Auditors Independence and Corporate Fraud

Auditors Independence and Corporate Fraud

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Abstract on Auditors Independence and Corporate Fraud

This research work examines auditor’s independence and corporate fraud. The incidence of increasing financial fraud scandal in corporate organization has been a center feature in recent years. This fact, together with the increasing sophistication of fraudsters creates difficult problems for directors (management) and independent auditors.

This research work is carried out in five chapters; chapter one focuses on introduction with emphasis on the background of the study, statement of the problem down to the scope of the study.

Chapter two gives detail review of relevant literatures in relation to the topic.

Chapter three contains the research methodology used. Chapter four highlights the various data analysis and interpretations of the various hypotheses formulated were tested using the z-test statistic.

While chapter five vividly points out our research findings, conclusions and recommendations put forward.

Chapter One of Auditors Independence and Corporate Fraud

INTRODUCTION 

BACKGROUND OF THE STUDY 

Professional independence is a concept fundamental to the accountancy profession. It is essentially an attitude of mind characterized by integrity and objective approach to professional work. The second half of the 20th century according to Baker (2005) saw various debates in both the academic and professional literature about auditor independence. One argument pertaining to auditor independence from idealized views of professionalism that emerged historically in both the British and the American accounting profession is the issue of independence in examining financial statement and detection of errors and fraud.

‘Independence’ has become an emotive word, a banner standing for freedom, integrity and all that is good. The word independence has two distinct meaning. Firstly, it falls within a family of words implying ‘an absence of relationship’ for example, like unrelated, disconnected, isolated, remote and insular. Perhaps this is the reason why, in the olden days, auditors were often required to hold shares in their client companies so as not to be too independent’. Secondly, ‘independence’ falls within a family of words implying freedom from the exercise of powers, for example: free, unhindered.

McGrath (2001) suggested that “An honest auditor will behave like someone who is independent, using independence to mean an attitude of mind which does not allow the viewpoints and conclusions of its possessor to be reliant on or subordinate to the influence and pressure of conflicting interest. This Olidipupo (2003) further buttressed that, auditor independence is a quality which permits an individual to apply unbiased judgment and objective consideration to establish facts in arriving at an opinion or decision. It is implicit that auditors should be independent from management influence so as to add credibility to financial statement.

In the face of independence of auditors, so many companies like the World Com, Enron, Anderson etc have fallen victims to corporate fraud. The incidence of financial fraud is increasing and has a central feature in a number of financial scandals around the world in recent years. This fact together with the increasing sophistication of fraudsters, create difficult problems for management and auditors. There are some who would argue that the detection of fraud, should be the auditors principal function. This prevailing attitude clearly gives rise to a public expectation which is neither shared nor fulfilled by the profession.

The English Illustrated Dictionary (1990:331) defines “Fraud” as ‘deceitfulness’, ‘criminal deception’ and using false representation to obtain unjust advantage. Adeniyi (2004) defines “corporate fraud” as an intentional act by one or more individuals among management, employees or third parties, which results in a misrepresentation of financial statements. This he further noted that corporate fraud may include manipulation, falsification or alteration of records or documents, misapplication of accounting policies, suppression, omission of the effects of transactions from records or documents etc. The various cases of corporate fraud arose from inadequate internal control system, poor security management for security document, management attitude to audit, chaotic accounting system and irregular balancing of books etc, Izedonmi (2000).

The detection of these frauds tends to pose serious concern on the stakeholders who rely adequately on the independent auditor, audited financial statement prepared by management.

The thrust of the project work is on independence of auditor and corporate fraud in an organization with thorough investigation of these manifestations in the accounting firms (independent auditors) in Nigeria.

STATEMENT OF THE PROBLEM 

Auditor’s independence from their clients is compromised by any relationship that builds a common identity between them. Auditor independence and the quality of auditing decisions deteriorate over time as the auditor-client relationship lengthens (Dies and Giroux 1992). Thompson (1995) has shown that even the most superficial affiliation with a partisan leads people to interpret ambiguous information in ways that are consistent with the partisan interest. This signifies that auditors independence and their role in corporate fraud has created crucial problem in people perception. In the current auditing practices, various incidence of fraud occurring in corporate organizations has attracted doubt if auditor independence is necessary. Stakeholders whom they represent or act as corporate governance from management exploitation seem to have lost confidence in them. The perception that independent auditor is responsible for fraud and error detection has created expectation gap in the mind of the public.

Despite the unending efforts by regulatory bodies in the protection of auditor’s independence and corporate fraud perception, there are still some questions that remained unanswered. These are stated in questions from which the research work seeks to suggest solutions to. These include:

How does auditor’s independence impact on corporate fraud?

Who should be charge with the responsibility of detection and prevention of fraud in the organization?

What are the threats to auditor’s independence?

What are the deficiencies to the auditor’s independence in the current practices?

How does the occurrence of different fraud affects auditor’s independence in the emerging market?

Does auditor’s independence have any relationship with corporate fraud?

OBJECTIVE OF THE STUDY 

It is an obvious fact that independence of the auditor is the heart of the auditing profession and the lack of inadequacy of such independence amounts to the failure of the profession and discipline. The objectives of the research work are stated below as follows:

To examine the threats to auditor’s independence

To investigate how auditor’s independence impacts on corporate fraud.

To find out who should be charged with the responsibility of detecting and preventing fraud in corporate organization.

To find out the deficiencies in the auditor’s independence in the current auditing practices.

To assess how occurrence of different frauds affects auditor’s independence.

To find out the relationship that exists between auditor’s independence and corporate fraud. 

SIGNIFICANCE OF THE STUDY 

The relevance of this study cannot be ruled out when completed because it would be of immense benefit to the following:

The Government: It would give the government insight on various issues surrounding auditor independence and corporate fraud. Based on that, government can use it as an avenue to review and strengthen various auditors’ independence rules and relationship on corporate fraud.

The Public: It would enlighten the public of the expectation and notion created about the independence auditor and corporate fraud. This would eventually assist to reduce the gap created about the independence of the auditor and the detection of fraud.

Auditors: It would add to their existing stock of knowledge.

Organizations: It would be vital to management of various organizations like banks, companies etc indicating their area of responsibilities in financial statement preparation and that of the independent auditor.

Shareholders: It would serve as guide to the shareholders, investors and other stakeholders on who to be held responsible in detection of fraud and errors between independent auditor and management.

Students: It would serve as an addition to knowledge and as a push for academic exercise especially accounting students. 

SCOPE OF THE STUDY 

The research intensively examines the independence of the auditor and corporate fraud in an organization. The research work spanned across some accounting firms in Nigeria but for the purpose of coming up with a reliable study, some selected accounting firms in Edo and Lagos States were focused on.

All the information and data generated were strictly within the ambit of the study. Irrelevant materials, information and data no matter how interesting they are, were totally filtered out from the research work. The study covers a period of five years that is 2005 to 2010.

STATEMENT OF HYPOTHESIS 

Hypothesis is one of the most powerful tools that man has invented to guide the process of investigation (Osunde and Iyamu, 1999). They further contend that a hypothesis is a is a tentative proposition advanced as a solution to a problem or as an explanation to some phenomena.

On this note, the below hypothesis are formulated for the purpose of the study:

Auditor independence has significant impact on preventing corporate fraud.

Auditor independence has effect on auditing practices.

There exist relationship between auditor independence and occurrence of corporate fraud.

LIMITATIONS OF THE STUDY 

The research work is faced with the below major constraints:

Problem of sourcing for data and materials: The research is faced with the problem of sourcing reasonable amount of vital information on the subject matter.

Problem of generalization: This is due to the smallness of the sample size in representing the population. This is strongly believed to be attributed to insufficient time and fund to cover the entire accounting firms in the country.

Geographical coverage: A challenged topic of this nature supposed to have covered the entire country instead of focusing on Edo and Lagos State. This is due to the fact that the researcher would have problem of retrieving questionnaire from respondents.

DEFINITION OF TERMS 

Audit:Attwood and Stein (1986:12) put the definition of an audit succinctly as “Checking somebody else’s accounting”, while Meig et al (1982:28), put it as “an examination or investigation by independent public accountant of a set of financial statements, and the accounting records and other supporting evidence, both within and outside client’s business.

The Institute of Chartered Accountant in England Wales (ICAEW, 1985:3) defines an audit as: the independent examination of, and expression of an opinion on the financial statements of an enterprise by an appointed auditor in pursuance of that appointment and in compliance with any relevant statutory obligation.

ICAEW:Institute of Chartered Accountant in England and Wales.

ICAN:Institute of Chartered Accountant of Nigeria.

AICPA:America Institute of Certified Public Accountant.

CACA:Chartered Association of Certified Accountants

Auditor:An auditor is an independent person appointed to examine the organization; its records and the financial statements prepared from them and thus form an opinion on the accuracy and correctness of the financial statements (Oladipupo, 2005). 

Independence:Freedom to organize or do things without interference from any quarter.

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