THE EFFECT OF AUDIT ROTATION IN NIGERIA
- Department: Banking and Finance
- Project ID: BFN0924
- Access Fee: ₦5,000
- Pages: 81 Pages
- Chapters: 5 Chapters
- Methodology: Ordinary Least Squares
- Reference: YES
- Format: Microsoft Word
- Views: 1,346
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THE EFFECT OF AUDIT ROTATION IN NIGERIA
CHAPTER ONE
INTRODUCTION
1.1 Background Of The Study
The concern about tenure arises because if a company and an auditing firm have been in close association for a long time, this may lead to auditors identifying with their client’s management consequent detrimental effect on independence, (Gray and Manson, 2008). This view has led to suggestions that audit should be rotated with the added benefit that this would result in automatic checks of the work of the previous auditor; encourage audit innovation; and discourage complacency (Gray and Manson, 2008).The idea with mandatory audit firm rotation is not new. Professionals and regulatory bodies have discussed this subject since senator Metcalf in 1976 suggested auditor rotation as a safeguard to prevent auditors to become too familiar with its clients Mandatory audit firm rotation is an extension of audit partner rotation while audit firm is being replaced after a fixed number of years. The replaced audit firm is then not allowed to take on the old client until a fixed period of years has elapsed. Some countries had tried mandatory audit firm rotation through the last two decade but they have later abandoned the idea (Porter, Simon and Hatherly, 2001). Over the years major organizational collapses have been attributed to poor audit quality associated with a perceived lack of auditor independence. These alleged audit failures were deemed to have occurred because auditors failed to either detect or report material errors in the financial statements. Mandatory auditor rotation frequently has been suggested as a means of strengthening independence and reducing the incidence of audit failure. (Catanach Jr. and Walker, 1999).US Congressman Shelby is typical of this view: “how can an auditing firm remain independent… when it has established long term personal and professional relationships with a company by auditing the same company for many years, some 10, 20, 30 years?.” The issue is that auditors might get too close to their clients and can lose professional skepticism and objectivity when the relationship goes on too long. Hayes, Dassen, Schilder and Wallage, (2005) argue that, after a long period, the auditor might lose his professional skepticism if the length of tenure exceeds 10 to 15 years. The European Commission argues that accountants are influenced by their clients and therefore lose their independence if the, audit tenure lasts for many years, the solution they propose is mandatory audit firm rotation. (EC 2010; EC 2011.Recently, the Central Bank of Nigeria has given all deposit money banks (DMBs) up to December 31, 2010 to replace external auditors that have been appointed for more than ten years including years spent with constituent legacy banks (CBN, 2010).This directive is in line with the provisions of the CBN Code of Corporate Governance for banks, which stipulates that “the tenure of the auditors in a given bank shall be for a maximum period of ten years after which the audit firm shall not be re-appointed in the bank until after a period of another ten years. ”For the avoidance of doubt, the maximum period of ten years shall include the period on audit firm which later merged, changed name, first commenced audit assignment in the bank. (CBN, 2010).
1.2 Statement of Research Problem
The motivation of this study comes from the strong interest in examining audit quality partly due to the concern of issues such as corporate collapse, expectation gaps and corporate governance. There is a lack of consensus among regulators and audit firms on the issue of mandatory audit firm rotation.
Research questions
1. What is the relationship between audit firm size and audit rotation in Nigeria?
2. What is the relationship between audit fee and audit rotation in Nigeria?
3. What is the relationship between audit committee and audit rotation in Nigeria?
4.What is the relationship between audit reputation and audit rotation in Nigeria?
1.3 Objective of the Study
The broad objective of this study is to examine the relationship between audit rotation and audit quality in Nigeria. The specific objectives are to:
1. investigate the significant relationship between audit firm size and audit rotation in Nigeria
2. examine the relationship between audit fee and audit rotation in Nigeria
3. find out the relationship between audit committee and audit rotation in Nigeria
4.investigate the relationship between audit reputation and audit rotation in Nigeria
1.4 The following null hypotheses were tested
HO1. There is no significant relationship between audit firm size and audit rotation in Nigeria
HO2. There is no significant relationship between audit fee and audit rotation in Nigeria
HO3. There is no significant relationship between the audit committee and audit rotation in Nigeria.
HO4.There is no significant relationship between audit reputation and audit rotation in Nigeria.
1.5 Scope of the Study
Cross sectional data gathered from annual reports of selected quoted companies in Nigeria will be used for this study. A sample size of thirty nine (39) companies of the 199 listed equities was selected using the simple random sampling technique.
1.6 Significance of the study
The study has the potential of encouraging auditors and users of financial information to see the need for audit quality. It will enable clients appreciate the enormity of the auditor’s job and factors that can affect his job. The outcome of the study will assist audit firms and management or directors of companies to further appreciate the need to comply with the relevant Statement of Accounting Standard (SAS) and the International Financial Reporting Standards (IFRS). This study hopes to provide relevant literature on audit rotation. This is cogent as the issue of audit rotation is ongoing and becoming more controversial. Consequently, current studies like this are required to provide updated and specific information. This study is also expected to serve as input to regulators and other stakeholders to establish policies relating to corporate financial reporting, particularly in the Nigerian context. Empirical evidence from domestic perspective can also assist policy makers and other relevant international accounting agencies in their attempt towards the audit rotation and audit quality.
- Department: Banking and Finance
- Project ID: BFN0924
- Access Fee: ₦5,000
- Pages: 81 Pages
- Chapters: 5 Chapters
- Methodology: Ordinary Least Squares
- Reference: YES
- Format: Microsoft Word
- Views: 1,346
Get this Project Materials