Full Project-ASSESSING THE IMPACT OF AUDITOR INDEPENDENCE ON INTERNAL CONTROL

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ASSESSING THE IMPACT OF AUDITOR INDEPENDENCE ON INTERNAL CONTROL

ABSTRACT

This research study was aimed at critically assessing the statutory auditors’ independence on internal control in Nigeria using some of the selected manufacturing firm in Rivers State. Many members of the Public believe that auditors are usually manipulated by managements of their client companies.

Also, in this study the independence of auditors was critically evaluated and the importance of auditors’ independence in internal control credibility was analyzed. In order to make informed decision it is important for the internal control to be credible. The auditors are expected to audit the financial statement of companies in order to present a true and fair view or otherwise of the financial statement.

The research population used for the study comprised all the registered audit firms of external auditors in the selected firm, the listed Public limited companies and the general public who are also known as interested parties.

The significant research questions examined were, whether the present statutory and professional provisions in relation to auditors’ independence and internal control are adequate?. Have the auditors’ independence significantly impacted the business firm internal control? The survey and descriptive methods of research were employed in carrying out this research. The statistical tools used in the analysis of the data collected were tables, frequency distributions and simple percentages using SPSS data tools for the irrigation analysis and the hypothesis tested using chi-square. The results of the test show that auditor’s independence affects the internal control, like the financial statement and the improvement in the credibility of the internal control system can reduce manipulation in the financial statement. The reason why audit exists is because investors and creditors can make use of financial statement to make their decisions. The study concluded that auditors’ independence and the internal control are to be significantly impaired when non-audit services are conducted and that there is a positive relationship between independence of an auditor and internal control flow of any business firm, therefore the independence of an auditor is fundamental to the internal control.It was observed that auditor’s internal control are manipulated by managements during the course of performing their audit task thus undermining auditors’ independence.

CHAPTER ONE

1.0 INTRODUCTION

In recent times there has been much discussion about the independence of Auditors; the leadership of the auditing standards board, the public oversight board, the independence standards board, and most recently the proposed independence rules promulgated by the Securities and Exchange Commission (SEC) have all attempted to clarify and strengthen auditor independence. Also in the medieval era financial statements were not necessary and hence financial statements were not prepared neither used to make decisions. But with the recent development every firm are expected to prepare financial statement in order to know the financial position of the organization so that stakeholders can make decisions. Securities and exchange commission (SEC) require traded companies to make sure their statements are prepared and audited by certified public accounting firm who assume the responsibility for the fairness of the financial statements. This opinion adds to internal control and the credibility of the statements which is agreed by the lender and private investors who voluntarily allow company’s statement to be verified by independent body. 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 (2007) 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.

The function of auditing is to lend credibility to the financial statement. The financial statements preparation is the responsibility of the management, while auditor responsibility is to lend credibility of the financial statements. The auditor also increases the credibility of other non audited information which is released by the management. For an audit to be credible 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 non audit services.

The auditor independence has long been recognized as the cornerstone of the public accounting profession (Sweeney, 2004; Mednick, 2005) 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 (Preston et al., 2006; Thompson and Jones, 2010). 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 (Antle, 2003). 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 (Dobson and Armstrong, 2005; Libby and Thorne, 2007).

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 it will argue that these auditors may be less independent than the other auditors.

Therefore safeguarding auditor’s independence is a key priority not only for auditors, but also for management and investors. In the global market of today, the government, creditors, institutional investors, lenders, regulator, stakeholder etc rely on the information provided by the auditors on the credibility and reliability of the financial statements.

More generally, setting objectives, budgets, plans and other expectations establish criteria for control. Control itself exists to keep performance or a state of affairs within what is expected, allowed or accepted. Control built within a process is internal in nature. It takes place with a combination of interrelated components – such as social environment effecting behavior of employees, information necessary in control, and policies and procedures. Internal control structure is a plan determining how internal control consists of these elements ( Matti Mattila: The ECAR Model)

1.1 BACKGROUND OF THE RESEARCH

Internal control according to Okezie (1999:43) could be likened to the heart”, which regulates the business blood”. No business could succeed without an effective control system. Internal control can also be likened to the brake and steering in a vehicle, which, if there are not there, the business “train” will cash. It can be likened to the laboratory or quality control machinery, which controls the quality of products produced by an organization. It is the center hob of all financial activities of an establishment.

Internal control is one of the essential means of establishing and maintaining management control of a business. It involves the entire basic element of management control and is itself the main element of the appraisal, measurement and evaluation control.

Effective system of control is a prerequisite for the attainment of organizational goals, but it has remained one of the biggest problems facing modern day business. It is an extremely broad topic and of course is not restricted to the accounting field but embraces all activities of the organization.

The consultative committee of accounting bodies in the United Kingdom (auditing guidelines {2005:5} defined internal control as “the whole system of controls, financial or otherwise, established by the management in other to carry on the business of the enterprise in an orderly and efficient manner, ensure adherence to management policies, safeguard the assets and secure as far as possible the completeness and accuracy of the records”.

Internal control system is divided into two main aspects – Accounting controls and Administrative controls. However, for the purpose of this research project, effort is concentrated mainly on the accounting control aspect.

Every organization both profit or non-profit organization has its objectives and goals in mind to achieve. For the non-profit making organization, their goal is to satisfy the social need of the citizens and in the effort to achieve these purposes supervision more often than not play a vital role.

The size and scope of these organizations have sometimes made it hard for the executors to exercise personal and first hand supervision of operation. It is in this light that internal control established by management is initiated. For an organization to carry out its business there must be some factors put in place for the smooth running of the organization like materials, machines, money etc.

These need to be well coordinated in order for the success of the organization to be achieved. These factors are used by a group of persons known as management. Neither can management exists without an organization both are inseparable. The system of internal control provides assurance to management of the dependability of the accounting data used in the decision making of the organization

It has been discovered that due to lack of internal control several industries have been discovered to have defrauded its customers mostly foreign investors, Having discovered this, industries now take extra precaution handling any financial issues because of rampant incidence of fraud.

Management use internal control as a tool to check it staff due to the fact that managers are not able to monitor the activities of the organization. It therefore adopts the internal control in such a way that the system checks itself and any irregularity within the system is been detected and corrected.

To ensure that the system checks itself, management could use devices such as segregations, supervision of work and acknowledgement of performance. The effective arrangement and implementation of this control system would ensure proper management.

1.2STATEMENT OF RESEARCH PROBLEM

Internal control is often cited as the root of most problems in public sectors. Problems of internal control are given as the explanation for failures and miss-management in public sectors. Since internal control is the factor for the survival of public sectors, the researcher wants to evaluate the impact of the auditors on internal control and the efficacy of internal control measures in public sectors. The researcher also wants to find out the independences of the auditors and how it can contribute to achieving an effective system of internal control and the problems facing it. Some of these problems are duplication of functions and duties, embezzlement of funds, errors of omission and commission, over staffing, pilferage and stealing as well as wrong reporting of data. Why do these problems exist? And what is the extent of this problem on the overall performance of the establishment. It is observed that some people are of the opinion that independent examination of books of accounts by external auditors can bring about improvement in the performance of these business units be enhanced by an independent examination of their books of accounts and related documents and records?

The problems this study attempts to examine are as follows:

(1) Many members of the public believe that Auditors are usually manipulated by managements of the companies they audit.

(2) Many people are of the opinion that Auditors pursue personal interests in the course of performing audit functions for their clients.

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