Effect Of Auditor’s Independence On Achieving True And Fair View Of Accounting Records

Effect Of Auditor’s Independence On Achieving True And Fair View Of Accounting Records

First Part

Introduction

1.1 Context Of The Study

Auditor independence is essential to the credibility of their reports. If auditors were not both in fact and in appearance independent, these reports would be unreliable, and investors and creditors would have little faith in them. In order for an auditor’s opinion to be credible, it must be founded on an objective and disinterested evaluation of whether the financial statements are presented fairly in accordance with generally accepted accounting principles.

As stated by the American Institute of Certified Public Accountants (AICPA) council in a 1947 statement: “Independence, both historically and philosophically, is the cornerstone of the public accounting profession, and its strength and stature are dependent upon its maintenance.”

In 1932, the AICPA council examined and rejected restrictions on accountants functioning as clients’ officers or directors. However, the plan aroused initial concerns regarding the need to maintain impartiality and actual independence.

The origin of the word audit is the Latin verb audre, which means “to hear.” Auditing dates back to ancient times, when proprietors permitted tenant farmers to work on their land without engaging in farming themselves. The proprietors relied on a supervisor who listened to the stewardship accounting of the tenants.

Throughout the years, diverse auditors have characterized auditing from various perspectives. However, the one supplied by International Auditing (IAG) will be considered for this research project. This guideline was issued by the International Federation of Accounting Committee (IFAC). Auditing is defined as “an independent evaluation of an appointed auditor’s expression of opinion on an enterprise’s financial statements in accordance with his engagement term and the fulfillment of statutory regulations and professional requirements.”

Certain aspects of the International Federation of Accounting Committee’s (IFAC) definition of auditing are essential to a complete understanding of the discipline: (a) independence; (b) professional opinion expression; (c) engagement term; and (d) statutory and professional obligations.

According to the definition, an auditor must be independent of the management responsible for the compilation of financial statements (financial statement) and accountable to the proprietors who receive and utilize the reports. Additionally, he must be independent of government agencies and other parties with whom the company communicates.

In his report, the auditor does not proclaim that the financial statements are honest and fair, but he can state that, in his opinion, they are true and fair. If the auditor is known to be independent, the shareholders and creditors will rely on his advice.

Prior to commencing any audit assignment, the auditor must agree in writing on the pricing scope of the work. This is accomplished by utilizing an engagement letter. The auditor adheres to both statutory regulations and professional standards. In Nigeria, an auditor must be a chartered accountant and a member of a recognized professional organization, such as ICAN, ACCA, etc. His operations are governed by laws such as the CAMD Act of 1990, the ICAN Act of 1965, and the pronouncements of other pertinent professional organizations.

An auditor must be impartial with regard to the entity being audited. The requirement for auditor independence is legally enforceable and can be found in multiple statutes and regulations. Therefore, the auditor should be an impartial individual appointed to investigate the financial activity of an organization. This includes both its archives and the management-prepared financial statements. To fulfill all of the expectations of the firm’s or organization’s shareholders and other interested parties, the auditor must be independent. A public accountant’s opinion on the justice of a company’s financial statements is meaningless unless the accountant is truly independent. In addition, they often serve as financial advisors and management consultants.

The independence of internal or external auditors from parties with a financial interest in the entity being audited is referred to as auditor independence.

Independence necessitates: – Mind independence: The mental state that enables an individual to provide an opinion without being influenced by influences that undermine professional discernment, thereby permitting an individual to act with integrity, impartiality, and professional skepticism.

– Appearance of independence: The avoidance of facts and circumstances so significant that a reasonable and informed third party, having knowledge of all relevant information, including safeguards used, would conclude a firm’s or a member of the assurance team’s integrity, objectivity, or professional skepticism had been compromised.

Using the term “independence” by itself may lead to misunderstandings. The term may mislead observers into believing that a professional judge should have no economic, financial, or other ties. Since every member of society interacts with others, this is unthinkable. Therefore, the significance of economic, financial, and other linkages should be evaluated in light of what a reasonable, well-informed third party with all pertinent information would conclude is undesirable.

In AU section 220, the American Institute of Certified Public Accountants (AICPA) states that an auditor “must be without bias with respect to the client, because otherwise he [or she] would lack the impartiality necessary for the dependability of his [or her] findings, regardless of how excellent his or her technical proficiency may be.”

The International Federation of Accountants Committee (IFAC) provides a framework of principles that assurance teams, firms, and network firms should use to identify threats to independence, evaluate the significance of those threats, and, if the threats are not clearly insignificant, identify and apply safeguards to eliminate or reduce the threats to an acceptable level, so that mental and physical independence are not compromised.

When there are no available protections to reduce the threat to an acceptable level, the only options are to discontinue the activities or interests that are causing concern, or to decline to accept or continue the assurance engagement.

According to Fagbohungbe (1993), if an auditor is dependent, his position no longer serves a purpose. The credibility gap that necessitated auditing in the first place will persist, rendering his report unreliable.

Therefore, the auditor’s independence is a crucial quality that allows him to ensure accountability. Auditor independence is significant because it influences audit quality. DeAngelo (1981b) defines audit quality as the probability that the auditor will discover and report the violation. If the auditor is not independent, he or she is less likely to report issues, resulting in a decrease in audit quality. Numerous studies have been conducted on this topic because auditor independence is a crucial issue for the auditing profession.

The significance of the client refers to the auditors’ financial dependence on the client. As a consequence of receiving payment from the client for auditing services rendered, auditors are financially dependent on the client (DeAngelo, 1988a). If a client represents a significant portion of an auditor’s portfolio, the auditor has an incentive to retain the client in order to assure a future source of revenue and profits, and thus to compromise independence and favor the client (Blay, 2005).

Non-audit services may have a negative impact on the independence of an auditor. When external auditors provide non-audit services to clients, they earn more money, which, as previously discussed, may increase economic dependence. In addition, the provision of audit and non-audit services by the same auditor may result in a conflict of interest, as he may examine his own work with less care.

Auditor tenure may lead to a loss of independence. As the duration of the auditor-client relationship increases, the auditor may develop a close rapport with the client and become more likely to act in favor of management, resulting in a decline in objectivity and audit quality.

Client affiliation with CPA firms indicates that a portion of the client’s personnel previously worked for the current auditor. The affiliation can compromise independence if there is a personal relationship between the client’s officer and the auditor or an acquaintance of the former auditor, as well as if the audit process is circumvented (Lennox, 2005).

1.2 STATEMENT OF PROBLEM

The primary objective of the auditor’s reliance is to acquire and maintain the users’ confidence in the audit report. Users of financial information in Nigeria have relied on auditors’ reports and other information sources to make financial decisions over the years. Their evaluation of the financial statements of their client is crucial for accounting information users.

However, recent distortions and misleading reports in the majority of companies’ financial reports indicate that auditors lack the independence to present the true problem of such companies to the outside world; thus, this research is necessary.

Numerous accounting records presented to shareholders and interested parties in a company’s report do not demonstrate the true and fair status of accounting records.

1.3 Objectives And Goals Of The Study

This study’s primary objective is to investigate the impact of auditor independence on attaining a true and fair view of accounting records at First bank Plc, a Nigerian business environment. Specifically, this investigation intends to:

(1) To assess the variables that impact the auditor’s independence with respect to audit work.

(2) Determine if the auditor’s independence has effectively reduced doubts about the report’s authenticity.

(3) Determine the impact of the auditor’s report on future decisions and make recommendations based on the results of this study.

(4) Investigate whether auditors are performing their duties in accordance with professional standards.

1.4 Research Questions

In order to achieve the purpose of this study, the following research questions are posed in pursuit of answers to the investigated issue.

Can auditor independence enhance the confidence of shareholders, creditors, and others in audit reports?

Are auditors always required to adhere to accounting standards and other regulations?

Can an auditor participate in the implementation of an effective auditing system within an organization?

How might statutory regulations and professional requirements impede the efficient implementation of audit work?

5. Is the law robust enough to safeguard the independence of auditors so that they can carry out their legitimate duties?

1.5 Radius Of Study

This study aims to shed light on auditor independence, which is regarded as the sole means of obtaining an accurate and impartial perspective of accounting data. It will examine the definition of independence, the different types of independence and their varying benefits, as well as the statutory and professional regulations that assure auditor independence, as well as their appointment, dismissal, liabilities, and obligations.

Due to time and cost constraints, it is not possible to visit all audit firms in the country to learn their perspective on this issue; therefore, the study is limited to First bank Plc and chartered accountants in Lagos state.

1.6 Significance Of Study

This study will increase the shareholders’ investment because the financial reports presented to them can be relied upon. This research will alter the perspective of the general public, particularly shareholders, regarding their reliance on accounts audited by an independent auditor.

This work will also aim to identify areas where auditors require substantial assistance and the full support of the law to perform their duties.

The study will also provide vital information to those interested in becoming auditors regarding their appointment, compensation, removal, and independence in the various organizational structures and parastals in which they find themselves. The potential outcome of the study will minimize the likelihood of conspiracy, fraud, and misappropriation of shareholders’ funds, as well as embezzlement, if the document is audited by a qualified independent auditor.

1.8 Definition Of Terms

A comprehensive listing of everything a person or business earns or spends.

A person who examines an organization’s accounts or conducts an audit of the organization.

INDEPENDENCE; freedom from dependence on or control by another individual or group.