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PROJECT TOPIC AND MATERIAL ON AN APPRAISAL OF THE USEFULNESS OF THE INDEPENDENCE OF EXTERNAL AUDITORS IN THE PREPARATION OF OBJECTIVE FINANCIAL STATEMENTS (A CASE STUDY OF SHELL PETROLEUM DEVELOPMENT COMPANY)
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- Name: An Appraisal Of The Usefulness Of The Independence Of External Auditors In The Preparation Of Objective Financial Statements (A Case Study Of Shell Petroleum Development Company)
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1.1 BACKGROUND OF THE STUDY
Recent studies into causes of most business failures revealed that such failures result from reliance on inaccurate financial reports by external auditors, which is consequent upon the reliability of the external auditor to separate himself both physically and mentally from the client company. In the words of Midgley (1994:9) “most of the inquest into major auditing failures of the last ten years or so have involved searching questions about independence of auditors”.
A general understanding of the nature of external audit, the legal and regulatory frame work applicable to the auditor and the auditors client comply with this frame work will reveal that the external auditor is in a better position to recognize non- compliance that may cause the company to cease its operations. This, the external auditor can do only if he is independenct.
Clients patronage is now a sensitive one to an external auditor. Years back, Shell production development companies did not bother much about retaining existing clients coming into the company and competition for new existing clients were minimal. Today, however the case is different. The number of shell production development companies have multiplied clients are more sophisticated and they consistently demand higher level of quality service each years.
We cannot overlook the importance of objective technical information in the survival of the company both big and small. According to Asechemic (1994:6), information is the impression about the form or condition of an object or knowledge created upon the apprehending mind to bring about a state of knowledge, certain or uncertain: information as an important component that leads to social, economic and political development of a society, needs to be regulated especially those that are technical in nature so as to deduce relevant information. Lee (1982:1) observed that “the complexity of an economic structure regulates the type and amount of information which flows through the system. The utility of such information depends not so much on its volume as its quality. The users must be confident of its reliability and credibility”. This quality basically explained the importance of independence of external auditors. Midgley (1994:9) noted that “independence is the central focus of objectivity”. He further noted that “the value of the audit depends to a large degree on public confidence and so it is a fundamental principle that the auditor should not only be, but be seen to be independence (Midgley 1994:9). It is apparently clear that the degree of confidence held by the public on the auditors to a large extent on the auditors independence.
In addressing the issue of public confidence Lee(1952:88) noted that “ the degree of confidence held in that auditors opinion (and in the annual technical report he is attesting) by the shareholders and other users of the petroleum products varies directly with the ability, physically and mentally, to disregard and to disassociate himself from the client company and its management”.
It is obvious that there is the need for external auditors independence for this independence to be well , be identified so that external auditors will be abreast with the effect of such threat to their audit functions.
It is important to note that the ability of the external auditor to be independent is a part of requirement of the audit function. Hall(1983:30) identified curiosity as an innate quality of an external auditor. He Suggested that “sence” of curiosity may be akin to skepticism. An auditor, it has been said, should be skeptical but suspicious”. The ability of an external auditor to be skeptical enables the auditor to be objective in his audit functions.
1.2 STATEMENT OF PROBLEM
Corporate organizations in recent times had faced a lot of impediments. Some of these impediments are traceable to the doubt about the usefulness of external auditors independence, as affecting objective reporting has been looked into by previous researchers.
Whitington (1995:66) noted that “certified public petrol dealers perform a host of services in which the client is the major beneficiary. Such as management consulting, tax and petroleum services. Such as review of technical functions are no substitute for any audit as noted by many researchers. The above function rather impair auditors independence often times. Some of the areas that are sparsely looked into by researchers are conflict between external auditors and clients, audit fees, expression of opinion and personal relationship between both parties.
The empirical evidence to the problem under study can be found in the recent bank distress that arise after these banks technical reports were adjusted by the external auditors as giving a true and fair view of the state of affairs of the banks.
In the words of Ovuarie (1993: 3). “Instance abound where supposedly reputable companies of Engineers acting as external auditors have deliberately mislied the public by vouching for good technical health of some petroleum companies that subsequently collapsed. He was of the view that auditors of Shell companies should be held responsible for their collapse.
1.2.1 RESEARCH QUESTIONS
To guide the researcher in the cause of the study, attempt will be made to answer the following questions.
- Are external auditors truly independence
- Is auditor’s independence necessary for objective audit report?
- Is there any relationship between thhe external auditors opinion and the audit fee
- Is there any relationship between opinion expressed by external auditors and social familiarity with their client.
- Has conflict between external auditors and clients any significant effect on external auditors opinion?
1.3 PURPOSE OF THE STUDY
The objectives which the researcher seeks to achieve from this research work includes:
– To X-ray the extent to which auditors are independent.
– To evaluate the usefulness of external auditors independence.
– To study those factors which impair auditors independence.
– To advise auditors on the best ways to avoid these impediments.
– To educate users of technical report on their right as regards to the unfaithfulness of external auditors when they fail to be independent.
– To encourage auditors, to ensure that they are independent and as such guarantee reliability to audited financial report on petroleum products by the users of the statement and.
– To add to the already existing general knowledge about auditors opinion and their objectivity.
1.4 RESEARCH HYPOTHESES
The following hypotheses were postulated as a guide to the researcher.
H0 – External auditors are not truly independent
H02 – External auditors independence is not necessary for objective audit report.
H03 – Audit fee social familiarity of the auditors with the clients and conflict between external auditors and the clients affect the external auditors opinion.
1.5 SIGNIFICANCE OF THE STUDY.
It is expected that at the end of this study, auditors clients and users of financial statements will come to understand the importance of auditors independence to the audit function. There are various types of threat identified by the researcher and will be studied to enable the auditors to realize and understand ways of handling situations that may influence their independence. The external auditors will conduct this study to reduce these threats and make the auditors clients and users of petroleum financial statement to appreciate the importance of adjective financial report.
The external auditor through this study stands to understand the effects of these threats and how they can be avoided, the companies too will promote effective technical decisions and growth, the users of technical information are at advantage since they can rely on a credible information that is based on “solid and sound independence”.
For accounting students, who are the future auditors, it will create an understanding of the importance of independence to the audit function.
In general, the study will add to the existing knowledge about the topic since it is an indebt analysis of the problem under study.
1.6 OPERATIONAL DEFINITION OF TERMS
The following operational terms are defined as they apply to this study only.
This is the state of mind characterized by objectivity and integrity, it explains a state of mind in which one is not controlled or influenced by another.
This is the state of being correct, what is said to be and what is considered worthy of belief.
Person authorized by law (statutes) to examine an account of the company to establish their consistency with the companies transaction and conformity, with approved audit standards. He is entitled to make an opinion as to the “true and fairness” of the account.