Abstract
The auditor’s independence is a
corner stone of the auditing profession, a crucial element in the statutory
corporate process and a key prerequisite for the adding of values to audited
financial statements. Corporate performance is an important concept that relates
to the way and manner in which financial resources available to an organization
are judiciously used to achieve the overall corporate objective of an
organization. The main objective of this study is to examine the impact of
auditor’s independence and corporate performance. Also, the study determines
the relationship between audit tenure and non audit services, and how corporate
performance is measured. The primary source of data which comprise of
questionnaire and personal interview were used in the study and it was found
that the provision of non audit service has a significant impact on auditor’s
independence in Nigeria. The study concludes that auditors independence may be
threatened when an auditor provide non audit services to their clients. Based
on the findings, it was recommended that legislative policies should aim at
disclosing valuable information such as audit and non audit services fees.
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
to the Study 1
1.2
Statement
of Problem 4
1.3
Research
Questions 5
1.4
Objective
of the Study 6
1.5
Statement
of Hypothesis(es) 7
1.6
Significance
of the Study 7
1.7
Scope
of the Study 8
1.8
Limitations
of the Study 8
1.9
Definition
of Terms 9
Chapter Two: Review of Related Literature
2.1 Introduction 12
2.2 Expectation Gap 18
2.3 Independence in fact and Appearance 19
2.4 Factors affection Independence of the
Auditor 22
2.5 Non-audit
services (NAS) 23
2.6 Management
Advisory System (MAS) 28
2.7
Empirical
Evidence of Reaction to Non Audit Services 30
2.8 Impact of Culture on Performance 36
2.9 Corporate Performance 37
2.10 What is Performance? 40
2.11 Rationality Behind Balances Scorecard 40
2.12 Internal Mechanisms for Good
Governance 43
2.12.1
External Mechanisms for
Good Governance 44
2.13 Professional Ethics 46
2.14 Ethical Consideration of Auditor Independence 47
Chapter Three: Research Method and
Design 49
3.1
Introduction 49
3.2
Research
Design 49
3.3
Description
of Population of the Study 50
3.4
Sample
Size 50
3.5
Sampling
Techniques 50
3.6
Sources
of Data Collection 50
3.7
Method
of Data Presentation 52
3.8
Method
of Data Analysis 52
Chapter Four: Data
Presentation, Analysis and Interpretation 54
4.1 Introduction
54
4.2 Presentation
of Data 54
4.3 Data
Analysis 54
4.4 Hypothesis
Testing 66
Chapter Five: Summary
of Findings, Conclusion and Recommendations
5.1 Introduction 72
5.2 Summary
of Findings 72
5.3 Conclusion
72
5.4 Recommendations
73
References
75
Appendix I 80
Appendix II 81
CHAPTER ONE
INTRODUCTION
1.1 Background
of the study
The auditor’ independence is a
cornerstone of the auditing profession. A crucial element in the statutory
corporate reporting process and a key prerequisite for the adding of value to
an audited financial statement (Mautz & Sharaf, 2009). In a general sense,
auditor’s independence has borne a relationship to the prevailing commercial
environment in different time periods. Independence is a state of mind
characterized by objectivity, and integrity in the part of the auditors. It
implies the performance of auditors work without being and avoiding undue
influence.
Corporate performance is the final
result of all activities. In evaluating performance, the emphasis is no
assessing the current behavior of the organization in respect of its efficiency
and effectiveness. Corporate performance is an important concept that relates
to the way and manner in which financial resources available to an organization
are judiciously used to achieve the over all corporate objectives of an
organization, it keep the
organization in business and creates a greater prospect for future
opportunities.
According to Ojo (2009), the
provision of non audit services by audit firm does not necessarily influence
the independence of auditors as other writers have said. However, where the
fees generated from such non audit service are considerably high (in proportion to the audit fees
earned by such accounting firms) and insufficient safeguards operates to
protect the auditors independence, this create a situation whereby the auditors
independence is likely to be compromised since the auditors may be denied
incentive contracts (in the from of fees generated from NAS) where he decides
to give a give a qualified opinion on the financial being audited.
There are number of performance
measurement tools. Which could be clubbed into two broad groups like (a)
Traditional measures (b) Nontraditional measures. Traditional measure which
indicate the financial strength, weakness, opportunities and threats are Return
on investment (ROI), Residual income (RI) etc but it is found that some users
of financial statement are interested on non financial performance of the
corporate bodies besides financial performance. In some cases some
nontraditional measurement tools are to be used like Economic Value Added,
Balanced Scorecard etc.
To measure over all corporate
performance, goals are set for each of these perspectives and then specific
measures for achieving such goals are determined, each of these perspectives is
critical and must be considered simultaneously to achieve overall efficiency
and effectiveness and to succeed in the long run. If any area is either
overemphasized or underemphasized, performance evaluation by the auditors will
become unbalanced, in this way, the aim of the concept is to establish a set of
measure – both financial and non financial through which a company can control
its activities and balance various measures to effectively track performance.
Traditionally, performance
measurement system measures the tangible and financial assets but an
organization has to measure and respond to intangible assets of value to the
substantial effect on the bottom line.
The provision of CAMA (2004) which
are appointment provision, disqualification provision, removal provision etc
and the rules of professional either like auditors not having financial
involvement in the affairs of their client, normal procedures to be followed
before accepting any new audit assignment. Auditors should not put his/herself
in a situation that will lead to conflict of interest etc are laid to ensure
auditors independence. The familiarity developed from lengthy auditors’ tenure,
personal relationships built through alumni employees have been alleged to
contribute to this erosion of auditors’ independence and corporate performance
(Freeka & Solomon, 2008). The consulting nature of non audit service also
puts auditors in managerial roles, potentially threatening the objectivity
about the transaction and account balance that they audit (Defond, Raghunandan
& Subramanian, 2002). In recant time, a great deal of attention has been
given to the importance of organization culture. This is because the importance
of culture to any group of people. Society, country and business organization
cannot be over emphasized. Organization culture comprises the attitudes.
Experience, beliefs and values of an organization.
Black (2003) defined organization
culture as a specific collection of values and norms that shared by people and
groups in an organization and that control the way they interact with each
other and with stakeholders outside the organization. Organization values are
beliefs and ideas about what kind of goals members of an organization should
pursue and ideas about the appropriate kind or standards of behavior
organizational members should use to achieve these goals.
1.2 Statement of Problem
Auditors’
independence is one
of the most important issues in accounting practice today. Independence
increases the effectiveness of the audit by providing assurance that the
auditor will plan and execute the audit objectively. Because of the importance
of auditors’ independence to audit quality performance in an organization, the
security and exchange commission (SEC) has engaged in substantial rule making
in this area without a conceptual framework. In the wake of the recent corporate
performance around the globe. Attention has been drawn to the issues of
auditors having market based institutional incentives to act independently in
protecting their reputation and independent (Watts & Zimmerman, 2003). The
question of whether auditors’ independence, organizational culture and mechanism
on governance have an impact on corporate performance has been the subject of
much debate and research. Auditors’ independence is an essential feature of an
efficient capital market. Managers have incentives to reduce agency costs in
the firm by hiring independent auditors (Jenson & Meckling, 2009).
Typically, the accusation made, that auditors have allowed inappropriate
accounting treatment which therefore affects their independence by the non
audit fees payable to them. The problems inherent in these study are those
auditors who may become too close to the company they are auditing or because
their objectivity may be challenged due to reliance on income from a single
source.
1.3 Research
Questions
In the light of the foregoing the
following research questions are raised.
1. Does
corporate governance positively affects corporate performance?
2. Does
organizational culture has any significant impact on corporate performance?
3. What
is the relationship between Audit Firm Tenure and The Provision of non Audit
Service?
4. Does
provision of non audit services have a significant impact on auditors’
independence?
5. Is
Balance scorecard a tool for measuring corporate performance?
1.4 Objective
of the Study
The aim of this study is to
empirically examine the auditors’ independence and corporate performance in
Nigeria. The study attempted to achieve the following objectives.
1. To
find out if corporate governance positively affects corporate performance.
2. To
determine if there’s a significant relationship between organizational culture
and corporate performance.
3. To
determine the relationship between Audit. Firm Tenure and the provision of non
audit services.
4. To
find out if the provision of non audit services have significant impact on
auditors’ independence.
5. To
how balance scorecard a tool for measuring corporate performance.
1.5 Statement of Hypothesis
The following hypothesis was stated.
Hypothesis One
HO:
Organizational culture does not have
any significant impact on corporate performance.
HI: Organizational culture has a positive
significant impact on corporate performance.
Hypothesis Two
HO: There is no positive relationship between
audit firm tenure and the provision of non audit services in Nigeria.
HI: There is a positive relationship
between audit firm tenure and the provision of non audit services in Nigeria.
Hypothesis Three
HO: Provision of non audit service has no
significant impact on auditor’s independence.
HI: Provision of non audit services has a
positive significant on auditors’ independence.
1.6 Significance
of the Study
This study is very significant, in
that the result of the investigation would contribute to the current debate on
the appropriateness or otherwise of audit firms providing non audit services to
audit clients. Different users of financial statement would equally be aware of
the inherent risk attributable to auditors providing non audit service. The
study is significant in the following areas;
i. Accountants: Professional accountants in the
country will also benefit from the findings of the study because it will reveal
the state and quality of the accounting and audit services they render to audit
firms in Nigeria.
ii. Government: The study is of significance to the
Nigerian government and institutionalized financial regulators in the country
because it will show where legislations needs to be made or modified to provide
for more effective regulation of the business activities in the country.
iii. Statutory Bodies: 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
The focus of the subject matter in
this research is the auditors’ Independence and corporate performance in the
private sector. The geographical area used in the study includes Banks in Edo
and Delta States.
1.8 Limitations
of the Study
This study would have gone beyond its current bounds, if not for the
following limitations. The time frame within which we are expected to conclude
this study is significantly limited and as such would greatly limit the scope
of the study. It is only perceptions of auditors and practicing accountants in
Edo, Delta, Lagos, Ondo State and banks in Port Harcourt were used. This has
again limited the scope of the study. The selection process of respondent for
the study was not completely random; although efforts were made to administer
the questionnaire to randomly selected respondents. It was observed that some
of the respondents were reluctant in giving the invitation required. It is the
therefore not possible to ascertain the extent to which this attitude would
have influenced the reliability of the information provide.
1.9 Definition
of Terms
Audit: The
independent examination
of/and expression of an opinion on the financial statement/ performance of an
enterprise by an appointed auditor in pursuance of that appointment and in
compliance with any relevant statutory obligation.
Audit fees: Fees paid to a company’s auditors
which are approved by the shareholders at an AGM.
Auditors Qualification: A form of words in a report from the
auditors of a company’s account. Stating
that in their opinion the accounts are not a true reflection of the
company’s finance position.
Auditors Report: A report written by a company’s
auditors after they have examined the accounts of the company.
Finance Statement: A document that shows the financial
statement of a company.
Integrity: A state of honesty but with a wide
range of qualities such as fairness, candour, courage, intellectual honesty and
confidentiality.
Objectivity: A state of mind which excludes
bias, prejudice and compromise and which gives fair and impartial consideration
to all matter that are relevant to the present task, disregarding those that
are not.
Non-audit services: All services provided by an auditor
that are not considered as an audit.
Balance scorecard:
Balance Scorecard is an organizational framework for implementing and managing
strategy at all levels of an enterprise by linking objectives, initiatives and
measures to an organization’s strategy.
Independence: Function of character with
characteristics of integrity and trustworthiness being essential or the absence
of interest that creates an unacceptable risk of bias.
Corporate performance: Is the outcome of the frame won
effort during a specified period. An accomplishment of an organization. The
past that can realistically be expected rather than what is desired.
Organizational culture: Is a specific collection of values
and norms that are shared by people and groups in an organization and that
control the ways they interact with each other and with stakeholders outside
the organization.
Corporate Governance: Corporate governance involves a
system by which governing institutions and all other organization relate to
their communities and stakeholders to improve their quality of life. it is
therefore important that good corporate governance ensures transparency,
accountability and fairness reporting.
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