ROLE OF FINANCIAL STATEMENT IN INVESTMENT DECISION MAKING ( A
CASE OF FIRST BANK OF NIGERIA PLC)
1.0 Introduction
1.1 Historical Background
1.2 Statement of the problem
1.3 Objective of the study
1.4 Research hypothesis
1.5 Research questions
1.6 Significance of the study
1.7 Scope and limitation of the study
1.8 Definition of terms
CHAPTER ONE
INTRODUCTION
Corporate organizations owe a duty to fully disclose matters concerning their operations so as to
aid investors in making investment decisions. Both large and small organizations in addition to
satisfying the legislating requirement tend to retain existing investors and to attract potential ones
through the publication of their financial statements where the capital stock of a corporation is
widely held and its affairs are of interest to general public relations. The discussions and
illustrations of the study is centered on the financial statement presented to shareholders and also
available for potential investors, bond holders and trade creditors as a tool of information for
investment decision. Financial statement based on result for the past activities was analyzed and
interpreted as a basis for predicting future rate of returns and assessment of risk (ICAN, 2013).
Financial statement provides important information for a wide variety of decision, investors draw
information from the statement of the firm in whose security they contemplate investing. Decision
makers who contemplate acquiring total or partial ownership of an enterprise expect to secure returns
on their investment such as dividends and increase in the value of their investment [capital gain]. Both
dividends and increase in the value of shares of company depends on the future profitability of the
enterprise. So investors are interested in future profitability. Past income dividend data are used to
forecast returns from dividend and increase in share prices.Financial statement is a formal and
comprehensive statement describing financial activities of a business organization such as the financial
institutions. For such a business entity, financial statement is a statement that reports all relevant
financial information, presented in a structured manner and in a form easy to understand for managerial
use for taking prompt and informed decision making related to investment (IASB, 2007a) and also to
decision making pertaining to cost planning, investment planning, expected returns and performance
evaluation. The financial statement comprises of balance sheet (for determining financial position),
profit and loss statement (describes statement of comprehensive income), statement of equity changes
(explain the changes of the company’s equity), and cash flow statements (reports on a company’s cash
flow activities, particularly its operating, investing and financing activities). Although, these statements
are often complex and may include an extensive set of notes to the financial statement and explanation
of financial policies and management discussion and analysis (IASB, 2007b). The notes typically describe
each item on the balance sheet, income statement and cash flow statement in further detail. Notes to
financial statement are considered an integral part of the financial statements. However, the
approaches that the notes and financial statement are presented and reported are critically for
investment decision making by existing and prospective investors in order to earn optimal returns on
their investments.
This indicates that financial statement methods in terms of information disclosure pattern, transparency,
auditing, reporting standards, regulatory control and flexibility, corporate governance, and financial
scandals have influence on investment decision making in any organization, especially in financial
institutions with extensive range of investment activities that requires comprehensive financial facts
that can be obtained from a financial statement.
The perceived relevance of the financial statement are, to provide information about the financial
position, performance and changes in financial position of a firm that is useful to a wide range of users
in making management and investment decisions. These users include managers, directors, employees,
prospective investors, financial institutions, government regulatory agencies, media, vendors and
general public. Though, these financial statement are often prepared according to national standards,
corporate governance, professional ethics, and code of ethics. This to avoid financial reporting fraud and
scandals that might hinders effective decision making process by management and other users of
reports. The purpose of ethics in financial accounting reporting with expected standards is to reorientate corporate organization on the need to abide by a code of conduct that facilitates public
confidence in their services (Okafor, 2006). In Nigeria, it has become common practice by financial
institutions to adopt creative accounting in anticipation of sourcing for equity capital from the capital
firms. Although this approach in financial reporting process often lead to over valuation of assets and
company’s net worth in the views of prospective shareholders and other stake holders. In Okoye and
Alao (2008) view, “creating accounting is the transformation of financial accounting figures from what
they actually are to what preparers desire by taking advantage of the existing rules and/or ignoring
some or all of them". Also, another perceived problem of financial statement disclosure is the non-
compliance to industry corporate governance, ethics, and regulatory standards which is prevalent in the
financial institutions of Nigeria. In 2009, during CBN commercial banks test, huge financial fraud and
scandal occurred in commercial banks and other financial institutions in Nigeria that led to service
disengagement of its Managing Director and Executive Director. This was on the account of
manipulating the company's financial records, book padding scandal and corruption. This warranted
CBN to review and investigate all the financial institutions accounting records. The investigation
confirmed a deliberate overstatement of the company’s financial position over a number of years to the
tune of billions of naira. The over-statements are directly traceable to those systems abuses, violation of
regulatory standards, in particular, deliberate breaches of our accounting systems and controls It was
observed that the roles of financial statement on investment decision making of financial institutions in
Nigeria has some problems to both investors and managers of business organizations who are either not
aware of the importance of interdependence relationship that exist between investors and financial
organizations.
The insurgence of corporate failures, like that of Enron Corporation and World.com in the year 2002 and
other accounting scandals compounded by the global energy, food and financial crisis leading to credit
squeeze across the globe, has partly been attributed to impact of financial statement manipulations
which portrayed some ailing company as if they were sound. In Nigeria also, corporate failures and
distresses have been witnessed in the banking sector. Evidence was the huge collapse of the commercial
banks all due to massive accounting related frauds. This problem resulted in the establishment of Asset
Management Company of Nigeria (AMCON) to prevent corporate failures particularly in the Nigeria
banking sector by acquiring and financially distress companies.
This trend has now more than ever ensures that financial statements are sternly scrutinized. Investors,
Financial analysts and other users of accounting information tend to use their ‘third’ eye to scrutinize
financial statements. This became necessary because audited financial statements, which used to
provide assurance as to the healthy nature or otherwise of a firm has now, become an object of criticism
due to manipulations done in these statements. According to Onyekwelu (2010), one of the most
difficulties facing the auditing profession is that there is no auditing process that can provide absolute
assurance in detecting all fraudulent financial reporting. Calls have been made on the
accounting/auditing profession to employ investigative principles in the preparation and audit of
financial statements in order to restore confidence of the investing public on the financial statements.
Mercy (2014), opined that contrary to the external auditor who is basically concerned about compliance,
the forensic accountant should employ investigative, law and business principles and acumen to carry
out investigations on financial statement and prepare it for the court. Obviously it is the responsibility of
the companies’ directors and management to prepare the final account of their companies. When a
company prepares its own final account purely for internal use by the directors and management, it can
draft them in any way which is most suitable. Although such accounts might have been prepared with
strict adherence to accounting theory and principles but will not necessarily be the one to be published.
These separate sets of statements are viewed by investors as creative accounting and has contributed to
eroding public confidence on the published financial statements. Banks have been accused of publishing
paper profits. There is therefore the general belief that published financial statements have failed in its
responsibility to provide credible information for investors and other users of financial statements
( Duru, 2012).
The above listed problems are the problems to look into in this research work. The problems analyzed
tend to scare away both existing and potential investors. The reason for this study will be, how to
adequately look into the above problems. Nevertheless this research will find possible key factors to
solving these problems because financial statement on investment decision making of the financial
institutions in Nigeria is the life blood of every organization to the potential investor.
The study will therefore investigate the degree of reliance on the published financial statements by
corporate investors in Nigeria with a view of finding the extent of the erosion of public confidence on
the published financial statements. The study will focus on the banking sector because the banking
sector in any country plays a pivotal role in sitting in the economy in motion and its developmental
process. Banks promote growth and success of business in both developed and developing countries.
The banking sector is an ideal area for this type of research because the banking sector is "intellectually"
intensive and its operations more homogeneous than those in other economic sectors. Therefore, any
loss of public confidence in the banking sector by investors will spell doom for the nation. On the basis
of the foregoing, this study is to examine the roles of financial statement in investment decision making
in First Bank PLC of Nigeria.
The main objective is to ascertain the role of financial statement in investment decision making in First
Bank PLC of Nigeria. The specific objectives are stated as follows: to detect how an asset in the financial
statement has assisted the effectiveness of investment decision making in first Bank PLC of Nigeria,
financial position of First Bank and how it aids prospective investors in accessing the financial position all
of First Bank PLC, to evaluate the financial statements of first Bank of Nigeria and its impacts on
investment decision making and its impact on investment decision making, to examine the extent to
which investors depend on the credibility of auditors/financial experts approval of financial statement in
making investment decisions and to determine how well the universities have understood the financial
statements before making investment decisions.
1.1 HISTORICAL BACKGROUND
According to Google, First Bank commenced business in 1894 in what was the British controlled areas as
the Bank of British West Africa. The Bank originally served British shipping and trading agencies in
Nigeria. The founder, Alfred Lewis Jones was a shipping magnet who originally had a monopoly on
importing silver currency into West Africa through his elder Dempster shipping company. According to
its founder, without a bank economics were reduced to using butter and a wide variety of mediums of
exchange, leading to an sound practices. A bank primarily financed foreign trade, but did little lending to
indigenous Nigerians, who had little to offer as collateral for loans loans.
After Nigeria's independence in 1960, the bank began to extend more credit to indigenous Nigerians. At
the same time, citizens began to trust British banks since there was an 'independent' financial control
mechanism and more citizens began to patronize the new Bank of West Africa.
In 1965, standard bank acquired the bank of west Africa and exchanged its acquisition's name to
standard bank of west Africa. In 1969, standard bank of west Africa incorporated in Nigerian operations
under the name standard bank of Nigeria. In 1971, standard bank of Nigeria listed its shares on the
Nigerian Stock Exchange(SEC) at least 13% of its share capital with Nigerian investors. After the end of
the Nigerian civil war, Nigeria's military government sought to increase local control of the retailbanking sector. In response, new standard bank reduced its stake in Standard Bankank Nigeria to 38%.
Once it had lost majority control, Standard chartered who wished to signal that it was no longer
responsible for the bank and the bank changed its name to First Bank of Nigeria Limited in 1979. By then,
the bank had re-organized and had more Nigerian directors than ever.
In 1991, the bank changed its name to first Bank of Nigeria PLC following listing on the Nigerian Stock
Exchange. In 2012, the bank changed its name again to first Bank of Nigeria limited as part of a
restructuring resulting in FBN Holdings PLC ('FBN Holdings'), having detached its commercial business
from other businesses in the first bank group in line with the requirements of the Central Bank of
Nigeria.
First bank had 1.3 million shareholders globally, was quoted on the Nigerian stock exchange (NSE),
where it was one of the most capitalised companies and also had an unlisted Global Depositary Maga
Communication Receipt (GDR) programme, all of which were transferred to its holding Company, FBN
Holdings in December 2012.
In June 2009, Stephen Olabisi Onasanya was appointed group managing director, chief executive officer,
replacing Sanusi Lamido Sanusi, who had been appointed governor of the Central Bank of Nigeria.
Onasanya was formerly executive director of banking operations and services. A retired on 31st
December 2015 and our Adesola Adeduntan took over as managing director/chief executive officer, first
Bank of Nigeria LTD and subsidiaries effective 1 January, 2016 with Gbenga Shobo as deputy managing
director.
In April 2021, the Central Bank of Nigeria fired the whole board of the first Bank of Nigeria which was in
a grave financial condition.
1.2 STATEMENT OF THE PROBLEM
several investment decision tools are used as financial statement of firms as it has been used for several
investment decisions which most often pays off bearing in mind the definition of what a financial
statement is. it is important to note the various roles it plays in investment decision since investors look
at them and decide whether to invest or not to invest since they look forward to getting returns on each
of their investments.
However the problems faced by investors include;
* Whether these financial statements represent a true and fair view of what it has to represent.
* Weather all necessary disclosure have been made by the management of the enterprises, which can
noun convince a person that deductions made based on the financial statement is not misleading.
* What benefit is this financial statement to the external users particularly investors who are taking
decision on a daily basis?
* How analytical tools are said to a prospective investors in accessing the financial position of the
corporate organisation.
* How to determine the profitability of a company.
1.3 OBJECTIVE OF THE STUDY
The general objective of this research work is to determine the role of financial statement in investment
decision of first Bank of Nigeria. This research work has the following objective;
* To identify the relationship between financial statements and investment decisions.
* To evaluate the impact of financial statement in investment decision making
* To identify factors influencing investment decisions on financial statements.
* To highlight the problems associated with financial statement in investment decision.
* to highlight the various tools used in investment decision on financial statement.
1.4 RESEARCH QUESTIONS
According to Uzoagulu [1998; 96], research questions guide the researcher in constructing the
questionnaires. The researcher therefore, have the research questions formulated from the objective
such as;
° What significant relationship does financial statement have to do with investment decision?
° What impact does financial statement have with investment?
° Are there any factors that influence investment decision?
° Does making investment decisions depend solely on financial statement?
° What are the various tools used in investment decision on financial statement?
1.5 RESEARCH HYPOTHESIS
According to Oxford Advanced Learner's Dictionary, 12th edition; hypothesis is an idea or explanation of
something that is based on a few known fact that has not yet been proved to be true or correct.
hypothesis is the guide for the investigation in the entire process of research in devil and they keep the
researcher on the mainline of the study, , in this research, the following hypotheses were formulated for
the study;
H⁰= Financial statement does not have any significant relationship with investment decision.
H¹= Financial statement has significant relationship with investment decision.
H⁰= Financial statement does not have any impact on investment decision.
H²= Financial statement has impact on investment decision.
H⁰= There are no factors that influence investment decision.
H³= Investment decision is influenced by several factors.
H⁰= Making investment decision does not solely depend on financial statement.
H⁴= Making investment decisions solely depend on financial statement.
1.6 SIGNIFICANCE OF THE STUDY
This study will be of any more help with the prospective investors and other interested parties of the
general public so as to know how to study financial report of a business in order for them to make a
decision as to whether or not to invest in such firm. it will be of greater benefit to banks by improving
the banking performance financial analyst, investors, companies and financial organisations. it will also
help the government to determine the taxation due and as well as to determine if all the company's
income has been included in the computation of taxes. By doing this, asset quality and lower costs of
funds. the researcher is of the view that the research work will properly address the problem.
1.7 SCOPE AND LIMITATION OF THE STUDY
With the increase in the number of banks in Nigeria, investors look forward to seeing where their
investment will yield much return, banks in there side, prepare reports that will attract investors. This
research work covers Nigeria. The researcher generalizes his research since the information needed for
this work can be collected from other quarters where the bank is in operation and the financial
statements and annual reports and accounts are available to be used because of the mode of data
collection.
1.8 DEFINITION OF TERMS
=> Financial statement
These are collection of summary label reports about an organization's financial results, financial position
and cash flows. They provide a snapshot of a corporation's financial health, give an insight into its
performance and cash flow. They are essential since they provide the information about a company's
Revenue, expenses profitability and dept.
=> Investment
Investment is the act of intelligently determining the uses to which seven can be put. Investment is also
defined as an asset acquired or invested in to build with and save money from the hard earned income
or appreciation.
=> Investment Decision
Investment decision it relates to how the funds of a firm arc be invested into different assets, so that the
firm is able to earn highest possible return for the investors. investment decision is one of the most
important and difficult decisions taken by management in the institutions, as these decisions aimed at
determining the optimal structure of the size of investment, as these decisions affect the survival and
continuity of the institution (Chiha 2009).
=> Investment Company
An investment company is a corporation or trust engaged in the business of investing put capital into
financial securities. They can be privately or publicly owned and they engage in the management, sale
and marketing of investment products to the public.
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University, Biskra Algeria.
–www.firstbanknigeria.com/history of First Bank of Nigeria PLC
–www.oxfordlearnersdictionaries.com
–Akinsoyime, A. B. (1990). The Objective of Accounting in a DynamicSociety Seminar NCAI Jos.
–Ezeamama, M.C (2010). Fundamental of financial management (A practical Guide). Enugu: Ema Press
Ltd.
–Gautem, U.S (2005). Accountancy (C. B.B.S.E XII Class). Dehi: Urinda Publication (p) Ltd.