stakeholders’ perception of the …...

1. INTRODUCTION

In Abbott et al. (2003), Jensen andMeckling (1976) suggested that demand forauditing stems from a desire to reducemanagements shirking, resulting frominformation asymmetries, which arises from

the separation of ownership and control. Ojo(2009) expressed that the involvement ofexternal auditors could contribute tocorporate governance and address theexpressed agency problem, because theauditor can facilitate a situation where bymanagers are encouraged or compelled to be

STAKEHOLDERS’ PERCEPTION OF THE INDEPENDENCE OF

STATUTORY AUDITORS IN NIGERIA

Semiu Babatunde Adeyemia*and Kehinde Opeyemi Akinniyib

aDepartment of Accounting, University of Lagos, Lagos, NigeriabDepartment of Accounting, University of Maiduguri, Maiduguri, Nigeria

(Received 12 June 2011; accepted 18 September 2011)

Abstract

Towards the end of the nineteenth century, there were celebrated cases of corporate frauds andfinancial misappropriation in corporate giants. The series of frauds have left a sense of doubt aboutthe “unbiasedness” of external auditors to render an attest function on the credibility of publishedfinancial statements. In this light, this research sought to empirically investigate into the perceptionof auditor independence in Nigeria. A cross-sectional survey was conducted on the opinions ofrandomly selected lecturers of auditing, practising auditors, stockbrokers, shareholders andmanagers. Primary data was extensively relied upon. In addition to the primary data, secondary datafrom annual reports were also used. The data collected were used to answer research questions andtest hypotheses. Test of hypotheses was performed using Pearson Correlation and Kendall’s measureof concordance at a 0.05 level of significance. The outcome of the tests showed that the selectedrespondents perceived size of audit fee as the most influencing factor, capable of deterring auditorindependence in Nigeria. It was also observed that existing laws were obsolete and need to beupdated to make them relevant.

Keywords: statutory auditor, independence, stakeholder

* Corresponding author: [email protected]

S e r b i a n

J o u r n a l

o f

M a n a g e m e n t

Serbian Journal of Management 6 (2) (2011) 247 - 267

www.sjm06.com

DOI: 10.5937/sjm1102247A

held accountable. Beattie and Fearnley(2002) pointed out that financial auditremains an integral part of corporategovernance.

Despite the prominence ascribed toexternal audit function, the sovereignty ofthe external auditor is an issue currentlyattracting scholarly scrunity. Mautz andSharaf (1961) in Arnold et al.(1999) notedthat, auditors must be constantly aware offactors that affect the audit environmentwhich can influence or harm theirindependence in other to ensure confidenceof investors. Supporting this statement, Xuand Wang (2008) reiterated thatindependence has long been recognized asthe most important defining characteristic ofthe public accounting profession.

However, the spate of corporate failure indeveloped and developing economies allover the world, have stirred the quest toascertain if the failures are associated withthe independence required of statutoryauditors. Byrne (2001), as well as Ayvaz andPehlivanli (2010) expressed that objectivityor “independence of mind” is essential forthe exercise of professional judgement,which has continued to be an importanttopic. In the same vein, Callaghan et al.(2009) identified auditor independence as anecessary condition for effective auditing. Inthe light of these statements, this researchsought to empirically examine theindependence of statutory auditors inNigeria, with emphasis on same selectedaudit firms.

1.1. Statement of the Problem

Adelaja (2009) expressed that crediblefinancial information is vital to the growth ofany economy; also auditors are expected tobe independent and objective in the

discharge of their responsibilities. Gallegos(2004) was of the view that the report ofexternal auditors in corporate financialstatements is seen as providing keyassurance to the interest of shareholders.

O’Connor (2006) stated that one of themost vexing problems in the financial worldtoday, is the emphasis placed on ensuring theindependence of external auditors as a resultof recent economic scandals. Beattie &Fearnley (2002) expressed that after thecollapse of Enron, it was generally believedthat rendering of non-audit servicescompromised the independence of externalauditors. An extract from the website ofInstitute of Chartered Accountants Englandand Wales (ICAEW) (2009), reiterated thatthe independence of statutory auditors is arather complex issue.

In the real world, when business entitiesgo out of business, the consequences areusually enormous. The oversight function ofthe auditor is placed under scrutiny when abusiness whose financial statement onceshowed no indication of going out ofbusiness suddenly becomes bankrupt. As afollow up to the oversight function, theindependence of the auditor also appears tobe in doubt. On this premise this researchfocuses on the possible challenges whichmay be affecting the independence ofexternal auditors in Nigeria.

1.2. Aim and Objectives of the Research

The primary objective of this research isto elucidate on the independence of externalauditors in Nigeria. This was achieved by:

1) Appraising the factors that arecapable of influencing the independence ofauditors.

2) Evaluating the perception of theNigerian public, concerning the

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independence of external auditors.3) Identifying the factor that is most

capable of influencing the independence ofstatutory auditors in Nigeria.

1.3. Research Questions

Supporting the research objectives set outabove, the following questions wereadvanced and answered:

1) How does audit fee affect theindependence of auditors?

2) How does audit tenure affect theindependence of external auditors?

3) How does non-audit serviceinfluence the independence of externalauditors?

4) Are there specific pronouncementswhich define the independence of externalauditors in Nigeria?

5) Do audit firms in Nigeria makereturns of their financial activities?

6) What threats are peculiar to theindependence of external auditors inNigeria?

7) Does any relationship exist betweenaudit tenor, and audit fees?

8) Do annual reports containinformation of non-audit services performedby auditors?

1.4. Research Hypotheses

The following research hypotheses flowfrom the research questions that were raised;

Hypothesis One: Xu and Wang (2008),and Callagham et al. (2009) argued thatindependence of external auditors is miredby performing non-audit services. Gul et al.(2007) however suggested that non audit feesmay not prejudice the independence ofauditors where the audit engagement is notfor a short period of time.

These positions form the bases of thehypothesis that:

Ho1: There is no correlation in theperception of respondents, that fees from theperformance of non-audit services can deterthe independence of auditors in Nigeria.

HI1: There is a correlation in theperception of respondents, that fees from theperformance of non-audit services can deterthe independence of auditors in Nigeria.

Hypothesis Two: Klimentchenko (2009)was of the view that it is likely for an auditorwho has been auditing a client for severalyears to let down on his guard. With regardsto tenure, Davis et al. (2000), suggested thatthere existed a significant negativerelationship between tenure and absoluteanalyst forecast errors. With respect toauditors in Nigeria, the hypothesis belowwas tested.

Ho2: There is no significant correlation inthe opinion of respondents that prolongedaudit tenure can impair the independence ofstatutory auditors.

HI2: There is a significant correlation inthe opinion of respondents that prolongedaudit tenure can impair the independence ofstatutory auditors.

Hypothesis Three: In an effort tounderstand the opinions expressed byrespondents, a ranking was done to test thehypothesis that;

Ho3: There is no significant agreement inthe opinion of respondents on the ranking offactors capable of influencing theindependence of statutory auditors inNigeria.

HI3: There is a significant agreement inthe opinion of respondents on the ranking offactors capable of influencing the

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independence of statutory auditors inNigeria.

Where Ho: is the null hypothesis and HI:is the alternative hypothesis.

2. SIGNIFICANCE AND THE

CONCEPT OF THE STUDY

This research dwells on the independenceof auditors particularly within the context oflisted companies in Nigeria. The findings ofthis research are expected to contribute toexisting body of knowledge. Practicingauditors in Nigeria are anticipated to becomemore informed of the intricacies surroundingauditor independence. The academiccommunity will also benefit enormouslyfrom the outcome of this research.

2.1. Scope and Limitation of the Study

This research centers on the independenceof external auditors within the context oflisted companies in Nigeria. This researchexcludes audits of non listed companies andinternal audit function of companies. Theoutcome of this research is based on what isobtained in Nigeria. It is likely that theopinions expressed may not represent theviews of every Nigerian; however thesevariations are not expected to adverselyinfluence the findings of this research.

2.2. The Concept of Auditor

Independence

The initial concept of auditorindependence was primarily of Britishorigin, in the 19th century, where auditorsdoubled as book keepers (Baker, 2005).Aderibigbe (2005) views independence as anemotive word serving as a banner for

freedom, integrity and all that is good.Auditor independence according toDictionary of International AccountingTerms (2001) infers a state of impartialityrequired of auditors who should have nopersonal or financial involvement with aclient. Louwers et al. (2007) expressesindependence as a mental attitude andphysical appearance which portrays theauditor as being uninfluenced by others injudgment and decision. This can be sustainedby avoiding financial connection that makesit appear that the wealth of the auditordepends on the outcome of the audit andmanagement connections that makes theauditor appear as if he is involved inmanagement decisions. As a key ingredientsof audit quality Gray & Manson (2000) andHayes et al. (2005) described independenceas a position required in other to take anunbiased viewpoint in the performance ofaudit tests, analysis of results and attestationin the audit report. Despite all the definitions,and descriptions of auditor independence,Whittington & Pany (2004) concluded thatauditor independence is relative and notabsolute. According to Tairu (2009), auditorindependence comprises of programmingindependence, investigation independence,and reporting independence. Of these threecomponents, reporting independence is themost likely to be influenced by the directorsof a client company. This is the foci of thisresearch. The independence of auditors isseen as a means and not an end in itself(McGrath,et al., 2001). Consequently, Smith(2003) opined that the prime responsibilityof maintaining independence and objectivityrests with the auditor.

2.3. Threats to Auditor Independence

From the foregoing, an auditor is

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expected to be free from undue influencewhich may affect his opinion about the stateof affairs of his client’s business. Theauditor is required to be independent andalso be seen to be independent bystakeholders of the entity he is reporting on.

Threat according to Chambers Dictionary(2002), implies a source of danger. It may beperceived that threat to independenceconnotes circumstances that can jettison the“unbiasedness” of the auditor. Threat toauditor independence have been broadlycategorized as one or a combination of self-interest, self-review, advocacy, familiarity(or trust) and intimidation threat (ICANMembership Handbook 1999; et al., 2001;Millichamp 2001; Adeniyi, 2002; Report,2003; Hayes et al., 2005).The elements thatare likely to give rise to these threats includetenure (Geiger & Raghunandan, 2002),rendering of non audit services (Xu & Wang,2008), ability of managers to influence thecompensation of auditors (Yost, 1995), sizeof the audit firm (Salehi & Mansoury, 2009),and strength of audit committee (Abbott etal., 2003). Other factors according toAbubakar et al. (2005) include; highlycompetitive audit service market, large sizeof audit fees and non existence of auditcommittees.

2.4. Tenure of Audit

Tenure of audit refers to the number ofyears audit firms or engagement partnershave spent on the audit of a particular client.There have been heated debates on therelevance of tenure to the independence ofauditors. Klimentchenko (2009) was of theopinion that if an auditor (or a representativeof the audit firm) reviews the financialinformation of a client, year-after-year, hebecomes familiar with the business of his

client, develops a desire to maintain goodrapport with the manager of the client’sbusiness and thereby losing his impartiality.Consequently, Davies et al. (2000) examinedsome arguments for and against how tenureinfluences the independence of auditors. Thearguments against presupposes that thelonger an audit firm retains a client, the lessable it is, to maintain objectivity. On thecontrary, the arguments for, suggested thatthe longer an auditor is on an engagement thebetter will be, his understanding of theclient’s risk areas. This will result in a moreeffective audit. Gul et al. (2007) reiteratedthat when audit tenure is short, non audit feesmay impair the independence of the auditor.

It is apparent that prolonged stay on anaudit may result in familiarity threat. To curbthis threat mandatory rotation of auditengagements have been advocated (Byrne,2001). In the view of Kilcommins (1997),long audit tenure was perceived to impairauditor independence because it encouragesauditors to become cosy in their relationshipswith their clients. Fairchild (2009) reiteratedthat the longer an auditor is, with a client,learning curve effect sets in. This will enablethe auditor to detect managerial frauds morequickly; on the other hand the auditor maybecome sympathetic towards managementthereby losing his independence.

2.5. Non-Audit Services

An observation of statutorypronouncements like Section 357 of theCompanies and Allied Matters Act 1990(CAMA, 1990), requires registeredcompanies to have their financial statementsaudited by an independent auditor for anyfinancial year. It can be perceived thatmanagers are responsible for the preparationof annual accounts, designing and

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implementing internal controls, and aboveall ensure the smooth running of thebusiness. Non-audit services, whichconstitute the source of non-audit income,may be described as any other servicerendered to an audit client different from theexamination of accounts and expressing aprofessional opinion thereof. These servicesare also referred to as consultancy services(Louwers et al., 2007). Ye et al. (2006),opined that the economic dependence ofauditors on non-audit services, lengthy audittenure and personal relationships builtthrough alumni employees have contributedto the erosion of auditor independence. Assuch Hay et al. (2006) suggests that thereexists a potential for the impairment ofauditor independence in appearance whenthey render non-audit services. To mitigateself-interest threat which is caused byrendering non-audit services (Byrne, 2001),recommended the implementation ofpronouncements like Section 202 of theSarbanes-Oxley act of 2002, which expresslyprohibits the rendering of non- audit servicesby statutory auditors. Abbott et al. (2003)proffered that companies with independentaudit committees pay lower non-auditservices fees. However Reiner & Bent (2009)proposed that the rendering of non-auditadvisory services increases quasi-rents, therebyposing a threat to auditor independence.

2.6. Influence of Managers on Audit

Fee

In an attempt to evaluate the influencemanagers exert on auditors, Yost (1995)demonstrated that increased ability ofmanagers to determine the compensation ofauditors may in fact increase incentives foran auditor to maintain independence. Mitraet al. (2007) observed that there exists a

significant positive relationship betweendiffused institutional share holdings andaudit fee, and a significantly negativerelationship between institutional blockholder ownership and audit fee. Theimplication of this is that where the shares ofa company are held by many investors, auditfees may very likely be determined bymanagement, unlike where shares are heldby a few, in which case it would beconvenient for the few owners to meet, inother to determine the audit fee. Though ithas been severally argued that non-audit feescan influence the independence of auditors,it is also likely that the influencing power ofmanagers on the audit fee payable to theauditor may be an issue which should not beignored. Gul (1999) recorded that the size ofaudit fee is a major explanatory factor for theability of the auditor to resist the pressure ofmanagement, regardless of the provision ofadvisory services. Green (2006), reiteratedthat as businesses become more complex andthe relationship between companymanagement and company ownershipbecomes more problematic, the issue ofauditor independence becomes moredifficult. He added that as long as the auditoris subject to influence from companymanagement, real independence remainsdifficult to achieve.

2.7. Size of Audit Firm

Salehi & Mansoury (2009) using auditfrom size as a surrogate, for audit qualityexpressed that the size of an audit firm is animportant characteristic that reflects auditorindependence. Lys & Watts (1994) were ofthe view that larger audit firms have betterfinancial resources and research facilities,superior technology and more talentedemployees to undertake large company

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audits than do smaller audit firms. Hence bigaudit firms are able to resist pressure frommanagement than smaller audit firms.

Muhammad & Karbhari (2006) inagreement with Lys & Watts (1994), opinedthat big audit firms are better able to resistmanagement pressure in conflict situationsthan smaller audit firms. Contrary to theseviews, Emby & Davidson (1998) opined thatthe size of the participant audit firm, relativeto the size of the client did not exert anyinfluence on the judgment of the auditor.Gray & Manson (2001) in examining theeffect of firm size on auditor independence,observed that while small and medium auditfirms may suffer from inadequate resources,to service their large clients, the big auditfirms appear as business ventures rather thanprofessional service providers.

2.8. Other Factors Influencing the

Independence of Auditors

In addition to the factors earlier identified,Bonu & Kitindi (2004) identified the size ofaudit market and level of competition in themarket of audit services as factors capable ofinfluencing the independence of auditors.They noted that the presence of a largenumber of audit firms competing in a smallmarket for audit services increased perceivedauditor independences as opposed to a fewfirms operating in a monopoly market. In thesame vein, Abu Bakar & Ahmad (2009)suggested that the existence of an auditcommittee will enhance the independence ofauditors.

2.9. Nature of Auditor Independence in

Nigeria

From the foregoing the independence ofexternal auditors appears to have generated

considerable concern. In Nigeria the cry forthe independence of external auditorsappears not to be too different. In the worldof statutory audit, audit firms can be referredas either “big players” or “small players”.The classification is often based ongeographical spread, staff strength andquality, and volume of audit work done.

There have been instances where auditorshave not qualified their reports in respect ofthe business of a client. Such that,subsequent to an audit a business suddenlybecomes insolvent, and acts of financialmismanagement might have gone unnoticedin previous years audit by the same auditfirm. This scenario is not too strange in thebusiness community of Nigeria. This hasbrought to bear the relevance of auditorindependence in lending credibility toaudited annual financial reports. The factorsaffecting the independence of auditorsappear to be universal and are undoubtedlycapable of affecting external auditors inNigeria.

A substantial proportion of practicingauditors in Nigeria are members of theInstitute of Chartered Accountants of Nigeria(ICAN), Association of NationalAccountants of Nigeria (ANAN), andInstitute of Public Accountants (IPA). Theseprofessional bodies have rules guiding theconduct of members in practice. There arealso specific provisions in the Companiesand Allied Matters Act of 1990 that aims atsafeguarding and enforcing theindependence of external auditors. Section359(6) specifically recommends companiesto have an audit committee. The committeeis poised to uphold the independence ofauditors with respect to determining theiraudit fee, as well as their appointment andremoval. Similar to what is obtained indeveloped economies, cases of corporate

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failures, mismanagement of finance andfraudulent practices of managers havecaused one to wonder if the independence ofstatutory auditors in Nigeria is not in doubt.Aderibigbe (2005), in his research observedthat in many companies across Nigeria,directors are empowered to determine auditfees of statutory auditors. This situation, nodoubt may incapacitate the audit committee,and cause the auditor to undermine hisindependence. A World Bank report of 2004,brought to bear the inadequate adherence toauditing standards and professional ethicsamong statutory auditors. In addition it waspointed out that existing ethical codes werenot in line with international requirements.Within the banking sector it was also notedthat monitoring and enforcing mechanismare very weak. From the foregoing review ofliterature, this research suggests that thereexists a relationship between prolonged audittenure, audit fee, and size of audit firm on theone hand and perceived independence ofauditors on the other hand. Between thesetwo extremes exists the inter play of strengthof audit committee, intensity of competitionin the market for audit services and finallythe enforcement powers of both regulatoryand professional bodies.

3. METHODOLOGY OF RESEARCH

This research is based on a survey ofselected companies operating in Nigeria thatare listed on the Nigerian Stock Exchange.Emphasis was placed on business activitiesbetween the periods from 2000 to 2008financial years. The research was designedto capture how selected respondents perceivethe independence of auditors in Nigeria. Apilot study was conducted using five samplesof a questionnaire. This was to ensure the

relevancy of the data gathering instrument.The reliability of the data gatheringinstrument was ascertained using a test- re-test correlation.

The study population used in this researchcomprised of auditors, shareholders,lecturers of accounting, stockbrokers, andindividuals in the capacity of managers incompanies listed on the Stock Exchange. Theauditors were identified from the Institute ofChartered Accountants of Nigeria (ICAN)website; Stockbrokers were identified on thefloor of the Nigerian Stock Exchange, whileindividuals in the capacity of managers werereached, at their different head offices. Theaccounting lectures were from the Universityof Lagos, University of Maiduguri, AjayiCrowther University (Oyo) and Yaba Tech.(Lagos).

Purpose sampling technique was adoptedin the selection of respondents required forthis research. This technique was consideredsuitable because of the emphasis on theknowledge of auditor independence.However, the organizations and individualsused for the research were randomly selectedfrom the strata of five identified from thestudy population. Twenty respondents wereselected for each of the strata to avoidopinions gathered from being skewed. Atotal of one hundred respondents made upthe sample size.

Primary data were extensively relied uponin the performance of this research.Questionnaires and structured interviewwere used to gather the primary data. Someof the instruments were administeredpersonally while some were forwarded asattachments through emails and returned viathe same method. Where physical interviewscould not be conducted, telephoneconversations were used. The questionnairewas designed to capture both demographic

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and topical data. The topical data werecaptured on a four likert scale type measurein two sections. The first section measuredvery weak, weak, strong and very strongopinions. The weights attached to theseopinions were 1, 2, 3, and 4 respectively. Thesecond section, measured strongly agrees,agree, disagree and strongly disagreeopinions. The weights assigned to theseopinions were 4, 3, 2, and 1, respectively.

In addition to the primary data, secondarydata were used. The secondary data weregathered from annual reports. Some of theannual reports were obtained from theSecurities and Exchange Commission onVictoria Island, some were obtained from theNigerian Accounting Standards Board atIkeja, while some were obtained from thedifferent head offices in Lagos State. Annualreports used were for the periods from year2000 to year 2008. The secondary datagathered from the annual reports include thetenure of auditors, and value of audit fees.

Both primary and secondary data wereanalyzed using, descriptive and inferentialstatistics. Inferential statistics wereperformed at a 0.05 level of significanceusing SPSS version 15.0. Kendall’s Measureof Concordance was performed to measurethe degree of correlation among the rankingsof the respondents. This tool was usedbecause the sample size was more than 20and the ordinal variables were more thantwo. (Ifah, 1996). Hypotheses one and twowere tested using Pearson product momentscorrelation coefficient (Đorđević et al.,2010). The Pearson correlation is measuredfrom -1 to +1. -1 implies an absolutenegative correlation, 0 signifies nocorrelation and +1 indicates an absolutepositive correlation. (Winks online, 2009).

4. RESULTS AND DISCUSSIONS

Table 1 presents a frequency distributionof the sample size used in this research. Thesample was drawn from the studypopulation. A total sample of one hundredrespondents was drawn from the population.

4.1. Test of Hypotheses

The hypotheses purported for thisresearch are tested below using acombination of the data gathered fromresponses to the questionnaire, interview andsecondary data. Table 2, contains outputs ofPearson correlation coefficients, depictingthe correlation between the factorsinfluencing the independence of statutoryauditors in Nigeria. From Table 2 it wasobserved that there exists a positive andrelatively strong correlation between theresponses on disclosure of income from non-audit services and prolonged audit tenure of0.092. A correlation of 0.060 exists betweenthe disclosure of non–audit income infinancial statements of audit firms and theability fee from non-audit services to deterthe independence of auditors. Thisrelationship is also positive and relativelystrong. Between the opinions that audit firmsshould be allowed to perform non-auditservices for their audit client and the need for

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Table 1. Frequency distribution ofrespondents

Strata

Category

Sample

Size

% of total

sample

Lecturer 20 20 Manager 20 20 Practicing auditor

20 20

Stockbroker 20 20 Shareholder 20 20 TOTAL 100 100

Source: Research Survey 2010

the financial statements of audit firms toclearly disclose how much is earned fromnon-audit service there exist a correlation is0.067. However, a relatively weak butpositive correlation of 0.014 was observed tobe present between performance of non-auditservices and prolonged audit tenure. Withrespect to the correlation of opinionsbetween allowing auditors to perform non-audit services and the effect of audit fee onindependence, there exists a negativecorrelation of -0.049. These correlationfigures were further used to test hypothesesone and two.

4.1.1. Test of Hypothesis One

Ho1: There is no correlation in theperception of respondents, that fees from theperformance of non-audit services can deterthe independence of auditors in Nigeria.

Using the figures from the table 2, there

exist a relative but negative correlation of -0.049 between the perception that auditorsshould be allowed to concurrently performnon-audit services for their clients and theability of non-audit fees to deter auditorindependence. It can be inferred that theindependence of auditors becomes moredeterred, where non-audit services areperformed concurrently and where there isno disclosure. With respect to significance, r(98) = -0.049, p>0.05, the inference that canbe drawn is that there is no significantdifference in the opinions expressed by thesampled respondents. The observedcorrelation of opinions between prolongedaudit tenure and concurrent rendering ofnon-audit services is 0.014. This implies thatthere exists a relative positive correlation inthe opinions expressed. The frequencydistribution in the Appendix I(M) relating tothese views showed that a cumulative ofeighty three representing eighty three

256 S. B. Adeyemi / SJM 6 (2) (2011) 247 - 267

Table 2. Output of Pearson correlation coefficient

Audit firms should be allowed to

perform non-audit services for their

audit client

Financial statements of audit firms should

clearly disclose how much is earned from

non-audit service

Fees from non audit services can deter

auditor independence

Prolonged audit tenure can impair the

independence of auditors

Audit firms should be allowed to perform non-audit services for their audit client

Pearson Correlation

1

Sig. (2-tailed)

N 100 Financial statements of audit firms should clearly disclose how much is earned from non-audit service

Pearson Correlation .067 1

Sig. (2-tailed)

.510

N 100 100 Fees from non audit services can deter auditor independence

Pearson Correlation

-.049 .060 1

Sig. (2-tailed)

.630 .552

N 100 100 100 Prolonged audit tenure can impair the independence of auditors

Pearson Correlation

.014 .092 -.223(*) 1

Sig. (2-tailed)

.886 .365 .026

N 100 100 100 100

* Correlation is significant at the 0.05 level (2-tailed).

Source: Field survey 2010

percent, of the respondents disagreed thatauditors should be allowed to concurrentlyrender non-audit services. In the same vein,Appendix I(L) depicted that all therespondents represented by a cumulative ofone hundred percent of the views expressed,agreed that prolonged audit tenure couldhinder the independence of auditors. At a pvalue of 0.886, it can be inferred that there isno significant difference in the viewsexpressed concerning prolonged audit tenureand rendering of non-audit services. As such,it can be assumed that prolonged auditortenure and performance of non-audit servicesmay deter the independence of auditors.

4.1.2. Test of Hypothesis Two

Ho2: There is no correlation in theopinion of respondents that prolonged audittenure can impair the independence ofstatutory auditors.

From the Table 2, the intercept betweenopinions relating to prolonged audit tenureand deterring effect of non audit fee show anegative but relative Pearson correlation of -0.223. At this point, the r (98) = -0.223, p< α.This implies that though the associationbetween the two perceptions is weak, it issignificant. It can be suggested therefore,that prolonged audit tenure can impair theindependence of statutory auditors. In the

same vain non- audit fees can also deter theindependence of auditors in Nigeria.

4.1.3. Test of Hypothesis Three

Ho3: There is no significant agreement inthe opinion of respondents on the ranking offactors capable of influencing theindependence of statutory auditors inNigeria.

From Table 3 which contains the rankingof factors capable of influencingindependence of statutory auditors onNigeria, it was observed that the mostdeterring factor is large audit fee. This isfollowed in a descending order of severity byprolonged audit tenure, size of the audit firm,intensity of competition in the market ofaudit services, strength of audit committee,enforcement power of professional bodies,and lastly the enforcing power of statutorybodies.

A test of correlation of opinions expressedwas performed using Kendall’s Measure ofConcordance. The output of this test ispresented in Table 4. It was deduced that thefactor perceived to impair auditorindependence most, was the size of audit fee.It was also observed from annual reports ofselected companies that over the years theamount paid as audit fee increased. Based onthe extract above it may be inferred that there

257S. B. Adeyemi / SJM 6 (2) (2011) 247 - 267

Table 3. Distribution of frequencies and means of ranksRanked variables N Minimum Maximum Mean

Prolonged audit tenure 100 2.00 7.00 5.4900 Large audit fee 100 1.00 7.00 5.7000 Size of audit firm 100 1.00 7.00 4.3300 Intensity of competition 100 2.00 6.00 3.8200 Strength of audit committee 100 1.00 7.00 3.5900 Strength of professional bodies 100 1.00 7.00 2.9200 Strength of regulatory bodies 100 1.00 7.00 2.3300 Valid N (listwise) 100


exists some degree of association in therankings of factors capable of affectingindependence of statutory auditors inNigeria.

4.2. Other Findings and Observations

With respect to the independence of

external auditors in Nigeria, the followingobservations were made in the research;

1) Directors of companies play a keyrole in the determination of audit fees.Though the Companies and Allied MattersAct of 1990 entrusted the audit committeewith the determination of audit fee, theargument is that whether or not, whatever

258 S. B. Adeyemi / SJM 6 (2) (2011) 247 - 267

Table 4.Correlation output of Kendall’s measure of concordance

Ranking for tenure

Ranking for audit fee

Ranking for size of audit firm

Ranking for intensity of competition

Ranking for strength of audit committee

Ranking for strength of professional bodies

Ranking for regulatory bodies

Kendall's tau_b

Ranking for tenure

Correlation Coefficient

1.000

Sig. (2-tailed) . N 100

Ranking for audit fee


-.109 1.000

Sig. (2-tailed) .193 . N 100 100

Ranking for size of audit firm


-.445(**) .214(**) 1.000

Sig. (2-tailed) .000 .009 . N 100 100 100

Ranking for intensity of competition


-.385(**) .460(**) .170(*) 1.000

Sig. (2-tailed) .000 .000 .033 . N 100 100 100 100

Ranking for strength of audit committee


.094 -.160 -.190(*) -.495(**) 1.000

Sig. (2-tailed) .251 .055 .017 .000 . N 100 100 100 100 100

Ranking for strength of professional bodies


-.121 -.188(*) -.234(**) .093 -.249(**) 1.000

Sig. (2-tailed) .144 .026 .004 .257 .002 . N 100 100 100 100 100 100

Ranking for regulatory bodies


.283(**) -.525(**) -.301(**) -.442(**) .312(**) -.168(*) 1.000

Sig. (2-tailed) .001 .000 .000 .000 .000 .047 . N 100 100 100 100 100 100 100

** Correlation is significant at the 0.01 level (2-tailed).* Correlation is significant at the 0.05 level (2-tailed).


Table 5. Extract of positive p values from Table 4Point of Intercept k value p value Comment Size of audit fee and strength of professional bodies -.188 .026 significant correlation Size of audit firm and intensity of competition .170 .033 significant correlation Size of audit firm and strength of audit committee -.190 .017 significant correlation Strength of professional bodies and strength of regulatory bodies -.168 .047 significant correlation

might have been decided by management isbeing ratified by the audit committee. It wasgathered in the course of the research thatmost times the directors fix audit fees whichare not always ratified by the auditcommittee. This act has brought to bear anarea of weakness in the audit committeefunction in Nigeria.

2) Existing ethical codes appear to beobsolete. A substantial proportion ofopinions expressed that existing ethicalcodes were no longer capable of enforcingthe independence of auditor.

3) With respect to tenure, the ICANethical code (1998) prescribed seven years asthe maximum tenure for which an auditorcan audit a client consecutively. Reacting tothis provision based on the questionnaire andinterview, an average of four years wasrecommended by the sampled respondents.An observation of Appendix II revealed thatsome companies have maintained the sameauditor for more than six years.

4) From Appendix II, a cross-sectionalview of some companies listed in Nigeria,showed that many companies maintained theservice of the same audit firm consecutivelyfor many years. It was also observed theamount paid for audit fee increased fromyear to year.

5) It may be argued that where there isno transparency, independence may beimpaired. As such it was suggested thatauditors should be made to publish theirfinancial statements. Table J in appendix I,showed that a total of fifty-six percent of therespondents agreed. It was further stated thatat the moment audit firms in Nigeria are notbody corporate and are not mandated by anylaw to publish their financial statements.

6) The annual reports examined did notmake any specific declaration of amountspaid for non-audit services. Hence based on

the disclosures in the annual reports it maybe insinuate that auditors of such companiesdid not render professional services whileacting as auditors. Where accountingservices of accounting firms were used, itwas observed that many of the companiesused accounting firms different from thereporting auditor.

5. CONCLUSION

The divorce of ownership frommanagement function in the world ofbusiness has created an aperture forcustodians to exercise their best of judgment.In the present day business world, partieswith stake include managers and directors(agents), stakeholders like government,employees, and providers of loan, tradecreditors and potential investors. It isapparent, that as agents take decisions thatare capable of influencing the business,owners, can also directly or indirectlyinfluence the operations of the business. Tocheckmate decisions taken and ensurecorrect reporting of state of affairs of abusiness the audit function became anecessity especially for publicly quotedcompanies.

It has been expressed that crediblefinancial information is vital to the growth ofany economy, in the same vein that auditorsare expected to be independent and objectivein the discharge of their responsibilities.Over the years, there have been series ofcorporate scandals both in developed anddeveloping economies alike. This has raisedquestions about the independence of theauditor in the discharge of his statutoryfunction. To this end this research set toelucidate on the independence of externalauditors in Nigeria, with emphasis on the

259S. B. Adeyemi / SJM 6 (2) (2011) 247 - 267

opinion of respondents. The outcome of the tests revealed that

among other factors capable of deterring theindependence of auditors in Nigeria, largeaudit fees appeared to be the mostsignificant. It was also observed that in theopinions expressed, prolonged auditor tenureand performance of non-audit services maydeter the independence of auditors. It wasalso noted that there are plenty of avenuesfor secrecy both on the part of the companybeing audited and the also on the part of theauditing firm.

As such, the independence of auditors isalso of concern and importance in Nigeria.Large audit fees, size of audit firm,

prolonged tenure have been asserted to besome of the factors capable of influencingthe independence of auditors in Nigeria. Itwas also observed that existing laws are oldand need to be reviewed to become relevantin the prevailing business world. Based onthe observations of this research, thereshould be a law requiring auditors to publishtheir financial statements. In addition,existing ethical codes and laws need to bereviewed to address the contemporarychallenges of engendering greater level ofconfidence in financial reporting andauditing.

260 S. B. Adeyemi / SJM 6 (2) (2011) 247 - 267

УЧЕШЋЕ СТЕЈКХОЛДЕРА И ЊИХОВ УТИЦАЈ НА

СТАТУТОРНЕ АУДИТОРЕ У НИГЕРИЈИ

Semiu Babatunde Adeyemia*and Kehinde Opeyemi Akinniyib

aDepartment of Accounting, University of Lagos, Lagos, NigeriabDepartment of Accounting, University of Maiduguri, Maiduguri, Nigeria

Извод

Пред крај 19тог века, јавили су се чувени случајеви корпоративних превара и финансијскихпроневера у тадашњим корпоративним гигантима. Серија превара је оставила утисак сумње унепристрасност екстерних аудитора на разматрање њихове функције и кредибилитетуобјављених финансијских извештаја. У овом светлу, ово истраживање се бави емпиријскимиспитивањем перцепције независности аудитора у Нигерији. Попречна анализа је спроведенакоја је укључивала предаваче из области аудита, аудиторе, берзанске мешетаре, деоничаре именаџере. Примарно сакупљени подаци су се веома заснивали на њиховим ставовима. Каододатак, сакупљени су и секундарни подаци из годишњих извештаја. Сакупљени подаци суупотребњени да би се одговорило на истраживачка питања и да би се тестирале хипотезе.тестирање хипотеза се заснивало на пеарсоновој корелацији и канделовој мери сагласности санивоом значајности од 0.05. Излаз наведених тесова је показао да је најутицајнији фактор, заселектоване испитанике, висина плате и да овај фактор битно утиче на њихову независност уНигерији. Такође је установљено да су постојећи закони застарели и потребно их јеосавременити како би били примењиви.

Kључне речи: Аудитор, независност, стејкхолдер

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264 S. B. Adeyemi / SJM 6 (2) (2011) 247 - 267

APPENDIX I

A: Status of respondent

Frequency Percent Valid Percent Cumulative Percent

Valid Lecturer 20 20.0 20.0 20.0 Manager 20 20.0 20.0 40.0 Practicing auditor 20 20.0 20.0 60.0 Stockbroker 20 20.0 20.0 80.0 Shareholder 20 20.0 20.0 100.0 Total 100 100.0 100.0

B: Strength of audit committees in Nigeria to enforce independence of auditors


Valid Very weak 32 32.0 32.0 32.0 Weak 24 24.0 24.0 56.0 Strong 28 28.0 28.0 84.0 Very strong 16 16.0 16.0 100.0 Total 100 100.0 100.0

C: Ability of directors to influence audit fee



D: Power of the auditor to express a qualified opinion



265S. B. Adeyemi / SJM 6 (2) (2011) 247 - 267

E: Effect of audit firm size on the independence of the auditor



F: Ability of professional bodies to enforce independence of practicing members



G: Independence of "big" audit firms in Nigeria



H: Independence of "small" audit firms in Nigeria



I: Intensity of competition in the market of audit services in Nigeria



266 S. B. Adeyemi / SJM 6 (2) (2011) 247 - 267

AP

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J: The published financial statements of audit firms should clearly disclose how much is earned from non-audit service



K: Fee from non audit services can deter auditor independence


Valid Agree 37 37.0 37.0 37.0

Strongly agree 63 63.0 63.0 100.0

Total 100 100.0 100.0

L: Prolonged audit tenure can impair the independence of auditors


Valid Agree 55 55.0 55.0 55.0 Strongly agree 45 45.0 45.0 100.0 Total 100 100.0 100.0

M: Audit firms should be allowed to perform non-audit services for their audit client concurrently



Source: Field Survey, 2010

267S. B. Adeyemi / SJM 6 (2) (2011) 247 - 267

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