CHAPTER ONE

GENERAL INTRODUCTION

1.0 INTRODUCTION

The role of external auditors is to provide an independent and objective opinion on the fairness and reliability of the financial statements prepared by the management of an entity. External auditors are expected to enhance the credibility and quality of accounting and financial information, which is essential for the efficient functioning of capital markets and the economy (Fossung and Saurelle La Fortune, 2019). However, the quality of audit services may be influenced by various factors, such as the auditor’s competence, independence, ethics, and professional standards (Quick, 2019).

One of the factors that have received considerable attention in the literature and practice is the duration of the audit mandate, which refers to the length of time that an audit firm serves a client. Audit mandate duration may have positive or negative effects on audit quality and, consequently, on the quality of accounting and financial information. On the one hand, longer audit mandate duration may enhance audit quality by allowing the auditor to accumulate more knowledge and experience about the client’s business, industry, and risks, as well as to establish a good working relationship with the management and the audit committee (Ghosh and Moon, 2005). On the other hand, longer audit mandate duration may impair audit quality by reducing the auditor’s independence, objectivity, and professional skepticism, as well as by increasing the auditor’s complacency, familiarity, and self-interest (De Angelo, 1981).

1.1 BACKGROUND OF THE STUDY:

 In the banking sector, the quality of accounting and financial information is crucial for decision-making and ensuring transparency. Audit mandate duration, referring to the length of time an audit firm is engaged by a commercial bank, can impact the thoroughness and reliability of financial reporting. Understanding this relationship is essential for improving financial governance within commercial banks in Fako Division, Cameroon.

The issue of audit mandate duration has been widely debated and regulated in different jurisdictions, especially after the global financial crisis and the collapse of several high-profile companies, such as Enron and WorldCom, which raised serious concerns about the quality and integrity of audit services. Some countries, such as the European Union, have introduced mandatory audit firm rotation (MAFR) or mandatory audit partner rotation (MAPR) rules, which require the auditor to change after a certain period of time, usually between five and ten years (EC, 2014). Other countries, such as the United States, have adopted a more flexible approach, which relies on the audit committee’s oversight and the auditor’s self-regulation, rather than imposing a mandatory rotation requirement (PCAOB, 2017).

However, the empirical evidence on the effect of audit mandate duration on audit quality and accounting quality is mixed and inconclusive. Some studies have found a positive relationship between audit mandate duration and audit quality or accounting quality, suggesting that longer audit mandates enhance the auditor’s competence and performance (e.g., Johnson et al., 2002; Carcello and Nagy, 2004; Ghosh and Moon, 2005). Other studies have found a negative relationship between audit mandate duration and audit quality or accounting quality, implying that longer audit mandates impair the auditor’s independence and objectivity (e.g., DeAngelo, 1981; Myers et al., 2003; Lim and Tan, 2010). Some studies have found a non-linear or U-shaped relationship between audit mandate duration and audit quality or accounting quality, indicating that audit quality or accounting quality increases at the initial stage of the audit mandate, but decreases after a certain threshold (e.g., Davis et al., 2009; Knechel and Vanstraelen, 2007).

Moreover, most of the existing studies on audit mandate duration have focused on developed countries, such as the United States and the European Union, where the audit market is more mature, competitive, and regulated. There is a lack of research on audit mandate duration in developing countries, where the audit market may have different characteristics, such as lower audit quality, higher audit market concentration, weaker legal and institutional frameworks, and more diverse cultural and economic factors (Fossung and Saurelle La Fortune, 2019). Therefore, there is a need to examine the effect of audit mandate duration on the quality of accounting and financial information in developing countries, such as Cameroon, where the audit market is still evolving and facing various challenges.

Cameroon is a country in Central Africa, with a population of about 25 million and a GDP of about $38 billion. Cameroon has a mixed legal system, which combines civil law, common law, and customary law. Cameroon is also a member of the Organization for the Harmonization of Business Law in Africa (OHADA), which is a regional organization that aims to harmonize and modernize business law and accounting standards in 17 African countries (OHADA, 2020). Cameroon has a relatively small and concentrated audit market, with only about 200 registered auditors, most of whom are affiliated with the Big Four audit firms (KPMG, PwC, EY, and Deloitte) (ONECCA, 2020). Cameroon does not have a mandatory audit firm rotation or audit partner rotation rule, but it requires the auditor to report any threats to their independence to the audit committee and the regulator (ONECCA, 2018).

The banking sector is one of the most important and regulated sectors in Cameroon, as it plays a vital role in the financing and development of the economy. According to the Bank of Central African States (BEAC), which is the central bank and the banking regulator for six countries in the Central African Economic and Monetary Community (CEMAC), including Cameroon, there were 15 commercial banks operating in Cameroon as of December 2019, with a total of 404 branches and 4.2 million customers (BEAC, 2020). The commercial banks in Cameroon are subject to various prudential and accounting rules, such as capital adequacy, liquidity, solvency, and disclosure requirements, as well as to external audit and supervision by the BEAC and the Banking Commission of Central Africa (COBAC) (BEAC, 2019).

The quality of accounting and financial information produced by the commercial banks in Cameroon is crucial for the decision-making of various stakeholders, such as the BEAC, the COBAC, the government, the shareholders, the depositors, the creditors, and the public. However, the quality of accounting and financial information may be affected by the duration of the audit mandate, which may have implications for the audit quality, the banking regulation, and the financial stability in Cameroon. Therefore, this research aims to examine the effect of audit mandate duration on the quality of accounting and financial information produced by commercial banks in Cameroon, with a focus on Fako division, which is one of the 10 administrative divisions of Cameroon, located in the Southwest region, and which hosts the headquarters of four commercial banks, namely Afriland First Bank, Union Bank of Cameroon, BICEC, and UBA (Fako Divisional Delegation of Economy, Planning and Regional Development, 2018).

1.2 STATEMENT OF THE PROBLEM:

   The duration of audit mandates in commercial banks can influence the depth and effectiveness of auditing procedures, potentially impacting the quality and reliability of accounting and financial information. A lack of empirical study on this specific topic in Fako Division presents an opportunity to investigate how audit mandate duration correlates with the quality of financial information produced by commercial banks.

1.3 RESEARCH QUESTIONS

Based on the research objectives, the following research questions

1. What is the impact of audit tenure on the quality of accounting and financial information produced by commercial banks in Fako division, Cameroon?
2. What is the influence of audit rotation on the quality of accounting and financial information produced by commercial banks in Fako division, Cameroon?
3. What is the effect of audit market concentration on the quality of accounting and financial information produced by commercial banks in Fako division, Cameroon?

1.4 RESEARCH OBJECTIVES

1.4.1 Main Objective

The main objective of this research is to examine the effect of audit mandate duration on the quality of accounting and financial information produced by commercial banks in Fako division, Cameroon.

1.4.2 Specific Objectives

The specific objectives are:

1. To assess the impact of audit tenure on the quality of accounting and financial information produced by commercial banks in Fako division, Cameroon.
2. To evaluate the influence of audit rotation on the quality of accounting and financial information produced by commercial banks in Fako division, Cameroon.
3. To analyze the effect of audit market concentration on the quality of accounting and financial information produced by commercial banks in Fako division, Cameroon.