This study examined the effect of auditors’ independence on corporate financial scandals in commercial banks in Nigeria. Three deposit money banks were used as the case study which are; First bank, Access bank and Guaranty Trust bank Plc in Lagos State.

Survey research design was used in the study. Descriptive analysis was used to achieve the mean, frequency distribution and percentage results of the research work and four (4) hypotheses were put forward and tested using the correlation, regression and ANOVA analysis.

These findings showed that: Auditors’ independence has a significant effect on financial scandals of commercial banks in Nigeria 0.742 < 0.05.  There is a significant relationship between auditor rotation and financial scandals of commercial banks in Nigeria 15.439 and 16.467 < 0.05.  Quality of audit report does have a significant effect on financial scandals of commercial banks in Nigeria. 60.976 and 11.117 < 0.05.  There is a significant relationship between audit firm tenure and financial scandals in Nigeria’s deposit money banks 0.452 < 0.05. 

The study hereby concludes that auditors’ independence has a significant relationship on the financial scandals of commercial banks in Nigeria. Therefore, the study suggested that: There should be corporate democracy in that stakeholders in our banking industry; accounting firms involved in anti-social financial practices from auditing and conducting other accounting related assignments and services should be barred; Reforming the audit profession through legislations; External auditing firms should be prohibited from providing certain non-auditing services especially those linking them directly to financial information and design, internal control, tax consultancy etc; There should be a mandatory rotation of audit firms; Auditors should ensure that there is transparency, accountability, reliability, and trust in their audit reports.






1.1 Background to the Study

Since the audit forum was established, one of its key aims has been to promote confidence in financial reporting. The statutory audit can reinforce confidence because auditors are expected to provide an external, objective opinion on the preparation and presentation of financial statements. Auditors need to be independent in the opinions they express, while the work they have to do to form their opinions is highly dependent on the real world and may become particularly challenging in some national environments.

Financial statements are prepared to provide useful information in making business and economic decisions (Dogan, Coskun & Celik, 2017). This information is important for the users, as they use the statements to assess the financial condition and performance of the related companies. Farouk and Hassan (2014) stated that the financial statement audit is a monitoring mechanism that helps reduce information asymmetry and protect the interests of the various stakeholders by providing reasonable assurance that the management’s financial statements are free from material misstatements. Farouk and Hassan (2014) posit that quality audit promotes the credibility of financial statements. Audit quality has been the focus of empirical and theoretical auditing research for the last years even though a plenty of studies investigate the audit quality especially in the western countries, there is a lack of empirical evidence from the developing countries context (Kitata, 2016).

Financial statement fraud is the deliberate misrepresentation of the financial condition of an enterprise accomplished through the intentional misstatement or omission of amounts or disclosures in the financial statements to deceive financial statement users (ACFE, 2016).Financial crises and scandals have existed for as long as it can probably be recorded, as long at least as a system of money and rudimentary banking can be traced (Ferguson, 2008). Over the last 10years, a number of corporate and financial events as in the case of Cadbury Nigeria and Eco bank in the early 2000’s have severely shaken the foundations of economic systems based on financial services industry in Nigeria. It starts with the observation that financial crises from the last ten years are essentially rooted in two main problems: a corporate governance one, represented by the lack of effective control systems over those who run the company, and a corporate finance one identified with the excesses of financial innovation and related abuses of capital market finance, which actually brought about auditors independence.

In Nigeria the spate of corporate failures witnessed in the financial sector in the early 1990s brought auditors into sharp focus and caused the Nigerian public to question the role of accountants and auditors Okike, (2004); Bakre, (2007); Ajibolade, (2008). With the recent banking crisis in Nigeria members of the auditing profession in Nigeria are once again in the limelight, as the banking crisis and the revelation of unethical practices by bank executives and board members has raised many questions about the ethical standards of the accounting profession and about the integrity of financial qualified audit reports issued by professional accountants ThisDay, 9 December (2009). The question has been raised as a result of the failure on the part of accountants and auditors to alert regulators when they have discovered fraud and other irregularities in company records, Bakre, (2007); Ajibolade, (2008); Okike, (2009); Neu et al, (2010). Bhasin (2013) observed that the corporate accounting scandals that have occurred over the past two decades not only came as a shock due to the enormity of the failures, but also that the discovery of these scandals questioned the integrity and capability of the auditing profession.

Auditor independence is important because it has an impact on the audit quality. Auditor’s independence has been termed the cornerstone of the auditing profession, since it is the foundation of the public’s trust in the attest function. Independence is fundamental to the reliability of auditors’ report. Those reports would not be credible, and investors and creditors would have little confidence in them, if auditors were not independent in both “fact and appearance”. To be credible, an auditor’s opinion must be based on an objective and disinterested assessment of whether the financial statements are presented fairly in conformity with generally acceptable accounting standards. According to Mr Jim  Henry a chartered accountant and a partner of Jim Henry and Co. questioned thus, “what can the auditor do, when the auditor only audits what the management want him to see and audit”. This is to say, that what the management don’t want to be audited they may devise a means to ensure that those aspect of the transaction of the firms are not allowed access to auditor. Besides, audit opinion of the deposit money 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. 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, 2012).

As a result of the significant number of financial statement frauds in the late 1990’s and early 2000’s, auditor independence became a widely debated topic in the popular press and by the Securities and Exchange Commission (SEC, 2000). The explosion of auditors’ independence and financial scandals has over the past decade triggered research and debates on their origin. Therefore, the above has necessitated this study to investigate the effect of auditors’ independence in corporate financial scandals in Nigeria, using deposit money banks as the case study.

1.2. Statement of the Problem

Auditing is a systematic process of objectively obtaining and evaluating evidences regarding assertion about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to intended users(American Accounting Association 1973). The role of auditing is to ensure that the financial statement prepared by the management shows a true and fair view of the state of affairs of the organisation in order that users are able to rely on it to make economic decisions.

Auditor’s independence refers to the auditor’s ability to maintain an objective and impartial mental attitude throughout the audit (Bahram Sultan). The auditor in performing his duties is expected to exercise all care, diligence, skill in any circumstances. 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, 2014). In the past decades, there are various studies being carried out by the researchers to examine the impact and significance of the issues.

Ideally, Auditor's Independence is expected to reduce the occurrence of corporate financial scandals in Nigeria. Currently, the issue of financial scandals is very rampant in the present economy especially in the Nigeria banking industry, where there are cases of fraudulent acts, misappropriation of funds and so on, which has brought about the impact of auditors independence and if how they have been able to execute their duties independently and with transparency. In regards to this, Abu Bakar, Abdul Rahman, and Abdul Rashid (2014) investigated the factors that influence auditor independence in Deposit Money banks loan officer’s perceptions based on the result from 86 officers’ responded. 

Overtime, it has been observed that the rotation of audit firms, reduction of auditors tenure, non-provision of non-audit services by the auditor could have both positive effect on the audit quality of a firm thereby reducing the occurrence of corporate financial scandals. Even with all the measure put in place to forestall the occurrence there have been little or no changes .A similar study to this was conducted by Kaplan and Mauldin (2008) who find no significant difference, and suggested that under both auditor rotation conditions, investors believe that most of the audit difference will be corrected.

The occurrence of corporate financial scandals have reduce the confidence of the shareholders and others users of the financial statements in the audit firm in providing them with reasonable assurance of to the financial state of affairs of the company. If this problem is not urgently resolved it will deter the personal reputation of auditors, audit firm and even the accounting profession as a whole. It has therefore been observed that the longer the audit tenure in an organization, the less quality in the audit report as a result of the long term mutual relationship that would have existed between the organization and the audit firm. A study by Carey and Simnett (2006) find a positive relationship between auditor tenure and audit failure in Australia. This implies that there is a deterioration of audit quality as audit tenure increases.

However, many of these studies were not conducted in Nigeria, and therefore the results might not be the same in Nigeria, in addition, based on the above studies, there are still some deficiencies in the past empirical researches. The study in Abu Bakar et al. (2014) only focus on the loan officer’s perceptions in Nigeria with a small sample size of less than 100 respondents, moreover, the study also ignored the interaction between factors that contribute to auditor independence by merely focus on each factor Besides, Carey and Simnett (2006) studied is very limited due to small sample size and small emerging market and thus it required caution in interpreting the findings. To the best of my knowledge, very few research has been done on the auditor independence on corporate financial scandals in deposit money banks in Nigeria financial institutions. Therefore, this research is carried out to fill the gap by investigating the effect auditor independence has on corporate financial scandals in Nigerian deposit money banks.

1.3. Research Question

The following research questions were posed for the study.

i. To what extent is the effect of auditors’ independence on financial scandals of deposit money banks in Nigeria?

ii. What is the effect of rotation of audit firm on financial scandals of deposit money banks in Nigeria?

iii. How does the quality of audit report affect financial scandals of deposit money banks banks in Nigeria?

iv. What effect does audit firm tenure has on financial scandals of deposit money banks in Nigeria?

1.4. Objectives of the Study

The main objective of the study is to examine the effect of auditor independence on corporate financial scandals in deposit money banks in Nigeria. The specific objectives are to;

i. Understand if rotation of audit firm have any impact on financial scandals of deposit money banks in Nigeria;

ii. Investigate if the qualities of audit report affect financial scandals of deposit money banks in Nigeria; and

iii. Identify the level of effect audit firm tenure has on financial scandals of deposit money banks in Nigeria.

1.5 Research Hypothesis

In view of the research objectives, the study sought to test the following null hypotheses

Ho1: Auditors’ independence does not have a significant effect on financial scandals of deposit money banks in Nigeria.

Ho2: There is no significant relationship between auditor rotation and financial scandals of deposit money banks in Nigeria

Ho3: Quality of audit report does not have significant effect on financial scandals of deposit money banks in Nigeria.

Ho4: There is no significant relationship between audit firm tenure and financial scandals in Nigeria’s deposit money banks.

1.6 Significance of the Study

This research is basically aimed at contributing theoretically to literature on audit independence and practically to the audit profession as a result of objective to examine the impact of auditor’s independence on financial scandals by examining “deposit money banks perception”. It also aim at contributing to literature on auditor independence by increasing the understanding of factors that poses threat to auditors independence including self-interest, self-review, intimidation, advocacy, familiarity and factors that enhance or protect auditors independence.

This research work will be useful to student of tertiary institution writing their final year project as well as lecturers. It also has the potential of encouraging auditors and users of financial information to see the need for auditor’s independence with respects to its on corporate financial scandals.

Finally, the result of this paper may also assist the relevant policies makers in their effort towards the international auditing standards.



1.7 Scope/Limitations of the Study

The study focuses on auditor independence as a correlate of financial scandals, three deposit money banks are used as the case study which are; First bank, Access bank and Guaranty Trust bank Plc in Lagos State. The study will be limited to the use of questionnaire as a primary source of data to gather the opinion of the respondents from the three selected deposit money banks.

The following limitation of the study are as follows:

Distance: this affected the research study because carrying out the study requires travelling to Lagos where the case studies are located.

Uncooperative Bank/ Staff: some of bank staff were uncooperative and some even to accept my questionnaire and those that accepted some of them did not submit it back on time.

1.8. Operational 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 something without being helped or influenced by other people.

Financial Scandal: These 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.

Objectivity: this refers to the need to maintain impartial judgment.

External audit: this is an audit carried out by an independent person who is not an employee of an enterprise.

Internal audit: this is an independent objective assurance and consulting activity designed to add value and improve an organization’s operations.