CHAPTER ONE
BACKGROUND OF STUDY
1.1 INTRODUCTION
A farmer, who plants crops, expects result, similarly to student who sits for an examination expects results. The same is also true of an investor.
For the farmer, the result might be communicated to him in the form of a bumper harvest. The result sheet or a report card would usually suffice for a student. However, in the case of an investor, the result is communicated through the financial reports.
Financial reports are law to be prepared by every limited liability company; these limited liability companies abound in virtually all sector of the economy.
Every company shall cause accounting records to be kept. The accounting records shall be sufficient to show and explain the transactions of the company and shall be such as to disclose with reasonable accuracy, at anytime the financial position of the company.
In the banking industry, financial reports are of great interest to the general public because the banks directly or indirectly interact with people.
This public interest has caused companies (including banks) to accept social as well as economic, financial and legal responsibilities and has created a consequence, a growing need for the communication of information to account for the results which are of considerable interest a wide range of individuals and organizations.
So, it becomes very important for reliable information to be circulated to interested parties which can enable them to acquire an essential knowledge of the ways is which companies particularly the bank are performing in relation to the public interest. This fact is further educated by the recommendation of the working party set up in Britain by the Accounting standard committee in October 1974 under the chairmanship of Derek boothman which took a study of the scope and aims of publishing financial statements.
The committee recommended that:
“The fundamental objectives of corporate reports are to communicate economic measurement of the reporting entity useful to those having reasonable right to such information”.
It is not an over statement when one says that the banking industry is the flume on which the national economy rotates. This huge impact upon a country economy therefore makes it a public affair as everybody has a right to know what such organization is doing, more so all information necessary to explain the
organization’s activities should be fully provided in the annual reports.
One of the most significant aspects of the information system of business enterprises in an economy is that it deals with the communication of financial data, especially in describing business profitability and financial position. This information is important because it attempts to communicate the economic resources of the enterprises and the financial results, which have been achieved by its management when those resources have been put to use. It attempts to reveal how effective management has been in resources utilization as well as the financial reward available to compensate for risk taken by various suppliers of capital.
1.2 STATEMENT OF THE PROBLEM
The genuineness of financial reports attracts diverse opinions from different quarters, such opinions can come from the general public, tax authorities, shareholders, creditors with long or short term interest, financial analyst and potential investors.
They argue that the financial reports do not usually give an accurate data about the financial capability of the business concern, for example, the idea of stating assets at their historical cost do not favour most investors as they argue that inflation is not usually taken care of, though the real value of such assets might have been eroded or wind swept.
Again since the financial reports are prepared by managements, the
shareholders and others argue that there would usually be some elements of bias on the part of management in the disclosure of management’s financial mismanagement.
But in any case the management claims that some inherent/natural problems would usually affect the accuracy of such reports. It is therefore my intention to delve into the matter to enable me establish a relationship between financial reporting and performance evaluation in bank.
1.3 OBJECTIVES OF THE STUDY
Companies including those in the banking industry have had to face the difficult task of presenting a credible and generally acceptable financial statement in their annual reports to the various people to whom they own such obligations.
The purpose of the study is:
a. To determine the various financial reports used by banks.
b. To ascertain the problems of using financial reports to assess performance of banks.
c. To examine the use of historical cost convention adopted by banks in stating this balance sheet items on investors.
d. To determine if there’s a relationship between financial reporting and performance evaluation of a bank.
e. To offer recommendations and solutions on the best way financial reports could be used in assessing bank performance.
1.4 RESEARCH QUESTIONS
a. What impact has financial reporting on bank performance with respect
to the financial position of the bank?
b. How does financial statement assess the bank performance?
c. Does financial reports disclose financial standard inefficiency of bank
managers to the shareholders?
d. What are the problems associated in using financial reports to assess
bank performance?
e. How do we know a reliable financial report?
f. Has financial statement of banks influence your investment decision?
1.5 RESEARCH HYPOTHESIS
Base on the statement of problem and objections of this research work the following general hypothesis are formulated:
Ho Investment decision, base entirely on the financial statement will not lead to poor and lazy decisions.
Hi Investment decision based entirely on the financial statements will lead to poor and lazy decisions.
Ho The efficiency of financial reports is greatly affected by inflationary trends in the economy.
Hi The efficiency of financial reports is not greatly affected by inflationary trends in the economy.
Ho Financial reports are true indicator of banks performance.
Hi financial reports are not true indicator of banks performance.
1.6 SIGNIFICANCE OF THE STUDY
The banking industry is a very important sector of the economy. This is because banks can determine the direction of growth or development of the economy through the financial service rendered by banks. The financial services which includes, funds mobilization, safekeeping and custodianship, funds transfer, foreign exchange transactions, equipment leasing, extension of loans and advances, investment in securities, bill discounting etc.
An investment key sector of the national economy of which the banking industry is one, becomes a goal-getters priority. Owing to this, it becomes necessary that financial reports presented by banks satisfy the need of the users which are the general public, investors, competitors etc.
Especially at the end of this study, we would be able to establish:
1. Whether or not the financial reports affects investment in the banking industry.
2. Whether or not the annual financial report currently reflect the inflationary effects.
3. Whether or not banks follow rigid accounting practices.
The emphasis of this research is not to discuss the determinants of performance, but to establish a relationship between financial reporting and performance so that potential investors is in banking industry may clearly define their stand.
1.7 SCOPE AND LIMITATIONS OF THE STUDY
The aim of the study is to examine, the use of financial reporting in assessing banks performance, however it will be restricted to investigations carried out on
Union bank of Nigerian Plc.
To enable the research have a broad view, the study will not be based on one branch. A study of some selected branches of the bank will also be carried out. But in any case, the following among others are the numerous constraint;
The dearth/scarcity of related books and journals will no doubt affect the quality of the research. The greatest employer of man, which is time was not in my favour through I manage it considering the time allocated to my studies, fellowship and the project.
The research work generally involves money but considering my stand as a student, I was limited by finance in achieving my aim of having a population rather a sample size used. Information received from questionnaire shared is to be used for this Research but there was little response to the questionnaire delivered to the respondents.
At the course of my research I come to release that many banks does not have any form inter-relationships which make things difficult for me in using one set of information generated as touching planning and control in UBN to generalize issues. That leads me into more research, which will continue even after this profit.
1.8 DEFINITION OF TERMS
AUDITING: The objective examination carried out by a qualified independent audit firm on the financial statements initially prepared by management with the goal of establishing the fairness of representations made therein and reporting on same as a guide to interested users.
ATTEST: To assume responsibility by confirmation of the financial report, for the fairness and dependability of financial statements.
BANKRUPT: Inability of person or company to meet his/its liabilities as they mature.
FRAUD: Deliberate misrepresentation of information by a person which tends to be untrue or made with reckless indifference as whether the fact is true with the intention of deceiving the other party and with the result that the other party is injured.
FINANCIAL STATEMENTS: This covers balance sheets, income
statement or profit and loss accounts notes and other statement and explanatory materials.
GOING CONCERN: Continuing in operation for the foreseeable future with the assumption that the enterprise has neither the intention of closing down
LIQUIDATION: Process of winding up of a company thereby brings to an end
its corporate existence.
TRUE AND FAIR VIEW: The confirmation of a financial report by an independent auditor, which depicts compliance with the generally accepted accounting principles and full of fair disclosure of facts.