. In other cases where private ownership concentration was not allowed, the banks were heavily interfered with and controlled by the government even without any ownership share (Williamson, 1970; Zahra, 1996 and Yeung, 2000). Understandably in either case, corporate governance was very poor. The symbiotic relationships between the government or political circle, banks and big businesses also contributed to the maintenance of lax prudential regulation, weak bankruptcy codes and poor corporate governance rules and regulations (Das and Ghosh, 2004; Bai, Liu, Lu, Song and Zhang, 2003).
In Nigeria, before the consolidation exercise, the banking industry had about 89 active players whose overall performance led to sagging of customers’ confidence. There was lingering distress in the industry, the supervisory structures were inadequate and there were cases of official recklessness amongst the managers and directors, while the industry was notorious for ethical abuses (Akpan, 2007). Poor corporate governance was identified as one of the major factors in virtually all known instances of bank distress in the country. Weak corporate governance was seen manifesting in form of weak internal control systems, excessive risk taking, override of internal control measures, absence of or non-adherence to limits of authority, disregard for cannons of prudent lending, absence of risk management processes, insider abuses and fraudulent practices remain a worrisome feature of the banking system (Soludo, 2004b). This view is supported by the Nigeria Security and Exchange Commission (SEC) survey in April 2004, which shows that corporate governance was at a rudimentary stage, as only about 40% of quoted companies including banks had recognized codes of corporate governance in place. This, as suggested by the study may hinder the public trust particularly in the Nigerian banks if proper measures are not put in place by regulatory bodies.
The Central Bank of Nigeria (CBN) in July 2004 unveiled new banking guidelines designed to consolidate and restructure the industry through mergers and acquisition. This was to make Nigerian banks more competitive and be able to play in the global market. However, the successful operation in the global market requires accountability, transparency and respect for the rule of law. In section one of the Code of Corporate Governance for banks in Nigerian post consolidation (2006), it was stated that the industry consolidation poses additional corporate governance challenges arising from integration processes, Information Technology and culture. The code further indicate that two-thirds of mergers world-wide failed due to inability to integrate personnel and systems and also as a result of the irreconcilable differences in corporate culture and management, resulting in Board of Management squabbles.
Despite all these measures, the problem of corporate governance still remains un-resolved among consolidated Nigerian banks, thereby increasing the level of fraud (Akpan, 2007) see Appendix 2. Akpan (2007) further disclosed that data from the National Deposit Insurance Commission report (2006) shows 741 cases of attempted fraud and forgery involving N5.4 billion. Soludo (2004b) also opined that a good corporate governance practice in the banking industry is imperative, if the industry is to effectively play a key role in the overall development of Nigeria.
The causes of the recent global financial crises have been traced to global imbalances in trade and financial sector as well as wealth and income inequalities (Goddard, 2008). More importantly, Caprio, Laeven & Levine (2008) opined that there should be a revision of bank supervision and corporate governance reforms to ensure that deliberate transparency reductions and risk mispricing are acted upon.
Furthermore, according to Sanusi (2010), the current banking crises in Nigeria, has been linked with governance malpractice within the consolidated banks which has therefore become a way of life in large parts of the sector. He further opined that corporate governance in many banks failed because boards ignored these practices for reasons including being misled by executive management, participating themselves in obtaining un-secured loans at the expense of depositors and not having the qualifications to enforce good governance on bank management.
The boards of directors were further criticized for the decline in shareholders’ wealth and corporate failure. They were said to have been in the spotlight for the fraud cases that had resulted in the failure of major corporations, such as Enron, WorldCom and Global Crossing.
The series of widely publicized cases of accounting improprieties recorded in the Nigerian banking industry in 2009 (for example, Oceanic Bank, Intercontinental Bank, Union Bank, Afri Bank, Fin Bank and Spring Bank) were related to the lack of vigilant oversight functions by the boards of directors, the board relinquishing control to corporate managers who pursue their own self-interests and the board being remiss in its accountability to stakeholders (Uadiale, 2010). Inan (2009) also confirmed that in some cases, these bank directors’ equity ownership is low in other to avoid signing blank share transfer forms to transfer share ownership to the bank for debts owed banks. He further opined that the relevance of non- executive directors may be watered down if they are bought over, since, in any case, they are been paid by the banks they are expected to oversee.
As a result, various corporate governance reforms have been specifically emphasized on appropriate changes to be made to the board of directors in terms of its composition, size and structure (Abidin, Kamal and Jusoff, 2009).
It is in the light of the above problems, that this research work studied the effects of corporate governance mechanisms on the financial performance of banks in Nigeria and also reviewed the annual reports of the listed banks in Nigeria to find out their level of compliance with the CBN (2006) post consolidation code of corporate governance. The study also finds out if there is any statistically significant difference between the profitability of the healthy and the rescued banks in Nigeria as listed by CBN in 2009. Finally, it went further to investigate if the banks with foreign directors perform better than those without foreign directors.
1.2 Objectives of Study
Generally, this study seeks to explore the relationship between internal corporate governance structures and firm financial performance in the Nigerian banking industry. However, it is set to achieve the following specific objectives:
- To examine the relationship between board size and financial performance of banks in Nigeria.
- To find out if there is a significant difference in the financial performance of banks with foreign directors and banks without foreign directors in Nigeria
- To appraise the effect of the proportion of non- executive directors on the financial performance of banks in Nigeria.
- To investigate if there is any significant relationship between directors’ equity interest and the financial performance of banks in Nigeria.
- To empirically determine if there is any significant relationship between the level of corporate governance disclosure and the financial performance of banks in Nigerian.
- To investigate if there is any significant difference between the profitability of the healthy banks and the rescued banks in Nigeria.
1.3 Research Questions
This study addressed issues relating to the following pertinent questions emerging within the domain of study problems:
- To what extent (if any) does board size affect and the financial performance of banks in Nigeria?
- Is there a significant difference in the financial performance of banks with foreign directors and banks without foreign directors in Nigeria?
- Is the relationship between the proportion of non-executive directors and the financial performance of listed banks in Nigeria statistically significant?
- Is there a significant relationship between directors’ equity holdings and the financial performance of banks in Nigeria?
- To what extent does the level of corporate governance disclosure affect the performance of banks in Nigeria?
- To what extent (if any) does the profitability of the healthy banks differ from that of the rescued banks in Nigeria?
1.4 Hypotheses
To proffer useful answers to the research questions and realize the study objectives, the following hypotheses stated in their null forms will be tested;
Hypothesis 1a:
H0: There is no significant relationship between board size and financial performance of banks in Nigeria
Hypothesis 1b:
H0: There is no significant difference in the financial performance of banks with foreign directors and banks without foreign directors in Nigeria
Hypothesis 2:
H0: The relationship between the proportion of non executive directors and the financial performance of Nigerian banks is statistically not significant
Hypothesis 3:
H0: There is no significant relationship between directors’ equity holding and the financial performance of banks in Nigeria
Hypothesis 4:
H0: There is no significant relationship between the governance disclosures of banks in Nigeria and their performance
Hypothesis 5:
H0: There is no significant difference between the profitability of the healthy and the rescued banks in Nigeria
1.5 Significance of the Study
This study is of immense value to bank regulators, investors, academics and other relevant stakeholders. By introducing a summary index that is better linked to firm performance than the widely used G-index, the study provides future researchers with an alternative summary measure. This study provides a picture of where banks stand in relation to the codes and principles on corporate governance introduced by the Central Bank of Nigeria. It further provides an insight into understanding the degree to which the banks that are reporting on their corporate governance have been compliant with different sections of the codes of best practice and where they are experiencing difficulties. Boards of directors will find the information of value in benchmarking the performance of their banks, against that of their peers. The result of this study will also serve as a data base for further researchers in this field of research.
1.6 Justification of Study
Generally, banks occupy an important position in the economic equation of any country such that its (good or poor) performance invariably affects the economy of the country. Poor corporate governance may contribute to bank failures, which can increase public costs significantly and consequences due to their potential impact on any applicable system. Poor corporate governance can also lead markets to lose confidence in the ability of a bank to properly manage its assets and liabilities, including deposits, which could in turn trigger liquidity crisis.
From the preceding discussions, it is evident that the question of ideal governance mechanism (board size, board composition and directors equity interest) is highly debatable. Since performance of a firm, as identified by Das and Gosh (2004), depends on the effectiveness of these mechanisms, there is a need to further explore this area. Although researchers have tried to find out the effects of board size and other variables on the performance of firms, they are mostly in context of developed markets. To the best of the researcher’s knowledge based on the literatures reviewed, only few studies were found in the context of Nigerian banks. Due to neglect of banking sector by other studies and with radical changes in Nigerian banking sector in the last few years, present study aims to fill the existing gap in corporate governance literatures.
Studies on bank governance are therefore important because banks play important monitoring and governance roles for their corporate clients to safeguard their credit against corporate financial distress and bankruptcy. An expose by Prowse (1997) shows that research on corporate governance applied to financial intermediaries especially banks, is indeed scarce. This shortage is confirmed in Oman (2001); Goswami (2001); Lin (2001); Malherbe and Segal (2001) and Arun and Turner (2002). They held a consensus that although the subject of corporate governance in developing economies has recently received a lot of attention in the literature, however, the corporate governance of banks in developing economies has been almost ignored by researchers. The idea was also shared by Caprio and Levine (2001). Macey and O’Hara (2002) shared the same opinion and noted that even in developed economies; the corporate governance of banks has only recently been discussed in the literature. To the best of the researchers knowledge, apart from the few studies by Caprio and Levine (2002), Peek and Rosengren (2000) on corporate governance and bank performance, very little or no empirical studies have been carried out specifically on this subject especially in developing economies like Nigeria. A similar study carried out in Nigeria was by Sanda, Mukailu and Garba (2005) where they looked at corporate governance and the financial performance of nonfinancial firms. This scarcity of research effort demands urgent intervention, which therefore justifies the importance of this study, which intends to provide guidance in corporate governance of banks. Furthermore, banks are very opaque, which makes the information asymmetry and the agency problem particularly serious (Biserka, 2007). This also necessitates the study on bank governance.
1.7 Scope and Limitation of Study
Considering the year 2006 as the year of initiation of post consolidation governance codes for the Nigerian banking sector, this study investigates the relationship between corporate governance and financial performance of banks. The choice of this sector is based on the fact that the banking sector’s stability has a large positive externality and banks are the key institutions maintaining the payment system of an economy that is essential for the stability of the financial sector. Financial sector stability, in turn has a profound externality on the economy as a whole. To this end, the study basically covers the 21 listed banks out of the 24 universal banks, operating in Nigeria till date that met the N25 billion capitalization dead-line of 2005. The study covers these banks’ activities during the post consolidation period i.e. 2006-2008. The choice of this period allows for a significant lag period for banks to have reviewed and implemented the recommendations by the CBN post consolidation code. However it was not possible to obtain the annual reports of 2009/2010 since they are yet to be published by many of the banks as at the time of this research.
Furthermore, we focused only on banking industry because corporate governance problems and transparency issues are important in the banking sector due to the crucial role in providing loans to non-financial firms, in transmitting the effects of monetary policy and in providing stability to the economy as a whole. The study therefore covers four key governance variables which are board size, board composition, directors’ equity interest and governance disclosure level.
1.8 Summary of Research Methodology
This study made use of secondary data in establishing the relationship between corporate governance and financial performance of the 21 banks listed in the Nigerian Stock Exchange. The secondary data is obtained basically from published annual reports of these banks. Books and other related materials especially the Central Bank of Nigeria bullions and the Nigerian Stock Exchange Fact Book for 2008 were also reviewed.
In analyzing the relationship that exists between corporate governance and the financial performance of the studied banks, a panel data regression analysis method was adopted. The Pearson correlation was used to measure the degree of association between variables under consideration. However, the proxies that were used for corporate governance are: board size, the proportion of non executive directors, directors’ equity interest and corporate governance disclosure index. Proxies for the financial performance of the banks also include the accounting measure of performance; return on equity (ROE) and return on asset (ROA) as identified by First Rand Banking Group (2006). To examine the level of corporate governance disclosures of the sampled banks, the content analysis method was used. Using the content analysis, a disclosure index is developed for each bank using the Nigerian post consolidation code and the Organization for Economic Cooperation and Development (OECD) code of corporate governance as a guide. This was used alongside with the papers prepared by the UN Secretariat for the nineteenth and the twentieth session of International Standards of Accounting and Reporting (ISAR), entitled “Transparency and Disclosure Requirements for Corporate Governance” and “Guidance on Good Practices in Corporate Governance Disclosure” respectively.
The student t- test was used in analyzing the difference in the performances of the healthy banks and the rescued banks. It was also used to determine if there is any significant difference in the performance of banks with foreign directors and that of banks without foreign directors.
1.9 Sources of Data
This study employed only the secondary data derived from the audited financial statements of the listed banks on the Nigerian Stock Exchange (NSE) in analyzing the relationship between our dependent and independent variables. The secondary data covers a period of three years i.e. 2006 and 2008. This study also made use of books and other related materials especially the Central Bank of Nigeria bullions and the Nigerian Stock Exchange Fact Book (2008). Some of the annual reports that were not available at the NSE were collected from the head offices of the concerned banks in addition to the downloaded materials from the banks’ websites.
The data that was used in analyzing the disclosure index was derived using the content analysis method to score the banks based on their disclosure level. This was done using the disclosure items developed through the use of the CBN and the OECD codes of corporate governance.
| The Impact of product development on banks performance ( A Case study of first bank plc )
The need for this study being the impact of product development on bank performance was to determine the rate at which the performance of this product is helping the economic development an growth in the banking industry in the terms of employment and amended in 1997. The public became aware of the importance especially through the introduction of privatization and the N25 billion capital bases for banks. There is no gainsaying therefore that the Nigerian capital market has come a long way to stay as the powerhouse for mobilizing and allocating long-term capital funds for commerce and industry. | IMPACT OF FINANCIAL INFORMATION ON THE PROFITABILITY OF BUSINESS ORGANIZATION IN NIGERIA
CHAPTER ONE
INTRODUCTION
Background of the Study
This research is on Impact of financial information on the profitability of business organization in Nigeria. The impact of financial information on the profitability of a business organization is becoming more apparent to user groups of a financial statement.
Information is a not an exact science neither are business operations without some subjective and judgmental errors when it comes to reporting them. A financial reporting therefore is a document statement which informs the various interest groups to a business on the operations and performance of their business in a period under review its present state of affairs as well as its anticipated future, in accordance with the statutes. If a financial report is to service its purpose it ought to be characterized by the following;
- Relevance
- Understandability
- Reliability
- Completeness
- Objectivity
- Timeliness
In the information process of an organization is to provide the information required to prepare a financial report which shall have the above characteristics then the transaction doing the period must be recorded prompt by and accurately and interpreted in conformity with the Generally Accepted Information Principles (GAAP), Statements of Information Standard Board (NASB), International Information Standard committee and the companies and Allied Matters Act cop LFN (CAMA).
Financial information reporting become necessary with the obvious need for accountability of stewardship from the managers to whom investors entrusted their financial resources. The Railway age in the UK. Occurred between 1830 to 1870 and for the first time the world same the emergence of multimillion corporations with large numbers of shareholders. It was a period of disorder but it brought the basis for the present day system of corporate financial report. Financial reporting is a duty of stewardship assigned to the directors of a company by section 334 of the company and Allied Matters Act Cap L20 LFN, equally the mandatory responsibility of companies to keep information records derives its strength from section 331 and 382 of the same act. These sections explicitly defined the necessary content and manner in which financial records should be kept.
1.2 STATEMENT OF THE PROBLEM
The study “The impact of Financial information on the profitability of business organization” aims at investigating the financial reports of selected companies in Enugu State with a view to determine the following ;
- The extent to which a standard financial report contributes to or detracts from the growth of a business organization.
- The extent to which the financial reports of corporate business organization comply with statutory provisions.
- The uniformity and conflict which exist in the financial reporting regulations given the multiplicity of regulators.
Therefore, bused on the above statements, the researcher shall investigate the financial information reporting standards and every regulation their bear on the financial statement and to the extent the selected company (s) has either complied with or disobeyed the relevant statutes.
1.3 OBJECTIVES OF THE STUDY
The objectives of this study are to critically examine the financial reports of the selected company and to probe into the fundamental for their preparation as well as its presentation with a view to determining:
- The adequacy of the basis and the fundamental that guides its preparation.
- The degree to which the financial report meets the needs of its various users.
- The extent to which the financial report conform to the established standard.
- The influence that financial report has on business performance.
- Finally, to present suggestions and recommendations based on my findings.
1.4 RESEARCH QUESTIONS
In order to determine the impact of financial reporting on the corporate performance of business organizations, it is pertinent to test the following question;
- Does the information disclosed in the financial statements adequate to support good decision making?
- Does the disclosure requirement of the statutes affect corporate performance positively or negatively?
- Do companies comply strictly with the regulation?
- Does the financial report meet the needs of the various users?
This study will offer solutions to ones raised it is my believe that the result of these finding will go a long why to helping researchers in this area of study, it will also enhance the understanding of the structure of published reports and accounts by the users.
The various users groups of the published financial report have their benefits from this study as follows:
- The Potential Investors: These are groups who are interested in committing their financial resources to the buying of the company’s shares. These set of people will benefit from this study as the result of this study still arm them with the necessary tools with which to evaluate the financial report of a corporate organization as it affects them.
- The General Public: This group shall benefit from this report by the knowledge that the business organization exists for them and not against them, as such has to live up to its full responsibilities.
- The Regulators of Financial information Report: This group includes the Nigerian Information Standard Board (NASB), the companies and Allied Matters Act 2004 Cap (20 LFN (CAMA) the Banking and Other Financial Institutions Act of 1991 (BOFIA), prudential guidelines for licensed Banks. The Insurance Act 2003. The study will help them to standardize and harmonize their operations.
- The Employee Group Including Existing: Potential and past employees.
- The Government Including Tax Authorities Department who have Interest in the Financial Reports of Companies: The result of this work shall be of immense assistance to each to these user groups in the advancement of their interest.
1.5 RESEARCH HYPOTHESES
The following null and alternative hypothesis shall be tested in this research works:
- H0: The information provided in financial statements is not adequate to support good decision making.
Hi: The information provided in financial statements is not adequate to support good decision making.
- H0: The disclosure requirements of statements do not affect corporate performance positively.
Hi: The disclosure requirements of statements do not affect corporate performance positively.
- H0: corporate organizations do not comply strictly to the statutory regulations.
Hi: corporate organizations do not comply strictly to the statutory regulations.
- H0: Financial reports do not meet the needs of the various users of financial information.
Hi: financial reports do not meet the needs of the various users of financial information.
1.6 SIGNIFICANCE OF THE STUDY
This study is a very important one and most significant at this period of economic situation which has witnessed the collapse of giant corporate with impressive profit and loss accounts and balance sheet statement, because the financial report serves is a “prima facie” evidence on the state of attains of such companies as well as its performance and could be relied upon as a certificate because it had the auditors certification, financial reporting could be done with every serious business, utmost good faith and diligence.
1.7 SCOPE OF THE STUDY
This study could have covered the impact of financial information reporting on corporate performance of all the sectors of the Nigerian economy but due to the challenges of such a task especially the financial resources with which to execute it, it is limited to braving industry. The study used the Nigerian Breweries plc, Enugu.
1.8 LIMITATIONS OF THE STUDY
The limitations encountered by the researcher of this work are given as follows:
- The confidential nature of financial information information in the business organization posed as a problem to this business organization posed as a problem to this study.
- The researcher was unable to reach all the members of the sample as a result of their frequent travels and busy schedule.
- The sample used in the research though representative but it is relatively small compared to the population, as a result of lack of financial with which to carry out the research on a greater sample.
1.9 DEFINITION OF TERMS
Auditor: A person who is qualified to examine the accounts of an organization to see that they are in order. 17
Balance Sheet: A business as at a specified date.
Bank: A financial institution whose responsibilities among others is to keep deposits for their client and customers.
Government: An institution of the state whose responsibility is to maintain law and order in the society.
Prima facie: Sufficient to establish something legally until disprove later.
Researcher: An enquiring basically concerned with search knowledge. | CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
This project is on Analysis of tax morale and tax compliance in Nigeria. The subject of taxation has received considerable intellectual and theoretical attention in the literature. Taxation is one of the most volatile subjects in governance both in the developing and developed nations. Tax refers to a “compulsory levy by a public authority for which nothing is received directly in return” (James and Nobes, 1992). According to Nightingale (2001), “a tax is compulsory contribution, imposed by government, and while taxpayers may receive nothing identifiable in return for their contribution, they nevertheless have the benefit of living in a relatively educated, healthy and safe society”. She further explains that taxation is part of the price to be paid for an organized society and identified six reasons for taxation: provision of public goods, redistribution of income and wealth, promotion of social and economic welfare, economic stability and harmonization and regulation.
In other words, a tax is an imposed levy by the government against the income, profits, property, wealth and consumption of individuals and corporate organizations to enable government obtain the required revenue to provide basic amenities, security and well-being of the citizens. First detailed information about taxation can be found in Ancient Egypt (Webber and Wildavsky, 1986). The Pharaohs appointed tax collectors (called scribes) and paid them high salaries to reduce the incentives to enrich themselves. Furthermore, scribes working in the field were controlled by a group of special scribes from head office. Today, corruption of the tax agency is still a problem, especially in developing countries.
According to the traditional model of tax compliance by Allingham and Sandmo (1972), taxpayers choose how much income to report on their tax returns by solving a standard expected utility-maximization problem that trade off the tax savings from underreporting true income against the risk of audit and penalties for detected non compliance. In this framework, both the threat of penalty and audit makes people pay their taxes (Allingham and Sandmo, 1972).
Some preliminary tax morale research was conducted during the 1960s by the Cologne School of Psychology, that tried to narrow the bridge between economics and social psychology by emphasizing that economic phenomena should not only be analyzed from the traditional neoclassical point of view but also from social psychology perspective. In particular, they saw tax morale as an important and integral attitude that was related to tax noncompliance.
Tax morale is defined as the “intrinsic motivation to pay taxes”. Torgler (2002) and Fred (2003) stress its relevance to understand the high observed level of compliance. Three key factors are important in understanding tax morale: they are, moral rule and sentiments, fairness and the relationship between taxpayer and government. According to James, Murphy and Reinhart (2005), tax laws cannot cope with every eventuality and has to be supplemented with administrative procedures and decisions and just as importantly, in order to work, it has to have a reasonable degree of willing compliance on the part of the taxpayers themselves.
Therefore, a more appropriate definition of compliance could include the degree of willingness with tax laws and administration that can be achieved without the immediate threat or actual application of enforcement activity. Tax compliance may be viewed in terms of tax avoidance and evasion. The two are conventionally distinguished in terms of legality, with avoidance referring to legal measures to reduce tax liability and evasion as illegal measures. Compliance might therefore be better defined in terms of compliance with the spirit as well as the letter of the law (James, Murphy and Reinhart 2005).
Nigeria is governed by a Federal system and the government's fiscal power is based on a three- tier tax structure divided among the Federal, State, and Local governments, each of which has different tax jurisdictions. The Nigerian tax system is lopsided. The federal government controls all the major sources of revenue like import and excise duties, mining rents and royalties, petroleum profit tax and company income tax, value added tax among other revenue sources. State and local government taxes are minimal, hence, this limits their ability to raise independent revenue and so they depend solely on allocation from Federation Account.
In 1992, the government introduced self assessment scheme, under which a taxpayer is expected to fill a tax assessment form to determine his taxable income. Here, the intrinsic motivation to pay tax (that is, tax morale) will determine the level of compliance with reporting requirements. Which means that the taxpayer files all required tax returns at the proper time and that the returns accurately report tax liability in accordance with the law. The advent of democratic rule in 1999 has put greater pressure on the three-tier of governments to generate enough revenue and meet electoral promises in terms of provision of basic necessities and infrastructure for the economic empowerment of the people. To achieve these goals taxpayers must pay their taxes willingly as and when due. In other words, a high tax morale is required from the taxpayer in order to achieve a high degree of tax compliance.
Webley et al. (1991), detect a positive relationship between government performance and tax compliance But in spite of all the researches that have been done, more empirical work is needed to confirm the existence of these relationships and to measure the strength of their influence on tax compliance. This is particularly so, since tax compliance is of obvious importance fo r most countries. This work aims to study tax compliance in Nigeria, thereby supplementing empirical research on this important international problem. This is therefore an opportunity to take a stroll through theoretical and empirical findings in the tax morale literature, focusing on Personal Income tax morale.
1.2 STATEMENT OF RESEARCH PROBLEM
Low tax compliance is a matter of serious concern in many developing countries. This is because it limits the capacity of government to raise revenue for developmental purposes (Torgler, 2003). This implies that the higher the revenue, the more likely government will put in place developmental plans for the enhancement of the living standard of the people. This is because when people pay taxes more revenue accrues to the government. The major problem of this research therefore, is to determine the effect of tax morale on the taxpayer in compliance with tax policies of government as a useful avenue for revenue generation.
The more modern approach to tax compliance has benefited from many contributions from different disciplines. There is a range of factors that might influence taxpayers behavior. For instance, work in sociology has identified a number of relevant variables such as age, gender, race and culture. The role of individuals in the society and accepted norms of behavior have also shown to have a strong influence (Wenzel, 2002). Also Polinsky and Shavell (2000), present a survey of the economic theory of public enforcement of law, and emphasize the aspect of social norms, that can be seen as a general alternative to law enforcement in channeling individual behavior.
There are limits for a government to increase compliance using traditional policies such as audits and fines. Therefore, if the government can influence a norm, tax evasion can be reduced by policy activities. Most researchers on tax compliance for example, (Torgler, 2003), (McBarnet, 2003) and (Murphy and Harris, 2007). focused their attention on the Western World and some Asian countries. Socio-cultural factors are important components in the lives of a people and given the deep-rooted and pervasiveness of these in the Nigerian societies, there is a clear need for more empirical research on the factors involved in the decision making process regard ing compliance, since a better understanding of these factors can give birth to strategies that improve compliance. It is therefore, the focus of this study to subject tax compliance to empirical analysis in the Nigerian context.
1.3 OBJECTIVES OF THE STUDY
The general objective of this study is to determine the effect of Tax Morale on the taxpayer in compliance with tax policies of government in Nigeria. In doing so, it seeks to:
i Determine the extent of tax morale on the tax payer and its effect on tax compliance.
ii Ascertain the effect of trust in government on tax compliance.
iii Examine the effect of Nigerian Traditional Institution on tax morale of tax payers.
iv Determine the effect of cultural norms on the tax payers morale.
v Ascertain the tax payers confidence in the legal system on tax morale.
1.4 RESEARCH QUESTIONS
This study is an effort at understanding the effect of tax morale on tax compliance in the Nigerian context. Therefore, the study is hinged on the following questions;
i What is the effect of tax morale on taxpayers compliance?
ii Will trust in government affect tax compliance?
iii To what extent has confidence in the legal system affect tax compliance?
iv What is the relationship between Traditional Institution and tax morale?
v To what extent has social norms affect tax morale?
1.5 HYPOTHESES
Hypotheses are assumptions on which a researcher bases his investigation and on the basis of which a confirmation of the assumed conditions are tested and validated. The hypothesis on which this research study is based are stated in null form as follows:
i Hο; Tax Morale has no significant effect on tax payer compliance.
ii Ho; There is no significant relationship between trust in government and tax compliance. iii Ho; There is no significant relationship between the Nigerian Traditional Institution and tax compliance.
iv Ho; There is no significant relationship between taxpayers cultural norms and the extent of their tax compliance
v Ho; There is no significant relationship between the tax payers‟ confidence in the legal system and tax compliance.
1.6 SIGNIFICANCE OF STUDY
1.6.1 Theoretical Significance
The deterrence doctrine can be traced back to the classical works of Jeremy Bentham and Cesare (Murphy,2008). Their classical utility theory of crime is that people are rational actors who behave in a manner that will maximize their expected utility. Becker (1968) argued that authorities needed to and appropriately balance between detection of non-compliers and sanctions to the point where non-compliance becomes irrational.
In the early 1970s, Alligham and Sandmo (1972) extended Becker‟s work on the economics of crime to the taxation context. They examined taxpayers‟ decision to evade taxes when they were filling out their tax returns and examined the relationship between penalty rate for tax evasion at the time, the probability of detection, and degree of tax evasion engaged in. What they found was that there was a relationship between these variables; with a higher penalty rate and probability of detection deterring individuals from evading their taxes. In the 1980s, therefore, many scholars began to question the value of deterrence alone in regulating behavior. They began to focus their attention on researching compliance rather than deterrence and began to realize the importance of persuasion and cooperation as a regulatory tool for gaining compliance. In fact, research has shown that the use of threat and legal coercion, particularly when perceived as illegitimate, can produce negative behavior; these actions are more likely to result in further non-compliance (Murphy and Harris 2007), creative compliance (McBarnet 2003), criminal behavior or opposition (Fehr and Rokenbach 2003).
According to Kagan and Scholz (1984), unreasonable behavior like disrespect for citizens, arbitrary refusal to take their concerns into consideration by regulators during enforcement generates resistance to compliance. Tyler (2006) argues that if regulators are prepared to first engage in dialogue and fair treatment with those they regulate, then, this will serve to encourage support for the law. Most research works in this area of study have focused on Western world and some Asian countries; therefore, the significance of this study lies in the fact that it will provide a framework for inter-state comparison between nations of the world. Moreover, our findings and conclusion will form a basis for further research work.
1.6.2 Practical Significance
With the current effort at social and economic development by Third World countries, a study like this is significant, as it is capable of contributing to the present knowledge in the area of interaction between socio-cultural factors and tax compliance, which may be in terms of consequences for policy issues and development programmes.
1.6.3 Operational Significance
Tyler (1997) has specifically shown that people value respective treatment by authorities and view those authorities that treat them with respect as more entitled to be obeyed. The operational significance of this study therefore, lies in the fact that; tax authorities will tend to be more oriented towards seeking result, through cooperation rather than by coercion alone, and prefer to see themselves as service providers rather than as strict law enforcers.
1.7 SCOPE AND LIMITATION OF STUDY
This study evaluates the effect of tax morale on tax evasion, tax avoidance and tax compliance in Nigeria. The study however, is limited to the study of organizations in the public, private and informal sectors of the Nigerian economy. These organizations are selected because they are duly registered with the Federal Inland Revenue Service and the Lagos State Internal Revenue Service for Pay As You Earn (PAYE). Also from the notes to their audited accounts, there has never been any negative report regarding tax evasion or tax avoidance. The limitation of this study, however, is in the area of methodological constraints in terms of which type of analytical technique is most appropriate for the work. In addition, because of funds and time constraint, the work is further limited to the selected organizations.
1.8 SUMMARY OF RESEARCH METHODOLOGY
The study adopted survey research design for data collection through standardized questionnaires administered to respondents. The population for this study comprised anybody of eighteen (18) years and above who is in employment (both in the private and public) sectors of Nigerian economy. Six organizations in the public, private and informal sectors formed the sample size of this study. Furthermore, a total number of 100 questionnaires were administered in each of the six public and private organizations. The nominal as well as the 7-point Likert Scale was employed in the study.
The data collected allow for measuring tax compliance as dependent variable and to search for factors that shape tax morale. Survey provides a good source of information about tax morale. The main advantage is that they include many socio-economic, demographic and attitudinal variables, thus, in a multivariate analysis; we can analyze what shape tax compliance using the multiple linear regression model. But it should be noted that surveys can be biased if they do not cover a representative share of the population. In other words, a high response rate is required. The sensitive nature of compliance information might discourage participation in such a survey, therefore, to reduce this problem, this study covered a broad variety of questions on different topics. Furthermore, the way we describe tax morale is less sensitive compared to a question asking whether a person has evaded taxes or not. Hence, we expect a higher degree of honesty in the answers to these questions.
1.9 SOURCES OF DATA
The study made use of primary source for data collection through standardized questionnaire administered to respondents and literatures. Questionnaire was administered to the respondents because of its advantage. It enables vital information, which cannot be obtained from written records to be at the disposal of the researcher. This is because in a questionnaire, the respondent's anonymity is assured.
1.10 OPERATIONAL DEFINITION OF TERM
Tax; Tax is an imposed levy by the government against the income, profit, property, wealth and consumption of individuals and corporate organizations.
Tax Evasion; Tax evasion is a deliberate act on the part of taxpayer not to pay tax due.
Tax Avoidance; Tax avoidance is a way of identifying the loop-hole in the tax law and then taking advantage of such a loop-hole to reduce the tax payable.
Tax aversion; Tax aversion is a situation where the tax law might be unclear, thereby, confusing taxpayer as to the correct tax payable.
Tax Morale; Tax Morale is the intrinsic motivation to pay tax.
Tax Compliance: Willingness to pay taxes without threat or coercion
Social Norms: A set of behavioural models and rules or standard of behaviour shared by members of a social group.
Cultural Norms: Are behavior patterns that are typical of specific groups.
Legal System: A system for interpreting and enforcing the laws
Tax System: A legal system for assessing and collecting taxes |
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