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Effect Of Auditor’s Independence On The Reliability Of Financial Reporting In Osun State

ABSTRACT

This study was carried out on the effect of auditor’s independence on the reliability of financial reporting in Osun state. The study focused on the banking sector of Osun state. Descriptive survey correlative research method was used for the study. Purposive sampling was used to select 250 accounting and auditing department employees of First Bank of Nigeria, Guarantee Trust Bank, Polaris Bank, Diamond Bank and Zenith Bank, Osun State, Nigeria. Descriptive statistics was used to analyze the responses from the questionnaire which involves descriptive analysis such as frequencies, percentages, mean and standard deviation. The results revealed that; Auditor’s independence has significance effect on understandability of financial statement in the banking sectors in Nigeria. The study also reveals that auditor’s independence has positive and significant effects on the relevance of financial statement of banks in Osun State. The correlation analysis reveals that auditor’s independence is positively related with faithful representation of financial statement.  In line with findings, it was concluded that Auditors’ independence is fundamental to the reliability of the financial statement and Auditors fee are influenced by various economic determinants including the size and complexity of the audit work. The study recommended that auditors should not be allowed to provide audit clients with any other advisory services; There should be rotation of auditors to improve the auditors’ independence; There should be an implementation of peer assessment in order to ensure that audits are carried out with utmost professionalism and mutual respect; An audit committee should be set up by every limited liability company to evaluate the audit work done.

 

 

TABLE OF CONTENTS

ABSTRACT

INTRODUCTION

I.1 Background of the study

I.2 Statement of the Problem

1.3 Objectives of the Study

1.4       Research questions

1.5       Research hypotheses

1.6       Significance of the study

1.7       Scope of study

1.8       Definition of Key Terms

CHAPTER TWO

LITERATURE REVIEW

2.1       Conceptual review

2.2       Theoretical review

2.3       Empirical review of related studies

2.4       Summary of literature review

CHAPTER THREE

METHODOLOGY

3.1       Research Design

3.2       Population of the Study

3.3       Sample and Sampling Technique

3.4       Method of Data Collection

3.5       Pilot Study

3.6       Validity of Research Instrument

3.7       Reliability of Instrument

3.6       Method of Data Analysis

3.7       Regression analysis

3.8       Operationalization of Variables

3.9       Ethical Considerations

CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND INTERPRETATION

CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary of the Findings

5.2   Conclusion

5.3       Implication of Findings

5.4       Contribution to knowledge

5.5       Recommendations

5.6       Suggestion for Further Studies

REFERENCES

APPENDIX

 

 

INTRODUCTION

I.1 Background of the study

Auditors’ independence has been termed the cornerstone of the auditing profession, since it is the foundation for the public’s trust in the attest function (Abdul Nasser, Mustapha and Hudaib, 2006). Auditors’ independence helps to ensure quality audits and contributes to financial statement users’ reliance on the financial reporting process. McGrath and Siegel, (2001) argued that when independent auditors render unbiased audit decisions, the broader goal of auditors’ independence, namely “to support user reliance on the financial reporting process and to enhance capital market efficiency,” is accomplished. However, several major instances of misstated funds have been reported over the last several years in federal higher institutions (Adams, 2001). These misstatements have led many to question the effectiveness of various aspects of the audit function, especially auditors’ independence.

Public sector audit has experienced considerable expansion throughout the world. The reason for this is closely related to changes in the structure of government and concern for more accountable and transparent governance, which has resulted in a large increase in the number of accounts and sophistication of financial reporting. The expansion has brought with it an added demand for accountability (Dowdall, 2003). Public sector accounting is quite distinct from commercial accounting in terms of objectives, sources of revenue and bases of recording accounts, responsibility and accountability among others.

It is useful however, to distinguish between audit and other forms of regulation and inspection. Public audit applies to almost every public sector body and is relatively wide-ranging, from certifying the accounts to examinations of economy, efficiency and effectiveness. The audit function and the platform, on which audit results are reported, tend to reinforce the traditional line of public sector accountability to elected representatives rather than establish new forms of accountability.

The function of auditing is to lend reliability to the financial statement. The financial statements preparation is the responsibility of the management, while auditor responsibility is to lend reliability of the financial statements. The auditor also increases the reliability of other non-audited information which is released by the management. For an audit to be reliable and reliable, it must be performed by someone who is independent and cannot be influence by position, power which will affect its own conclusion. The securities exchange commission approved new auditor independence regulation which requires that traded companies should disclose the level of fees that were paid to their external auditor for nonaudit services (IAASB, 2015).

The auditor independence has long been recognized as the cornerstone of the public accounting profession and that it is privileged to govern itself. Society grants power and privilege to the Accounting profession. Auditors are obligated to perform their duties for the public benefit in exchange for exclusive professional privilege. Traditional audit independence view regard as a moral perspective (Babatoolu, Osasrere and Emmanuel, 2016). As for a moral perspective, auditors are professionals, with professional obligations to the public. They should not engage in any activity that appears to impair their effectiveness as professionals, regardless of the totality of their incentives (Enofe, Okunega and Ediae, 2013).

Professionals are presumed to do things because of their professional duties, not because of their best interests. In incentives right or wrong is concentrated. Morally, some seem to believe that it is wrong for an auditor if “appear” not to be independent. Intrinsic ethical concentration is an influencing factor to consider on a moral view the nature of the moralistic analysis that support the enhancement of the audit independence and have significant to the auditor’s role to play auditors’ primary duty to protect the public interest and the necessity to use judgment in fulfilling this duty (Ilaboya and Ohiokha, 2014). The ideal of auditor independence has been clearly stated for a long time.

The second general standard of generally accepted auditing standards states that “in all matters relating to the assignment, independence in mental attitude is to be maintained by the auditor or auditors.” Essentially, an auditor may function as an employee (internal auditor) or an independent professional (external auditor). Users of these entities’ financial information, such as investors, government agencies, and the general public, rely on the external auditor to present an unbiased and independent evaluation on such entities.  In an ideal world this may be the case, but in reality auditors may be less independent than the other auditors (Nemit, 2015).

Safeguarding auditor’s independence is a key priority not only for auditors, but also for management and investors. In the global market of today, the government, creditors, institutional investors, lenders, regulator, stakeholder etc. rely on the information provided by the auditors on the reliability and reliability of the financial statements. From a theoretical perspective, one of the primary purposes of financial reporting is to facilitate capital allocation by increasing contracting efficiency and reducing information asymmetry among capital market participants (Gow, Larcker and Reiss, 2015). Improvements in reporting quality serve to provide investors with more accurate information and thus can reduce information asymmetry and increase contracting efficiency. Thus, improvements in reporting quality can increase a company’s access to external finance and ultimately lead to increases in investment and investment efficiency (Novie, 2013).

Companies establish the reliability of their financial statements by having an independent auditor to verify the accuracy of those disclosures. However, the effect of auditing on financial statement reliability depends on the independence of the auditor and the rigor with which the audit is performed (DeFond and Zhang, 2014). An increase in reporting reliability can increase the degree to which investors rely on financial statement information for both contracting and learning about companies’ operations and performance, which can increase the company’s access to external finance and investment/investment efficiency (Nwanyanwu, 2013).

The foregoing discussions show that the independence of an auditor is fundamental when the issue of accountability is concerned and is influenced by many factors within and outside the control of the auditor himself. In addition, most literature appears to concentrate on the developed countries and the Asian countries.  In Nigeria, much evidence from literature dwells more on private sector audit. Very few literatures exist, particularly about audit in the public sector. Therefore, this study is concerned with the effect of auditor’s independence on the reliability of financial reporting in Osun state

 

I.2 Statement of the Problem

Some organizations in Nigeria have shown bad accounting practices that have brought the issue of auditor independence to the fore and cast doubt on the reliability of the audit profession (Otusanya and Lauwo, 2010). Financial reports are intended to be a formal record of business activity and these reports are intended to provide users of these financial statements such as shareholders, managers, employees, … with an overview of the financial condition and profitability of companies in both the short and long term. Tax analyst, banks, etc. Recent misappropriation of financial reports such as Enron, Worldcom or Parmalat has shown that the information contained in the annual financial statements does not correspond to the statements. Based on the recent Parmalat case, as well as Comroad and FlowTex in Germany, management has forged documents and receipts for non-existent assets or transactions.

These scandals clearly mean that relying on management representations is not enough to be what they seem at first sight. Rather, the auditor must go beyond the facade and question the truth of all information with professional skepticism. In response to these developments, standard setters have tightened professional auditing standards. (AU 316, 2005). Several studies have been conducted in developed and developing economies (Adebayo, 2011; Wali, 2015; Loveday, 2017) on how the independence of the audit affects the quality of the audit.

To the best of the authors’ knowledge, no one has investigated how the independence of the audit affects the reliability of financial reporting. Any subsequent failure by companies due to mismanagement, fraudulent practices, etc., is viewed as a failure of the auditor’s independence in the performance of their duties (Adeniji, 2004). For example, Enron and WorldCom in the US collapsed shortly after an unqualified (clean report) audit report was confirmed. Based on the above discussions, the reliability of the annual financial statements of companies must be ensured in order to increase user confidence and thus influence the behavior of investors.

This study seeks to investigate why corporate organizations fail and how it is occasioned by the independence of auditors. Therefore, the study tends to have solve these problems by determining the effect of auditors’ independence on reliability of financial reporting in the Banking Sector in Osun State.

1.3 Objectives of the Study

The main objective of the study is to determine the effect of auditors’ independence on reliability of financial reporting in Osun State.

There are specific objectives of the study which were to:

  1. Examine the effect of audit independence on the understandability of financial statement of banks in Osun State.
  2. Examine the effects of audit independence on relevance of financial statement of banks in Osun State.
  3. Examine the effects of audit independence on the faithful representation of financial statement of banks in Osun State.

 

1.4       Research questions

  1. What is the effect of audit independence on the understandability of financial statement of banks in Osun State?
  2. What are the effects of audit independence on relevance of financial statement of banks in Osun State?
  3. What are the effects of audit independence on the faithful representation of financial statement of banks in Osun State?

 

1.5       Research hypotheses

H01: Audit independence does not have significant effect on understandability of financial statement of banks in Osun State.

H02: There is no significant effect of audit independence on reliability of financial statement of banks in Osun State.

H03: There is no significant relationship between audit independence and faithful representation of financial statement of banks in Osun State.

 

1.6       Significance of the study

The focus of this study is to examine the impact of audit independence on reliability of financial reporting in Osun state. This study will be of importance to several stakeholders such as:

Management: The study will help management in knowing matters that can and cannot affect the auditor independence and ensuring the reliability of the financial statement. This will also assist in taking responsibility of preparing and presentation of the financial statement and also ensure the going concern principle is met.

Potential Investors: The outcome of this research will serve as an input to potential investors in decision making concerning investment and financial policies from the financial statement. That is, the research work will serve as a way to put their reliance on the financial statements audited by professional auditors.

Shareholders: The study will assist shareholders to ensure that the financial statement is true and fair and also free from material misstatement in order to place their decisions on the report. The report serves as an assurance that the going concern principle is being followed.

General Public: The research work will educate the general public on how the auditor independence has a positive impact on reliability of financial reporting in the Nigerian Banking Sector. It will also educate them on how auditor independence will help in eliminating creative accounting and window dressing.

Further Researchers: This research will also serve as a resource base to other scholars and researchers interested in carrying out further research in this field subsequently, if applied will go to an extent to provide new explanation to the topic.

 

1.7       Scope of study

The research work is on the determination of the effect of auditors’ independence on reliability of financial reporting in Osun State with the scope explained below;

The scope of the study is delimited to the banking institutions in Osun state. The study will be further delimited to selected banks: First Bank, Polaris Bank, Guaranty Trust bank, Zenith Bank Plc, and Diamond bank. Specifically, the study will be carried out among the branches of these banks that are located in Osun.

 

1.8       Definition of Key Terms

Audit Fees: This is a fee a company pays an auditor in exchange for performing an audit.

Audit Tenure: This refers to the length of the auditor-client relationship. Thus tenure includes the period that the predecessor audit firms (where there has been mergers/de-mergers or other combinations in the audit firm) issued audit reports on the entity.

Auditors’ Independence: This refers to the freedom of the auditor to act professionally. Independence requires integrity and objective approach to the audit process.

Faithful Representation: This is the concepts that financial statements be produced that accurately reflect the condition of a business. The faithful representations extend to all parts of the financial statements, including the results of operations, financial position, and cash flows of the reporting entity.

Financial Reporting: This is the process of producing statements that disclose an organization’s financial status to management, investors and the government.

Independence of audit committee: This is a committee of the board of directors responsible for oversight of the financial reporting process, selection of the independent auditor, and receipt of audit results both internal and external.

Relevance: This refers to whether financial information can be verified and used consistently by investors and creditors with the same results. Basically, relevance refers to the trustworthiness of the financial statements.

Reliability: This refers to the objective and subjective components of the believability of a source or message. Traditionally, modern, reliability has two key components: trustworthiness and expertise, which both have objective and subjective components.

Understandability: This is the concept that financial information should be presented so that a reader can easily comprehend it to adherence to a reasonable level of understandability would prevent an organization from deliberately obfuscating financial information in order to mislead users of its financial statements.

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