THE INFLUENCE OF AUDITOR’S TYPE ON THE QUALITY OF FINANCIAL REPORTS OF MANUFACTURING FIRMS IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Over the years, the influence of auditors on financial reports of firms or companies all over the world has become a source of concern to users of financial information’s such as investors, shareholders, stakeholders etc. In view of the importance of quality financial reporting, the International Federation of Accountants (IFAC) and it audit arm, International Auditing and Assurance Standards Boards (IAASB) stated that audit service is an assurance service that the financial statement prepared by the managers is true and fair and free from intentional and unintentional errors and misstatement and, that it also conforms to the relevant rules and regulations guiding the preparation and presentations of accounting information’s. According to (IAASB 2013) global financial stability is supported through high quality reporting which can be achieved thought high quality auditors type.

Auditors type can be seen as an audit firm made up by a group of auditors or a single auditor with the sole responsibility ofexaming books of accounts vouchers of organization in order to detect fraud, errors, misstatement and rendering professional services. The auditors type are:

1. The Big4 auditors
2. The Non Big4 auditors

• Joint auditors

The ability of audit firm to provide high audit quality, capable of producing high financial reporting quality is attributed to certain features of the auditor’s firm. These features are:

1. Auditors independence
2. Auditors compensation

• Auditor’s type.

For the purpose of this study our concern will be drawn to just one of these features which is the “Auditors type”.

The auditors type is conceived as financially independent and highly experienced from any pressure from the client’s “to look the other way” in their role of discovering irregularities. Moreover, Big4 auditors have more to lose should a scandal arises in that their brand names and reputation as more valuable compared to the Non-Big4 auditors.

According to Becker, Defond, Jiambalvo and Subra manian (1998) is off the opinion that, the Big4 auditors have shown to have higher accrual quality financial report while the lowest level of quality occurs when a single auditor is responsible for the audit engagement.

Therefore, this study is motivated by critical role that the auditor’s type influences the quality of financial report of manufacturing firm in Nigeria.

1.2 STATEMENT OF THE PROBLEM

The rate of organizational failure in recent times is alarming and of great concern to all. Research has revealed that wrong preparation and presentation of financial report which is the ground on which decision is made is one of the major contributions to these failures and the auditors type that detect errors and misstatement in any manufacturing firm also influences the quality of the financial report of the firm. Therefore, in as much as accurate financial reporting is very essential to any manufacturing firm, it has much impact to create due to some inherent problem faced by the company such as:

1. Misappropriation of Assets and Funds
2. Mismanagement of Fund

• Fraudulent Practices

1. Operational Losses etc.

To ensure that resources used achieve beneficial objective, there is serious need for accurate and quality financial reports with the help of the right auditor type either the Big4 auditors or the Non-Big4 auditors.

1.3 OBJECTIVE OF THE STUDY

The overall objective of the auditor’s type on the quality of financial reports of manufacturing firms in Nigeria. The specific objectives are:

1. Examine the perception of the users of financial statement prepared by the Big4, Non-Big4 and joint Audit.
2. Assess the effect of auditor’s type on quality financial reports of manufacturing firms.

• Determine the impact of the Big4 auditors, Non-Big4 auditor and joint audit on the reporting quality of financial report of a manufacturing firm.

1. Determine the relationship between the Big4 financial reports and the Non-Big4 financial report and their impact on manufacturing firms.

1.4 RESEARCH QUESTION

1. What are the perception of the users of financial systememt prepared by the Big4, Non-Big4 and joint Audit?
2. What is the effect of the Big4, Non-Big4 and joint auditor’s type on quoted manufacturing firms in Nigeria?

• Does auditors type have any impact on the quality of financial report of quoted manufacturing firms in Nigeria

1. What is the relationship between the Big4, Non-Big4 and the joint auditors type?

1.5 STATEMENT OF HYPOTHESIS

In line with objectives of the study, the following hypothesis are formulated.

HI: Auditor’s type has a significant impact on the quality of financial reporting of quoted manufacturing firms.

HO: There is no significant relationship between the auditor’s type and the quality of financial reports.

1.6 SIGNIFICANT OF THE STUDY

This study is significantly in light of the recent search by regulators for measures that could protect and improve financial reports quality in the corporate world. It is also a response to the current call by the IAASB’s framework for auditor’s type which include raising awareness of the key elements of auditor’s quality, encouraging key stakeholders to explore ways to improve audit quality. The finding from the study could educate both existing and potential shareholder of manufacturing company in Nigeria to know the best audit type use as it provides empirical evidence on the relation between auditor’s type and the quality of financial reporting for listed manufacturing firms in Nigeria.

1.7 SCOPE OF THE STUDY

This study focuses on the auditor’s type and the quality of financial reporting written the context of listed manufacturing firms in the south-south region. This study covers the period of 5 years (2010-2015) and it deal with the influence of the auditor’s type which is Big4 and Non-Bi 4 auditor’s type on the quality at financial reports of manufacturing firms in the south-south region.

1.8 LIMITATION OF THE STUDY

This research work faced some limitations ranging from finance and time. These limitations were envisaged of the proposal stage sequel to the limited time of starting and finishing.

The negative attitude of some respondents to questionnaires and interviews which would have helped in the collection of vital information which are needed to improve the quality of the research was also a factor, as persons concern were reluctant with releasing the information. The information was actually gathered but after much wastage as regard persuation.

1.9 DEFINITION OF TERMS

Big4 Auditor’s: This is the four largest accounting firm that handle accounting services for a number of public and private companies. (Deloitte Touche, Totimatsu, Price-water house, Ernst & Young, KP MG)

Non-Big4 Auditor’s: This is any other auditing firm other than the Big4 firms.

Manufacturing Firms: These are firms or companies that engaged in the processing of raw materials into finished product.

Joint Audit: A joint audit is an audit on a legal entity by two or more auditors to produce a single audit report, thereby sharing responsibility.

Financial Reporting: This is the process of producing statements that disclose an organizations financial status to management, investors, government and other users of financial information.

Auditor: An auditor is someone who prepares and examiners financial records.