AUDITOR INDEPENDENCE AS A CORRELATE OF FINANCIAL SCANDALS

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

In recent times, research about the quality of audit report has increased tremendously, several factors has contributed to this fact, stemming from the growing importance of good corporate governance mechanism arising from highly publicized accounting scandals in Nigeria and across the globe. Many high profile corporate collapses, such as the case of world Com and Enron in the United state, have been traced to poor audit independence associated with a perceived lack of auditor independence. Recent reports of questionable accounting practices adopted by some companies in Nigeria have brought the issue of auditor’s independence to the forefront, and putting the auditing profession credibility in doubt (Otusanya and Lauwo, 2010). As a result of all these questionable accounting practices engaged in by companies, auditors have been put under pressure to ensure that their reports is made up of assurance to investors whose funds are invested in those companies are properly accounted for.

In Nigeria at present, there are two recognized accounting bodies, the institute of Chartered Accountants of Nigeria  (ICAN) and the Association of National Accountant of Nigeria (ANAN), which are saddled with the responsibility of regulating accounting practices in Nigeria. As stipulated by CAMA (2004) it is pertinent that every incorporated companies appoints an external auditor, who is required by law to give an independent opinion on the state of affairs of these corporations, whether or not they show a true and fair view of the financial health of the corporation. The company and allied matters act (CAMA, 2004) states that every auditor shall have the right of access, at all times, to the books, accounts and vouchers of the company and to such information and explanation as may be necessary in the course of carrying out the audit work.

As posited by Knechel (2009), auditing and the audit process provide an evaluation of the probability of material misstatement and reduce the possibility of undetected misstatement to a reasonable or appropriate assurance level. Auditor’s independence has been of serious concern not only to the end users of financial information but to the whole society in general. The need to ensure dependable and high quality audit work has largely focused on auditor’s independence in order to ensure that an auditor is not too familiar with his client, because familiarity will jeopardize the integrity of the auditor and in turn impair their independent opinion as to the financial health of their client. Arrunda (2000), in his view shows that demand for auditing services arose from the need to facilitate dealings between the parties involved in business relationships- shareholders, creditors, public authorities, employees and customers.