Financial performance : idea of managing organizational performance

CHAPTER ONE
INTRODUCTION
1.1 Background to the study
Financial performance can be defined as the outcomes of work because they provide the
strongest linkage to the strategic goals of an organization, customer satisfaction and economic
contributions (Salem, 2013). Financial Performance is quite different than individual
Performance Management which specifically targets the personal performance of an employee
although the latter comprises an essential part of the overall organizational performance
framework. It is, ideally, the means through which organization performance can be improved by
ensuring appropriate recognition and reward for their efforts, and by improving communication,
learning and working arrangements.
Financial Performance is one of the most popular terms in today’s business management
terminology. The idea of managing organizational performance is being widely accepted and
adopted all over the world. It spread rapidly from the private sector to the public sector in the
developed world and has recently found its way in many developing countries (Beirut, 2003).
The global economy is changing rapidly and organisations are increasingly being forced to make
changes in order to maintain a competitive edge.
According to Abbott, (2010), understanding the characteristics of tax audit is key in determining
its effectiveness. Carcello (2012), emphasized that tax auditors should be made up of
independent individuals, with some possessing financial knowledge and experience.

The ultimate aim of any government‟s tax system is to achieve its legitimate projected revenue
to finance the country‟s expenditure. This can only be immensely realized if all taxpayers both in
developed countries such as “USA, China, Russia, Malaysia, New Zealand” and less developing
countries such as Nigeria, Togo, Ghana and Mail” willingly comply with the tax laws. Even
though the development of tax audit in Nigeria has expanded recently with a few empirical
studies exploring tax compliance audit, the role of tax audit has been neglected. The current
study provides a different standpoint to view tax audit in Nigeria while contributing to the
existing tax audit compliance literature, particularly from a developing country perspective.
The findings may also be generalized for other countries since all of the world‟s major tax audit
have a substantial representation in Nigeria (Adediran., Alade & Oshode, 2013; Nwaiwu, 2016).
The underlying assumption is that the more highly tax audit the taxpayers are, and the more
positive their perceptive towards government, the more they comply with tax laws (Due, 2008;
Avi – Jonah, 2009; Ironkwe & Nwaiwu, 2016).
Carcello, (2012) gave emphasis on the frequent meetings of the tax audit. High level corporate
failures have been experienced in the world. Hence, focus has been shifted to the governance of
corporate and the effectiveness of tax audit, boards, disclosures, internal controls and auditors
and director’s independence. Globally corporate internal governance has been strengthened by
tax audit. Previously the tax audit committees were non-mandatory instruments that ensured
accountability.
Nevertheless, many countries have established regulations for institutions to adopt audit
committees and emphasize on the increase of their roles (Raghunandan & Rama, 2011).

Tax audit is a much discussed topic and many researchers have investigated the relationship
between tax audit and tax revenue. Allinghan & Sandom (2012) find that the explanatory power
of tax revenue is very low and this casts doubts on the descriptive validity of deterrence theory.
They suggest that it is important to test the explanatory value of alternative paradigms to the
deterrence based models. Avi-Jonah (2009); Adediran, Alade & Oshode (2013) use deterrence
theory to explain the relationship between tax audit and tax revenue; Alade & Oshod (2013);
Nwaiwu (2015) on the other hand, use a strategic management perspective to explain the same
relationship and they reach a different conclusion. In sum, economic theory, psychological
theory, sociological theory and deterrence theory and other management theories may give
contrasting predictions on the relationship between tax audit and tax revenue.
A number of recent studies take a contingent view of the sector. Researchers have investigated
the mutual relationship among government regulations, tax audit and financial performance. This
research argues that examining tax audit in an isolated context is not effective. For example,
Abudlrazaq (1992); Akindele & Obiyan (2002) examine the inter-linkages between tax audit,
and argue that the tax operate as substitutes and work simultaneously in the sector. The
underlying assumption in this study is that government regulations, tax audit and tax revenue are
interrelated.
It is on this premise that the study tends to investigate why individuals, corporate bodies, trust
and other institutions choose to be tax audited via desk and field tax audit. Thus, this study
examined the relationship between tax audit and financial performance in Nigeria.
The foregoing has shown the inability of government to realistically curb the high rising problem
of tax audit in Nigeria.

1.2 Statement of the Problem
1.3 Aim and Objectives of the Study
The aim of the study is to examine the relationship between tax audit and financial performance
of firms in Nigeria.
The specific objectives are to:
1 Ascertain the relationship between desk tax audit and return on assets.
2 Evaluate how desk tax audit relate to return on equity.
3 Ascertain the relationship between field tax audit and return on assets.
4 Evaluate how field tax audit relate to return on equity.
1.4 Research Question
1. What is the relationship between desk tax audit and return on assets?
2. What is the relationship between desk tax audit and return on equity?
3. What is the relationship between field tax audit and return on assets?
4. What is the relationship between field tax audit and return on equity?
1.5 Research Hypotheses
Ho1 Desk tax audit does not relate significantly to return on assets.
Ho2 Desk tax audit does not relate significantly to return on equity.
Ho3 Field tax audit does not relate significantly to return on assets.
Ho4 Field tax audit does not relate significantly to return on equity.
1.6 Significance of the study

This study will be useful to the following
Private sector: it will give them a better understanding about the benefit or importance of tax
audit and financial performance. It will also enable them to know the effect tax audit has on
financial performance of firms in Nigeria.
Student: this study broadens the knowledge of accounting students on tax audit and also teaches
them how tax evasion can be a catalyst to financial performance.
Researchers: This study will serve as a source of data to them and also increase their
knowledge.
Employees: this study enables them to work in line with the standard set for the organization.
Government Parastatals: The study will provide useful information for planning and
forecasting.
1.7 Scope of the study
Scope: The study scope was discussed under three perspectives – content scope, geographic
scope and unit of analysis.
a. Content Scope: The content scope of this study is streamlined to the effect of tax audit
and financial performance in Nigeria. The study shall also examine the likely causes and
challenges tax audit may pose on the Nigerian economy, performance and development.
b. Geographic Scope: Geographically, the review of extant literature cuts across the
Nigerian economy from 2008 - 2018. However, the analysis was carried out in Port
Harcourt, Rivers State, Nigeria.

c. Unit of Analysis: Since the study is focused on the influence of tax audit and economic
development in Nigeria, the unit of analysis was at the macroeconomic level.
1.8 Definition of Terms
Desk Tax Audit: This kind of audit, tax officer reviews the document that taxpayers submit to
them monthly or annually as per tax law requirement. For example, the entity is required to
file tax returns monthly including salary tax, withholding tax, prepayment profit tax, and other
related tax
Field Tax Audit: is a comprehensive tax audit conducted by the Internal Revenue Service (IRS)
at either the taxpayer's home, place of business or accountant's office, so they can examine your
individual or business financial records to ensure you filed your tax return accurately.
Financial Performance: it is a measure of how well a firm can use assets from its mode of
business and generate revenue.
Return on Assets: it is an indicator of how profitable a company is relative to its total assets.
Return on Equity: a measure of financial performance calculated by dividing net income by
shareholders equity
Tax Audit: is an examination of your tax return by the IRS to verify that your income and
deductions are accurate. A tax audit is when the IRS decides to examine your tax return a little
more closely
1.9 Organization of study
The study was organized into five chapters.

Chapter one anchors on introduction. This section discusses the background of the study,
statement of the problem, objectives of the study, purpose, the research questions, the research
hypotheses, significance of the study and scope and limitation of the study.
Chapter two reviewed related theoretical, conceptual and empirical literature on tax audit and
financial performance of firms in Nigeria.
Chapter three deals with the methodology used in data collection and analysis which includes
research design, population of study, sample and sampling techniques, nature of data, methods of
data collection, validity and reliability of instrument.
Results and discussion will be presented in chapter four which is made up of presentation of data
in table, data analysis and discussion of findings.
Finally, chapter five will discuss the summary, conclusion, recommendations and contribution to
knowledge.

CHAPTER TWO
LITERATURE REVIEW
2.1 Theoretical Framework
2.1.1 Audit Theories
The form on tax administration (2004) “identified some of the basic theories of tax audit and
compliance which include, among others: audit theory, economic theory, psychological theories
and sociological theories.
Awe (2008) defines auditing as an independent examination of the books and accounts of an
organization by a duly appointed person to enable that person give an opinion as to whether the
accounts give a true and fair view and comply with relevant statutory guidelines. The American
Accounting Association (1971) in its Statement of Basic Auditing Concepts in Hayes, Schilder,
Daseen and Wallage (1999) described auditing as: a systematic process of objectively obtaining
and evaluating evidence regarding assertions about economic actions and events to ascertain the
degree of correspondence between these assertions and established criteria and communicating
the results to interested users. Akinbuli (2010), Hayes et al (1999) reported that several theories
of auditing were made to specify and determine the audit functions. Some of these theories
include:
The Policeman Theory: This theory of auditing was purely on the arithmetical accuracy and on
the prevention and detection of fraud. This theory makes the auditor to detect and prevent errors
and fraud in organizations.