AUDITOR INDEPENDENCE AND AUDIT QUALITY IN NGIERIA ABSTRACT This study is motivated by a desire to examine the relationship between auditor independence and audit quality. A sample of five banks listed in the Nigeria Stock Exchange was selected as the sample size covering the period of 2004 – 2009 financial years. In light of the empirical review and other discussions, a number of questions arose as to how related are auditor independence, size of firm, nature of firm, board size and audit committee to audit quality in Nigeria. This then lead to the formulation of model were auditor independence, size of firm, nature of firm, board size and audit committee was used as explanatory variables, while audit quality was used as the dependent variable in the study, using the Binary Logistic Regression technique with the aid of a computer software Eviews 7. The empirical findings revealed among other things that, there is a relationship between auditor independence and audit quality. The OLS result also supported that there is a relationship between size of a firm and audit quality. The OLS result however reveals that, board size and audit composition has no significant influence on audit quality in Nigeria. Recommendation therefore made in the concluding chapter of this study based on the findings obtained. TABLE OF CONTENTS CHAPTER ONE: INTRODUCTION Background to the Study Statement of the Research Problem Objectives of the Study Research Hypothesis Scope of the Study Significance of the Study Limitation of the Study References CHAPTER TWO: LITERATURE REVIEW Introduction The Meaning and Types of Auditors Independence Meaning and Measurement of Audit Quality Auditor Independence and Audit Quality Audit Independence and Audit Quality in Nigeria References CHAPTER THREE: RESEARCH METHODOLOGY 3.1 Introduction The Research Design Sources of Data Collection The Population of the Study Theoretical Framework Model Specification Method of Data Analysis References CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS 4.1 Introduction 4.2 Descriptive Statistics 4.3 Correlations Analysis 4.4 Regression Analysis 4.5 Test of Hypotheses Discussion of Findings CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS 5.1 Summary of Findings 5.2 Conclusion Recommendations Bibliography Appendix CHAPTER ONE INTRODUCTION BACKGROUND TO THE STUDY Auditors’ independence is the foundation of the auditing profession, a significant element in the statutory financial reporting process and a key condition for adding value to all audited financial reports. According to Appah (2008), the duty of an external auditor is to form and express a professional opinion on the financial statement presented to him. In order to achieve this, the auditor needs to be and be seen to be independent from the management. The question of auditor independence - which is synonymous with auditor objectivity and the auditor’s ability to withstand client pressure - has received increased attention from regulators, academics, and practitioners around the world in recent years due to highly publicized audit failures. Regulators often argue that independence is compromised through an auditor’s dependence on “excessive” audit fees. Some academics, however, argue that regulators fail to consider the cost to auditors of compromising their independence (e.g., loss of reputation) and that regulators ignore the possibility that may actually improve audit quality (e.g., DeFond, Raghunandan and Subramanyam 2002). Auditors’ independence in fact enhances the reliability of financial statements whereas Auditors independence in appearance promotes public confidence as to enable users rely on financial statements (Church and Zhang, 2002). The fundamental concept of professional independence is an attitude of the mind based on integrity and an objective approach to work. An auditor must at all times, perform his work objectively, impartially and free from influence by any consideration which might appear to be in conflict with this requirement. Appah (2008) note that independence in auditing means having a position to take an unbiased view point in the performance of audit test, analysis of results and attestation in the audit report. Auditor independence refers to the independence of the internal auditor or of the external auditor. It is essentially an attitude of mind characterized by integrity and an objective approach to the audit process. The concept requires the auditor to carry out his or her work freely and in an objective manner. Audits are carried out to ascertain the validity and reliability of financial statement and presented corporate information. It also provides an assessment of organization internal control. However, the goal of an audit is to express a professional opinion on the financial statements being examined, based on work done on a test basis. Evans and Parker (2008), describe auditing as one of the most powerful safety monitoring technologies and effective way to avoid complacency and highlight slowly deteriorating conditions especially when the auditing focuses not just on compliance but effectiveness. However, the rise in accounting regulations has re-opened questions about audit quality (Bricker 2002). Accounting profession seeking to improve financial reporting practices should increase auditor reporting responsibilities and establish programs to monitor audit quality. Although every country has different accounting regulations but mostly require quality financial report for investment, financing and tax purposes. These are usually performed by independent auditing firms. The results of the audit are summarized in an audit report that either provides a qualified opinion on the financial statement or qualification as to its truth and fairness. On the other hand, De Angelo (1981), defines audit quality as the probability that an auditor will both discover and report a breach in the client’s accounting system. Audit quality deals with the influence of the audit on financial statement and ability of the auditors to control the quality of information produced through the assured Generally Accepted Accounting Principle (GAAP) and relevant supporting legislations. Therefore, the Auditor’s expertise which consists of both the ability to discover misappropriations and form an opinion is very important in financial reporting. These abilities are useful to internal and external users of financial statements i.e. shareholders, managers, employers, investors, banks and government among others. For a number of years researchers have been convinced that the quality of audit services varies according to the size of audit firms. Consequently, the quality of audit is often operationalised by the size of audit firms (Hashanah and Takiah 2003; Che Ahmad and Shamharir 2002). Previous studies use big international audit firms to represent high quality audit and small audit firms to represent low quality audit, hence, the use of the dichotomy of Big 8/non-Big 8, Big 6/non-Big 6, Big 5/non-Big 5, and Big 4/non-Big 4 (e.g. Francis 1984; Francis and Stokes 1986; Ferguson and Stokes 2002; Mohd-Mohid and Takiah 2004). Big audit firms are viewed as providing higher quality audit based on their perceived competence and independence (DeAngelo 1981). Big 8 (then) auditors are perceived to be providing higher quality audit (as in the US) in order to protect the firm reputation and to avoid costly litigation (e.g. DeAngelo 1981). It is argued that big audit firms have more resources to invest in better technology and training (Craswell, Francis and Taylor 1995). As a result, they are able to develop their expertise and reputation among clients. Big audit firms are expected to sustain the quality of audit services in order to maintain reputation and audit market (Behn, Carcello, Hermanson and Hermanson, 1997). With the recent collapse of Enron involving the misconduct of one of the Big 4, Arthur Andersen & Co., the argument for audits for big audit firms as synonymous with quality audit has become questionable. Khurana and Raman (2004a) provide evidence that there is no significant difference in the quality of audit between Big 4 and non-Big 4 audit firms in the Association of South East Asian Nations (ASEAN) countries where the audit environment is less litigious. The study suggests that in the emerging market such as in ASEAN countries, Big 4 audit firms are not living up to their brand name reputation and that, by implication, the quality of Big 4 audits in these countries is not any higher than the quality of non-Big 4 audits (Khurana and Raman 2004a). It is argued that in countries with generally less litigious environments than that in litigious environments (Saudagaran and Diga 2000). Thus, the absence of litigation risk may weaken the incentives of Big 4 auditors to provide higher quality audits (Khurana and Raman 2004a). Khurana and Raman (2004b) argue that in such environments the Big 4 brand name reputation becomes an important professional asset in retaining current audit clients, attracting new major clients, and in retaining or recruiting outstanding individuals as employees. However, in that environment, auditors have no incentive to provide quality differentiated audit (Khurana and Raman 2004a). Consistent with the Big 4 brand name eminence, therefore, reputation concerns could provide sufficient incentives for Big 4 auditors to provide quality audits in the less litigious ASEAN environment. It is a concern, therefore, whether companies audited by the Big 4 receive better quality audit services than those audited by the non-Big 4. If the hypothesis that the quality of Big 4 audit services is higher than that of the non-Big 4 does not hold in ASEAN countries, then the use of size of audit firm as a proxy of audit quality for research in this region may not be justifiable. STATEMENT OF THE RESEARCH PROBLEM Auditor independence is commonly referred to as the cornerstone of the auditing profession since it is the foundation of the public’s trust in the accounting profession. Since 2000, wave of high profile accounting scandals have cast the profession into the limelight, negatively affecting the public perception of auditor independence. It is against this backdrop, the following research questions are raised. What is the relationship between auditor independence and audit quality? What is the relationship between size of a firm and audit quality? OBJECTIVES OF THE STUDY Stemming from the above statement of problems, the broad objective of this study is to empirically investigate the impact of auditor independence and audit quality. Other specific objectives include: To find out the relationship between auditor independence and audit quality. To ascertain the relationship between size of a firm and audit quality. RESEARCH HYPOTHESIS The following hypotheses shall be tested in this study Hypothesis I Ho: There is no relationship between auditor independence and audit quality. H1: There is relationship between auditor independence and audit quality. Hypothesis II Ho: There is no relationship between size of a firm and audit quality. H1: There is relationship between size of a firm and audit quality. SCOPE OF THE STUDY This research work is an empirical study on auditor independence and audit quality. The population of the study is Nigeria, while the sample is selected audit users in Benin City, Edo State. This study will involve assessing auditors in the discharge of their duties as well as their credibility. SIGNIFICANCE OF THE STUDY This research work on its conclusion, together with whatever solution or findings that may arise, will prove useful to some particular group of persons or otherwise for various reasons in accordance with their varying needs. Beneficiaries Stakeholders: This study will be important and beneficial to stakeholders of an organization to know the impact of auditor independence and audit quality. The Government: It will acquaint the government of the importance of auditor independence and how it should be encouraged. The public: This study will help to restore the lost confidence of the public as regard auditor independence and audit quality. Academic/future researcher: Both academic and other future researchers in this similar subject matter will find it a useful source of learning and research. LIMITATION OF THE STUDY The problems encountered in the course of this research includes; Inadequate Study Materials: Research materials were of limited supply due to the practicality of the study. Where they were available; the cost involved in sourcing for them was very expensive. Lack of Access to Current Data: Most managements and staff of the establishment would not want to disclose important or relevant information about their organizations on this subject matter, except were such is permitted by law to be disclosed. Finance Cost: The cost involved in sourcing for the available materials and other necessary information was very high within the reach of the student researcher REFERENCES Appah, E., (2008). Auditors Independence: A Real Issue. J. Creativity Sci. Stud., 3: 66-71. Behn, B. K., Carcello, J. V., Hermanson, D. R. and Hermanson, R. H. (1997) The Determinants of Audit Client Satisfaction among Clients of Big 6 Firms, Accounting Horizons. 11(1). American Accounting Association. March: 7–24. Bonner S.E. and Pennington (1991) “Cognitive Process and Knowledge as Determinants of Audit Expertise.” Journal of Accounting Literature, 1-50. Bonner S.E. and Walker P.L. (1994) “The Effects of Instruction and Experience on the Acquisition of Auditing Knowledge.” The Accounting Review. 157-178. Bricker R. (2002) “Transparency, Independence, Technology and the CPA Scope of Services. New challenges to the profession”. The Ohio CPA Journal, 4, 48-50. Che Ahmad, A. and Shamharir, A. (2002) Audit Industry Specialization, Brand Name Auditors and Financial Reporting Lag. Paper presented at Audit Quality Conference in Bangkok, 24–26 August. Church, B. and P. Zhang, (2002). Independence in Appearance: Non-Auditing Services and Auditor Fee Disclosures. Working Paper, Toronto University, www.ccsenet.org/journal.html.
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