AUDIT INDEPENDENCE AND CREDIBILITY OF FINANCIAL REPORTING IN THE NIGERIAN BANKING SECTOR

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AUDIT INDEPENDENCE AND CREDIBILITY OF FINANCIAL REPORTING IN THE NIGERIAN BANKING SECTOR

ABSTRACT

The financial statements preparation is the responsibility of the management, while auditor responsibility is to lend credibility of the financial statements. This study investigated the audit independence and credibility of financial reporting in the Nigerian banking sector. Descriptive survey was used for the study. purposive sampling was used to select 250 accounting and auditing department employees of Guarantee Trust Bank, First Bank of Nigeria, Polaris Bank, Zenith Bank, and Diamond Bank, Lagos State, Nigeria. Fifty (50) respondents was selected from each of the five banks to represent the sample size. 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 impact 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 in the Nigerian Banking sector. 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 credibility 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.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

In present times, there has been much discussion about the Auditors independence; the leadership of the auditing standards board, the public oversight board, the independence standards board, and most recently the proposed independence rules promulgated by the Securities and Exchange Commission (SEC) have all attempted to clarify and strengthen auditor independence. Also in the medieval era financial statements were not necessary and hence financial statements were not prepared neither used to make decisions. But with the recent development every firm are expected to prepare financial statement in order to know the financial position of the organization so that stakeholders can make decisions (Loveday, 2017).

Securities and exchange commission (SEC) require traded companies to make sure their statements are prepared and audited by certified public accounting firm who assume the responsibility for the fairness of the financial statements. This opinion adds to the credibility of the statements which is agreed by the lender and private investors who voluntarily allow company‟s statement to be verified by independent body. The user of financial statement which include: shareholders, government, creditors, investors, etc. All rely on the audited financial statement in other to make informed decision. Therefore, the credibility and reliability of this statement is necessary (Eko, 2015).

The function of auditing is to lend credibility to the financial statement. The financial statements preparation is the responsibility of the management, while auditor responsibility is to lend credibility of the financial statements. The auditor also increases the credibility of other non-audited information which is released by the management. For an audit to be credible 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 credibility 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 credibility of their financial statements by having an independent auditor to verify the accuracy of those disclosures. However, the effect of auditing on financial statement credibility depends on the independence of the auditor and the rigor with which the audit is performed (DeFond and Zhang, 2014). An increase in reporting credibility 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).

One of the information used is the financial report is the product of a process of accounting. In this case the financial statements that can be trusted by investors absolutely necessary. In order for those statements to be believed, then the audit of financial statements is necessary especially for a company incorporated in the form of a limited liability company that is open. The management company appointed by the shareholders held accountable in the form of financial statements for the funds that have been submitted to the management of company (Wali, 2015).

I.2 Statement of the Problem

Recent reports of questionable accounting practices adopted by some companies in Nigeria have brought the issue of auditor‟s independence to the forefront, and putting the auditing profession credibility in doubt (Otusanya and Lauwo, 2010). Financial reports are meant to be a formal record of business activities and these reports are meant to provide an overview of the financial position and profitability in both short and long term of companies to the users of these financial statements such as shareholders, managers, employees, tax analyst, banks, etc.

Recent misappropriation of financial statement such as by Enron, Worldcom, or Parmalat revealed that information provided by financial statements does not faithfully represent what its purports. Based on recent case of Parmalat, as well as in the cases of Comroad and FlowTex in Germany, management counterfeited documents and receipts for non-existent assets or transactions. These scandals clearly mean that it is not sufficient to rely on management representations to be what they seem at first instance. Rather, the auditor must go beyond the façade and question the truth of any information using professional skepticism. Responding to these developments, standard setters have tightened professional auditing standards. (AU 316, 2005).

Several researches (Adebayo, 2011; Wali, 2015; Loveday, 2017) have been carried out in developed and developing economies on how audit independence affects audit quality. To the best of the authors‟ knowledge, none have researched on how audit independence affects financial reporting credibility. Any subsequent failure of firms due to mismanagement, fraudulent practices, etc., are viewed as failures in auditors‟ independence in carrying out their duties (Adeniji, 2004). For instance, Enron and WorldCom in USA collapsed shortly after an unqualified (clean report) audit report was endorsed. From the above discussions, there is need to ensure credibility of financial statement of companies in order to increase users‟ confidence and thereby affecting investors behavior.

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 impact of auditors‟ independence on credibility of financial reporting in the Nigerian Banking Sector.

1.3 Objectives of the Study

The main objective of the study is to determine the impact of auditors‟ independence on credibility of financial reporting in the Nigerian Banking Sector. There are specific objectives of the study which were to:

i. Determine the impact of audit independence on the understandability of financial statement in the Nigerian Banking Sector.

ii. Evaluate the effects of audit independence on relevance of financial statement in the Nigerian Banking Sector.

iii. Determine the effects of audit independence on the faithful representation of financial statement in the Nigerian Banking Sector.

1.4 Scope of study

The research work is on the determination of the impact of auditors‟ independence on credibility of financial reporting in the Nigerian Banking Sector with the scope explained below;

The scope of the study is delimited to the Nigerian banking sector. There are 21 commercial banks as listed on the website of CBN. These banks will form the universe of the study. The study will be further delimited to selected banks: Guaranty Trust bank, First Bank, Polaris Bank Diamond and Zenith Bank Plc. The employees of these banks will be the focus of the study where data will be gathered. Specifically, the study will be carried out among the branches of these banks that are located in Lagos.

1.5 Operationalization of Variables

Auditors‟ independence is the independent variable which is represented with three proxy variables which are Audit tenure, Audit fees and Independence of audit committee. However, Financial reporting credibility is the dependent variable measured by free from understandability of financial statement, reliability of financial statement and faithful representation of financial statement.

Functional Equations

Y=f(X)

Y= Financial Reporting Credibility (FRC) Dependent Variable

X= Auditor Independence (AUI) Independent Variable

Hence FRC = f (AUI)

Where

X = Audit Independence (AUI)

Then x1= Audit Tenure (AUT)

Then x2= Audit Fees (AUF)

Then x3= Independence of audit committee (IAC)

Where Y = Financial Statement Credibility (FRC)

Then y1= Understandability of financial statement (UDE)

Then y2= relevance of financial statement (RFS)

Then y3= Faithful representation of financial statement (FRS)

Functional Relationships

UDE = f (AUT, AUF, IAC) ………………………………………… F1

RFS = f (AUT, AUF, IAC) ………………………………………… F2

FRS = f (AUT, AUF, IAC) ………………………………………… F3

Therefore (UDE, RFS, FRS) = f (AUT, AUF, IAC)

F1, F2 and F3 are the working functional relationship in this study used to determine the relationship between the impact of auditor independence on credibility of financial reporting in the Nigerian Banking Sector.

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