EXAMINING THE IMPACT OF THE AUDIT REPORT ON INVESTMENT IN FINANCIAL INSTITUTIONS IN CAMEROON

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

According to the Companies Act, all registered companies must present audited accounts to their shareholders during the Annual General Meeting. These accounts should include the statement of financial position and statement of comprehensive income for the relevant year, along with the auditors' report. It is important to read these accounts together with the auditors' report (Jasper et al., 2018). Auditors are designated by the shareholders to serve as overseers of the management. Due to the significant investment and laborious nature of the company, investors do not maintain regular contact with the organization's day-to-day operations. The purpose of an audit is to bolster the credibility of financial statements by providing reasonable assurance, from an impartial entity, that they accurately and impartially depict the company's condition and activities in accordance with accounting standards. Therefore, investors ensure that their resources are being utilised effectively and in their best interest (Sanchez, 2017).

Audit reports act as a means of communication between the auditor and the users of financial statements by conveying the auditor's view. Investors in emerging markets are requesting more thorough audit reports to improve their decision-making process. There is a demand for more comprehensive and officially verified information from an external auditor (Adetula, Adesanmi & Lawal, 2017). The auditor's report is regarded as a crucial instrument for communicating financial information to users. Given that numerous external parties want certified financial information, many audio companies depend on auditor reports to validate their data, with the aim of attracting investors, securing loans, and enhancing their public image. According to Okere (2019), financial information without an auditors' report is considered to be of little value for investment reasons.

The concept of auditors' report has long been a subject of interest for academia, the business community, and financial experts. There is a body of both theoretical and empirical literature that demonstrates academics' interest in this field. Ogundana (2019) conducted studies that examined the usefulness of audit reports in predicting company failure, their influence on the stock values of both new and established companies, and their effect on the lending decisions made by financial institutions. The auditors' report is a document that presents the auditors' assessment of whether a company's financial statements adhere to Generally Accepted Accounting Principles (GAAP). The Audit report serves as a means of communication between the auditor and the users of financial statements. It highlights the key aspects of the auditor's work and conveys the findings of the evaluation of financial statements to the users (Salehi et al., 2019). An audit of a company's financial accounts is necessary because banks, creditors, and regulators mandate it.

As stated by Harold (2019), an auditor's report is a written assessment provided by an independent certified public accountant, affirming that a company's financial statements accurately reflect its financial performance and condition. An auditors' report is mandatory for every corporation whose shares are publicly traded. An auditors’ report is a crucial instrument for communicating financial information to users, especially in the context of business. There are individuals who argue that financial information lacking an auditors' report is essentially devoid of value for investment purposes. According to Al-Thuneibat (2019), the audit report is a document that includes the independent auditors' opinion on the entity's financial statements and related reports, following their review. Jorge (2020) argues that reports are primarily generated based on auditors' professional assessment against predetermined measurement criteria or standards. This is achieved by assigning a responsibility of being answerable to a company's management (Crowther et al., 2017). For instance, auditors conduct an audit to assess the extent to which the client's financial statement adheres to applicable accounting standards. Essentially, they assess whether the financial accounts accurately and honestly reflect the accounting standards. The possible standards are IFRS, US GAAP, or local GAAP (Abedini, 2020).

Upon concluding the examinations, the auditor proceeds to issue the audit report regarding the recently audited financial statements, expressing their professional judgement on the financial statements. The audit report serves as a valuable tool for various stakeholders, such as the entity's management, the board of directors, shareholders, investors, government bodies, banks, and other interested parties (Al-Thuneibat, 2019). Typically, the audit report is provided to encompass financial accounts for a duration of 12 months or a one-year period. Okere, et al. (2017) argue that audit reports validate the facts presented in financial statements. Audited financial statements provide as a foundation for making investment and financial choices. The auditors' report is a verified and dependable source of information. According to Hoti (2017), audit reports enhance the accounting information obtained from financial reports and contribute to the credibility of management disclosures. The combination of audit reports and financial information can significantly influence many business events. Investors utilise audit reports and audited financial statements to evaluate the financial performance and position of an organisation in order to determine its investment potential. The government agency utilises audit reports and financial accounts to evaluate the thoroughness and precision of tax declarations. The audit report is utilised by shareholders and the board of directors to evaluate the trustworthiness of management and the clarity of financial accounts (Ahmeti & Dërmaku, 2018). It is important to emphasise that the audit reports must be of high quality and provide an opinion on the accuracy and fairness of the information presented. Measuring the validity, quality, and fairness of the auditors' report is challenging due to the unobservable nature of the assurance provided by the auditors. Auditors, like any other firm, want to generate profits rather than incur losses. They operate under the guidance of the individuals who have chosen them (Ismajli, 2020).

The financial sector of Cameroon consists of commercial banks, microfinance institutions, insurance firms, and other non-bank financial institutions. These companies are crucial for maintaining economic stability and promoting growth, as they provide a wide range of financial products and services that assist both businesses and consumers. Investors, both local and international, have a keen interest in the health and performance of these institutions. The financial sector plays a crucial role in the economic progress of any nation, acting as a vital channel for the movement of capital and fostering economic expansion (Ismajli, 2020). Financial institutions in Cameroon have a crucial role in gathering savings, offering credit, and enabling investment. Nevertheless, the crucial factor in attracting and retaining investment is the stability and credibility of these organisations. The audit report is a crucial instrument that guarantees stability and reliability. This study aims to investigate the crucial impact of audit reports on influencing investment decisions in the financial industry of Cameroon. The research intends to strengthen the investment climate in Cameroon by measuring investor perceptions, examining the correlation between audit quality and investment, and identifying problems in the audit process. Valuable recommendations will be provided based on these findings.

1.2 Statement of the problem

Financial statements' reliability and financial reporting's openness are vital in the financial sector to ensure investor confidence and facilitate decision-making. Audit reports are crucial in this context since they offer an impartial evaluation of the correctness and impartiality of a financial institution's financial statements. The impact of audit findings on investment decisions is a matter of great concern in Cameroon, as well as in other developing economies.

The impact of audit reports has been thoroughly examined in numerous research (e.g. Ladi, 2017; Hughes, 2019; Gbade, 2017). It is widely believed that published financial statements have not fulfilled their duty of providing reliable information for investors and other users of financial statements (Duru, 2018). This study trend pertains to the inquiry of how seasoned professionals in the educational field perceive the correlation between the auditor's report and investment choices. In their study, Majed, Ayman, Firas, and Abdullah (2022) examined the substance of the auditor's report and its impact on decision-making. The findings indicated a detrimental correlation, revealing that the auditor's report does not possess complete impartiality when it comes to influencing the decision-making process of both management and lenders.  Panayiotis, John, and Evaggelia (2020). The findings suggest that audit reports offer investors just a restricted amount of information and lack relevance. This could be due to the inadequate informational value of these reports. The study conducted by Tahinakis, Mylonakis, and Daskalopoulou (2021) assessed the impact of audit reports on stock prices. The investigation revealed that audit reports lack comprehensive informational content for investors, which means they do not contribute to the investor's decision-making process.

Moreover, auditors commonly encounter resource limitations, such as restricted financial resources, personnel, or technological capabilities, which might hinder their capacity to conduct comprehensive audits or appropriately address all aspects of the organisation. According to Mane (2020), financial institutions in Cameroon suffer from a deficiency of contemporary auditing technologies and techniques, such as data analytics and automated auditing software. These technologies have the potential to improve the precision and effectiveness of audits. Organisations must acknowledge the significance of allocating sufficient resources to audit services. This can entail assigning an ample budget for training, recruiting extra auditors as needed, and utilising technology to speed audit procedures and enhance effectiveness (Moses, 2018).

This study focusses on the influence of audit report quality on investment decisions in financial institutions in Cameroon. Investors heavily depend on audit reports to make well-informed judgements regarding the allocation of their resources. Perceiving audit reports as untrustworthy or of poor quality undermines investor confidence, resulting in decreased investment in the financial sector. The study aims to offer a thorough comprehension of the influence of audit report quality on investment in financial institutions in Cameroon. By resolving the identified issues, its objective is to enhance the creation of a more robust and appealing financial sector for investors.

Objectives of the study

The primary objective of this study is to critically examine the impact of audit report on investment in financial institutions in Cameroon. Specific objectives of this study are to:

To find out whether there is a relationship between audit report findings and investment decisions in financial institutions in Cameroon

To assess the impact of Audit Report Transparency on Investment Attractiveness in financial institutions in Cameroon

To evaluate the Impact of Audit Reports on Financial Institution Performance in Cameroon

To assess the Impact of Audit Reports on investors behavior in financial institutions in Cameroon

To offer recommendations for enhancing audit report practices to improve the overall investment climate in Cameroon’s financial sector

1.4 Research Questions

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

Is there a relationship between audit report findings and investment decisions in financial institutions in Cameroon?

What is the impact of Audit Report Transparency on Investment Attractiveness in financial institutions in Cameroon?

What is the impact of Audit Reports on Financial Institution Performance in Cameroon?

What is the Impact of Audit Reports on investors behavior in financial institutions in Cameroon?

What are the recommendations for enhancing audit report practices to improve the overall investment climate in Cameroon’s financial sector?

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: There is no significant relationship between audit report findings and investment decisions in financial institutions in Cameroon.

Ha: There is no significant relationship between audit report findings and investment decisions in financial institutions in Cameroon.

1.6 Significance of the study

This study is important because it investigates the influence of audit reports on investment decisions in financial institutions, offering valuable insights that can improve transparency, investor trust, and overall market stability. It will function as a reference point for financial institutions, stakeholders, policymakers, researchers, and scholars.

Audit reports are essential in influencing investor confidence. The study analyses the influence of audit report quality and dependability on investors' decisions to invest in financial institutions in Cameroon. Enhanced trust in audit reports can result in a rise in investment. The study can offer investors significant insights into the importance of audit reports when evaluating financial institutions. This promotes investor education and enables them to make more knowledgeable investing choices.

Audit reports offer clarity regarding the fiscal well-being and operational soundness of financial institutions. The study evaluates the impact of transparency on investment decisions, enhancing comprehension of how transparent and precise reporting might attract investors. The study aims to investigate the correlation between audit reports and investment levels in order to determine the influence of audit quality on the performance and stability of financial institutions. Investments guided by dependable audit reports have the potential to enhance institutional performance and foster growth.

Moreover, the study's findings can provide valuable insights to regulatory organisations and legislators regarding the efficacy of existing auditing processes and reporting standards. This can result in enhancements to legislation and policies that are targeted at improving the quality of audit reports and their influence on investment.

Moreover, the study might contribute to the establishment of standards for the excellence of audit reports in the financial industry. These benchmarks can serve as a reference for financial institutions to enhance their reporting methods in order to align with investor expectations and regulatory norms. Through an analysis of audit reports, this study aims to highlight the difficulties that investors have while assessing financial institutions. Additionally, it can identify potential areas for enhancing audit methodologies and enhancing reporting criteria to more effectively address the requirements of investors.

In conclusion, the study contributes to the existing knowledge regarding the correlation between audit reports and investment. The research offers significant case-specific insights and theoretical contributions that can be utilised by both academics and practitioners to delve deeper into relevant subjects.

1.7 Scope of the study

Broadly, this study focus is to critically examine the impact of audit report on investment in financial institutions in Cameroon. Specifically, this study seeks to find out whether there is a relationship between audit report findings and investment decisions in financial institutions in Cameroon, assess the impact of Audit Report Transparency on Investment Attractiveness in financial institutions in Cameroon and evaluate the Impact of Audit Reports on Financial Institution Performance in Cameroon. 

Further, this study will focus on assessing the Impact of Audit Reports on investors behavior in financial institutions in Cameroon and it also seeks to offer recommendations for enhancing audit report practices to improve the overall investment climate in Cameroon’s financial sector.

 The study is carried out in Cameroon. 

1.8 Limitations of the study

As with any human endeavour, the researchers experienced 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 about the examination of the influence of audit reports on investment in financial institutions in 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 charges at the research location posed a challenge in covering the expenses for transportation fees.

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

1.9 Definition of terms

Audit: Audit is the examination or inspection of various books of accounts by an auditor followed by physical checking of inventory to make sure that all departments are following documented system of recording transactions. It is done to ascertain the accuracy of financial statements provided by the organization.

Audit report: Audit reports provide an independent and objective assessment of a company's financial statements. They enhance the credibility of financial information by ensuring that it accurately reflects the company’s financial position and performance

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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