Assessing The Impact Of Auditors Independence On Internal Control

This study was carried out to examine the impact of auditors independence on internal control using some of the selected manufacturing firm in Rivers State as a case study. The study was carried out to ascertain whether the present statutory and professional provisions in relation to auditors" independence and internal control are adequate, find out if the auditors" independence have significantly impacted the business firm internal control, and ascertain whether the law is strong enough to protect the independence of auditors in order to be able to carry out legitimate functions. The survey design was adopted and the simple random sampling techniques were employed in this study. The population size comprise of auditors of the some of the selected manufacturing firm in Rivers State. In determining the sample size, the researcher conveniently selected 65 respondents and 50 were validated. Self-constructed and validated questionnaire was used for data collection. The collected and validated questionnaires were analyzed using frequency tables. While the hypotheses were tested using Chi-square statistical tool. The result of the findings reveals that the present statutory and professional provisions in relation to auditors" independence and internal control is adequate. Furthermore, the study also revealed that the auditors" independence have significantly impacted the business firm internal control. Therefore, it is recommended that statutory auditors should take all possible measures which would make them independent in order to carry out their audit assignments successfully. To mention but a few.

Introduction

1.1 Background of the Study

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).

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.

1.2 Statement 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:

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

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

1.3 Research Objectives

The purpose of this study is to investigate the impact of auditors independence on internal control. Specifically, the objectives of this study will be;

Ascertain whether the present statutory and professional provisions in relation to auditors" independence and internal control are adequate.

Find out if the auditors" independence have significantly impacted the business firm internal control.

Ascertain whether the law is strong enough to protect the independence of auditors in order to be able to carry out legitimate functions.

1.4 Research Questions

The following research question will guide the study.

Is the present statutory and professional provisions in relation to auditors" independence and internal control adequate?

Have the auditors" independence significantly impacted the business firm internal control?

Is the law strong enough to protect the independence of auditors in order to be able to carry out legitimate functions?

1.5 Statement of the Hypothesis

H0: Auditors" independence have not significantly impacted the business firm internal control.

Ha: Auditors" independence have significantly impacted the business firm internal control.

1.6 Significance of Study

This study will bring increase in investment from the shareholders because the financial reports so presented to them could be relied upon. This research work will change the orientation of the general public especially the shareholders as to their dependability on the accounts audited by an independent auditor.

This work will also seek to make known areas where auditors need much assistance and full backing of the law in the discharge of their duties.

The study will also give vital information to those aspiring to be auditors as regard their appointment, remuneration, removal and independence in the various organization set ups and parastals they find themselves.

The possible outcome of the study will reduce the chance of conspiracy, fraud and misappropriation of shareholders" funds and also embezzlement can be minimized where there is a qualified independent auditor to cover document.

1.7 Scope of the Study

The purpose of this study is to investigatethe impact of auditors independence on internal control. Specifically, the study will seeks to ascertain whether the present statutory and professional provisions in relation to auditors" independence and internal control are adequate, find out if the auditors" independence have significantly impacted the business firm internal control, and ascertain whether the law is strong enough to protect the independence of auditors in order to be able to carry out legitimate functions.

1.8 Limitation of the Study

Financial constraint

Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint

The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.9 Definition of Terms

Accounts

A detailed list of everything that a person or company earns or spend.

Auditor

Somebody who checks accounts or conducts the audit of an organization.

Independence

Freedom from dependence on or control by another person or organization.

1.10 Organizations of the Study

The study consisted of five chapters. Chapter one comprised background of the study and a general introduction to the work. It included statement of problem of the study, highlighted the objectives of the study, the scope within which the research was conducted is also highlighted. An outline of how the work is organized is also detailed in the chapter one. The chapter two of the study comprised of the literature review. The chapter three comprises of the research methodology. Chapter four comprises of analysis and the chapter five deals with the summary of the major findings, recommendations and conclusion to the study.

Summary, Conclusions and Recommendations:

5.1 Introduction

This chapter summarizes the findings on the impact of auditors independence on internal control using some of the selected manufacturing firm in Rivers State as a case study. The chapter consists of summary of the study, conclusions, and recommendations.

5.2 Summary of the Study

In this study, our focus was to examine the impact of auditors independence on internal control using some of the selected manufacturing firm in Rivers State as a case study. The study is was specifically focus to ascertain whether the present statutory and professional provisions in relation to auditors" independence and internal control are adequate, find out if the auditors" independence have significantly impacted the business firm internal control, and ascertain whether the law is strong enough to protect the independence of auditors in order to be able to carry out legitimate functions.

The study adopted the survey research design and randomly enrolled participants in the study. A total of 50 responses were validated from the enrolled participants where all respondent are auditors of the some of the selected manufacturing firm in Rivers State.

5.3 Conclusions

In the light of the analysis carried out, the following conclusions were drawn.

The present statutory and professional provisions in relation to auditors" independence and internal control is adequate.

The auditors" independence have significantly impacted the business firm internal control.

The law is strong enough to protect the independence of auditors in order to be able to carry out legitimate functions.

5.4 Recommendation

Based on the findings the researcher recommends that;

Statutory auditors should take all possible measures which would make them independent in order tocarry out their audit assignments successfully.

Statutory auditors should ensure that they do not earn a large proportion of their total income from asingle client firm in order to cut off any intimidation or self-interest threat while carrying out their auditassignments.

Audit firms and companies should enforce the mandatory auditor‟s rotation scheme. This would help toreduce or eliminate familiarity threat, hence, ensuring shareholders‟ reliability on the financialstatements.

To foster the independence of statutory auditors, audit firms should regulate the number and length ofnon-audit services rendered to companies they serve as external auditor to. With this, self-review threatwould be eliminated and the statutory auditors can perform his work without due pressure.

Audit firms should undergo a frequent review on their employees‟ financial interest in their audit firms.This would assist in reducing self-interest threat when carrying out an audit assignment on a client firm.

Title Page

Certification

Dedication

Acknowledgement

Table of Content

List of Tables

Abstract

Chapter One:

Introduction

1.1 Background of the Study

1.2 Statement of the Problem

1.3 Objective of the Study

1.4 Research Questions

1.5 Research Hypothesis

1.6 Significance of the Study

1.7 Scope of the Study

1.8 Limitation of the Study

1.9 Definition of Terms

1.10 Organisations of the Study

Chapter Two:

Review of Literature

2.1 Conceptual Framework

2.2 Theoretical Framework

2.3 Empirical Review

Chapter Three:

Research Methodology

3.1 Research Design

3.2 Population of the Study

3.3 Sample Size Determination

3.4 Sample Size Selection Technique and Procedure

3.5 Research Instrument and Administration

3.6 Method of Data Collection

3.7 Method of Data Analysis

3.8 Validity of the Study

3.9 Reliability of the Study

3.10 Ethical Consideration

Chapter Four:

Data Presentation and Analysis

4.1 Data Presentation

4.2 Analysis of Data

4.3 Answering Research Questions

4.4 Test of Hypotheses

Chapter Five:

Summary, Conclusion and Recommendation

5.1 Summary

5.2 Conclusion

5.3 Recommendation

References

APPENDIX

QUESTIONNAIRE

• Accounting Project Topics and Materials