CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

In the world today there are a lot of financial variations and many complicated parts of doing business, doing legal Audit and there is a lot of uncertainty environmental fighting in the continents and in between nations especially in the Middle East, retarding Business in china and many other upcoming markets. Fluctuations in the prices of goods and currencies, risk of every world market Audit committee. According to the National Association of legal fee analysis (NALFA), legal Auditing is a lawful institutional practice and institutional risk tool; it is used by businesses, firms, insurance and other consumers of legal services, to determine if hourly billings, errors abuses and inefficiencies exist by Assessment.  

In light of the aforementioned, many have questioned the overall credibility of the auditor’s job role, the quality of auditing outcomes and the legal responsibility of auditors, the latter of which urges a professional review to improving performance quality and eventually rationalising the decisions made by financial statement users. Source: National Association Of Legal Fees Analysis(2020).

The aim of auditors’ legal liability is the guarantee of achieving a reasonable quality for the auditing profession and the overall creditability of financial reports; hence the support of investment process within society. The investment level should be at an optimal level and not at the utmost level. Thus, considered a full guarantee for investment through the imposition of legal rules to compensate investors for any loss potentially exacerbating investment levels, without any study of the risk and cause of collapse in the investment process. Therefore, our problem is concerned with achieving a framework for the relation between auditors’ legal liabilities, auditing quality, and investment level. It is considered that this will help to structure emerging economies.

When striving to achieve auditor liability, there is the call for a well-defined liability rule and damage measure. Moreover, there are a number of legal rules adopted to govern auditor liability; these vary from compensation to deterrence, and which can ultimately enhance auditing quality. In this regard, a compensation rule offers a greater guarantee for investors regarding investments, although this may ultimately cause auditors additional apprehensions regarding financial reports and thus a lesser desire to accept customers with risky business. Moreover, a deterrence rule, through professional sanction, may offer higher auditing quality, but a lesser guarantee for investors. Source (Corporate finance institute 2019)

Auditing quality—a multi-faceted concept—is concerned with all participants in the auditing process and beneficiaries. However, both parties view the auditing process from different perspectives: shareholders, on the one hand, evaluate quality in a different way from creditors, who consider quality differently from investors. 

Importantly, auditing quality needs to be at a level where the probability of audit failure is at its lowest rate in society. Importantly, auditing quality could not be at its highest level owing to the high costs of the auditing process or at its lowest level owing to legal liabilities. Essentially, auditing quality depends on auditor activity, which is a function of auditing costs and expected liabilities in the case of auditing failure. With additional costs meaning a lesser supply of auditing process, which subsequently increases uncertainty for financial statements users. Accordingly, imposing a strict liability regime means a high cost for the auditing profession.

Uncertainty affects the level of investment: a higher risk will lead to reduced investment levels, whilst reducing risk depends on auditors’ liabilities, which may lead to poor investments decisions and the transfer of risk from investors to auditors. Source: corporate finance institute(2019)

Trust in regard to the financial statements released by companies is one of the fundamentals helping to support and assist the financial markets. In this context, it is true to state that the role played by external auditors from the aspect of validating and authenticating the issued financial statements is of great importance as the basis for decision making. 

Various studies have examined this issue; however, thus far, there has not been any development in terms of establishing a definite and comprehensive framework addressing the different dimensions constituting the relationship of legal liability to the auditing process, thus helping users to measure the overall quality level of auditing. Therefore, there is a dire need for researchers and practitioners to develop existing approaches to quality control, thus suggesting new approaches that would protect equity and enhance performance quality, so that decisions made by investors are rationalised. Source: surdana et al (2020) international journal of scientific and technology research.

A number of emerging economies seek to expand the proprietary base, thus leading to the expansion of the role adopted by the capital market and an increase in the listed joint stock in the securities market. As a result, there is a critical need to incorporate greater trust into the quality of information circulated through improving the quality of the auditor’s report. For this reason, the position in Kuwait as compared to Cameroon will be focussed on as a generic suggestion for how the emerging economies can add to the understanding of the role of the auditor, when it comes to improving audit quality and encouraging a greater amount of investment. Where the position in Kuwait can be understood, this will then give the researcher a strong impression of how the civil legal liability of external auditor can impact on the quality of the audit and, importantly, the chances of obtaining investment. 

In regard to the financial violations experienced by major corporations in developed economies as well as developing economies like that of Cameroon, the collapse of some of these entities is attributed, in some cases, to faulty accounting practices, which points the finger of accusation at auditing service quality. Harsh criticism has been directed towards the auditing profession, in Kuwait, for failing to keep up with developments in light of recent changes, thus causing deficient professional performance and poor levels of quality. Source: The implementation of legal audit(2020).

The series of financial scandals that took place at the dawn of the 21st century, increased by the occurrence of other large “deals” such as Worldcom(1 billion fraud in 2002), Parmalat(4 billion euro by fausto tonna and Luciano del soldato), Vivendi(in 2000 to 2002 by jean-Marie messier), Maddof(2008 ponzi scheme), Batam, justify the confidence crisis observed by users of accounting and financial information. They also discredit audit firms that guarantee its integrity (Mballa & Feudjo, 2016; Kueda & Feudjo, 2019). It should be recalled that Africa and more precisely Cameroon has not remained on the sidelines of these scandals which seem very frequent (Gandja, 2013; Kueda & Ngassa, 2019). With reference to SODECOTON, SONARA, FIFA, COFINEST, and more recently in 2016, the BICEC case, we understand that the quality of the accounting information produced and disseminated attracts the attention of multiple users.

In the face of this growing inconvenience (financial scandals and the confidence crisis observed by users of accounting and financial information), measures have been taken to reorganize and strengthen corporate governance rules and the audit quality control system. This is particularly the case with the Sarbanes-Oxley law (2002) in the USA, the law on New Economic Regulations (2001) and the law on financial security (2003) in the case of France. Note that Cameroon has not remained on the side lines of this movement. This is evidenced by Law No. 2003/008 of July 10, 2003, relating to the suppression of offenses contained in certain OHADA uniform acts. In order to discourage delinquent behaviour, this article provides in its article 16, sanctions ranging from 2 to 5 years imprisonment and / or a fine of 200 thousand to 5 million CFA francs, to sanction any act likely to bring attack on the independence and incompatibilities of the external auditors.

Despite the measures taken on the Cameroonian national scene, facilitated by the “Operation Sparrowhawk” (is the name given by the Cameroonian government to the clean-up company of management practices in state companies and public administrations, launched in February 2006),we note within state enterprises, the indictment of members of the National Order of Chartered Accountants of Cameroon (ONECCA) for complicity in embezzlement of public funds (seven members of the National Order of Cameroonian Accountants (ONECCA) were arrested and imprisoned; two auditors were convicted of embezzlement of public funds on the basis of Articles 74 and 184 of the Penal Code).

 These arrests contribute to further discredit the liberal accounting profession. Therefore, it is vital to give permanent credit to the quality of the audit work, in order to reassure users of accounting and financial information, disillusioned by the financial scandals that have become almost permanent (Djongoué, 2007).

Moreover, corruption a worm in the study context, is characterised by the fact that certain auditors, to protect their mandate and increase their fees, are very often forced to issue a favourable opinion to the management (Djoutsa & Foka, 2014). The continuation of these scandals is marked by the development of audit firms and therefore the number of statutory auditors (Mouhamed, 2016). Despite the increased development of cipher professionals, the issue of the reliability of financial information still remains at the heart of debates in this field of research. Indeed, it emerges from the study of Ngassa & Kueda (2019), that a diversion of a value of 50 billion CFAF is orchestrated at BICEC, despite controls by both COBAC and the auditors. Once again, the quality of the accounting and financial information is at the center of debates in the field of accounting research and in the academic and professional circles. As a result, the auditor, a third-party arbitrator in corporate governance, is at the heart of accounting manipulation (Omri et al. 2009).

As a governance mechanism, the main objective of external audit is to guarantee the reliability of the accounting data disseminated (Yeoh & Jubb, 2001, Omri et al., 2009, Mballa & Feudjo, 2016; Fossung & Magang, 2019; Kueda & Feudjo, 2019). Ownership structure can also be an effective means of controlling the management of leaders. Indeed, the fundamental role of the ownership structure is then to reduce the information asymmetry between managers and shareholders (Usman, 2013). However, Ndjanyou (2001) and Djongoué (2007) already highlighted the production of fanciful data in Small and Medium Sized Enterprises (SMEs) in Cameroon. Note that other authors have particularly addressed the question of the quality of accounting and financial information in the Cameroonian context (Ngantchou, 2008; Djoutsa et al, 2013; Djoutsa & Foka, 2014; Mballa, 2016; Mballa & Feudjo, 2016; Ngassa & Kueda, 2019).

Studies by Ngantchou (2008) showed that almost 53% of Cameroonian companies manipulate their financial statements for multiple reasons. In addition, according to Djoutsa et al. (2015) the probability that a company chosen at random from a sample of 108 limited companies has presented non-compliant financial statements is 79%.

With this in mind, few studies have thus far sought to tackle the issue of legal responsibility for external auditors, from the various dimensions relevant to auditing quality, as viewed by the different parties making up the auditing environment and the users of financial statements.

With the discussion thus far taken into account, the present study will seek to incorporate legal and accounting knowledge in order to gain an understanding of the way in which legal rules impact the liability of external auditors and decisions by auditors, as well as the users of financial statements. Importantly, there have been no studies carried out, previously, in a weak legal environment, such as the Kuwaiti business environment, and which have tested the relationship between the administrative alternatives of the legal responsibility, and decisions relating to auditing quality. 

The present study aims to consider and discuss the impacts of alternative rules, and further directs attention to the third party, who has the right to sue the auditor in respect of auditing quality, as well as the users of financial statements—an issue rarely examined by previous studies.

The financial scandals within the financial system led to the creation of various statutes and codes to save and sanitize the Nigerian banking system and promote sound banking practices. Invariably, governance failure was at the heart of processes that led to the crises which resulted into liquidity loss across the industries and diminution of value of capital of most of the financial institutions in Nigeria. Good governance by the board of directors is essential to improving the quality of financial reporting; which in turn; has impact on the confidence of investors. Levitt (1998 and 2002), good corporate governance reduces the negative effects of earnings management as well as the likelihood of creative financial reporting arising from fraud and errors (Beasley 1996, Dechow et al, 1996; MacMullin 1996). Financial reporting system can equally play a pivotal role in developing the quality of corporate governance systems. One of the key tasks of financial reporting system is to limit the decisions made by top managers because top managers are motivated to protect either the interest of major shareholders (Johnson & Macling 1996; Watts 1978) or overall strategic shareholders interest (Melis 2002). Since good financial reporting is very vital, audit quality is also an important player to the development of good financial reporting. High quality auditing seems to improve the confidence of investors in financial reporting and increase fund raising possibilities (Lin &Liu , 2009). The external auditors have also played an important role in improving the credibility of financial information (Mautz & Sharafi, 1961 and Wallance ,1980).

Therefore, effective and sound corporate governance is very important must especially in developing countries like Nigeria in particular which is still trying to regain the confidence of investors both domestic and international as a result of the adverse effect global financial crises that seriously affects our Stock Exchange Market

A fair control and management system within the company will further promote business continuity and survival. Therefore, control will be more important for the organization because the management may not be able to personally monitor everything that is its responsibility. So prevention needs to be done as early as possible to avoid the risks associated with legal issues. In overcoming this issue, one of the functions that must be consistently empowered by the company is to conduct a legal audit to identify legal issues both current and future situations. Legal audit is a solution to resolve disputes internally / early as an effort, in order to avoid the wasting costs and protracted litigation. Legal audit through the principles of fine corporate governance further enhance the effectiveness of risk management, particularly the risk of unlawful acts specifically related to responsibility for reporting audit results that will be delivered to all authorized parties both inside and outside the company. Referring to the Company’s activities in the form of a Limited Liability Company, hereinafter abbreviated as PT (Perseroan Terbatas), must be supported by reliable Organ and Human Resources and a programmed framework. Those are necessary things so that this business unit is able to work productively and efficiently.

The organ of the company that oversees policy and counsel as regulated in Article 108 of the Company Law No. 40 of 2007 concerning Limited Liability Companies is a Commissioner. The Audit Committee is one of many to carry out its duties to form committees (Article 121 paragraph 1). Structurally, the company has also a control work unit formed by the Board of Directors. The work unit is the Internal Control Unit abbreviated as SPI which is the company’s internal supervisory apparatus (Article 67 of Law No. 19 of 2003).

 The establishment of this work unit is to provide assurance for achieving the company’s goals economically, efficiently and effectively. The practice of the outcomes of the legal audit is not focused on performance results, but rather on the transaction process to determine policies and or decisions regarding the compliance, whether the process is consistent or not violating available regulations by taking into account Ultra Varies. Unlike the audits conducted by SPI, the audited is the results of performance or operational. Legal risk from the transaction process raises merely weak supervision. This issue is immediately corrected, on the other words detecting the issues as early as possible. It is a different case if the result of the performance’s risk is illegal acts. Source ( J.N. Bakoh Firm 2012)

This is correlated with the news in the media, where corruption cases committed by state institutions and other independent state institutions that stumble in legal issues and even companies with legal entities are likely to face the same matters. The occurring issues are characterized by the nature of weak internal control, lack of balanced disclosure and lack of concerns about the risks in fulfilling the applicable policy, as well as the weak implementation of law in the practice of a company business circle. The existence of the established audit committee must be independent and able to boost the management to carry out the development related to the efforts in becoming good corporate governance, not merely declare it but also apply it in real circumstances.

A legal audit is one of the instruments to enforce the principle of responsibility in the management of the company. That is considered significant since the legal audit process aims at reviewing and testing the quality of compliance, whether it is in accordance with the procedure or not. Other considerations of legal audit are a mechanism of verifying on the existence of legal subjects including activities from the perspective of legal objectively and the practice of existing rules.

The reason is simple because the results of rules inspection report will be in the form of more professional legal statement. Hence, a legal auditor in most companies does not yet exist since the requirements of this profession includes becoming expertise in the field of law (lexspecialis) in order to be right on target in carrying out their duties and responsibilities (the right men on the right place). According to Article 121 paragraph 1 of the Constitution of Limited Liability Companies may establish an “Audit Committee”. It is related to Article 70 paragraph 1 of UUBUMN and be further clarified in the Decree of Minister of BUMN Number: Kep-10/MBU/2012 date 24 of July 2012 concerning supported members of the Commissioners Board/ BUMN Article 2 paragraph 2 that is a limited liability company can form an audit committee.

The committee is formed to assist in carrying out the supervisory duties and functions which being mandated by the Constitution to the Board of Commissioners. The existence of an audit committee aims to support SPI as an internal supervisor. SPI itself has a job desk to give opinions objectively. It leads to the supervision on the management of the company to be in accordance with the principles of good corporate governance. The roles and responsibilities of the audit committee basically assist the board of commissioners in carrying out their duties regarding internal control and management. Hence, the implementation of legal audits is expected to reduce the legal issues particularly regarding to compliance. Source: Field work (From the Asah Audit firm 2021)

Based on the news from the audit committee members in the world in United Kingdom from members of global companies, the following observations are made: then the questions here are, what is staying the same in the world Audit committee Agenda, what is changing? to answer these questions the researcher explains that; the first work of every Audit committee is the reporting of the financial clearness or integrity, by so doing, the committee main function is the overseer of financial reporting and controls within the organisations over the financial reporting, as well as creating.

Nationally, in Cameroon, the Provisions for the external Audit policies as well as creating provisions for quality reporting for both the internal and external Audit groups are based on audit legality, this is a big invitation for every Audit committee in Cameroon, but it is specifically disturbing for Audit committees  with complicated world organizations. Source(City Chartered Accountants 2019)

The answer for the question holds the facts that, the whole connected nation in which organisations operates with it so many phased of legal and Agreeable environments, put together supply chains, cyber security uncertainty, and unfounded fluctuations requires that Audit committees are aware about the world, and that they can help to make sure that their companies are constructed to perform in business environment. Every time, it is an upcoming difficulty, which the full board apportions with the audit committee. It is obvious that national Audit committees rechecks whether they have more time and perhaps about which board committees are best in the position to over right which uncertainty and more apportionment oversee functions as correct or not) putting others to do what you want in a non-usual life. Material to profit is a great comprehension of some risks, and getting in other national moves, to see things in reality and joint with those on the ground.

 The key difficulties faced by the Audit committee in Cameroon nowadays shows 4 key difficulties, like the culture, talent in the financial responsibility, sound national control environmental maintenance, with lawful and regulatory Agreement. For culture; it is a serious matter to the arrival of every national company putting in place non-negotiable parts of national values around agreements, security and how the organisations treat people. The key to meeting these cultural difficulties are spice from the higher levels (throughout the group). The comparism between the actual cost and the estimated cost to maintain, analyse and reporting is constructed into the organisational structure, the way forward communication and the correct motivations and gains. The second difficulty of talent in the finance responsibility; has  it is a difficulty to express the fact that quality financial statements presentations begins with the chief finance officer, but then needs  a powerful team on the ground in the markets the company operates, assisted by usually corporate roles such as financial controller, chief Accountant and treasury responsibilities. Source: Legal audit concepts(2019)

 Making it big here needs the right people and their capability to work together. The third difficulty of maintaining a sound national control environmental with logistics management getting over across continents and doing business across different cultures and legal frameworks, organisation have ever-greater difficulties in presenting the growing uncertainty that these getting over acts of business presence for example financial reporting and insider controls, the growing uncertainty  that these getting over acts of business presence for example financial reporting and insider controls, the growing uncertainty of fraud and corruption,, quality control issues, and corporate functions are matters such as human rights, proper labour standards and long life time societal practices. The last but not the least difficulty of the global market fluctuation explains that legal and regulatory agreements plays the role of semons, role for global Audit committee as to assisting to Guarantee that  its company’s generally acceptable principles and agreement programs stay up with globalization, technology and the fluctuating or changing business models (City Chartered accountants Audit committee, 2009).

1.2 Statement of the Problem

Referring to the area of research, it is understood that the problem in the context of Cameroonian firms, is that there have been false audits (forgery) of businesses financial statements. The study strives to investigate the non-legality of Audits, the three most common deficiencies of engagement management problems affecting many areas of the Audit: a failure to gather sufficient information, lack of competent evidence, and lack of due care and lack of professional skepticism which could result to false financial statement.  The financial statements of these companies have been Audited by an Audit firm or by an Independent and competent Auditor so businesses in Cameroon has increase in size and so needs legal audit that comes to be envisage especially before and after the fiasco of some major companies in Cameroon like the ccc (Cameroon commercial company bank), the FIFA (the first investment and financial assistance), the CONFINEST and many others. The effects could be seen in :What has been done on the false audit (forgery): once the auditors do a proper audit and certify that the company is facing a situation of false audits, then the company will be able to adjust its strategy and this will help the company to avoid cases of false audit. Source: concepts of legal audit (2021)

What has not yet been done: on the other hand, if the auditors do certify that, the financial statement of the auditee, shows a true and faire state of affairs, whereas the audit was not properly done, then it will cause the auditee to be having a false result financial statement. What is intended to be done: the researcher recommends that, both the auditor and the auditee should present a fair and true state of the affairs of their situation and the auditor does a true audit and present a true and proper accounts of the reports, which will help to ameliorate the situation of the auditee or audit firm and this will project a good image of both the auditee transactions and that of the auditor. On this note the researcher has realize 3 determinants of audit quality in the literature, as for the first category related to the audit firm, that’s the size which could be determine base on their regime in which they operate, such as the liberated regime, the simplified regime and the actualized regime., reputation is base on the way the audit firm carries on its audits, the type of audit contracts they are engaging; it may be abroad; in a foreign country or in Cameroon  and the type of contract being sign with them., number of workers ,refer to the audit firm having as from 15 workers and 0r 25 to determine whether they are under the simplified regime or the actual regime in that audit firm and image projection. The 2^nd point: this category is related to the auditee levels of non-properly presentation of financial statements, to indicate whether they have wrong presentation false figures for which figure and for how long are they intending to present the correct figures of the financial statements, as well as checking their financial situation and many other important aspects. Source: ( Kueda 2020)

The 3^rd point: the third category is related to the relationship between the auditor and the auditee, that is the duration of the mandate which is usually 5 years to have another auditor to do the company’s financial statement and the Rotation is done through a selection of the other audit companies. From the problem statement, one could ask so many questions; the researcher could have three suggested specific questions: What are the effects of audit firm characteristics on legal audit quality in the context of Cameroon? What are the effects of auditee characteristics on the legal audit quality in the context of Cameroon? What are the effects of the relationship between the auditor and auditee characteristics on legal Audit, ownership concentration of quality in the context of Cameroon? Based on the growth and employment strategy paper in (2009),

the false financial statement rate of Cameroonian companies and corporations is about 35%. The major cause of this problem is coming from the fact that many companies have diverse ways of reporting needs between the shareholders and the managers. The efficient and effective management of businesses requires that these divergences of interest, especially on the parts of the managers are handled in the appropriate manner by shareholders. The effects are that, the industry has to adopt one or both of the two strategies as envisage by Arrow (1985). The first option consists of basing executive remuneration on the specific performance indicators and the second option is the use of an legal auditor who complies’ to certify that the financial statement produced by the managers are in compliant with the legal audit principles and that the manager has managed the business in the interest of the stakeholders in fulfillment of its stewardship (agent) responsibility. There is a limitation to the first solution because indeed. Since it is the manager who prepares the Accounts, he could be tempted to resort to the methods that maximizes the result and consequently his remuneration (Omri et al 2009) and by doing so, produces a false financial statement. This gives way for the second solution to be accepted, by using an auditor who does legal audit compliance to give his opinion on the sincerity and clarity of the accounting figures established by the management. In reality a legalized audit process ensures that a company’s internal contracts, process, guidelines and policies are adequate, effective and in compliance with governmental requirements, industry standards and company policies. This type of Audit also ensures that reporting mechanisms prevent errors in financial statement. The external audit is a corporate governance mechanism whose primary purpose is to ensure the reliability of the published accounting data (O’ Sullivans and Diacon 2002). A legalized audit helps to mitigate the asymmetry of information underlying the relationship between different economic partners, to resolve agency conflicts considered as a significant impediment to the development and sustainability of companies and to reduce related costs.

1.3 Research Questions

1.3.1 The Main Research Question

 What is the relationship between legal audit, ownership concentration and quality of reporting in the context of Cameroonian Chartered accounting firms?

1.3.2 Specific Research Questions

i What is the relationship between legal Audits and ownership concentration in Cameroonian Chartered accounting firms?

ii Is there any relationship between ownership concentration and quality reporting in Cameroonian chartered accounting firms.

iii Is there any relationship between legal audit and quality of reporting in Cameroonian chartered accounting firms.

1.4 ResearchObjectives

1.4.1 Main Research Objectives

The Main objective is to investigate the relationships that exist between the legal audit, ownership concentration and quality of reporting in the context of Cameroonian Chartered Accounting firms.

1.4.2 Specific Objective Of The Study

I To assess the relationship between legal audit and ownership concentration of Cameroonian chartered accounting firms.

Ii To evaluate the relationship that exist between ownership concentration and quality of reporting in Cameroonian Chartered accounting firms.

Iii To assess the relationship that exist between legal audit and quality of reporting in Cameroonian chartered accounting firms.