External auditors occupy a unique position in the business community when they perform an
audit for clients. The auditors are called upon to attest to financial statements and to safeguard the interest of various parties. However, in recent years the audit practice because of several scandals has been undermined. Although evidence of corporate governance practices and auditors’ independence exists from developed economies, very scanty studies have been conducted in Nigeria where corporate governance is just evolving. Therefore, this empirical study provides evidence on corporate governance, auditors’ independence, and firm related attributes from a developing country, Nigeria. The purpose of this study is to investigate the relationship between corporate board attributes and auditors’ independence measured by discretionary accruals. To do so, six (6) Listed Deposit Money Banks are selected and studied during the period 2006-2013. Board size and board composition are considered as corporate board attributes and profitability, leverage and size as control variables. The Ordinary Least Square Model estimation technique was used to analyze the relationship between the board attributes and auditors’ independence. The result of the study shows that there is no significant relationship between corporate board attributes and auditors’ independence of Listed Deposit Money Banks in Nigeria. The study therefore recommended that the board should be composed in such a way so as to ensure diversity of experience without compromising compatibility, integrity and independence.
Keywords: Corporate, Board Attributes, Auditors Independence, Deposit Money Banks
The globalization of business practices and financial crisis brought corporate governance to the fore front of research. The increased attention on corporate governance has been motivated by the collapse of great corporations like WorldCom and Enron. The collapse of the Nigerian financial institutions was as a result of poor corporate governance standard, corruption and lack of transparency. Shareholders lost confidence totally in both public and private companies in the country as a result of weak corporate governance practice. In order to gain back the confidence, Security and Exchange Commission came up with the Code of Best Practice. It provides guidelines on the principles of corporate governance in Nigeria (Akpan & Amran, 2014). The existing studies have indicated that there is no exact definition for corporate governance (Solomon, 2007). For example, the Cadbury (1992) defined corporate governance as: “a system by which companies are directed and controlled”. The nature of corporate governance, therefore, going by this definition consists of two dimensions, direction and control. Direction emphasizes the responsibility of board to attend strategic positioning and planning in order to enhance performance and sustainability of the company. The control side of the definition, on the other hand, emphasizes the responsibility of the board to oversee the executive management of the company in the execution of the plans and strategies. Therefore, a good system of corporate governance is considered as an important element in running the affairs of the company for the best interest of the shareholders. It assists in controlling the performance of the board in business operations. The board of director has a part to play in corporate governance as their main duty is that of supervising the management to ensure proper accountability to shareholders and other stakeholders. Since the board of director is vested with the responsibility of monitoring the interest of shareholders, they ought to have greater interest in the appointment of directors and auditors to ensure that qualified, experienced and educated directors and auditors are appointed. Individual firms apart from the SEC (2006) requirements have specified the profile requirements expected of their directors and auditors. Auditor Independence (AI) has been defined as the conditional probability of reporting a discovered breach (De Angelo (1981). The International Federation of Accountants (IFAC) differentiates between independence of mind and independence in appearance. It defines independence of mind as the state of mind that permits the provision of an opinion without being affected by influences that compromise professional judgement allowing an individual to act with integrity, exercise objectivity and professional scepticism. Independence in appearance is defined by IFAC as “the avoidance of facts and circumstances that are so significant that a reasonable and informed third party, having knowledge of all relevant information would reasonably conclude that a firm’s or a member of the assurance team’s integrity, objectivity or professional scepticism had been compromised” (IFAC 2001).
Statement of Research Problem
The importance of auditors’ independence opinion on financial statements is undeniable in audit practice. However, still within the capacity to discharge his duties in an organization, the auditor is faced with circumstances that pose as threats to the very essence of the practice.
Also, in as much as we try to tackle the issue of lack of auditor independence in the context of this study, the question is: are there board characteristics that influence auditor’s independence and even if such exist, how we can resolve it for the purpose of ensuring auditor independence. It is as such paramount that the relationship between these two concepts must be established in order to provide a lasting resolve to the issue of lack of auditor independence.
Moreover, the issue of compromise of auditor’s independence is rampant in today’s corporate
world. With Particular reference to the recent corporate scandals (e.g. Gulf bank, Savanah
bank etc) in the Nigerian Banking Industry, the issue of the inability of auditors to independently express a true and fair view of the company records given various circumstances which he finds himself is worth noting. As Hussey and Lan (2001) stated, the client’s management is often seen as the client and the auditor wants to do everything he can to make them happy. He as such plays the role of an accommodating auditor in order not to “lose next year’s audit as well as the other services being provided” (Hussey and Lan, 2001). Taking this into consideration and given the nature of the geographical setting where corruption is counted for as norms, the resultant effect of such manipulation of auditor independence is the misinformation of the stakeholders of the company. It therefore posits that the standards which the auditor stands by in practice sometimes fail and his independence manoeuvred to satisfy his client’s interest. Therefore, this study aims to examine the influence of board characteristics on auditors’ independence in the Nigerian banking industry. The reason for the choice of board characteristics is that, it is an important tool or mechanism for monitoring and advising, management of corporations to managing the affairs of the business for the benefit of shareholders (Fama & Jensen, 1983).
In the light of the above problems, this research intends to provide answers to the following
i. How does board size influence auditors’ independence?
ii. How does board composition affect auditors’ independence?
Objectives of the Study
The objectives that this research seeks to achieve include the following;
i. Examine the relationship between board size and auditors’ independence.
ii. Determine the relationship between board composition and auditors’ independence.
In order to carry out this research, the following research hypotheses are postulated. These
hypotheses serve as a guide in shaping and directing the study to a logical conclusion.
Ho1: There is no significant relationship between board size and auditors’ independence.
Ho2: There is no significant relationship between board composition and auditors’
Scope of the Study
The scope of the study is limited to the examination of the influence of corporate board
attributes on auditors’ independence in the Banking Industry. In doing this, Listed Money Deposit Banks are selected as sample to represent the population. This study will be limited to cover the period of 8 years (2006-2013).