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AUDITORS’ INDEPENDENCE AND EARNINGS MANAGEMENT OF DEPOSIT MONEY BANKS IN NIGERIA

 Format: Ms-Word   Chapters: 1-5

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 Jan 20, 2022 |  04:26 pm |  499


Project Topic and Materials on AUDITORS’ INDEPENDENCE AND EARNINGS MANAGEMENT OF DEPOSIT MONEY BANKS IN NIGERIA 
CHAPTER ONE

INTRODUCTION
1.1        Background to the Study 
The monitoring role of external auditor is critical in promoting the quality of financial statements prepared by management. By providing independent verification of financial statements, auditors lend credibility to accounting information and enhance its integrity. Watts and Zimmerman (1986) argued that financial statements audit is a monitoring mechanism that minimizes information asymmetry and protect the interest of the principals as well as existing and potential stakeholders, by providing reasonable assurance that the financial statements (prepared by management) are free from material misstatements. As such, external audit helps reduce agency costs between managers and external parties. However, these external parties cannot be expected to trust reported financial information without confidence in the Auditors‟ Independence. Recently, there is an increasing concern by regulators, investors and the general public regarding the quality and reliability of audited financial statements, because auditors compromise independence and thus diminish the quality of earnings reported, by either providing non-audit services to clients or collecting abnormal audit fees from the clients (Romano, 2004).

 

In Nigeria, Semiu and Kehinde (2011) and Semiu and Johnson (2012) empirically examine the perception of auditor independence in Nigeria and reported that the size of audit fee is the most influencing factor capable of deterring auditor independence in Nigeria. Similarly, they reported that, joint provision of audit and non-audit services affects auditor independence adversely. On the contrary, an investigation of stakeholders‟ perception of non-audit services provision vis-à-vis auditor independence in Nigeria by Umar (2012) reveals that non-audit services do not impair auditor independence. However, his findings reveal that there are a number of threats to auditor independence and one of which is familiarity, which comes as a results of long-term audit firm-client relationship.

 

The regulators‟ concern over the increase in the provision of management consultancy services impair audit firm independence is based on the premise that the provision of nonaudit services increases the fees paid to the audit firm thereby increasing the economic dependence of the audit firm on the client (Ashbaugh, Lafond & Mayhew, 2003). Similarly, DeAngelo (1981) and Magee and Tseng (1990) opined that non-audit services impair auditors‟ independence because of the presence of client‟s future quasi-rents (non-audit fee) provided to the auditors. They further stressed that it is the strength of the economic bond between the audit firm and its client that reduces auditor independence. This proposition holds true in some corporate collapse in USA and has forced regulators to ban certain kinds of non-audit services with the view that the financial reporting quality and investor confidence will increase. It is in light of this proposition that excessive audit fee (abnormal fees) is related to auditor‟s incentive to compromise independence. That is because of economic bond between client and auditor; the auditor with the possible loss of revenue is more likely to comply with client‟s wishes to manage earnings. However, Simunic (1984) and Chung and Kallapur (2003) were of the view that costs related to the loss of reputation and litigation minimize the incentives for auditors to compromise their independence. They further lamented that auditors care much about their reputation and if the auditor complies with the client and damages the reputation may potentially lose fees from current and future clients.

 

For any country to achieve economic growth and development a sound and efficient banking system is necessary to mobilize funds from the surplus units to the deficit units of the economy for productive activities. In Nigeria, banking industry witnessed different factors that slow the desired level of economic growth and development, which according to Soludo

(2004) include weak internal audit, high incidence of fraud and poor corporate governance.

Similarly, the Central Bank of Nigeria (CBN) Code of Corporate Governance for Banks in Nigeria Post Consolidation of 2006 identified weak internal controls, non-compliance with laid-down internal controls and operations procedures; poor risk management practices resulting in large quantum of nonperforming credits including insider-related credits, and abuses in lending, as problems of the Nigerian banking sector. Historical trend in the Nigerian banking industry shows that 59 banks have failed between 1994 and 2007, and four chief executives were sacked in 2009 in connection with unethical practices with respect to loans and advances. Similarly, the CBN in 2011 had revoked the license of four banks in connection with financial regulatory cases. These have questioned the integrity and quality of audited financial statements of Nigerian banks as well as the independence of external auditors on whether they are independent of management influence via audit fees and auditor tenure. 

 

Auditor independence is critical to the reliability of financial statements as well as investors‟ confidence due to the psychological belief in the auditors‟ role. This together with public expectations of the audit work is critical to regulatory agencies. It is in this context that

Abdelkhalik (2002) states that the value of an audit depends on independence (objectivity). 

The codes of Ethics of the International Federation of Accountants (IFAC, 2000) and the Institute of Chartered Accountants‟ of Nigeria (ICAN, 2010) define independence as a state of not being controlled by other people or things, such as financial benefits. The code further states that an auditor needs to be objective in the course of performing his duties.

Independence is divided into two according to the code; independence of mind and independence in appearance which are to be observed by an auditor in passing his professional opinion. 

 

In an effort to ensure independence of mind and in appearance, the International Standard on

Auditing (ISA) No. 200 (objective and general principles of audit) states that “in the conduct of any audit of financial statements, auditors should comply with the ethical guidance issued by their relevant professional bodies”. These ethical rules govern auditors‟ responsibilities and guide the audit and non-audit functions performed by auditors. In this regard, the auditors‟ code, published by Auditing Practice Board (APB), titled fundamental principles of independent auditing state that auditors should be seen to be objective in all other dealings with their clients, and their opinions should be independent of its directors. Similarly, in

Nigeria, ICAN‟s rules of professional conduct for members‟ regard objectivity as independence of mind, and require auditors‟ objectivity to be beyond question when conducting an audit. The code makes it mandatory for both accountants in business and in public practice with special emphasis on all professional persons to exercise professional judgement. Hence, the ICAN‟s ethical principles out rightly prohibits misconduct and ignorance of misconduct in the audit of financial statements and thus, defined misconduct as any act or default which is likely to bring disrepute to auditor, his fellow accountant, and the profession of accounting in general (ICAN, 1999). 

 


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