AUDIT TENURE AND QUALITY OF FINANCIAL REPORTING IN NIGERIA.
Need help with a related project topic or New topic? Send Us Your Topic
DOWNLOAD THE COMPLETE PROJECT MATERIAL
AUDIT TENURE AND QUALITY OF FINANCIAL REPORTING IN NIGERIA.
Chapter one
INTRODUCTION
1.1 Background for the Study
Auditors have been condemned in recent years for their involvement in huge corporate scandals such as Enron, WorldCom, Global Crossing, Imclone System, and Tyco International, as well as in Nigeria with Cadbury (Nig) Plc and African Petroleum (Nig) Plc.
The criticism created many doubts about auditors’ independence; such criticism was levelled against auditors because they had been auditing their clients for a long time and had since focused more on non-audit services rather than auditing.
Long audit employment fosters familiarity between auditors and clients, which causes failure in auditor independence. However, there has been a request for significant changes in the auditing profession to maintain independence and thereby increase audit quality (Palmrose, 2006).
The phrase audit comes from the Latin word ‘audire’, which means to hear. Originally, an auditor would listen to an accountant read over the accounts to ensure their accuracy. It was used in all ancient countries, including Mesopotamia, Greece, Egypt, Rome, the United Kingdom, and auditing (Ojo, 2009).
Auditing evolved and flourished significantly following the industrial revolution in the 18th century, as joint stock corporations expanded and ownership management became separate.
The shareholders, or owners, required a report from an independent expert on the company’s accounting, which were overseen by the board of directors, who were workers. The goal is to determine whether the account was true and fair, not to detect errors and fraud (Petersen, 2005).
With the growth of businesses and the volume of transactions, the primary goal of auditing switched to determining whether the accounts were accurate and fair rather than true and exact.
As a result, the emphasis was on financial reporting fairness rather than numerical correctness (Lennox, 2005). Accounting and auditing play an important part in the principal-agent relationship (or agency relationship).
Because of the knowledge asymmetry between managers and owners, the agency relationship in a corporation produces an inherent conflict of interest.
This information asymmetry means that the manager has more information about the enterprise’s “true” financial status (as shown by a statement of financial position) and operating performance (as shown by a statement of comprehensive incomes) than the absentee owner. This contractual relationship between shareholders and managers in a company prompted the desire for firm audits.
Auditing has a significant impact on firms; it aids in determining whether the overall financial statement presents fairly in accordance with the established criteria, the extent to which rules, policies, and laws audit and trace funds or assets identification and recovery, and investigating the existence, nature, extent, and identification of employees who misappropriate assets.
Long audit tenure has produced an expectation gap, which has resulted in the auditor’s failure to carry out his duties efficiently. This is due to the fact that auditors’ expectations are not met due to the familiarity that exists between auditors and their clients;
this familiarity has caused auditors to fail in their areas of independence, credibility, and confidentiality because during long-term audit tenure, auditors focus on non-audit services rather than audit services, resulting in numerous corporate scandals.
1.2 Statement of the Problem
Several studies have attempted to identify possible explanatory variables for audit quality. Following these investigations, auditor tenure has become a hotly debated topic.
Should a company replace its auditors on a regular basis, or should the auditor be given the opportunity to develop long-term relationships with the client? Studies on the impact of audit tenure on financial reporting quality are polarising.
Many of these studies looked at audit firm rotation as a means to improve financial reporting quality. This is because auditors’ familiarity with the client reduces their ability to see things from a new perspective in the early stages of engagement.
The Sarbanes-Oxley Act of 2002 reinforces this viewpoint by requiring the rotation of the lead audit partner every five years so that the engagement can be seen “with fresh and sceptical eyes”.
The argument is that longer audit tenure tends to result in an opportunity cost of auditor independence; however, other studies argue that longer audit tenure improves auditor quality because auditors may require time to become experts in the business they audit and gain client-specific knowledge over time.
This means that audit quality is poorer in the first year of the auditor-client relationship, and that audit quality improves over time as knowledge asymmetry between auditor and client decreases.
1.3 Research Questions.
The research questions developed from this study work are:
i. Is there a link between the term of an auditor and the quality of financial reporting?
ii. Does audit tenure increase the quality of financial reporting in meeting organisational goals?
iii. Does audit goal help to preserve accountability?
1.4 Objectives of the Study
The primary goal of the study is to investigate the influence of audit tenure on the quality of financial reporting; others include:
i. Investigate the association between auditor length and financial reporting quality.
2. To determine whether audit tenure improves the quality of financial reporting.
3. To examine whether audit tenure contributes to the accountability of financial reporting in an organisation.
1.5 Statement of Hypothesis
In order to meet the study’s stated aims, the following null and alternative hypotheses were developed.
Hypothesis 1.
HO: There is no substantial association between the time of an auditor’s tenure and financial reporting quality.
Ho There is a considerable association between the duration of an auditor and the quality of financial reporting.
Need help with a related project topic or New topic? Send Us Your Topic