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AUDITOR INDEPENDENCE AS A CORRELATE
OF FINANCIAL SCANDALS
ABSTRACT
The study
examines auditor independence as a correlate of financial scandals, three
commercial banks are used as the case study which are (first bank, zenith bank
and diamond bank plc) in Lagos State.
This study
makes use of survey research technique, which implies getting information
directly or indirectly from group of respondents through interview and
questionnaire.
The sample
size obtained using Taro Yamani formula, the total numeration techniques that
was adopted for this research owing to the samples size of one hundred and
thirty-three (133) copies of the questionnaire which was personally given to
respondents. The sample size was determined by using random sampling
techniques.
The results
showed that; There is a negative relationship between auditors’ independence
and financial scandals in Nigeria’s deposit money banks; Quality of audit
report have significant effect on financial scandals in Nigeria’s deposit money
banks with negative correlation coefficient; There is significant positive
relationship between audit firm tenure and financial scandals in Nigeria’s
deposit money banks; There is significant relationship between auditor rotation
and financial scandals in Nigeria’s deposit money banks with negative
correlation coefficient.
The study
concluded that auditor’s play important roles in the prevention and detection
of financial scandals.
The study
suggested that; Auditors independence should be given utmost attention in
deposit money banks in order to minimize the prevalence of financial scandals
in the system; Auditors should spend quality time in the preparation of quality
audit report for the organizations they are employed for. In order to ensure,
qualitative audit reports are prepared, audit firms should employ competent
hands as well as invest in the training of their staff; The tenure of audit
firms should be specified appropriately and adhered to as a mitigation strategy
for financial scandals in deposit money banks.
CHAPTER ONE
INTRODUCTION
1.1
Background of the Study
According to
Elliott and Jacobson (1998), auditor independence is defined as in respect to
the reliability of financial statements, the unacceptable risk of material bias
which result from an absence of interests. When the particular interest
presents a risk that would impair auditor‟s objectivity to an extent that it is
going to affect the outcome of the audit, the auditor independence is said to
be materially impaired (Elliott & Jacobson, 1998).
Generally,
credible and unbiased appraisal of information about the listed organizations'
financial position provided by auditor is important for investors to make
investment decision and enhances the efficiency of financial markets.
Therefore, independence is central to the function served by auditors (Moore,
Loewenstein, Tanlu, & Bazerman, 2002). Besides, audit opinion of the
commercial banks serves as an effective quality label which is unavailable from
most of the second tier firms due to their lack of industry knowledge,
reputation and geographic pressure (Frieswick, 2003). However, the auditing
firms that provide financial audit services to most of the companies such as
large private, non-profit and government organizations also involved in major
corporate scandals which in turn raised the question of independence of
auditors (Gray & Ratzinger, 2010).
1.2
Statement of the Problem
Auditor
independence is questionable upon the failure of audit role in various
corporate scandals which gained the attention of the statutory body to enforce
the law for improved governance of auditors (Shafie, Hussin, Yusof, &
Hussain, 2009). In the past decades, there are various studies being carried
out by the researchers to examine the impact and significance of the issues.
Abu Bakar, Abdul Rahman, and Abdul Rashid (2005) investigated the factors that
influence auditor independence in commercial banks loan officer‟s perceptions
based on the result from 86 officers‟ responded. According to Moorthy,
Seetharaman, and Saravanan (2010), auditor independence is required to improve
the ability to build independent audit decision. Besides, there is a study in
Barbados which investigates the perceived auditor independence between auditors
and users as auditor independence is a major concern after the collapse of
Enron (Alleyne, Devonish, & Alleyne, 2006). On the other hand, Abu Bakar
and Ahmad (2009) also investigated Nigeria accountant perceived determinants of
auditor independence by identified the size of audit fees as the most important
influencing factor, followed by competition, size of audit firm, tenure,
provision of management advisory service and lastly audit committee.
However,
there are still some deficiencies in the past empirical researches. The study
in Abu Bakar et al. (2005) only focus on the loan officer‟s perceptions in
Nigeria with a small sample size of less than 100 respondents. Besides, Moorthy
et al. (2010) pointed out that the degree of auditor independence is subjected
to how the people view it and thus, it varies from one person to another
person. In addition, Alleyne et al. (2006) studied is very limited due to small
sample size and small emerging market and thus it required caution in
interpreting the findings. Moreover, the study of Abu Bakar and Ahmad (2009)
also ignored the interaction between factors that contribute to auditor
independence by merely focus on each factor. Until today, there is no research
done on the auditor independence of commercial banks in Nigeria financial
institutions. Therefore, this research is carried out to fill the gap by
investigating the factors that affect auditor independence and the financial
Scandal in commercial banks of Nigeria.
1.3
Objectives of the Study
To know if thereis any relationship between auditors’ independence
and financial scandals.
To understand if rotation of audit firm
have any impact on financial scandals.
To identify the level audit firm tenure has
on financial scandals.
To know if the quality of audit report
affect financial scandals.
To know the impact provision of non-audit
service have on financial scandals.
1.4 Research
Question
Is there any relationship between auditors’
independence and financial scandals?
Does rotation of audit firm have any impact
on financial scandals?
What effect does audit firm tenure has on
financial scandals?
Can the quality of audit report affect
financial scandals?
What impact does the provision of non-audit
service have on financial scandals?
1.5 Research
Hypothesis
Ho1: Quality of audit report does not have
significant effect on financial scandals in Nigeria’s deposit money banks.
Hypothesis
two
Ho2: There
is no significant relationship between audit firm tenure and financial scandals
in Nigeria’s deposit money banks.
Hypothesis
three
Ho3: There
is no significant relationship between auditor rotation and financial scandals
in Nigeria’s deposit money banks.
1.6
Significance of the Study
Many studies
on auditor independence were carried out in developed countries such as United
Kingdom and United States. However, there is limited empirical evidence
regarding the influence of important factors on auditor independence in
Nigeria. This paper aims to further investigate the effect of important factors
on auditor independence as ongoing significant issue for the profession
nowadays by examining commercial banks‟ perception. This result can contribute
to a better understanding and supply recent evidences for Nigeria auditors in
order to improve their profession practices.
In addition,
regulators and policy makers of Malaysia generally review the audit legislation
of developed countries during standard setting process. However, the regulatory
audit environment in Nigeria has been different from the developed countries. Therefore,
the result of this paper may also assist the relevant policy makers in their
effort towards the international auditing standard.
1.7 Scope of
the Study
the study
focuses on auditor independence as a correlate of financial scandals, three
commercial banks are used as the case study which are (first bank, zenith bank
and diamond bank plc) in Lagos State.
1.8
Definition of Terms
Auditor
Independence: It refers to the independence of the internal auditor or of the
external auditor from parties that may have a financial interest in the
business being audited.
Auditor:
This is a person or a firm appointed by a company to execute an audit.
Independence:
The ability to do somthing without being helped or influenced by other people.
Financial
Scandal: This are business scandals which arise from intentional manipulation
of financial statements with the disclosure of financial misdeeds by trusted
executives of corporations or governments.
Financial:
The finances or financial situation of an organization or individual.
Scandal: An
action or event regarded as morally or legally wrong and causing general public
outrage.
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