CHAPTER ONE

INTRODUCTION

1. Background of the Study

Fraud poses a massive challenge for many organisations, impacting greatly on bottom-line profits, causing negative publicity and eroding customers, stakeholders and shareholders confidence around the world (Owojori and Asaolu, 2009).There has been considerable public criticism of the attest function performed by auditors of publicly held corporations when performing external audits (Hilzenrath, 2002; Johnson and Masters, 2003; Pulliam and Bandler, 2003). Auditors are responsible for providing reasonable assurance that companies‘ financial statements are free of material fraud and errors. Respected global audit and financial advisory firm, KPMG, has rated Nigeria as the most fraudulent country in Africa, with the cost of fraud during the first half of 2012 estimated at N225 billion ($1.5 billion) (Adeyemi, 2012).

Audit quality is all about audit risk assessment (Peecher, 2006) and may be improved by enhancing auditors‘ ability to detect fraud. On the other hand, audit quality enhances corporate governance. Assessing fraud risk is indeed a challenging task for auditors. Macroeconomic forces, excessive risk taking and inadequate regulations of economic and professional practices brought about the worst global recession since the great depression of the 1930‘s (Moghalu, 2010). The Association of Certified Fraud Examiners (ACFE, 2006) estimates that total annual fraud losses in the U.S. exceed $650 billion and that fraud costs organizations five percent of their annual revenue. Also, according to Wells (2002), one of the most remarkable fraud of the 19th century occurred in the 1970s, when an enterprising insurance salesman, Stanley Goldblum, managed easily to add 65,000 phoney policyholders to his company‘s – Equity Funding – rolls, along with $800 million of fake assets right under

the nose of its independent Auditor. Since then, financial statement fraud with audit failures have been increasingly a hot issue, including the recent cases of Enron, Waste Management, Xerox and AOL Time Warner, Tyco, WorldCom, Global Crossing. The international auditing firm, Arthur Anderson, which audited Enron, appears to be an example of a firm entangled in a major audit failure. The case brought to light the weaknesses of the audit process. As a result, more people believe professional auditors/accountants have to learn how to detect financial statement fraud more effectively.

Nigeria has had its own share of financial reporting failure problems. According to Egbunike (2009) the recent banking scandals involving chief executives of five banks was glaring pointer. The Central Bank of Nigeria, in a swift move reminiscent of the Asian tsunami, on August 14th 2009, accused the chief executives of the banks of irregular financial reporting and corporate governance dysfunction. The banks were also accused of being over loaded with non-performing loans and with their balance sheets prepared by their auditors to paint a picture of prosperity and buoyancy. The banks include Intercontinental Bank, Union Bank, Oceanic Bank, Afribank and Finbank; by 2012, these banks collapsed and were either merged or acquired by other banks. These were expressed by Obinor (2009) when he quoted Sanusi (2009) that these banks had been living on bubble capital all along, giving false impression about their actual states and coupled with high debt portfolio that were not disclosed in their financial statements. Second, is the case of Lever Brothers Plc (now Unilever) in 1998, where stocks were over-valued to run into billions of Naira (N). The sad case of African Petroleum Plc in 2000 is another shocking audit failure, where the company‘s board concealed indebtedness of over N22 billion and yet it was not detected in the course of audit for the year. The fraudulent financial reporting issue in Cadbury (Nigeria) Plc is worthy to reference here. The Security and Exchange Commission (SEC) on their investigation of the company

financial reports discovered a whopping colossal sum of N13 billion which was fraudulently not reported by the management over a period of time, yet the auditors audited their financial statements within the said time without discovering it. Issues of insider deals and manipulation of security market transactions are rife.

Besides, countries around the world have set codes of best practice as guidelines to address governance and financial reporting anomalies. Such development is one of the best ways to profit from the mistakes of others. In Nigeria, the regulatory authorities have responded by compelling companies to comply with stringent corporate governance codes. However, Idornigie (2010) reports that Nigeria has multiplicity of codes of corporate governance with distinctive dissimilarities namely:

1. Security and Exchange Commission (SEC) code of corporate governance (2003) addresses public companies listed in the Nigeria Stock Exchange (NSE). The code was reviewed in 2011;
   1. Central Bank of Nigeria (CBN) Code (2006) is for banks established under the provisions of the Bank and Other Financial Institutions Act (BOFIA);
   1. National Insurance Commission (NAICOM) Code (2009), is directed at all insurance, reinsurance, broking and loss adjusting companies in Nigeria; and
   1. Pension Commission (PENCOM) Code (2008) is for all licensed pension fund operators.

Despite the interventions of the regulatory authorities, the challenges of ensuring credibility in financial reporting and auditing are still prevalent. It therefore becomes pertinent to investigate the risk factors auditors should apply using fraud pentagon model in order to enhance the relevance of audit and fraud risk assessment in financial statement in Nigeria.

In 1997, in an effort to address concerns of both the profession and the public, the American Institute of Certified Public Accountants (AICPA) and the Auditing Standards Board (ASB) issued Statement on Auditing Standards (SAS) No. 82: Consideration of Fraud in a Financial Statement Audit, which was designed to assist auditors in fraud detection. Relying on academic research and recommendations from the Panel on Audit Effectiveness- the ASB‘s Fraud Task Force, and various stakeholders, the ASB concluded that SAS No. 82 fell short of its intended goal of enhancing auditors‘ performance in considering material fraud in financial statements. In an effort to address perceived deficiencies of SAS No. 82, the ASB issued  SAS  No.  99:  ―Consideration  of  Fraud  in  a  Financial  Statement  Audit,‖  in  2002 (AICPA, 2002a). One of the requirements of SAS No. 99 is that the auditors‘ consideration of fraud must involve the ―exchange of ideas or brainstorming among the audit team members, including the auditor with final responsibility for the audit, about how and where they believe the entity‘s financial statements might be susceptible to material misstatement due to fraud, how management could perpetrate and conceal fraudulent financial reporting, and how assets of the entity could be misappropriated‖ (ASA 240; ASA 315; ISA 240; ISA 315; SAS No. 99; AICPA, 2002b).

To assist in assessing fraud risk, the Public Company Accounting Oversight Board (PCAOB) has emphasised that detection of fraud is an important objective of an audit and an important focus of the Board. In a report issued by PCAOB, the board reminds the auditors to be diligently focused on their responsibility to detect fraud and has urged auditors to comply with the requirements of Statement on Auditing Standards (SAS) No. 99, Consideration of Fraud in aFinancial Statement Audit (PCAOB 2007),thereby improving the likelihood that auditors will detect material misstatements due to fraud in a financial audit. This discussion is to be carried out regardless of any past honest dealings with the entity (Peecher, Schwartz and

Solomon 2007). It is proposed that these requirements will result in a broadening of information used to assess risks of material misstatements, such as, a consideration of external and internal factors affecting the entity which might create incentives toperpetuate fraud provide opportunities tocommit fraud and rationalisation to justify fraudulent action (AICPA 2005). Once fraud risks have been identified, appropriate responses to each can be developed in advance.

According to Okoye (2008), in order to prevent red flags from being viewed as simply a list of ineffective and unrelated cues or being too long a list, where dilution effects might occur due to irrelevant information, the list of the causes of red flags found in SAS No. 99 were summarized in an axiom known as fraud triangle developed from the work of Donald Cressey. He posited that fraud triangle has three elements, which involves the interaction of major classes of fraud risk factors: perceived pressure, perceived opportunity and, rationalization. Though, Wolfe and Hermanson (2004) proffered the fourth element, capability which is called the ―Fraud Diamond‖ to the three-factor theory of Cressey -Fraud triangle. They argue that the Fraud Diamond offers a better view of factors leading to fraud and could enhance both fraud prevention and detection, because the fraud perpetrator must have the necessary traits, abilities, or personal authority to pull off his crime.

However, tailoring with today‘s environment, Crowe‘s Fraud Pentagon factored two additional elements with the Fraud Triangle Model which are arrogance and competence. Arrogance or lack of conscience is an attitude of superiority and entitlement or greed on the part of a person who believes that internal controls simply do not personally apply (Crowe, 2011). Auditors should not assume that all the five conditions must be observed or evident before concluding that there are identified risks related to misstatements. Although the risk of

material misstatement due to fraud may be greatest when all five fraud conditions are observed or evident, the auditor cannot assume that, the inability to observe one or two of these conditions means there is less risk of material misstatement due to fraud‖ (AICPA, 2003). The standard also suggests that the presence of any one set of fraud risk factors alone (pressures, opportunities, rationalizations, capability or arrogance) could be a dominant cause of fraud. Hence, when encountered with any of these fraud risk factors, the auditors should be sceptical and consider adequate measures to investigate for the presence of material misstatements.

SAS No.99 also stipulated that Auditors need effective model(s), ratios or statistical techniques to augment the various Audit analytical procedures usually performed in the cause of their Audit assignment. They need tested ratios that possess the capability of pointing to areas in the Financial Statement prone to manipulation, thus strengthening the substantive tests usually performed on the figures and balances of the Financial Statements (Nwoye, Okoye and Oraka, 2013). The report of the Association of Certified Fraud Examiners (ACFE), USA in 2004, also attested to the above belief. These provide Auditors with a better understanding of what fraud entails, exposing them skilfully to those model indicators and fraud risk factors that constitute and contribute to fraud perpetration in the Financial Statements of commercial banks in Nigeria.

In a nut shell, Crowe‘s fraud Pentagon model incorporated into Fraud Triangle theory is an important concept introduced at the level of financial statement audits with the global fraud prevalence. This research seeks insight into ways of improving identification of potential material misstatements due to fraud, at the audit planning stage. As outlined above, the emphasis is now shifting towards auditors actively searching for frauds. Auditing standards

now make it compulsory for auditors to discuss at the audit planning stage, how and where the financial statements may be susceptible to fraud. Therefore, the essential import of SAS No. 99 is the change in strategy for anti- fraud war from reactive to proactive.

1.2              Statement of Problem

Frauds and other financial crimes constitute a very serious threat to the survival of the any nation. Frauds in banks are not new. They are as old as the industry itself. It is very widespread and manifests itself in virtually all aspects of national life. The nation, organizations and individuals have lost huge funds to fraudulent practices (Wurim, 2013).

Meanwhile, the importance of deposit money banks as engine of growth for development cannot be over emphasised, but the alarming rate at which this criminal act has permeated Nigeriandeposit money banks in the recent times has made this study more relevant.

The banking business has become more complex with the development in the field of Information and Communication Technology (ICT) which has changed the nature of bank fraud and fraudulent practices. Berney (2008) observes that customers rely heavily on the web for their banking business which leads to an increase in the number of online transactions. Gates and Jacob (2009) and Malphrus (2009) assert that the internet provides fraudsters with more opportunities to attack customers who are not physically present on the web to authenticate transactions.

In Nigeria, in spite of the banking regulation and bank examination by the Central Bank of Nigeria (CBN), the supervisory role of the Nigeria Deposit Insurance Corporation (NDIC), and the Chartered Institute of Bankers of Nigeria (CIBN), there is still a growing concern about fraud and other unethical practices in the commercial banks. Evidence from the NDIC

Report (2008) reveals that the report of the examinations and special investigations showed that some banks were still bedevilled with problems of fraud, weak board and management oversight; fraudulent financial reporting; poor book-keeping practices; non-performing loanwith its attendant large provisioning requirements; related party transactions; poor management, declining asset quality; inadequate debt recovery; liquidity problems; leverage problems; non-compliance with banking laws, rules and regulations. Okpara (2009) found that one of the factors that impacted most on the performance of the banking system in Nigeria was fraudulent practices.

Also, despite the use of several model such as CAMELs model (Capital adequacy, Asset quality, Management efficiency, Earnings strength, Liquidity Position and Sensitivity to market risk) developed in the United States in 1984 to determine the strength and weaknesses of many banks in Nigeria, eight banks failed the stress tests conducted by the Joint audit of CBN/NDIC team of inspectors. The stress revealed fundamental weaknesses in corporate governance and risk management.

Before the establishment of SAS No.99, AICPA (1988) issued SAS 53 to explain the auditors‘ roles in identifying errors and material misstatements that may affect the financial statement. However, Moyes & Hasan (1996) as cited in Shabnam, Takiah and Zakiah (2014) believe that the concentration on auditors‘ qualification in fraud detection is insufficient. Therefore, SAS No. 82 was established in 1997 to help auditors in detecting the fraud of financial statements practically. This standard provides more comprehensive instructions about fraud detection by observing high-risk areas and divisions compared to SAS 53. Nevertheless, due to the high rate of business failures, new auditing standards (SAS No. 99) concentrate on the requirements of regulators and auditors for preventing and detecting fraud.

According to Ramos (2003), the objective of SAS 99 is increasing the auditors‘ role to fully incorporating fraud in the audit process. The fraud risk factors of SAS 99 are based on the fraud triangle model developed by Cressey (1953). Based on this model, the fraud risk factors are categorized into three groups of pressure/motivation, opportunity and rationalization.

Several researches have been carried out based on the Fraud Triangle Model. For example; (Shabnam, Takiah and Zakiah , 2014; Skousen and Wright, 2006; Albrecht, Albrecht and Albrecht, 2008) research on the usefulness of Cressey‘s fraud risk factor framework adopted from SAS No. 99 to prevent fraud from occurring. Also, a large number of studies have focused on assessing risk of financial statements to find out the possible risk factors and the best model for assessing risk and detecting fraud (Nieschwietz, Schultz & Zimbelman,2000; Wilks & Zimbelman, 2004). Smith, Omar, Syad- Idris and Baharuddin (2005) investigated the most significant factors that were noticed by auditors to find out how auditors‘ demographic factors influence the significance of fraud risk factors for fraud prevention in Malaysia.

Although, Cressey‘s fraud triangle was supported and used by Audit Regulators- American Standard Board (ASB) and American Institute of Certified Public Accountant (AICPA). Critics have argued that fraud triangle was found to be incomprehensive in dealing with issues of fraud (Kazeem and Higson, 2012 as cited in Soruke, 2016).

In 2004, Wolfe and Hermanson proffered the fourth element ―capability‖ to be included to the three-factor theory of Cressey-Fraud  triangle,  called  the  ―Fraud  Diamond‖. They argue that the Fraud Diamond offers a better view of factors leading to fraud and could enhance both fraud prevention and detection, because the fraud perpetrator must have the necessary traits, abilities, or personal authority to pull off his crime. Based on this, the Fraud Diamond

concept was incorporated in the Cressey fraud triangle. However, limited number of studies used Fraud Diamond Model both in and outside Nigeria (Onodi, 2014; Omar and Mohamad, 2010). Their studiessuggested variables as proxy measures for pressure and opportunity, rationalization and capability and test these variables using financial statement of some quoted banks.

However, recent happening in the corporate world with regard to fraud has shown that the aforementioned theories are inadequate to explain the behaviour of a fraudster. Fraud still persists in the banks. Since fraud is a dynamic issue and many of today‘s largest frauds are committed by intelligent, experienced, creative people, with a solid grasp of company controls and vulnerabilities, SAS No. 99 urge auditors to continually brainstorm at initial planning stage where they search for flaws in their plans on the fraud risk that might endanger auditors in the detection of fraud in the financial statement in Nigeria. The essential import of SAS No. 99 is the change in strategy for anti- fraud war from reactive to proactive.

Nevertheless, in 2011 the Crowe‘s Fraud Pentagon model was developed by Jonathan Marks which incorporated the fifth element ―Arrogance‖ to be included to the three-factor theory of Cressey-Fraud triangle. Having known that these Fraud Models have been developed in Western countries, there has been concern that these Fraud Models may not fit the peculiar political and corporate governance needs of developing countries, such as Nigeria. Therefore, the researcher is of the opinion that important factor like ‗behavioural trait‘ of the fraud perpetrator be incorporated to Crowes‘s Fraud Pentagon Model because from the work on learning theory by Edward Thorndike (1898) as cited inMcLeod (2007), operant conditioning involves learning from the consequences of our behaviour. According to Law of Effect by Edward Thorndikeand the Skinner‘s Theory of Behaviourism, any behaviour that is followed

by pleasant consequences is likely to be repeated, and any behaviour followed by unpleasant consequences is likely to be stopped.

The fraud pentagon model in no doubt offered more comprehensive result in fraud risk assessment when compared with other previous models- the fraud triangle model, the fraud diamond model used assessing fraud risk in the deposit money banks in Nigeria and equally contributed to the existing literature by bridging the gap in fraud prevention, detection and deterrence in the commercial banks in Nigeria.

1.3              Objectives of the Study

The main objective of this study is to examine the effect of fraud pentagon model on fraud risk assessment in Nigerian quoted commercial banks. In order to address the main objective, the following specific objectives were drawn:

1. To determine the effect of financial pressure (FP) indices such as; Changes in Cash Flow (CCF), Non- performing Loan (NPL), Working Capital (WC) and Provision for Non-performing Loan (PNPL) on fraudin the financial statement ofNigerian banks.
2. To determine the effect of opportunity (OPR) indices such as; Non- performing loan over Shareholders Fund (NPL/SF), Total Loan over Shareholders Fund (TL/SF) and Non performing Loan Over Total Current Assets (NPL/TCA) on fraud in the financial statement of Nigerian banks.
3. To investigate the effect of rationalization (RAT) indices; Profit after Tax over Dividend paid (PAT/DP) and Earnings before Interest and Tax over Interest Charge (EBIT/IC) on fraud in the financial statement of Nigerian banks.

• To ascertain the effect of capability (CA) indices; Return on Equity (PATI/SF) and Net Profit Margin (NI/NA)on fraud in the financial statement of Nigerian banks.
• To appraise the effect of corporate governance (CORP) indices; Debt to Total Assets Ratio (D/TA), Total Liability to Equity Capital (TL/EC) and Equity Capital to Net Loan (EC/NL)on fraud in the financial statement of Nigerian banks.
• To investigate the effect of behavioural trait (BET) indices; Cash to Current Assets (C/CA) and Cash plus Marketable Security to Current Liability (C/CL) on fraud in the financial statement of Nigerian banks.

1.4              Research Questions

In order to address the above stated objectives, the researcher raised the followingresearch questions:

1. How can financial pressure (FP) indices such as; Changes in Cash Flow (CCF), Non-performing Loan (NPL), Working Capital (WC) and Provision for Non- performing Loan (PNPL) affect fraud in the financial statement of Nigeria banks?
2. How can opportunity (OPR) indices such as; Non-performing loan over Shareholders Fund (NPL/SF), Total Loan over Shareholders Fund (TL/SF) and Non- performing Loan over Total Current Assets (NPL/TCA)affect fraud in the financial statement ofNigerian banks?
3. How can rationalization (RAT) indices;Profit after Tax over Dividend paid (PAT/DP) and Earnings before Interest and Tax over Interest Charge (EBIT/IC) affect fraud in the commercial banks in Nigeria?
4. How can capability (CA) indices; Return on Equity (PATI/SF) and Net Profit Margin (NI/NA)affect fraud in the financial statement of Nigerian banks?

• How can corporate governance (CORP) indices; Debt to Total Assets Ratio (D/TA), Total Liability to Equity Capital (TL/EC) and Equity Capital to Net Loan (EC/NL)affect fraud in the financial statement ofNigerian banks?
• How can behavioural trait of individual (BET)indices; Cash to Current Assets (C/CA) and Cashplus Marketable security to Current Liability (CM/CL)affect fraud in the financial statement ofNigerian banks?

1.5              Research Hypotheses

The following hypotheses were formulated in Null form based on the above stated objectives and research questions:

H₀₁:    Financial pressure indices do not significantly affect fraud in the financial statement of Nigerian banks.

H₀₂:            Opportunity indices do not significantlyaffect fraudin the financial statement of Nigerian banks.

H₀₃:    Rationalization indicesdo not significantly affect fraud in the financial statement of Nigerian banks.

H₀₄:    Capability indices do notsignificantly affect fraudin the financial statement of Nigerian banks.

H₀₅: Corporate governance indices do not significantly affect fraud in the financial statement of Nigerian banks.

H₀₆:Behavioural trait indicesdo notsignificantly affect fraud in the financial statement of Nigerian banks.

.

1.6              Significance of the Study

The researcher believes that the discussions and recommendation of this study would be beneficial to organisations, regulatory authority and the general public in the following ways:

1. The study would help the forensic accountants, audit committees and fraud examiners to understand the financial pressure signal which is embedded in the fraud pentagon model in identifying and investigating the remote cause of fraud concealment.
2. This study would educate bank management team by exposing them on the effect of opportunity whichis embedded in the fraud pentagon model as a determinant of distress symptomsand to form measures to further securitize the banking system.
3. This study will equally restore investors‘ confidence by knowing whether the banking system is safe and sound through continuous monitoring by the regulatory authorities such as the Central Bank of Nigeria, the Security and Exchange Commission and the Nigeria Deposit Insurance Corporation as the corporate financial reporting will show transparency on the information stated thereon, hence choice for investment decision.
4. Auditors will also be guided on the judgement with regard to SAS No. 99 provision for identification and assessment of capability risk factor in the financial statement of deposit money banks in Nigeria.
5. This study is also significant in that it would help the anti-graft agencies- the Economic and Financial Crimes Commission (EFCC) and the Independent Corrupt Practices & Other Related Offences Commission (ICPC) at ensuring accountability and corporate governance in Nigeria deposit money banks..
6. Moreover, this study is expected to become an academic reference material for students and researchers on fraud and the importance of its prevention due to the high costs of its existence.

1.7              Scope of the Study

This study covers the investigation of fraud risks on the seventeen (17) deposit money banks quoted on the Nigerian Stock Exchange Market. As at the time this research begun,17 banks were listed on the NSE. The period covered in this study is ten years (10yrs) ranging from 2005 to 2014. The researcher chose the fifteen banks because the availability of the financial statements for the period under study. The banking industry was also chosen because it encompasses all the variables proxy for this study in their financial statement.

1.8              Limitations of the Study

The researcher intended to study the seventeen (17) deposit money banks listed on the Nigeria exchange. However, on May 2016, two banks out of the seventeen deposit money banks merged with other banks reducing the number to fifteen deposit money. Also, the study relies on data obtained from secondary source of publish annual statements of companies. Such published annual statements are usually subject to accounting choices and earning management practices, the depth of such practices cannot be ascertained from the face value due to window dressing of the financial statement of some banks.

However, in spite of all these odds, the researcher was able to come out with reliable and reasonable generalisation through scholarly articles and other relevant publications of which proper acknowledgment for such aids were referenced.

1.9              Operational Definition of Terms and Variables

1. Fraud:Farlex Financial Dictionary (2012) defines fraud as anyattempt to deceive another for financialgain.

• Fraud Risk:Fraud risk is the risk of abuse on assets and of fraud caused by false pretences on financial statements to cause alterations on financial statements enough to adversely influence decisions of the decision-makers (Guredin, 2010).

• Fraud Risk Factors: According to (Wilks and Zimbelman, 2004) fraud risk factors can be defined as events or conditions that indicate incentives to perpetrate fraud, opportunities to carry out fraud, rationalizations to justify a fraudulent action, the capability and behavioural aspect to use positional authority to pull off a crime.

• Audit Risk: According to the International Auditing andAssurance Standards Board (IAASB), audit risk is definedas follows:

‘It is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Audit risk is a function of material misstatement and detection risk‘.

• Inherent Risk: Inherent risk is the susceptibility of an account balance or class of transactions to material misstatement, individually or when aggregated with misstatements in other balances or classes assuming that there were no related internal controls.

• Control Risk: Control risk is the risk of a misstatement that could occur in an account balance or class of transactions and that could be material individually or when aggregated with misstatements in other balances or classes.

• Detection Risk: Detection risk is the risk that auditor’s substantive procedures will not detect a misstatement that exist in an account balance or class of transactions that could be material, individually or when aggregated with misstatements in other balances or classes.

• Brainstorming: is a problem-solving technique that involves creating a list that includes a wide variety of related ideas. It is a technique for generating, refining and developing ideas that can be undertaken by individuals, but it is more effective when undertaken by a group of people.

1. Non-performing Loan: also called Non Performing Assets (NPAs). A non- performing loan or assets is a credit facility in respect of which the interest and the principal amount has remained past due for a specific period of time (usually 90 days).
   1. Non -Performing Loan coverage ratio: refers to the ratio of allowance for probable losses on non-performing loan to total non-performing loan. Computed as follows:

Provision for losses on non-performing loan                                                                          PNPL Non-performing loan                                = NPL

1. Non-Performing Loan Ratio: refers to the ratio of non- performing loan to totalloans(gross of allowancefor probable losses). It is measured as:

Non-performing loan                                          NPL Total loan and advances = TL

• Working Capital (WC) Ratio: this measures the relationship between current assets over current liabilities. It equally indicates the liquidity of the banks to meet its short obligations as they fall due. Computed as follows:

Current assets              CA Current liability = CL

A ratio of 2:1 is considered appropriate.

• Dividend Coverage Ratio states the number of times an organization is capable of paying dividends to shareholders from the profits earned during an accounting period.Measured as:

Profit After Taxdividend Paid on Irredeemable Preference Share PAT Dividend Paid to Ordinary Shareholders      =                          DP

• Interest Coverage Ratio:is a debt ratio and profitability ratio used to determine how easily a company can pay interest on outstanding debt. The interest coverage ratio may be calculated by dividing a company’s earnings before interest and taxes (EBIT) during a given period by the amount a company must pay in interest on its debts during the same period. Calculated with the following formula:

Earning Before Interest and TaxEBIT Interest Charge                               =                               IN

• Return on Equity: this measures an organisation‘s profitability after all expenses have been deducted by indicating how much profit a company generates with shareholders‘ fund. Computed as follows:

Profit After Tax and Interest                                                  PATI Shareholders Fund                  = SF

• Net Profit Margin: this is an indicator of how profitable a company is in relation to its net assets. Calculated as follows:

Net Income     NI

Net Assets     =     NA

• Debt – to- Total Assets: This ratio measures the amount of the total funds provided by creditors in relation to the total assets of the firm. Debt-to-total asset is given by:

Total Debt x 100 TD Total Assets           = TA

• Debt-to–Equity: This ratio assesses the extent to which firm is using borrowed funds, it is computed by dividing the total debt of a firm (including current liabilities) in the event of shrinking asset values or outright losses. Preference stocks are sometimes included as debt rather than equity when leverage ratios are calculated.

Total Debt x 100                     TL

Shareholders‘ Equity =           SE

• Equity Capital to Net Loan:This ratio assesses the extent to which firm is using shareholders‘ funds, it is computed by dividing the total shareholders‘ fund over net loan.

Total shareholders fundSF

Net loan               = NL

• Cash Ratio: this ratio takes more stringent view on liquidity. It examines only cash and its equivalent (marketable security) in relation to current liabilities.

It is a measure of most liquid assets of a firm as it considers only cash and its current assets as numerators. Cash ratio is given by:

Cash +marketable Securities		CM
Current liabilities	=	CL
and
Cash		C
Current assets	=	CA

• Changes in Cash Flow: is a statement showing changes in cashposition of the firm in the present year less cash flow in the previous year.It is given by:

CFt – CFt— 1

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