CHAPTER ONE

INTRODUCTION

1.1 Introduction

This chapter of the study formed the basis of research problem. It entailed the following sections in order; background of information, problem statement, research questions, objective of the study, hypothesis and the significance of the study

1.2 Background of the Study

The global financial landscape demands transparency, accountability and intergrity in financial reporting, primarily driven by the necessity to safeguard investor interests and maintain market stability (DeAngelo, 1981). Audit quality is defined as the likelihood that an auditor will detect and report material misstatements in financial statement. High quality audit serves as crucial mechanism for reducing information inequality between management and stakeholders, ensuring that financial statement fairly represent an organization’s financial position and performance (Jensen & Meckling, 1976). The importance of audit quality extends beyond publicly traded companies to encompass a wide range of financial institutions including credit unions which operate on a cooperative model and manage the savings and investments of their members (Basel Committee on Banking Supervision, 2012).

Micro Finance Institutions (MFIs) refer to financial institutions which provide financial services to poor economic agents who are typically excluded from the formal banking system for lack of sufficient collateral (Murdoch 2000). Lack of access to credit can be understood within the context of the absence of collateral that the economically challenged should provide to conventional financial institutions coupled with the various difficulties and high costs involved in dealing with large numbers of small, often illiterate borrowers (Weiss and Montgomery 2005). The poor mostly rely on money from money lenders at high interest rates or friends and family who themselves are cash trapped. MFIs try to overcome these obstacles through initiatives such as group lending and regular savings schemes. Micro Finance is defined as the provision of financial services to low-income economic agents and very poor self-employed and/or unemployed people (Otero, 1999). These financial services according to Ledgerwood (1999) generally include savings and credit but can also include other financial services such as insurance and payment services. Schreiner and Colombet (2001) on the other hand, define Micro Finance as the attempt to improve access to small deposits and small loans for poor households neglected by the formal banking sector. All around the world, poor economic agents are excluded from formal financial and banking systems. As a result of this exclusion, the poor, especially those in the developing world have developed a wide variety of informal; communitybased financial arrangements to meet their financial needs. Over the last twenty years, an increasing number of formal sector organizations (nongovernment, government, and private) have been created for the purpose of meeting those same needs. Such informal and formal arrangements offering financial services to poor economic agents come to be commonly referred to as Micro Finance (Brau and Woller, 2004).

In the context of Africa, the extent of poverty and the existence of a huge informal and private sector, with little or no access to formal sector financial services make micro-financial involvement particularly crucial (Steel et al. 1997). According to Robinson (2001), Micro Finance refers to small scale financial services for both credits and deposits that are provided to people who farm or fish or herd; operate small or microenterprise where goods are produced, recycled, repaired, or traded; provide services; work for wages or commissions; gain income from renting out small amounts of land, vehicles, draft animals, or machinery and tools; and to other individuals and local groups in developing countries in both rural and urban areas. Thus, Micro Finance has often been understood as the means by which poor economic agents convert small sums of money into large lump sums (Rutherford, 1997). Over the last two decades, the growth of the finance sector in the CEMAC region has been marred by the collapse of many operators. In the 1990s, as the region went through a turbulent economic turmoil, the banking sector was shaken to the roots. Of the 40 banks operating in the region, 9 simply closed down, 16 were declared insolvent and because of their vulnerability while 14 others were placed under constant supervisory observation by the region’s central bank. Of the fourteen banks, it was found that only one met the Central bank and other international regulatory standards. After five years of extensive restructuring by the Central Bank, BEAC, 35 banks are currently operating in a region deemed under-served when it comes to conventional financial services. Micro Finance is not a foreign import in most CEMAC countries. Indeed, it is culturally rooted and can be traced back several centuries. Traditional Micro Finance institutions continue to provide access to credit and to some basic micro-insurance for the rural and urban communities. They are mainly informal Self-Help Groups (SHGs) or Rotating Savings and Credit Associations (ROSCAs) commonly known as susus in Ghana, tontines or Njangi in Cameroon. Other providers of Micro Finance services include market roving savings collectors for small traders and co-operatives. These traditional and informal financial institutions have tended to be constrained by geographical and societal boundaries with no aspiration to expand. In response and to restore health in the sector, the COBAC launched a vigorous reform programme. Central to this reform was the development and enforcement of an adequate regulatory framework. By 2006, the number of Micro Finance Institutions had halved. In January 2002, the Ministry of Finance of Cameroon banned 400 hundred companies from providing any form of financial services. Since then, the number of MFIs has been on the increase Source; BEAC (CEMAC Central Bank) Annual Report (2006).

Micro Finance is a source of financial services for entrepreneurs and small businesses lacking access to banking and related services. The two main mechanism for the delivery of financial services to such client are relationship base banking for individual entrepreneur and small businesses and group base model where several entrepreneurs comes together to apply for loans and other services as a group. In some regions for example southern Africa, Micro Finance is use to describe the supply of financial services to low income employees, which is closer to the retail finance model prevalent in mainstream banks. For some, micro finance is a movement whose object is a word in which as many poor and near–poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance and fund transfer. Micro Finance is a way to promote economic development, employment and growth through the support of micro- entrepreneurs and small businesses.

The current COBAC Micro Finance regulatory framework fills a legal vacuum. Member countries such as Cameroon had some embryos of legislation aimed at Micro Finance. Their activities were placed under the tutorship of the Ministries of Agriculture and The Ministries of Finance, because Micro Finance was initially seen as essentially suited for the promotion of rural and agricultural activities (Creusot, 2006). In addition, there are networks which are not a special category per se, but which may be required to comply with an additional layer of requirements pertaining to the legal status. Overall, COBAC’s key instrument and control mechanism at the inception of MFIs seems to be “Accreditation” or licensing. However, the prudential advantages of early licensing system as a control tool are not clear. In the CEMAC region, it is still possible to start Micro Finance activities without any prior authorization from anybody. This is typically the case for churches, a large number of domestic non-governmental organizations some of which have been known to manage portfolio of financial assets that are large enough to contain potential systemic risks.

The master framework that regulates Micro Finance activities in the CEMAC region came into force in 2002 and is known as “Standard n° 01/02/CEMAC/IMAC/COBAC Organization and supervision of Micro Finance activities in the CEMAC”. The COBAC does not prescribe any legal form for MFIs. It focuses on the nature of the activities and divided into three categories:

1. Category one provides savings opportunities exclusively to members and then uses these savings to offer credit for member-run projects. These organizations cannot seek profit and exist for the sole purpose of the empowerment of their members. They are institutions that collect savings and deposits and lend them on exclusively to their members. This category includes associations, cooperatives and credit unions.
2. Category two Micro Finance Institutions are profit-seeking institutions which offer savings and credit services to the public. They are institutions that collect savings and deposits and lend them on to third parties. This category groups limited liability companies that function more like mini banks.

iii. The third category is made of lending institutions that do not collect savings and deposits. They include micro credit and project finance institutions, NGOs. They can be easily assimilated to usurers but they do not lend a usury interest rate. It is a legal frame for private lenders to sell their money at a legal interest rate. The third category is not always private limited companies.

The financial sector plays a critical role in the economic development of nations, particularly in emerging economies like Cameroon. Cameroon’s financial sector is a crucial engine for economic growth, supporting investment, employment and overall development. Credit unions known locally as “cooperatives d’epargne et de credit” (CEC) play a particularly significant role in providing financial services to a large portion of the population, especially in rural and underserved areas (MINFI, 2020).

These institutions offer a vital access to savings, credit and other financial products empowering individuals and communities to participate in the formal economy. Credit unions as member-owned financial cooperatives provide essential financial services to their members, promoting savings and providing access to credit. The framework governing financial institutions in Cameroon, including credit unions is primarily overseen by Banking Commission of Central Africa (COBAC). COBAC is responsible for ensuring that banks and other financial institutions operate within the established regulatory framework, maintaining financial stability and protecting depositors’ interest. The legal basis for these regulations is the Law No. 2019/ 021 of 24 December 2019. This law lays down certain rules relating to credit activity in banking and microfinance sectors in Cameroon, including credit unions. It outlines the conditions for granting credit, the obligations of credit institutions, and the rights of credit consumers.

The Post and Telecommunications Credit Union in Buea is a pivotal institution that serves employees in the telecommunications and postal sectors, contributing to their financial well-being and economic stability.

In recent years, the demand for transparency and accountability in financial reporting has intensified, driven by the need to protect stakeholders’ interests and ensure the sustainability of financial institutions. Audit quality has emerged as a crucial factor influencing the credibility of financial statements, which in turn affects the financial performance of organizations. High-quality audits not only enhance stakeholder trust but also mitigate risks associated with financial mismanagement and fraud.

Financial reporting is one of the primary responsibilities of management which enables them to give account of their stewardship. Managers of credit unions are expected to prepare and present the annual financial reports to the members and shareholder who are owners of the Corporation and interested users such as analysts, government and the general public to enable them assess the performance financial position reporting corporation. The main objective of financial reporting therefore is the provision of information on the financial performance and position of the reporting corporation that is useful to different users, to enable them assess the stewardship of management and make informed economic decisions (Amahalu, Okoye &Obi, 2019). This means that published financial reports that fail to meet the information needs of its users do not achieve their intended purpose.

Audit quality is defined as a probability that the external auditor will both detect and report any violations in the accounting system of the client (De Angelo, 1981). This depends on the technical skills of the auditor in order to detect misreporting and on his independence to report any observed miscalculation. Accountants, as described in the code of professional conduct, perform an essential role society. In accordance with that role they are considered to exercise professional and moral judgments in their activities in order to maintain the public’s confidence. Therefore, the quality of auditing services is perceived as higher whenever the auditor is independent and possesses the capabilities to critically judge the financial reporting of clients firms. These capabilities are constructed by values, ethics, knowledge and experience of the auditor (IAASB, 2013). Before making accounting choices, organizations rely heavily on auditor guidance. This suggests auditors modify financial statements before auditing. When corporations make an accounting judgment or financial statement, they rely heavily on auditors. High reliance on the auditor means the auditor affects the financial accounts (Baatwah, Salleh, and Ahmad, 2018). According to Adenle, Anyanwu, Okafor, and Oyaleke (2022), the goal of an audit is to acquire adequate audit evidence to support the auditor’s findings. The auditing process is completed with the auditor’s conclusion in a signed audit report. In this report, auditors summarize audit findings and provide their opinion on the company’s declared financial accounts. Financial statement quality and trustworthiness depend on audit quality (Siregar and Nuryanah, 2019). Audit quality is important, and auditors’ reports are heavily weighted.

Before making accounting choices, these organizations rely heavily on auditor guidance. This suggests auditors modify financial statements before auditing. When corporations make an accounting judgment or financial statement, they rely heavily on auditors. High reliance on the auditor means the auditor affects the financial accounts (Baatwah, Salleh, and Ahmad, 2018). According to Adenle, Anyanwu, Okafor, and Oyaleke (2022), the goal of an audit is to acquire adequate audit evidence to support the auditor’s findings. The auditing process is completed with the auditor’s conclusion in a signed audit report. In this report, auditors summarize audit findings and provide their opinion on the company’s declared financial accounts.

Audit quality plays an important role in maintaining an efficient market environment; an independent quality audit underpins confidence in the credibility and integrity of financial statements which is essential for well-functioning markets and enhanced financial performance. External audits performed in accordance with high quality auditing standards can promote the implementation of accounting standards by reporting entities and help ensure that their financial statements are reliable, transparent and useful. Sound audits can help reinforce strong corporate governance, risk management and internal control at firms, thus contributing to financial performance. The statutory audit can reinforce confidence because auditors are expected to provide an external, objective opinion on the preparation and presentation of financial statements. Auditors need to be independent in the opinions they express, while the work they have to do to form their opinions is highly dependent on and rooted in the real world and may become challenging in some business environments such as the Post and Telecommunication Credit Unions in Buea. It is against this background that this research work was carried out. The purpose of this study therefore is to determine the effect of audit quality on the financial performance of post and telecommunications credit union, Buea.

1.3 Statement of the Problem

In today’s complex financial environment, the quality of audits plays a vital role in ensuring the reliability and integrity of financial statements. Low-quality financial reporting has also been a contributing factor in many high-profile corporate scandals, leading stakeholders in many countries to demand higher quality corporate governance (Amahalu, Egolum & Obi, 2019). The Post and Telecommunication in Buea, like many financial institutions, relies on accurate financial reporting to maintain stakeholders trust and make informed decisions. However, there is growing concern regarding the quality of audits conducted within this sector, which may significantly impact the financial performance of credit union. Despite the recognized Importance of audit quality, there is limited empirical research specifically examine its effects on the financial performance of credit unions in the Buea region. Factors such as auditor independence, professionalism and adherence to auditing standards are critical components that may influence audit quality.

Given this, the study aims to investigate the effect of audit quality on the financial performance of the Post and Telecommunication Credit Union Buea and identify the specific factors that contribute to improve financial health and sustainable growth. If this problem is not solve it may lead to the following consequences; a reduction in members engagement, withdrawals of investment and loss of market share to competitors, because of non-compliance with regulatory standards the credit union will be expose to potential legal penalties.

1.4 Research Questions

1.4.1. Main Research Question

What is the effect of audit quality on the financial performance of post and telecommunications credit union, Buea?

1.4.2 Specific Research Questions

1. How does auditor independence influence the financial performance of the post and telecommunication credit union?
2. What role does the auditor’s competence and experience play in determining audit quality within credit union?
3. To what extent do modern auditing standards impact the financial outcomes of the post and telecommunication credit union?

1.5 Research Objectives

1.5.1 Main Research Objective

The main research objective is to analyze the effect of audit quality on the financial performance of post and telecommunications credit union, Buea.

1.5.2 Specific Research Objectives.

1. To assess the effect of auditor independence influence on financial performance of the post and telecommunication credit union in Buea.
2. To evaluate the effect of auditor’s competence and experience in determining audit quality within credit union in Buea.
3. To assess the extent to which modern auditing standards impact the financial outcomes of the post and telecommunication credit union in Buea.

1.6 Hypothesis of the Study

H₁: Auditor independence has no significant influence on financial performance of the post and telecommunication credit union in Buea.

H₂: Competence and Experience and has no significant on auditors in determining audit quality within credit union in Buea.

H₃: Modern auditing standards have no significant on the financial outcomes of the post and telecommunication credit union in Buea.