IMPACT OF AUDIT FEES ON AUDITOR’S INDEPENDENCE IN THE NIGERIA PRIVATE SECTOR
CHAPTER ONE
BACKGROUND OF THE STUDY
1.1 Introduction
Audit independence refers to the ability of the external auditor to act with integrity and impartiality during his/her auditing functions. Two types of auditor independence were developed by Mautz and Sharaf (1961) namely practitioner-independence (or independence in fact), and profession independence (or independence in appearance). Communication of accurate financial statements is vital to the operation of the economy since users of financial statements depend on this information to make financial decisions. To increase the confidence in their financial statements, companies utilize the services of external independent auditors to audit their books. Independent auditors audit the financial statements and express an opinion on the fairness of the statements. The confidence placed on these statements depends ultimately on the perceptions held by the users of these statements regarding the independence of the external auditors. While the external auditors may in fact be independent of the management of the company being audited, if they are perceived not to be independent, then the value of their opinions to the users of the statements is diminished.
In recent times there has been much discussion about the independence of Auditors; 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 neither prepared nor 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 organisation so that stakeholders can make decisions. 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.
The basic purpose of financial statements in the view of Meigs and Meigs (1981) is to assist decision makers in evaluating the financial strength, profitability and the future prospects of a business entity. The basic objective for preparing financial statement is to provide information useful for making economic decisions. The objective of an audit of financial statements is to enable the auditor express an opinion whether the financial statements are prepared in all material respects and also in accordance with auditing standard.
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 non audit services.
The auditor independence has long been recognized as the cornerstone of the public accounting profession (Sweeney, 1992; Mednick, 1997) 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 (Preston et al., 1995; Thompson and Jones, 1990). 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 (Antle, 1999). 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 (Dobson and Armstrong, 1995; Libby and Thorne, 2007).
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 will argue that these auditors may be less independent than the other auditors. Therefore 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.
1.2 Statement of the Problem
Financial reports as stated in Igben (1999) 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. But in recent times, the financial manipulations, weak internal control systems, ignorance on the part of the board of directors and audit committee, manipulation on the part of the reporting auditor and other fraudulent activities that occur within companies, creating a negative goodwill to the general public.
In fact every year, a new business fraud is unraveled, often with similar components: corporate instability, uniformed accountants, high-level connections, and broker investors (Swartz and Watkins, 2003.
1.3 Objective of the Study
The broad objective of this study is to examine the impact of Audit fees on Auditor’s Independence in the Nigeria Private sector.
The specific objectives are;
- To determine the impact of audit fees on auditors’ independence
- To determine if incentives and gifts influences auditors independence
- To determine if auditors will act independently without any remunerations
1.4 Research Questions
Answer to the following questions will be sought as a basis for testing the hypotheses:
- Does audit fees have any impact on Auditor’s independence?
- Does auditors’ independence affect the credibility of a financial statement?
- What are the duties, powers, and rights of an auditor?
1.5 Research Hypothesis
For the purpose of this study, the following hypotheses were formulated and tested
Null Hypothesis
Ho1. There is no significant relationship between audit fees and Auditor’s independence.
Ho2 Incentives/Gift does not influence auditors independence
Ho3: Auditors will not act independently without any remuneration
Alternative Hypothesis
Ho1. There is significant relationship between audit fees and Auditor’s independence.
Ho2 Incentives/Gift influence auditors independence
Ho3: Auditors will act independently without any remuneration
1.6 Significance of the Study
The fee of auditor is paid by the board of directors leaving them with the power in the relationship. Therein lies the dilemma, how can the audit team please the directors without losing any of their independence but keep the directors happy to ensure maintain repeat business? The problem regarding independence stems from two main sources the auditors’ relationship with the company and the nature of the accountancy profession. An auditor earns a living from the fee he is paid it is therefore automatic that does not want to do anything to jeopardize this income. This reliance on clients’ fees may affect the independence of an auditor. If the auditor feels this client income is more important than their responsibilities to shareholders he may not perform the audit with the shareholder’s interest in mind. The larger the fee income the more likely the auditor is to shirk his responsibilities and perform the audit without independence. This could lead to the manipulation of figures and exploitation of accounting standards. By performing the audit without independence the shareholders’ may get misled, as the auditor is now reliant on the directors.
There are two important aspects to independence which must be distinguished from each other: independence in fact (real independence) and independence in appearance (perceived independence). Together, both forms are essential to achieve the goals of independence. Real independence refers to the actual independence of the auditor, also known as independence of mind. Real independence is concerned with the state of mind the auditor is in and how the auditors deal with a specific situation. An auditor who is really independent has the ability to make independent decision even when there is no independence present or if he is placed in a compromising condition by the director of the company. Similarly, an auditor’s objectivity must be beyond question and this can be guaranteed by perceived independence which is very important. (Lindberg, D.L and Beck, F.D, 2004).
It is therefore important that the auditor should not only act independently, but appears independent. If some facts suggest that an auditor is not really independent this could lead to the public concluding that the audit report does not represent a true and fair view. Independent in appearances also reduces the opportunity for an auditor to act otherwise than independently, which subsequently adds credibility to the audit report.
1.7 Scope and Limitation of the Study
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.
Therefore 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 rely on the information provided by the auditors on the credibility and reliability of the financial statements.
The research work will be limited to Impact of Audit fees on Auditor’s independence in the Nigeria Private Sector, the major constrain during this research work will be lack of fund and challenges in coping with academic work and the research project itself.
1.8 Definition of Terms
Audit and Auditor: Audit is defined as an examination of a company’s financial statement by a firm of independent public accountants. Awe 2005 defined auditing as “in independent examination of the books and accounts of an organization by a dully appointed person to enable that person give an opinion as to whether the accounts show a true and fair view and comply with relevant statutory guidelines.
Audit Independence: This is defined as an auditor’ unbiased mental attitude in making decisions throughout the audit and financial reporting (Bartlett, 1993).
Compliance Test: This entails the design and performance of test to establish whether those controlling the system that the auditor has decided to rely upon are effective in practice as they are on paper.
Financial Statement: This refer to the reports prepared by the public companies showing the income they generated during the period and how it is expended during the same period. It includes the income statement, profit and loss, cash and fund flow statement, and statement of source and application of fund, auditors report e.t.c.
Independence: Independence refers to the quality of being free from influence, persuasion or bias (Maury, 2000).
Programming independence: This is resistance of auditor to any form of interferences from the client’s management as he plans out his audit work. Auditor should disallow the board or management from restriction, specification or modification of his chosen procedures.
Transparency: The concept entails the willingness and readiness to submit to public enquiry or examination to confirm that the activities of the stewards are clear and without doubt. They must be certified as the true and fair by the trustee or his appointed agent who should be of good integrity.
True and fair Concept: By “truth” we mean the financial statement is a true summary of the book of accounts and records of the company. By “fairness” we refer to the consideration of the interest of all stakeholders on a fair basis. Therefore, by true and fair, we mean:
– The financial statements area summary of valid, accurate and completely processed transactions.
– The financial statement prepared in accordance with relevant accounting and statutory rules Awe Wale O.I. (2005).
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