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EFFECTS OF EXTERNAL AUDITING ON THE PROFITABILITY OF DEPOSITS MONEY BANK IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

External auditing has become an important part of modern corporate governance because it helps to improve the credibility and reliability of financial statements prepared by organizations (International Auditing and Assurance Standards Board [IAASB], 2022). Deposit money banks operate in a highly regulated environment where investors, regulators, depositors, and other stakeholders depend on accurate financial information for decision making (Central Bank of Nigeria [CBN], 2023). The growing complexity of banking operations has increased the need for independent external auditors who can provide assurance on the fairness of financial reports and compliance with regulatory requirements (World Bank, 2023).

The primary responsibility of external auditors is to examine financial records and express an independent opinion on whether the financial statements present a true and fair view of an organization's financial position (IAASB, 2022). Through this process, auditors help to reduce information asymmetry between management and stakeholders by enhancing the quality of financial reporting (International Federation of Accountants [IFAC], 2023). Effective external auditing also contributes to transparency and accountability, which are essential for maintaining public confidence in the banking sector (Organisation for Economic Co-operation and Development [OECD], 2023).

Profitability remains one of the major indicators used to assess the performance and sustainability of deposit money banks (CBN, 2023). A profitable bank is better positioned to meet its obligations, expand its operations, and contribute to economic growth through financial intermediation (International Monetary Fund [IMF], 2024). However, profitability can be negatively affected when financial irregularities, fraud, weak internal controls, and poor governance practices exist within banking institutions (PwC, 2024). As a result, external auditing is often viewed as a mechanism that can help detect material misstatements and strengthen financial discipline within banks (KPMG, 2024).

In Nigeria, the banking industry has experienced various reforms aimed at improving financial stability and strengthening public trust in financial institutions (CBN, 2023). These reforms have increased the expectations placed on external auditors regarding the quality of assurance services provided to banks (Financial Reporting Council of Nigeria [FRCN], 2023). The effectiveness of external auditing has become more significant as stakeholders seek greater confidence in reported profits and financial performance figures published by deposit money banks (FRCN, 2023).

Several studies have suggested that high quality auditing can improve investor confidence, reduce agency problems, and support better financial performance in organizations (IFAC, 2023). When external auditors perform their duties independently and professionally, management is more likely to comply with accounting standards and regulatory requirements, thereby improving the reliability of financial information (OECD, 2023). Improved financial reporting quality can enhance a bank's reputation and attract investment, which may positively influence profitability over time (World Bank, 2023). Therefore, examining the effects of external auditing on the profitability of deposit money banks in Nigeria is important for understanding how audit practices contribute to the performance and stability of the banking sector (IMF, 2024).

1.2 Statement of the Problem

Deposit money banks in Nigeria play a significant role in economic development through the mobilization of savings and the provision of credit facilities. Despite the importance of these banks, concerns continue to exist regarding financial reporting quality, corporate governance practices, and the reliability of reported profits. Cases of financial irregularities, weak internal controls, and governance challenges have raised questions about the effectiveness of external auditing in ensuring transparency and accountability within the banking sector. This situation has created uncertainty among investors, regulators, and depositors regarding the actual financial performance of some banks.

Although external auditing is expected to improve the credibility of financial statements and strengthen stakeholder confidence, there is still debate on whether it significantly influences the profitability of deposit money banks in Nigeria. Some banks continue to experience profitability challenges despite being subjected to regular external audits. Consequently, there is a need to investigate the extent to which external auditing contributes to profitability among deposit money banks in Nigeria. This study seeks to fill this gap by examining the effects of external auditing on the profitability of deposit money banks in Nigeria.

1.3 Objectives of the Study

The main objective of this study is to determine the effects of external auditing on the profitability of deposit money banks in Nigeria.

Specific objectives include:

      i.         To evaluate the impact of external audit quality on the profitability of deposit money banks in Nigeria.

    ii.         To determine the effect of auditor independence on the profitability of deposit money banks in Nigeria.

   iii.         To find out the influence of audit reporting credibility on the profitability of deposit money banks in Nigeria.

1.4 Research Questions

      i.         What is the impact of external audit quality on the profitability of deposit money banks in Nigeria?

    ii.         What is the effect of auditor independence on the profitability of deposit money banks in Nigeria?

   iii.         How does audit reporting credibility influence the profitability of deposit money banks in Nigeria?

1.5 Research Hypotheses

Hypothesis I

H0: There is no significant impact of external audit quality on the profitability of deposit money banks in Nigeria.

H1: There is a significant impact of external audit quality on the profitability of deposit money banks in Nigeria.

Hypothesis II

H0: There is no significant effect of auditor independence on the profitability of deposit money banks in Nigeria.

H2: There is a significant effect of auditor independence on the profitability of deposit money banks in Nigeria.

Hypothesis III

H0: There is no significant influence of audit reporting credibility on the profitability of deposit money banks in Nigeria.

H3: There is a significant influence of audit reporting credibility on the profitability of deposit money banks in Nigeria.

1.6 Significance of the Study

This study will be beneficial to bank management, shareholders, investors, regulators, and external auditors. The findings will provide useful information on how external auditing contributes to the profitability of deposit money banks in Nigeria. Bank managers may use the results to improve audit practices, strengthen internal controls, and enhance financial reporting quality.

The study will also assist regulatory agencies such as the Central Bank of Nigeria and the Financial Reporting Council of Nigeria in formulating policies that promote effective auditing and transparency in the banking industry. Furthermore, future researchers and academic scholars will benefit from the study as it will serve as a reference material for further studies on auditing and bank performance.

1.7 Scope of the Study

This study focuses on the effects of external auditing on the profitability of deposit money banks in Nigeria. The study specifically examines how external audit quality, auditor independence, and audit reporting credibility influence the profitability of selected deposit money banks operating within Nigeria.

The study is limited to deposit money banks because of their importance to the Nigerian financial system and their responsibility for safeguarding public deposits. The analysis concentrates on profitability indicators and external auditing variables considered relevant to the banking sector.

1.8 Limitations of the Study

One of the limitations of this study is the possibility of restricted access to certain confidential financial and audit information of deposit money banks. Some relevant data may not be publicly available, which could affect the depth of the analysis.

Another limitation is the time and financial resources required to collect and analyze data from selected banks. In addition, differences in accounting policies, reporting practices, and operational structures among banks may affect the comparability of information used in the study.

1.9 Definition of Terms

External Auditing: An independent examination of an organization's financial statements to determine whether they present a true and fair view of financial performance and position.

Profitability: The ability of a bank to generate earnings from its operations over a given period.

Deposit Money Banks: Financial institutions licensed to accept deposits from the public and provide banking services.

Audit Quality: The degree to which an audit is performed in accordance with professional standards and capable of detecting material misstatements.

Auditor Independence: The ability of an auditor to perform audit duties objectively without undue influence from management or external parties.

Audit Report: A formal opinion issued by an external auditor regarding the fairness and reliability of financial statements.

Financial Statements: Structured reports that present the financial performance, position, and cash flows of an organization.

Corporate Governance: The system of rules, practices, and processes through which organizations are directed and controlled.

Stakeholders: Individuals or groups with an interest in the activities and performance of an organization.

Financial Reporting: The process of preparing and presenting financial information to users for decision making.

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