CHALLENGES FACING AUDITOR’S INDEPENDENCE IN PRIVATE SECTOR ORGANISATIONS IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1      Background to the Study

Over the past three decades, Nigeria has witnessed a huge growth in its private sector with the development of free enterprise, and influx of foreign corporations (Zhao & Murinde; 2011, Ezeoha, 2007; Ningi & Dutse, 2008). Also, the level of private sector investments increased the need for fairly stated financial statements became more important.

This surge in the private sector came along with many positive and negative aspects. The economy witnessed a rapid growth in the level of corruption, and fraud perpetuated by businesses. This pointed to the need for further governmental efforts to regulate business reporting in the country (Ayoola-Akinjobi, 2010).

Auditing is not yet well developed in Nigeria. Currently, there are two accounting bodies, Institute of Chartered Accountants of Nigeria (ICAN) and Association of National Accountants of Nigeria (ANAN), recognized in the country to regulate the practice of accounting, however, ICAN is the oldest and most dominant accounting body in Nigeria. The house and senate approved a bill to set up a third accounting body (Certified Public Accountants of Nigeria, 1998), but the bill was not signed by President Obasanjo before he left office, and his predecessors are yet to sign the bill into law. While both bodies have witnessed great improvements in their regulation of the practice of accounting in the country, they have not done much in the area of auditing.

Recent reports of questionable accounting practices employed by some companies in Nigeria have brought the issue of auditor independence to the forefront, and put the auditing profession in a serious credibility crisis (Otusanya & Lauwo, 2010). In response to this, the public has called for auditors to be independent of their clients.

Audit independence refers to the ability of the external auditor to act with integrity and impartiality during his/her auditing functions. Two types of auditor independence were developed by Mautz and Sharaf (1961) namely practitioner-independence (or independence in fact), and profession independence (or independence in appearance). Communication of accurate financial statements is vital to the operation of the economy since users of financial statements depend on this information to make financial decisions. To increase the confidence in their financial statements, companies utilize the services of external independent auditors to audit their books. Independent auditors audit the financial statements and express an opinion on the fairness of the statements. The confidence placed on these statements depends ultimately on the perceptions held by the users of these statements regarding the independence of the external auditors. While the external auditors may in fact be independent of the management of the company being audited, if they are perceived not to be independent, then the value of their opinions to the users of the statements is diminished.

1.2      Statement of Problem

The concept of independence is a cornerstone of the accounting profession. The main aim of employing the services of an auditor in an organization is to audit the financial statement in order to produce a report that will add credibility to financial report in practical terms if independence of the auditor is in place. This research is to ascertain the challenges facing auditor’s independence on management decision making process and to proffer solutions on the ways forward to enhance auditor’s independence in Nigeria.

1.3   Research Questions

Below are research questions meant to direct the study.

i.      Does the effectiveness of auditor’s independence have an impact on the report given?

ii.     Does the increase in credibility on the financial statement have an impact on user?

iii.    To what extent do auditors know and appreciate relevance of independence?

iv.    To what extent can one appraise the areas of weakness and strength with a view to making recommendation on possible improvements where necessary?

v.     Of what relevant is the provision by statutory bodies and standard on auditor’s independence?

1.4   Objectives of the Study

The level of reliance on the audited financial statement by the users is not that encouraging due to the ineffectiveness, of auditor’s independence. The aim of this project is to achieve the following objective;

i.      To evaluate the impact of auditors independence on audited report.

ii.     To increase credibility on the financial statement to the user.

iii.    To ensure that auditors know and appreciate relevance of independence

iv.    To appraise the areas of weakness and strength with a view to making recommendation on possible improvements where necessary.

v.     To assess relevant provision by statutory bodies and standard on auditor’s independence and as certain how credible it has been. If not to evaluate and give necessary suggestions that will help appraise the system.

1.5   Statement of Hypotheses

In order to achieve the objective of this study, the following hypotheses are raised.

Hypothesis One

Ho:  Auditors’ independence does not have a direct impact on the auditor’s report.

H_I:    Auditors independence have a direct impact on the auditor’s report.

Hypothesis Two

Ho:  There is no significant relationship between the provision of statutory bodies and auditors independence.

Hi:   There is significant relationship between the provision of statutory bodies and auditors independence.

Hypothesis Three

Ho:  There is no significant relationship between auditors and appreciating relevance of audit independence of auditors in private sector organization in Nigeria. 

Hi:   There is a significant relationship between auditors and appreciating relevance of audit independence of auditors in private sector organization in Nigeria.

Hypothesis Four

Ho:  There is no significant relationship between weakness and strength with improvement on audit dependence to private sector organization in Nigeria.

Hi:   There is a significant relationship between weakness and strength with improvement on audit dependence to private sector organization in Nigeria.

Hypothesis Five

Ho:  There is no significant relationship between the provision of statutory bodies and auditor’s independence to private sector organization in Nigeria.

Hi:   There is a significant relationship between the provision of statutory bodies and auditor’s independence to private sector organization in Nigeria.

1.6   Significance of the Study

This study aims at evaluating the impact of auditor’s independence on audited report and gives insight into the effect to the users of such reports. It is also to assess relevant provision by statutory bodies and standard on auditor’s independence and ascertain how credible it has been.

1.7 Scope of the Study

This research focuses on the independence of auditors and its impact on audit report in accounting and its scope is centered on selected audit firms in the country using some audit firms in Benin City, Edo state as case study. The study covers the range between 2008 -2013 and the sample size of 30 is used for the population.

1.8   Limitations of the Study

The limitation of this study was the difficulty in getting relevant journals that is related to the area of study.

1.9   Definition of Terms

Audit: it is a process carried out by suitably qualified auditor where the accounts of business entities, including limited companies, charities trusts and professional firms are subjected to scrutiny in such details as will enable the auditor.

Auditing: It is defined as the process by which a competent qualified independent person accumulates and evaluates evidence about quantifiable information relating to a specific economic entity for the purpose of ascertaining the compliance with any relevant statutory obligation.

Auditor: Is an auditor as an expert accountant who makes an examination of accounting data in order to form his opinion as to the reliability of those data.
Independence: This is the independence of the auditors mind in order to form an objective opinion of the financial statement examined by him without any direct interference from his client.

True and fair view: This means accounts prepare in accordance to the generally accepted accounting principles.

Audit Report: This is the opinion of the auditor after due examination of the financial statements. Audit report is a written summary of the findings of the auditors during their audit work along with their opinion on such findings. The report may either be the domestic report also called letter of weakness addresses to owners of the organization (in case of company’s shareholders).

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