Auditor’s Independence and Financial Reporting Quality: a Study of Deposit Money Bank
CHAPTER ONE
AIMS AND OBJECTIVES OF THE STUDY
The aim of this study is to enhance audit quality credibility and reliability of financial reporting in Nigeria and seeks among other things to identify the factors of auditor’s independence. Specifically, the study intends to:
Examine the relationship between auditor independence in relation to the quality of financial reporting in Nigeria.
To determine the factors which encourages the independence of auditors on financial report in public enterprises?
To ascertain the adequacy of professional and regulatory stipulations on auditors independence in relation to quality financial reporting.
CHAPTER TWO
Review of related literature
INTRODUCTION
Auditor‟s independence may be defined as an auditor‟s unbiased mental attitude in making decisions throughout the financial reporting auditing process. An auditor‟s lack of independence increases the possibility of being perceived as not being objective. This means that the auditor will not likely report a discovered breach (Deangelo, 1981). Auditor independence is seen as very important for the reliability and integrity of financial reporting (Wallman, 1996). Auditor independence not only comprises independence of mind but also, independence in appearance. Two types of auditor independence were developed by Mautz and Sharaf (1961) namely practitioner-independence (or independence in fact), and profession independence (or independence in appearance). The Code of Ethics for professional accountants defines independence of mind as “the state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity and exercise objectivity and professional skepticism” (IFAC, 2009, p.21). The Code of Ethics defines independence in appearance as the avoidance of facts and circumstances that are so significant that a reasonable and informed third party would be likely to conclude, weighing all the specific facts and circumstances, that a firms, or a member of the audit team‟s, integrity, objectivity or professional skepticism has been compromised. Safeguarding auditor independence is essential for creditworthiness of the auditor and its reputation. Not only is the perceived independence of the auditor important for the auditor itself but also for the client and their audited figures. Beattie, Brandt, and Fearnley (1999) argued that there are three factors (or threats) that could influence the perceived auditor‟s independence. Among these major threats are the fees perceived by the auditor for audit and non audit services, the length of the auditor and auditor rotation. The impaired independence of an auditor result in poor audit quality and allows for greater earnings management and lower earnings quality (Okolie, 2014). Auditor‟s independence may be impaired by auditor tenure. As the auditor client relationship lengthens, the auditor may develop close relationship with the client and become more likely to act in favour of management, resulting in reduced objectivity and audit quality. The proponents of mandatory rotation equally argued that the longer an auditor tenure the lesser its objectivity and opponent claiming that it is expensive to carry out. Davis, Soo, and Trompeter (2000) agreed that there is no empirical evidence about the effect of rotation on auditor cost and quality. Similarly, providing non-audit services, as earlier stressed as in the case of Arthur Anderson, increases the economic bond between the auditor and the client, and there is a widespread belief that auditors might sacrifice independence in order to retain clients who are paying large amounts in non-audit fees (DeFond, Raghunandan, & Subramanyam, 2002).
CHAPTER THREE
RESEARCH METHODOLOGY
INTRODUCTION
In this chapter, we described the research procedure for this study. A research methodology is a research process adopted or employed to systematically and scientifically present the results of a study to the research audience viz. a vis, the study beneficiaries.
RESEARCH DESIGN
Research designs are perceived to be an overall strategy adopted by the researcher whereby different components of the study are integrated in a logical manner to effectively address a research problem. In this study, the researcher employed the survey research design. This is due to the nature of the study whereby the opinion and views of people are sampled. According to Singleton & Straits, (2009), Survey research can use quantitative research strategies (e.g., using questionnaires with numerically rated items), qualitative research strategies (e.g., using open-ended questions), or both strategies (i.e., mixed methods). As it is often used to describe and explore human behaviour, surveys are therefore frequently used in social and psychological research.
POPULATION OF THE STUDY
According to Udoyen (2019), a study population is a group of elements or individuals as the case may be, who share similar characteristics. These similar features can include location, gender, age, sex or specific interest. The emphasis on study population is that it constitutes of individuals or elements that are homogeneous in description.
This study was carried to examine Auditor’s independence and financial reporting quality: A study of deposit money bank. First bank form the population of the study.
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
INTRODUCTION
This chapter presents the analysis of data derived through the questionnaire and key informant interview administered on the respondents in the study area. The analysis and interpretation were derived from the findings of the study. The data analysis depicts the simple frequency and percentage of the respondents as well as interpretation of the information gathered. A total of eighty (80) questionnaires were administered to respondents of which only seventy-seven (77) were returned and validated. This was due to irregular, incomplete and inappropriate responses to some questionnaire. For this study a total of 77 was validated for the analysis.
TEST OF HYPOTHESIS
- There is no significant relationship between the statutory audit quality and quality of financial reporting.
- There is no factor that reduces the independence of auditors.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
Introduction
It is important to ascertain that the objective of this study was to ascertain Auditor’s independence and financial reporting quality: A study of deposit money bank. In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of auditor’s independence and financial reporting quality: A study of deposit money bank
Summary
This study was on auditor’s independence and financial reporting quality: A study of deposit money bank: Examine the relationship between auditor independence in relation to the quality of financial reporting in Nigeria, to determine the factors which encourages the independence of auditors on financial report in public enterprises and to ascertain the adequacy of professional and regulatory stipulations on auditors independence in relation to quality financial reporting. A total of 77 responses were received and validated from the enrolled participants where all respondents were drawn from first bank, Uyo. Hypothesis was tested using Chi-Square statistical tool (SPSS).
Conclusion
The results of the study indicate that there is a significant relationship between the external auditor’s integrity and the credibility of audited financial statements in Nigeria. The results of the study also reveal that an objective approach to the external audit process is significantly connected with the credibility of audited financial statements in Nigeria. The results of this study are in agreement with those of Okolie (2014) and Okezie and Egeolu(2019) It recommends that auditor’s independence should be strengthened by taking different measures such as reduction in the tenure of auditors, regular rotation of auditors and appropriate audit fees in Nigeria.
Recommendation
The study recommends a regulation on the disclosure of the components of the total audit fees and auditing pricing process in order to strike a balance between abnormally high fees and low audit fees. This is because, most auditing firms may accept audit fees at less than the market rate and make up for the deficit by providing non-audit services which will jeopardize independence and reduce audit quality; while abnormally high audit fees may promote the bonding between the client and the auditor which will also affect independence. The disclosure and regulation of audit fees calculation will enhance auditor independence by providing public insight into the financial dependence of an auditor on a client and whether the fee corresponds with the complexity of the audit assignment. This will limit auditors from becoming financially dependent on an individual client and is expected to improve auditors‟ resistance against pressure exerted by the clients‟ management, thereby enhancing audit independence and audit quality
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