Abstract
This
project work titled “the impact of conflicts of interest on the auditor’s
independence” using a price water house coopers as a case study, examines
specifically the concepts of independence and conflicts that may arise when it
is lacking. Independence are identified and discussed on how to manage threats.
The primary and secondary sources of data were used in gathering information
for the success of the project work. It was discovered that auditor’s conflict
of interest greatly influence the auditor’s independence. It was concluded that
the conflicts of interest exists from the auditor to the structures that govern
the industry, the institutions and legislation. Finally, it was recommended
that auditors should be chosen not by management of the company, but by the
committee which should comprise of the Board of Directors (BODs).
TABLE OF CONTENTS
Title
Page i
Certification ii
Dedication iii
Acknowledgements iv
Abstract
v
Table
of Contents vi
Chapter
One: Introduction 1
1.1
Background of the Study 1
1.2
Statement of Problem 3
1.3
Statement of Research Problem
1.4
Objectives of the Study 6
1.5 Research
Hypotheses
1.6 Scope of the Study 6
1.7
Significance of the Study 7
1.8
Limitation of the Study 7
1.9
Definition of Terms 8
Chapter
Two: Literature
Review 12
2.1
Introduction 12
2.2
The Historical Origin and Development of
Auditing 12
2.3
The Concept of Independence 21
2.4
Auditor and the Importance of
Independence 23
2.5 Professional
Responsibility of an Independent
Auditor 25
2.6
The Companies and Allied Matter Act 1990
and the
Auditor’s Independence 27
2.7
Conflicts of Interest 32
2.8 Price Water House Cooper: History and
Milestones 54
Chapter
Three: Research
Method and Design 59
3.1
Introduction 59
3.2
Research Design 59
3.3 Description of Population of the Study 60
3.4 Sample Size 60
3.5 Sampling Techniques 60
3.6
Sources of Data Collection 60
3.7
Method of Data Presentation 61
3.8 Method
of Data Analysis 62
Chapter
Four: Data
Presentation, Analysis and
Interpretation 64
4.1
Introduction 64
4.2
Data Presentation 64
4.3 Data Analysis 64
4.4
Hypothesis Testing 79
Chapter
Five: Summary,
Conclusion and
Recommendations 83
5.1 Introduction 83
5.2 Summary of Findings 83
5.3 Conclusion
84
5.4 Recommendations
86
References
89
Appendices 91
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Conflict
of interest and auditor’s independence are two concepts that must be considered
properly in this project work. If there is any way auditors’ conflict of
interest affects his independence.
To
start with auditor’s conflict of interest according to Andrew (2004) is a
setting where an auditor trade off the influence and been biased of his report.
There are two types of conflicts of interest in this regard. They are conflict
where auditor earns reward from a third party between form and clients interest
and conflict between the interests of two or more client e.g. where an auditor
or audit team has a long term relationship.
While
auditor’s independence refers to as the independence of the auditor from
parties that have an interest in the financial statement of an entity.
This
usually safeguard the auditor’s integrity and also an objective approach to the
audit process.
It
is obvious that there is auditor’s conflict of interest i.e. either of the two
types of conflict of interest, there is usually auditor trade of the influence
and been based that could make auditor not given accurate report, and then
affect auditor independence.
The
definition of auditor and auditor’s independence over the decades, have evolved
along with accounting profession itself the concept independence was considered
of great importance, and the focus was am elimination of conflict of interest
that arose from financial relationships between auditors and their clients.
The
twin sides of a coin are the concept of audit and the concept of independence.
The auditor who has lost his independence has lost his reason, he has become a
dependent auditor and will be in conflict of interest with his clients.
Independence remains as crucial an issue as it was in the nineteenth century,
and is still required to be demonstrated.
1.2 Statement of Problem
Financial
reports are meant to be a formal record of business activities and these
reports are meant to provide an overview of the financial position and
profitability in both short and long term of companies to the users of these
financial statements such as shareholders, managers, employees, tax analyst,
banks, etc. But in recent times, the financial manipulations, weak internal
control systems, ignorance on the part of the board of directors and audit
committee, manipulation on the part of the reporting auditor and other
fraudulent activities that occur within companies, creating a negative goodwill
to the general public.
A
typical example of a financial statement malfunction is the popular case of
Enron. Enron was one of the largest energy companies in the US.
By
fraud and bribery, Enron executives avoided income taxes, and this lead to the
downfall of this multi-billion dollar firm. Importantly, this wasn’t the first,
a similar case appeared in 1973, when equity funding an insurance firm located
in Los Angeles went bankrupt (Don, 2006).
In
fact every year, a new business fraud is unraveled, often with similar
components, corporate instability, uniformed accountants, high-level
connections, and broke investors (Knapp, 2005). Enron started in July 1985 when
Omaha-based inter-north merged with Houston natural gas.
Kenneth
Lay, who had originally held positions in academic and the government, became
chief executive and chairman. By 2001, Enron had grown to one of the of the
largest energy companies in the world. However, the company sudden by unraveled
and collapsed. Some other examples of corporate failure on the local scene are
Lever Plc now Unilever in (1998) and African Petroleum (2000). From the above
discussions, there is need to ensure credibility of financial statement of
companies in order to increase users confidence and thereby affecting investors
behaviour.
This
study seeks to investigate why corporate organizations fail and how it is
occasioned by the independence of auditors.
1.3 Statement
of Hypothesis
A
research hypothesis is an assumption of statement, which may not be true
concerning one or more population.
There
are two types of hypothesis, the null hypothesis (Ho) and the alternative
hypothesis (Hi). The null hypothesis is a negative type of proposition of the
research hypothesis. The alternative hypothesis is accepted once the wall
hypothesis is rejected. Below is the formulated hypothesis.
Hypothesis
One
HO: Conflicts of interest
does not influence the auditors independence
HI: Conflict of interest influences the
auditors independence
Hypothesis
Two
HO:
Conflicts of interest does not cause
bias judgment and decisions by an auditor
HI:
Conflict of interest can cause bias
judgment and decisions by an auditor.
1.4 Objectives of the Study
The
main objective of this research is to examine specifically the impact of
conflict of interest on auditors’ independence.
The
specific research objectives are:
1. to assess the impact of interest influences
on the auditors’ independence.
ii. to evaluate whether the conflict of
interest can cause bias judgment and decisions by an auditor.
1.5 Scope of Study
The
scope of this research was limited to price Water House Coopers, which is one
of the largest professional service providers globally.
1.6 Significance of the Study
This
study will help reveal the conflicts of interest of auditors, its impact on
auditors’ independence and its findings and recommendations will be of benefit
to:
a. Auditors: The auditors will benefit from
this study in the sense that it reveals the conflicts of interest which will be
an advantage to them in carrying out their audit work.
b. Individuals who may wish to be auditors in
future. This study will serve as guidelines for them in the course of carrying
out their audit exercise.
c. Organizations that hire auditors
high-lightening them on the rules governing the independence of auditors.
1.7 Limitations of the Study
So
many limitations were met during the process of this research work. The first
among others was getting information relevant to the research combining and
relating the research work. Another limitation are:
Finance: There was also the challenge of
inadequate finance faced by the researcher to carry on adequate research in
respect of the aforementioned topic.
Time: There was often time consuming in
sourcing for research materials and other relevant information. This, in
addition to the above mentioned was a great challenge to the researcher.
1.8 Definition of Terms
Accountability:
It
is the obligation stewards or agents to provide relevant and reliable
information relating to resources over which they have control and which have
effects on others.
Accounting
Principles: These are principles according to which
the amounts of all items in a company’s account are to be determined.
Audit
Opinion: This is an opinion expressed by an auditor upon
financial statements,
Statement
of Financial Position: This shows
the assets, liabilities and capital of an organization at a particular data.
Statement
of Comprehensive Income: This is a financial statement of an
enterprises or income and expenditure.
Auditors
Attitude: It is
a combination of education, experience and judgement which provides a frame of
mind, a point of view toward his work, that enables and auditor to appraise his
problems accurately.
Audit
Services: Fee
based services provided by the qualities to provide reasonable assurance that
the company’s financial statements are fairly presented.
Auditor: The external professional charged with the task of attesting to
the fair presentation of company financial statements.
Auditor
Independence: The expected relationship between the
auditor and client in order to receive reasonable assurance that the judgement
made by the auditor are free age any influence by the client or other parties.
Conflict
of Interest: The perceived or actual state of an
individual where the judgements and opinions are developed to promote the interests
of the individual rather than the other interested stakeholders.
Non-Audit
Services: Free based services performed by the auditing firm
which are not related to the audit engagement.
Auditors
Report: A report made by an auditor upon financial statements.
Financial
Statements: The statement of financial position, statement
of comprehensive income, statement of cash flows or total recognized gains and
losses, notes and other statements and explanatory material all of which are
identified in the auditors reports as being part of the financial statement.
Fraud:
The
use of deception to obtain an unjust illegal financial advantage or intentional
misinterpretation by one or more individuals among management, employees,
auditors or other parties.
True
and Fair View: The accounting standards obtained a
legal opinion that stated true
and fair view which is to be adhered to by auditors.
Low-Balling:
The
reduction in audit fees by an auditor, so as to protect or establish the
relationship between the auditor and clients and to build the relationship that
could become profitable later.
Objectives
Assessment: An opinion or a judgement about the
financial statements of a company, that is made by an auditor, and is free from
influence of personal feelings, from clients and other parties.
Audit
Evidence: The information obtained in arriving on the
condition on which he bases his opinion about the financial statements of a
company.
Audit
Fees: The combined and total fees generated by the auditor
for providing service to the client.
Institution
Provisions: This include auditing standard and
auditing guidelines, the statements issued by profession accounting bodies
setting up basic principles, procedures and ethics to be adopted by members in
the conduct of audit and how they should be applied.
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