EFFECT OF AUDITOR’S INDEPENDENCE ON THE RELIABILITY OF FINANCIAL REPORTING IN OSUN STATE
CHAPTER ONE
INTRODUCTION
I.1 Background of the study
Auditors’ independence has been termed the cornerstone of the auditing profession, since it is the foundation for the public’s trust in the attest function (Abdul Nasser, Mustapha and Hudaib, 2006). Auditors’ independence helps to ensure quality audits and contributes to financial statement users’ reliance on the financial reporting process. McGrath and Siegel, (2001) argued that when independent auditors render unbiased audit decisions, the broader goal of auditors’ independence, namely “to support user reliance on the financial reporting process and to enhance capital market efficiency,” is accomplished. However, several major instances of misstated funds have been reported over the last several years in federal higher institutions (Adams, 2001). These misstatements have led many to question the effectiveness of various aspects of the audit function, especially auditors’ independence.
Public sector audit has experienced considerable expansion throughout the world. The reason for this is closely related to changes in the structure of government and concern for more accountable and transparent governance, which has resulted in a large increase in the number of accounts and sophistication of financial reporting. The expansion has brought with it an added demand for accountability (Dowdall, 2003). Public sector accounting is quite distinct from commercial accounting in terms of objectives, sources of revenue and bases of recording accounts, responsibility and accountability among others.
It is useful however, to distinguish between audit and other forms of regulation and inspection. Public audit applies to almost every public sector body and is relatively wide-ranging, from certifying the accounts to examinations of economy, efficiency and effectiveness. The audit function and the platform, on which audit results are reported, tend to reinforce the traditional line of public sector accountability to elected representatives rather than establish new forms of accountability.
The function of auditing is to lend reliability to the financial statement. The financial statements preparation is the responsibility of the management, while auditor responsibility is to lend reliability of the financial statements. The auditor also increases the reliability of other non-audited information which is released by the management. For an audit to be reliable and reliable, it must be performed by someone who is independent and cannot be influence by position, power which will affect its own conclusion. The securities exchange commission approved new auditor independence regulation which requires that traded companies should disclose the level of fees that were paid to their external auditor for nonaudit services (IAASB, 2015).
The auditor independence has long been recognized as the cornerstone of the public accounting profession and that it is privileged to govern itself. Society grants power and privilege to the Accounting profession. Auditors are obligated to perform their duties for the public benefit in exchange for exclusive professional privilege. Traditional audit independence view regard as a moral perspective (Babatoolu, Osasrere and Emmanuel, 2016). As for a moral perspective, auditors are professionals, with professional obligations to the public. They should not engage in any activity that appears to impair their effectiveness as professionals, regardless of the totality of their incentives (Enofe, Okunega and Ediae, 2013).
Professionals are presumed to do things because of their professional duties, not because of their best interests. In incentives right or wrong is concentrated. Morally, some seem to believe that it is wrong for an auditor if “appear” not to be independent. Intrinsic ethical concentration is an influencing factor to consider on a moral view the nature of the moralistic analysis that support the enhancement of the audit independence and have significant to the auditor’s role to play auditors’ primary duty to protect the public interest and the necessity to use judgment in fulfilling this duty (Ilaboya and Ohiokha, 2014). The ideal of auditor independence has been clearly stated for a long time.
The second general standard of generally accepted auditing standards states that “in all matters relating to the assignment, independence in mental attitude is to be maintained by the auditor or auditors.” Essentially, an auditor may function as an employee (internal auditor) or an independent professional (external auditor). Users of these entities’ financial information, such as investors, government agencies, and the general public, rely on the external auditor to present an unbiased and independent evaluation on such entities. In an ideal world this may be the case, but in reality auditors may be less independent than the other auditors (Nemit, 2015).
EFFECT OF AUDITOR’S INDEPENDENCE ON THE RELIABILITY OF FINANCIAL REPORTING IN OSUN STATE