1.1 Background to the Study
Changes in the economic environment and growth of corporate structure have brought about the need to separate business ownership from management. In the past, the nature and size of businesses made it possible for owners to manage their firms hence self-accountability was prominent. Separation of owners (principals) from managers (agents) has necessitated owners and managers rapport such that managers have the responsibility of handling the business activities of the firm on behalf of their principals. This in turn brought the need for owners of business organizations to search for an intermediary whose responsibility was to check the stewardship of managers of the firm and assure the owners of fair performance. This intermediary role is what auditing plays so as to be able to establish whether managers' report truly reflect correct and complete position of transactions as presented (DeAngelo, 1981).
Auditing involves scrutiny of financial records with a view to ascertaining the true state of financial position of the company as presented by directors. It enhances credibility, provides an independent confirmation of financial information presented by management thus serving to lessen investors' information risk (Watts & Zimmeranson, 1983; Mansi, Maxwell & Miller 2004). In its role as the link between management and other stakeholders, the auditor assesses how corporate managers apply relevant accounting standards in financial statements preparation. In view of this, accounting information users anticipate auditors to apply technical ability, honesty, and independence, in the audit process to prevent issuance of false financial reports. Thus, for an audit to satisfy the reasonable expectations of various stakeholders, it becomes imperative for the audit assignment to be executed with due regard for financial reporting excellence.
It is the duty of a company's directors to prepare financial statement. Nevertheless, Section 359(1) of the Companies and Allied Matters Act (CAMA), 1990 (as amended) provides for audit of financial statements. External auditors are appointed at Annual General Meetings (AGM) by shareholders for this purpose. The audit report being the end product of any audit task is then issued expressing a 'true and fair view' opinion on the financial statements (Blandon & Bosch, 2015; Otuya, Donwa & Egware, 2017).
Generally, auditors are saddled with the responsibility of examining the financial report of organizations for the purpose of ascertaining whether it represents that which they purport (Abubakar, N.d). The primary purpose of an audit, therefore, is to provide company shareholders with an expert and independent opinion as to whether the annual financial statement of the company reflects a true and fair view of the financial position of such company, and whether they can be relied upon for investment decision purposes. However, for the auditor to give the expected unbiased and honest professional opinion on the trueness and fairness of financial statements to the shareholders, the auditor needs to be independent from the client company, so that the audit opinion will not be influenced by any relationship between them.
Auditor independence, therefore, refers to the ability of the external auditor to act with integrity and impartiality during his auditing functions
(Akpom & Dimkpah, 2013). Independence, in this context, represents the means by which an auditor demonstrates that he can perform his task in an objective manner. However, doubts are sometimes expressed regarding the independence of external auditors as most auditors could reach audit opinions and judgments that are heavily influenced by the wish to maintain good relations with the a client company. If this happens, the auditors can no longer be said to be independent and the shareholders may not rely on their opinion. A typical example would be the relationship between Enron and their auditors, Arthur Andersen in the year 2000, where it was reported that the latter received about $27million for nonaudit services, compared with $25million for audit services (Ferdinard & Fung, 2014). Similar cases of corporate and accounting scandals in Nigeria such as Cadbury Nigeria Plc, African Petroleum (AP), Savannah Bank, Wema Bank, Nampak, Finbank, Spring Bank, Intercontinental Bank, Bank PHB; Oceanic Bank Plc, AfriBank Plc, among others, were equally highly publicized. One common phenomenon in majority of these corporate failures is that most of the distressed corporations had clean auditor’s reports prior to their eventual collapse (Dabor & Dabor, 2015). These have called to question the validity of the financial statements prepared by corporations as well as the independence of the external auditors.
Recent studies on financial crises and corporate failures (Enofe, Mgbame, Otuya & Ovie, 2013; Igbekoyi & Agbaje, 2018; Ilaboya & Ohiokha, 2014; Manukaji, 2018; Odia, 2015; Oyewole & Adegoke, 2018) have raised public concerns regarding independence of auditors. Studies such as (Enofe, Mgbame, Otuya & Ovie, 2013; Ndubuisi & Ezechukwu, 2017) have asked questions about the effectiveness of financial statements to perform their function as a guide to informed decision making and a tool for appraisal of corporate performance. The studies reveal that a number of the corporate failures in Nigerian have had a link to external auditors' vulnerability in displaying independence required of them. Auditor independence which is a necessity to achieve financial reporting quality seems to have been compromised in recent times as companies given a clean bill of health with unqualified reports had experienced financial problems shortly after release of audit reports with shocking revelations of financial misstatements (Adeyemi, Okpala & Dabor, 2012; Enofe, Mgbame & Okunega, 2013; Ilaboya & Ohiokha, 2014). Based on the premises above, this study will seek to examine auditor’s independence and financial reporting quality of Access Bank Plc, Nigeria.
1.2 Statement of the Problem
Audit quality depends on auditor’s independence as proposed by Aren, Elder, Randal, Beasley and Mark (2014) that the value of auditing depends heavily on the public’s perception of the independence of auditors. Enofe, Nbgame and Ediae (2013) shared similar opinion based on the results of research that as auditors’ independence increases, the quality of the audit will increase also. The American Securities and Exchange Commission (2003) defines auditor independence as a mental state of objectivity and lack of bias. Auditor independence which is the fulcrum of audit quality in recent times seems compromised as most corporations whose financial statements were audited and issued unqualified reports collapsed shortly after audit with the news that the financial statements are grossly misstated (Deirdre, 2010).
Auditor’s independence determines financial reporting quality and therefore considered to be one of the key reasons for corporate disappointments that prompted the breakdown of strong organisations whose fallout caused the worldwide economic meltdown of the middle 2000. This prompted user’s lack of concern and disarray about the role auditor should play to safeguard their profession as well as construct and reestablish speculators' certainty with the end goal of lessening the audit loophole that existed after the collapse of these organizations. Examinations of their collapse uncovered that their failures were not detached with auditor’s incapability to show their expert skill and independence. The collapse of these organizations caused the disintegration of investors' fund, and further broadened the gap among investors and the management. In a similar vein, creditors and other fund providers lost their fate in what might be their compensation for their lost investments.
The questions raised by various users of financial statements are whether auditors have compromised with the management of firms or are grossly incompetent to perform their statutory duties? Recent studies have uncovered four threats to auditor independence, which are client importance, non-audit services (NAS), auditor tenure, and client’s affiliation with CPA firms. It is on this note that the researcher deems it plausible to review relevant literature to find out if the unveiled threats have any effect on auditor independence which has a strong bond with audit quality. Experimental investigations on auditors’ independence and financial reporting quality were centred on a couple of the threats and significantly done outside Nigeria. This might be seen as a research gap for local research work.
1.3 Objectives of the Study
The main objective of the study is to investigate why corporate organizations fail and how it is occasioned by the independence of auditors. Therefore, the study tends to have solved these problems by determining the impact of auditors’ independence on financial reporting quality in the Nigerian Banking Sector by using Access Bank Plc as a case study. There are specific objectives of the study which are:
i) To determine the impact of auditor’s independence on the understandability of financial statement in Access Bank Plc.
ii) To examine the effects of size of audit firm on the auditor’s independence on financial reporting quality in Access Bank Plc.
iii) To understand the effects of audit fee on the auditor’s independence in the Nigerian Banking Sector.
1.4 Research Questions
This study is designed to give clarifications to the ensuing research questions.
i) What is the impact of auditor’s independence on the understandability of financial statement in Access Bank Plc?
ii) What are the effects of size of audit firm on the auditor’s independence on financial reporting quality in Access Bank Plc?
iii) What are the effects of audit fee on the auditor’s independence in the Nigerian Banking Sector?
1.5 Statement of Hypotheses
The following statements are designed for the hypotheses testing for this study:
i) There is a significant correlation between auditor’s independence and the understandability of financial statement in Access Bank Plc
ii) There is no significant correlation between size of audit firm and the auditor’s independence on financial reporting quality in Access Bank Plc
iii) There is a significant relationship between audit fee and the auditor’s independence in the Nigerian Banking Sector
1.6 Significance of the Study
The focus of this study is to examine auditor’s independence and financial reporting quality of the Nigerian Banking Sector by using Access Bank Plc as a case study. This study will be of importance to several stakeholders. The study will assist shareholders to ensure that the financial statement is true and fair and also free from material misstatement in order to place their decisions on the report. The report serves as an assurance that the going concern principle is being followed. The outcome of this research will serve as an input to potential investors in decision making concerning investment and financial policies from the financial statement. That is, the research work will serve as a way to put their reliance on the financial statements audited by professional auditors. Also, the study will help management in knowing matters that can and cannot affect the auditor independence and ensuring the credibility of the financial statement. This will also assist in taking responsibility of preparing and presentation of the financial statement and also ensure the going concern principle is met. In addition, the research work will educate the general public on how the auditor independence has a positive impact on credibility of financial reporting in the Nigerian Banking Sector. It will also educate them on how auditor independence will help in eliminating creative accounting and window dressing. Lastly, this study will also serve as a resource base to other scholars and researchers interested in carrying out further research in this field subsequently, if applied will go to an extent to provide new explanation to the topic.
1.7 Scope of the study
This study is on the examination of auditor’s independence and financial reporting quality of the Nigerian Banking Sector by using Access Bank Plc as a case study. The employees of this bank will be the focus of the study where data will be gathered. Specifically, the study will be carried out among the branches of this bank that are located in four local Government Areas namely; Yaba, Mushin, Ikeja and Lagos Mainland Local Government Areas in Lagos.
1.8 Definition of Key Terms
The following terms were used in the course of carrying out this study:
Auditors’ Independence: This refers to the freedom of the auditor to act professionally. Independence requires integrity and objective approach to the audit process.
Audit Fees: This is a fee a company pays an auditor in exchange for performing an audit.
Financial Reporting: This is the process of producing statements that disclose an organization’s financial status to management, investors and the government.
Understandability: This is the concept that financial information should be presented so that a reader can easily comprehend it to adherence to a reasonable level of understandability would prevent an organization from deliberately obfuscating financial information in order to mislead users of its financial statements.