1.1 Background to the Study
The concept of auditor independence changed during the late 19th and early 20th centuries. Because there was a large shift from capital coming from some sources to capital deriving primarily from domestic sources, noted economic sectors means articulated this change that large corporations were based on the separation of ownership from management, which they also emphasized the growing importance and role of accounting and auditing. The auditors’ primary duty was to serve the needs of proprietary interest, which comprises of shareholders and general public. The creation of SEC laid emphasis on standards for financial reporting and auditing. The concept of auditor independence shifted in favor of objectivity and neutrality in reporting.
The audit of accounts in the corporate sector by an independent auditor is obligatory by statute, which defines his duties, rights and powers. It is essential because of the separation of ownership from the management in the corporate sector as the former needs someone who can keep a professional watch on the latter and to whom they can trust for the reliability of accounts as the preparation of financial statement is the prerogative of the management. The auditor has not much to suggest on the form and adequacy of financial statement and independent auditor is responsible for his report.
Independence is fundamental to the reliability of auditors’ reports. Those reports would not be credible, and investors and creditors would have little confidence in them, if auditors were not independent in both fact and appearance, which it expressed by Council of the American Institute of Certified Public Accountants (AICPA) in a statement adopted in 1947. Auditor independence is considered the hallmark of auditing profession. Independence is viewed as the most essential factor in business sector in protecting the interest of several parties. Independence, both historically and philosophically, is the foundation of the public accounting profession and upon its maintenance depend the profession’s strength and its stature (Carey, 1970).
1.2 Statement of the problem
Media comments in the wake of Enron and other corporate scandals including WorldCom and Parmalat to name a few have ended to focus heavily on the issue of auditor independence (Raja Tun Uda, 2002). These financial scandals and corporate failures, thus, are proven to have had a detrimental effect on the public’s perception of auditors. More worryingly, as been raised by O’Malley (1993), the issues related to independence are threatening the survival of accounting firms of all sizes and indeed it has the power to destroy the accounting profession as a whole. It is therefore, vital that auditors maintain their independence and ensure that they provide a high quality of auditing to ensure the credibility of financial information not only for the purpose of reducing the number of corporate scandals but most importantly the survival of their profession and the development of healthy financial and capital market (Abu Bakar, 2006).
1.3 Research Objectives
The research seeks to evaluate Auditor Independence: Nigerian Professional Accountants’ Perceptions.
- To ascertain what the Nigerian Professional Accountants think about the six factors (i.e. audit firm size, competition level, tenure, size of audit fees, management advisory services and audit committee) and whether they have any influence on an auditor’s independence?
- To find out which of the six factors (i.e. audit firm size, competition level, tenure, size of audit fees, management advisory services and audit committee) is the most important factor influencing auditor independence?
- To identify what kinds of relationships (i.e. its direction) exist between the six factors (i.e. audit firm size, competition level, tenure, size of audit fees, management advisory services and audit committee) and the auditor’s independence?
- To provide further understanding of the factors influencing auditor independence (hereafter referred to as AI) from the perspective of Nigerian Professional Accountants.
1.4 Research Questions
This research work answers the following research questions:
- Do the Nigerian Professional Accountants think that the six factors (i.e. audit firm size, competition level, tenure, size of audit fees, management advisory services and audit committee) have any influence on an auditor’s independence?
- Which of the six factors (i.e. audit firm size, competition level, tenure, size of audit fees, management advisory services and audit committee) is the most important factor influencing auditor independence?
- What kinds of relationships (i.e. its direction) exist between the six factors (i.e. audit firm size, competition level, tenure, size of audit fees, management advisory services and audit committee) and the auditor’s independence?
1.5 Significance of the study
Among the significance of this study is that it provides recent input on the literature of auditor independence. This is important since the issue of auditor independence is ongoing and becoming more controversial nowadays, thus fresh studies on this issue should always be conducted to ensure its updated information.
In addition, this study also offers important input to serve as a strong basis for the profession to establish policies relating to auditor independence, particularly in Nigerian context since empirical evidence regarding this issue have been relatively limited so much so that the accounting profession has had no choice but to rely on conjecture and assertion to establish policy (Shockley, 1981).
Providing empirical evidence from local context also can assist the policy makers and other relevant international accounting agencies in their attempt towards the international harmonization of auditing standards.
Finally the work would serve as a basis for further research and discussion into auditor independence.
1.6 Scope and Limitation to the study
It is important for to define the boundaries of this study such that the readers are aware of the direction to which this study is headed. In this study, the researcher considered auditors as individuals and not specific auditing firms.
Due mainly to time and budgetary constraints, this research will cover Professional Accountants who are registered members of the Institute of Chartered Accountants of Nigeria. The study will focus on the factors influencing auditor independence and the perceptions of Nigerian Professional Accountants’.
This study, however, focused only on six of those factors which are deemed to be the relatively important factors in influencing PAI; (i) size of audit firm; (ii) level of competition in the audit services market; (iii) tenure of audit firms serving the needs of a given client; (iv) size of audit fees received by audit firms; (v) provision of managerial advisory services by audit firms to the audit clients; and (vi) the existence of audit committee.
The foremost limitation of the study is that, it only considers each factor per se. It ignores any interaction effects which may exist between any two factors. For example, in a few of the prior studies, some researchers find the interaction effects between (1) firm size and fees, (2) competition and tenure, (3) fees and ICAG, and, (4) fees and competition.
1.7 Definition of Concepts
Auditing: Auditing is defined as a systematic process of objectively obtaining, evaluating evidence regarding assertion about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users (American Accounting Association [AAA], 1973).
Auditor: An auditor is an approved or authorized accountant with the capacity to carry out audit, not to be declared bankrupt or subject to trading and consultancy prohibitions, have an education and experience required for the audit business, have passed the examination of professional competence as an approved or authorized accountant certified by the Institute of Chartered Accountants of Nigeria, and be fit and proper person to carry on audit process.
Audit tenure: This is the number of consecutive years that the audit firm (auditor) has audited the client (Johnson et al., 2002, p.640).
Objectivity: “A professional accountant should not allow bias, conflict of interest, or undue influence of others to override professional and business judgments” (Eilifsen et al., 2006, p.587).
1.8 Organisation of the Study
This study was divided into five chapters.
Chapter one, which is the introductory chapter, gives the background of the study, research problem, the objectives, research questions, significance of the study, scope and limitation of the study and organization of the study.
Chapter two puts into perspective the relevant literature to this research; this involves the theoretical framework for the study, review of relevant literature.
Chapter three highlights on the methodology used in collecting data and the analysis of the data. It covers subtopics such as area of study, population, sampling size and sampling procedures used, data collection made, sampling techniques, data analysis and research constraints.
Chapter four consists of presentation of research findings and discussion of findings.
Chapter five summarizes the research findings, and gives conclusion originating from the study as well and the recommendations made by the researcher.
To go back to to the previous page click here: