Effect Of Audit Quality On Performance Of Insurance Companies

CHAPTER ONE

INTRODUCTION

• background Information to the Study

In the business environment, especially in insurance sector, auditors are required to provide objective assessments concerning whether companies are managed responsibly and effectively to achieve the intended results or not. The confidence of investors is very important in the successful operation of the world’s financial markets, and is one of the most frequently debated areas amongst auditors, politicians, media, regulators and the public (Eshitemi & Omwenga, 2016; Matoke & Omwenga, 2016). The trust of auditors in delivering high quality audit report continued until after the Enron Scandal in 2002 and the collapse of both small and big corporations across the globe which resulted in a heavy debate about audit quality and the factors that might influence the quality of an audit. The audit profession suffered a hit on the basic principles of independence of an auditor and audit report presented to the public (Chinedu, Nwoha & Udeh, 2020).

Several corporate failures across the globe have been attributed to asymmetric information content of the financial statement. The asymmetric financial information footage in the annual report is mostly triggered by the opportunistic tendencies of the managements who attempt by all means to usurp the returns made by the enterprise against the wishes of the shareholders. Pertinently, Mishra and Malhotra (2016) posit that pressures on the enterprise to meet up with the estimated earnings and the analysts’ expectations or even to their own targeted level of earnings on the other hand compels the managers to engage in earnings management, which reduces financial reporting quality. Again, Price Water house Coopers (PwC, 2018) Global Economic Crime and Fraud Survey indicates that 49% of financial reports presented by firms do not meet the quality standard. In which case, any financial statement that is materially misstated or contains any deceitful information does not represent qualitative financial reporting, hence the representation of financial reporting quality with earnings management.

According to Nwoye, Anichebe, and Osegbue (2021) audit quality is the joint probability that, an auditor will both discover and report a breach in the client’s accounting system. The discovery of a misstatement measures quality in terms of auditor’s knowledge and ability, while reporting the misstatement depends on the auditor’s incentives to disclose. This definition is appropriate for external financial statement audits; it can be expanded to include other types of auditors (e.g., internal auditors) and audits (e.g., compliance and operational audits). Seyyed, Mahdi and Mohsen (2012) provides further explanation that, audit quality could be a function of the auditor’s ability to detect material misstatements and reporting the errors. Together with other similar definitions, they all emphasized on two of the most important aspects of audit quality, namely auditor ability or auditor effort, and auditor independence. High quality auditors are more likely to discover questionable accounting practices by clients and report material irregularities and misstatements compared with low quality auditors (Zehri & Shabou, 2011).

Ozegbe and Jeroh (2022) opined that auditing and audit procedures generally, are monitoring tools that serves the purpose of helping to decrease information asymmetry thereby safeguarding the welfare of diverse stakeholders by ensuring that companies’ financial statements are free from substantial misstatements. The belief of stakeholders therefore is that auditors have a fiduciary role of significantly contributing to both financial reporting and financial performance as it stands to lower the risk of severe misleading statements by guaranteeing that financial statements are prepared in accordance with established norms, regulations and standards. No doubt, financial reporting and audit quality has remained crucial to various aspects of regulatory and supervisory thrusts overtime. The quality of audited financial information is important not only to a number of people, but to organizations, governments and regulators (Odjaremu & Jeroh, 2019; Ivungu, Anande & Ogirah 2019).

Audit quality is defined as the possibility that an auditor would find out break in the owners accounting system and report the violated (Abubakar, Mazadu & Yusuf, 2020). The findings of misstatement measures quality in terms of the auditor’s knowledge and ability, while the reporting of a misstatement is dependent on the auditor’s incentives to disclose (Ozkan, 2018). Thus, the auditors should give a professional judgment concerning the creditability and reliability of accounting information enclosed in the annual reports and accounts for a particular period of time. However, the assessment carry out by auditors is vague ((Iwiyisi & Ifeanyi, 2018).