The research titled “Effect of external auditing expenditure on the profitability of Nigeria Banks” highlights the relevance of external auditing in improving performance of Nigerian banks. The cardinal objective of this study is to ascertain the effect of external auditing expenditure on the profitability of Nigerian banks. The study aims at achieving the following specific objectives which includes: ascertaining the effect of external audit expenditures on profit after tax of Nigerian banks and examining the effect of external audit expenditure on return on shareholders’ funds of Nigerian banks. The study adopted the ex-post facto research design. The empirical research used secondary data sourced from First Bank of Nigeria annual reports and statistical bulletins of the Central Bank Nigeria. The time series for the study covered a period of 2002 to 2016. Simple regression model was employed for the study while the hypotheses formulated were tested using version 20 of the Statistical Package for Social Sciences software. The result of the study show that external auditing expenditure has negative and non-significant effect on the profit after of commercial banks in Nigeria and external auditing expenditure has negative and non-significant effect on the return on shareholder funds of commercial banks in Nigeria. This work recommend that auditors should maintain a degree of independence to guarantee quality assurance that could provide the much needed protection of depositors finds and other shareholders interest in the bank.. We recommend also that further research should be carried out on this topic with an enlarged scope capturing more than one commercial bank in Nigeria.


Title page                                                                                                                                i
Declaration page                                                                                                                     ii
Approval page                                                                                                                        iii
Dedication                                                                                                                               iv
Acknowledgements                                                                                                                 v
Abstract                                                                                                                                   viii

1.1 Background of the study                                                                                                  1
1.2 Statement of the Problem                                                                                                  3
1.3 Objectives of the Study                                                                                                    3
1.4 Research questions                                                                                                           4
1.5 Research Hypothesis                                                                                                        4
1.7 Scope of the study                                                                                                            4
1.8 Limitations of the study                                                                                                   5
1.9 Definition of terms                                                                                                            5
2.1 Introduction                                                                                                                      7
2.2 Conceptual framework                                                                                                     7
2.1.1Concept of External Auditing:                                                                                       7
2.2.2 The Concept of Audit Risk                                                                                            8
2.2.3 Firms’ profitability                                                                                                        13
2.2.4 Duties and Responsibilities of External Auditors                                                         14
2.2.5 Objectives of an Audit                                                                                                  15
2.2.6 Ways external auditing can influence the growth of deposit mobilization in banks    15
2.2.7    Defining Auditors’s liability                                                                                       18
2.2.8    Auditor Responsibilities and their duties as regards the Going Concern Concept    19
2.2.9    The Problems Frustrating Effective Role of External Auditor                                  21
2.2.10 Profile of First Bank of Nigeria plc                                                                            22
2.3       Theoretical Framework                                                                                               25
2.4       Empirical framework                                                                                                 27
2.5       Summary of Literature Review                                                                                  29

3.1 Research design                                                                                                                30
3.2 Sources of data                                                                                                                 30
3.3 Model specification                                                                                                          30
3.4 Technique for Data Analysis                                                                                            31
3.5 Hypothesis testing                                                                                                            31
3.6 Description of research variable                                                                                       32
4.1 Data Presentation                                                                                                              33
4.2 Test of hypothesis                                                                                                             38
5.1 Summary of findings                                                                                                        40
5.2 Conclusions                                                                                                                       41
5.3 Recommendations                                                                                                            41
5.4 Suggestions for further studies                                                                                         42
References                                                                                                                         43
Appendix                                                                                                                            48

1.1 Background of the Study

The word “audit” is derived from a Latin word “audire” which means “to hear”. In the olden days, whenever the owner of a trade suspected “a foul play” by his store keeper, he sent for certain independent persons to resolve the issue. The person goes to the store keeper and “hears” whatever he has to say in regards or connection with the accounts in dispute. This person from his vast knowledge and simple experience of similar situations would be able to tell, if all the explanations given form any discrepancies in the record which were adequate and credible. These individuals of integrity are whom we today call auditors.

In societies marked by divisions of expert labour, external auditing is promoted as a trust engendering technology with the capacity to promote a certain kind of social order (Power, 1999). Accountants, as auditors, have cemented their status and privileges on the basis of claims that their expertise enables them to mediate uncertainty and construct independent, objective, true and fair accounts of corporate affairs (Sikka, 2009). It has been argued, however, that such claims are not good indicators of corporate performance, because capitalist economies are inherently prone to crises (O’Connor, 1987; Sikka, 2009).

Furthermore, the claims of expertise are frequently affected by unexpected corporate collapses, fraud, financial crime and the general crisis of capitalism (Baker, 2007; Sikka, 2009; Sikka et al , 2009) Since 2007, major Western economies have been experiencing a deepening banking and financial crisis arising from subprime lending practices by banks, which in turn has restricted the availability of credit and has led to what has been described as the ‘credit crunch’ (Sikka et al , 2009).

Some commentators have attributed this economic crisis to the unethical practices of corporate bank managers and to the inability of auditors to expose such anti-social practices from previous audits (Broad Street Journal, 21 October 2009; Sikka, 2009). Some auditors may have failed to comply with expected standards. If a company fails shortly after being audited, the auditors may be blamed for conducting an inferior audit (Dopuch, 1988).

Thus, whenever there is a financial scandal, it must be questioned whether the auditors carried out their duties and obligations with due care and diligence.

Merkling (1976) in Omokhudu & Omoye (2012) define the agency relationship as a contract under which one party (the principal) engages another party (the agent) to perform some services on their behalf with the principal delegating decision making authority to the agent.

As such the owners or share holders of most banks are not part of the daily operations of the organizational activities look forward to the realization of their goals.

There are however, other interest groups who depend on the organization to realize their own respective goal. The suppliers, stock brokers, lenders, government and so on are all part of the stakeholders, since these owners are not involved in the daily operations of the business, they may be doubtful of what the management may present to them as report of the organizations performance for the purpose of reliance on the management report, the stakeholders need confirmation report, or assurance by an independent party known as the external auditor.

In the light of this, customers need the assurance of the external auditors, who are greatly depended upon, since they are expected to adopt the attitude of professional skepticism.
This suggests that even though the auditors are not mainly, finding out fraud in the financial report, they should recognize the possibility of its existence.

1.2       Statement of the Problem

External audit functions are seen as powerful tool that could aid corporate performance. The sensitive nature of banks especially in Nigeria has put more demand on external audit reports as most depositors look up to the yearly assurance reports affirming and reaffirming the viability or otherwise of the banks. In the early 1990’s Nigeria experienced the collapse of almost 80% of her first generation banks like the Cooperative and Commerce bank(CCB), African Continental Bank (ACB), Orient Bank and a host of others (Onyekwelu &Ugwuanyi, 2014).

Reports have it that a good number of depositors lost their deposits, other forms of investments in the banks and even lives. Again, between 2008 – 2009, the Central Bank of Nigeria in a bid to save the banking public floated the Asset Management Company of Nigeria (AMCON) to rescue about five banks in Nigeria which were declared weak whose assets and depositors’ funds were in the negative balance. Undoubtedly, these banks had external auditors who had conducted annual auditing on their accounts and certified the banks as being healthy. It appears that only few studies have been carried out on the effect of external expenditure on the profitability of banks especially in Nigeria…..

This chapter reviews related literature under the following:

  • Conceptual framework
  • Theoretical framework
  • Empirical review
  • Summary of literature

2.1 Conceptual framework:
Concept of External Auditing
External auditing which is the function of statutory auditors is the process of reviewing the accounting and financial books of a company by a certified public accounting firms (Inyiama, 2010).
This task is performed quarterly and annually, consistent with the reporting cycle for public investment. Companies professional accountants performs this function to enhance the credibility of information about a subject matter which conforms in all materials respects with suitable criteria (law) Millichamp & Taylor (2008).

External auditing function is carried out by an external auditor who is approved by the shareholders of the organization and for whose interest the (external auditor) represents. This follows that the external auditors’ reports are key to ensuring the performance of public investments in banks as the quality assurance reports attracts deposit while a negative report could trigger off a panic withdrawal of deposits (Inyiama, 2012).

An audit is a systematic and independent examination of books, accounts, statutory records, documents and vouchers of an organization to ascertain how far the financial statements as well as non-financial disclosures present a true and fair view of the concern. It also attempts to ensure that the books of accounts are properly maintained by the concern as required by law. Auditing
has become such a ubiquitous phenomenon in the corporate and the public sector that academics started identifying an “Audit Society” (Power 1999)…..


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