There has been
celebrated cases of corporate frauds and financial misappropriation in
Nigeria’s big corporations. The series of frauds have left a sense of doubt
about the “unbiasedness” of external auditors to render an attest function on
the credibility of published financial statements. In this light, this research
sought to empirically investigate the Independence of
auditors and reliability of financial reports in banking industry. The research adopts a survey and a
descriptive research design with a well-structured questionnaire. Data were
basically sourced through primary means. The population of the study comprise
staff of the twenty four (24) commercial banks in Nigeria. Five banks were
selected from the twenty four and One hundred (100) respondents were sampled,
twenty from each banks. Four hypothesis were formulated and tested with the
used of Chi-square analysis. The analysis resulted into rejecting the four null
hypotheses and concluding that; there is significant relationship between audit
tenure and reliability of auditors’ financial reports; audit firm Competition
for service affect reliability of data; auditor-client-relationship affect the
reliability of financial report and that there is relationship between audit
fee and reliability of auditors’ financial report. Among other
recommendations, it was recommended that standards of independence for auditors should
be designed to promote an environment in which the auditor is free of any
influence, interest or relationship that might impair professional judgment or
TABLE OF CONTENTS
Chapter One: Introduction
to the Study
of the Problem
1.3 Objectives of the Study
1.4 Research Questions
1.5 Statement of Research Hypotheses
1.6 Scope of the Study
of the Study
1.8 Significance of the Study
Definition of Key Terms
Chapter Two: Literature Review
2.2 Conceptual Framework
2.4 Empirical Framework
2.5 Gaps in Literature
Chapter Three: Research Methodology
3.4 Sample Size
3.5 Sampling Technique
3.6 Re-Statement of Research Hypotheses
3.7 Sources of Data Collection
3.8 Instrument of Data Collection
3.9 Validity and Reliability Test
3.10 Methods of Data Analysis
Chapter Four: Data Presentation and Analysis
Personal Characteristics of the Respondents
of Respondents to the Problem Areas
And Interpretation of Hypotheses
4.6 Discussion of Results
Chapter Five: Summary, Conclusion and
5.1 Summary of Findings
for Further Studies
1.1 Background to the Study
Auditor’s independence is seen as the back
bone of the auditor’s profession. It is an important part of the statutory
financial reporting process and a necessary condition for adding value to all
audited financial report.
Izedonmi (2000) opines that independence is
of the mind, characterized by objectivity and integrity on the part of the
auditor. Auditor’s independence is an important ingredient in audit practice.
De Angelo (1981) and Simunic (1984) posit that there is an understanding that
auditors face substantial economic cost when there is an occurrence of audit
failure but in contrast Becker, Defond, Jiambalio and Subramayan (1998).
DeFond, Raghumandan and Subramanyam, (2002) say that independence could be influenced because auditors are reluctant to
bring up issues pertaining to the
preparations of the financial statement at the risk of losing lucrative fees
from its clients. Becker et al (1998) and DeFond et al (2002) also say that
independence could be influenced because auditors are reluctant to bring up
issues pertaining to the preparations of the financial statement at the risk of
losing lucrative fees from its clients, thereby making the subject
The concept of auditor independence changed
during the late 19th and early 20thcenturies. Because there was a
large shift from capital coming from some sources to capital deriving primarily
from domestic sources articulated change that large corporations were based on
the separation of ownership from management. This emphasized the growing
importance and role of accounting and auditing (DeAngelo 1981). The auditors’
primary duty was to serve the needs of proprietary interest, which comprises of
shareholders and general public. The creation of SEC laid emphasis on standards
for financial reporting and auditing. The concept of auditor independence shifted
in favor of objectivity and neutrality in reporting (Carcello, 2004).
In order for the users of financial statements to gain
assurance that the data are being reported, properly measured and fairly
presented, independent certified auditors audit financial statements and
express an opinion on the fairness of these statements. The value of auditing
services depends upon the fundamental assumption that the certified auditors
are not influenced by their client-firms or by other financial bodies
(governmental or non) (Reynolds & Francis, 2001).
The term audit independence refers to the ability of the
certified auditor to act with integrity and impartiality during his/her
auditing practice (Dye, 1993).The audit of accounts in the corporate sector by
an independent auditor is obligatory by statute, which defines his
duties,rights and powers. It is essential because of the separation of
ownership from the management in the corporate sector asthe former needs
someone who can keep a professional watch on the latter and to whom they can
trust for the reliabilityof accounts as the preparation of financial statement
is the prerogative of the management. The auditor has not much tosuggest on the
form and adequacy of financial statement and independent auditor is responsible
for his report.
Independence is fundamental to the
reliability of auditors’ reports. Those reports would not be credible, and
investorsand creditors would have little confidence in them, if auditors were
not independent in both fact and appearance, whichit expressed by Council of
the American Institute of Certified Public Accountants (AICPA) in a statement
adopted in1947. Auditor independence is considered the hallmark of auditing
profession. Independence is viewed as the mostessential factor in business
sector in protecting the interest of several parties.
The issue of Auditor’s Independence as an
essential platform for quality audit is not debatable. Auditor’s Independence is commonly referred
to as the cornerstone of the auditing profession since it is the foundation of
the public’s trust in the accounting profession. More so in this present era of
the adoption of new globally accepted rules on financial reporting, the
International Financial Reporting Standards (IFRS) and our nation’s yearn for
direct foreign investment for national development.
Independence, both historically and
philosophically, is the foundation of the public accounting profession and upon
itsmaintenance depend the profession’s strength and its stature (Carey, 1970).
Statement of the Problem
The recent corporate accounting scandals has
cast doubt on the quality of reported earnings and the ability of audit
processto effectively constrain earnings management of companies across the
world and Nigeria in particular(Badawi, 2008; Enofe, 2010). Differences in
qualityof the audit process and auditors reportsresults in variations in the
credibility of auditors and the reliability of the earnings reports of
companies. Theserecent corporate financial failurespose a great challenge to
the authenticity, integrity, effectivenessandsignificanceof the audit function.
Badawi (2008) reports a list of companies involved in cases of accounting
scandals related to poor audit quality and earnings manipulations in the past
decade. In Nigeria, corporate scandals include the cases of Savannah Bank and
African International Bank (Odia, 2007); Wema Bank, Nampak, Finbank and Spring
Bank (Adeyemi &Fagbemi, 2010); and more recently Intercontinental Bank
Plc., Bank PHB; Oceanic Bank Plc.and AfriBank Plc.
Apart from some of the international instances
mentioned above, we are also very familiar with some national cases. Aruwa
& Atabs (2011) provided instances of creative accounting and fraudulent
financial reporting in Nigeria to include Alpha Merchant Bank Plc-accounting
problem and market manipulation, Lever Brothers Plc-exaggerated profit through
the use of questionable accounting methods and AP Petroleum Plc-false financial
reporting. The Cadbury Nigeria Plc misstatement case, which overstated its
earnings in its books of account and sanctioned by the Security and Exchange
Commission, is well known.
In the Nigeria
banking sector, according to the Guardian Newspaper of 21 August 2009, the
audit conducted by the Central Bank of Nigeria (CBN) into the activities of the
some registered banks in 2009 revealed that they were experiencing huge
financial difficulties in their operations.
Consequently in August 2009, CBN injected N420 Billion ($2.8 Billon)
into the first five banks (Afribank, FinBank, Intercontinental Bank, Oceanic
Bank and Union Bank) which failed the CBN Audit. Two months later, an
additional N200 billion was injected to stimulate the liquidity of four other
banks (Bank PHB, Equatorial Trust Bank, Spring Bank and Wema Bank). This
injection was done to stabilize the banks and ensure they remained going
concerns after their former MDs were sacked for reckless lending and lax in
corporate governance (Nigeria Tribune 17 August 2009 and This Day 12 December,
Recently also, the
Guardian newspaper of 17 October 2011, carried a report that 374 government
agencies are yet to clear since 1999 to date the backlog of unaudited accounts
and submit to the Auditor-General of the Federation as required by law. The
Public Accounts Committee (PAC) of the National Assembly and the
Auditor-General are yet to agree on the reasons for such serious lapses by the
managers of public funds.
Accountants and Auditors in particular, here are part of our worries. We must be motivated to proffer solutions to
this great challenge. In spite of the enabling IT audit tools and the various
professional standards issued for guidance and efficient audit work, there are
still reported cases of lapses and scandals. The question is why have there
been failed banks and companies?
independence in fact is a mental state, investors and other users of financial
statements cannot accurately assess actual auditor’s objectivity; they can only
evaluate an auditor’s appearance of objectivity. Thus, even when an auditor acts independently
in fact and issues an unbiased audit opinion, investor confidence is eroded if
investors and other users of the financial statement information do not
perceive that the auditor was independent in appearance. Many difficulties as earlier said lie in
determining whether an auditor is truly independent, since it is impossible to
observe and measure a person’s mental attitude and personal integrity.
Based on the above
problems, the followings are identified to affect the reliability of financial
report of auditors and their dependency;
Length of consistent use of an audit firm. The
longer the length of service provided by an audit firm, the more the
familiarity with the directors and the higher the chance of compromise.
Audit firms competes to get services from clients.
Auditors could secretly bargain with some member of the executive the secure
service from the firm
Auditor – client relationship could affect the
reliability of financial report. If auditor has any form of relationship with
client it could affect the report.
Charges / audit fee of the firm can determine the
reliability of financial report. i.e KPMG fianancial report should be reliable
than a street auditor.
of the Study
The primary objective of this research isto
elucidate on the independence of auditors and reliability of financial reports in
thebanking industry. Other specific objectives includes:
the effect of audit tenure on reliability of financial reports
examine the effect of competition of service by auditors on the reliability of
examine the effect of auditor-client-relationship on reliability of financial
the relationship between audit fee and reliability of financial reports.
Supporting the research objectives set
outabove, the following questions wereadvanced and answered:
extent does audit feeaffect the reliability of financial report?
audit tenure affect thereliability of financial report?
extent does audit firm compete for service from clients?
does auditor-client-relationship affect reliability of financial report?
of Research Hypotheses
The following research hypotheses flowfrom
the research questions that were raised;
Ho: There is no significant relationship between audit tenure and
reliability of auditors’ financial reports
is significant relationship between audit tenure and reliability of auditors’
Ho: Audit firm competition for service does not affect reliability of
firm Competition for service affect reliability of data
Ho: Auditor-client-relationship does not affect the reliability of
affect the reliability of financial report
Ho: There is no relationship between audit fee and reliability of auditor’s
HI: There is relationship between audit fee and reliability of
auditors’ financial report.
of the Study
This research centers on the independence of
auditors within the context of some banks in Nigeria. The scope of the study
cover five banks namely, First Bank, Guaranty Trust Bank, United Bank for
Africa, Access Bank and Diamond Bank located in Lagos. The population of the
study covers the entire management staff of banks of the study. The researcher
tends to draw a sample of one Hundred (100) from the population study. Stratify
random sampling will be adopted in selection of respondents. Data will be
sourced by both primary and secondary means.
of the Study
In the course of conducting
this research work it is expected that the following will constitute
impediments to the effective conduct of the study
Access to Data: inability to access relevant
information is a foreseen challenge to the success of this research. The tax
authourity may not reveal data or a true information which they which they may choose
to keep for themselves.
Time Constraint: this study would have choose
to cover a larger scope to consider the thirty-six state tax authority which
would yield a more reliable result but due to the limited time available, the
scope is limited to Lagos State tax authority.
High cost of running a large area: Also the
financial implication of covering the entire nation could be a predicament to
the success of this research.
Despite all this limitations mentioned above
and hindrances, the research study no doubt will turn out to be successful.
of the Study
This research dwells on the independence of
auditors particularly within the context of banking industry in Nigeria. The
findings of this research are expected to contribute to existing body of
Practicing auditors in Nigeria are
anticipated to become more informed of the intricacies surrounding auditor
The academic community; students and future
researchers will also benefit enormously from the outcome of this research.
research is based on a survey of selected banks in Nigeria that are listed on
the Nigerian Stock Exchange. In addition to the primary data which will be
collected through questionnaires, secondary data would be used. The secondary
data will be gathered from annual reports from CBN, the Securities and Exchange
Commission, some would be obtained from the Nigerian Accounting Standards,
while some will be obtained from the different head offices of banks in Lagos
primary and secondary data will be analyzed using, descriptive statistics and
Chi-Square analysis was used in analyzing the data gathered.
of Key Terms
Independence: is the main means by which the auditor
demonstrates that he can perform his task in an objective manner” (FEE 1995)
and ‘Freedom from those pressures and other factors that compromise, or can
reasonably be expected to compromise, an auditor ability to make unbiased audit
decisions’ (ISB, 2000).
Financial statements.A structured representation of historical
financial information, including related notes, intended to communicate an
entity's economic resources and obligations at a point in time or the changes
therein for a period of time in accordance with a financial reporting
of audit: refers to the number of years audit firms or engagement
partners have spent on the audit of a particular client
which constitute the source of non-audit income, is be described as any other
service rendered to an audit client different from the examination of accounts
and expressing a professional opinion thereof. These services are also referred
to as consultancy services
Audit Evidence.Information used by the auditor in arriving atthe conclusions on which
the auditor's opinion is based.
Audit Risk.The risk that the auditor expresses an inappropriateaudit opinion when
the financial statements are materially misstated.Audit risk is a function of
the risks of material misstatementand detection risk.
Auditor:The term used to refer to the person or persons conductingthe audit,
usually the engagement partner or other members ofthe engagement team, or, as
applicable, the firm.
Detection Risk: The
risk that the procedures performed by the auditor to reduce audit risk to an
acceptably low level will not detect a misstatement that exists and that could
be material, either individually or when aggregated with other misstatements.