CHAPTER ONE

INTRODUCTION

BACKGROUND TO THE STUDY

An external auditor is a professional or better still an audit professional that is mainly out to perform an independent audit in respect to stated laws or rules on financial statements of legal entities, state cooperation, government organizations, companies as well as institutions that prepare financial statements. The auditor is completely independent to these institutions that are audited. Being independent is one of most important points to consider when searching for an external auditor to audit the financial statements for its users. These users include shareholders, investors, foreign organizations, government agencies as well as the general public who have a great need for the auditors report. The audited repot is relied on and consulted before most decisions affecting the company are taken.

Looking at the roots of an external auditor, it can be traced right back in to the1850s where in Britain external audits were required to be done by companies. The companies Act (1855-1856) introduced the independent auditor (external auditor) by removing the stockholders as auditors. This was one of the first laws to establish auditors and the rules for audit reports by external auditors. An external auditor became mandatory to all Public Limited Companies in 1900 and was followed by laid downed standards and qualification of external auditors.

     For public limited company listed in the stock exchange in the USA, the Sarbones – Oxley (SOX) has imposed stringent requirement on external auditors. This SOX was as a result of the publication of acts regulating auditors. These acts came due to collaboration between the ALCPA and the New York stock exchange with the purpose of improving auditing standards of reporting. The security Act of (1933) and the security exchange (1934) were passed which required listed companies to file audited financial statements.

     The Supreme State Audit Office (SAIC) is in charge of state audit in Cameroon which was established by the head of state of Cameroon. The SAIC is required to perform the requisitioning of auditee department records by decree No97-48 Article 7. Furthermore Cameroon as other countries seeing the need of statutory audit recognizes the Institute of Chartered Accountants of Cameroon (ONECCA) as the professional body to carry out  audit of companies and other institution.

     Internal auditors are independent assurance service providers to companies as a whole and public limited liability companies in particular.  auditors provide tremendous important information to stakeholders on the financial statement audited. The scope of the audit assignment externs to some vital sections in the internal system of the organization this includes the fact that the auditors via his report may make recommendations to the management on the loop holes found in the accounting system. For example, not adhering to internal accounting standards (IAS), inform the directors on the general efficiency and accuracy of the accounting system put in place while recommending methods to improve the present accounting process. All these advice is provided to the company by an external auditor after conducting the audit. The OHADA law under Article 689 relating to the appointment of an external auditor provides a list of qualities to be use when appointing an auditor. It is for the purpose of ensuring total independence of the auditor. Still on the quality of independence, an auditor cannot give an unbiased audited report or unclean report unless he or she is independent of all parties involved. Auditors should be independent in fact and appearance that is relationship that can impair their objectives. This requires that the auditor when conducting an audit of the financial statements should not be related to the management, inventory organizational structure that will hinder objectiveness in the audit process and final audit report.

     On the international horizon, the international standard of auditing (ISA) issued by the International Auditing and Assurance Standard Board (IAASB) is the starting point for the audit process. This processes which is expected to be carried out in accordance to the General Acceptable Accounting Standard (GAAS) and the General Acceptable Accounting Principle (GAAP) especially in the process of reporting on the findings of the financial statements.

     The OHADA uniform act in relation to other regional organization such as the UEMOA has establish an accounting system refereed to as SYSCOA which is under the UEMOA regulation No 4196 /CM December 1996, B.O UEMOA November 1997 which shows the need to ensure that there is full consultation and corporation on the part of auditors involved in the organization.

      The main role of the auditor is to present a true and fair view on the audited company’s’ activities without encroaching in to the management of the company.. Hence these directors are compelled under article 702 under the OHADA act to appoint an external auditor, or two as specified under article 703 relating to subsequent auditors. All who are to be appointed during the general meeting. The external auditor is in charge of analysing the financial statements prepared as well as participating in the adoption of the fiscal year budget.

1.2 STATEMENT OF PROBLEM                                  

     The auditor has the responsibility of providing an opinion on the financial statements prepared during the fiscal year that enhances the financial  performance of MFIs in Bamenda. Stated in Article 106 under commercial company in line with business operation, a company may be leased out to managers who run it at his or her own risk as a legal entity. For this reason, the owner needs to be sure of the operation of the business which can be provided only by an external auditor.

However, many companies in the world are faced with financial mismanagement a case in point is Enron Company which suffered financial mismanagement due to the failure of the board of directors and the auditors to state the realities of the financial statements as well as providing balance sheet and income statements for ghost companies. It later resulted in bankruptcy. Other companies that suffered this devastating effect were WorldCom, Global Crossing Tyco and Adelphia

The problem comes in when looking at the ongoing trend in MFIs. Furthermore, financial institutions from 2012 up to 2013 have continuously had negative cash flows and finally declared insolvent such as FIFA in the year 2012 and Global Financial Trust, Security Finance all in the year 2013. Given there happenings the researcher wonders why they happen even though auditors were present. The following research questions then came to mind:

1.3 Research question

1.3.1 Main research question

What is the effect of external audit on the financial performance of MFIs in bamenda city?

1.3.1Specific research question

1. What is the effect of audit reputation on the financial performance of MFIs in bamenda city?
2. What is the impact of audit fees on the financial performance of MFIs in bamenda city?

• What is the effect of audit specialisation on the financial performance of MFIs in bamenda city?

1.4 Research Objective

1.4.1 Main objectives

1. To examine the effect of external audit on the financial performance of MFIs in bamenda city?

1.4.2           Specific objectives

1. To investigate the impact of audit reputation on the financial performance of MFIs in bamenda city
2. To analyse the effect of audit fee on the financial performance of MFIs in bamenda city

• To know the impact of audit specialisation on the financial performance of MFIs in bamenda city