THE IMPACT OF AUDITORS INDEPENDENCE ON FINANCIAL REPORTING IN NIGERIA

ABSTRACT

This research was carried out in order to examine the impact of auditor’s independence on financial reporting in Nigeria. The study aimed at examining investigating and ascertaining the interaction between audit quality and financial reporting in Nigeria. Hence, the study is a movement towards improving the quality of audit practice in Nigeria.

In conducting this research primary date were used. The study captured the opinions of respondents including Auditor, Shareholders, Brokers, Regulators Management and Academic. The primary data were 120 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 audit quality and the quality of financial reporting.

The relevant data collected were analyzed using simple percentage and tables and tested using chi-square with SPSS version 20.0. Finally, the study recommended that auditors should avoid familiarity, and auditors should not be allowed to provide audit client with any other advisory services or non-audit services.

CHAPTER ONE

INTRODUCTION

1.1BACKGROUND TO THE STUDY

In Nigeria, every incorporated company is required to appoint an external auditor who is required to render an independent opinion on the financial statements whether or not they show a true and fair view. 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 client when undertaking an audit is enshrined in the International Federation of Accountant (IFAC) code of ethics and in the European Union’s Eight Directives. In the IFAC Code, this requirement is translated into various situations where observance of certain rules should ensure independence.

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.

In Nigeria, there have been a number of audit failures in the financial statement, some leading to the restatement of figures in the financial reporting with a clean audit report of auditors with recent bankruptcies of many large corporations. For example Lever Brothers, African Petroleum and Cadbury just to mention a few important one. Although, it has not been proved by any detailed investigation that these audit failures were due to impairment of auditors independent, it could reasonably be a contributing factor (Adelaja, 2009). Auditor independence is the cornerstone of accountability of the public accounting profession (Sweency, 1992, Mednick, 1997) and that it is privileged to govern itself. Society grants power and privilege to the accounting profession. Auditors are obligated to perform their duties for the public benefit in exchange for exclusive professional privilege. They should not engage in any activity that appears to impair their effectiveness as professionals, regardless of the totality of their incentives (Antle, 1999).

The public credibility of the independent auditor’s role is a matter of concern to regulators and the profession, because of lack of public confidence could compromise the reputation for objectivity and independence that should be the hallmark of the profession in Nigeria. Therefore, safeguarding auditor’s independence is a key priority not only for auditors, but also for management and investors. In the global market of today, the users of financial statement rely on the information provided by the auditors on the credibility and reliability of the financial statements. All these studies were conceptualized and executed from the perspectives of developed nations. However, in Nigeria, there is a paucity of empirical studies in the same direction the foregoing perspective therefore make it desirable to investigate the impact of auditor’s independence on financial reporting empirical evidence from Nigeria.

1.2THE RESEARCH PROBLEM

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). With the introduction of the constitution (Suspension nd modification) (Amendment) Decree (1985 No. 17) in Nigeria, the directors of Nigeria companies are empowered to appoint, reappoint and remove their auditors and they are also to fix the auditor’s fees using the guidelines of the Auditor-General as an aid. The development therefore appears to put the auditors investigating and reporting independence in jeopardy and this may defeat the ideal principle and purpose of public audit and erode the independence and hence objectivity of report of the auditors. And the study seeks to answer question problem which are:

To what extent does the auditor’s independence impact on accountability in Nigeria financial reporting of companies?

What are the determinants of auditors’ independence in Nigeria companies and enterprises?

What is the relationship between the statutory audit quality and quality of financial reporting?

Are there professional and regulatory stipulations on auditor independence in Nigeria?

To what extent has auditor’s engagement in management advisory services influence the quality of financial reporting in Nigeria?

What are the factors that reduce the independence of auditors?

What are the factors which encourage the independence of auditors?

1.3AIMS AND OBJECTIVES OF THE STUDY

The aim of this study is to enhance audit quality credibility and reliability of financial reporting in Nigeria and seeks among other things to identify the factors of auditor’s independence. Specifically, the study intends to:

Examine the relationship between auditor independence in relation to the quality of financial reporting 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.

1.4SCOPE OF STUDY

The study covers the impact of auditor independence on financial reporting in Nigeria. The study is applicable to Nigeria companies, audit firms and users of financial information which operates in the same economic, social, legal and political environment. Benin is corporate capital of Nigeria it represents the entire major geographical and social-political divisions of the country. A study designed executed and carried out from this areas appears to be representatives of the corporate population of the country.

1.5SIGNIFICANCE OF 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.

1.6HYPOTHESES

The hypotheses proposed in this study are stated as follows:

There is a significant relationship between the statutory audit quality and quality of financial reporting.

There is no factor that reduces the independence of auditors.

There is no determinant of auditor’s independence in Nigeria companies.

There is a significant relationship between professional and regulatory stipulations on auditor independence in Nigeria.

1.7THE LIMITATION OF STUDY

The study has been limited to Nigeria empirical evidence, since all audit firms, companies and users of financial information are not covered in recent day. It tends to act as a constraint been limited to those companies in Benin.

The study is limited by time, data, and geographical location coverage, policy of respondent audit firms, companies and individual users.

Lastly, the study is limited due to lack of funds to travel to gather information, print out information from the source likewise the sample size as a Nigeria evidence and lack of time in combining the findings of this study and my personal working hours.