Qualitative Analysis Of Factors Influencing Auditor Independence In Nigeria
This study examined the factors influencing auditor independence in Nigeria using qualitative approach. Primary data were employed for the study. A total of 133 copies of questionnaire were personally administered to Chief Accountants/Preparers of Financial Statement, Financial Analysts and Statutory auditors of listed companies in Nigeria using purposive sampling technique. Descriptive analysis such as mean, percentages, tables and graphs as well as Relative Importance/Significance Index (RII) and Mean Index Score (MIS) were employed in data analysis using a five-point likert scale. Data analysis was done by the use of Statistical Package for Social sciences (SPSS v 16.0) to analyze the questionnaires that will be used to collect data. Analyzed data were presented in form of tables and graphs and make conclusions and recommendations based on the findings of the study. The study established that the auditor’s independence was influenced by the four selected factors audit firm size, audit firm tenure, audit fees and audit committee’s commitment in a significant and positive way. On the effect of audit firm size the study concludes that the firm size influenced the independence of the auditors and will protect them from being manipulated and hence there was a likely hood of the auditors providing accurate reports. From the study it is recommended that there should be a consideration on how often auditors qualify opinions on financial statements. Another way to gauge auditor independence is to look at the nature of Generally Accepted Accounting Principles. If auditors were really independent, they would not need an extensive list of rules to hide behind when clients try to use strange accounting methods to produce misleading financial statements. A more drastic step would be to require rotation of audit firms at regular intervals like 5 years. Increasing interaction between auditors and audit committees may help, but it must be recognized that often audit committees and members of boards of directors are in sort of an incestuous relationship with management.
1.1 Background to the study
Auditor independence refers to the ability of the external auditor to act with integrity and impartiality during his/her auditing functions. According to the Indonesian Accounting Association (2010), auditor independence is an expected auditor behaviour that directs that an auditor does not have personal interest in doing his / her jobs, because it is contrary to integrity. Institute of Chartered Accountants of Nigeria (ICAN) (2013) also described auditor independence as comprising: (a) Independence of mind, that is, the state of mind that permits the provision of an opinion without being affected by influences that compromise professional judgment, allowing an individual to act with integrity and exercise objectivity and professional scepticism; and (b) Independence in appearance, that is, the avoidance of facts and circumstances that are so significant that a reasonable and informed third party, having knowledge of all relevant information, including any safeguards applied, would reasonably conclude a firm’s or a member of the assurance team’s integrity, objectivity or professional scepticism had been compromised.
With reference to Sarbanes Oxley Act (2002), independence is both a description of the relationship between auditor and client and the mindset with which the auditor must approach his or her work. The most general of the independence requirements in the auditing standards as provided in Paragraph 02 of AU section 150, Generally Accepted Auditing Standards states that “in all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor or auditors.” One measure of this mindset as spelt out in Paragraph 07 of AU section 230, Due Professional Care in the Performance of Work is the auditor’s ability to exercise “professional scepticism,” which is described as “an attitude that includes a questioning mind and a critical assessment of audit evidence.”
Auditor independence is believed to be determined by various factors including the provision of non-audit services, the size of the audit firm and the size of the client company, auditor tenure, Auditor/client relationship, the level of competition in the audit market while high risk of damage to auditor’s reputation, disciplinary action by the government, litigation against the auditor, disciplinary action by the professional association are associated with enhancement of auditor independence.
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.In recent years there has been much discussion about the independence of CPA auditors; the leadership of the AICPA, the Auditing Standards Board, the Public Oversight Board, the Independence Standards Board, and most recently the proposed independence rules promulgated by the SEC have all attempted to clarify and strengthen auditor independence. Several newspaper and magazine articles have also addressed the issue.
Recent scandals in the United States have demonstrated that ensuring the independence of auditors from the publicly traded clients whose books they inspect is one of the most vexing problems in the financial world today. Arguably, the imposition of a mandatory audit system through the 1930s federal securities laws created the modern problem of auditor independence. Since then, numerous attempts to fix the problem have failed. The core issue is that the statutory audit is simply a commoditised cost of doing business for issuers that imposes an impossible obligation to serve an unspecified investing public on the auditors. Yet, this investing public neither hires, fires, nor controls the auditors. Instead, the audit relationship is managed by the management of the institution being audited. The resultant conflict of interest has proven to be insurmountable even after multiple reform efforts (O’Connor, 2006).
These financial scandals and corporate failures, thus, are proven to have had a detrimental effect on the public‟s perception of auditors. More worryingly, as been raised by O‟Malley (1993), the issues related to independence are threatening the survival of accounting firms of all sizes and indeed it has the power to destroy the accounting profession as a whole. It is therefore, vital that auditors maintain their independence and ensure that they provide a high quality of auditing to ensure the credibility of financial information not only for the purpose of reducing the number of corporate scandals but most importantly the survival of their profession and the development of healthy financial and capital market (Abu Bakar, 2006).
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, Very few literatures exist, particularly about audit in the agricultural sector; hence this study is concerned about independence of auditors in the Nigerian agricultural sector.
1.2 Statement of the Problem
Audit is essentially entrusted with the task of reporting reality in financial statements and this reality is what the users of accounting information expect. However, the auditors may not check out the reality and this reality may fall short of user expectations. This shortfall in audit effectiveness is broadly labelled as audit expectation gap. Most of the time financial statement users consider an auditor’s report to be a clean bill of health. Thus most users‟ expectation toward auditors is far more than what they should be. The expectation gap occurs when there are differences between what the public expects from the auditor and what the auditor actually provides.
This 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 not very clear if the independence of the auditor has any significant impact on the accountability of the public institutions in Nigeria. Auditor’s independence is fundamental to public confidence in financial reporting and the auditing profession. This study therefore aims to provide further understanding of the factors influencing auditor independence from the perspective of the agricultural sector in Nigeria.
1.3 Objectives of the Study
- To determine the factors which encourage the independence and accountability of the auditors
- To determine whether the audit firm’s tenure has an effect on the auditor’s independence
- To establish whether the size of the audit fee has an effect on the auditor’s independence
- To examine the influence of the audit committee competence on the auditors independency
1.4 Research Questions
- What are the factors that influence the independence and accountability of the auditors
- What is the effect of audit firm’s tenure on the auditor’s independence
- What is the effect of the size of the audit fee on the auditor’s independence
- How does audit committee competence influence the auditor’s independence
1.5 Significance of the Study
The present study identified various factors that most influence the auditor’s independence among companies in presenting most reliable financial statements. Auditors are faced with various challenges as they try to ensure ethical and accurate presentation of the financial reports for the companies for which they work for. The fact that the auditor is employed or contracted by the Institutions for which they are auditing it means they are at the mercy of the employer and the way they present the information is very crucial. This study sought to shed light on various factors and how they can be applied in making the auditing process as appropriate as possible. The outcome of the study was significantly advance the frontier of knowledge and adds to the existing academic literature on auditors‟ independence.
1.6 Scope of the Study
The study targeted management staff, more specifically the chief accountant and head of internal audit department and audit firms which has audited the listed firms for last three years. The study was significant to the users of financial information who want more transparent information and in understanding the nature, significance, and limitations of auditor independence and to focus debate on, and provide a common language for auditor independence issues. The research provided important insights into the factors affecting auditor independence and contributes towards better understanding on the ways to improve the confidence in financial reporting and credibility of the auditing profession.
In addition, this study also offered important input to serve as a strong basis for the profession to establish policies relating to auditor independence, particularly in the Nigerian context. The study formed a fundamental base upon which further researchers into the field of auditing was based as it will act as both reading and secondary source material in such cases.
1.7 Limitations of the Study
There was a limitation that the confidential information that management staffs know may not accept to give out, and the number of listed firms to be researched on was few compared to the total number of listed firms available in Nigeria.
Summary of the Findings, Conclusions and Recommendations
This chapter presents the summary of the findings, the conclusions and the recommendations to the study. From the recommendation the study will present the areas for further studies.
5.1. Summary of the Findings
The summary of the results were based on the objective of the study. However, the independence of the auditors was first established. It was noted that majority of the auditors indicated that they did not have independence while they were undertaking their duties. On whether the managers of the organizations supported their independence when undertaking their audit duties, majority also disagreed. This indicated that most of them did not experience the independence they required to provide a true position of the financial statements. The same results were held by Gupta (1999), who noted that, if he is not independent of management, his opinion would mean nothing to shareholders, prospective investors, bankers, government agencies, and others who are concerned with the financial statements of a company
The study established that, majority of the respondents who respondents strongly agreed with the statements defining the effect of the audit firm size on the auditor’s independence. This implies that the changes in the level of the auditor’s independence can be explained to extend by the tenure of the auditors with the clients
On whether the audit fees have a significant effect of the auditors independence. The result of revealed that there is a positive and significant relationship between the audit fees charged by the audit firm’s policy governing all the audit firms to ensure uniformity in their pricing.
On whether the audit committee’s competence had an effect on the auditor’s independence, it was noted that only 14% of the auditor’s independence in the preparation of financial reports could be explained by the audit committee’s commitment. This indicates that lack of audit independence can be explained by 14 percent of audit committee’s commitment in the organization. Therefore, audit committees commitments affect the auditors independence among the listed firms. The overall results show that Auditors independence among the listed firms was influenced by all the factors that were selected for the study.
The study established that the auditor’s independence was influenced by the four selected factors audit firm size, audit firm tenure, audit fees and audit committee’s commitment in a significant and positive way. On the effect of audit firm size the study concludes that the firm size will influence the independence of the auditors and will protect them from being manipulated and hence there was a likely hood of the auditors providing accurate reports.
The study further concludes that audit independence is also affected by the audit firm tenure. The study established that auditors from well-established audit firm tend to have high level of independence than those from small firm. Therefore, the study concludes that the firm’s tenure has a significant and positive relationship with auditor’s independence. As the auditor or audit firm gain experience through many years, their independence is assured.
In addition, the study concludes that audit fees have a higher effect on the auditor’s independence. This was noted to be as a result of the auditors resisting manipulation because the firm has no option as the fees charged by most of the firms is almost same. In other words, it was noted that as the audit fees increasing among the auditors the level of independence also increases reducing the pressure of manipulation from the management
The study also noted and concludes that audit committees have a significant relationship on the auditor’s independence. This means that as the audit committees commitment increases the auditor’s independence is also made stronger.
From the study it is recommended that there should be a consideration on how often auditors qualify opinions on financial statements. Another way to gauge auditor independence is to look at the nature of Generally Accepted Accounting Principles. If auditors were really independent, they would not need an extensive list of rules to hide behind when clients try to use strange accounting methods to produce misleading financial statements. A more drastic step would be to require rotation of audit firms at regular intervals like 5 years. Perhaps the firms or some other body could select the audit firms. Increasing interaction between auditors and audit committees may help, but it must be recognized that often audit committees and members of boards of directors are in sort of an incestuous relationship with management.
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