INTERNAL AUDITING AND FINANCIAL PERFORMANCE OF QUOTED INSURANCE COMPANIES IN NIGERIA

INTERNAL AUDITING AND FINANCIAL PERFORMANCE OF QUOTED INSURANCE COMPANIES IN NIGERIA

The purpose of this study is to discover how internal auditing can affect the financial performance of quoted insurance companies in Nigeria.

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CHAPTER ONE: INTRODUCTION

1.1     Background of the Study

According to Ibanichuka and Ebere (2016), the highest challenge to human beings on this earth from time past has been issues arising from risk and uncertainties. They further claimed that in a bid to address this challenge insurance which is a product of human mind has been accepted worldwide as an important element in the safeguard of any nation, and no economy can do well in this modem age without fully having the support of viable and well-organized insurance industry.

Insurance companies provide essential financial service for the growth and development of any economy through the function of underwriting risks and mobilization of large amounts of funds through premiums for long term investment. These risk absorption roles of insurers promote financial stability in the financial markets and provide a sense of peace to economic entities (Mirie and Jane, 2015). The insurance industry has proven to be the cornerstone and catalyst for economic growth and development of any nation, including Nigeria. Hence, it is the expectations of Nigerians that the insurance industry will unfold its service qualities that would bring economic growth in the country. For the insurance industry to make good of this expectation adequately, the need to introduce internal auditing function in its operations becomes imperative.

Internal auditing is very important not only on the survival of insurance companies in this globally competitive market but in providing good quality services that would bring about rapid growth and development in the economy. As postulated by Kiabel (2012) a company’s accounting control practice (such as internal auditing) is widely believed to be crucial to the success of an enterprise as it acts as a powerful brake on the possible deviation from determining objectives and policies. Fie further advanced that organization that put in place an appropriate and adequate system of accounting controls is likely to perform better ( in financial terms) than those that do not. In the same vein, Okezie (2004) says “an enterprise’s internal auditing function significantly affects the operations of the entity to remain a going- concern”. Therefore, the role of internal auditing in assisting the Management and Board of Directors and Audit Committee to manage risk and perform optimally to accomplish corporate objectives has been increasingly recognized.

Despite the global awareness and well-defined roles of the internal audit function, it is unimaginable to observe that most of the companies and institutions operating in Nigeria do not have an internal audit department. Internal Auditors are perceived as playing a fairly modest role within the organizations and had only “limited responsibilities in the total managerial spectrum” (Moeller and Witt, 1999). Therefore, an internal auditing job is viewed as an extension of external auditor’s work, thus, only needful to assist the external auditors in financial statement review or auditing. Contrary to the claims of Venables and Impey (1991), that internal audit is an “invaluable tool of management for improving performance.”

Financial performance is a measure of an organization’s earnings, profits, appreciations in value as evidenced by the rise in the entity’s share price. In insurance, performance is normally expressed in net premiums earned; profitability from underwriting activities, annual turnover, return on asset and return on equity. Profitability is the only gateway to the survival, growth, and competitiveness of insurance firms and the cheapest source of funds. Without profits insurers, cant attract outside capital to meet their set objectives in this ever-changing and competitive globalized environment. Profit does not only improve upon insurers’ solvency state but it also plays an essential role in persuading policyholders and shareholders to supply funds to insurance firms, (Mirie and Jane, 2015). Thus, one of the objectives of the management of insurance companies is to attain optimal financial performance as an underlying requirement for conducting any insurance business (Chen and Wong, 2004: and Harrington and Welson, 1989).

Internal auditing, therefore, provides selective visibility to areas that need management intervention to ensure that business activities are executed according to management conceptions and that management meets the accountability demands of the Board of Directors and Shareholders of the firm (Spira and Page, 2003). In line with the work of Beasley et al(2000) and Dechow et al (1996), which shows documentary evidence of an association between weak internal auditing (such as poor financial reporting, lack of effective internal control, partial independence of internal auditor) and financial crisis among corporate companies. Internal auditing is the mechanism that focuses the company on issues that are important to verify and protect the integrity of the company’s financial reporting.

Available literature has shown that some research works have been done in similar areas of internal auditing and financial performance of government-owned corporations, institutions, and privately owned large companies except quoted insurance companies. However, some studies must have been done on internal auditing and financial performance of listed insurance companies in advance countries, but, there is no study of such in Nigeria, to best of the researcher knowledge. Hence, this study fills the gap in the literature

1.2     Statement of the Problems

In Nigeria, there is no doubt that the recent banking reforms and insurance reforms that led to the recapitalization of the operators in both industries were introduced as a remedy to the problem of business failure. Many insurance companies that failed to have full internal audit function, internal control, and other elements of good corporate governance went out of business, some were acquired or merged with others. The high rate of business failure particularly in the insurance industry in Nigeria has been attributed to several factors, few among them are ownership structure, seize, absence of proper legal framework, weak capital base, poor financial performance, unhealthy competition, poor management, and so on.

Internal audit functions which are the heart that fuel other units of a company are vital to its survival and growth, but fail to be recognized by law, as a compulsory unit to be operated by quoted companies in Nigeria and codify its modies operatis for the good interest of stakeholders. The consequence is that some quoted insurance companies undermine the vital role of internal auditing. The top management can flagrantly reject internal auditors’ reports or advice thus, raising questions on the independence of internal auditors. Internal auditors being a staff of a company are sometimes being used by fraudulent top management to perpetrate fraud and other financial crimes that the external auditors may not dictate or found out during audit.

These unwholesome practices dovetail to the poor financial performance that cripples most of the insurance companies in Nigeria. The recent call by insurance companies for a financial bailout from the federal government and other several sectors like the manufacturing industry are clear indications of lack of or ineffective internal auditing function in the insurance industry, resulting in poor utilization of funds, resources, and poor financial reporting. Sequel to these problems, it is obvious to conduct this study on internal auditing and financial performance of quoted insurance companies in Nigeria.

1.3     The Purpose of the Study

The purpose of this study is to discover how internal auditing can affect the financial performance of quoted insurance companies in Nigeria. Stemming from this, the specific objectives of this study are:

1. To identify the extent internal auditing function of risk assessment affects net profit margin.
2. To identify the extent the internal auditing function of risk assessment affects the return on assets.
3. To identify the extent the internal auditing function of risk assessment affects the return on equity.
4. To investigate the extent internal auditing function of asset safeguard affects net profit margin.
5. To investigate the extent of the internal auditing function of asset safeguard affects return on asset.
6. To investigate the extent of the internal auditing function of asset safeguard affects return on equity.

1.4     Conceptual Framework 

Source: Researcher’s Survey Data 2016

1.5     Research Questions

The following research questions shall provide a guideline for the study:

1. What extent does risk assessment affect net profit margin?
2. What extent does risk assessment affect the return on assets?
3. What extent does risk assessment affect the return on equity?
4. What extent does asset safeguard affect net profit margin?
5. What extent does asset safeguard affect the return on assets?
6. What extent does asset safeguard affect the return on equity?

1.6     Research Hypotheses

The undermentioned hypotheses shall be tested:

1. There is no significant relationship between risk assessment and net profit margin.
2. There is no significant relationship between risk assessment and return on assets.
3. There is no significant relationship between risk assessment and return on equity
4. There is no significant relationship between asset safeguard and net profit margin.
5. There is no significant relationship between asset safeguard and return on asset.
6. There is no significant relationship between asset safeguard and return on equity.

1.7     Significance of the Study

The importance of this research study lies in its usefulness.

This study will be of immense help to a lot of individuals, companies, and student that will carry out research on this area. It will also add to the existing stock of knowledge. The findings of this study will be a great assistance to insurance companies in understanding the importance of internal audit function in running an organization profitable via the deployment of the instrumentality of internal auditings such as asset safeguard and risk assessment.

Hence, the study findings shall be of ultimate interest to investors and other fund providers as it would provide indices for evaluation of Companies’ commercial viability and investment worthiness.

Finally, it will equally be of help to the board of directors, management of companies to ascertain or determine the degree of reliance they can place on the internal audit function to improve on their financial performance.

1.8     Scope and Limitation

This research study is primarily on internal auditing on and financial performance of quoted insurance companies in Nigeria; however, the scope of the study is narrowed to some selected listed insurance companies in Nigeria, and selected ones were studied and the finding on them shall be used to make a generalization on others.

No study of this magnitude would be conducted without one or more constraints. The researcher encounters many problems, one of such is cost, the total cost of collecting the data is exorbitant, and this limits the scope of the study.

Furthermore, the attitude of the respondents will also pose a problem. It is observed that some of the respondents conceal some vital information on the ground that they are confidential. Finally, given the sample of insurance companies chosen, it would not be enough to make generalizations in the entire industry in the country. To this end, the validity of the findings will not be 100% assured.

1.9     Definition of Terms

For the purpose of this study, the following terms need to be defined operationally to allow the reader to understand the research work.

1. Company: A business organization that makes, buys, or sells goods or provides services in exchange for money.
2. Risk: Is the uncertainty associated with a future outcome or event.
3. Premium: Is the specific amount of payment required periodically by an insurer to provide coverage under a given insurance plan for a defined period of time.
4. Financial Performance: The level of performance of a business over a specified period of time, expressed terms of overall profits and losses during that time. Evaluating the financial performance of business allows decision-makers to judge the results of business strategies and activities in objective monetary terms.
5. Underwriting: Is a term used by life insurers to describe the process of assessing risk, ensuring that the cost of the cover is proportionate to the risk faced by the individual concerned.
6. Internal Auditing and internal Audit Function are used interchangeably: Is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations.
7. Profitability: This is the ability of a business to earn a profit. A profit is what is left of the revenue a business generates after it pays all expenses directly related to the generation of the revenue, such as producing a product, and other expenses related to the conduct of the business activities.
8. Net Profit Margin: Is the percentage of revenue left after all expenses have been deducted from sales.

1.10   Organization of the Study

This research work will be divided into five chapters. Chapter one comprises; statement of the problem, the purpose of the study, research question, research hypothesis, significance of the study, limitation of the study, definition of terms, and organization of the study.

Chapter two is a review of related literature, leading to statements of the expectation and hypothesis of this study. Sections dealing with the research study. Chapter three deals with the research method and it comprises, research design, sampling procedure/ sample size determination, data collection method, operational measures of variables, and data analysis techniques.