Financial Statement Insurance: Restoring Investor Confidence in Nigerian Banks

Abstract

Nigerian banks are the driving force of the economy and are important players in the financial market. Their healthy existence is very key to the survival of all other industries while their failure or lack of liquidity will lead to a drastic decline in economic activities. Over the past few years, The Nigerian banking industry has experienced a massive wave of failures, which has led to the continued lack of confidence in the banking system. The problem identified was the auditors’ lack of independence as shown in the provision of false or misleading financial statements to investors. In order to provide investors with the assurances that they can rely on financial statements issued to them, this research aims at identifying a mechanism that can restore investors’ confidence in Nigerian banks. It posits that, to depict the true and fair view of the affairs of the banks, auditors must be removed from the employment of the corporation. The study expatiates on how Financial Statement Insurance (FSI) concept is effective in eliminating the problem of auditor’s independence and the inherent conflict of interest between the management and auditor. The underlining idea is that audits of corporate financial statements must be completed and paid for by an outside third-party entity which may be an insurance company that can manage and control entire audit process and protect shareholders, customers and investors in the event that they suffer a loss as a result of misrepresentation in the financial statements. Hence, FSI is a process whereby a company, instead of appointing and paying auditors, purchases financial statement insurance that provides coverage to investors against losses suffered as a result of misrepresentation in financial reports. Both the insurance coverage that the companies obtain and the premiums paid for the coverage are made public. The insurance companies would then appoint and pay the auditors who ascertain and testify to the accuracy of the financial statements of the companies (insurance clients).  This study finds that the benefits of FSI outweigh its inherent limitations and that the adoption of Financial Statement Insurance will eliminate the problem of auditors’ lack of independence and give reasonable assurance that financial statements have been prepared fairly, therefore restoring investor’s confidence in Nigerian banks. Thus, it concludes that there is a need to introduce a market-based financial statement insurance scheme designed to eliminate conflicts of interest that are inherent in the auditor-client relationship and, at the same time, credibly signal the quality of financial statements. It therefore recommends that Nigerian banks and all concerned stakeholders should promote their level of awareness and application of Financial Statement Insurance as this would help engender not only better communication with stakeholders but also greater investor confidence and trust.

Keywords: Insurance; Financial Statement; Banks; Investors.