Auditors Independence And Quality Of Audit Work In Nigerian Banking Industry
This research was carried out to evaluate the effect of auditors independence on the quality of audit work in Nigerian banking industry. While carrying out this research work these are the areas that this research work concentrated. The first chapter is the introductory part of the research work. This chapter also contains the background of the study, statement of problems, research Question etc.
Data for the study was sourced from two main sources. Which includes
- Primary data: Questionnaires and oral interviews was used to collect information from the respondents.
- Secondary data: Journals, magazine and other relevant materials relating to the area of my investigation will be review.
Extensive literature review was carried out on direct literature and indirect literature on books, journals and past works.
The research instrument used in this study includes oral interview and questionnaire. The questionnaire is structural as to contain both close and open ended question.
Simple tables, pie-charts and percentages were used in treatment of data while chi-square was used in the research work.
Based on the findings, conclusions were drawn and recommendations were also in the last chapter of this work which is the fifth chapter.
1.1 Background of the Study
The independence of auditors is regarded as key to their credibility as external verifiers of external financial statements. The requirement for external auditors to be independent of their clients when undertaking an audit is enshrined in the International Federation of Accountant’s (IFAC) Code of Ethics and in the European Union’s Eighth Directive. In the IFAC code, this requirement is translated into various situations where observance of certain rules should ensure independence. Recent bankruptcies of many large corporations with clean auditor‘s reports around the globe have called to question the validity of the financial statements prepared by those corporations. The case of Enron in the United States, Parmalat in Italy and Cadbury in Nigeria are clear examples. According to Okolie (2007), ―statutory auditors are expected to audit the financial statements prepared by the directors of enterprises and express an independent opinion on them‖. Therefore, in accounting practice of today, the independence of the auditor is one of the most important issues because it increases the effectiveness of the audit by ensuring that the auditor plans and carries out the audit objectively. Okolie (2007) maintains that high quality audits enhance the reliability of the financial reporting process and facilitate optimal allocation of capital by investors and other users of the financial statements.
The immediate role of audit independence is to serve the audit, and the objective of the audit is to improve the reliability of information used for investment and credit decisions. Ultimately, the purpose of audit independence e is to improve the cost-effectiveness of the capital markets. Materiality has to be considered within this context, and an auditor’s interest should be considered material if it presents a risk of impaired objectivity with a likelihood so high and an impairment of such a dimension that the interest reasonably can be assumed to affect the outcome of the audit. The appearance-of-independence concept should not be included in any conceptual framework unless the relationship of that concept to both the objective of independence and desirable concepts of independence is determined and spelled out. The root question in evaluating audit independence is whether an interest creates an unacceptable risk of material bias. In answering that question, a decision will have to be made as to whether it should be based on a reasonable or prudent person concept, regulators’ judgment, or investor opinion. Another question that has to be answered is whether the objective of audit independence is served by applying regulatory prohibitions to parties that cannot influence the audit. The authors have developed a set of eight principles that should be part of the conceptual framework. There has never been a conceptual framework for audit independence before–not even an official definition of the term. Audit independence has been guided by detailed rules, common sense, and conservatism. The public has been protected. But the rules have not had the benefit of clear concepts and consistently applied principles. It is hard to believe this of independence, because no other single idea has so much signified what the auditing profession means in the world. It is time to give it fresh thought, to rise above the clutter of detail and think through what audit independence should mean in any circumstance, what is necessary to analyze and evaluate whether the properties of independence are present, and what is the objective of the whole exercise. There is reason for hope. The Independence Standards Board (ISB) has put the conceptual framework for audit independence in its sights. Planning decisions have been made, and a project director has been engaged. The first step will be to develop a discussion memorandum. Here are our versions of the objective, the definition, and the principles of audit independence, as well as several of the conceptual issues that will have to be resolved in order to develop the framework.
The nature of the auditor‘s work requires him to be independent from the influence of any party so that he can objectively form an opinion on the financial statements examined by him and not tossed by wind from either the owners of the resources or the managers of such resources (Okolie, 2006: 11-15). The foregoing discussions show that the independence of an auditor is fundamental when the issue of accountability is concerned and is influenced by many factors within and outside the control of the auditor himself. In addition, most literature appears to concentrate on the developed countries and the Asian countries. In Nigeria, much evidence from literature dwells more on private sector audit. Very few literatures exist, particularly about audit in the public sector. That is why this study is concentrating on auditor’s independent and quality of audit work in Nigerian banking industry with a particular reference to selected banks in Nigeria which includes: Zenith bank Plc, Access bank Plc, First bank Nig. Plc and Diamond bank plc.
1.2 Statement of Problem
The directors of banks are empowered to appoint, reappoint, and remove their external auditors and they are also to fix the external auditor‘s fees using the guidelines of the Auditor-General as an aid. The problem so created is that the directors are officers of the organization, who also have the responsibility of managing the funds, budgeting, spending including awarding of contracts and the preparation of financial statements. The same people who are therefore placed in a position to render stewardship accounts are now given the power to hire and fire‘ external auditors who would audit the accounts of their own activities. This runs counter to the ideal principles of public accountability.
Auditors in Nigeria are saddled with the responsibility of examining the financial statements of organizations for the purpose of ascertaining their truth and fairness. The auditing profession in Nigeria is regulated by a combination of three regulatory documents. The Companies and Allied Matters Act (CAMA), No. 1 of 1990 serves as the supreme regulator; while the Nigerian Standards on Auditing (NSAs) and Rules of Professional Conduct released by ICAN and ANAN for the members in practice. The main objective of these regulatory documents is to provide guidelines for the practice of auditing in Nigeria.
Although CAMA provides extensive provisions on the practice of auditing in Nigeria, it fails to specifically address the issue of auditor’s independence. However, it contains only guidelines as to the manner at which the auditors should be appointed, how they should function and to whom they should report to. The other two regulatory documents also do not capture explicitly what auditor’s independence means but rather require auditors to be independent and be seen acting as such. However, they provide detailed list of issues that surrounds the auditor’s independence.
The main thrust of ethical standards in auditing is to ensure and uphold the auditor’s independence (Jackling et al, 2007; Dearman and Beard, 2005). Independence has become an emotive word, a banner standing for freedom, integrity and all that is good. According to Aderibigbe (2005), the word independence has two distinct meanings. Firstly, it falls within a family of words implying an absence of relationship like unrelated, disconnected, isolated, remote and insular. Perhaps this is the reason why, in the olden days, auditors were often required to hold shares in their client companies so as not to be too independent. Secondly, independence falls within a family of words implying freedom from the exercise of powers; for example, free, unhindered, emancipated and free from dominance or influence, The independence of auditors in Nigeria has been frequently cautioned. The way at which Nigerian auditors secure their audit assignments and the rate at which they lobby for auditing job put their independence in jeopardy. Even though recognized professional accounting bodies in Nigeria, like ICAN and ANAN, are trying very hard to ensure best practice in the auditing profession via the enforcement of professional code of conduct for their members, the strict observance of such codes is still questionable.The development therefore appears to put the auditor‘s investigative and reporting independence in jeopardy and this may defeat the purpose of public audit and erode the independence and hence, the objectivity of report of the auditors. It is therefore doubtful if the independence of the auditor will have any significant impact on the accountability and quality of independent auditor in Nigerian banking industry and hence this study
1.3 Objective of the Study
The following specific objectives were put forward by the researcher;
- To examine the relationship between auditor independence in relation to the quality of financial statement examination in Nigeria
- To determine the factors which encourages the independence of auditors on financial report in public enterprises
- To ascertain the adequacy of professional and regulatory stipulations on auditors independence in relation to quality financial reporting
- To ascertain the effect of external auditors independence in examination of the financial statement
1.4 Research Hypotheses
The hypotheses proposed in this study are stated as follows:
- H1: There is a significant relationship between the statutory audit quality and quality of financial reporting.
H0: There is no significant relationship between the statutory audit quality and quality of financial reporting.
- H0: There is no factor that reduces the independence of auditors.
H2: There are factor that reduces the independence of auditors.
- H0: There is no determinant of auditor’s independence in Nigeria companies.
H3: There is determinant of auditor’s independence in Nigeria companies.
- H0: There is no significant relationship between professional and regulatory stipulations on auditor independence in Nigeria.
H4: There is a significant relationship between professional and regulatory stipulations on auditor independence in Nigeria.
1.5 Significance of the Study
The study has the positive and potential of motivating, likewise encouraging auditors and users of financial information to see the need for auditor independence. It will enable clients appreciate the enormity of the auditor’s job and factors that can negatively affect his job and career. The outcome of the study will assist and motivate audit firm, company’s management or directors of companies and the public to further appreciate and welcome the need to comply with the relevant Statement of Accounting Standards (SAS) and the International Financial Reporting Standard (IFRS). This study hopes to provide relevant literature on auditor independence. This is cogent as the issue of auditors independence is ongoing and becoming more controversial. This study also expected to serve as input to regulators and other stakeholders of corporate financial reporting to established policies relating to financial reporting in the Nigeria context.
1.6 Scope and Limitation of the Study
The scope of the study covers significance of external auditors on the examination of financial statement. In the cause of the study there were some factors which limited the scope of the study which were out of the researchers control;
a) Availability of Research Material:
The research material available to the researcher is insufficient, thereby limiting the study
The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.
Limited Access to the required finances was a major constrain to the scope of the study, as the researcher could not travel across all the state in the federation to gather firsthand information.
1.7 Operational Definition of Terms
This is an official examination of business and financial records to see that they are true and correct.
Independence: the freedom to organize a business and make decisions for the business.
A strict control over the way that you behave or allowed to behave.
Akakpan (2002) defines financial statement as the financial data or reports concerning an organization. Financial statement or report is a formal record of the financial activities of a business, person or other entity. It consist of statement of financial position, statement of comprehensive income, income statement, value added statement, statement of source and application of find.
Audit working papers contain information from accounting and statistical records, personal observation, they result interview and enquires and other available sources.
These are rules of conduct imposed by professional Accounting bodies on their members as a guideline on audit work.
Taylor and Glezen (1994) define peer view as review of an audit firms systems and procedures, approaches and audit standards generally conducted by another audit firm of comparable size and reputation
1.9 Organization of Study
This research work is organized in five chapters, for easy understanding, as follows
- Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, research methodology, definition of terms and historical background of the study.
- Chapter two highlight the theoretical framework on which the study its based, thus the review of related literature.
- Chapter three deals on the research design and methodology adopted in the study.
- Chapter four concentrate on the data collection and analysis and presentation of finding.
- Chapter five gives summary, conclusion, and recommendations made of the study
Summary, Conclusion and Recommendation
It is important to ascertain that the objective of this study was to ascertain auditor’s independence and quality of audit work in Nigerian banking industry.
In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of financial statement examination by external auditors
This study is the first to develop and then empirically investigate a multi-dimensional framework of factors and their elements affecting auditors’ failure to detect financial statement fraud. We developed our framework through analyzing prior research on auditors’ detection of fraud and interviews with four experts. The study draws on the experiences of fraud examiners who are brought in ex post to investigate fraud and are have the field experience and knowledge to provide important insights on why auditors fail to detect fraud. Many of our participants were engaged as expert witnesses on the cases that they reported on. Since our participants were engaged to testify regarding the cause of an auditor’s failure to detect the fraud, their opinions are relevant to helping auditors defend their work in litigation settings.
The study concludes that:
- Independence of an auditor does significantly improve the quality of audited financial statements of money deposit banks in Nigeria.
- Compliance to auditing guidelines has positive and significant effect on the quality of audited financial statement of money deposit banks in Nigeria.
- Material misstatement does significantly affect the quality of audited financial statements of money deposit banks in Nigeria.
- The audited financial statements of Nigerian money deposit banks, if re-audited by other independent auditors, will give the same result and conclusion.
- Independence of Auditor on financial statements places a test on the financial quality of Nigerian banks’ audited financial statements.
- Consistency and reliability can be absolutely achieved if financial statements of banks in Nigeria are independently audited.
- Auditors always comply with various auditing and assurance guidelines in carrying out their auditing job on the financial statements of Nigerian Money Deposit Banks.
- Most audited financial statements of money deposit banks in Nigeria contain material misstatements which are usually reported in the domestic reports that Auditors write to the management of the banks.
In order to make Nigerian Accounting firms more effective in their activities, especially auditing responsibilities, so that they can continue to play their appropriate roles in the growth and development of money deposit banks and the economy at large, the following measures are recommended for adoption and practice:
Auditors of money deposit banks in Nigeria should live up to the expectations of their clients, their professional bodies, the laws of the land and, to a large extent, the general public. These they could do by simply upholding the ethics of their profession as they observe ethical codes such as integrity, objectivity and confidentiality.
The auditors and regulatory agencies, like CNB, NDIC, SEC, etc, should ensure that money deposit banks in Nigeria do strict comply with the suggestions made by the auditor in the management reports and take appropriate punitive measures on the Directors where they fail to comply.
The professional bodies should always watch governmental actions and raise alarm on policies which could hinder smooth discharge of Auditors’ responsibility, especially in the audit of money deposit banks in Nigeria.
Audit committees of banks should be more strict in their investigations and should be empowered to sue Auditors where they are found wanting and also they should always call for management report(s) to appreciate the issues raised therein. All these issues are attainable and where they are adequately implemented, the future of the profession is bright and this will go a long way in aiding Auditors to carry out their roles and responsibilities appropriately.
As audit quality is enhanced through clear demonstration of good agency relationship, where an Auditor serves the interest of equity holders and the audit committee serves the interest of Directors (who are direct agents of equity holders also), the whole process would positively aid the growth and development of the reporting entities (the MDBs) and the economy as a whole.
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