CHAPTER ONE

INTRODUCTION

• Background of Study.

Scandal reporting have driven away investors from many finance institutions.

Several international leaders have been apprised of or involved in famous financial scandals. These leaders include Bernie Madoff of Bernard L. Madoff Investment Securities, Kenneth Lay of Enron, John Sidgmore of WorldCom, Mark Vorsatz of Arthur Anderson, Xerox, Maxwell, and Allied Irish Bank (Agrawal & Cooper,2017). These financial scandals resulted in a drop in the stock market, and several employees lost their jobs and lost their financial security. Investotem, which resulted from poor corporate governance (Awolowo, Garrow, Clark, & Chan, 2018).

Corporate governance refers to the rules, regulations and practices for the operations and control of business (organization for economic co-operation and Development        OECD 2015). It describes the monitoring mechanism that ensures the quality of financial information and improve the level of transparency in the organization.

Corporate governance is a valuable tool to mitigate the conflicts of interest between stakeholders and management (Al-Matari & Al-Arussi, 2016; Pandya, 2011).

It also includes relationships among the stakeholders of the company and a definition of the goals for which it is governed (OECD, 2004; Cadbury Committee, 1992; Economiesuisse, 2002). In the early days, most attention focused on rules and policies to share power between principals and agents and govern management activities Corporate governance is a crucial piece to market stability and economic development, shown through research (Bonna, 2011; Chahine & Safieddine, 2011). Corporate governance is crucial to protect the interest of all the stakeholders and shareholders. Corporate governance induces confidence not only from the stakeholders and shareholders but also (a) government, (b) employees, (c) suppliers, and (d) customers. Companies with weaker corporate ogovernance have higher input costs, lower

labor productivity, lower equity returns, lower value, and lower operating performance than banks with good corporate governance (Zaharia & Zaharia, 2012). Shareholders can see economic growth and an increase in wealth due to good corporate governance (Cretu 2012. The key to an effective corporate governance is the Independence of the board of directors, the transparency of this board of directors, the Independence of audit committee and the board size of MFIs as far as reporting quality is concerned. The challenge in corporate governance is wanting to provide a good image of a company’s well being and detrimental to the investors not part of the day to day transactions as the continuous scandal reporting might lead to company loss of these valuable investors.

The Independence of the board of directors is one of the key factors to financial reporting quality in MFIs in Bamenda as it has a positive impact on FRQ. The  audit committees Independence is therefore very Important to FRQ as he doesn’t have to collaborate with the board members on what to say about the institution. Thus if this audit committee is not independent ,FRQ will be poor as corporate governance is not practiced. This negative impact of audit committee independence on FRQ induces rethinking among the policy makers in Pakistan and calls for fully independent audit committee (Hasan,A,ALY,D and Hussainey,K 2022).

Financial reporting, the predominant occupation of the accounting profession is the process through which information about organizational performance and financial position is presented to the users. It is often believed to be precise and factual in its contents and, attested to by external person(s) (Independent Auditors) confirming its validity (Kantudu and Atabs, 2007, p.155).

The financial performance of microfinance institutions is a necessary condition for institutional sustainability (Hollis and Sweetman, 1998). African MFIs have structural weaknesses at several levels: governance, portfolio management, internal control, human resources and lack of financial sustainability. The microfinance sector of Cameroon still lacks the capacity to match the huge needs of the poor; this is because of the challenges relating to their growth. In recent times, microfinance has face a lot of challenges retarding their growth; some of these challenges are that: the microfinance community has experienced some major failures because of inadequacies in its operation including corporate governance (Labie, 2001),given its tremendous outreach, its future growth and sustainability depends on how it is governed and to attract further fresh capital in to this industry requires a thorough understanding of corporate governance practices of MFIs.

• Statement of problem

Although Cameroon has a large human Capital (approximately 25 million people) and vast, the Cameroonian business environment is being seen in some quarters as not too conducive for investment to both local and foreign investors. Reasons being the inability of financial reports to meet the needs of different group users. The prevalence of fraud, excessive earnings management, and other financial crimes has reduced the level of confidence reposed in these financial statements. The relationship between corporate governance and FRQ has been strongly explored in developed countries. They emphasis on specific governance factors like board independence, concerted shareholding, director shareholding and audit performance (Ballesta and Meca, 2007; Bradbury et al., 2006; Beekes et al., 2004; Petra, 2007; Han, 2005 and Yeo et al., 2002). However, these corporate governance practices are still being neglected by those involved in MFIs in Cameroon thus affecting the quality of financial reporting.

Cohen et al., (2004) identified board of director’s transparency as an important element in financial reporting. According to them, one of the most important functions of corporate governance is to ensure the quality of the financial reporting process. According (Sloan, 2001) the financial information is the first source of independent and true, communication about the performance of company managers. This relevance makes the financial reporting as the main attraction to management influence. The board of directors is regarded as the highest control

Kkklmechanism that is accountable for monitoring the actions taken by the top executive of the firm (Fama and Jensen, 1983). Although they satisfy numerous regulatory requirements there exist primarily because of conflicts of interest they help to address (Hermalin and Weisbach, 2003). The exercise of the function of monitoring by the board of directors is connected with its composition. (Fama,1980) and (Fama and Jensen,1983) show that its composition is an important factor to build a council to monitor under effective mode the actions developed by the management. These authors assert that it is natural that the more dominant members of the board are those who are also inside managers, because they have specific and measurable information about the activities of the organization. The supremacy of inside members of the board of directors in the mining industry in Cameroon is a factor that has been creating conditions for the occurrence of wealth transfer from shareholders to managers of the firm. This industry has limited the inclusion of external members to the board of directors to act as arbitrators in disagreements between members that are inside thus making the decisions involving the agency problems more complex

Cheng and Courtenay, (2006) analyzed the importance of the independence level of the board. Their research provide evidence that firms with a high proportion of independent directors have significantly higher level of disclosure compared to companies with other types of boards of directors. Though other authors (Srinivasan, 2005) argue that independent directors are subject to higher reputation costs in the event of a fault detected in the financial information submitted by the company, the dependence of directors on the board and the ministry limits their level of disclosure thus affecting the quality of financial reporting in MFIs in Bamenda Cameroon.

Rezaee, et al, (2003) also identified board of director’s Separate Audit Committees as an important element for the quality of financial reporting. The study stated that good corporate governance promotes relationships of accountability among the primary corporate participants and this may enhance corporate performance as it holds management accountable to the board and the board  accountable to the shareholders. Filatotchev et al, (2003) have suggested that excessive management control and ignorance of the governance process is causing problems that could be reduced by increasing the influence of outside directors. The Audit Committee serves as a bridge between the external Auditor and Board of Directors. They view the company’s position in a detached and dispassionate light and often liaised between the board and external auditors to ensure that areas of differences are resolved. lack of vigilant oversight by their boards of directors and audit committees in the financial reporting is still a great drawback to the quality of financial reporting in MFIs in Bamenda.

However, previous literature on corporate governance in the areas of financial reporting are still nascent and lacking in the Cameroon context. As such there is still a rather limited understanding of corporate governance-driven financial reporting quality in  MFIs in Cameroon. Based on the above, this study is geared at investigating the effects of good Corporate Governance Practices on Financial Reporting Quality in MFIs in Cameroon.k

• The purpose of study.

The purpose of the study is to establish the relationship between corporate governance and financial reporting quality in MFIs.

• Objective of the Study.

Main objective.

To evaluate the effect of corporate governance on financial reporting quality of MFIs.

Specific objective.

 -To examine how the board of directors transparency affect financial reporting quality of MFIs.

-To evaluate the Independence of  board of directors on the FRQ of MFIs .

-To examine the independence of  audit committee on the financial reporting quality of MFIs.

1.5 Research questions.

-What are the effects of corporate governance on FRQ in MFIs Bamenda?

-what are the effects of audit committee independence to the FRQ of MFIs?

-what is the influence of board size on the FRQ of MFIs in Bamenda?

-what impact does the Independence of board members have on the FRQ of MFIs in Bamenda?

-What is the essence of transparency on the FRQ of MFIs in Bamenda.