| Content | ABSTRACT
This research is on THE ROLE OF FINANCIAL CONTROL IN THE PUBLIC SECTOR, a case study of ministry of finance, Alausa Lagos State” The chapters reveal the creation of Public sectoring Nigeria, source of income and revenue in Public sector and the topic also reveal the financial management operation system in Nigerian. Many problems are ascribed to the cause of managing a public sector which included corruption, misappropriation of funds, proper accessing control and mismanagement of funds. The research work also reveal the basic problems affecting ministry of finance in Lagos state which include source of revenue, financial motivation and ways by which revenue allocated are been utilized. However, the research basically state that the problems of financing a public sector lies in the hands of the government, the society and individual contribution to their community. It should be noted that for .any society to achieved success, most especially in the area of financial there is need for individual, nongovernmental and governmental support is needed.
CHAPTER ONE
INTRODUCTION
1.2 BACKGROUND TO THE STUDY
Finance is the sinews of wars for all functional organizations in any economic. It is a critical prerequisite which enables an enterprise, public or private to maintain itself and effectively meet its commitment to individuals and groups who consume its output of goods and services.
Lagos state ministry of finance is a public sector organization with assigned functions and responsibilities-administrative structure and financial arrangement for maintaining both itself and rendering its statutorily assigned functions to us citizens. In view of this, the genetic centrality of finance to organizational performances also applies to public sector.
In Nigeria, the operating 1999 constitution of the Federal Republic accepted local government as a third tier of government. Like in most countries of the world, the Nigeria public sectors have five easily discernible sources of revenue open to them. Those are grants, local tax, rates or property tax, user fees and charges and loans. The prevailing federal government revenue allocation formula stipulates that public sector is entitled to twenty percent of the revenue accruable to the federal and ten percent of the internally generated revenue of the state government and of course these are in addition to finance from traditional internal sources of local revenue. However, the amount internally generated by each of the public sectors is very small.
The ministry of finance is therefore in a situation where they depend almost entirely on the Federal and State Government for funds for the performance of their statutory functions. Consequently, the federal and state government have often remained paternal in the financing of this level of government. A function of this paternalism is the financial uncertainly in the country. Therefore one is not surprised that the little wonder Nigerian public sector have seasonally suffered pecuniary distress which taxes their operations. The peculiar circumstance of the creation and existence of public sector coupled with the unpredictability of its political and administrative environment in Nigeria largely account for the appeal of the topic: the role of financial control in the public sector.
The result of this appeal has been the sustained effort in seeking strategies for evolving stable financial arrangement for the success of public sector in meeting its dual commitment of maintaining itself and rendering services of the people.
This part also informs the present study. However, it is clear from the prevailing literature that most of the findings are not up-to-date hence some of the beliefs and attitudes of scholars to the identified problems of public sector finance are not supported by both adequate and current data.
In view of the laps that has been identified, another enquiry into ministry finance in Nigeria as become most imperative. It is hoped that such inquiry will be more intellectually simulative in the area of public sector finance especially as it highlights the financial policy for public sector in the country in particular and the world at large.
1.2 STATEMENT OF THE PROBLEM
Despite the various efforts and initiatives taken by past governments in ensuring financial emancipation of ministry of finance and to ensure its smooth functioning, this third tier government is still faced with mirage problems. Some of them are as follows:
- Lack of financial autonomy for the public sectors, which hampers the effectiveness of the ministry of finance.
- Unstable financial arrangement for the success of public sector.
- The menace of corruption and mismanagement is still a major concern.
- The inability of most ministry of finance to improve on their internally generated revenue to complement the statutory allocation.
- The gap between income and expenditure vis-à-vis the expenditure pattern of most ministry of finance.
1.3 OBJECTIVES OF THE STUDY
The objectives of the study include the followings:
(i) To examine the existing financial control arrangement relevant to the Nigerian public sectors with special reference to sources of income.
(ii) To examine the inter–governmental relationship existing between Nigeria’s three levels of government and by extension ascertain the constraints on the financial autonomy of public sectors.
(iii) To attempt to appraise the existing and potential source of income for public sector.
(iv) To explore citizens for residents attitudes to public sector finances with a view to explaining whether or not they are ready to pay rates, users fees charges and taxes and possibly find out their perception of local services in general.
(v) To examine prospects for Nigeria public sector in the light of the finding and logically recommend ways for effective financial management for public sector throughout the country
1.4 RESEARCH QUESTIONS
Towards attaining the given objectives of this study, a number of pertinent and specific questions were asked. Some of the questions are:
(i) What are the existing source of revenue of public sector and to what external is their statutory functions commensurate with the financial implications of their statutory functions.
(ii) What implication has the inter-governmental constitutional relationship between Nigeria’s three levels of government for public sector.
(iii) What are the factors hindering the improvement of the financial base of public sector.
(iv) Are the people unwilling to pay their taxes while they expect and demand good services.
(v) What other potential revenue sources abound which public sector could tap to improve their efficiency and effectiveness.
1.5 STATEMENT OF HYPOTHESIS
In order to achieve the objectives of this study, the following hypothesis will be tested.
(1)Ho: Inadequate financial control will not affect the performance of public sector.
HA: Inadequate financial control will affect the performance of public sector
(2)Ho: Financial autonomy will not improve the administration of public sector.
HA: Financial autonomy will not improve the administration of public sector.
(3)Ho: Increasing the internal generated revenue base on public sectors will not stimulate growth.
HA: Increasing the internal generated revenue base on public sectors will stimulate growth.
1.6 SIGNIFICANCE OF THE STUDY
This study is very essential to various classes of people in the area of business. the study will go a long way in helping both the existing and potential entrepreneurs and management of business organization and public sector organization towards the undertaking and the knowledge of the uses of the financial control for the expansion of their businesses and opportunity to the creditors financials and suppliers, to study the usage of the financial statements in estimating the risk of entering into bad debts in their transactions.
1.7 SCOPE AND LIMITATION OF THE STUDY
This study will focus on the activities of Lagos State ministry of finance (Alausa).
It will examine the financial capacity and capability of the public sector to finance its expenses vis-à-vis its revenue and various problems.
Difficulties in getting relevant information and materials are the major factors that tend to limit the success of this research. However, lack of time and financial resources are also major bones of contentions.
1.8 METHOD OF DATA COLLECTION
This research work will make use of PRIMARY DATA that will be the source from the staff of Lagos State Ministry of Finance, Alausa, through the use of questionnaire and personal interview, (when necessary) for case of work, the RANDOM PROBABILITY SAMPLING method was adopted, this is to ensure information is gathered from all the level of workers. Also, varieties of scholarly investigations of subject matter will be exploited.
1.9 METHOD OF DATA ANALYSIS
The method of data analysis and interpretation would be based on analysis of variance and tabulation will be used, this is to ensure that proper analysis at various variables are examined as exemplified in the hypothesis. It also ensure that every problem units of analysis of the research work has equal chance of being dually represented by the analysis. Pilot study will be conducted to pre —test the study schedule.
The Chi-square test is given by the formular.
X2 = ∑(O-E)2
E
Definition of variables
X2 = Chi - square sign
∑ = Summation sign
E = Expected frequency
0 = Observation frequency
1.10 DEFINITION OF TERMS
Financial Control: It refers to facts that show whether or not the business has the right to control the economic aspects of the worker’s job.
Public Sector: Is the state sector, is a part of the state that deals with either the production, delivery and allocation of goods and services by and for the government or its citizens, whether national, regional or local/municipal
Finance: Is often defined simply as the management of money or “funds” management.
1.11 HISTORICAL BACKGROUND OF THE CASE STUDY
The Ministry of Finance is a unique agency that provides the financial backbone that helps government translate its vision of providing the dividends of democracy to the teeming population of Lagos State.
Designated the ministry of Finance and Economic Development at inception in April 1968, the Ministry had Aihaji Chief I. A. S. Adewale as its pioneer Commissioner.
Late in 1995, the Economic Development was separated from Ministry of Finance and merged with Budget to become the Ministry of Economic Planning and Budget while Ministry of Finance stands on its own.
The Finance Ministry then was structured into six Directorates consisting of the three common services personnel Management, Planning, Research and Statistics as well as Finance and Supplies and three other professional Directorates Public Finance, Computer Services and Central Internal Audit.
At inception, the Ministry operated through three (3) Agencies: Finance Headquarters, the State Treasury Office, and the Board of Internal Revenue. However, the Board of Internal Revenue, which is saddled with the responsibility of collecting tax-related Internally Generated Revenue (IGR) for the State Government, was upgraded and became semi autonomous in Year 2006 to enhance revenue generation, transparency and accountability.
Also, the PF/DMO, hitherto a Department in the Ministry was equally elevated to an Agency status in 2005 with a Permanent Secretary as head. This autonomy has however not diminished the performance of the responsibilities of the Ministry of Finance.
The Finance Headquarters is one of the arms of the Ministry of Finance and is headed by a Permanent Secretary. The Headquarters serves as the coordinating arm of the Ministry. It currently has staff strength of 112 Officers. The Office is also the pool house of all Internal Auditors; who are deployed to other Government Ministries, Departments and Offices in the State. There are 154 Internal Auditors working in different Government Agencies in the State who ensure compliance with laid down financial guidelines and early detection of financial malpractices | PUBLIC EXPENDITURE AND THE ROLE OF ACCOUNTING IN THE CONTROL OF IN NIGERIA (A CASE STUDY OF BANK)
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
This project is on Public expenditure and the role of accounting in the control of in Nigeria (a case study of bank). The role of accounting in enterprises in Nigeria is primary to ensure accurate accountability in these sectors and true and fair financial position of the enterprise. This role is of utmost importance in any organization. An organization can only grow or profit when the resources at its disposal are well managed. The role of accounting seems to be more pronounced public enterprises. In recent times, there are cases of mis-appropriation of funds in the public enterprises and improper accountability. These factors have led to a lot of public enterprises into oblivion, if the government had recognized the role of accounting all most of the problems witnessed would not have occurred. No Enterprise can move forward without having a well-organized and functional account department which will provide accurate financial information for the Enterprise and other interest group(s).
Public expenditure is the spending made by the government of a country on the collective needs and wants of her citizenries such as spending on; the provision of infrastructures, pension provision etc. Until the 19th century, Public expenditure was limited as Laissez faire philosophies which believed that money left in private could bring better returns. In the 20th Century John Maynard Keyness argued the role of Public Expenditure in determining levels of income and distribution in the economy. Since then government expenditures has shown an increasing trend. In the 17th and the 18th Century Public Expenditure was considered as wastage of money. Thinkers are of the view that Government should stay with their traditional functions of spending on defense and maintaining law and other.
Public Expenditures are incurred through budget implementation. The macro-economic goals of the state budget are administered in specific and complex systems which were developed in the managerial information unit of the General Accounting department under the name of “Budget Implementation macro system” The role of accounting in the control of public expenditures relates mostly on setting of standards via budgeting and ensuring that the standard set are adhered to. The accounting controls also ensure the actualization of the macro-economic goals which are viz:
- Maintaining the total framework of the planned expenses.
- Adjustment of expenditure rate to the rate of the reception of incomes.
- Regular follow-up of compliance with deficit goals.
- Planning of the financing of the deficit in order to reduce the national debt-product ratio etc.
In Nigeria, public enterprises are engaged in a wide spectrum of economic activities including agriculture, mining, construction, manufacturing commerce and services. The classification of public enterprises in Nigeria has been made according to varieties of criteria by different authorities. The Public Service review commission (1975:101) classified public sector into:
- Public Utilities
- Regulatory of Service body
- Financial Institutions
- Commercial and Industrial Enterprises.
Nigeria being a mixed enterprises. Eze (2013) opined that a firm is classified as private enterprises when it is funded, owned and managed by an individual or group of individuals.
These firms are expected to be registered in the state within which they operate. The activities of the public enterprises have been on the increase in recent times which necessitated the introduction of the accounting to check and monitor the financial activities of these enterprises.
According to Onyekwelu (2010:2) Accounting is defined as the process by which data relating to the economic activities of an organization are measured, recorded and communicated to interested parties for making informed decision. The earliest methods of accounting records were kept in physical quantities. These records came from Eastern early civilization which involved countries around the Mediterranean sea such as Mesopotamia, Egypt, Greece Italy etc. Money was recorded as soon as it was received. Money took the place of barter as a medium of exchange and unit of account. This practice has been closely related to economic development of countries. If the operation of Public enterprise grow in size and complexity, management and other stakeholders will like to be informed on the enterprise’s operation. Accounting is the only means via which such information which are financial in nature can be communicated to the stakeholders.
In summary, the role of accounting in the control of public expenditure deals with the process of setting cost standards and ensuring that the standard set are maintained, However, if the already set standards appear to be in realistic such standard can be reviewed and adjusted for it to be more realistic. Control of public expenditure can be done through adequate budget implementation.
1.2 STATEMENT OF PROBLEM
The amount of public expenditure to be incurred by the government in any fiscal year is contained in the annual budget. It is the goal of government to maintain balanced budget, but many countries especially the developing ones have rather witnessed budget deficit this implies excess of expenditure over revenue. The resources to finance this deficit are always unavailable and most government has failed to acknowledge the need for adequate forecasting and adjustment of forecast to ensure that a balanced budget is attained.
There are increasing cases of financial mismanagement and misappropriation in virtually all public enterprises in Nigeria, this is occasioned by non-existence of proper accounting system that will ensure accountability and transparency in the execution of public expenditures. Furthermore, non-application of standard costing during forecasting by public administrators has made the control of public expenditures a difficult task. Standard costing, which is a good accounting technique for cost forecasting and control has not been adopted by public administrator hence, there are numerous cases or incidents of unfavorable or adverse variance between the budgeted or standard amount of public expenditure and the actual amount of public expenditure. Thus, there is need to evaluate the role of accounting in the control of public expenditure in Nigeria.
1.3 OBJECTIVES OF STUDY
The aim of this research work in general is to vividly evaluate the role of accounting in the control of public expenditures in Nigeria. The specific objectives for this research work are:
- To ascertain whether adequate government budgeting can regulate public expenditures and improve the productivity of public expenditures.
- To ascertain whether an effective and efficient accounting system in public institutions can ensure accountability and transparency in the execution of public expenditures.
- To evaluate the impact of standard costing on the control of public expenditures and also on the productivity of public expenditures when adopted by public institution administrators.
1.4 RESEARCH QUESTIONS
- How can adequate government budgeting regulate public expenditures and improve its productivity?
- How does an effective and efficient accounting system guarantee transparency and accountability in the execution of public expenditures?
- How does the application of standard costing in the administration of public institutions regulate public expenditures and enhance the productivity of such expenditures?
1.5 RESEARCH HYPOTHESES
HYPOTHESIS ONE
H0 - Adequate government budgeting does not regulate public
Expenditures and improve the productivity of public expenditures.
HYPOTHESIS TWO
H0 - Effective and efficient accounting system in public institution
Does not ensure transparency and accountability in the execution of public expenditures.
HYPOTHESIS THREE
H0 - Application of standard costing in the management of public institution will not enhance the regulation of public expenditure and its productivity.
1.6 SIGNIFICANCE OF THE STUDY
This research work which focuses on the impact or role of accounting in the control of public expenditure in Nigeria will be of great importance to federal, state and local governments who are basically responsible for incurring public expenditure.
This is because this research work will awaken their consciousness on the enormous role accounting plays on the control of public expenditures.
This research will also be of great importance to administrators of public institutions who before now may be ignorant of the roles accounting plays in ensuring transparency and accountability in the execution of public expenditures.
Finally, this research will also serve as a stepping stone for students of institution of higher learning who may be researching on similar or topic related to this. It could help precisely on the review of related literature.
1.7 SCOPE AND LIMITATIONS OF THE STUDY
In the course of this research the researcher examined the role of accounting in the control of public expenditure in Nigeria. However, this research covered only the FIST Bank of Nigeria, Enugu branch.
This research work is not free of limiting factors. The researcher was constrained by the following factors:
FINANCE: Previously, research project such as this use to be a joint or group work, but now is embarked upon individually. Thus, the meager fund at the disposal of the researcher constrained her from extending the research to other branches. Some other public (government) establishment in addition to the FIST bank would have been visited by the researcher if not for this constraint.
SCARCITY OF RELATED LITERATURE: Most of the libraries visited lacked journals with articles related to the topic of this study. Even when there is related article, such article will not give detailed analysis of the topic. More so, there is scarcity of already made research on this topic. Although one was gotten in the course of the research for it, but its contents were insufficient for this study. All of these constrained the research from making intense analysis.
STAFF NON COORPERATION: The uncooperative attitude of some of the staff of the FIST bank of Nigeria, Enugu in terms of releasing data constituted a major setback for the researcher. Most of the staff is not willing to let out some of the needed data for this research.
1.8 DEFINITION OF TERMS
PUBLIC EXPENDITURE: Okwo (2011:40) defined it as the spending made by the government of a country on the collective needs and wants of her citizenry. It normally leads to the provision of infrastructures.
ACCOUNTING: Onyekwelu (2010:2) defined it as the process by which data relating to economic activities of an organizational are measured recorded summarized interpreted and communicated to users to enable them make informed decisions.
STANDARD COSTING: Nweze (2014:80) defined it as a system of cost accounting which makes use of predetermined cost relating to each element of cost layout, material and overhead for each line of product manufactured or service supplied.
BUDGETING: Adeniji (2009) defined it as the processes involved in making a budget. That is the act of constructing a budget.
BUDGET: Adeniji(2009:596) defined it as a financial summary of estimated incomes and expenditure of government for a fiscal year.
BUDGET IMPLEMENTATION: The is defined as the execution of budget through either revenue generation or public expenditure.
BUDGETARY CONTROL: This is the methodical control of an organization’s operations through establishment of standards and targets regarding income and expenditure and a continuous monitoring and adjustment of performance against them.
ACCOUNTING CONTROLS: These are measures instilled by a good accounting system to ensure accurate recording of transaction, adherence to rules, safety of assets and accuracy of financial statement.
ACCOUNTING SYSTEM: This is defined as an organized set of manual and computerized accounting methods, procedures and controls established to gather, record, classify, analyze, summarize, internet and present accurate and timely financial data for management decisions.
PUBLIC INSTITUTION: This is defined as an institution or organization owned and majority managed by the government for the interest of the general public.
ADMINISTRATOR: This is an individual who administers affairs, one who directs, manages, executes or dispenses, whether in civil judicial, political or ecclesiastical affairs. He is also known as a manager.
MIXED ECONOMY: This is defined by Udeabah (2004:22) as an economic system in which public and private ownership of means of production exist and in which government participates extensively in the regulation management and supervision of economic activities.
PRODUCTIVITY OF PUBLIC EXPENDITURE: This is defined as the ability of government expenditure to yield the required outcome for which such expenditure was incurred. | Project Title: The impact of budget and budgetary control in tertiary institutions ( A Case study of Imo state university )
This study was carried out in order to find out the impact of budget and budgeting control in tertiary institution which are non-profit making organizations used Imo state university as it case study. However budgets are said to be a quantitative expression of plans It could also be said to be a method for translating the goals and strategies of an organization into operational terms. Due to the importance of budget and its control in organization. The study investigated how tertiary institutions with particular reference and controlled to meet target goals. Finally from the data collected and analyzed it is also used as a corrective mechanism through the duties and by ensuring that authorization and approval of all concerned in the preparation of budgets are fully carried out.
Project Title: The impact of budget and budgetary control in tertiary institutions ( A Case study of Imo state university ) | CHAPTER ONE
1.1 INTRODUCTION
This research is on Fiscal Accountability Dilemma in Nigeria Public Sector: A Warning Model for Economic Retrogression. Government exists to serve the needs of the citizens and ensure those needs are provided efficiently and effectively. It accomplishes these goals by providing clear processes and structures for all aspects of executive management (decision-making, strategic alignment, managerial control, supervision and accountability). Governance in both private and public arena has been a hot topic and now hotter due to various recent financial scandals. Citizens and regulators are calling for higher levels of transparency and accountability in all areas of business especially in public service. In a recent study, the World Bank found a significant relationship between good governance and high level of performance (Word Bank 1997). This generated the issue of using appropriate accounting method and today, many countries government are adopting accrual basis of accounting to improve governance and control which is a common practice in the private sector. Accountability is made possible when there is an established clear link between expenditures and performance. Accrual accounting helps agencies focus on outcomes and results rather than budgets and spending. Accountability is a concept in ethics and governance with several meanings and it is often used synonymously with such concepts as responsibility, answerability, blameworthiness, liability, and other terms associated with the expectation of account-giving. It stands out as a cherished goal of every civilized and well Statement of Research Problem constituted government all over the world. Accountability is increasingly being used in political discourse and policy documents because it conveys an image of transparency and trustworthiness (Bovens, 2006) and its evocative powers make it indescribable. Government is entrusted with public funds and other resources, and must adhere to the highest ethical standards, honesty, integrity, propriety and objectivity to ensure optimum utilization. These goals can be achieved only through a combination of individual professionalism, personal standards and a rigorous control framework. Openness and transparency help instill public confidence and trust, and are increasingly considered basic operating requirements for any government.
The diagnostic survey conducted in 2001 into the Federal Government) public procurement revealed that "Nigeria lost several hundred billions of Naira over the last few decades due of flagrant abuse of procedures, lack, of transparency and merit in the award of contracts in the public sector and accountability quandary (Uremadu, 2004). The problem of this research paper is based on the perceived weak accountability of government fund by public servants in Nigeria which has not only increased the height of corruption but also resulted in enormous waste of national resources and decay of economic infrastructure within the economy. Other problems include poor planning and implementation of national budget experienced in all facets of Nigeria public sector, lack of transparency leading to mistrust and other negative consequences, weak accounting infrastructure which may not support accountability of government funds and finally, all the above problems has created room for diverse economic disorder and resulted in under backwardness.
1.2 Research Objectives
The main objective of this paper is to investigate the extent of accountability in the public sector of Nigeria economy within 2006 and 2010 and to achieve this; the following will also be investigated:
- The relationship between existing accounting infrastructure and accountability in Nigeria
- The control parameters and oversight bodies established by the government and it is effectiveness
- The accountability regulatory framework within Nigeria public sector.
1.3 Research Question
- T o what extent is accountability institution working in the Nigerian public sector?
- Does professional base of Accountants exist in terms of number and quality that support public expenditure management in Nigeria?
- T o what extent has Nigeria government lost money due to lack of accountability?
- Does public resources managers in Nigeria rendered a timely, adequate and reliable stewardships accounting?
- Are the electorate satisfied with the state of public infrastructure and services compared with the amount of resources so far invested in the country?
- How effective and efficient is the audit process providing potential for establishing accountability and detection of corruption?
- Do competent oversight bodies exist and functioning effectively in the public sector?
- Does the accountability arrangement contribute to the availability of information about former and current administrative actions for the administrative body involved and a wider range of administrative bodies?
1.4 Research Hypothesis
In order to validate the above research questions, the following hypotheses shall be empirically tested using Pearson Product Moment Correlation:
Hypothesis (I)
Ho: There is no accountability of public fund in Nigeria public sector Hypothesis (II)
Ho: There is no significant relationship between accounting infrastructure and accountability in Public Sector in Nigeria.
Hypothesis (HI)
Ho: The Nigeria Economy is not developing due to financial indiscipline and wastages in the system resulting from lack of Accountability in Nigeria public sector. | CHAPTER 1
INTRODUCTION
1.1 Background of Study
This project is on Forensic auditing and financial fraud in Nigerian deposit money banks (DMBs). Corporate organization’s like banks are essentially social-technical devices made up of people and physical actors who process inputs and at the same time execute some functions and / or tasks that lead to the accomplishment of certain goals and these stakeholders who are probably within and / or outside the organisations may for various reasons have engaged in fraudulent financial activities (Akenbor and Oghoghomeh, 2013). The Nigerian banking sector is one of the most controlled and regulated sectors. In spite of this, fraud has continued to rear its ugly head in the sector. Fraudulent financial activities are illicit activities committed with the purpose of acquiring riches either individually, in group or organised manner thereby violating existing legislation or accounting policies governing the economic activities and administration of the organisation (Yio and Cheng, 2004).
Globally, the occurrence of fraud in corporate organisation’s is becoming rampant and this can be shown in the large number of reported cases of bribery, corruption, embezzlement, money laundering, racketeering, fraudulent financial reporting, tax evasion, forgery and other means through which both financial and economic dishonesty are being perpetrated (Ofiafoh and Otalor, 2013). The accounting profession had already undergone radical changes as a result of the Enron and WorldCom debacles as well as other accounting scandals (Cotton, 2000). Hence, with the spotlight on the accounting profession, a new market with a new breed of accountants (forensic accountants) has emerged. Today, the occurrence of fraud and other financial crimes have gone sophisticated and even the advent of computerization together with the introduction of internet facilities have enhanced the problem of financial crimes. The detection and / or reduction of these fraudulent activities are made more difficult and committing these crimes much easier. Hence, Onodi, Okafor and Onyali (2015) are of the opinion that forensic investigative skills are required to uncover and establish the occurrence of financial crimes.
The Centre for Forensic Studies (2010) states that if well applied, forensic auditing could be utilised to reverse the leakages that cause corporate failures. This can be attributed to the fact that proactive forensic auditing practice seeks out errors, operational vagaries and deviant transactions before they crystallise into fraud. This study focused on both management and employees frauds. The management fraud include fraudulent disbursements, window dressing, creative accounting and soon while employees fraud include asset / cash theft, teeming and lading (roll over fraud) and soon. The problem of fraud in banking industry is not limited to any economy, nation, continent or an environment; it is a general phenomenon. The origin of bank failure in Nigeria can be traced to the 1930s bank failure and crises (Owolabi, 2010). Nwankwo (1992) writes that “the crises of confidence in Nigerian banking industry is not a new one, it has been with us for quite a long time. In Nigeria now, the level of fraud in Deposit Money Banks has reached an alarming peak. The Nigerian Deposit Insurance Corporation (NDIC) annual report for the year 2014 revealed that the increase in expected/actual loss in fraud and forgeries was mainly due to the astronomical increase in the occurrence of web-based (online banking)/ATM and fraudulent transfer/withdrawal of deposit frauds.
The incidence of fraud and misappropriation of funds in recent time pose a threat to traditional auditing as a branch of accounting profession because of its perennial nature and this has resulted to the question as to whether the statutory auditing actually play a significant role towards the attainment of accountability and prevention of fraud especially that which was recently witnessed in our commercial banks. Statutory audit appears to have shown a lack of concern and reflective attitude towards fraud fighting, thereby failing to offer the public desirable assurance to handle corruption and fraud (Akhidime and Ugbale-Ekatah, 2014) cited in (Okolie and Taiwo, 2014). The gap identified by this present study is the failure of traditional auditing to combat the occurrence of fraud and other financial crimes in the Nigerian banking industry. Hence, this study examined the effect of forensic auditing on financial fraud in Nigerian Deposit Money Banks (DMBs) using logistic regression analysis and with particular focus on DMBs, audit firms and the Abeokuta zonal branch of the Central Bank of Nigeria (CBN) all in Abeokuta, Ogun State, Nigeria.
Objectives of the study
The core objective of this study is to ascertain the effect of forensic auditing on financial fraud in Nigerian DMBs. Hence, from the study’s main objective, the following specific objectives are addressed;
- To ascertain the effect of forensic audit on financial fraud in Nigerian DMBs.
- To find out whether forensic audit report can enhance court adjudication on financial fraud in Nigeria.
Research questions
- What is the effect of forensic audit on financial fraud in Nigerian DMBs?
- What is the effect of forensic audit report on the enhancement of court adjudication on financial fraud in Nigeria?
Statement of the hypotheses
The following hypotheses were tested in the course of the study;
HO1: Forensic audit has no significant effect on financial fraud control in Nigerian Deposit Money Banks.
HO2: Forensic audit report has no significant effect on the enhancement of court adjudication on financial fraud in Nigeria. | 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.
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