Auditor Independence: Nigerian Evidence

The literature review begins by establishing the critical importance of auditor independence. Flint (1988) highlights independence as a cornerstone of auditing, a sentiment echoed by the Institute of Chartered Accountants of Nigeria (ICAN). ICAN's 2009 Professional Code of Conduct emphasizes both 'independence in mind' and 'independence in appearance.' 'Independence in appearance' is defined as avoiding circumstances that could lead a reasonable third party to question the auditor's objectivity. The Nigerian Standards on Auditing (ICAN, 2013) further underscores the engagement partners' responsibility for ensuring compliance with independence requirements. This foundational understanding of auditor independence sets the stage for the subsequent examination of threats to this crucial principle.

A significant portion of the literature review focuses on the contentious relationship between the provision of non-audit services and auditor independence. Quantitative studies examining this link have yielded inconsistent results. Frankel et al. (2002) found a positive correlation between non-audit fees and earnings management, suggesting a potential compromise of independence. However, Ashbaugh et al. (2003) challenged these findings, reporting no statistically significant association. The research of Joe and Vandervelde (2007) added another layer of complexity by demonstrating both potential risks and potential benefits (knowledge transfer) of offering non-audit services. Zhang et al.'s (2016) Norwegian study found no relationship between non-audit services and auditor independence. Tepalagul and Lin (2015) summarized this inconsistency in the literature, noting the lack of conclusive empirical evidence to definitively prove that non-audit services impair auditor independence. Despite inconsistent quantitative results, a widely held perception persists that non-audit services can hinder independence.

The review extends beyond the purely empirical, incorporating the international context and regulatory responses. The rapid growth of the Nigerian economy (a tenfold increase in GDP between 1997 and 2017, World Bank, 2018) and its status as a major oil producer (fourteenth largest, Fantini and Quinn, 2017) are highlighted as factors influencing the significance of this research. The Sarbanes-Oxley Act of 2002 in the USA, prompted by the Arthur Andersen scandal (Edelman and Nicholson, 2011), is presented as a significant regulatory response to concerns about auditor independence and non-audit services. This act prohibited registered public accounting firms from providing certain non-audit services to audit clients. Ghosh and Pawlewicz (2009) observed a subsequent increase in audit fees following the Act's implementation. Furthermore, the review includes studies from various countries (Saudi Arabia, Iran, Nigeria) showcasing diverse perspectives and highlighting the cultural context within which perceptions of auditor independence and the impact of non-audit services are shaped. Different studies reveal varying perceptions of threat from non-audit services among investors and auditors.

The literature review also addresses the concept of the audit expectation gap (AEG), defined as the difference between societal expectations of auditor performance and the actual achievable level. Porter (1993) expands the concept to include a 'reasonableness gap' and a 'performance gap.' Porter's New Zealand-based survey identified unrealistic expectations, deficiencies in standards, and deficient performance as contributing factors to the gap. Studies in Nigeria (Oloowokere and Soyemi, 2013; Onulaka, 2015) explore the expectation gap further, highlighting how perceptions of auditor responsibility can influence views about auditor independence. A study in Mauritius (Ramlugun, 2014) underscores the renewed focus on the audit profession due to global financial scandals, which erode public trust. These studies contribute to the broader understanding of how societal expectations, regulatory frameworks, and auditor practices interact to influence the perception and reality of auditor independence.

This research employed a qualitative approach, utilizing thematic analysis as developed in Onulaka and Samy (2017). This method was chosen to allow for a holistic understanding of the research topic without imposing pre-determined categories on the responses, aligning with the interpretivist perspective advocated by Power and Gendron (2015). The study acknowledges the potential for diverse interpretations of the findings, a characteristic described by Latour (2005) as 'risky texts.' Thirty semi-structured, face-to-face interviews were conducted, fifteen with audit partners and fifteen with pension fund managers in Nigeria. The selection of participants prioritized depth of understanding over breadth of sample, aiming for information saturation as described by Braun and Clarke (2006) and Bordens and Abbott (2014). The study used both interviews and validation of transcripts with participants, emphasizing a rigorous approach to data collection and analysis, with multiple data collection points across the selected regions.

Participants consisted of senior audit firm members with 10-25 years of post-qualification experience and Pension Fund Administrators (PFAs) acting as Investment or Portfolio Managers with 10-22 years of experience. The auditors selected had direct or indirect responsibility for auditing clients, while PFAs were active in the Nigerian capital market. Participants (10 from each of Nigeria’s three major regions: North, East, and West) were interviewed in Abuja, Enugu, Awka, and Lagos. These locations were selected for their significant commercial activity and the high concentration of Chartered Accountants and audit firms. The use of Pension Fund Managers to represent investors was justified by Section 73(1) of the Nigerian Pension Reform Act 2004. The researchers implemented snowball sampling, expanding their sample by asking participants to recommend further interviewees, a method outlined by Groenewald (2006). Online search engines were utilized to locate participants, followed by email and phone calls for scheduling.

Thematic analysis was selected for its flexibility and its ability to let themes emerge from the data, rather than being imposed a priori (Braun and Clarke, 2006). This contrasted with previous studies using Likert scales. The researchers employed both open and hierarchical coding, guided by a list of predefined issues, themes, and categories developed after the interviews. The process included systematic line-by-line coding to focus on the content of each line of interview transcripts, as per Attride-Stirling (2001). Repetitive topics and phrases across transcripts were identified as potential themes (Bogdan and Taylor, 1975), following Strauss (1992) and Braun and Clarke (2006). The authors then connected these themes to verbatim expressions and quotes in the transcripts, categorizing them accordingly (Weller and Romney, 1988; Clarke and Spence, 2013). Participant anonymity was maintained, and where new information emerged, some participants were interviewed twice (Horton et al., 2004).

Thematic analysis of the interview data revealed several key themes concerning the relationship between non-audit services and auditor independence in Nigeria. The most prominent theme was the perceived economic necessity of providing non-audit services for the survival of Nigerian audit practitioners. This finding suggests a significant conflict between economic pressures and the maintenance of auditor independence. Other prominent themes included the perceived link between the provision of non-audit services and permissive auditing standards, as well as the contribution of non-audit services to an increasing audit expectation gap. The analysis also explored the varying perspectives of auditors from different sized firms (large, medium, and small) and their views compared with those of Pension Fund Administrators (representing institutional investors). The frequency with which each theme emerged from the data was also noted, highlighting some themes as more dominant in respondents’ answers than others.

A dominant theme highlighted the significant economic pressures faced by auditors in Nigeria. The interviews revealed strong and emphatic views on the need to provide non-audit services for survival, citing factors such as paying bills and wages, unemployment, and difficulty in securing jobs. This finding underscores a crucial link between economic realities and the potential erosion of auditor independence. While 60% of respondents (67% of auditors and 53% of Pension Fund Administrators) linked non-audit services to the economic environment, some disagreed or provided nuanced responses. Several respondents emphasized that ethical integrity should prevail, even during economic hardship. This conflicting viewpoint highlights the complex interplay between economic survival and the upholding of professional ethics in the Nigerian auditing context. The intensity of these expressed frustrations suggests a critical area needing regulatory attention.

A substantial percentage of respondents (77% overall, with higher percentages among auditors) linked the provision of non-audit services to permissive auditing standards. This suggests that the existing regulatory framework may inadvertently contribute to the erosion of auditor independence. While some participants believed there was nothing inherently wrong with providing non-audit services if permitted by standards, others highlighted this permissiveness as a loophole or a factor that fosters auditor self-interest. The findings suggest that the current auditing standards may not adequately address the potential conflicts of interest arising from the provision of non-audit services, particularly impacting smaller firms' economic survival and professional ethics. This highlights the need for a review and potential strengthening of auditing regulations to mitigate these risks.

A strong majority of respondents (84% overall) believed that the provision of non-audit services contributes to a widening audit expectation gap. However, the responses revealed a diversity of opinions, especially among auditors, reflecting the mixed empirical evidence regarding the impact of non-audit services on audit quality (Tepalagul and Lin, 2015). Auditors from larger firms were less likely to see a link between non-audit services and the expectation gap, potentially due to their greater economic stability and resources. The responses also indicate that various factors contribute to this gap, including auditor independence, the permissiveness of auditing standards, and insufficient public education. Some participants viewed the problem as one of auditors failing to 'draw the line' between audit and non-audit services, highlighting the crucial role of professional judgment and ethical conduct in maintaining auditor independence and managing the audit expectation gap.

The study concludes that providing non-audit services is widely perceived as an economic necessity for Nigerian audit practitioners' survival. This crucial finding, stemming from a phenomenological study, highlights the influence of environmental, legal, political, and economic factors. The findings show a strong correlation between the provision of non-audit services and an increased audit expectation gap. A significant finding was the strong negative relationship between economic pressures and auditor independence, with highly charged language reflecting significant frustration from both auditors and pension fund managers. While the study acknowledges that auditors are permitted to offer non-audit services, it reveals that competitive pressures can drive down auditing fees, potentially compromising auditor independence – a point supported by the research of Joe and Vandervelde (2007).

The study's policy implications emphasize the need for a review of regulations related to auditor appointments and removals to reflect current economic realities. It suggests exploring a policy change to prevent external auditors from providing non-audit services to audit clients, aligning with the evidence suggesting this can increase auditor fees (Ghosh and Pawlewicz, 2009). The research highlights the urgent need to address the tension between the economic survival of audit firms and the maintenance of auditor independence. The observed economic pressures necessitate a reevaluation of current practices to ensure that auditor independence is not compromised due to unsustainable fee levels in a competitive environment. This could lead to the development of more robust regulatory frameworks better protecting the integrity and independence of the auditing profession in Nigeria.