Auditors independence is the foundation of the auditing profession, a
significant element in the statutory financial reporting process and a key condition
for adding value to all audited financial reports. According to Appah
(2008), the duty of an auditor-statutory wise is to form and express an
opinion on the financial statement presented to him. In order to achieve this,
the auditor needs to be and be seen to be independent from the business.
Ye et al. (2006) observed that recent financial
scandals involving large corporations have cast doubt over the independence
of auditors and the overall value of auditing. They noted that the economic
dependence resulting from the provision of non-audit services have been alleged
to contribute to the erosion of auditor independence. As Francis
(2006) puts it, the possibility that such non-audit services fundamentally
change the auditors role from outside skeptical reviewer to inside adviser
and decision maker and that this change compromises the auditors ability
to be independent outsider; the increasing fee reliance on non-audit services
creates an economic bond that compromises auditor independence.
Knechel and Sharma (2008) argue that auditor provided
non-audit services have been a controversial topic in the auditing profession
for many years and are one of the key issues in debates between regulators and
the accounting profession regarding potential threats to auditors independence.
Many commentators believe auditors are more lenient in dealing with difficult
accounting issues where a client purchases significant amounts of non-audit
services from a firm. According to Ojo (2009), the provision
of non-audit services by audit firms does not necessarily influence the independence
of auditors. However, where the fees generated from such non-audit services
are considerably high (in proportion to the audit fees earned by such accounting
firms) and insufficient safeguards operates to protect the auditors independence,
this creates a situation whereby the auditors independence is likely to be compromised-since
the auditor may be denied lucrative contracts (in the form of fees generated
from NAS) where he decides to give a qualified opinion on the financial statement
Proponents of the provision of audit services argue that synergies of knowledge
spillover and audit efficiency arise from providing both audit and non-audit
services. While the opponents contend that providing non-audit services increases
the auditors financial reliance on the client and therefore may impair
auditors independence. Empirical evidence generally suggests that the
level of non-audit services fees does not threaten auditor independence (Defond
et al., 2002; Kinney et al., 2003).
While some empirical evidence suggests a negative relationship between non-audit
services and auditor independence (Frankel et al.,
2002; Firth, 2002; Duh et
al., 2007). This issue of the provision of non-audit services affecting
auditors independence remains an important question for regulators, policy
makers and academicians alike. Regulators want to make sure that transparency
and the reported financial statements audited by auditors is not affected by
conflicts of interest. Policy makers want to ensure that disclosure requirements
reflect conflict of interest relationships and shareholders should be able to
evaluate their investment decisions. Academic accountants have sought after
this question to assess which of the competing theories dominate when auditors
provide non-auditing services-one that the loss of reputation and increased
risk of litigation will deter auditors from compromising independence versus
alternate theory that states that auditors increased economic bonding with clients
can adversely impair independence (Sinha, 2009; Gupta,
2005; Whittington and Pany, 2001).
The concept of independence: According to Ekezie, the fundamental concept
of professional independence is an attitude of the mind based on integrity and
an objective approach to work. He maintained that an auditor must at all times,
perform his research objectively and impartially and free from influence by
any consideration which might appear to be in conflict with this requirement.
Also Appah (2008) note that independence in auditing
means having a position to take an unbiased view point in the performance of
audit test, analysis of results and attestation in the audit report.
It is where the auditor should not be under the influence of clients at any
given circumstances. In a similar vein, the Independence Standard Board cited
in Salehi (2009) defines independence as freedom from
pressures and other factors that impair or are perceived to impair, an auditors
willingness to exercise objectivity and integrity when performing an audit.
It is the absence of certain activities and relationships that may impair or
may be perceived to impair, an auditors willingness to exercise objectivity
and integrity when performing an audit. Ekezie argue that professional independence
may either be corporate independence or individual independence. Corporate independence
means independence of professional accountancy body as a whole whereas individual
independence is that of a member of an accountancy profession in the research
place. Independence can also be viewed as independence fact and appearance.
Independence may be in a state of mind. This requires the auditor to be free
from bias, personal interest, prior commitment to an interest or susceptible
to undue influence. This means that an average auditor possessing the requisite
state of mind will act in the correct way that will not affect the professional
duty of due care and skill. The IFA (2003) Code states
that the state of mind that permits the provision of an opinion without being
affected by influences that impairs professional judgement, allowing an individual
to act with integrity and exercise objectivity and professional skepticism.
Salehi (2009) notes that auditors should not be independent
in fact but more fundamentally they should be seen to be independent in examining
Therefore, auditors are expected to be able to independently decide on reporting
strategies without any undue influence from clients (Cullinan,
2004). Independence in fact means the objective relationship between the
auditor and the client while independence in appearance is the subjective relationship
as perceived by the client and third parties.
Independence in fact enhances the reliability of financial statements whereas
appearance promotes public confidence as to enable users rely on financial statements
(Church and Zhang, 2002). According to Ezeikpe
(2004), Appah (2008) and Salehi
(2009), the concept of independence can be viewed from three dimensions.
Programme independence: Auditors must remain free from interference by client managers who may intend to restrict, specify or modify the procedures the auditors want o perform including attempt to assign personnel or otherwise control the audit.
Reporting independence: The auditor must at all times not let any feelings
of loyalty to the client or interfere with their obligations to disclose fully
and fairly. Neither should management be allowed to exert pressure or over-rule
auditors judgement on the content of an audit. In the same vein, Salehi
(2009) state that the auditor should exercise.
Investigative independence: The auditor should have free access to all
books, records, correspondence and other essential materials for their job.
It also involve active co-operation from management personnel during audit examination;
freedom any management attempt to specify activities to be examined or to establish
the acceptability of evidential matter and freedom from personal interests by
the auditor leading to the exclusions from or limitations on the audit examination
(Salehi, 2009). There are two approaches to the achievement
of auditor independence. The rule based approach and the conceptual framework
approach. There are two views under the rule based approach. The first view
is to allow auditors some limited freedom to engage in selected professional
involvement with their clients as adopted by SOX in the US. The second view
is to restrict auditors from any involvement with their clients other than the
performance of statutory audit. The conceptual approach is the setting of independence
guidelines for auditors based on the fundamental principles of ethical behaviour
implemented by most professional institutes.
Factors affecting independence: There are several factors that affect
the independence of an auditor. These factors include contingent fee arrangements,
gifts, opinion shopping, reporting relationships, etc. According to Salehi
(2009) there are factors that affect the independence of auditor that have
been studied. These factors include:
||The effects of gifts
||The purchase of discounts arrangement
||The audit firm size
||The provision of management advisory services by the audit firm
||The client financial condition
||The nature of conflict issue
||The audit firms tenure
||The degree of completion in the audit services market
||The size of the audit fees or relative client size
||The audit committee
||Practicing non-audit services by auditors
The audit failures that have been reported have led to major criticism of the
profession worldwide by exposing the weakness of the profession in terms of
safeguarding shareholders and stockholders interest thus this criticism arose
as a result of the provision of non-audit services (Salehi
and Moradi, 2010).
Non-audit services: Non-audit services may be any services other than
audit provided by an auditor to an audit client. Public accounting firms expanded
the scope of their services to include corporate and individual tax planning,
internal audit outsourcing and consulting related to mergers and acquisitions,
information system (Salehi, 2009). It is argued by many
researchers that it is more economic for auditors to provide other additional
services to their clients, since the auditor already has a good knowledge of
their clients business (Islam et al., 2005a).
According to Beattie and Fearnley (2003), it is evident
from studies that in some cases, fees received from non-audit services exceed
the amount received from audit research. Table 1 and 2
shows the fees received by accounting firm from non audit services.
When audit and non-audit services are provided to the same client, the provider
needs to be careful not to jeopardize their independence because there are occasions
where independence may be threatened or appear to be threatened by the provision
of services other than audit. Provision of some of these services might provide
either a real or perceived threat to independence (Islam
et al., 2005a, b). It is found that auditors
believe that the auditors work would be used as a guide for investment, valuation
of companies and in predicting, bankruptcy, etc.
Wahdan et al. (2005) say an auditors work
facilitates the process of economic development through the presentation of
reliable information concerning the financial position of the companies. Brierley
and Gwilliam also noted that the globalization in accounting and assurance services
has created the multi-disciplinary nature of large audit firms. According to
Adeniyi (2004), Gupta (2005), Whittington
and Pany (2001), Okezie (2008) and Salehi
and Naghilo (2009), the range of sevices offered by auditors to the private
and public sector include:
||Services for payroll
||Risk management advice
||Mergers and acquisition
||Taxation, including tax compliance and tax planning advice
||System and information technology
||Forensic and litigation support
||Recruitment and human resources
||Transaction support and follow up
||Book keeping services
The provision of these services may provide threat to the independence of an
auditor. Some the threats which may arise from the provision of non-audit services
Self-interest threat: An auditors independence may be threatened
if the auditor benefits from a financial interest or some other self-interest
conflict with an audit client. Islam et al. (2005b)
argue that the perceived threat to independence grows with the amount of
the ensuring fee payable and self-interest caveat is thus increased with the
provision of non-audit services to the client. Okezie (2008)
contend that there are great number of areas in which self-interest threat to
independence might arise. Figure 1 shows these areas of threat.
Self-review threat: This is a type of threat that has to do with the
inability of the auditor to identify and accept weaknesses and mistakes in a
previous audit (Okezie, 2008).
In a similar vein, Islam et al. (2005a) opine
that this threat relates to the difficulty of maintaining objectivity when conducting
a self-review procedure. This may arise when any product or judgement from a
previous audit assignment needs to be challenged or re-evaluated in reaching
the current audit conclusions. Figure 2 shows these areas
|| Areas of familiarity threat
Advocacy threat: It is a threat where the auditor takes an advocate
for or against the clients position in any situation. For example, advocacy
in any sharpened form is likely to threaten an auditors independence and
appears to be in compatible with particular objectivity required by the audit
reporting role (Islam et al., 2005b). The Fig.
3 shows the areas of threat.
Familiarity threat: This threat has to do with the auditor being over-influenced
by the personality and qualities of the management (Okezie,
2008). The close relationship between the auditor and the client is a risk
that the auditor may be influenced by the clients business ambience. Figure
4 shows the areas of threats.
|| Treatment of non-audit services in selected regulatory framework
|Islam et al. (2005a, b);
No = Prohibited; Normally No = prohibited except in very limited or exceptional
circumstances; No if material = Only permitted if the figures involved are
not material to the financial statements; Caution = Threats and safeguards
of each case should be considered before proceeding; Yes = Permitted; No
specific guidance = Not referred to as NAS in framework therefore no specific
Salehi and Moradi (2010) stated that the Sarbones Oxley
Act of 2002 in the United States of America implemented the ban of nine audit
services which include:
||Bookkeeping and other services related to the audit clients
||Financial information systems design and implementation
||Valuation services and fairness opinions
||Internal audit services
||Human resource planning
The prohibition of these specific non-audit services is based on three principles:
||An auditor cannot function in the role of management
||An auditor cannot audit its own work
||An auditor cannot serve in an advocacy role for its client
Non-audit services and regulatory framework: Treatment of non-audit
services in selected regulatory framework is shown in Table 3.
Non-audit services and regulatory framework in Nigeria: The provision of non-auditing services by firms of Chartered Accountants besides providing the statutory audit service is a major issue in Nigeria like other countries.
This is basically due to how the provision of these services impairs the independence of auditors. The two major important non-audit services provided by auditors in Nigeria are tax advice and management consultancy. The question now is does the provision of these services in Nigeria impair the independence of auditors? The answer to this question lies on the issue of independence of mind and that of appearance.
An auditor that understands the Rules of Professional Conduct for Members issued
by the Institute of Chartered Accountants of Nigeria may provide these services
without basically affecting the independence in the provision of statutory audit.
This is confirmed by the studies of Ghosh and Kallapur (2006).
However, some scholars are of the opinion that the provision of non-audit services
will affect the independence of auditors negatively. This is supported by Frankel
et al. (2002), Brandon et al. (2004).
According to the Local Authority Pension Fund Forum (2010)
there is a conflict of interest for auditors providing non-audit services to
companies for which they provide audit services; a conflict of interest occurs
when the auditor provides consultancy services for the management at the same
time as it undertakes an audit on behalf of the shareholders; the auditor in
this case cannot be truly independent from the management since other commercial
interests can compromise auditors in their ability to confront directors on
difficult issues; the current ethical guidance on objectivity within the auditing
profession is not sufficient to prevent significant concern being raised.
The Institute of Chartered Accountants of Nigeria (ICAN) and the Association
of National Accountants of Nigeria (ANAN) have only successfully put in place
code of conduct for their members that regulate their professional activities
within the society. But there is no detailed regulation relating to the provision
of non-audit services. Therefore, it is important that these professional accountancy
bodies in Nigeria design and implement regulatory frameworks such as USA, UK,
New Zealand, Australia, EC. The Sarbanes Oxley Act 2002 provided prohibited
categories of Non-Audit Services (NAS).
Empirical studies have reported mixed results concerning the relationship between the provision of non-audit services and auditors independence. Some of these maintain that non-audit services impair objectivity as well as independence whereas others argue that there exists positive relationship between auditors independence and the provision of non-audit services. Table 4 shows a summary of methods, sample and main results for some of these prior research.
|| Summery of methods, sample and main results
This study examines the effect of the provision of non-audit services on the independence of auditors. The client appoints the auditor for the provision of statutory audit and non-audit services. The provision of non-audit services by auditors is said to impair the independence of the auditor. Thus auditors have market based incentives to remain independent but independence may be threatened when non-audit services are provided to their clients and it is reasonable that the non-audit services actually impair independence. This argument has brought about mixed reactions on this topic.
Several prior studies have argued that the provision of non-audit services
do not affect the independence of the auditor (Ghosh and
Kallapur, 2006). Opponents of the provision of non-audit services and independence
of the auditor (Frankel et al., 2002; Salehi,
2009) argue that the provision of non-audit services affect the independence
of auditors. The provision of non-audit services has been banned in many countries
around the world.
The issue of paramount importance is that banning the provision of non-audit services by the same auditor does not solve the problem of corporate failures rather countries should look inwardly on the complex nature of the modern business environment, regulatory framework and in particular a thorough x-ray of the profession in terms of the moral standards of members admitted into the profession. In conclusion there is no need for a complete prohibition on auditors providing non-audit services rather there should be improved disclosure, transparency and governance around the subject of non-audit fees, policy and procedures. There is also the need for auditors to improve on their moral capacity in the conduct of professional engagements with clients.