ENHANCING PUBLIC CONFIDENCE IN AUDIT REPORT OF FINANCIAL INSTITUTIONS: THE ROLE OF AUDITOR’S INDEPENDENCE
CHAPTER ONEE
INTRODUCTION
1.1 The Study’s Background
Accounting-wise, the creation of stewardship reports is the job of management, which oversees the operations of the corporate organization on behalf of the owners, typically the shareholders. This stewardship report contains financial statements that cover a company’s operating performance and financial position. It is often prepared by the board of directors and addressed to the shareholders as part of their agency obligation.
Suffice it to say that if all financial transaction facts were properly and accurately recorded, and if the owners were properly and accurately recorded, and if business owners and managers were entirely honest and sufficiently skilled in accounting and recording, there would be little need for independent auditing.
However, given the nature of human nature, there will very certainly always be a need for auditors (www.crfonline.org/orc/cro-11,int ml).
Dependable financial information is critical to our society’s survival. Our society’s credit professionals: the credit professional determining to give trade credit, the investors opting to buy or sell securities, the banker deciding revenue based on income tax returns, all rely on information provided by others.
In many of these cases, the aims of the information suppliers are diametrically opposed to those of the information users.
The awareness of the social need for independent auditors, individuals with professional competence and integrity who can tell us whether the information on which we rely is a fair picture of what is really going on, is implicit in this line of reasoning. Accounting and financial reporting help society allocate its resources more efficiently.
The independence auditor’s contribution is to lend credibility to financial statements.
In this context, credibility means that the financial statements can be trusted; that is, they can be relied on by third parties such as trade creditors, bankers, stockholders, the government, and other interested parties. The Oxford Advanced Learner’s Dictionary of English defines credibility as “the attribute of being widely accepted and trusted.”
Audited financial statements are currently the standard method for reporting a company’s operating results and financial situation.
When applied to financial statements, the term audit means that the balance sheet, income statements, and retained by an audit report prepared by independent public accountants, expressing their professional opinion as to the fairness of the company’s financial statements (www. Crfonline.org/cro/cro-11. intml).
Confidence, on the other hand, is defined by the Oxford Advanced Learner’s Dictionary of English, 5th Edition as “the sensation that you can trust, believe in, and be certain about the talents or excellent characteristics of something or somebody.”
Audit competency may only be attained if public trust in audit reports is greatly increased.
Both credibility and confidence are intertwined, and one characteristic influenced the other in order to attain the audit quality and competence that financial statement users desired.
However, management failures resulting from cooperative governance failures have significantly contributed to the erosion of credibility in audit findings throughout the years.
The solution to the problem of credibility in financial and audit reporting is to designate an independent individual, and public trust in audit reports is increased when the profession encourages high standards of performance and conduct on the part of all practitioners.’
According to Olagunju (2011), in order for an audit to be trustworthy and reliable, it must be completed by someone who is independent and who is not influenced by position or authority that will affect its own findings.
Auditor independence contributes to quality auditing (Beck, 2004). The UK Financial Reporting Council (UKFRC) has conducted considerable research on audit quality and produced the audit quality framework in February 2008 in order to improve audit confidence and credibility.
They are as follows: the culture of an audit firm, the skills and personal qualities of audit partners and staff, the effectiveness of the audit process, the dependability and usefulness of audit reporting, and factors beyond auditors’ control affecting audit quality (www.mia.org.my/at/at/2011/12/06.paf).
To that end, this research work aims to use the significance of confidence and credibility as approaches to improve audit competence in relation to the issue of public confidence and credibility (1z-a-v-z the factor responsible for the loss of credibility and public confidence, the attitude of users of financial statements to audit reports, as well as providing the way forward to improve audit credibility and public confidence.
Research Problems Statement
One of the cumulative negative effects that the window dressing (creative accounting) collapse of some USA giant companies such as Enron, WorldCom, Global Crossing, Tyco, and others, as well as a slew of smaller scale examples around the world such as Cadbury in Nigeria (ICAN Study Pack, 2009: 252) has on the credibility of financial reporting, attention has been drawn to the following problem areas and research questions.
Is the investing public confident in the audit reports of recent Ebor companies?
Does an increase in the reliability of financial statements increase the trustworthiness of the audit report?
Is there a strong relationship between auditor independence and financial statement credibility?
Is audit quality and trustworthiness determined by the auditor’s personal qualities?
Is the lack of credibility in audit reports the result of a breakdown in corporate governance?
What solution may be suggested to restore and strengthen audit reporting confidence?
The Study’s Objective
To ascertain whether the investing public has faith in the audit report of a recent audit.
To study if improving the credibility of financial statements can boost public trust in audit reports.
To determine whether there is a substantial relationship between auditor independence and financial statement credibility.
To establish whether the audit quality and believability of financial statements are satisfactory.
To determine whether the loss of credibility in audit reports is due to a breakdown in corporate governance in organizations.
To propose some potential remedies for restoring and improving public trust in audit and financial reporting.
Research Hypotheses Statement
The following hypotheses have been proposed in order to obtain empirical results:
Ho: Improving the integrity of financial statements will not increase public trust in audit reports.
Hi: Improvements in the integrity of financial statements can boost public trust in audit reports.
Ho: Audit quality and trustworthiness are not dependent on auditors’ personal characteristics.
Hi: Audit and credibility are personal attributes of auditors.
Ho: The failure of corporate governance in organizations does not produce a loss of credibility and confidence in audit reports.
Hi: The collapse of corporate governance in corporations causes a loss of credibility and confidence in audit reports.
The Study’s Scope
The study will include the global perspective on challenges of public trust and credibility in audit and financial report reporting. Cases of window dressing and corporate governance failures that have harmed audit credibility will be converted, both globally and in Nigeria.
The Study’s Importance
The research findings will be extremely useful to professional accountants and their stakeholders or interest groups with a financial stake in audit reports.
Shareholders, directors, investors, employees, labor and trade unions, creditors, government, and others can benefit from the findings of this study by understanding the true nature of an audit and its significance in achieving openness and accountability.
Furthermore, the duties and obligations of each stakeholder in the enforcement of good corporate governance leading to auditor independence and the development of impartial audit reports will be valued.
Finally, readers will be exposed to various variables that work against achieving public trust that are not directly caused by auditors ( as most times, auditors are being blamed for the feature of management and corporate governance)
The Study’s Limitations
The unusually limited time frame for doing this research is one of the challenges it faces. Another barrier is a lack of prior literature on the subject.
Finally, the overall apathy of Nigerians about responding research questions posed in a slightly different manner. Regardless of the restraints, the researcher remained tenacious in completing a promising study.
Term Definitions
The following are some keywords utilized in this project work:
Audit Report: This audit report is a written account of the auditors’ findings during their audit work, as well as their comments on such findings.
Internal auditing is an independent appraisal function within an organization that reviews the control system and the quality of performance as a service to the organization (Okolie 2007: 76)
According to Corporate Governance: ICAN Study Pack (2009:207), corporate governance is “the collection of processes that protect outside investors from expropriation by insiders” (including management, family interest and for governments).
Internal control system is defined by Okolie (2007:71) as “the complete range of control, financial or otherwise established by management in order to carry on the business of the organization orderly and to ensure adherence to management policies, safeguard the asset, and secure as far as possible the completeness and accuracy of the records.”
Stewardship Report: A financial document created by the directors and addressed to the shareholders as part of their agency obligation.
Fraud: According to Auditing Standards Statement 110, fraud includes both the use of deception to acquire an unjust or illegal financial benefit and international misrepresentation impacting financial statements, employees, or third parties.
Window Dressing/Creative Accounting: When a company incurs expenses and losses and thus overstates profit earnings, like Enron did, the organization’s accounts are “window dressed or manufactured.” Creating an account is both dishonest and unlawful (ICAN Study Pack, 2009:191).
Paper Profit: This is a result of “window dressing.” The word refers to a circumstance in which the profit stated in the financial statement does not have a cash equivalent or tangible assets equivalent. (From the Oxford Advanced Learner’s Dictionary of Accounting.)
Management’s financial or other interests will inappropriately affect the professional manager’s or accountant’s judgements, actions, or behavior.
The contrast between what the public expects from an audit and what the auditing profession chooses as audit objectives (Porter, 1993).
Audit risk is the danger that the auditor would draw an incorrect view or conclusion from his audit job. ICAN Pack (2009, 379).
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ENHANCING PUBLIC CONFIDENCE IN AUDIT REPORT OF FINANCIAL INSTITUTIONS: THE ROLE OF AUDITOR’S INDEPENDENCE
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