Accounting Project Topics

Independence of Auditors and Reliability of Financial Reports in the Banking Industry

Independence of Auditors and Reliability of Financial Reports in Banking Industry

Independence of Auditors and Reliability of Financial Reports in the Banking Industry

Chapter One  

 Objectives of the Study

The primary objective of this research is to elucidate on the independence of auditors and reliability of financial reports in the banking industry. Other specific objectives includes:

  1. Examining the effect of audit tenure on reliability of financial reports.
  2. To examine the effect of competition of service by auditors on the reliability of financial report.
  3. To examine the effect of auditor-client-relationship on reliability of financial report.
  4. Evaluating the relationship between audit fee and reliability of financial reports.



Conceptual Framework

 Concept of Audit Independence

Bahram (2007) describes the concept of auditors’ independence as the ability to maintain an objective and impartial mental attitude throughout an audit. Rick, Roger, Arnold and Philip (2004) defines the independence of the auditor as having a position to take an unbiased viewpoint in the performance of audit tests, analyses of result, and attestation in the audit report of an entity. Furthermore Arens et al (2011) explains that audit independence requires an attitude of responsibility separate from the client’s interest. The auditor must maintain an attitude of healthy professional skepticism. Auditor’s independence can therefore be summarised as the auditors’ ability to maintain mental attitude objectively and impartially in the interest of the client in conducting the audit, analysing the results and attesting to the the audit report without influence. Arens et al (2011) observed that independence of the auditor can be explained from two perspectives; Independence in mind and independence in appearance. Independence in mind reflects the auditor’s state of mind that permits the audit to be performed with an unbiased attitude. It reflects a long standing requirement that members be independent in fact. While independence in appearance is the result of others’ interpretation of what independence should actually be. If auditors are independent in fact but users believe them to be advocates for client, then most of the value of audit function will be lost.

 Audit Independence and Reliability of Financial Reports

The audit report is the primary medium of communication between auditors and the company stakeholders. The growing interest about financial reports and the extent to which they could be trusted by investors and stakeholders suggests that they should be prepared objectively and audited by an independent and neutral body, this body normally being the independent external auditors. Reliability of audit report refers to a condition, in which investors and all those interested in a company’s business affairs, consistently find the audit reports and opinion about a company’s financial statements and position to be dependable and credible.

Reliable audit reports also reveal whether accounting reports are reasonably free from error and bias and whether the accountants are justified in making a ‘going concern’ assumption. It therefore implies that for the audit report to be reliable it must give investors adequate information about the quality and accuracy of the accounting reports so that they can decide the extent to which to place reliance on the report in making investment decisions. Ndubuisi and Ezechukwu (2017) opined that the immediate role of audit independence is to serve the audit by making it more effective in providing assurance that the auditor will plan and execute the audit objectively.

Hence the larger purpose of audit independence and its objective must be sought. Mitra, Deis and Hossain (2009) on the other hand assert that the immediate objective of an audit is to improve the reliability of information. Improvement in the reliability of corporate disclosure reduces the risk that an investor or creditor will make a poor decision because the information is inaccurate or otherwise wanting in quality. It must be noted that risk information is present every time an investor or creditor uses information to assess the economic risk of a potential investment, so care should be taken in carrying out an audit assignment. The better the quality of information investors and creditors use for the assessment of economic risk, the better their chances of making sound decisions. In other-words their information risk is lower. This information risk perceived by investors and creditors is reflected in the cost of capital of the firms. Both suppliers and users of capital benefit from reliable corporate disclosure.

Knechel, Krishman, Pevzner, Shechik and Velury (2012) acknowledge the fact that the way in which audit independence improve the reliability of information used for investment and credit decision is well understood in theory and practice. Audit work by deterrence, detection and verification. Knowing that auditors will do their work, management is deterred from distorting the financial results. However, auditors often detect the vast majority of distortions that nevertheless occur and verification of undistorted information by selective tests provides evidence of its reliability. Asthana, Khurana and Raman (2018) showed that auditing improves the reliability of the financial information investors’ use for decision making. More reliable information affects the earnings reported which is of value relevance to the investors. Also earnings per share is more likely to reflect corporate earning power if figures used more closely reflect the substance of financial performance of the bank. Investors are likely to invest their capital in the most productive enterprises if financial reports reflect corporate earning power than if they do not. The auditors’ independence is sometimes described as adding credibility to the timeliness of financial report which is an important ingredient of auditing though management’s corporation is also needed (Carmona, Momparler & Lassala, 2015). Audit quality when considered with auditor independence impact the confidence level which users of financial statements have in financial reports (Al Khaddash et al, 2013).

Without improved reliability there would be no valid basis for investor confidence in the information made available and earnings will have less of a relationship with firms earning power and report timeliness.

Auditor’s Report Lag and Quality of Financial Reporting The auditors’ report being the final product of the audit process serves as an important means through which corporate performance is provided. It is an essential document used in evaluating the going concern status of the firm. ‘Relevance’ is an essential qualitative characteristic of financial reporting. For accounting information to be relevant, it also has to satisfy the feature of timeliness. Timeliness is therefore viewed from the perspective of audit reporting lag; the interval of time from accounting year end and the date financial report is signed. On the one hand, it is believed that if the audit report period is unusually long, it is meant to carry out a thorough audit job by the external auditors. This position is supported by a number of prior studies who view extended audits as additional effort to achieve better audit quality. Bamber and Schoderbek (1993) establish positive correlation between lag period and amount of audit work required and thus higher audit reporting quality. According to Knechel and Payne (2001), there exist a positive association between time put in audit process, audit reporting lag and audit quality. Egbunike and Abiahu (2017) found no significant connection between lag period and financial performance.

On the other hand, long audit reporting lag could be seen as a compromise by the auditors to buy time so as to be able to doctor audit reports to favour management. For instance, Blankley, Hurtt and MacGregor (2014) in a study to ascertain whether undue delays in submitting an audit report has a connection with a future restatement, discovered that there is greater possibility of financial statement being restated.





In this chapter, we would describe how the study was carried out.

Research design

The study employs quantitative descriptive research design to examine auditing as an instrument for ensuring accountability

Sources of Data

The data for this study were generated from two main sources; Primary sources and secondary sources. The primary sources include questionnaire, interviews and observation. The secondary sources include journals, bulletins, textbooks and the internet.

Population of the study

A study population is a group of elements or individuals as the case may be, who share similar characteristics. These similar features can include location, gender, age, sex or specific interest. The emphasis on study population is that it constitute of individuals or elements that are homogeneous in description (Prince Udoyen: 2019). In this study, the population of the study comprise staff of the twenty four (24) commercial banks in Nigeria.



Demographic Profile

The table below presents the demographic characteristics of the sampled respondents. It includes education qualification, working experience, income level and occupation.





The recent corporate accounting scandals has cast doubt on the quality of reported earnings and the ability of audit process to effectively constrain earnings management of companies across the world and Nigeria in particular. Differences in quality of the audit process and auditors reports result in variations in the credibility of auditors and the reliability of the earnings reports of companies. These recent corporate financial failures pose a great challenge to the authenticity, integrity, effectiveness and significance of the audit function

The auditing and the audit process provide an evaluation of the probability of material misstatements and reduce the possibility of undetected misstatement to a reasonable or appropriate assurance level. Consequently, auditing has been acknowledged to influence financial reporting and provide robust impact on investors’ confidence. Essentially, external auditors typically perform significant and greatly challenging tasks in guaranteeing the credibility of financial reports.

The demand for auditing services arises from a need to facilitate dealings between the parties involved in business relationships – shareholders, creditors, public authorities, employees, customers, etc. Exchanges between such parties are usually costly since information asymmetries give rise to uncertainty concerning the performance of contractual obligations.

One position of this study is that the quality of the audit process as an outcome cannot be completely separated from financial reporting quality. Many accounting scandals of the past decade have involved outright manipulation of accounting data through discretionary accruals including recording fictitious inventory and hiding liabilities even in the face of audited financial reports


The following suggestions are given:

  1. Generally, In order to enhance high Audit Quality and minimize Earnings Management, Companies in Nigeria should adapt to or engage in an outright adoption of currently available best practices like the provisions of US Public Companies Accounting Oversight (Sarbanes Oxley’s) Act, 2002 and Public Companies Accounting Oversight Board standards, the UK Financial Reporting Council’s Audit Quality Guidelines and Frameworks, followed by a statutorily backed earnings monitoring of companies in Nigeria.
  2. Standards of independence for auditors should be designed to promote an environment in which the auditor is free of any influence, interest or relationship that might impair professional judgement or objectivity.


  • Abdul-Rahman, O.A., Benjamin, O.A., & Olayinka, O. H. (2017). Effect of audit fees on audit quality: Evidence from cement manufacturing companies in Nigeria. European Journal of Accounting, Auditing and Finance Research, 5(1), 6–17.
  • AbdulMalik, S., & Ahmad, A. C. (2016).Audit fees, corporate governance mechanisms and financial reporting quality in Nigeria.DLSU Business & Economics Review, 26(1), 1– 14. AICPA, Statement on Auditing Standards No. 122. “Statements on Auditing Standards: Clarification and Recodification.” October 2011
  • Arens, R., Alvin A., Shailer, G. & Fielder, B. (2011) Auditing, Assurance Service and Ethics in Australia. 8th Edition. Pearson Australia
  • Asien, E. N. (2014). Exploring the state of the audit market in Nigeria.African Journal of Accounting, Auditing and Finance, 3(4), 287–307.
  • Asthana, S., Khurana, I., & Raman, K. K. (2018).Fee competition among Big 4 auditors and audit quality. Review of Quantitative Finance and Accounting, 50, 1–36.
  • Bahram, S. (2007) Auditing_ An International Approach -Trans-Atlantic Publications, Inc.
  • Bartov, E., Givoly, D., & Hayn, C. (2002).The rewards to meeting or beating earnings expectations. Journal of Accounting and Economics, 33(2), 173–204.
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