AUDITING AND AUDIT INDEPENDENCE
Generally, Auditing refers to the examination and verification of financial statements. It is the evaluation of the financial records of a company to reveal the true state of financial affairs. Basically, the common types of audit include; the internal audit, the external audit and the Government audit.
The internal audits are performed by the employees of a company or organization. These audits are not distributed outside the company. Instead, they are prepared for the use of management and other internal stakeholders.
The external audits are carried out by auditors who are independent of their Clients. It is more reliable as external auditors proffer more unbiased opinions on financial statements. They easily track misstatements and unbalanced accounts.
Government audits are performed to ensure compliance with tax payments by companies and firms. It is also used to determine the taxable income of the firms too.
Auditors are expected to provide professional and unbiased opinions, hence the need for them to be independent in reporting financial statements. Auditors are required to have the highest level of professional diligence in order to maintain international best practices. When an auditor lacks independence, the auditor’s report invariably lacks credibility and makes it difficult for anyone to rely on, such as the true and financial state of a business.
In Nigeria, there have been incidences of fraudulent financial reporting which did not fail to be accompanied by its dire consequences. The Cadbury (Nig.) Plc scandal, fraud at Afribank Plc and the fraud at Lever Brothers (Nig.) Plc (now
Unilever) has remained a point of reference for fraudulent financial reporting. The effect of the financial frauds did not just lead to financial losses but also affected the goodwill and reputation of such companies. Economically, there was a downturn in the capital market as investors lost trust in the system.
Corporate fraud may happen in different forms. They include financial statement fraud, asset misappropriation and lastly, corruption. Financial misstatements are most likely committed by the management; Asset misappropriation refers to the misuse of a company’s assets which is prone to be performed by employees. Corruption, on the other hand, is prone to be committed by regulatory bodies through the collection of bribes to overlook compliance with regulations. Auditors have the responsibility to disseminate corporate fraud in order to reflect professional diligence, hence the need for auditors’ independence in financial reporting.
Auditors are required to be seen as self-sufficient in their actions, thoughts and activities. Any action by the auditor or management that could jeopardize this independence should be avoided. The Institute of Chartered Accountants of Nigeria (ICAN) in assessing the benefits of auditor’s independence, maintained that it is crucial to sustain strict adherence to rules which concern the basic principles for independent auditing, which are supposed to influence professionalism of auditors positively, and boost trust and respect of people and other users of audited monetary report.
In continuance of the independence of an auditor, the Companies and Allied Matters Act, 2020 also provides a position concerning the appointment of an auditor and their required qualifications in Section 403 (1-3). It sustains that the below-mentioned provisions are the qualifications for an auditor to any company:
(a) Officer or servant to such company;
(b) Someone who is a partner or employee of such officer or servant of such company; or
(c) Body corporate.
All these provisions are intended to promote audit independence, help stakeholders and investors trust the financial statements of such companies and also improve the stock market generally.
It is however not in doubt that there are threats to auditor’s independence in financial reporting. It is necessary to adequately examine these threats.
AUDITOR’S INDEPENDENCE: THE THREATS
There are certain factors that threaten the independence of an auditor such as the size of an audit firm, the number of clients, the status of the client, etc. The threats that can influence an auditor’s independence can be classified into five;
- Self-review threat;
- Self-interest threat;
- Advocacy threat;
- Intimidation threat; and
- Familiarity threat.
Self-review threat occurs where the auditor is auditing his own work or the work of others in the same firm. Such a financial report has the tendency to be influenced by the auditor’s affiliation with the company.
- Self-review threat occurs where the auditor is auditing his own work or the work of others in the same firm. Such a financial report has the tendency to be influenced by the auditor’s affiliation with the company.
- Self-interest threat is slightly different from the above in the sense that it occurs where the auditor has a direct or indirect financial interest in the company, or is reliant on the client for the payment of professional fees owed.
- Advocacy threat refers to when an auditor promotes the client company it is to audit. There is every tendency that the auditor’s objectivity will be compromised.
- Intimidation threat occurs in a situation where the management or its directors intimidate the auditors to the point where they are prevented from acting objectively and unbiased. Such a situation makes it easy for an auditor’s independence to be jeopardized.
- Familiarity threat will involve the presence of a mutual business interest with the company, or any of its officers, or a personal relationship between a member of the audit firm and an employee of the company.
In all, it is recommended that auditors and companies should be able to spot these threats and work out acceptable plans to conquer these threats, such as involving more than one external auditor, scrutinizing personal relationships and familiarity with auditors, conducting trainings on the implementations of good corporate governance and best practices, etcetera.