EXTERNAL AUDIT AND QUALITY OF ACCOUNTING AND FINANCIAL INFORMATION IN THE CAMEROONIAN PUBLIC SECTOR

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

The main purpose of external audit as a governance mechanism is to enhance the accuracy and trustworthiness of the financial information generated by corporations, hence ensuring the dependability and credibility of the companies' reported financial statements. However, due to the global awareness of several financial scandals such as Enron and WorldCom, the reliability of audited financial statements has been extensively discussed. These scandals were caused by external auditors, as highlighted by Vepgnou (2019). Precise financial reporting is crucial for accurately determining the value of securities traded in all capital markets, particularly in emerging markets such as the Douala Stock Exchange. Accurate financial information is crucial for independent business persons and corporate entities in Cameroon to make well-informed decisions about investments, reinvestments, strategy design, business model, and risk assessment. Provided that the management unit or board is adequately informed and receives accurate information, they have the potential to effectively organise compensation packages and other distributions in a manner that aligns with the company's best interests (Kin-Yew, 2022).

Transparency and accountability in the public sector have become increasingly important worldwide in recent years. The importance of maintaining the accuracy and reliability of financial information, as well as improving accounting standards in public sector companies, has become a significant concern in Cameroon (Vepgnou, 2019). External audits are a crucial means of ensuring that public resources are efficiently handled and that financial statements accurately represent an entity's financial status (Toluwalase, 2017). External audits offer an impartial and unbiased evaluation of an organization's financial accounts, guaranteeing their accuracy and adherence to applicable accounting rules and regulations. External audits in the public sector are crucial for bolstering the trustworthiness of financial information, fostering responsibility and openness, identifying and avoiding fraud and irregularities, and boosting financial management and governance processes (Hwang, 2019).

Engaging an auditor who possesses high audit quality and serves as an unbiased and rigorous third party to conduct an independent examination of the financial statements is usually essential to ensure the precision and openness of the financial statements provided to the public and shareholders (Angelo 2018).  This guarantees the credibility of the financial accounts from the perspective of the users.  According to several audit researchers, the main objective of an audit assignment is to generate a report of satisfactory quality. Hence, it is imperative that an impartial and proficient third party, specifically the external auditor, conducts an audit of the financial statements to provide assurance to the consumers that there are no significant errors or misrepresentations (Angelo 2018). 

Financial statements are essential for organisations to provide external parties with accurate and detailed information about the company's finances. In order to determine the reasonableness of the financial accounts and statements provided by management, it is necessary to conduct a third-party audit of the company's financial statements (Suma, 2021). Nevertheless, the widespread occurrence of audit errors on a global scale, specifically inside the Cameroonian economy, has resulted in a profound sense of disappointment among users of financial reports. The prevalence of corporate corruption and embezzlement in Cameroon is escalating, necessitating the implementation of preventive measures to avoid their establishment as defining characteristics of the nation (Hanko, 2022). Cameroon held the highest corruption index in the world in both 1998 and 1999 (Nguimfack, 2023). However, the determination of the dishonest individuals to evade the regulatory systems aligns with the determination of the auditors and government authorities to prevent it.

In recent years, there has been a growing association between various corporate failures and deficiencies in auditing, as recognised by the business world, academics, regulators, and the general public.  Examples of such scandals include the MacDonald and Robbins scandal, the Equities Funding scandal, Enron Corporation, WorldCom, Lehman Brothers, Tyco, Waste Management, and Health South in the USA, Bank of Credit and Commerce International (BCCI), Parmalat in Italy, and HIH Insurance group in Australia (Nyamalum, 2021). Cameroonian firms are not exempt from this failure due to the substandard quality of the audit.  The Cameroon Housing Loan Fund (CF) and the National Real Estate Corporation (SIC), both of which had their auditors accused in 2007 of certifying false and misleading financial statements and being complicit in the embezzlement of state funds, serve as two instances of scandals resulting from inadequate audit quality (Wamba & Tagne, 2017). 

Recently, the auditors of the former Cameroon Airlines Corporation and the BICEC bank were incarcerated for engaging in unethical behaviour during the execution of their auditing responsibilities (Wambang, 2022).  Furthermore, in 2013, the Cameroonian Budget and Finance Disciplinary Board imposed sanctions on auditors employed by SODECOTON and the Cameroon Oil Refinery Corporation (SONARA). The business failures have been attributed to audit failure, leading to public and financial statement consumers criticising the quality of audits in Cameroon and the services offered by auditors. Foka & Wamba (2019) conducted a study on the service quality of Cameroonian audit firms and found evidence of the country's poor auditing standards. Foka, Hikouatcha, and Wamba (2021) found that the likelihood of receiving a qualified audit opinion in Cameroon is only 33%. Ndjetcheu (2022) reports that around 75% of auditors in Cameroon exhibit a deficiency in audit quality. The researcher is motivated to conduct a study that aims to tackle the problem of audit quality, specifically in the context of Cameroon, due to the prevailing crisis of audit failure.

The public sector in Cameroon consists of numerous ministries, departments, and agencies that are accountable for overseeing significant amounts of public expenditures. The accuracy and reliability of accounting and financial information generated by these organisations are crucial for making well-informed decisions, effectively allocating resources, and upholding public confidence (Watts, 2023). The integrity of accounting and financial information is essential for the efficient operation of the public sector. External audits are essential for verifying the reliability, accuracy, and compliance of financial statements with established criteria (Jayeola, 2023). This study aims to examine the present condition of external audits in the public sector of Cameroon. It will identify the obstacles and suggest remedies to improve the accuracy of financial information and reinforce governance procedures.

1.2 Statement of the problem

The quality of accounting and financial information in the Cameroonian public sector is a crucial determinant of openness, accountability, and successful governance. Nevertheless, the impact of external audit on improving this level of excellence continues to be a noteworthy issue. Although there is an established structure for external auditing, there are indications that the accuracy and reliability of accounting and financial information in the public sector may still be compromised due to several structural and operational issues.

An important problem is the lack of uniformity in following accounting standards and financial legislation. External audits are intended to guarantee adherence to these standards; nonetheless, there are many complaints of non-compliance or departures from established processes (Soliman, 2018). This prompts enquiries on the efficacy of external audits in imposing uniformity and enhancing financial reporting. Zehri (2019) argues that the external audit process in the public sector of Cameroon frequently encounters limitations concerning its scope, resources, and techniques. The narrow extent of audits and the efficacy of audit procedures might influence the dependability of financial data, resulting in possible misrepresentation or financial mishandling. Furthermore, there are apprehensions regarding the transparency of the auditing process and the responsibility of auditors. The efficacy of external audits in augmenting openness and ensuring the right utilisation of public monies may be undermined if the audit process lacks impartiality or if conflicts of interest arise (Yasser, 2020). It is crucial to tackle these problems in order to enhance the standard of accounting and financial data in the public sector of Cameroon. The issue at hand pertains to comprehending the means by which external audits might be enhanced in order to guarantee more precise, dependable, and open financial reporting. This is of utmost importance for efficient governance and the establishment of public confidence. Therefore, the necessity for this investigation arises.

Objectives of the study

The primary objective of this study is to critically assess external audit and quality of accounting and financial information in the Cameroonian public sector. Specific objectives of this study are to:

To assess the Impact of External Audits on Financial Reporting Quality

To assess the Impact of External Audits in enhancing transparency within public sector institutions

To Examine the Role of External Auditors in detecting financial fraud within public sector institutions in Cameroon

To Examine the Role of External Auditors in Enhancing Accountability within public sector institutions in Cameroon

To offer Recommendations for Enhancing Audit Quality and Financial Reporting within public sector institutions in Cameroon

1.4 Research Questions

The following research questions which are in line with the objectives of this study will be answered in this study:

What is the Impact of External Audits on Financial Reporting Quality?

What is the Impact of External Audits in enhancing transparency within public sector institutions?

What is the role of External Auditors in detecting financial fraud within public sector institutions in Cameroon?

What is the role of External Auditors in Enhancing Accountability within public sector institutions in Cameroon?

What are the Recommendations for Enhancing Audit Quality and Financial Reporting within public sector institutions in Cameroon?

1.5 Research Hypotheses

To determine the effectiveness of this study, the following research null hypotheses will be formulated to guide the study and it will be tested at 0.05% levels of significance.:

Ho: External audits have no significant impact on Financial Reporting Quality within public sector institutions in Cameroon.

Ha: External audits have significant impact on Financial Reporting Quality within public sector institutions in Cameroon.

1.6 Significance of the study

The importance of this study is in its capacity to enhance the calibre of accounting and financial data in the Cameroonian public sector by gaining a deeper comprehension of the function of external audits. The study seeks to examine the influence of external audits on financial reporting, transparency, and accountability. Its objective is to improve financial management, provide insights for policy and regulatory advancements, and promote the overall efficiency of external audit processes.

The study aims to evaluate the impact of external audits on the accuracy and dependability of financial reports. It will identify specific areas where external audits enhance the precision of financial information, thereby facilitating improved decision-making and financial planning. The study aims to assess the effectiveness of external audits in ensuring adherence to national and international accounting standards, hence enhancing the overall quality and reliability of financial reporting in the public sector.

Moreover, comprehending the influence of external audits on financial controls can result in the detection of vulnerabilities and opportunities for enhancement in internal control systems, thereby bolstering financial management practices. External audits are essential for evaluating budgetary methods and expenditures. The study can offer valuable insights into the ways in which these audits lead to enhanced budget management and monitoring.

Moreover, External audits that are effective contribute to the improvement of openness in financial reporting, so bolstering public confidence in the administration of public resources. The study will emphasise the role of external audits in enhancing financial transparency and improving financial procedures and reporting. The study aims to investigate the impact of external audits on accountability, specifically focussing on how these audits contribute to ensuring that public officials are held responsible for the appropriate utilisation of public monies.

Moreover, the study offers policymakers significant insights on the efficacy of external audits in enhancing financial reporting. This can facilitate the formulation of policies targeted at improving audit processes and financial management. The findings may reveal deficiencies or inadequacies in the current regulatory framework for external audits, which could result in suggestions for modifications that enhance audit methods and financial reporting requirements.

In conclusion, this study contributes to the existing academic literature on external auditing and financial reporting by presenting a case study that can be utilised for future research and analysis in this topic. The study's findings can provide valuable insights for future research on the correlation between external audits and the quality of financial reporting, thereby enhancing our comprehension of the usefulness of audits.

1.7 Scope of the study

Broadly, this study focus is to critically assess external audit and quality of accounting and financial information in the Cameroonian public sector. Specifically, this study seeks to assess the Impact of External Audits on Financial Reporting Quality, assess the Impact of External Audits in enhancing transparency within public sector institutions and examine the Role of External Auditors in detecting financial fraud within public sector institutions in Cameroon. 

Further, this study will focus on examining the Role of External Auditors in Enhancing Accountability within public sector institutions in Cameroon and it also seeks to offer recommendations for addressing the identified challenges and offer Recommendations for Enhancing Audit Quality and Financial Reporting within public sector institutions in Cameroon.

 The study is carried out in Cameroon. 

1.8 Limitations of the study

As with any human endeavour, the researchers faced many minor constraints during the investigation. The main limitation was the lack of extensive literature on the subject, due to the limited availability of data regarding external audit and the quality of accounting and financial information in the public sector of Cameroon. Hence, a significant allocation of time and exertion was necessary to ascertain the appropriate materials, books, or information and amass data. 

Furthermore, this study is constrained by its small sample size and narrow geographical scope, focussing solely on Cameroon. Therefore, the conclusions of this study cannot be extended to other situations, thus requiring further investigation. 

Moreover, the researcher's restrictions were primarily due to financial constraints, as they are a student without any source of income to sustain themselves. The exorbitant transportation costs at the research location posed a challenge in terms of affording transportation fees.

Furthermore, the researcher faced a time constraint due to the need to do this research while still fulfilling the obligations of attending lectures and participating in other educational activities.

1.9 Definition of terms

External audit: An external audit is a financial review that is conducted by a party not associated with the company or department that is voluntarily or involuntarily under audit. An external audit takes place within a defined set of rules or laws.

Corporate governance: Corporate governance is the structure of rules, practices, and processes used to direct and manage a company. A company's board of directors is the primary force influencing corporate governance.

Accountability: Accountability is the practice of being held to a certain standard of excellence. It is the idea that an individual is responsible for their actions and, if that individual chooses unfavorable actions, they will face consequences.

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