auditor’s independence is a veritable tool of the auditing profession, a
crucial element of the statutory corporate reporting process and a key
ingredient of the added value to an audited financial statement. The broad
objective of this study is to examine the impact of auditor independence on
corporate performance and also to determine the relationship between audit
firms tenure and the provision of non audit services. The primary source of
data collection was used to gather relevant information for the study while the
z-score statistical tool was used to test the hypothesis. The findings revealed
that there is significant relationship between audit firm tenure and the
provision of non-audit services and that the provision of non-audit services
have significant impact on auditor independence. It was concluded that the
provision of non-audit service impair the auditor’s independence by making the
auditor economically dependent on the client and that the consulting nature of non audit services reduces the auditor’s
objectivity. It was however recommended among others that management executives
who just arrived in an organization should have a detailed understanding of the
existing culture before initiating new ones.
TABLE OF CONTENTS
Title Page i
Table of Contents vi
Chapter One: Introduction 1
to the Study 1
of Problem 3
of the Study 5
of Hypothesis 5
of the Study 6
1.7 Scope of
the Study 7
of the Study 8
of Terms 8
Chapter Two: Review of Related Literature 12
Objectives of Auditor Independence 15
Services and Auditor Independence 20
in Fact and Appearance 24
Audit Services (NAS) 28
Evidence of Reaction to Non-Audit Services 30
of Balance Scorecard 35
Cornerstone of the Profession 38
to Auditor Independence 40
Chapter Three: Research Method and
of Population to the Study 45
of Data Collection 46
of Data Presentation 46
3.8 Method of Data Analysis 47
Chapter Four: Data Presentation, Analysis and Interpretation 48
of Data 49
Chapter five: Summary of Findings, Conclusion and
of Findings 60
Background to the Study
auditor’s independence is a cornerstone of the auditing profession. A crucial
clement in the statutory corporate reporting process and a key prerequisite for
adding value to an audited financial statement (Mautz & Sharaf, 2003). 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 on the part of the
auditors. It implies the performance of auditors work without being biased and
avoiding undue influence.
performance is the final results of all activities. It evaluating performance,
the emphasis is on 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
overall corporate objective of an organization; it keeps the organization in
business and create a greater prospect for future opportunities.
provision of non-audit services by audit firms does not necessarily influence
the independence of auditors (Jensen & Meckling, 2006). However, where the
fees generated from such non audit services are considerably high (in
proportion to the audit fees earned by such accounting firms), this may
jeopardize auditor independence.
This create a situation whereby the auditors independence is likely to be
compromised since the auditor may be denied lucrative contracts (in the form of
fees generated from NAS) where he decides to give a qualified opinion on the
financial statement being audited.
are numbers of performance measurement tools, which could be classified into
broad groups which include (a) traditional measures (b) non-traditional
measures. In some case, some non-traditional measurement tools are to be used
like economic value added, balance scorecard, etc in the long run, if any area
is emphasized, performance evaluation by the auditors will become unbalance. 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.
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 (Elliot, 2001). Because of the
importance of auditors’ independence to audit quality scandal 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 (Zmijwski,
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, 2006).
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
the light of the foregoing the following research questions are raised.
i. Does auditor independence have a
significant impact on corporate performance?
ii. What is the relationship between audit firm
tenure and the provision of non-audit service?
iii. Does provision of non-audit services have a
significant impact on auditors’ independence?
Objective of the Study
aim of this study is to empirically examine the auditors’ independence and
corporate performance in Nigeria. The study attempted to achieve the following
i. To examine the impact of auditor
independence on corporate performance.
ii. To determine the relationship between audit
firms tenure and the provision of non audit services.
iii. To investigate the impact of the provision
of non-audit services on audit independence.
1.5 Statement of Hypotheses
following hypotheses formulated for the study were tested with a view to
achieving the objectives of the study.
HO: Auditor independence has no significant
impact on corporate performance in Nigeria.
HI: Auditor independence
has significant impact on corporate performance in Nigeria.
There is no significant relationship
between audit firm tenure and the provision of non-audit services.
HI: There is significant relationship between
audit firm tenure and the provision of non-audit services.
HO: The provision of
non-audit services have no significant impact on auditor independence.
HI: The provision of
non-audit services have significant impact on auditor independence.
Significance of the Study
study is very significant, in that the results of the research work would
contribute to the current debate on the appropriateness or otherwise of audit
firms providing non audit services to audit clients and the relationship
between auditor independence and corporate performance. 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
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.
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.
Scope of the Study
focus of the study 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.
Limitations of the Study
of the limitations of this study is self selection bias. This is because it was
only the perceptions of auditors and practicing accountants in Edo and Delta
States were used. The selection process of respondent for the study was not
completely random, it was observed that some of the respondents were reluctant
in giving the relevant information necessary to achieve the objective of the
study. It is therefore not possible to ascertain the extent to which this
attitude would have influenced the reliability of the information provided.
The inability to obtain completely
random sampling size.
Respondents were too reluctant in giving
Definition of Terms
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.
fees: Fees paid to a company’s auditors which are approved
by the shareholders at an annual general meeting.
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.
Report: A report
written by a company’s auditors after they have examined the accounts of the
Statement: A document
that shows the financial statement of a company.
A state of honesty but
with a wide range of qualities such as fairness, candour, courage, intellectual
honesty and confidentiality.
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.
services: All services provided by an auditor that are not
considered as an audit.
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.
of character with characteristics of integrity and trustworthiness being
essential or the absence of interest that creates an unacceptable risk of bias.
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.
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.
Governance: Corporate governance involves a system
by which governing institutions and other organization related to their
communities and stakeholders to improve their quality of services rendered to
their host communities and stakeholders. It is paramount that good corporate
governance should ensure transparency, accountability and fairness in reporting