AUDITOR INDEPENDENCE AS A CORRELATE OF FINANCIAL SCANDALS

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). In general, a reliable and unbiased assessment of the information provided by auditors regarding the financial condition of listed organizations is important for investors to make investment decisions and improve the efficiency of financial markets. Independence is therefore a central component of the auditor function (Moore, Loewenstein, Tanlu & Bazerman, 2002). In addition, commercial bank audit opinions serve as an effective seal of quality that most second-tier firms cannot obtain due to lack of industry knowledge, reputation, and geographic pressures (Frieswick, 2003). However, accounting firms that provide financial auditing services to most companies, including large private, non-profit and government agencies, have also been implicated in major corporate scandals, raising questions about the independence of their auditors. (Gray & Ratzinger, 2010).

1.2 Problem Description

The auditor’s independence has been questioned. This is because the auditor’s role has failed in several corporate scandals that have drawn the attention of statutory bodies enforcing laws for improved auditor governance (Shafie, Hussin, Yusof & Hussain, 2009). . Various studies have been conducted by researchers over the past decades to examine the impact and significance of the problem. Abu Bakar, Abdul Rahman, and Abdul Rashid (2005) examined factors influencing auditor independence in the perception of commercial bank loan officers based on responses from 86 officers. According to Moorthy, Seetharaman and Saravanan (2010), auditor independence is necessary to enhance the ability to make independent audit decisions. Also there is one

1.3 Purpose of the survey

Knowing whether there is a link between auditor independence and financial scandals.
Understand whether accounting firm rotations have an impact on financial scandals.
Identify the level of tenure of accounting firms in relation to financial scandals.
To know if the quality of audit reports affects financial scandals.
Understand the impact of providing unaudited services on financial scandals. 1.4 Research question

Is there a link between auditor independence and financial scandals?
Will Audit Firm Rotation Affect Financial Scandals?
How does accounting firm tenure affect financial scandals?
Can the quality of audit reports affect financial scandals?
What are the implications for financial scandals of providing non-audited services?

1.5 Research hypothesis

Ho1:
The quality of the audit report has no material impact on the financial scandals of Nigerian depository banks.

Hypothesis 2

Ho2:
There is no significant association between accounting firm tenure and financial scandals at Nigerian deposit banks.

Hypothesis 3

Ho3:
There is no significant link between auditor rotation and financial scandals in Nigerian depository banks.

1.6 Validity of research

Many studies have been conducted on auditor independence in developed countries such as the United Kingdom and the United States. However, empirical evidence regarding the impact of key factors on the independence of Nigerian auditors is limited. This paper aims to further explore the impact of key factors on auditor independence as a key ongoing issue for professionals today, by examining commercial bank perceptions. The results will help Nigerian accountants to better understand and provide up-to-date insights to improve their professional practice.

In addition, Malaysian regulators and policy makers commonly review developed country audit laws during the standard-setting process. However, Nigeria’s regulatory audit environment differs from developed countries. Therefore, the results of this paper will also help relevant political decision makers in their efforts towards international auditing standards. 1.7 Scope of investigation

The study focuses on auditor independence as a correlate of financial scandals, using his three commercial banks in Lagos State (Erste Bank, Zenith Bank and Diamond Bank plc) as a case study .

1.8 Definition of terms

Auditor Independence:
This means that the internal or external auditor is independent of any party that may have a financial interest in the entity being audited.

judge:
This is the person or company hired by the company to conduct the audit.

Independent:
The ability to do something without the help or influence of others.

Financial Scandal:
These are business scandals resulting from the deliberate manipulation of financial statements by disclosure of financial misconduct by trusted corporate or government officials. Financially:
the finances or financial status of an organization or individual;

scandal:
An act or event that is considered morally or legally wrong and causes public outrage.