AUDITOR INDEPENDENCE AND BANK FAILURE
ABSTRACT
This study is motivated by a desire to examine the auditor independence and bank failure. In light of the empirical review and other discussions, a number of questions arose as to whether there is a significant relationship between auditor independence, audit tenure, audit fee and bank failure. Using the Ordinary Least Square (OLS) regression technique with the aid of a computer software E-view 7.0, the empirical findings revealed among other things that, there is no significant relationship between auditor independence, auditor tenure and bank failure, it was also discovered that, there is a significant relationship between auditor fee and bank failure. We recommend among other things that, for auditors to remain strictly independent, they should not be allowed to provide audit clients with any other advisory services, so as to improve firm performance.
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
Background to the Study
Statement of the Problem
Objectives of the Study
Research Hypotheses
Scope of Study
Relevance and Significance of the Study
References
CHAPTER TWO: LITERATURE REVIEW
Introduction
The Meaning and Types of Auditors Independence
The Concept of Auditor Independence
Threats to Auditor Independence
Tenure of Audit
Non-Audit Services
Influence of Managers on Audit Fee
Size of Audit Firm
Other Factors Influencing the Independence of Auditors
Nature of Auditor Independence in Nigeria
Theoretical Framework
History of Management Influence on Auditor’s Independence
Management Influence on Auditors Independence, Meaning
and Concept
Nature of Management Influence on Auditor Independence
Techniques for Evaluation of Auditors Independence
Components of Auditor Independence
Responsibility of Auditors’ Independence
The Need for an Independent Auditor in our Organizations
Firm Performance
References
CHAPTER THREE: RESEARCH METHODOLOGY
Introduction
Research Design
Population of the Study
The Sample Size
Sampling Techniques
Sources of Data
Method of Data Analysis
Model Specification
References
CHAPTER FOUR: DATA ANALYSIS AND INTERPRETATION
Introduction
Data Analysis and Interpretation
Model Summary and Analysis of Result
Test of Hypotheses
CHAPTER FIVE:    SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
Introduction
Summary of the Finding
Recommendations
Conclusion
Bibliography
Appendix
CHAPTER ONE
INTRODUCTION
BACKGROUND TO THE STUDY
The independence of the auditor is the foundation of the principle of objectivity in the auditing profession. It is indeed a major statutory element in financial reporting process and a key condition for eliciting public confidence and adding value to all audited financial reports. Izedonmi (2000), sees audit as an independent examination of the financial statements of an enterprise as prepared by the management of that enterprise by an appointed person called the auditor in order to express a professional opinion whether or not those financial statements show a true and fair view position of the enterprise as at the end of the financial period in accordance with the relevant statutory and professional regulations.
According to Appah (2008), the statutory duty of an auditor is to form and express an opinion on the financial statement presented to him. In order to achieve this, he needs to be, and should be seen to be independent from the business. This includes independence from management and board control. In recent times, the financial scandals involving large corporations across the globe have cast doubt over the independence of auditors and consequently on the overall value of auditing profession and the audited financial statements in particular. One of the causative factor of the spate of corporate malfeasance seen in recent times is the economic dependence resulting from the provision of non-audit services has been alleged to contribute to the erosion of auditor’s independence.
In societies marked by divisions of expert labour, external auditing is promoted as a trust engendering technology with the capacity to promote a certain kind of social order (Power, 1999). Accountants, as auditors, have cemented their status and privileges on the basis of claims that their expertise enables them to mediate uncertainty and construct independent, objective, true and fair accounts of corporate affairs (Sikka, 2009). It has been argued, however, that such claims are not good indicators of corporate performance, because capitalist economies are inherently prone to crises (O’Connor, 1987; Sikka, 2009). Furthermore, the claims of expertise are frequently affected by unexpected corporate collapses, fraud, financial crime and the general crisis of capitalism (Baker, 2007; Sikka, 2009; Sikka et al, 2009)
Since 2007, major Western economies have been experiencing a deepening banking and financial crisis arising from subprime lending practices by banks, which in turn has restricted the availability of credit and has led to what has been described as the ‘credit crunch’ (Sikka et al, 2009). Some commentators have attributed this economic crisis to the unethical practices of corporate bank managers and to the inability of auditors to expose such anti-social practices from previous audits (Broad Street Journal, 21 October 2009; Sikka, 2009). Some auditors may have failed to comply with expected standards. If a company fails shortly after being audited, the auditors may be blamed for conducting an inferior audit (Dopuch, 1988). Thus, whenever there is a financial scandal, it must be questioned whether the auditors carried out their duties and obligations with due care and diligence.
In Nigeria the spate of corporate failures witnessed in the financial sector in the early 1990s brought auditors into sharp focus and caused the Nigerian public to question the role of accountants and auditors (Okike, 2004; Bakre, 2007; Ajibolade, 2008). Furthermore, the investigations launched by the regulators and other stakeholders into the cases of distress and disclosure revealed that accountants and auditors were implicated (NDIC, 2007).
With the recent banking failure in Nigeria members of the auditing profession in Nigeria are once again in the limelight, as the banking crisis and the revelation of unethical practices by bank executives and board members has raised many questions about the ethical standards of the accounting profession and about the integrity of financial reports issued by professional accountants (Ebhodaghe, 2009). The question has been raised as a result of the failure on the part of accountants and auditors to alert regulators when they have discovered fraud and other irregularities in company records (Bakre, 2007).
In respect of the banking failure, attention has focused on the role of accountants and auditors who have been involved. Accountants and auditors may be expected to report financial irregularities in company accounts by ensuring transparency and accountability and by developing techniques for fraud detection. However, an emerging body of literature argues that accounting professionals have increasingly used their expertise to conceal and promote anti-social practices (Sikka, 2008). For example, Akintola Williams and Deloitte (AWD) was indicted for facilitating the falsification of the accounts of Afribank Plc and for deliberately overstating the profits of Cadbury Nigeria Plc. It has been reported that between 1990 and 1994 the Nigerian economy lost more than N6 billion ($42.9 million) to fraud within the banking sector alone (Bakre, 2007).
The social cost of the banking crisis is difficult to estimate, but huge amounts of public money are being used to bail out distressed banks (Sikka, 2009). In 2008, almost every Reserve Bank across the globe, in collaboration with finance ministries, forced to adopt extraordinary measures to stave off the collapse of the financial institutions and to restore confidence in the banking system (Ogwuma, 2009).
While the global recession was biting hard on advanced economies, the governors of the Central Bank of Nigeria (CBN) had stated that ‘what the rest of the world is now trying to do as the bailout option was what Nigeria did about four years ago, through a pro-active initiative, the result of which we are celebrating today’. Less than a year later, however, Nigerians were awoken to the reality that the Nigerian banks were not so stable after all (Ogwuma, 2009). The audit conducted by the CBN into the activities of the 24 registered banks in 2009 revealed that they were experiencing huge financial difficulties in their operations. As a consequence, in August 2009, CBN injected N420 billion ($2.8 billion) into the first five banks (Afribank, Finbank, Intercontinental Bank, Oceanic Bank and Union Bank) which had failed the CBN audit. Two months later, an additional N200 billion ($1.33 billion) was injected to stimulate the liquidity of four other banks (BankPHB, Equitorial Trust Bank, Spring Bank and Wema Bank) (Odozi, 2009). This injection of money was done in order to stabilise the banks and to ensure that they remained going concerns after their former managers had been sacked for reckless lending and for lax corporate governance which had rendered the institutions undercapitalised (Odozi, 2009).
Against this backdrop, the researcher intends to empirically investigate auditor independence and bank failure in Nigeria.
STATEMENT OF THE PROBLEM
Adelaja (2009) expressed that credible financial information is vital to the growth of any economy; also auditors are expected to be independent and objective in the discharge of their responsibilities. Gallegos (2004) was of the view that the report of external auditors in corporate financial statements is seen as providing key assurance to the interest of shareholders.
O’Connor (2006) stated that one of the most vexing problems in the financial world today, is the emphasis placed on ensuring the independence of external auditors as a result of recent economic scandals. Beattie & Fearnley (2002) expressed that after the collapse of Enron, it was generally believed that rendering of non-audit services compromised the independence of external auditors. An extract from the website of Institute of Chartered Accountants England and Wales (ICAEW) (2009), reiterated that the independence of statutory auditors is a rather complex issue.
In the real world, when business entities go out of business, the consequences are usually enormous. The oversight function of the auditor is placed under scrutiny when a business whose financial statement once showed no indication of going out of business suddenly becomes bankrupt. As a follow up to the oversight function, the independence of the auditor also appears to be in doubt.
On this premise, this research focuses on auditors’ independence and bank failure in Nigeria; hence the following research questions are raised:
Is there significant relationship between auditor independence and bank failure in Nigeria?
Is there significant relationship between audit tenure and bank failure?
Is there significant relationship between audit fees and bank failure?
OBJECTIVES OF THE STUDY
The primary objective of this research is to elucidate on auditor independence auditors and bank failure in Nigeria.
The specific objectives are:
To examine whether there is significant relationship between auditor independence and bank failure in Nigeria.
To verify if there is significant relationship between audit tenure and bank failure.
To ascertain if there is significant relationship between audit tenure and bank failure.
RESEARCH HYPOTHESES
The following research hypotheses flow from the research questions that were raised;
Hypothesis I
Ho:    There is no significant relationship between auditor independence and bank failure in Nigeria.
H1:    There is a significant relationship between auditor independence and bank failure in Nigeria.
Hypothesis II
Ho:    There is no significant relationship between audit tenure and bank failure.
H1:    There is a significant relationship between audit tenure and bank failure.
Hypothesis III
Ho:    There is no significant relationship between audit tenure and bank failure.
H1:    There is a significant relationship between audit tenure and bank failure.
SCOPE OF STUDY
This research work is an empirical study on auditor independence and bank failure. The population of the study is entire quoted companies in the Nigeria Stock Exchange, while the sample size is five selected banks operating in Nigeria.
The length of period covered by the study was three years (2007 – 2010).
Geographically, the study will be conducted in Benin City, Edo State.
 RELEVANCE AND SIGNIFICANCE OF THE STUDY
This study will be important and beneficial to stakeholders of corporate firms (banking sector) on the important of auditor independence and firm performance.
The study will assist the government and regulatory agencies on the proper conduct of auditor independence and firm performance.
The study will help to restore the lost confidence of the public as regard the auditor independence and firm performance.
The study will assist both academic and other future researchers in this similar subject matter will find it a useful source of learning and research.  
 REFERENCES
Ajibolade, S. O. (2008) ‘A Survey of the Perception of Ethical Behaviour of Future Nigerian Accounting Professionals’, The Nigerian Accountant, 43 (3): 54-59.
Bakre, O. M. (2007) ‘The Unethical Practices of Accountants and Auditors and the Compromising Stance of Professional Bodies in the Corporate World: Evidence from Corporate Nigeria’, Accounting Forum, 31(3): 277-303.
Davidson, R.A. and Neu, D. (1993), "A Note on the Association between Audit Firm Size and Audit Quality", Contemporary Accounting Research, Vol. 9, No. 2, pp.479-488.
Ebhodaghe, J. U., (2009) “Banking: The Growing Distress Syndrome”, ThisDay Newspaper, 12 December 2009
Fragher, N. L. and Jiang, L. (2008), "Changes in the Audit Environment and Auditors’ Propensity to Issue Going-Concern Opinions", Auditing: a Journal of Practice & Theory, Vol.27, No.2, pp.55-77