Full Project-A REVIEW OF THE INDEPENDENCY OF THE INDEPENDENT AUDITOR

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A REVIEW OF THE INDEPENDENCY OF THE INDEPENDENT AUDITOR

CHAPTER ONE

1.1 INTRODUCTION

Most of the inquest into major auditing failures during the last decades or so aroused certain questions about the independence of the auditors.

Independence has become an emotive word which stands for freedom, integrity and all that is good. Years back, auditors were often required to hold shares in their client companies so as not to be too independent. However, the qualities of independence is free, unhindered, emancipated or liberated and free from dominance or influence.

Professional independence is a concept fundamental to the accountancy profession. It is essentially a way of thinking of the mind characterized by integrity and objective approach to professional work. Accountants believe that the process of accountability is incomplete without an audit; which off course can only be meaningful if the person performing it is independent.

The auditor should be an independent person who is appointed to investigate the organization, its records and the financial statements. The primary aim of an audit is to produce a report of his opinion of the truth and fairness of the financial statements, so that any person reading and using them can have belief in them.

Essentially, the major value of an audit depends to a large extent on the degree of confidence reposed in it by the public and therefore, it is a fundamental principle that not only must the auditor be independent in fact and attitude of mind but he must also be seen to be independent that is appearance of independence and there are many stakeholders in this issue: It is no surprise therefore, that the appearance issues has proved to be the key point in the discussion of the auditors independence.

It is worthy of note that the questions relating to the effective independence of the auditor started to arise at the inception of the company form of business in the early 17th century. This steadily expanding influence of the auditor arose from the increasing complexity of the modern industrial world, and its greater emphasis on accountability. However, the recent business failures caused by management illegal acts like in the case of “a bank being certified healthy today by an auditor and going into liquidation in less than a financial year”, has created a growing atmosphere of criticism about auditors’ independence.

Factors that had lead to this include:

Firstly, increasing competition among firms for audit appointment has presented an image of auditors fighting for directorsfavour.

Secondly, the growth of non-audit services has created a suspicion that auditors’ independence might be sacrificed for the sake of obtaining a non-audit work.

Thirdly, the sudden and unexpected collapse of major companies worldwide has tended to undermine confidence in audited accounts. A case point is the Enron collapse and recently Nigerians Cadbury’s misleading accounting reports.

Fourthly, dependence often arises when the fee contribution of one client becomes too high or exceed 15% of gross practice income of which this is common amongst auditors.

In the light of these reasons and regardless of the thinking behind them, we have chosen the project topic “the Independency of the Independent Auditor” of which every auditor needs to be aware of the potential dangers involved in carrying out audit functions and also the safeguards to be adopted bearing in mind that independence is at the very foundation of the audit process and the centre piece of the credibility of the audit function.

1.2 STATEMENT OF RESEARCH PROBLEM

Millichamp (1996: 3) puts the primary objective of auditing thus: “To produce a report by the auditor of his opinion of the truth and fairness of financial statements so that any person reading and using them can have belief in them”.

This reposes on independent auditors an important public trust. It is the auditors opinion that provide investors with critical assurance that the finacial statements have been subjected to a rigorous examination by an objective impartial and skilled professional and that investors can therefore rely on them. If investors do not believe that an auditor is independent of a company, they will derive little confidence from the auditors opinion and will be far less lively to invest in that public companies securities.

From the above therefore, the problems which the researcher intends to concentrate on are:

Is auditor independence subjective?

Is auditor independence really the solution?

How difficult is auditor independence in practice?

To what extent does the performance of non-audit services undermine auditor independence in practice?

To what extent is auditor independence governed by law?

1.3 OBJECTIVES OF THE STUDY

The auditor should posses an independent, mental attitude, integrity and objectivity in his approach to his professional work. He must be fair and must not allow prejudice or unreasonable opinion to cloud his objectivity and sense of judgement. He should maintain all impartial attitude and be free of any interest which might be regarded as being incompatible with integrity and objectivity. In this regard, the auditor is not permitted to have any financial interest by way of equity, bonds or debenture stock in its client company.

The following are therefore the objectives of this study.

1. To examine the extent to which independence in auditing is applied in practice by the independent auditors.

2. To examine the role played by professional accounting bodies in enhancing auditors independence in practice.

3. To ascertain how far company law in Nigeria has ensured auditors independence in practice.

4. To find out the relationship that exists between auditors and the clients in the performance of their statutory duties in practice.

5. To find out the effect of non-audit services on auditors independence in practice.

6. To find out the role played by audit committee in ensuring and enhancing auditors independence in practice.

7. Finally, to evaluate how recent developments such as corporate governance has placed emphasis on total independence of external auditors.

The purpose of the study therefore, is essentially to evaluate how effective the independence of independent auditors are in carrying out their audit work.

1.4 RESEARCHHYPOTHESES

In the course of this study, the following hypotheses will be developed and empirically tested and their results will form the basis of conclusion and recommendations.

H0: The independency of an independent auditor is not a measure of avoiding corporate fraud.

H1: The independency of an independent auditor is a measure of avoiding corporate fraud.

HYPOTHESIS 2

H0: The introduction of the Audit committee is not a positive measure ensuring auditors independence.

H1: The introduction of the Audit committee is a positive measure ensuring auditors independence.

HYPOTHESIS 3

H0: The integrity of an auditor does not determine the degree of independence exhibited.

H1: the integrity of an auditor determines the degree of independence exhibited.

HYPOTHESIS 4

H0: The performance of non-audit services to client company does not undermine auditors independence.

H1: The performance of non-audit services to client company undermine auditors independence.

1.5 SCOPE OF THE STUDY

This study is centred on independent auditors. Auditing firms will play a very important role in information gathering and will be restricted to auditing firms within Edo State.

The study is intended to appraise thoroughly the theoretical framework in which the actual practice of auditing is built so as to determine and be well acquainted with the basic facts about the significance of independence in auditing.

The practice of independent auditors in firms in the above mentioned state will be examined if they conform to laid down rules and regulations of the Companies and Allied Matters Act 1990 as amended as well as statements on Auditing standard.

1.6 SIGNIFICANCE OF STUDY

Traditionally, Auditing has been one of the most important attributes of the public accounting profession. As a distinct aspect of accounting, auditing has its own techniques. The significance of the study here is to help highlight the adequacy of auditor independence and the inherent problems if independence is compromised, appraised from the viewpoint of the above stated objectives that is the adequacy of independence of an independent auditor in carrying out his duties.

The study will also be beneficial to:

(A) Auditors: Auditors will stand to benefit from the study as the study will provide some basic explanation and insight to the knowledge of the independence of auditors by evaluating the degree of their professional independence. where such independence is highly compromised, it will be possible to know the factors that are responsible thereof. In this way, the study will provide the basis from practitioners in audit to reexamine professional standard and guideline, so as to take into consideration socially, political and economic exigencies.

(B) Government: The government also stand to benefit as the study will pinpoint how the government through its regulating bodies can protect its citizenry from corporate fraud resulting from jeopardized auditor independence by applying measures advocated and taking necessary actions to rectify weakness in the existing laid down rules and regulations.

(C) Investors and Potential Investors: This group also stand to gain as the study will highlight the resultant effects the auditors independence has on report produced by them, thus lessening the fears of investors, creditors, shareholders and other stakeholders of the firms well being.

(D) Researchers: The students in accounting, business, scholars and their general public stands to benefit from this study as it adds to knowledge finding a permanent solution to the problem of independence of the auditors and its associated effects to the accounting profession.

1.7 LIMITATION OF THE STUDY

The scope of the study will be limited to independent auditors in Edo State. The data would have been relevant if it could be gathered from all existing audit firms in Nigeria. A sample of opinion from respondents cut across all parts of Nigeria would have been much more representative but for certain constraints which include the following:

(a) Time Factors: Considering the short time to complete the whole work while doing some other academic works.

(b) Project Funding: Funding of the project, funds for information gathering and general expense involved in completion of this research.

(c) Inaccessibility of Respondents: The respondents from whom data are to be collected are not easily accessible. For instance, conducting interviews and administering questionnaires will be an uphill task.

1.8 ORGANIZATION OF WORK

For orderly presentation of this research work, it is divided into five (5) chapters.

The Introduction

Review of Relevant Literature on the topic

Research Methodology

Data Analysis and Interpretation

The Summary of Findings, Conclusion and Recommendations.

1.9 DEFINITION OF TERMS

1. Audit: An independent examination of an expression of opinion on the financial statements of an enterprise.

2. Auditing: Involves the collection and evaluation of evidence about the performance and position of an entity or about information on the performance and position by a competent independent person with a view to reporting an opinion on the quality of that performance, position or information as measured by established criteria.

3. Auditor: An auditor is an independent person appointed to examine the organization, its records and the financial statements prepared from them and thus form an opinion on the accuracy and correctness of the financial statements.

4. Auditing Standards: Prescribe the basic principles and practices which members are expected to follow in the conduct of an audit.

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