Corporate Board Attributes And Auditors’ Independence

Project and Seminar Material for Accountancy / Accounting

Abstract

This main objective of this study is to examine the corporate board attribute such as board leadership structure, audit committee meetings held, size of independent non-executive directors and size of non-executive directors have significant impact on audit quality and auditors independence of manufacturing companies listed on the Nigerian stock exchange. In conducting this research primary date were used. The study captured the opinions of respondents including Auditor, Shareholders, directors, Regulators Management and Academic. The primary data were 133 and usable copies of questionnaire, the data gathered were used to test the research hypotheses and answer some of the research questions. The study found that there is a relationship between corporate board attribute and auditors independence

Chapter One

Introduction

1.1 Background of the Study

Corporate governance (CG) takes leadership role in a country’s economic development through private sector’s economy, which provides large contribution to the growth. Hence, sound corporate governance practices are vital for a country to ensure the economy’s sustainable development and growth. There are numerous explanations about CG. In this way, CG is trying to minimize the loss of value that results from the separation of ownership and control. This is concerned with the ways by which suppliers of capital to firms assure themselves of getting returns on their investment, according to Shleifer and Vishny (1997). Deakin and Hughes (1997) defined that CG is concerned with the relationship between the internal governance mechanisms of corporations and society’s conception of the scope of corporate accountability, whereas the Cadbury Committee defines a governance system as the system by which companies are directed and controlled (Cadbury, 1992). Morin and Jarrell (2001) argued that corporate governance mechanism is a framework that controls and safeguards the interest of the relevant players in the market which include managers, employees, customers, shareholders, executive management, suppliers, and the board of directors. According to Ruin (2001) and Velnampy (2013), corporate governance has been referred to as a collective group of people united as one body with power and authority to direct, control and rule an organization. The Australian Standard (2003) defines the corporate governance as the process, by which organizations are directed, controlled, and held to account. This impliesthat corporate governance encompasses the authority, accountability, stewardship, leadership, direction, and control exercised in the process of managing organizations. Moreover, while internal mechanisms of CG concentrates more on board size, board independence, board leadership structure, board committees, executive compensation and ownership structure, external mechanisms focus on external auditors, debt and equity market and legal and regulatory system . In recent times there has been much discussion about the independence of auditors; the leadership of the auditing standards board, the public oversight board, the independence standards board, and most recently the proposed independence rules promulgated by the Securities and Exchange Commission (SEC) have attempted to clarify and strengthen auditor independence. Also in the medieval era, financial statements were not necessary and hence financial statements were not prepared neither used to make decisions. But with the recent development, every firm is expected to prepare financial statement in order to know the financial position of the organization so that stakeholders can make decisions. SEC require traded companies to make sure their statements are prepared and audited by certified public accounting firms who assume their responsibility for the fairness of the financial statements. The basic purpose of financial statements in the view of Meigs and Meigs (1981) is to assist decision makers in evaluating the financial strength, profitability and the future prospects of a business entity. The user of financial statement which includes: shareholders, government, creditor, investors, etc. All rely on the audited financial statement in order to make informed decision and therefore, the credibility and reliability of this statement is necessary.

For an audit to be credible and reliable, it must be performed by someone who is independent and cannot be influenced by position, power which will affect its own conclusion. The Securities Exchange Commission approved new auditor independence regulation which requires that traded companies should disclose the level of fees that were paid to their external auditor for non-audit services. In accounting practices of today, the auditor independence 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.

1.2 Statement of the Problem

Board of directors are responsible for accounting for the daily activities in organizations and rendering proper stewardship on how the financial resources of the shareholders were managed. Towards this end, shareholders, at Annual General Meetings, appoint an external auditor to provide assurance services that the financial statements prepared by Management represent the underlying financial transactions of the organization for the period covered.

Theoretically, the auditor is expected to be independent of the management staff of the company being audited. However, a number of factors like familiarity, threat of replacement of an auditor and the provision of management advisory services appear to impair auditor’s independence. Concerns have been expressed about the conflict of interest between the statutory role of the auditor and the other services it may undertake for a client (UK House of Common Treasury Committee, 2008). The spate of audit failures in the world has brought a great deal of disappointment to investors and other corporate financial reporting stakeholders. Longevity of audit firm tenure has also been linked with fraudulent financial reporting. If empirical studies are not carried out with respect to specific environmental factors the problem of poor audit quality may be exacerbated with likely grave consequences for the nascent Nigerian Capital Market.

1.3 Objective of the Study

The main objective of the study is to investigate corporate board attribute and auditors independence. But to aid the successful completion of the study, the researcher intends to achieve the following specific objective;

To ascertain the role of the board in ensuring auditors independence
To examine the impact of the board of directors attribute on the credibility of the financial statement
To examine the relationship between board attribute and auditors independence
To examine the effect of auditors independence on the credibility of the auditors opinion on the financial statement.

1.4 Research Hypotheses

To aid the successful completion of the study, the following research hypotheses were formulated by the researcher;

H0: corporate board does not play any role in ensuring auditors independence
H1: corporate board does play a role in ensuring auditors independence.
H02: there is no significant relationship between board attribute and auditors independence
H2: there is a significant relationship between board attribute and auditors independence

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 corporate board attribute and auditors independence. In the cause of the studies there were some factors which limited the scope of the study

a) Availability of Research Material:

The research material available to the researcher is insufficient, thereby limiting the study

b) Time:

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.

c) Organizational Privacy:

Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities

1.7 Operational Definition of Terms

Audit:

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.

Constraint:

A strict control over the way that you behave or allowed to behave.

Financial Statement:

Akakpan (2002) defines financial statement as the financial data or reports concerning an organization

Corporate board

The Corporate Board is the nation’s leading corporate governance magazine, providing corporate directors and senior executive officers with information vital to the efficiency and success of their corporate governance actions

1.8 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

Chapter Five

Summary, Conclusion and Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was to investigate how corporate board attribute affect auditors independence.

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 auditor’s independence.

5.2 Summary

Every company should be managed by an effective board, which is responsible for the long term success of the company. The Corporate Governance Codes not only acknowledge this fact but also principally address the conduct and responsibilities of the board. The SEC Code applies to all public companies in Nigeria, especially those whose securities are listed on a recognized securities exchange. The compliance seems to be mandatory because the Code used the word „shall‟ comply with the principles and provisions of the Code and it is supposed to be the minimum standard expected from any public company in Nigeria. There is in fact no modality for enforcement, there is no facility for monitoring compliance and there is no penalty whatsoever for non observance of the Code. The Code standard of corporate governance is extremely lower than expected from a country looking for foreign direct investment and the provisions are of a general nature that it cannot be easily enforced.

5.3 Conclusion

Corporate governance can greatly assist Companies by infusing better management practices, effective control and accounting systems, stringent monitoring and etc (Achchuthan et al., 2013). This study examined the significant association between corporate board attribute and auditors independence. Overall, findings revealed those board leadership attribute and audit committees’ characteristics contribute to auditors independence. This was explained by Cox and Snell R Square, indicating that all independent variables incorporated in this model explains of the variance in audit quality. Board leadership structure which has categorized into separate and combined structure has significant relationship with audit quality. Further, audit committee meetings also have significant relationship with audit quality. On the other hand, variables such as number of non-executive directors and number of independent non-executive directors have shown insignificant association with it.

5.4 Recommendations

Haven completed the study, the researcher recommends that companies should have more than one director position as it enhances audit committee contribution to the companies’ financial reporting quality. It is recommended that the frequency of meetings held by the audit committee in companies should improve. To the extent that this statement is true, it should be expected that the frequency of meetings of the audit committee should be positively related to audit quality. The study also reveals provision of non-audit services would likely have a significant effect on the audit quality in Nigeria. Consequently, there is a need to strengthen the capacity of the regulatory bodies and review adequacy of statutory enforcement provisions. This will enable the regulators to effectively deal with accounting, auditing and financial reporting practices of the regulated entities properly. Finally, it is recommended that the independence of the board of audit committee should be encouraged in companies as it would improve audit quality and enhance the credibility level of financial reporting in Nigeria.

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