There has been celebrated cases of corporate frauds and financial misappropriation in Nigeria’s big corporations. The series of frauds have left a sense of doubt about the “unbiasedness” of external auditors to render an attest function on the credibility of published financial statements. In this light, this research sought to empirically investigate the Independence of auditors and reliability of financial reports in banking industry. The research adopts a survey and a descriptive research design with a well-structured questionnaire. Data were basically sourced through primary means. The population of the study comprise staff of the twenty four (24) commercial banks in Nigeria. Five banks were selected from the twenty four and One hundred (100) respondents were sampled, twenty from each banks. Four hypothesis were formulated and tested with the used of Chi-square analysis. The analysis resulted into rejecting the four null hypotheses and concluding that; there is significant relationship between audit tenure and reliability of auditors’ financial reports; audit firm Competition for service affect reliability of data; auditor-client-relationship affect the reliability of financial report and that there is relationship between audit fee and reliability of auditors’ financial report. Among other recommendations, it was recommended that 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 judgment or objectivity.














Chapter One: Introduction

1.1            Background to the Study

1.2     Statement of the Problem

1.3     Objectives of the Study

1.4     Research Questions

1.5     Statement of Research Hypotheses

1.6     Scope of the Study       

1.7     Limitation of the Study 

1.8     Significance of the Study        

1.9     Research Methodology

1.10   Definition of Key Terms         


Chapter Two: Literature Review

2.1     Introduction                  

2.2     Conceptual Framework

2.3     Theoretical Framework

2.4     Empirical Framework

2.5     Gaps in Literature


Chapter Three: Research Methodology

3.1     Introduction                  

3.2     Research Design  

3.3     Population of Study     

3.4     Sample Size                  

3.5     Sampling Technique     

3.6     Re-Statement of Research Hypotheses      

3.7     Sources of Data Collection     

3.8     Instrument of Data Collection

3.9     Validity and Reliability Test

3.10   Methods of Data Analysis


Chapter Four: Data Presentation and Analysis

4.1                      Introduction                  

4.2                      Personal Characteristics of the Respondents      

4.3     Response of Respondents to the Problem Areas 

4.4     Testing And Interpretation of Hypotheses

4.6     Discussion of Results   


Chapter Five: Summary, Conclusion and Recommendation

5.0     Introduction                 

5.1     Summary of Findings   

5.2     Conclusion                    

5.3     Recommendations        

5.4     Suggestions for Further Studies

5.5     Contribution to Knowledge


Appendix I                             

Appendix II                            




1.1      Backgroundto the Study

Auditor’s independence is seen as the backbone of the auditor’s profession. It is an important part of the statutoryfinancial reporting process and a necessary condition for adding value to allaudited financial report.

Izedonmi (2000) opines that independence isof the mind, characterized by objectivity and integrity on the part of theauditor. Auditor’s independence is an important ingredient in audit practice.De Angelo (1981) and Simunic (1984) posit that there is an understanding thatauditors face substantial economic cost when there is an occurrence of auditfailure but in contrast Becker, Defond, Jiambalio and Subramayan (1998).DeFond, Raghumandan and Subramanyam, (2002) say that independence could be  influenced because auditors are reluctant tobring  up issues pertaining to thepreparations of the financial statement at the risk of losing lucrative feesfrom its clients. Becker et al (1998) and DeFond et al (2002) also say thatindependence could be influenced because auditors are reluctant to bring upissues pertaining to the preparations of the financial statement at the risk oflosing lucrative fees from its clients, thereby making the subjecttheoretically ambiguous.

The concept of auditor independence changedduring the late 19th and early 20th centuries. Because there was alarge shift from capital coming from some sources to capital deriving primarilyfrom domestic sources articulated change that large corporations were based onthe separation of ownership from management. This emphasized the growingimportance and role of accounting and auditing (DeAngelo 1981). The auditors’primary duty was to serve the needs of proprietary interest, which comprises ofshareholders and general public. The creation of SEC laid emphasis on standardsfor financial reporting and auditing. The concept of auditor independenceshifted in favor of objectivity and neutrality in reporting (Carcello, 2004).

In order for the users of financial statements to gainassurance that the data are being reported, properly measured and fairlypresented, independent certified auditors audit financial statements andexpress an opinion on the fairness of these statements. The value of auditingservices depends upon the fundamental assumption that the certified auditorsare not influenced by their client-firms or by other financial bodies(governmental or non) (Reynolds & Francis, 2001).

The term audit independence refers to the ability of thecertified auditor to act with integrity and impartiality during his/herauditing practice (Dye, 1993). The audit of accounts in the corporate sector byan independent auditor is obligatory by statute, which defines his duties, rightsand powers. It is essential because of the separation of ownership from themanagement in the corporate sector as the former needs someone who can keep aprofessional watch on the latter and to whom they can trust for the reliabilityof accounts as the preparation of financial statement is the prerogative of themanagement. The auditor has not much to suggest on the form and adequacy offinancial statement and independent auditor is responsible for his report.

Independence is fundamental to thereliability of auditors’ reports. Those reports would not be credible, andinvestors and creditors would have little confidence in them, if auditors werenot independent in both fact and appearance, which it expressed by Council ofthe American Institute of Certified Public Accountants (AICPA) in a statementadopted in 1947. Auditor independence is considered the hallmark of auditingprofession. Independence is viewed as the most essential factor in businesssector in protecting the interest of several parties.

The issue of Auditor’s Independence as anessential platform for quality audit is not debatable.  Auditor’s Independence is commonly referredto as the cornerstone of the auditing profession since it is the foundation ofthe public’s trust in the accounting profession. More so in this present era ofthe adoption of new globally accepted rules on financial reporting, the InternationalFinancial Reporting Standards (IFRS) and our nation’s yearn for direct foreigninvestment for national development.

Independence, both historically andphilosophically, is the foundation of the public accounting profession and uponits maintenance depend the profession’s strength and its stature (Carey, 1970).


1.2    Statement of the Problem

The recent corporate accounting scandals hascast doubt on the quality of reported earnings and the ability of audit processto effectively constrain earnings management of companies across the world andNigeria in particular (Badawi, 2008; Enofe, 2010). Differences in quality ofthe audit process and auditors reports results in variations in the credibilityof auditors and the reliability of the earnings reports of companies. These recentcorporate financial failures pose a great challenge to the authenticity,integrity, effectiveness and significance of the audit function. Badawi (2008)reports a list of companies involved in cases of accounting scandals related topoor audit quality and earnings manipulations in the past decade. In Nigeria,corporate scandals include the cases of Savannah Bank and African InternationalBank (Odia, 2007); Wema Bank, Nampak, Finbank and Spring Bank (Adeyemi & Fagbemi,2010); and more recently Intercontinental Bank Plc., Bank PHB; Oceanic BankPlc. and AfriBank Plc.

Apart from some of the international instancesmentioned above, we are also very familiar with some national cases. Aruwa& Atabs (2011) provided instances of creative accounting and fraudulentfinancial reporting in Nigeria to include Alpha Merchant Bank Plc-accountingproblem and market manipulation, Lever Brothers Plc-exaggerated profit throughthe use of questionable accounting methods and AP Petroleum Plc-false financialreporting. The Cadbury Nigeria Plc misstatement case, which overstated itsearnings in its books of account and sanctioned by the Security and ExchangeCommission, is well known.

In the Nigeriabanking sector, according to the Guardian Newspaper of 21 August 2009, theaudit conducted by the Central Bank of Nigeria (CBN) into the activities of thesome registered banks in 2009 revealed that they were experiencing hugefinancial difficulties in their operations. Consequently in August 2009, CBN injected N420 Billion ($2.8 Billon)into the first five banks (Afribank, FinBank, Intercontinental Bank, OceanicBank and Union Bank) which failed the CBN Audit. Two months later, anadditional N200 billion was injected to stimulate the liquidity of four otherbanks (Bank PHB, Equatorial Trust Bank, Spring Bank and Wema Bank). Thisinjection was done to stabilize the banks and ensure they remained goingconcerns after their former MDs were sacked for reckless lending and lax incorporate governance (Nigeria Tribune 17 August 2009 and This Day 12 December,2009.

Recently also, theGuardian newspaper of 17 October 2011, carried a report that 374 governmentagencies are yet to clear since 1999 to date the backlog of unaudited accountsand submit to the Auditor-General of the Federation as required by law. ThePublic Accounts Committee (PAC) of the National Assembly and theAuditor-General are yet to agree on the reasons for such serious lapses by themanagers of public funds.

ProfessionalAccountants and Auditors in particular, here are part of our worries.  We must be motivated to proffer solutions tothis great challenge. In spite of the enabling IT audit tools and the variousprofessional standards issued for guidance and efficient audit work, there arestill reported cases of lapses and scandals. The question is why have therebeen failed banks and companies?

Because auditorindependence in fact is a mental state, investors and other users of financialstatements cannot accurately assess actual auditor’s objectivity; they can onlyevaluate an auditor’s appearance of objectivity.  Thus, even when an auditor acts independentlyin fact and issues an unbiased audit opinion, investor confidence is eroded ifinvestors and other users of the financial statement information do notperceive that the auditor was independent in appearance.  Many difficulties as earlier said lie indetermining whether an auditor is truly independent, since it is impossible toobserve and measure a person’s mental attitude and personal integrity.

Based on the aboveproblems, the followings are identified to affect the reliability of financialreport of auditors and their dependency;

i.               Length of consistent use of an audit firm. Thelonger the length of service provided by an audit firm, the more thefamiliarity with the directors and the higher the chance of compromise.

ii.              Audit firmscompetes to get services from clients. Auditors could secretly bargain withsome member of the executive the secure service from the firm

iii.           Auditor – client relationship could affect thereliability of financial report. If auditor has any form of relationship withclient it could affect the report.  

iv.           Charges / audit fee of the firm can determine thereliability of financial report. i.e KPMG fianancial report should be reliablethan a street auditor.


1.3     Objectivesof the Study

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

      i.         Examiningthe effect of audit tenure on reliability of financial reports

    ii.         Toexamine the effect of competition of service by auditors on the reliability offinancial report.

  iii.         Toexamine the effect of auditor-client-relationship on reliability of financialreport.

  iv.         Evaluatingthe relationship between audit fee and reliability of financial reports.


1.4     ResearchQuestions

Supporting the research objectives set out above,the following questions were advanced and answered:

i.               To whatextent does audit fee affect the reliability of financial report?

ii.             How doesaudit tenure affect the reliability of financial report?

iii.           To whatextent does audit firm compete for service from clients?

iv.           Howdoes auditor-client-relationship affect reliability of financial report?


1.5     Statementof Research Hypotheses

The following research hypotheses flow fromthe research questions that were raised;

Hypothesis One

Ho:     There is no significant relationship between audit tenure andreliability of auditors’ financial reports

HI:     Thereis significant relationship between audit tenure and reliability of auditors’financial reports


Hypothesis Two

Ho:     Audit firm competition for service does not affect reliability ofdata

HI:     Auditfirm Competition for service affect reliability of data


Hypothesis Three

Ho:     Auditor-client-relationship does not affect the reliability offinancial report

HI:     Auditor-client-relationshipaffect the reliability of financial report


Hypothesis Four

Ho:     There is no relationship between audit fee and reliability of auditor’sfinancial report.

HI:     There is relationship between audit fee and reliability of auditors’financial report.


1.6     Scopeof the Study

This research centers on the independence ofauditors within the context of some banks in Nigeria. The scope of the studycover five banks namely, First Bank, Guaranty Trust Bank, United Bank forAfrica, Access Bank and Diamond Bank located in Lagos. The population of thestudy covers the entire management staff of banks of the study. The researchertends to draw a sample of one Hundred (100) from the population study. Stratifyrandom sampling will be adopted in selection of respondents. Data will besourced by both primary and secondary means.


1.7     Limitationof the Study

In the course of conductingthis research work it is expected that the following will constituteimpediments to the effective conduct of the study

Access to Data: inability to access relevantinformation is a foreseen challenge to the success of this research. The taxauthourity may not reveal data or a true information which they which they may chooseto keep for themselves.  

Time Constraint: this study would have chooseto cover a larger scope to consider the thirty-six state tax authority whichwould yield a more reliable result but due to the limited time available, thescope is limited to Lagos State tax authority.

High cost of running a large area: Also thefinancial implication of covering the entire nation could be a predicament tothe success of this research.

Despite all this limitations mentioned aboveand hindrances, the research study no doubt will turn out to be successful.


1.8     Significanceof the Study

This research dwells on the independence ofauditors particularly within the context of banking industry in Nigeria. Thefindings of this research are expected to contribute to existing body ofknowledge.

Practicing auditors in Nigeria areanticipated to become more informed of the intricacies surrounding auditorindependence.

The academic community; students and futureresearchers will also benefit enormously from the outcome of this research.


1.9  Research Methodology

Thisresearch is based on a survey of selected banks in Nigeria that are listed onthe Nigerian Stock Exchange. In addition to the primary data which will becollected through questionnaires, secondary data would be used. The secondarydata will be gathered from annual reports from CBN, the Securities and ExchangeCommission, some would be obtained from the Nigerian Accounting Standards,while some will be obtained from the different head offices of banks in LagosState.

Bothprimary and secondary data will be analyzed using, descriptive statistics andChi-Square analysis was used in analyzing the data gathered.


1.10   Definitionof Key Terms

AuditorIndependence: is the main means by which the auditordemonstrates that he can perform his task in an objective manner” (FEE 1995)and ‘Freedom from those pressures and other factors that compromise, or canreasonably be expected to compromise, an auditor ability to make unbiased auditdecisions’ (ISB, 2000).

Financial statements. A structured representation of historicalfinancial information, including related notes, intended to communicate anentity's economic resources and obligations at a point in time or the changestherein for a period of time in accordance with a financial reportingframework.

Tenureof audit: refers to the number of years audit firms or engagementpartners have spent on the audit of a particular client

Non-audit services:which constitute the source of non-audit income, is be described as any otherservice rendered to an audit client different from the examination of accountsand expressing a professional opinion thereof. These services are also referredto as consultancy services

Audit Evidence. Information used by the auditor in arriving at the conclusions on whichthe auditor's opinion is based.

Audit Risk. The risk that the auditor expresses an inappropriate audit opinion whenthe financial statements are materially misstated. Audit risk is a function ofthe risks of material misstatement and detection risk.

Auditor: The term used to refer to the person or persons conducting the audit,usually the engagement partner or other members of the engagement team, or, asapplicable, the firm.

Detection Risk: Therisk that the procedures performed by the auditor to reduce audit risk to anacceptably low level will not detect a misstatement that exists and that couldbe material, either individually or when aggregated with other misstatements.

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