AUDITORS INDEPENDENCE AND CONFLICTS OF INTEREST

Project Abstract

Auditors play a crucial role in ensuring the reliability and integrity of financial information. However, the independence of auditors is essential to maintain the credibility and trustworthiness of their work. This research delves into the concept of auditor independence and the conflicts of interest that may arise in the auditing process. The independence of auditors is fundamental as it allows them to provide unbiased and objective opinions on the financial statements of companies. Independence ensures that auditors are not influenced by external factors that may compromise their ability to provide an accurate assessment of the financial position of the audited entity. Conflicts of interest, on the other hand, can arise when auditors face pressures or incentives that may lead them to act in a way that is not in the best interest of their duty to provide an independent and fair audit. This research explores various factors that can impact auditor independence, including financial relationships between auditors and clients, the provision of non-audit services, and the tenure of the auditing engagement. It also investigates the role of regulatory bodies and professional standards in safeguarding auditor independence and mitigating conflicts of interest. Furthermore, this study examines the potential consequences of impaired auditor independence, such as the erosion of investor confidence, financial statement fraud, and damage to the reputation of auditing firms. By understanding the factors that can influence auditor independence and lead to conflicts of interest, stakeholders can take proactive measures to enhance the credibility and effectiveness of the audit process. The findings of this research highlight the importance of promoting a strong ethical culture within auditing firms, implementing robust independence policies and procedures, and fostering open communication between auditors, clients, and regulatory bodies. By addressing potential conflicts of interest and upholding auditor independence, stakeholders can uphold the integrity of financial reporting and maintain public trust in the auditing profession. In conclusion, auditor independence is a cornerstone of the auditing profession, and conflicts of interest pose a significant threat to the credibility and reliability of audit reports. This research underscores the need for ongoing vigilance and proactive measures to safeguard auditor independence and mitigate conflicts of interest in the auditing process.

Project Overview

<p> </p><p><br>Auditing as a profession is carried out by an accountant in public practice. Accounting is a profession; Professions have certain characteristics including ethical codes and rules of conducts. Hence, professional conduct is frequently found in auditing examination, as examiners see auditing papers as a suitable vehicle for examining ethics, even when they do not specifically relate to auditing. Therefore, auditors are members of recognized professional bodies of Accountancy, who are into public practice and are also required to observe proper standards of professional conduct whether or not the standards required are written or unwritten. They are specifically required to refrain from misconduct which is difficult to define precisely but which includes any act or default which is likely to bring discredit to himself, the professional body he represents or the profession generally. In this wise, in May 2000, the Institute of Chartered Accountants of Nigeria reviewed an existing document issued in November, 1979 embodying a code of conduct for its members. This document is titled “Rules of Professional Conduct for Members”. This rules stipulate, independence and conflicts of interest in sections A and D respectively which is the core of this research work. On this ground, auditor’s independences is greatly important in accounting profession. This is very much an attitude of mind and objectivity rather than a set of rules.</p><p>Independence implies one’s ability to act with integrity and exercise objectivity and professional skepticism. More also, independence is not-for-profit governance is critical to promote ethical behaviour and reliable financial reporting. With direct contacts to the management team and the auditing firm, the audit committee is quite possibly in the best position to monitor an organization’s compliance with independence standards. Independence is not just something that is a matter of fact but it is also something which is a matter of appearance. The question relating to the effective auditors independence started to arise at the inception of the company form of business in the early 17th century. This steadily expanding influence of the auditor arose from the increasing complexity of modern industrial world. The influence is also as a result of greater emphasis on accountability. It is therefore the need of man to refer his actions to judgment by standards he shares with men. In this light, if professional independence is strictly adhere to, the users of financial statement such as; the shareholders, potential investors, the public etc. would have confidence on the Audited Financial Statement, who do not in themselves evaluate the performance of an auditor. The long-run effect of the public accountancy profession in fact, its very existence and recognition as a profession is dependent upon the independence, integrity and objectivity of the Auditor. If auditors assume the role of partisan spokesmen for management, they thereby sacrifice their professional status as independent public accountant. In 1920s and 1930s, basically the concept of independence was focused on eliminating conflicts of interest that arose from financial relationship between auditors and their clients.</p><p>Thus, conflicts of interest have played a central role in corporate scandals. Therefore, conflicts of interest arise in a situation where the auditing standard is intended to be compromised either by management or the auditor of the company. In other words, it is where individual private interests interfere or appear to interfere with the interest of his company. During the course of performing an auditing service conflict of interest may arise as a result of private interest or activities whether financial or otherwise of an auditor influence the exercise of his or her independence judgment. It may also arise in the following circumstances; outside interests, outside activities and gifts, gratuities and entertainment. To this end, it is essential in audit relationships that a clear distinction is establish between the role of the auditors and his clients which must be clearly understood by both parties involved. In some cases, it is noted that auditors performed non-audit services for their clients which might interfere with their audit work and thereby, involved in making executive decisions for the client and could result to a conflict scenario. An auditor in performance of one or more duties for his client is expected to approach his work with integrity, independence and objectivity. In addition, there are instances in which services other than pure audit work to an audit client may or appear to threaten the independence of an auditor such as self-interest, competition between audit firms, advocacy threat etc these threats may opposed to auditors objectivity.</p><p><strong>STATEMENT OF THE PROBLEM</strong></p><p>The problem of investigation here is targeted at providing answers to the following questions: To what extent is auditor expected to be independence of his client? Does non-audit service performed by the auditor impair the independence of auditor? Is it possible for conflicts of interest to hinder auditor firm making objective assessments? When does conflict of interest arise and how can these conflicts be resolved? Can auditor practice absolute or true independence? What are the things that pose threats to Auditors independence and how should it be avoided? What should the auditor be independent of? Should management continue to be involved in hiring and firing auditors of a company?</p><p><strong>OBJECTIVES OF THE STUDY</strong></p><p>This research work is aim at achieving the following:</p><p>To examine the types of threat to auditors independence.</p><p>To identify ways of avoiding independence threat</p><p>To known whether auditor should disclose conflict of interest.</p><p>To identify ways conflicts of interest can arise during the audit service.</p><p>To determine ways of resolving the conflict of interest.</p><p>To determine the extent to which auditors can be truly independence in practice.</p><p><strong>STATEMENT OF HYPOTHESIS</strong></p><p>The topic Auditors Independence and Conflicts of Interests. Independence is a fact finding study which can be hypothesized on the following statements:</p><p>Ho: Conflicts of interest cannot be eliminated</p><p>H1: Conflicts of interest can be eliminated</p><p>Ho: Auditors cannot maintain true independence in audit service of their clients.</p><p>Auditors can maintain true independence in audit service of their client’s.</p><p>H1: Ho: The performance of non-audit services to client</p><p>undermine auditors’ independence</p><p>Ho: The performance of Non- audit services to client does not</p><p>undermine auditors’ independence.</p><p><strong>RESEARCH METHODOLOGY</strong></p><p>The sources of data in this research are classified into categories: The Primary and the secondary data.</p><p>Primary Data: These are the most important aspect and in fact the basis of the research. It involves collecting data from field surveys in which questionnaires were used. The questionnaires were directed to some selected audit firm and users of the financial statements like, Bankers, insurers, stockbrokers and accounting graduates.</p><p>Secondary Data: The secondary data include existing text books, expert opinion and other published material on internet.</p><p><strong>SIGNIFICANCE OF THE STUDY</strong></p><p>Auditor’s independence, integrity and objectivity has been the hall mark of accounting profession for more than centuries. Therefore, this research work will be of relevance in the following ways:</p><p>It will re-point the auditors to maintaining their integrity, independence and objectivity.</p><p>It assist, shareholders, the general public and other to have confidence on audited financial statement.</p><p>It will serve for a better understanding of auditors’ independence.</p><p>Create a conscious effort on how to avoid conflict of interest.</p><p>Assist students, intellectuals and professional institutions to establish a base for contributing to the continuous debate on auditor independence.</p><p><strong>SCOPE OF THE STUDY</strong></p><p>This Study centered on the theoretical framework on which auditing practice is founded. This is to create a conscious mind in Auditor of the relevance of independence in auditing and how conflict of interest can be prevented from it occurrence during audit service. The dynamic nature of auditing as a discipline necessitates changes in view with time. However, this research work is restricted to a period of decade i.e. from 2000-2009.</p><p><strong>LIMITATION OF THE STUDY</strong></p><p>In writing a project of this nature, there are some constraints that actually limit the extent to which the research work should have been carried out. Insufficient Material: Although there were a lot of materials on the topic but most of writers talked more on Auditors Independence and conflicts generally. Only very few writers related conflicts of interest to audits. Lack of in-depth knowledge: Conflict of interest as it relate to auditing was not adequately depth with by the writers and how it affects auditors independence. It was below our expectation. Fund: Because of the high cost of associated with internet air time, we were unable to browse for a longer time to reduce cost in order to enable us meet other project expenses. Therefore, the extent to which a study of this nature could be pursued is bound to be curtailed.</p><p><strong>DEFINITION OF TERMS</strong></p><p>In the process of writing this research some concepts were used. This section of the chapter is therefore devoted to clarifying such concepts as they relate to the study. They are clearly defined below in an alphabetical order:</p><p><strong>CONFLICTS OF INTEREST:</strong>&nbsp;Is any relationship that is or appears to be not in the best interest of the company. It could also, be a situation that prejudice an individual ability to perform his or her duties and responsibilities objectively.</p><p><strong>DISCLOSURE OF CONFLICT OF INTEREST:</strong>&nbsp;In the context of this study, disclosure of conflict of interest is also referred to as auditor’s fee and other things such as; gifts, outside activites, entertainment etc. that are capable of resulting to a conflict situation.</p><p><strong>INDEPENDENCE CONCEPT:</strong>&nbsp;Is the ability of an auditor to report fearlessly to members of company (shareholders), without the management or third party influencing his decisions as to whether to qualify or not to qualify his audit report know as reporting independence. While independence, is freedom from being biased in the expression of an opinion. It is purely an attitude of the mind characterized by integrity and objectivity.</p><p><strong>INTEGRITY:</strong>&nbsp;Is referred to as the quality of being honest and having moral principle.</p><p><strong>NON-AUDIT SERVICE:</strong>&nbsp;Is a situation whereby an auditor performed other services for his client during the auditing work.</p><p><strong>OBJECTIVITY:</strong>&nbsp;Is a state of not being influenced by personal feelings or opinions, considering only facts. It is a state of mind that requires auditors to be impartial, intellectually honest and free of conflicts of interest.</p><p><strong>PROFESSIONAL RESPONSIBILITIES OF INDEPENDENT AUDITOR:</strong>&nbsp;This means responsibility to his client (the company) and to the third parties (shareholder or investors).</p><p><strong>ICAN:</strong>&nbsp;Means Institute of Chartered Accountants of Nigeria, a professional body of accountancy</p> <br><p></p>