Auditor’s Independence A Tool For Managerial Effectiveness (A Study Manufacturing Company In Nigeria Coca Cola Company)
The study examined on auditor’s independence a tool for managerial effectiveness using coca cola manufacturing company in Nigeria as a case study. The study was specifically set to find out how the Auditor can carry out his work without compromising his independence if the fees contributed by one client constitute more than 25 percent of the total audit income, find out how the problem of internal control could be solved which is one of the problems that confronts auditors in our present day business environment, also find out how the Auditors are been paid ( in the case of external Auditor) if they have any rules or law that guides them, if they are paid by the board of directors under any pressure of their fees are given to them by the board of directors or any ruling body, find out Auditors report problems identified and negotiate plans with management to address the problem and find out if clients at times influence the auditor into tailoring the audit work to the budget of the firm instead of the other way round. The survey design was adopted and the simple random sampling techniques were employed in this study. The population size comprise of staff in the financial department of coca cola manufacturing company in Nigeria. In determining the sample size, the researcher conveniently selected 57 respondents and 50 were validated. Self-constructed and validated questionnaire was used for data collection. The collected and validated questionnaires were analyzed using frequency tables. While the hypotheses were tested using Chi-square statistical tool. The result of the findings reveals that the internal audit department are not given a free hand in terms of independence in executing its duties. The study also revealed that the recommendations of the internal auditors or aspects of internal auditing are not frequently implemented. Therefore, it is recommended that the accounting professional bodies should team up and establish a monitoring system or mechanism to lead the crusade on transparency and accountability in reporting. To mention but a few.
Table of Content
- 1.1 Background of the Study
- 1.2 Statement of the Problem
- 1.3 Objective of the Study
- 1.4 Research Questions
- 1.5 Research Hypothesis
- 1.6 Significance of the Study
- 1.7 Scope of the Study
- 1.8 Limitation of the Study
- 1.9 Definition of Terms
- 1.10 Organization of the Study
Review of Literature
- 2.1 Conceptual Framework
- 2.2 Theoretical Framework
- 2.3 Empirical Review
- 3.1 Research Design
- 3.2 Population of the Study
- 3.3 Sample Size Determination
- 3.4 Sample Size Selection Technique and Procedure
- 3.5 Research Instrument and Administration
- 3.6 Method of Data Collection
- 3.7 Method of Data Analysis
- 3.8 Validity of the Study
- 3.9 Reliability of the Study
- 3.10 Ethical Consideration
Data Presentation and Analysis
- 4.1 Data Presentation
- 4.2 Analysis of Data
- 4.3 Answering Research Questions
- 4.4 Test of Hypotheses
Summary, Conclusion and Recommendation
- 5.1 Summary
- 5.2 Conclusion
- 5.3 Recommendation
1.1 Background of the Study
Business organizations operate in an environment which is very dynamic thereby demanding periodic and necessary changes in management operations and functions. Thus the dynamism of the business environment demands great managerial responsibilities to cope with the changes to enhance effective and efficient management of the business. As a result of this, the up keep of financial records becomes very necessary to ensure accountability growth and success of the business. However, one of the most commonly acceptable instruments for the appraised of accountability and performance of management is the annual financial statements (which include the income statement and balance sheet) and value added statement of accounts produced and prepared by the management of any entity or organization.
Every discipline in the administrative sciences contributes in one way or the other in helping managers run the organizations more effectively. For instance, marketing guide managers in expanding revenues and market share, financial management concepts assist them in making the optimum use of funds invested in the organizations production and operations, management concepts offer guidance in designing effective production process whereas the accounting principles assist managers by prodding information that enhance the quality of decisions they make based on adherence to certain ethical rules and professional guidelines.
However, it is the duty of the managers of any organization to prepare annual financial and value added statements and make all the required disclosure necessary for the benefit of the owners of the business and the third parties to the business who are interested in the continued existence and survival of the business organization. Such third parties who may have financial states and interests in the business include government, agents, customers, creditors, prospective and potential investors among to others. Moreover for the information that are contained in the financial statement and value added statements to be accepted as true, equitable and fair by the users of the financial statements, such must be examined and certified by an independent expert or professional who is vast in auditing and investigation to vouch their equitability and fairness (holmes, 2002).
It is at this point that the auditor comes into play the origin of auditing is as a result of the separation of ownership from control. As business organizations developed over the years from sole proprietorship to partnership and then to corporate entities, ownership continued to separate from the control of the business. As an organization grows from a sole proprietorship to a public corporation, the audit function becomes more pronounced and distinct from the regular accounting function. In a sole proprietorship, the accounts may be required merely for the preparation of tax returns, pay rolls and the likes. The financial statements are required for credit purposes and to borrow from third parties in addition to giving the proprietor a broad idea of the progress that has been made. A partnership will have the additional needs for the certified accountants as a basis to determine individual share of the earnings and then share of the net worth of the enterprise.
A private corporation will need auditing attest to the truth and fairness of the financial statements, unearth any error, fraud, theft or defalcation and for the consumption of management. The auditors of a public corporation have the widest responsibilities. A Chartered auditing firm will enhance the reputation of the corporation. For a Company going public, the Companies decree and be Nigerian Stock Exchange (NSE) will require a report by a well known and experienced auditor on the Company as “An Independent Examination and expression of opinion on the financial statements of an organization by an appointed auditor in pursuance of that appointment and in compliance with the relevant statutory obligations. Auditing can be classified by scope method of approach or extent of work done and by level of independence. According to the classification by scope, we have the statutory and non-statutory or private audits. By approach and work performed, we have the final or complete audit, interim audit or continuous audit. We also have the procedural audit, internal audit, external audit and management audit.
For the purpose of this study, the internal audit control system and the external audit system shall be carefully examined.
The Chartered Institute of Management Accounting Official Terminology defines internal audit as “An Independent appraisal activity established within an organization as a service to it. It is control which functions by examining and evaluating the adequacy and effectiveness of other controls while the external audit could be defined as an independent examination carried out by an individual or firm who is appointed by the shareholders of the organization at an annual general meeting (AGM). It is crystals clear that the auditor acts as an intermediary mediating between the owner and the managers of an organization to provide credibility on reports and account prepared by the director which may contain errors, not disclose fraud, be unintentionally misleading fail to conform to regulations and disclosure relevant information.
It is also conventional for auditors in their letters of engagement to highlight other services they render other than their opinion on the financial statements audited by them. Such services could include taxation, consultancy, accounting and financial management.
From the definitions of internal and external audit systems, it is obvious that the auditors’ independence must be paramount for an effective organizational management. Independence is a concept fundamental to the accounting profession, the corner stone of the philosophical structure and the guiding tool required by auditors; in exercising their duties. It is an auditor’s asset as it encourages him to remain unbiased in drawing conclusion about the financial statements of an organization.
The present state of independent auditing represent the culmination of a century of developments. To the accountancy profession, The fundamental concept of professional independence is an attitude of the mind based on integrity and an objective approach to work. An auditor must at all times perform his work objectively, impartially and fee from influence by any consideration which might appear to be in conflict with this requirement.
It is very obvious that a direct proportionally exists between the auditors independence and the managerial effectiveness. This is to say that the higher the degree of the auditor’s independence, the greater the effectiveness of the managers of the organization in review and vice versa. In essence, an auditor should be a check on the management and not a part of it in the case of an external auditor and for the internal auditor, although an employee of the organization should report to the highest authority in order to be independent of members of staff.
The articles written about auditing reveal a shift in the focus of auditors. In earlier years, the audit function was merely concerned with the prevention and detection of dishonest action by directors as custodians of shareholders’ funds but presently this function is taking second place to the auditors contain that the books are presented according to the order given by law which requires him to assure that the accounts show a true and fair view to a wide range of interest including the shareholders (Johnson 2005). This shift in focus meant a change for the auditor’s method of operation.
Recent business failures caused by or involving inaccurate/poor quality financial reporting have focused world wide attention of the auditors’ role and responsibility to his ability to separate himself both mentally and physically from the client Company. This is as a result of the fact that a misleading audit report will affect the investors and other third parties negatively. They are bound to make the wrong investment and financial decisions due to their reliance on the supposed audited financial statements. This wrong investments and financial decisions often times lead to great financial losses which in turn cause negative returns on the capital invested as no dividend will be declared and paid to the shareholders.
Due to the meager profit realized, the government sector will also be affected as little or no tax will be paid to the Board of Internal Revenue (BIR). Therefore the eventual liquidation of the business becomes inevitable as a result of poor management sequel to the poor insulation of the auditors against influence and interference. As such, the investors and other third parties are forced into channeling their resources into other profitable ventures. While the business which was once viable comes crumbling and folding up all as result of a low degree of the auditor’s independence.
1.2 Statement of Problem
Corporate organizations in recent times have been facing a lot of setbacks some of which are as a result of lack of independence which in turn leads to inaccurate reporting. Auditors face a lot of interference from their clients which come in various guises. One of these may be a straight forward dependency where the health of the audit practice is too closely bound up with that of a client. Here, the auditor considers himself running at a risk of loosing his client. This is mostly the case when the fees contributed by one client constitute more than 25 percent of the total audit income.
Another factor which constitutes a threat to the auditor is the issue of audit expectation gap. This could come in form of communication or performance gap. In the case of communication gap, once an auditor states that an account gives a true and fair view as at a period of time, this opinion is thought to be constant throughout.
Therefore the third parties/users of the financial statement make the following assumptions:
- That unqualified audit opinion is a clean but of sound health.
- That auditors of guarantee the continued existence of firms.
- That auditors issue financial statements after the audit exercise.
- Users of the account may expert all fraud to be discovered by the auditor.
The performance gap occurs when public expectation conflict with the auditors’ performance or when public expectations are reasonable but not fulfilled by the auditors performance as a result of inadequate technical skills, outdated knowledge, unreasonable audit budget or insufficiency of audit evidence.
Lack of adequate internal control in most organization is a major problem confronting auditors in our present day business environment. Here, segregation of duties authorization and approval of funds, supervision, organization, accounting and personnel management are not properly carried out.
Although no internal control system, however elaborate by itself guarantee efficient administration, completeness and accuracy of the records nor can it be proof against fraudulent collusion, especially on the part of those holding position of authority or trust but an internal auditor who notices that a control system is absent or weak or not properly applied should report to the management who will probably asks for an assessment of the risk involved. It is then the responsibility of management to decide whether the risk is acceptable or whether to take action on the missing or inadequate control. It is usually observed by auditors that there is always a reluctance of client’s employees especially those concerned with the recording and documentation of financial transactions and accounting for custody of the assets of the business organization to discuss freely with auditors or make disclosures to them without reservation. This could mislead the auditor into expressing his opinion as to the truth and fairness of the financial statements and reports.
1.3 Objective of Study
This study is aimed at emphasizing the need for the auditors’ independence. It is also designed for various purpose which motivates the researcher into action.
- To find out how the Auditor can carry out his work without compromising his independence if the fees contributed by one client constitute more than 25 percent of the total audit income.
- To find out how the problem of internal control could be solved which is one of the problems that confronts auditors in our present day business environment.
- To also find out how the Auditors are been paid ( in the case of external Auditor) if they have any rules or law that guides them, if they are paid by the board of directors under any pressure of their fees are given to them by the board of directors or any ruling body.
- To find out Auditors report problems identified and negotiate plans with management to address the problem.
- To find out if clients at times influence the auditor into tailoring the audit work to the budget of the firm instead of the other way round.
1.4 Research Questions
For the in-depth knowledge and understanding of the topic under review, some important questions will be asked and an attempt into answering them will be made in one of the subsequent chapter of this research work.
These questions include:
- Is the internal audit department given a free hand in terms of independence in executing its duties?
- How often are the recommendations of the internal auditors or aspects of internal auditing implemented?
- Do external auditors have the total independence to effective carry out their duties?
- Does auditors’ independence affect the level of managerial effectiveness?
- Should organizations directly or indirectly fix the remuneration of auditors?
1.5 Research Hypotheses
The following hypotheses will be stated and tested later for either acceptance or rejection. This is for the purpose of gaining a better insight of the study.
- H01: Auditors independence affect negatively to managerial efficiency and effectiveness.
- Ha1: Auditors independence affect positively to managerial efficiency and effectiveness.
- H02: Auditors independence causes poor managerial effectiveness.
- Ha2: Auditors independence causes good managerial effectiveness.
1.6 Significance of the Study
The significance of the study basically is to inform the management and shareholders in organizations of the need for auditor’s independence as it enhances managerial effectiveness. A conducive environment also should be created for the auditor in order to insulate him from either external or internal direct or indirect influences. The essence, the management and shareholders of organizations should make it possible for the auditors to receive maximum co-operation in the performance of their duties.
The research is also targeted to enlighten the general public on the topic under discussion. Most times, the public’s view or perception of the duties of auditors conflict with the laid down statutory duties of the auditors. This is the causes of audit expectation gap which could be a performance gap or a communication gap. Also the public sees auditors as detectors of fraud no matter how little not knowing that the management of the organizations also have great roles to play in prevention of fraud.
This study further encourage the various interest groups in the organization. These include the users of financial statements and reports prepared by the directors of the organization. Some of these interest groups are potential and prospective investors, creditors and customers. These study will be of immense benefit to professionals in the finance industry on the need to be reassured and educated that the degree of independence conferred on the auditors to a great extent influences the managerial effectiveness either positively or negatively.
This study will be of immense benefit to professionals in the finance industry on the need to up skill themselves, so as not to become redundant or left behind in the present trend. It will reveal a lot of things to them on the need for proper accountability, prudence order, effectiveness and efficiency.
On the part of the government, it will enable it formulate policies that will ensure independence of the auditors thus making the managers (stakeholders) of the various sectors of the economy imbibe the culture of being prudent and accountable for their activities instead of being looters and embezzlers of public funds.
The study will enable the auditors to be knowledgeable on how best to identify and tackle the various factors which threaten their independence. They should be well vast on the professional ethnics and conducts governing them and the relationship they have with their clients.
Finally, this study should provide literature in the field of auditing and investigations and serve as material for future researchers.
The researcher was wide on the area of auditing and investigation although she didn’t loose focus on the major issue of auditors’ independence. To this effect, everybody will find this research work invaluable to use.
1.7 Scope of the Study
This study focuses on auditor’s independence a tool for managerial effectiveness. The study will be conducted and delimited to Coca Cola Company, Nigeria. Hence the respondents for this study will be obtained from the financial department of the company.
1.8 Limitations of the Study
During the course of this research work, the researcher encountered certain factors which posed as hindrances to the execution of the work. Although the researcher was not expecting a hitch-free exercise in the course of this study what she encountered was so over whelming when compared with what she envisaged.
The topic under review is a sensitive one as issues on audit reports x-ray the success or failure of any organization. As a result of this, the researcher found it difficult getting organizations which she could use as case studies. Also there was an initial reluctant of some employees of the firms under review to disclose certain information to the researcher.
Limited time constituted a great constraint to the researcher because of this, She didn’t carry out the researches to the fullest. This is to say that given more time, a more detailed and in-depth study of the topic would have been made. Also having combined this research work with the normal school courses, the researcher faced a very big problem of time allocation in a bid to measure up on both areas of her academic pursuit.
Inadequate finance no doubt posed a hindrance to the researcher. The researcher spent much on transporting herself to the various organization she used as studies. She made a number of calls which also contributed to her financial expenses. The printing of questionnaires and the project itself raised up the cost of this research work and as such, the researcher had to restrict the scope of the work to a few studies. There was also a delay by the respondents whom questionnaire were given to fill. Some of the questionnaires were wrongly filled while some were not even returned. The delay in return of the questionnaires to a great extent delayed this research work as the researcher had to wait so as to compute the figures to be tested.
1.9 Definition of Terms
Here, some key terms used in this research work will be defined so as to create a better understanding for the benefit of anyone who will find the material useful. Some of the terms include:
This is the independent examination and expression of opinion on the financial statements of an organization by an appointed auditor in pursuance of that appointment and in compliance with the relevant statutory obligations.
This is a business set up which engages in buying or selling of goods and services or any other business oriented activity for the sole aim of profit making.
This is the process of getting things done using both human and material resources. It is also the planning organizing, staffing, directing and controlling for the purpose of achieving set goals and objectives.
d. Internal Control:
Internal control refers to the whole system of control, financial and otherwise established by management in order to carry on the business of a company in an orderly manner, safeguard its assets and secure as far as possible the accuracy and reliability of its records.
e. Statutory Audit:
This is an audit that is being carried out within an enterprise as a result of being compulsorily required by legislation. It refers to those audits related to limited companies and are governed by the enabling act. Here, the client cannot restrict the duties of the auditor and the act spells out the different permissible actions of the directors which must be recorded in the minutes.
f. Non-Statutory Audit:
This is an audit performed by independent audit because the owners, proprietors, members, trustees, professional and governing bodies or other interested parties want them rather than because the law requires them. Here, the scope of the audit is subject to the arrangement between the auditors and his client.
g. Final Audit:
This is an audit approach being carried out by external auditors within an enterprise which involves examination of transactions and balances as well as the content of financial statement as a whole at the end of the accounting period of a business enterprise.
h. Interim Audit:
This is an audit approach being carried out within the accounting period of an enterprise. It is usually adopted when an interim account is to be prepared for the declaration of the interim dividends or for the purpose of carrying out system audit.
i. Continuous Audit:
This is an audit approach being carried out by the internal auditor as well as the external auditor within an enterprise. It involves independent examination of transactions and balances on a daily basis with the objective of ascertaining the completeness, accuracy and validity of those transactions.
j. Procedural Audit:
In this case, the auditor is concerned with the procedures with a strong belief that where the procedures adopted are sound, the information generated there from would be reliable and accurate. Here the extent of the auditor work would be influenced by the soundness or otherwise of the procedures in existence.
k. Internal Audit:
This is an independent appraisal activity established within an organization as a service to it. It is a control which functions by examining and evaluating the adequacy and effectiveness of other controls. The appraisal is usually on a continuous basis and the internal auditor channels his report to the management.
L. External Audit:
This is an independent examination and investigation of the books, accounts and vouchers of a business with a view to enabling the appointed auditor to pass an opinion of the truth and fairness of the records in pursuance of that appointment and in compliance with the relevant statutory obligations.
m. Management Audit:
This type of audit involves enquiring into and reporting on how well the company has followed the desire of the company’s shareholders and how effectively they are carried out. It addresses the issue of whether the wishes of shareholders are carried out in all respects and whether the business is managed effectively and efficiently.
N. Auditors’ Independence:
This is the insulation of an auditor whether internal or external from the direct and indirect interference or influence of their clients.
o. Managerial Effectiveness:
This is the process of attaining or achieving the set organizational goals or target using the minimum resources available. It is a measure of the growth of an organization with reference to managers.
p. Audit Expectation Gap:
Audit expectation gap refers to the situation when the public expectation as to the auditors’ duty conflicts with the statutory duties of the auditor.
q. Audit Opinion:
This is the report of the auditors as to the state of the financial records presented to them by the management of the organizations.
1.10 Organization of the Studies
The study is categorized into five chapters. The first chapter presents the background of the study, statement of the problem, objective of the study, research questions and hypothesis, the significance of the study, scope/limitations of the study, and definition of terms. The chapter two covers the review of literature with emphasis on conceptual framework, theoretical framework, and empirical review. Likewise, the chapter three which is the research methodology, specifically covers the research design, population of the study, sample size determination, sample size, and selection technique and procedure, research instrument and administration, method of data collection, method of data analysis, validity and reliability of the study, and ethical consideration. The second to last chapter being the chapter four presents the data presentation and analysis, while the last chapter(chapter five) contains the summary, conclusion and recommendation.
Summary, Conclusions and Recommendations:
This chapter summarizes the findings on auditor’s independence a tool for managerial effectiveness using coca cola manufacturing company in Nigeria as a case study. The chapter consists of summary of the study, conclusions, and recommendations.
5.2 Summary of the Study
In this study, our focus was on auditor’s independence a tool for managerial effectiveness using coca cola manufacturing company in Nigeria as a case study. The study was specifically set to find out how the Auditor can carry out his work without compromising his independence if the fees contributed by one client constitute more than 25 percent of the total audit income, find out how the problem of internal control could be solved which is one of the problems that confronts auditors in our present day business environment, also find out how the Auditors are been paid ( in the case of external Auditor) if they have any rules or law that guides them, if they are paid by the board of directors under any pressure of their fees are given to them by the board of directors or any ruling body, find out Auditors report problems identified and negotiate plans with management to address the problem and find out if clients at times influence the auditor into tailoring the audit work to the budget of the firm instead of the other way round.
The study adopted the survey research design and randomly enrolled participants in the study. A total of 50 responses were validated from the enrolled participants where all respondent arestaff in the financial department of coca cola manufacturing company in Nigeria.
In the light of the analysis carried out, the following conclusions were drawn.
- The internal audit department are not given a free hand in terms of independence in executing its duties.
- The recommendations of the internal auditors or aspects of internal auditing are not frequently implemented.
- External auditors does not have the total independence to effective carry out their duties.
- Auditors’ independence affect the level of managerial effectiveness.
- Organizations should directly or indirectly fix the remuneration of auditors.
Based on the responses obtained, the researcher proffers the following recommendations:
- There is an urgent need to reform the audit profession through legislations.
- The accounting professional bodies should team up and establish a monitoring system or mechanism to lead the crusade on transparency and accountability in reporting.
- External auditing firms should be prohibited from providing certain non auditing services especially those linking them directly to financial information and design, internal control, tax consultancy etc alongside auditing functions. There should be a law to this effect.
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