AUDITORS INDEPENDENCE AND CORPORATE PERFORMANCE FOR LISTED FIRMS IN THE NIGERIAN STOCK EXCHANGE

Abstract

The auditor’s independence is a veritable tool of the auditing profession, a crucial element of the statutory corporate reporting process and a key ingredient of the added value to an audited financial statement. The broad objective of this study is to examine the impact of auditor independence on corporate performance and also to determine the relationship between audit firms tenure and the provision of non audit services. The primary source of data collection was used to gather relevant information for the study while the z-score statistical tool was used to test the hypothesis. The findings revealed that there is significant relationship between audit firm tenure and the provision of non-audit services and that the provision of non-audit services have significant impact on auditor independence. It was concluded that the provision of non-audit service impair the auditor’s independence by making the auditor economically dependent on the client and that the consulting nature of non audit services reduces the auditor’s objectivity. It was however recommended among others that management executives who just arrived in an organization should have a detailed understanding of the existing culture before initiating new ones.

TABLE OF CONTENTS

Title Page                                                                                          i

Certification                                                                                     ii

Dedication                                                                                        iii

Acknowledgements                                                                          iv

Abstract                                                                                           v

Table of Contents                                                                             vi

Chapter One: Introduction                                                1

1.1    Background to the Study                                                      1

1.2    Statement of Problem                                                             3

1.3    Research Questions                                                               4

1.4    Objectives of the Study                                                          5

1.5    Statement of Hypothesis                                                        5

1.6    Significance of the Study                                                        6

1.7    Scope of the Study                                                                 7

1.8    Limitations of the Study                                                         8

1.9    Definitions of Terms                                                               8

Chapter Two: Review of Related Literature                        12

2.1    Introduction                                                                           12

2.2    Auditor Independence                                                           14

2.3    The Objectives of Auditor Independence                    15

2.4    Non-Audit Services and Auditor Independence                  20

2.5    Independence in Fact and Appearance                                24

2.6    Non Audit Services (NAS)                                                      28

2.7    Empirical Evidence of Reaction to Non-Audit Services       30

2.8    Corporate Performance                                                         32

2.9    Concept of Balance Scorecard                                              35

2.10  Independence: Cornerstone of the Profession                     38

2.11  Threats to Auditor Independence                                         40

Chapter Three: Research Method and Design                     44

3.1    Introduction                                                                           44

3.2    Research Design                                                                    44

3.3    Description of Population to the Study                                45

3.4    Sample Size                                                                            45

3.5    Sampling Techniques                                                            46

3.6    Sources of Data Collection                                                    46

3.7    Method of Data Presentation                                       46

3.8    Method of Data Analysis                                                        47    

Chapter Four: Data Presentation, Analysis and

Interpretation                                                                   48

4.1    Introduction                                                                           48

4.2    Presentation of Data                                                              49

4.3    Data Analysis                                                                         49

4.4    Hypotheses Testing                                                                56

Chapter five: Summary of Findings, Conclusion and Recommendations                                                              60

5.1    Introduction                                                                           60

5.2    Summary of Findings                                                            60

5.3    Conclusion                                                                             61

5.4    Recommendations                                                                 63

References                                                                              65

Appendices                                                                             68

CHAPTER ONE

INTRODUCTION

1.1   Background to the Study

The auditor’s independence is a cornerstone of the auditing profession. A crucial clement in the statutory corporate reporting process and a key prerequisite for adding value to an audited financial statement (Mautz & Sharaf, 2003). In a general sense, auditor’s independence has borne a relationship to the prevailing commercial environment in different time periods. Independence is a state of mind characterized by objectivity and integrity on the part of the auditors. It implies the performance of auditors work without being biased and avoiding undue influence.

Corporate performance is the final results of all activities. It evaluating performance, the emphasis is on assessing the current behavior of the organization in respect of its efficiency and effectiveness. Corporate performance is an important concept that relates to the way and manner in which financial resources available to an organization are judiciously used to achieve the overall corporate objective of an organization; it keeps the organization in business and create a greater prospect for future opportunities.

The provision of non-audit services by audit firms does not necessarily influence the independence of auditors (Jensen & Meckling, 2006). However, where the fees generated from such non audit services are considerably high (in proportion to the audit fees earned by such accounting firms), this may jeopardize auditor independence. This create a situation whereby the auditors independence is likely to be compromised since the auditor may be denied lucrative contracts (in the form of fees generated from NAS) where he decides to give a qualified opinion on the financial statement being audited.

There are numbers of performance measurement tools, which could be classified into broad groups which include (a) traditional measures (b) non-traditional measures. In some case, some non-traditional measurement tools are to be used like economic value added, balance scorecard, etc in the long run, if any area is emphasized, performance evaluation by the auditors will become unbalance. In this way, the aim of the concept is to establish a set of measure both financial and non-financial through which a company can control its activities and balance various measures to effectively track performance.

1.2   Statement of Problem

Auditors’ independence is one of the most important issues in accounting practice today. Independence increases the effectiveness of the audit by providing assurance that the auditor will plan and execute the audit objectively (Elliot, 2001). Because of the importance of auditors’ independence to audit quality scandal in an organization, the Security and Exchange Commission (SEC) has engaged in substantial rule making in this area without a conceptual framework. In the wake of the recent corporate performance around the globe, attention has been drawn to the issues of auditors having market based institutional incentives to act independently in protecting their reputation and independent (Zmijwski, 2003). The question of whether auditors’ independence, organizational culture and mechanism on governance have an impact on corporate performance has been the subject of much debate and research. Auditors’ independence is an essential feature of an efficient capital market. Managers have incentives to reduce agency costs in the firm by hiring independent auditors (Jenson & Meckling, 2006). Typically, the accusation made, that auditors have allowed inappropriate accounting treatment which therefore affects their independence by the non audit fees payable to them. The problems inherent in these study are those auditors who may become too close to the company they are auditing or because their objectivity may be challenged due to reliance on income from a single source.

1.3   Research Questions

In the light of the foregoing the following research questions are raised.

i.      Does auditor independence have a significant impact on corporate performance?

ii.     What is the relationship between audit firm tenure and the provision of non-audit service?

iii.    Does provision of non-audit services have a significant impact on auditors’ independence?

1.4   Objective of the Study

The aim of this study is to empirically examine the auditors’ independence and corporate performance in Nigeria. The study attempted to achieve the following objectives.

i.      To examine the impact of auditor independence on corporate performance.

ii.     To determine the relationship between audit firms tenure and the provision of non audit services.

iii.    To investigate the impact of the provision of non-audit services on audit independence.

1.5   Statement of Hypotheses

The following hypotheses formulated for the study were tested with a view to achieving the objectives of the study.

Hypothesis One

HO:   Auditor independence has no significant impact on corporate performance in Nigeria.

HI:    Auditor independence has significant impact on corporate performance in Nigeria.

Hypothesis Two

HO:   There is no significant relationship between audit firm tenure and the provision of non-audit services.

HI:    There is significant relationship between audit firm tenure and the provision of non-audit services.

Hypothesis Three

HO:   The provision of non-audit services have no significant impact on auditor independence.  

HI:    The provision of non-audit services have significant impact on auditor independence.

1.6   Significance of the Study

This study is very significant, in that the results of the research work would contribute to the current debate on the appropriateness or otherwise of audit firms providing non audit services to audit clients and the relationship between auditor independence and corporate performance. Different users of financial statement would equally be aware of the inherent risk attributable to auditors providing non audit service. The study is significant in the following areas;

i.      Accountants: Professional accountants in the country will also benefit from the findings of the study because it will reveal the state and quality of the accounting and audit services they render to audit firms in Nigeria.

ii.     Government: The study is of significance to the Nigerian government and institutionalized financial regulators in the country because it will show where legislations needs to be made or modified to provide for more effective regulation of the business activities in the country.

iii.    Statutory Bodies: It is also to assess relevant provision by statutory bodies and standard on auditor’s independence and ascertain how credible it has been.

1.7   Scope of the Study

The focus of the study is the auditors’ independence and corporate performance in the private sector. The geographical area used in the study includes Banks in Edo and Delta States.

1.8   Limitations of the Study

One of the limitations of this study is self selection bias. This is because it was only the perceptions of auditors and practicing accountants in Edo and Delta States were used. The selection process of respondent for the study was not completely random, it was observed that some of the respondents were reluctant in giving the relevant information necessary to achieve the objective of the study. It is therefore not possible to ascertain the extent to which this attitude would have influenced the reliability of the information provided.

• The inability to obtain completely random sampling size.
• Respondents were too reluctant in giving information provided

1.9   Definition of Terms

Audit: The independent examination of/and expression of an opinion on the financial statement/ performance of an enterprise by an appointed auditor in pursuance of that appointment and in compliance with any relevant statutory obligation.

Audit fees: Fees paid to a company’s auditors which are approved by the shareholders at an annual general meeting.

Auditors Qualification: A form of words in a report from the auditors of a company’s account. Stating that in their opinion the accounts are not a true reflection of the company’s finance position.

Auditors Report: A report written by a company’s auditors after they have examined the accounts of the company.

Finance Statement: A document that shows the financial statement of a company.

Integrity: A state of honesty but with a wide range of qualities such as fairness, candour, courage, intellectual honesty and confidentiality.

Objectivity: A state of mind which excludes bias, prejudice and compromise and which gives fair and impartial consideration to all matter that are relevant to the present task, disregarding those that are not.

Non-audit services: All services provided by an auditor that are not considered as an audit.

Balance scorecard: Balance Scorecard is an organizational framework for implementing and managing strategy at all levels of an enterprise by linking objectives, initiatives and measures to an organization’s strategy.

Independence: Function of character with characteristics of integrity and trustworthiness being essential or the absence of interest that creates an unacceptable risk of bias.

Corporate performance: Is the outcome of the frame won effort during a specified period. An accomplishment of an organization. The past that can realistically be expected rather than what is desired.

Organizational culture: Is a specific collection of values and norms that are shared by people and groups in an organization and that control the ways they interact with each other and with stakeholders outside the organization.

Corporate Governance: Corporate governance involves a system by which governing institutions and other organization related to their communities and stakeholders to improve their quality of services rendered to their host communities and stakeholders. It is paramount that good corporate governance should ensure transparency, accountability and fairness in reporting information.