ENHANCING PUBLIC CONFIDENCE IN AUDIT REPORT OF FINANCIAL INSTITUTIONS: THE ROLE OF AUDITOR’S INDEPENDENCE

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The preparation of stewardship report from the accounting point of view is the role of the management who oversees the affairs of the business organization on behalf of the owners usually the shareholders. This stewardship report represents the financial statements covering the operating performance and the financial position of a company. It is usually prepared by the directors and addressed to the shareholders as a fulfillment of their agency responsibility.

Suffice to say that if all the facts concerning financial transaction were properly and accurately recorded and if the owners were properly and accurately recorded, and if the owners and managers of business enterprises were entirely honest and sufficiently skilled in matters of accounting and recording, there would be little need for independent auditing. However, human nature being as it is, there probably will always be a need for the auditor (www.crfonline.org/orc/cro-11,int ml).

Dependable financial information is essential to be very existence of our society. The credit professional making a decision of our society: the credit professional making a decision to grant trade credit, the investors making a decision to buy or sell securities, the banker deciding revenue based on income tax returns, all are relying upon information provided by others.

In many of these situations, the goals of the providers of information run directly counter to those of the users of the information. Implicit in this line of reasoning is recognition of the social need for independent auditors, individuals with a professional competence and integrity who can tell us whether the information on which we rely constitutes a fair picture of what is really going on. Good accounting and financial reporting and society in allocating its resources in the most efficient manner.

The contribution of the independence auditor is to give credibility to financial statement. Credibility in this usage means that the financial statements can be believed; that is, they can be relied upon by outsiders, such as trade creditors, bankers, stock holders, government and other interested third parties. According to the Oxford Advanced Learner’s Dictionary of English, Credibility can be defined as “The quality of being generally accepted and trusted.

Audited financial statements are now the accepted means by which business corporations report their operating results and financial position. The word audit when applied to financial statements means that the balance sheet, statements of income and retained by an audit report prepared by independent public accounts, expressing their professional opinion as to the fairness of the company’s financial statement (www. Crfonline.org/cro/cro-11. intml).

On the other hand, the oxford Advanced Learner’s Dictionary of English, 5th Edition defined Confidence as “The feeling that you can trust, believe in and be sure about the abilities or good qualities of some thing or somebody.

Audit competence can only be achieved if public confidence on audit reports can be improved significantly. Both credibility and confidence go hand in hand and each variable impacted on each other to achieve the audit quality and competence the users of financial statement desired. However, management failure arising from co-operate governance failure over the years majorly contributed to the loss of credibility in audit reports. The solution to this problem of credibility in financial and audit reporting lies in appointing an independent person and public confidence in audit reports is enhanced when the profession encourage high standards of performance and conduct on the part of all practitioners’.

According to Olagunju (2011), for an audit to be credible and reliable, it must be performed by someone, who is independent and cannot be influenced by position, power which will affect its own conclusion. Auditor independence helps to ensure quality audit (Beck, 2004). The UK financial Reporting Council (UKFRC) has undertaken an extensive on audit quality and in February 2008 released the audit quality frame work to improve i.e.  the confidence and credibility in audit. They are: the culture within an audit firm, the skills and personal qualities of audit partners and staff, the effectiveness of the audit process; the reliability and usefulness of audit reporting; and factors outside the control of auditors affecting audit quality (www.mia.org.my/at/at/2011/12/06.paf).

To this end, with regards to the issue of public confidence and credibility (1z-a-v-z the factor responsible to the loss of credibility and public confidence, the attitude of users of financial statement to audit reports as well as providing the way forward to improve audit credibility and public confidence, this research work aims at utilizing the significance of confidence and credibility as approaches to improve audit competence.

1.2      Statement of Research Problems

One to the cumulative negative effects that window dressing (creative accounting) collapse of some USA giant companies such as Enron; world-com, Global Crossing, Tyco, etc together with a host of smaller scale examples worldwide such as Cadbury in Nigeria (ICAN Study Pack, 2009: 252) has on the credibility of financial reporting, attention has been drawn to the following problem areas and research questions

1.     Does the investing public have confidence in the audit reports of companies in recent Ebor?

2.    Does improvement in the credibility of financial statement enhance the confidence of audit report?

3.  Is there significant relationship between auditors’ independence and credibility of financial statement?

4.                  Is audit quality and credibility a question of auditor’s personal quality?

5.                  Is the loss of Credibility in audit report caused by the collapse of corporate governance?

6.                  What remedy could be recommended to restore and improve audit confidence in audit reporting?

1.3      Objective of the Study

1.   To determine whether the investing public has confidence in the audit report of an audit in recent time.

2.   To investigate whether improvement in the credibility of financial statement can enhance the public confidence of audit report

3.   To examine whether there is significant relationship between auditors’ independence and credibility of financial statement.

4.   To determine whether audit quality and credibility of financial statement.

5.   To investigate whether the loss of credibility in audit reports is caused by the collapse of corporate governance in companies.

6.   To provide some possible remedies to restores and improve public confidence in audit and financial reporting.

1.4      Statement of Research Hypotheses

In order to achieve empirical findings the following hypotheses have been postulated:

1.   Ho: Improvement in the credibility of financial statements cannot enhance the public confidence of audit report.

Hi: Improvement in the credibility of financial statements can enhance the public confidence of audit report.

2.      Ho: Audit quality and credibility is not a question of auditors’ personal qualities.

Hi: Audit and credibility is a question of auditors’ personal qualities

3.          Ho: Loss of credibility and confidence in audit report is not caused by the collapse of corporate governance in companies.

Hi: Loses of credibility and confidence in audit report is caused by the collapse of corporate governance in companies.

1.5      Scope of the Study

Geographically, the study will cover the global view on issues of public confidence and credibility in audit and financial report reporting. Cases of window dressing and collapse of corporate governance as it negatively impacted on audit credibility will be converted, both in global view and in Nigeria.

1.6      Significance of the Study

The research work will be of great significance to the professional accountants and their stakeholders or interest groups having financial interest in audit reports. They include shareholders, directors, investors, employees, labour and trade union, creditors, government etc could through the finding of this research appreciate the true nature of an audit and its importance as it related to transparency and accountability achievement.

Also, the duties and obligation of each stakeholder as to the enforcement of good corporate governance leading to the independence of the auditors and the generation of objectives audit report will be appreciated. Lastly, readers will be exposed to other factors militating against public confidence achievement which is not directly caused by the auditors ( as most times, auditors are being blamed for the feature of management and corporate governance).

1.7      Limitation of the Study

The constraints facing this research include the relatively short times to conduct it. Also, inadequate previous literature on the topic is another constraint. Finally, the general apathy of Nigerians towards answering research question posed little differently. However, irrespective of whatever constraints available the researcher remained tenacious in achieving a promising study.

1.8      Definition of Terms

Some keywords that are used in this project work are defined below:

Audit Report: This audit report is a written summary of finding of the auditors during their audit work along with their opinions on such findings.

Iinternal Audit: Internal audit is an independence appraisal function within an organization for the review of the system of control and the quality of performance as a service to the organization (Okolie 2007: 76).

Corporate Governance:  ICAN Study Pack (2009:207) defines corporate governance as “the set of mechanisms through which outside investors are protected from expropriation by insiders(including management, family interest and for governments).

Internal Control System: Okolie (2007:71) defines internal control system as “the   complete range of control, financial or otherwise established by management in order to carry on the business of the organization orderly manner and to ensure adherence to management policies, safeguard the asset and secure as far as possible the completeness and accuracy of the records.

Stewardship Report: It is the financial statement prepared by the directors addressed to the shareholders as a fulfillment of their agency responsibility.

Fraud: According to statement of Auditing standards 110, fraud comprises both the use of deception to obtain an unjust or illegal financial advantage and international mis-representation affecting the financial statements, employees or third parties.

Window Dressing/Creative Accounting: When a company undertake expenses and losses and consequently overstate profit earnings, just as Enron corporation have done, the organization’s account are “window dressed or created. It is fraudulent and criminal to create account (ICAN Study Pack, 2009:191).

Paper Profit: This is the consequence of “window dressing”. The term is used to describe a situation whereby the profit disclosed in the financial statement lack cash equivalent or tangible assets equivalent (Oxford Advanced Learner’s Dictionary of Accounting).

Self Interest: It is the management’s financial or other interest which will inappropriately influence the professional manager’s or accountants judgments, conduct or behaviour.

Expectation Gap: Is the difference between what the public expect from an audit and what the auditing profession prefers the audit objectives to be (Porter, 1993).

Audit Risk: Is the term given to the risk that the auditor will draw an invalid opinion or conclusion from his audit work. (ICAN Pack, 2009.379).

REFERNCES

Understanding the auditor Report (2010 Retrieved on 24th August 2012 from:  http://www.crfonline.og/orc/cro-11-html

Oxford Advanced Learners Dictionary of English, 5th Edition, London

Olagunju, A. (2001). An Empirical Analysis of the Impact of Auditor’s Independence on the Credibility of Financial Statement in Nigeria. Research Journal of Finance and Accounting, vol 2. No.3. Retrieved on 25th August, 2012 from http://www.iiste.org/journals/inders.php/RJFA/article/download/32/218

Linberg, D.L. and Beck F.O (2004). Before and After Enron: Certified Public Accountants view on Auditors Independence, the CPA Journal online.

Improving Confidence in Audit: A Framework for Auditor’s Self Assessment (2011). Retrieved on 22nd August, 2012 from http://www.mia.org.my/at/at/2011/12/06.pdp

ICAN (2009): Study Pack (Professional Examination I) Advanced Audit and Assurance, Lagos VI Published. Pg 252, 379 – 381

Okolie, A.O (2007). Fundamentals of Audit, 3rd Edition Nono Publishers. Pg 4-5,71-76

ICAN (2009): Study Pack (Professional Examination II) Financial Reporting and Ethics, Lagos VI Publishers. Pg 191-207

Auditing Practices Board (1995): Statement of Auditing standards 110: Fraud and Error, issued January, 1995

Oxford Advanced Learner’s Dictionary of Accounting 5th Edition, Oxford University Press, London

Portor, B (1993): An Empirical Study of the Audit Expectation-Performance GAP. Accounting and Business research vol 24, No 93