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PROJECT TOPIC: AUDIT TENURE AND QUALITY OF FINANCIAL REPORTING IN NIGERIA

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CHAPTER ONE

1.0 INTRODUCTION

1.1Background to the Study

In the past few years, auditors had been blamed due to their role in the mega corporate scandals such as Enron, WorldCom, Global crossing, Imclone system and Tyco international and in Nigeria such as Cadbury (Nig) Plc, African Petroleum (Nig) Plc. The criticism had raised lot of questions regarding auditors’ independence, such criticism leveled against auditors because they have be auditing their clients for a long time and subsequently concentrated more on non-audit services rather than audit.

The familiarity that exists between the auditors and their clients as a result of long audit tenure encourages failure in auditor independence. Though, there has been a call for sweeping changes in the auditing profession to ensure independence and therefore improved their audit quality (Palmrose, 2006).

The term audit is derived from the Latin word ‘audire’ which means to hear. In early days an auditor used to listen to the accounts read over by an accountant in order to check them. It was in use in all ancient countries such as Mesopotamia, Greece, Egypt, Rome, U.K and auditing (Ojo, 2009).

Auditing evolved and grew rapidly after the industrial revolution in the 18th century with the growth of the joint stock companies the ownership management became separate. The shareholders who were the owners needed a report from an independent expert on the accounts of the company managed by the board of director’s who were the employees. The purpose for this is to ascertain whether the account was true and fair rather than detection of errors and frauds (Petersen, 2005).

With increase in the size of companies and the volume of transaction the main objective of audit shifted to ascertaining whether the accounts were true and fair rather than true and correct. Hence, the emphasis was not on arithmetic accuracy but on a fair presentation of financial reporting (Lennox, 2005). Accounting and auditing play significant role in principal-agent relationship (i.e. agency relationship). The agency relationship between owners and manager in a firm creates a natural conflict of interest because of the information asymmetry that exists between managers and the owners. This information asymmetry means that manager generally has more information about “true” financial position (shown by statement of financial position), and results of operations (in a statement of comprehensive incomes) of the enterprise than the absentee owner does. This contract relationship between the shareholders and managers in a firm lead to the demand for firm auditing.

Auditing has a significant effect on firms, it helps to determine whether the overall financial statement present fairly in accordance with the established criteria, the extent to which rules, policies, laws audit and tracing funds or assets identification and recovery, investigating the existence, nature., extent and identification of employee who misappropriate asset.

Long term audit tenure has created some expectation gap this gap has led to failure of the auditor, to carryout is duty effectively. This is due, to the fact that the expectation of the auditors are not met because of the familiarity that exist between the auditors and their clients, this familiarity has made the auditors to fail in their area of independence, credibility and confidentiality because during long term audit tenure, auditors focus on non-audit service than audit services, and this led to many corporate scandal.


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