AUDITOR INDEPENDENCE AS A CORRELATE OF FINANCIAL SCANDALS

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CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

According to Elliott and Jacobson (1998), auditor independence is defined as in respect to the reliability of financial statements, the unacceptable risk of material bias which result from an absence of interests. When the particular interest presents a risk that would impair auditor‟s objectivity to an extent that it is going to affect the outcome of the audit, the auditor independence is said to be materially impaired (Elliott & Jacobson, 1998).

Generally, credible and unbiased appraisal of information about the listed organizations’ financial position provided by auditor is important for investors to make investment decision and enhances the efficiency of financial markets. Therefore, independence is central to the function served by auditors (Moore, Loewenstein, Tanlu, & Bazerman, 2002). Besides, audit opinion of the commercial banks serves as an effective quality label which is unavailable from most of the second tier firms due to their lack of industry knowledge, reputation and geographic pressure (Frieswick, 2003). However, the auditing firms that provide financial audit services to most of the companies such as large private, non-profit and government organizations also involved in major corporate scandals which in turn raised the question of independence of auditors (Gray & Ratzinger, 2010).

1.2 Statement of the Problem

Auditor independence is questionable upon the failure of audit role in various corporate scandals which gained the attention of the statutory body to enforce the law for improved governance of auditors (Shafie, Hussin, Yusof, & Hussain, 2009). In the past decades, there are various studies being carried out by the researchers to examine the impact and significance of the issues. Abu Bakar, Abdul Rahman, and Abdul Rashid (2005) investigated the factors that influence auditor independence in commercial banks loan officer‟s perceptions based on the result from 86 officers‟ responded. According to Moorthy, Seetharaman, and Saravanan (2010), auditor independence is required to improve the ability to build independent audit decision. Besides, there is a study in Barbados which investigates the perceived auditor independence between auditors and users as auditor independence is a major concern after the collapse of Enron (Alleyne, Devonish, & Alleyne, 2006). On the other hand, Abu Bakar and Ahmad (2009) also investigated Nigeria accountant perceived determinants of auditor independence by identified the size of audit fees as the most important influencing factor, followed by competition, size of audit firm, tenure, provision of management advisory service and lastly audit committee.

However, there are still some deficiencies in the past empirical researches. The study in Abu Bakar et al. (2005) only focus on the loan officer‟s perceptions in Nigeria with a small sample size of less than 100 respondents. Besides, Moorthy et al. (2010) pointed out that the degree of auditor independence is subjected to how the people view it and thus, it varies from one person to another person. In addition, Alleyne et al. (2006) studied is very limited due to small sample size and small emerging market and thus it required caution in interpreting the findings. Moreover, the study of Abu Bakar and Ahmad (2009) also ignored the interaction between factors that contribute to auditor independence by merely focus on each factor. Until today, there is no research done on the auditor independence of commercial banks in Nigeria financial institutions. Therefore, this research is carried out to fill the gap by investigating the factors that affect auditor independence and the financial Scandal in commercial banks of Nigeria.

1.3 Objectives of the Study

• To know if thereis  any relationship between auditors’ independence and financial scandals.
• To understand if rotation of audit firm have any impact on financial scandals.
• To identify the level audit firm tenure has on financial scandals.
• To know if the quality of audit report affect financial scandals.
• To know the impact provision of non-audit service have on financial scandals.

1.4 Research Question

• Is there any relationship between auditors’ independence and financial scandals?
• Does rotation of audit firm have any impact on financial scandals?
• What effect does audit firm tenure has on financial scandals?
• Can the quality of audit report affect financial scandals?
• What impact does the provision of non-audit service have on financial scandals?

1.5 Research Hypothesis

H_o1:   Quality of audit report does not have significant effect on financial scandals in Nigeria’s deposit money banks.

Hypothesis two

H_o2: There is no significant relationship between audit firm tenure and financial scandals in Nigeria’s deposit money banks.

Hypothesis three

H_o3: There is no significant relationship between auditor rotation and financial scandals in Nigeria’s deposit money banks.

1.6 Significance of the Study

Many studies on auditor independence were carried out in developed countries such as United Kingdom and United States. However, there is limited empirical evidence regarding the influence of important factors on auditor independence in Nigeria. This paper aims to further investigate the effect of important factors on auditor independence as ongoing significant issue for the profession nowadays by examining commercial banks‟ perception. This result can contribute to a better understanding and supply recent evidences for Nigeria auditors in order to improve their profession practices.

In addition, regulators and policy makers of Malaysia generally review the audit legislation of developed countries during standard setting process. However, the regulatory audit environment in Nigeria has been different from the developed countries. Therefore, the result of this paper may also assist the relevant policy makers in their effort towards the international auditing standard.

1.7 Scope of the Study

the study focuses on auditor independence as a correlate of financial scandals, three commercial banks are used as the case study which are (first bank, zenith bank and diamond bank plc) in Lagos State.

1.8 Definition of Terms

Auditor Independence: It refers to the independence of the internal auditor or of the external auditor from parties that may have a financial interest in the business being audited.

Auditor: This is a person or a firm appointed by a company to execute an audit.

Independence: The ability to do somthing without being helped or influenced by other people.

Financial Scandal: This are business scandals which arise from intentional manipulation of financial statements with the disclosure of financial misdeeds by trusted executives of corporations or governments.

Financial: The finances or financial situation of an organization or individual.

Scandal: An action or event regarded as morally or legally wrong and causing general public outrage.

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