AN INVESTIGATION ON RELIANCE OF AUDITOR’S INDEPENDENCE ON THE CREDIBILITY OF FINANCIAL REPORTING QUALITY OF CORPORATE ORGANIZATION

CHAPTER ONE

INTRODUCTION

1.1. BACKGROUND TO THE STUDY

The auditing profession performs a role in giving reasonable assurance to the public and users’ of financial statements, specifically investors and creditors, of the reliability and credibility of a firms’ financial statements. To fulfill this role, there are several principles that auditors should espouse. One of the most important principles is independence. By demonstrating their independence, auditors’ opinions on financial statements will be valued by the users. In essence, auditor independence refers to an absence of interest by the auditor in the auditing assignment, thereby avoiding material bias that could affect the reliability and credibility of the financial statements. The auditing profession promotes the principle of independence to define, defend, and extend the profession. Auditor independence also refers to the independence of the internal auditor or of the external auditor from parties that may have a financial interest in the business being audited. Independence requires integrity and objective approach to the audit process.

The concept requires the auditor to carry out his or her work freely and in an objective manner. Financial statements apart from stating the financial position of an organization, provides other information such as the value added, changes in equity if any and cash flows of the enterprise within a defined period time to which it relates (Iyoha and Faboyede, 2011). This information is useful to a wide range of users making informed economic decisions. The quality of financial reporting is indispensable to the need of users who requires them for investment and other decision making purposes. Financial reports can only be regarded as useful if it represents the “economic substance” of an organization in terms of relevance, reliability, comparability and aids interpretation simplicity (Penman, 1984). Ahmed (2003), stated that useful accounting information derived from qualitative financial reports help in efficient allocation of resources by reducing dissemination of information asymmetry and improving pricing of securities. The user of financial statement which include: shareholders, government, creditors, investors, etc. All rely on the audited financial statement in other to make informed decision. Therefore the credibility and reliability of this statement is necessary.

The basic purpose of financial statements in the view of Meigs and Meigs (1981) is to assist decision makers in evaluating the financial strength, profitability and the future prospects of a business entity. The basic objective for preparing financial statement is to provide information useful for making economic decisions. The objective of an audit of financial statements is to enable the auditor express an opinion whether the financial statements are prepared in all material respects and also in accordance with auditing standard. In recent times, auditors have been put under pressure to ensure that their reports constitute assurance to investors that their funds are put into good use and properly accounted for. In Nigeria, every incorporated company is required to appoint an external auditor, who is required to render an independent opinion on the financial statements; whether or not they show a true and fair view. The Companies and Allied Matters Act (1990) states that every auditor of a company shall have a right of access, at all times, to the books, accounts and vouchers of the company and to such information and explanations as may be necessary in the course of an audit. The auditor shall make a report to the members of the company on the accounts examined by them. The auditor in performing his duties is expected to exercise all care, diligence and skills as is reasonably necessary in each particular circumstance.