This study critically assessed auditor independence and analyzed its importance to the reliability of financial statements. Reliable financial statements are critical to making informed decisions. Auditors are expected to audit a company’s financial statements to provide a true and fair view of the financial statements. A survey study design was adopted in this study. The data used in this work were collected from primary sources. The relevant data collected were analyzed using descriptive statistics of mean and standard deviation and inferential statistics of regression and correlation. The results of the analysis show that auditor’s independence affects the understandability, reliability and faithful representation of financial statement in the Nigerian Banking sector. The reason why audit exists is because investors and creditors can make use of financial statement to make their decisions. The study concluded that auditors’ independence and the credibility of financial statement are to be significantly impaired when non-audit services are conducted and that there is a positive relationship between independence of an auditor and the credibility of financial statement, therefore the independence of an auditor is fundamental to the credibility of financial statement. Finally, the study recommends that there should be rotation of auditors to improve the auditors’ independence, implementation of peer assessment in other to ensure that audit are carried out with outmost professionalism and mutual respect and that auditors should not be allowed to provide audit client with any other advisory services. chapter One


I.1 Research Background

There has been much debate today about the independence of auditors. The leadership of the Auditing Standards Board, the Public Oversight Board, the Independent Standards Board, and the proposed independence rules recently promulgated by the U.S. Securities and Exchange Commission (SEC) all seek to clarify and strengthen auditor independence. did. Even in the Middle Ages, annual accounts were not used for preparation or decision-making, as they were not required. However, with recent developments, all companies are expected to prepare financial statements to know the financial condition of the organization so that stakeholders can make decisions (Loveday, 2017).

The Securities and Exchange Commission (SEC) requires publicly traded companies to ensure that their financial statements are prepared and audited by a chartered accountant firm who is responsible for the fairness of their financial statements. This opinion adds credibility to statements made by lenders and individual investors who voluntarily allow company statements to be independently verified. Users of financial statements, including:
Shareholders, governments, creditors, investors and others all rely on audited financial statements to make informed decisions. Therefore, credibility and credibility of this statement are required (Eko, 2015).

The auditor’s job is to give credibility to the annual financial statements. The preparation of financial statements is the responsibility of management, and the auditor’s responsibility is to lend credibility to the financial statements. Auditors also add credibility to other unaudited information released by management. For a test to be credible, it must be conducted by an independent person, not influenced by positions or powers that influence their conclusions. The Securities and Exchange Commission has approved a new statutory auditor independence rule that requires listed companies to disclose the amount of fees paid to external auditors for non-auditing services (IAASB, 2015).

Auditor independence has long been recognized as a cornerstone of the accounting profession and has autonomy. Society gives people power and privilege

The second general standard of generally accepted auditing standards states that “In all matters relating to the work, the auditor or auditors are maintained independent of attitude”. In principle, an auditor can work as an employee (internal auditor) or as a freelancer (external auditor). Users of the financial information of these companies. B. Investors, government agencies and the public rely on external auditors to provide unbiased and independent evaluations of these companies. In an ideal world this might be the case, but in practice auditors may be less independent than other auditors (Nemit, 2015).

Maintaining auditor independence is a top priority not only for auditors, but also for management and investors. In today’s global market, governments, creditors, institutional investors, lenders, regulators, stakeholders and more. The credibility and reliability of the financial statements depend on the auditor’s statements. From a theoretical perspective, one of the main purposes of financial reporting is to facilitate capital allocation by increasing contractual efficiency and reducing information asymmetries among capital market participants (Gow , Larker, and Reiss, 2015). Improved reporting quality can help provide investors with more accurate information, reduce information asymmetries, and increase contract efficiency. Improving the quality of reporting can therefore improve a company’s access to external funding, ultimately leading to higher investment and investment efficiency (Novie, 2013).

Companies ensure the reliability of their financial statements by hiring independent auditors to verify the accuracy of these disclosures. However, the impact of audits on the reliability of financial statements depends on the independence of the auditor and the rigor of the audit (DeFond and Zhang, 2014). By increasing the reliability of reporting, investors will rely on financial statement information to complete transactions, gain greater knowledge of the company’s operations and performance, and improve the company’s access to external funds and investment/investment efficiency. Possibly (Nwanyanwu, 2013).

One of the pieces of information used is the financial report, which is the deliverable of the accounting process. In this case, financial statements that investors can trust are essential. An audit is required for these statements to be relied upon, especially for open limited companies. A management company appointed by shareholders is accountable for the funds presented to management in the form of annual accounts (Wali, 2015)

I.2 Problem

Recent reports of questionable accounting practices by some companies in Nigeria have brought to the fore the issue of auditor independence and cast doubt on the credibility of the auditing profession (Otusanya and Lauwo, 2010). Financial reports are intended to be the formal record of business activities and these reports are made available to users of these financial reports, including shareholders, managers, employees, accountants and banks. It is intended to be

Recent misuse of financial statements by Enron, WorldCom, Parmalat and others shows that the information provided in financial statements does not faithfully reflect what they say. Based on the recent Parmalat lawsuit, and the German Komroad and Flotex lawsuits, management forged documents and receipts for non-existent assets or transactions. Clearly, these scandals mean that it’s not enough to rely on management’s first explanation. Rather, the auditor must go beyond pretenses and question the veracity of all information with professional skepticism. Standard-setters reacted to these developments

1.3 Purpose of the survey

The primary objective of this study is to determine the impact of auditor independence on the reliability of financial reporting in the Nigerian banking sector. The specific objectives of the research are as follows.

Me. Determines the impact of audit independence on the understandability of financial statements in the Nigerian banking sector.
ii. Assess the impact of audit independence on the relevance of financial statements in the Nigerian banking sector. iii. Determine the impact of audit independence on the fair presentation of financial statements in the Nigerian banking sector.
1.4 Research question

The above goals lead to the following questions:

Me. What is the impact of audit independence on the understandability of financial statements in the Nigerian banking sector?
ii. What is the impact of audit independence on the relevance of financial statements in the Nigerian banking sector?
iii. What is the impact of audit independence on the fair presentation of financial statements in the Nigerian banking sector?
1.5 Formulation of hypotheses

Hypothesis I

Audit independence has no material impact on the understandability of financial statements in the Nigerian banking sector.

Hypothesis II

Audit independence does not significantly affect the reliability of financial statements in the Nigerian banking sector. Hypothesis III

In the Nigerian banking sector, there is no material relationship between audit independence and the fair presentation of financial statements.

1.6 Validity of research

The focus of this study is to examine the impact of audit independence on the reliability of financial reporting in the Nigerian banking sector. This research is relevant to multiple stakeholders, including:

This research helps shareholders to ensure that the financial statements are true and fair and free of material misstatement in making decisions regarding the reports. This report helps ensure that the going concern principle is adhered to.

Potential Investor:
The results of this study will serve potential investors as input in the decision-making process related to investments and financial policies from the annual financial statements. That is, research work relies on financial statements audited by professional certified public accountants.

This research helps management identify matters that may or may not affect the auditor’s independence and help ensure the reliability of the financial statements. It also helps us to take responsibility for the preparation and presentation of our financial statements and to ensure that the going concern principle is adhered to.

This study educates the public on how auditor independence positively impacts the reliability of financial reporting in the Nigerian banking sector. We also discuss how auditor independence can help eliminate creative accounting and pretenses. Other researchers:
This work will also serve as a resource base for other academics and researchers interested in doing further research in this area later on, providing a substantial new explanation of the subject when applied.

1.7 Scope of investigation

This study is concerned with determining the impact of auditor independence on the reliability of financial reporting in the Nigerian banking sector, to the extent detailed below.

The scope of the investigation is limited to the Nigerian banking sector. There are 21 CMs

1.8 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= 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. 1.9 Definition of key terms

Auditor Independence:
This relates to the auditor’s freedom to act professionally. Independence requires an honest and objective approach to the audit process.

Review period:
This relates to the duration of the auditor-client relationship. Tenure therefore covers the period during which the predecessor auditor (in the case of a merger/split or other consolidation in an audit firm) prepared an audit report for that firm.

Exam fee:
This is a fee that a company pays to an auditor in exchange for performing an audit. reliability:
This implies objective and subjective factors of the authenticity of a source or message. Traditional and modern reliability has two key ingredients:
Credibility and professionalism with both objective and subjective elements.

Financial reporting:
This is the process of making statements disclosing the financial condition of an organization to management, investors, and governments.

Audit Committee Independence:
It is a board committee responsible for overseeing the financial reporting process, selecting independent auditors, and receiving internal and external audit results.

Faithful representation:
The idea is to create financial statements that accurately reflect the actual state of the company. Good faith representations cover all parts of the financial statements, including the reporting company’s results of operations, financial position and cash flows.

This is to prevent organizations from intentionally obscuring financial information to mislead users of financial statements and to maintain a reasonable level of understandability. It’s a concept that needs to be presented in an easily understandable way.

This refers to whether investors and creditors can verify and use financial information with the same outcome. Relevance basically refers to the credibility of a degree.


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