CHAPTER ONE INTRODUCTION 1.1 Background to the Study Auditors are the third pair of eyes for people who use financial statements ( Uzuh,2008). The audit provides users of the financial statements with assurances of the firm's financial situation. Without an audit, determining the company's financial success would be difficult (Uzuh, 2008). Auditing is the objective examination and expression of an independent auditor's judgment on the truthfulness and fairness of a company's financial statements. (IAASB, 2011) It is critical to keep in mind that the independence of the auditors is essential to the accounting profession, and because of this, international authorities have begun to think about the serious consequences of repeated audit failures. Okafor, Ofoegbu, and Okaro (2018). The innocent inventors are bleeding profusely from the loss of their investments as a result of the collapse of companies even a few months after receiving a clean audit report (Olagunju, 2011). Olagunju et al (2011) opined that the case of Enron Corporation of the United States of America and Cadbury of Nigeria are events that buttressed the subject of study. In the Enron case, Arthur Anderson (the companys external auditors) was also responsible for its accounting and advisory services with attached professional fees. Enron was involved in reporting inaccurate figures in its financial statements such as over-bloated income statement and manipulated balance sheets items which misled investors. Arthur Anderson (the external auditor,) who was the companys auditor since commencement of operation was found guilty of compromising with the partners of the company to cover-up significant transactions with values which had no representation in the financial statements. Arthur Anderson (the external auditor) was also found liable for obstruction of justice by destroying thousands of documents relating to Enrons operations (Okaro & Okafor, 2013). Similarly, in Nigeria, Okaro et.al, (2013), conducted a research on Drivers of Audit Failure in Nigeria of which Cadbury (Nig) Plc was as a case study. Cadbury (Nig) Plc, a manufacturer and distributor of confectionery and beverages in Nigeria was reported to have manipulated her earnings in 2006. Messrs, Akintola Williams Deloitte (the external auditor) was indicted on the grounds that the audit failed to uncover the accumulated losses of the company for the past years of an audit. They failed to confirm a material credit transaction of N7.7Billion allegedly credited to the companys accounts and the audit failed to probe further into the companys management failure to provide satisfactory explanations to an audit query. The auditor was indicted to have given consent to a misleading profit forecast issued by Cadbury (Nig) Plc, an the auditors inability to exercise professional skepticism and due diligence in the performance of their work (Okaro et al, 2013). Fodio, Ibikunle, and Oba, (2013), assert there have been series of corporate scandals both within and globally, that has eroded the trust placed in the financial statements, and has cast doubt in the minds of the investors and hence resulted in the loss of confidence by investors, especially the institutional investors and therefore called on the regulators to stem this ugly trend (Ajibolade, 2008). The main objective of financial reporting is to provide financial information to the users such as ; current and potential investors, creditors and stakeholders. The information is intended to assist them in making well seasoned investment decision as well as accurately report the economic resources and obligations of a company. Furthermore, auditors are perceived as the gatekeepers in the protection of the investing public. Arowoshegbe, Uniamikogbo&Atu.(2017) The fundamental issue which this study seeks to address is can enforcement of Mandatory joint audit mitigate audit failure in companies in Nigeria, with emphasis of selected Audit firms located in Lagos State. Okaro etal., (2018) cited ( Ratzinger-Sakelet.,2013) that Joint audit can be defined as an audit in which the financial statements are audited by two or more independent auditors. the nature of joint audit involves two different audit firms form an opinion about a clients financial statements. Okaro eta,.( 2018) opined that such a nature of engagement assumes that both audit firms are liable for their opinion. Okaro etal.,(2018) cited ( Julia and Rudolf,2012) that the process of joint audits is similar to the single audit, though differs in the monitoring process between both auditors. And the deliberation of audit findings are of immence importance as this would ordinarily cumulates into higher audit quality. Okaro etal., (2018) acclaimed that there has been debates on whether joint audit should be mandatory considering the handful benefits and demerits. Furthermore, Okaro etal.,(2018) cited( Craswell, 1988; Petty and Cuganesian,1996; Lennox, 2000) that the major arguments of the proponents of joint audits is that it has the ability of discouraging organizations from changing their auditors simply to get different results. citing (Deis and Giroux, 1996; Ragbunathan etal., 1994; Zeff, 2003; Francis 2004; Carrera etal., 2007) that it has the potential of preventing over-familiarity that may erode audit quality. Siddiqui,J(2019) corroborated the view point of Okaro etal, (2018) that Joint audit was a fall-out of the the intense need of the the CMA (Competition and Market Authority) in the UK who proposed that Audit of companies should be carried out by atleast two audit firms, inorder to foster experience of lower firms and ensure cross check on quality. Siddiqui, J etal., ( 2019) cited (Haak etal., 2018) that joint audit has the potential of reinforcing the independence of the auditors and strengthening the audit market positions of the non- Big 4 firms Okaro eta.,(2018) Cited (Ratzinger- Sakel etal.,2013) that the opponents of joint audit argued that it would amount to additional costs. Okaro etal., (2018) cited (velte and Azibi , 2015; Zerni etal., 2012; Deng etal.,2012; Lesage etal.,2012; and Groff and Salhovic 2016) that many studies have critically examined joint audit and its effects on audit quality, auditor independence, audit fee and market concentration and stated that most of the studies had beamed it light on developed countries and developed capital markets such as Germany, France, Sweden, Denmark. Okaro etal., (2018) cited ( Ratzinger-Sakel et at.,( 2012) that most countries have adopted mandatory joint audits in banking, insurance and corporate groups such as ( Sweden in 2006; South Africa in 1990, Canada I923, France in 1966, and Demark in 1930) while Demark abolished her joint audit law in 2005.
1.2. Statement of the Problem Audit failure has eroded the confidence of the investing public and this has raised a fundamental question on the Auditors role of detection and prevention of fraud and errors. However, this corporate failures is traceable to the following factors; first, auditors giving more attention to non -audit services due to the lucrative benefits. Benito.(2004). Second, legal restriction to prohibits inspection of working papers for instance; The Peoples Republic of China prohibits working papers of Audit firms in her jurisdiction to be investigated by outside countries Securities and Exchange Commission. Jeffery (2013). Third, the inability of the Regulatory body in Nigeria( FRCN) to enforce Mandatory joint audit between big 4 firms and Non-Big firms as widely practice by advanced western countries such as France. Otete (2018). Fourth, the auditors long tenure being a contributory factor to his independence impairment. LI,Zhang&Zhou( 2021), and Firfth, ineffective audit quality, Okaro and Okafor.(2013).
1.3. Aim and Objectives of the Study The aim of this study is to address the need to enforce Mandatory joint audit in organizations in Nigeria. To achieve this aim, the following objectives were designed for this study;
- To Investigate the relationship between non- audit services and Audit failure.
- To examine the relationship between Poor Audit Quality and Auditor failure.
- To determine the relationship between restriction to inspect audit working papers audit failure.
- To determine the relationship between auditors rotation and Audit failure.
- To investigate the relationship between mandatory audit and audit failure.
1.4. Research Questions In an attempt to achieve the objectives of this study, the following research questions were focused;
- To what extent is the relationship between non- audit services and audit failure ?
- To what degree is the relationship between poor Audit Quality and audit failure ?
- To what volume is the relationship between mandatory joint audit and audit failure ?
- To what measure is the relationship betwwen restriction to inspect audit working papers and audit failure?
- To what extent is the relationship between auditors rotation and auditors failure?
1.5. Research Hypotheses The following hypotheses were postulated and tested by the study based on the research questions; - There is a significant relationship between mandatory joint audit and audit failure
- There is a significant relationship between consultancy services and audit failure
- There is a significant relationship between audit rotation and audit failure.
- There is significant relationship between legal restriction of working papers and audit failure.
- There is a significant relationship between poor audit quality and audit failure.
1.6. Significance of the Study There is no doubt the devastating impact of the negligence of the auditors have robbed off the shareholders their hard earned assets in the company who had relied on the purported certified financial statements presented by the auditors. nonetheless, there are other chain of negative impact such as loss of investors confidence in audit reports, loss of revenue to the state and massive loss of employment to the labour markets. This study addresses the need enforcement of mandatory joint audit to address the adverse impact of audit failure on organizations in Nigeria. Though, mandatory Joint audit is widely debatable in the developing economy such as Nigeria but has received huge acceptance in the advanced countries such as france Gandy.(2019) In of view of the striking merits, the concept of manadatory joint audit is being widely criticism in other advanced countries such as Canada, Sweden, South Africa and Denmark who have abolished provisions of mandatory joint audit and moved into a single audit system for a variety of reasons (Siddiqui, 2019) In developing countries such Nigeria is yet to wake up to the call of manadatory joint audit as this was widely supported by the president of the institute of chartered Accountants of Nigeria. Chidi( 2010). He stated that there is the need of manadatory joint audit to address the structure of the Nigeria market, which appeared to be dominated by the Big Four audit firms (Okaro etal., 2018). The Gap which this study seeks to fill in the literature knowledge, is considering the enormous advantages of Joint audit as a veritable tool to curb the impact of surging auditors failure( Okaro etal., 2018) This study would contribute immensely to the quality of auditors work as regards ensuring compliance with relevant audit standards and assurance. Hence the auditors report would again gain the confidence of the shareholders. The Regulators would be better equipped to review and issue effective standards as often as possible to ensure audit reports and work are in compliance with best global practices. The professional bodies such as ICAN and ANAN would see the need to champion the course of high ethical standards in the profession and ensuring the best global practices are upheld. The study would better enhance the knowledge of the students in accounting, Auditing and Corporate Governance.
1.7. Scope and Delimitation of the Study To achieve an indepth coverage of this study as regards providing empirical evidence that audit failure could be curtailed by recommending to the professional and Regulatory authorities to enforce manadatory joint audit in the performamce of all audit engagements of companies. It would be practically impossible to sample the wide opinions of accounting firms in Nigeria, and lagos state as a whole, therefore, we had to employ data of accounting firms under the Lagos Mainland District Society under ICAN, considering the short time, proximity of accounting firms, and implied financial cost which this may have on the study. Therefore, such limitations would not in any way affect the validity of the research findings. Review of journals and articles on the affected study was employed, while designed Questionares which centred on relevant areas of the study was admistered to respondendents which would be used for answering the research questions and testing the stated hypotheses. This study is segregated into the followings chapters; Chapter one; Background to the study; Chapter two; theory and conceptual framework and Literature Review to the study. While chapter three; Methodology or Research Methods to the study. Chapter four; Summary, Conclusion and Recommendations.
- Operational Definition of Terms;
Audit failure; This is a situation where the Auditors performs below the audit standards as codified in the Audit and Assurance Standards
Clean audit Certificate; this is where the auditor issues a an reserved audit opinion or unqualified Audit Report
Stakeholders; These are Classified interest in the company eg; employees, management, shareholders, government, creditors, etc.
Joint Audit; This is an audit of a company performed by two or more audit or accounting firms 1.8.5. Mandatory joint audit
; These are regulated or enforceable joint audits.
CHAPTER TWO LITERATURE REVIEW 2.1 Introduction In the preceding chapter, the background to the study focused on the impact of mandatory joint audit to curtail incessant auditors failure in organisations in Nigeria. The merits and critique that greeted joint audit were noted by scholars. The chapter also considered the statement of the problem; Aims and objectives of the study; Research questions, statement of hypothesis,significance, scope and delimitation of the study. This chapter would focuse on theoretical concept; Conceptual framework; Review of relevant literatures to the study. 2.2.1
Historical development of Mandatory Joint Audits This part is an overview of the Historical development of Mandatory Joint Audits in (i) the World (ii) and in Nigeria. 2.2.2.(i)
Historical development of Mandatory Joint Audits in the World Okaro etal., (2018) cited ( Ratzinger-Sakelet.,2013) that joint audit can be defined as an audit in which the financial statements are audited by two or more independent auditors. the nature of joint audit involves two different audit firms form an opinion about a clients financial statements. Okaro eta,.( 2018) opined that such nature of engagement assumes that both audit firms are liable for their opinion. Okaro etal.,(2018) cited ( Julia and Rudolf,2012) that the process of joint audits is similar to the single audit, however differs in the monitoring process between both auditors as well as the deliberation of audit findings are of immence importance as this would ordinarily cumulates into higher audit quality. Okaro etal., (2018) acclaimed that there has been debates on whether joint audit should be mandatory considering the handful benefits and demerits. Furthermore, Okaro etal.,(2018) cited( Craswell, 1988; Petty and Cuganesian,1996; Lennox, 2000) that the major arguments of the proponents of joint audits is that has the ability of discouraging organizatios from changing their auditos simply to get different results, also citing (Deis and Giroux, 1996; Ragbunathan etal., 1994; Zeff, 2003; Francis 2004; Carrera etal., 2007) tha it has the potential of preventing overfamiliarity tha may erode audit quality. Siddiqui,J(2019) corroborated the view point of Okaro etal, (2018) that joint audit was a fallout of the the intense need of the the CMA (Competition and Market Authority) in the UK who proposed that Audit of companies should be carried out by atleast two audit firms, inorder to foster experience of lower firms and ensure cross check on quality. Andre (2009) cited (EC, 2011a, p.90) corroborated the scholars view point that joint audits was a set of solution to for improving the audit market in Europe. The subsequent consultation highlighted the importance of joint audits four eyes are better than two Andre etal., (2009) (EC, 2011a,p, 90). Andre etal., (2009) cited (EC 2011a, pp. 250-251; CNCC) identified points of opposition over joint audits as this may lead to increase in costs due to enforcement of joint audit. Siddiqui, J etal., ( 2019) cited (Haak etal., 2018) that joint audit has the potential of reinforcing the independence of the auditors and strengthening the audit market positions of the non- Big 4 firms. According to ICAEW (2019) stated that in joint audits, two or more firms are appointed to take joint responsibility for the entire group audit. It further maintained that the audit market has been saturated by the Big four firms such as ; Deloitte, PwC, EY, and KPMG. These firms are larger than the challenger firms such as BDO, RSM, Grant Thorton,Crowe Nexia, Baker tiily and Mazars. ICAEW etal., (2019) opined that the Government and regulators in a number of jurisdiction are considering whether to intervene in this market in an attempt to increase audit quality, completion and choice, by mandating joint audits to be a way of attaining this. It pointed however, that existing evidence is far from compelling in terms of the impactof a second audit firm on audit quality or cost. ICAEW etal., (2019) maintained that as a general principle, two professional opinions are oftern considered batter than one and seeking a second opinion is seen as appropriate. It consider other merits of joint audit as a way of increasing competition and choice in the audit market which of it self should enhance audit quality. It maintained that there were series of debates that some audit firms and investors remain unconvinced that the risks and long term costs associated with joint audits can be justified. ICAEW etal.,(2019) stated that shared audit used to be common for many multinational corporations but over time, listed companies have shifted their choice to singe audit firms. In the UK 97% of the 350 largest companies are audited by Big Four firms. It attributed this migration owing to the audit firms international networks and increasing integration within international businesses and also pointed that another reason for reduction in joint audit may be due to regulatory and investors requirement, citing the financial scandals of Parmalat in 2003. It maintained that shared or joint audit exited in some countries like south Africa because of differences in auditor rotation requirements globally. In corroboration with the previous scholars view on joint audit, Siddiqui j.(2019) cited (CMA 2018) that the need for joint audit was a result of the dominating influence of the Big four firms who controlled the audit market and most instances down played on the essence of audit quality. Siddiqui,j etal.,(2019) stated that joint audit are retatively uncommon and exist in different forms in some countries such as france who adopted joint audits in 1965. Other countries such as Morocco, Kuwait, Congo and Ivory Coast made provisions in support of joint audits while countries such as Saudi Arabia, Algeria and Tunisia implemented mandatory joint audits. However, countries such as Canada, Sweden, SouthAfrica and Denmark eventually abrogated joint audits to a single audit for variety of reasons. Siddiqui, j etal.,(2019) . Siddiqui, j etal.,( 2019) cited (EC 2010) beamed it light on surging audit market concentration and recommended that a mandatory joint audit would be of importance. Furthermore, Siddiqui j. etal.,( 2019) cited ( Haak etal, 2018; Mazars 2010; Hapama, Rvinen, Niemi 2012) highlighted some advantages of joint audit to include; a vehicle for reinforcement of auditors independence and the strengthening of the audit market positions of the non- Bog 4 firms and stated that auditors independence can be enhanced because both auditors have lower economic bonding with the audit clients and would be more pretty difficult for managers to convince both auditors to compromise on any shading transactions. On the contrary, Siddiqui j, etal.,(2019) cited ( Neveling 2007; Deng etal., 2014) claimed that the opponents of joint audits are mainly critique of its potentially high organization and coordination costs and the possibility free riding and internal opinion shopping without a corresponding increase in audit quality. 2.2.3(ii)
Historical development of Joint Audits in Nigeria Okaro, Ofoegbu(2018) stated that quite a number of developing countries have made policies on joint audits and this include; Algeria, Congo,Morroco,India, Tunisia. Furthermore, Okaro etal.,(2018) Cited (Ajaegbu, 2014) maintained that in 2010 the president of the institute of chartered Accountants of Nigeria (ICAN) requested for a mandatory joint audits in Nigeria to tackle the structure of the Nigerian audit Market, which is predominantly controlled by the Big four audit firms and cited (Ejoh,2015) the Big four opposed to mandatory joint audits in Nigeria preffering instead a voulountary joint audit regime. Moreso, okaro etal.,(2018)cited (FRCN, 2016) that the Financial Reporting Council of Nigeria introduced a unified code of corporate governance for the Nigerian private sector and one of the provisions of the code was on the adoption of a mandatory joint audits for firms. However, Okaro etal.,(2018) highlighted that the code as well as manadatory joint audits received wider criticism from investors and other interest groups and of which lead to suspension of the code by the Nigerian government. According to Okaro etal.,(2018) opined that there were varied studies in Nigerian which suggested mandatory joint audits as a solution to auditing market concentration in Nigeria. Moreso, Okaro etal.,(2018) cited ( Okaro and Okafor , 2013; Asien, 2014; Olowookere, 2016; Olugbenga etal.,(2016) which conducted investigation to determine whether the introduction of a joint audits would lead to the improved audit and earnings quality of listed companies in Nigeria. However, the studied did not show the relationship of this variables but recommended volountary joint audits in Nigeria for reasons such as increased opportunity for growth for small and medium sized accounting practice.(okaro etal.,(2018). It cited (Asien, 2014; Abdulmalik etal., 2016) that though mandatory joint audit may be of a high costs but would be necessary to assist in tackling the problem of those in the political class who operated entities that retain only the Big four firms for fear that better audit quality may reveal shady trasactions of the proprietors of the business. 2.3.
Theoretical Framework Every empirical study should be supported by theoretical framework and this basis, the following theories appears prominent amongst others.
2.3.1 Agency Relationship; In a reviewed article compiled by Owolabi & Kassim( 2020) affirms, that the demand and supply of audit services was largely borne out of audit issue referred to agency relationship. Agency theory postulates that managers (agents) portrays strange and unpredictable attitude which most times are unobservable by the principal to the relationship and they are thereby faced with the risk that the managers may act contrary to what shareholders expect resulting in moral hazards and therefore cannot verify the skills and capabilities of managers resulting in adverse selection as cited in ( bratten, Gaynor, Mc Daniel, Montague &Sierra, 2013) This theory was supported by Arowoshegbe,Uniamikogbo &Atu( 2017) where it maintained that an agency relationship is one which one or more persons ( the principal(s)) engage another person ( the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent. The Arthur further stated that in auditing, agency relationship exist between the auditor, management ( agents) and the shareholders (principal) by the virtue of their business relationship, hence accountable to the shareholders this relationship that exist between them is kinown as agency theory. 2.3.2
Institutional Investors shield (Protection) According to Leyira &Olagunju( 2012) that it is natural expectation that , shareholders wish to be given assurance by an independent person ( auditors) as regards the accuracy and fair presentation of financial statements being presented by the directors( agent) of the business. Therefore, the auditors provides the shield or assurance to the institutional investors as whether the ventures have been well managed by the directors of the business. Hence, the auditor must deploy all relevant skills required to fulfill the statutory responsibility. 2.2.3.
Theory of Broken Trust According to Loveday A Nwayanwu( 2018) argued that broken trust theory is a fraud perpetrated by those in authority and position of trust and with the capabilities and knowledge of manipulating accounting and internal control system. 2.3.4.
Ethics and accounting/ auditing Arowoshegbe et.al( 2017) identified accounting as having a moral discourse partially reflecting the moral order of the world in which its been practice. It stated that the injustices that have occurred with the accounting profession reflect the current state of immorality in the society. As defined, ethics is the discipline dealing with what is good and bad and with a moral duty and obligation principles of conduct governing an individual or a group. Following tha accounting scandles like Eron, Worldcom and the recent Nigerian Cadbury plc cases that have painted the accounting profession black, it is however disturbing to know that a profession guided by certain codes of ethics, regulated by standards, monitored by recognized regulatory bodies could record a high level of unethical behavior in time. 2.3.
5 Theory of inspired Confidence. According to Owolabi&Kassim(2020) view the essence of confidence as one of the features of an audit expected by the stakeholders who are not part of the management of an entity. The author further stated that the theory of inspired confidence posits that stakeholders demand accountability from the management . the autor cited (limpeerg,1932; muda & Hutapea, 2018; Niyonzima &Soetan, 2018) that the theory suggest that confidence and assurance arose to assure the owners of the business and other stakeholders the reliability and accuracy of the state of affairs of underlying economic activities for a period of time being reported. The author reported that the demand for audit issues arose in the Companies and Allied matters Act(CAMA) as a consequence of divergences of interest between the managers and stakeholders resulting to conflict of interests. It further cited ( Deegan, 2000; Handoko, Sunnnaryo& Muda,2017; Lufti, Nazwar&Muda2016; Marhayanie, Ismail&Muda,2017) that it is normal that since the managers who run the activities of the company are are the same that prepares the financial statements, it becomes very important fo the auditors who are independent umpires be involved to verify through audit exercise to enable them to express an opinion of certification and true and fairness of the financial state of tye company for the period covered in the reported financial statements 2.
4 Conceptual Framework This deals with the research variables on the basis of the theories. In other word, this involves connecting the independent variables with the dependent variables in the study.
Conceptual Framework showing the relationship between Factors of audit failure and Auditors failure Source; Developed by the study. Year 2022 2.5 Review of Relevant Literatures This section is dedicated to reviewing the relevant literatures affecting the subject matter of this study. There are many articles published on this subject of which few amongst them would be reviewed to determine the thoughts of various scholars on the research study.
2.5.(i) Audit quality Okaro and Okafor,(2013) cited Tackett et al. (2006) that audit failure is attributed to an occurrence where the auditors failed to exercise his detection skill to detect grossly misrepresented financial statements prepared by management of an enterprise. This statement therefore, confirms that audit failure stems from a weak audit process that leads to ineffective audit quality. In its article, three cardinal attributes were identified as what constitutes an effective audit process such as; auditors knowledge of the clients business environment, auditors high preference for independence, objectivity, due professional care and healthy relationship between internal, external auditors and finance team( Bender 2006). Okaro.et.al, further stressed that there is need for auditors to have experience at both the firm and client level as this would enable the auditor to have a well- structured audit plan which achieves improved efficiency. On industrial experience, it pointed out that, it reveals the risks, opportunity, and accounting practices of the client and enables a more effective audit. More so, compliance with technical and ethical standards which pre-supposes audit staff with the relevant qualification, knowledge and experience. Audit quality, is the identification and reporting of substantial misrepresentations of facts in the financial statements by auditors (Wakil,Alifah, Teru; 2020). Furthermore, Wakil et.al( 2020) states that reporting entails ethics or honesty of auditors. In essence audit quality relates to an auditors ability to safeguard the interest of the users of the financial statements by identifying and disclosing misstatements and information asymmetry among financial statements users and managements. wakil. et.al( 2020) was indifference on the measure of audit quality and stated that there is no widely accepted evaluation of audit quality because of the specific nature of the work. Audit quality measurement was strongly supported by Soyemi, Afolabi& Obigbemi.(2021) that audit quality is more of a concept than a term. It cited the work of Knechel(2016), that audit quality is hardly observable but may be measured. It also, considered the position of Christensen, etal,. (2016) that the description of the concept can be viewed into two perspectives namely; the auditors, and investors each having a preferred attributes before an audit engagements by highlighting, compliance with Generally Acceptable Auditing Standards, accurate and reliable financial statements, efficient audit planning, training skills, competence, independence etc Hence, audit quality requirement is largely determined by; regular auditing, accountability auditing, performance control and audit report. Wakil,et.al (2020) However, this audit quality can only be effective if there is full implementation by the SEC ( Security and Exchange Commission) (PCAOB; 2018) Moreso, Jaeger,(2021) reported on the penalty imposed by PCAOB on EY partners for Synchronoss audit deficiencies. In the report it was allerged that Alison yablonowitz and Shawn Rogers were ordered to pay $25,000 and $10,000 , respectively for lapses while serving as an engagement partners on EYs audit of SynochronossTechnologies Financial statements for the year ended 2014 to 2016. In each of the transactions, Synchronoss licenced Software technology to an entity in exchange for a licence fee around the same time it was negotiating a strategic transactions (ie, an acquisition, business venture or divestiture) with the same entity or one of its affiliates. In each instances the Synchronoss incorrectly accounted for the licence as separate transactions and improperly recognized the licence payments as revenue. The licence fee in the transactions ranged from $6million to $23million. Yablonowitz and Rogers failed in evaluating Synchronoss improper accouting for the licence transactions, according to the regulator. The two partners failed to exercise due care and skepticism in obtaining sufficient evidence to support EYs audit opinion for the 2014-2016 audit , instead relying on uncorroborated management repesentations According to Arrunada( 2004), the author pointed out three basic characteristics of audit of which includes; professional judgment, the specific nature of audit quality and the existence and effectiveneness of private quality- assurance techniques. Arrnada et,al (2004) stated that professional judgment means that auditors use information that is unverifiable or costly for third parties to verify when deciding on an audit report. As a consequence, verification capabilities determine which approach regualtors should follow. if they think that the market is able to verify and sanction a broader set of performance variables than regulators or judges, then regulation should be market friendly, meaning that it should aim to facilitate market sanctions in the case of auditor failure, instead of substituting such market sanctions with regulatory or judicial sanctions. Otherwise, regulation risks inducing so- called defensive auditing with auditors using only hard- ie easily verifiable- evidence to support their opinions with the end result that audits becom trivial. Arrunada et,al,(2004) futher stated that another second consideration for regulating audit quality is that clients are aminly harmed not when their own audit is far low quality but when some other client of the same auditing firm unexpectedly fails, without proper warning from its auditor. Therefore, clients have very strong incentives to monitor, evaluate and invest in their audit firms quality. Meaningful regulation should therefore focus on helping this monitoring process by providing useful information. This could make it advisable to impose mandatory disclosure duties on audit firms if private incentives in this regard are insufficient because of problems of collective action between or within audit firms. Olagunju, and Adebayo( 2011) explains that audit independence is defined as auditors unbiased mental attitude in making decisions through out the audit and financial reporting citing (Barlett, 1993). It further stated that the attitude of independence is a very specialized concept of auditors. The author cited ( Maury,2000) stated that considering maintaining the highest ethical standard for the accounting profession, independence refers to the quality of being free from influence, persuasion, or bias. Citing (Maury 2000) that auditor is expected to be without bias with respect to the client under audit and should appear to be objective to those relying on the result of the audit. Similarly, the author cited (Sridharan etal, 2002) auditor independence, refers to the auditors ability to maintain an objective and impartial mental attitude throughout the audit. Olagunju et al,( 2011) cited (Sweeney,1992) that in the absence of independence, the value of audit services will be greatly impaired and in turn, it cited (Lowe and Pany,1995) if an auditor lacks independence, this may increase the likelihood that they would be perceived as fewer objectives and therefore less likely to report a discovered breach. The author, cited ( Baber,etal,1995) that compromised independence results in a lower level of audit quality being provided on financial statements. In other words, if the auditor is not independence, the incentive to do a high quality audit is weakened,as misstatements will not be reported even if found citing the work of ( pike,2003) Furthermore, the author cited ( Linberg and Beck, 2004) maintained that auditor independence helps to ensure quality audits and and contributes to financial statements users reliance on the financial reporting process. Olagunju et al,(2011) cited ( Dando and Swift, 2003) that audit credibility can be achieve through various mechanisms of assurance; ie Assuring the public and other users that the information in a report is true and fair. An intense review of the work of Waleed and Hla( 2016) it gave us insight to the relationship between Audit failure and Corruption on the performance of public sector in Iraq. The author cited (Karapetrovic and Willborn, 2000) that in the past few years, audit quality has attracted attention as a tool used to assess the auditing effectiveness and in recent times increasing importance has been place on SAIS to conduct quality auditing. Waleel et al,( 2016) cited (Nuri and Al-lahibi (2013)) that in a related study revealed some barriers to achieving effective auditing in the level of federal board of supreme audit of Iraq. FSBA auditing in Iraqis linked to the competence, experience, and independence of the auditor and his ability to determine material errors and missattements citing the work of (Salih& Hla 2015) The author cited ( Hamdan,2011) that audit failures have led to debates concerning the new requirement in place to reinforce quality auditing (Hagman& Persson,2014) Moreso, the author cited ( Fafatas, 2010) that in its prior studies audit failures have been revealed to tarnish auditors reputation through loss of market share. It stated that quality of audit may be considered conceptually as a continuum that ranges from very low to very high audit quality. In addition, the author cited ( francis, 2004; Bing etal,2014; Hagman & Persson, 2014; Fafas, 2010; Beattie et al, 2010) that audit failure arise on the lower quality continuum while audit quality is at the opposite, with the former having the possibility of leading to business failure, corruption as well as other negative consequences. Moreover, audit failure lead to to minimized perceived audit quality of firms. Waleed et al, (2016) cited (Alkafaji, 2007) study which revealed several indicators that confirm the significant relationship between poor quality review and audit failure or corruption. On the basis of the majority of the business scandals that occurred, the author suggested that it is imperative to enhance audit quality by conducting an analysis of the factors that influence effective auditing. It stated in contrast that audit failures and corruption are costly to investors, auditors and to the society as a whole as this may lead to loss of public funds and weaken the economy and societal welfare. A review of the article of Yuan, Zhang, Kong and Shi(2019) highlighted the consequence of audit failure on audit firms; evidence from IPO approval in China. Yuan et al, (2019) stated that audit failure can significantly impairs audit firm reputatation and results in various adverse conseuences. The author carried a study on one type of potentential consequences of audit failure ; whether and how audit failure impacts its clients IPO rejection rates. The author cited ( davis & Simon, 1992; Dopuch &Simunic, 1982,; firth, 1990; Sami, Kim,Zhou, &Fang, 2012; Wilson& Grimlund, 1990) that the existing literature on audit failure examines either the direct economic consequence in terms of a decrease in market share and audit fees or the indirect consequences in terms of a decline in the clients financial statements credibility, a decline in the clients market value, and an increase in the clients cost of capital. Yuan et al,(2019) remarked that the existing literature was silence on whether and how audit failure affects government decision. Furthermore, the author stated that based on the IPO approval system in China, the current study aims to fill this void in literature. It stated that an audit failure is identified if any client of an audit firm involves in accounting fraud is known as the failed firm. If the failed audit firms are subsequently sanctioned by the CSRC, then these firms are known as sanctioned audit firms. In comparison, if the failed audit firms are exempted from regulatory sanction, then thes firms are non sanctioned Audit firms. Yuan et al, (2019) commented that there is large body of literature on whether and how regulatory sanctions after audit failures impacts the audit firms. According to the author, it revealed that the literature documents significant impairment on the audit firms reputation by the regulatory sanctions. It cited (Chaney and Philipich (2002) noting from the perpective of the audit firms existing clients, examined how the enron event impacts Arthur Anderson and find significantly negative market reactions of Arthur Andersons other clients on its investigation by SEC. the Author reviewed a study by Fan,Xu, and Hong (2006) which traced similar phenomenon in the chinese contex. Their report gave an over view on how the accounting fraud conducted by Yinguangxia impacts its audit firm, Zhongtianqin. The author claimed that the market reacts significantly negative to Zhongtianqins other client when the CSRC announced a regulatory sanction on Zhongtianqin. The author cited( fith (1990) commented that form the perspective of the audit firm per se, that regulatory sanction leads to decreases in the audit firms market share and audit fee, as well as the stock prices of the firms other clients. Furthermore, the author cited (Samie et al,2012) that a higher probability of audit firms being replaced and lower audit fees after the regulatory sanctions. It also considered opinions of (Davis and Simon, 1992; Wilson and Grimlud,1990) that a lower audit fee will be resultant effect and the firm will find it difficult to retain existing clients as well as attract new clients. Moreso, the author cited (Hennes, Leone, and Miller (2014) which agreed with its position that sanction audit firm are more likely to be dismissed by the Board of Directors after a restatement of financial statements. A review of the article of Akhidime(PhD)(2009) supporting earlier scholars that Auditors had a price to pay for audit failures in the form of declined reputation. The author cited (Ajibolade,2008) that corporate failures in the financial sector brought auitors into sharp focus and caused he public to question the quality and independence of external auditors. The author cited (Skimmer &Scinivassan, 2010) that auditors with low audit quality are known to have been switched by audit clients. Akhidime et al, (2009) cited ( Bello, 2011) that auditors are faced with high risk of potentential litigation if their reports continue to fail to provide early warning signals to current and potential investors that may have to rely on them for their investment decision.
2.5.(ii) Non- Audit Service( Consultancy) okaro. et,al (2013), in its article, reported that there have been few studies on audit failure factors, in Nigeria. It emphasized that the results of such studies are mixed.it pointed out some studies reviewed the factors likely to influence the independence of the Nigerian Auditors and thus identified audit fee as the most significant factor. Its study relied deeply on a survey data conducted by Adeyemi &Akinniyi ( 2011) and other studies conducted, which corroborated with the provision of non- audit services as a high determinant of audit failure . It cited Otusanya et al, 2010, that in Nigeria, auditors have been accused of anti- social behavior deriving from their personal pursuit of commercial interest. Onulaka,Shubita & Combs( 2019) confirms this assertion that auditors preference for other non- audit services than audit has been an audit quality issue, stating that there are legislation in the United Stated of America(USA) prohibiting auditors from providing nine (9) specified non- audit services to audit clients while requiring audit committees authorization for others. It further stated that despite the prohibition of the provision of the non- audit services by European auditors that this has never seen the light of the day. And also, compares the Nigerian standards with other global standards, for auditors and then concludes them as being principal based as well as relatively permissive. More so, onulaka, et.al, (2019) cited a study conducted by Adeyemi &Oloowokere( 2012) to confirm that audit fee was considered to have a significant effect on auditors independence as revealed by a survey where 142 responses gathered from Lagos State of which 66.9% agreed that auditors should not by law be allowed to provide non- audit services while 78.2% agreed that those providing such services could impair their independence. In article published by Ogriki & Oyadonghan (2017), it cited Adhikari(2011) that there are roles or relationships that reduces the independence of the auditors, of which includes; auditors economic dependence on the client, market competition in audit , other non- audit services close relationship with client in confessional rate or free of cost, worries about their re- appointment as s a confirmation to other researchers view point on the topic. Charlie Shannon, (2016) a review of
Top 10 Financial Reporting Deficiencies from Regulators and External Auditors It highlighted that the consulting and other non- audit services may impair the independence of the audit firm, depending on the nature of the service. Roy& Amy(2018) highlighted the predominance of consulting income over auditing income of which inclines the auditor to be more accommodating in order to use its auditing role as both a loss leader and portal of entry into the client in order to maximize more lucrative consulting income. This position reconfirms from the view of Pakaluk (2018) which states that the rise for non- audit consulting services has soared since 2006 and of 2017. It claimed that 70% of the audit firms fee is majorly attributable to non- audit services generated by the big four firms. Its, mirrored down such factor as likely to dominate the internal governance decision of the audit firms and invariable the old culture of auditing may be subordinated to the values and style of the consultant. The public watch dog role of the auditing side , with its commitment to an attitude of professional skepticism may thus be sacrificed. Prem Sikka ( 2019), queried the potency of the watch dogs report in his article the big Four auditors are failing and the watch dogs report wont change that he identified several companies such as BHS, Carillion, Conviviality, Quindell, Aero inventory, the Co-op Bank, and London and Capital Finance. He queried what these companies had in common but audit client of the Big four accountancy firms- PWC, KPMG, EY and Deloitte. He claimed that these firms collected huge fee and delivered little of public value and their failure to identify fragility of those businesses resulted in the loss of jobs, savings pensions and tax revenues. Yet the victims of these failures have no legal recourse to seek compensation because auditors owe a duty of care only to the company that hires their services and not to any individual stakeholders or creditors. Despite the inability of the firms to spot the flaws in the financial statements of the banks which led to the 2007 / 2008 financial crash, the auditing industry escaped meaningful reforms. Arowoshegbe et al,.(2017) cited the work of Weil(2000) that scholars have documented studies on the relatively high level of non- audit fees from client for non- audit services. It claimed that the provison of non- assurance services may , however create threats to independence of the firm, a network firm or the members of the assurance team, particularly with respect to perceieved threats to independence. Arowoshegbe et al,(2017) cited Habbash(2010) submission that there are four types of threats that could occur as a result of provison of non- assurance services to a company. First, is the threat of self interest which arises from auditors consideration of the revenue from the client of which may be significant and so the auditor is economically dependent on the client. It further stated that this could cause the auditor to ignoreaccounting breaches committed by the company and issue a clean audit report. Arowoshegbe et al,.(2017) identified the second threat to be fear of loosing the non- audit job would make the auditor not to raise any negative opinion against the management . third, self- review threat may also be perceived as a major threat faced by the auditor while reviewing what he has done such as provision of accounatnacy services, which he may find difficult to condemn. Fourth. The auditor could be faced with familiarity threat for carrying out other services. The auditor may become too familiar with the client company that he may not be inclined to carry out extensive tests based on the fact that he has trust on the company being audited. According to DCSL(2011), which provides a highlights of Rule 3 of the FRCN Act No6, 2011, that external audiors of companies are required to disclose non- audit services rendered to the entity and the fees paid thereon. The engagement partners were also required to ensure that the services rendered were within the purview of the Act. Arrunada(2004), argued that the proposed PCAOB provision or directive fell short of stopping auditors from consulting work, despite persistent protest that their linkage compromises auditors independence. However,
the wouters rulling of the European court of justice, by which national law can forbid lawyers from working with auditors, inorder to protect the proper practices of the legal profession, has been followed by a different proposal for a directive on professional services in the internal market(Com(2004)2) The author stated that since in early days of auditors profession, financial auditors, either alone or work together with professional working for the same firm or within the same network of separate firms, have provided a whole array of audit services to their client . these services include; bookkeeping,development of accounting systems, tax consulting, executive recruitment, manangement and financial advisory services, legal help and corporate recovery, etc. In the previous work by the auditor ( Arunada,1999a and 1999b) argued strongly and concluded that the provison of these services by the auditors reduces total costs, increases technical competence and motivates more intense competition. Furthermore, the auditor, stated that it does not damamge auditor indepence nor the quality of non- audit services. Prohibitions are therefore misguided. A review of the article of Olagunju and Adebayo( 2011) noted the effect of non- audit services on auditors objectivity to have been a long area of concern in the accounting and audit profession. It further stressed that this concern has been compounded in recent years by significant increase in the scope of non- audit services provided by the audit firms and it may result to threats such as independence, self interest and Self- Review threat. The author cited (Simunic and Stein 1987) that an external auditor plays a cruicial role in improving and promoting financial reporting quality because auditors give credibility to accounting information system. It cited ( Hillson and Microsoft 2004) further stated that an outsider cannot trust a companys financial statements without having confidence in the independence of an auditor. Therefore, the author suggests that for an auditor to express a qualified opinion, the auditors, should objectively evaluate the firms performance and also be able to withstand client pressure to issue an opinion. Olagunju et al,(2011) stated that a self interest threat is one which stems from a financial or self interest conflict which result from a direct interest interest or indirect interest in a client for losing the audit assignment. Which might make them being reluctant to take actions that would be adverse to the interest of the audit firm. Moreso, the author, explained that Self- Review threat arises when the result of non- audit services is performed by the auditors or by others within the audit firm are included in the figures disclosed in the financial statements. It stated that the apparent difficulty of maintaining objectivity and conducting what is effectively a self review if any product or judgment of aprevious audit assignment or non audit assignment needs to be challenged or re-evaluated in reaching audit conclusion. Concluding, the author cited( Whitaker A.M, 2006) that there are other threat that can question or evaluate the independence of the auditor which includes; familiarity threat, advocacy,intimidation threat and management threat. Another mind bugging question is will high dependence of the auditors on the management for its income, not affect his independence irrespective whether its derived from audit service or other non- audit service? Reviewing the work of Olagunju, and Adebayo( 2011) gave us the highlight that When auditors of a company are in conflict with the directors , it is important that this conflict is resolved without the auditors losing any of their independence. This can be proved to be difficult as an auditor earns a fee from providing a service, which he earns a living. This fee is paid by the board of directors leaving them with the power in the relationship. The author noted the impending dilemma, and querrying , how can the audit team please the directors without loosing any of their independence but keep the directors happy to ensure maintain repeat business. The problem regarding independence arise from two main sources; the auditors relationship with the the company and the nature of the accountancy profession. According to the author, it argued that auditors earn a living from the fee he is paid it is logical that it would not want to jeopardize this income. The reliance on the clients fee may affect the independence of the auditor. If the auditors feel this client income is more important than their responsibilities to the shareholders, it may not perform the audit with the shareholders interest in mind. The larger the fee income, the more lileky the auditor may wave his responsibilities and perform the audit without independence. This could lead to the manipulation of figures and exploitation of accounting standards. By performing the audit without independence, the shareholders may get misled, as the auditors are now reliant on the directors. Olagunju et al,(2011) recommended that the auditors to maintain their independence and they must be protected from directors board. If they were able to challenge statements and figures without the risk of loosing their job, they would be more likely to work with complete independence. Akhidime (2009) identified audit fee as one of the potent drivers of audit failures. Ciing ( Lucy, 2016), the author maintained that low quality audit characterized by low audit fee can facilitate audit failure as it does not have sufficient effect on banks from committing financial statements fraud and recommends that bank audit should be expensive enough to attract auditors with requisite skills and with the required incentive to uncover fraud. High quality audit in his view a disincentive to banks from engaging in fraudulent financial reporting. The author cited ( Angelo, 1981a) which argued strongly that the level of economic bonding between auditor and the auditee ( client) has a tendency to impact on auditors independence and that, the extent to which auditors can earn client specific rent ( fee) and auditors independence which is the joint probility that the auditor will discover ( competence) and report a misstatements ( objectivity and independence). The author, quoted (Angelo, 1981a) to have held his position that economic bonding between the firm and the auditor could impose limitations on auditor independence and invariable on the qulity of their audit. Akhidime et al, (2009) stated that studies have confimed that companies amy reimburse or financially induce auditors to reduce their possibility of detecting financial statements fraud. The autor cited (De angelo, 1981b) to have provided a multi- period analysis of the economic relationship between the auditor and audited and argues that the auditors are exposed to two main risks in situation where they earn significant client specific rent ( fee) and that there is a certain pressure to compromise independence inorder to maintain the continuity of that rent ( audit fee) and avoid the threat of switching to another audit firm. The author cited (Craswell and Francis, 2002) that the level of economic depence between the auditor and their client does not affect auditor propensity to issue a qualified audit opinion, except in a setting where public disclosure audit and non- audit fee is not mandatory. Ahidime et al,(2009) cited ( Otusanya and Lauwo, 2010) showed a table indicating Auditors and Distressed Banks, which was a findings by CBN- NDIC( 2009)
| Bank | Year end | auditors | Date of last audit report | Audit opinion | Audit fees 2007 | 2008 |
| afribank | March 31, 2008 | Akintola Williams | March 31, 2008 | Unqualified | N50M | N65M |
| Finbank | April, 2008 | Akintola Williams | December , 2008 | Unqualified | N63M | N67M |
| Unionbank | Feb29, 2008 | Akintola Williams | October, 2009 | Unqualified | N113M | N118M |
| Intercontinental | Dec 31, 2008 | Price Water Coopers | May 2008 | Unqualified | N112M | N208M |
| Oceanic | Dece 31,2008 | Price Water Coopers | May , 2009 | Unqualified | N100m | N168m |
The author, showed that in Table the auditors issued unqualified opinion on the first five Banks which the CBN-NDIC special examination report proved and adjudged insolvent included Akintola Williams Deloitte (AWD), PricewaterhouseCooopers (PWC); and to a lesser extent KPMG professional services, these banks belonged to the Big 4 international reputable firms; the author further stated that PricewaterhouseCoopers(PWC) and KPMG Professional services are classified as bank specialists. Akhimide et al, (2009) attributed the poor audit qualities or failure to largely of fee dependency owing to the enormous income derived from these banks. The author cited (Ekundayo and Atu (2010) that this factor could have created bonds between the auditors and the bank management, in exerting pressure on auditors to agree with management having compromised their independence. 2.5.(iii)
Auditors Tenure on engagement Auditors tenure was remarked by LI,Zhang&Zhou( 2021) that it could create positive correlation to auditors expertise and this with the ability to detect errors. However, it predicted that it has a negative association with auditors independence and this invariable decrease reporting. Long audit tenure is another factor that may affect the independence of the auditor in the conduct of his professional engagement. In an article by Malis& Brozovic( 2014) it maintain a position on auditors long tenure as one of the major factor that may trigger audit failure. Furthermore, it stated that long association though may have healthy impact on the auditor as regards having a deeper understanding of the clients industry but its potent threat to auditors independence is inevitable. It cited okolie, (2014, p.70), that it may constitute a threat to independence as personal ties and familiarity may develop between the parties. Sikka et al,.(2019) opined that many audit failures have shown that longer of auditors term in office results to chumminess with directors and impairs their scepticism. It critique the role of CMA( Current Market Authority) as being content with the current rule which requires major companies to change their auditors every 20 years. The CMA washed its hands off by saying that audit committee should be empowered to deal with the appointment and oversight of auditors but it neglected to note that all the bailed out banks along with carillion and BHS had such committee. They failed, and the CMA does not ask why? Sikka et al,.(2019) noted that it was the consecutive third times of the unsuccessful attempt by the CMA to tackle the dysfunctional auditing industry. Under the weight of lobbying and political intervention, previous report in 2006 and 2013 shelved the overdue reforms. Arrunada(2005) acclaims that the proposed directive will compel member states to introduce the mandatory rotation of audit firms every seven years or alternatively, the less costly partners ever five years. Mandatory audit rotation increases costs and substantially reduces quality. It makes audit more costly because it increases production costs and reduces competition in the market place. It reduces the incentive to invest and compete because firms that manage to excel find themselves obliged to relinquish their achievements periodically. Thabang&Latridis(2017) supported the mandatory rotation of auditors. it stated that South Africa has one of the best regulated systems in the world and yet there are still occurences of audit risk. The two most important corporate governance tools in place are the new companies Act 71,2008( Mandatory implementation since 2011 and King III report). The company act has made mandatory rotation of auditors. Johnson &Waidi(2013) cited (Gray and Manson,2018) states that if there is close association between the auditor and the company for a long time, this may result to the auditor identifying with the clients management consequent detrimental effects on independence. It therefore, suggest that mandatory audit rotation should be implemented due to the following reasons; i. to serve as a check on the work of the previous auditors ii. It encourages audit innovation as regards to compliance with the standards. iii. It tends to discourage complacency on the existing auditor. Johnson et al,(2013) opined that over the years organizational collapse have been attributed to poor audit quality associated with a perceived lack of independence. It postulates that audit failures were deemed to have occurred because auditors failed to either detect or report material errors in the financial statements. John et al,(2013) cited ( Catanach &Walker, 1999) that manadatory auditor rotation has been considered as a means of strengthening independence and reducing the incidence of audit failure. However, Johnson et al, stated that mandatory auditor roation has been greeted with stiff opposition by the auditors. Johnson et al, (2013) cited PWC (2007) which argued that mandatory firm rotation prevents an effective working relationship with management. audit committee, and Board of Directors. It also cited Stringer, (2011) where it stated that some management of the company may fear that employees may be reluctant to release information to new auditors and this may hamper the audit in general and fraud detection in particular. 2.5.(iv)
. Legal restriction of inspection of audit working papers by investing public or stakeholders; Auditors working papers, inspection by other third parties. Is it strictly enforceable by the enabling law? In an article compiled by Jeffery (2013) titled US, China, agree to modest deal on audit working papers. In the article, it was gathered that after two years of frantic effort coupled with lobbying for access to the working papers of Chinese auditors of companies listed in the US, the PCAOB has come to an understanding with the chinese regulating authority that its auditors working papers would be accessible only when enforcement actions were involved. It cited ( Gillis,2013) that the deal was tainted with limitation clauses but at last paved the way for resolving legal issues. He further expressed his frustration that this has not done any good to investors and other users of the financial information. It was noted that in the course of implementing the agreement, which sparked a litigation from deloitte , the chinese affiliate praying on the US federal judge to dismiss the two- year long SEC effort to obtain audit papers in the Long top financial technologies limited case in 2011. Jeffery et.al (2013), stated that the SEC charged Longtop with fraud
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