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CONFLICT OF INTEREST AND THE AUDITOR INDEPENDENCE. (A CASE STUDY OF PRICE WATER HOUSE COOPERS)

Abstract

This project work titled “the impact of conflicts of interest on the auditor’s independence” using a price water house coopers as a case study, examines specifically the concepts of independence and conflicts that may arise when it is lacking. Independence are identified and discussed on how to manage threats. The primary and secondary sources of data were used in gathering information for the success of the project work. It was discovered that auditor’s conflict of interest greatly influence the auditor’s independence. It was concluded that the conflicts of interest exists from the auditor to the structures that govern the industry, the institutions and legislation. Finally, it was recommended that auditors should be chosen not by management of the company, but by the committee which should comprise of the Board of Directors (BODs).

TABLE OF CONTENTS

Title Page                                                                         i

Certification                                                             ii

Dedication                                                               iii

Acknowledgements                                                  iv

Abstract                                                                   v

Table of Contents                                                     vi

Chapter One: Introduction                                    1

1.1   Background of the Study                                         1

1.2   Statement of Problem                                              3

1.3   Statement of Research Problem

1.4   Objectives of the Study                                            6

1.5   Research Hypotheses

1.6   Scope of the Study                                                   6

1.7   Significance of the Study                                         7

1.8   Limitation of the Study                                            7

1.9   Definition of Terms                                                  8

Chapter Two: Literature Review                            12

2.1   Introduction                                                             12

2.2   The Historical Origin and Development of Auditing         12

2.3   The Concept of Independence                                  21

2.4   Auditor and the Importance of Independence          23

2.5   Professional Responsibility of an Independent

Auditor                                                                    25

2.6   The Companies and Allied Matter Act 1990 and the

Auditor’s Independence                                           27

2.7   Conflicts of Interest                                                  32

2.8   Price Water House Cooper: History and Milestones  54

Chapter Three: Research Method and Design               59

3.1   Introduction                                                             59

3.2   Research Design                                                      59

3.3   Description of Population of the Study                    60

3.4   Sample Size                                                             60

3.5   Sampling Techniques                                              60

3.6   Sources of Data Collection                                       60

3.7   Method of Data Presentation                                   61

3.8   Method of Data Analysis                                          62

Chapter Four: Data Presentation, Analysis and

Interpretation                                                                        64

4.1   Introduction                                                             64

4.2   Data Presentation                                                    64

4.3   Data Analysis                                                           64

4.4   Hypothesis Testing                                                  79

Chapter Five: Summary, Conclusion and

Recommendations                                                         83

5.1   Introduction                                                             83

5.2   Summary of Findings                                              83

5.3   Conclusion                                                              84

5.4   Recommendations                                                   86

References                                                               89

Appendices                                                              91

CHAPTER ONE

INTRODUCTION

1.1   Background to the Study

Conflict of interest and auditor’s independence are two concepts that must be considered properly in this project work. If there is any way auditors’ conflict of interest affects his independence.

To start with auditor’s conflict of interest according to Andrew (2004) is a setting where an auditor trade off the influence and been biased of his report. There are two types of conflicts of interest in this regard. They are conflict where auditor earns reward from a third party between form and clients interest and conflict between the interests of two or more client e.g. where an auditor or audit team has a long term relationship.

While auditor’s independence refers to as the independence of the auditor from parties that have an interest in the financial statement of an entity.

This usually safeguard the auditor’s integrity and also an objective approach to the audit process.

It is obvious that there is auditor’s conflict of interest i.e. either of the two types of conflict of interest, there is usually auditor trade of the influence and been based that could make auditor not given accurate report, and then affect auditor independence.

The definition of auditor and auditor’s independence over the decades, have evolved along with accounting profession itself the concept independence was considered of great importance, and the focus was am elimination of conflict of interest that arose from financial relationships between auditors and their clients.

The twin sides of a coin are the concept of audit and the concept of independence. The auditor who has lost his independence has lost his reason, he has become a dependent auditor and will be in conflict of interest with his clients. Independence remains as crucial an issue as it was in the nineteenth century, and is still required to be demonstrated.

1.2   Statement of Problem

Financial reports are meant to be a formal record of business activities and these reports are meant to provide an overview of the financial position and profitability in both short and long term of companies to the users of these financial statements such as shareholders, managers, employees, tax analyst, banks, etc. But in recent times, the financial manipulations, weak internal control systems, ignorance on the part of the board of directors and audit committee, manipulation on the part of the reporting auditor and other fraudulent activities that occur within companies, creating a negative goodwill to the general public.

A typical example of a financial statement malfunction is the popular case of Enron. Enron was one of the largest energy companies in the US.

By fraud and bribery, Enron executives avoided income taxes, and this lead to the downfall of this multi-billion dollar firm. Importantly, this wasn’t the first, a similar case appeared in 1973, when equity funding an insurance firm located in Los Angeles went bankrupt (Don, 2006).

In fact every year, a new business fraud is unraveled, often with similar components, corporate instability, uniformed accountants, high-level connections, and broke investors (Knapp, 2005). Enron started in July 1985 when Omaha-based inter-north merged with Houston natural gas.

Kenneth Lay, who had originally held positions in academic and the government, became chief executive and chairman. By 2001, Enron had grown to one of the of the largest energy companies in the world. However, the company sudden by unraveled and collapsed. Some other examples of corporate failure on the local scene are Lever Plc now Unilever in (1998) and African Petroleum (2000). From the above discussions, there is need to ensure credibility of financial statement of companies in order to increase users confidence and thereby affecting investors behaviour.

This study seeks to investigate why corporate organizations fail and how it is occasioned by the independence of auditors.

1.3  

Statement of Hypothesis

A research hypothesis is an assumption of statement, which may not be true concerning one or more population.

There are two types of hypothesis, the null hypothesis (Ho) and the alternative hypothesis (Hi). The null hypothesis is a negative type of proposition of the research hypothesis. The alternative hypothesis is accepted once the wall hypothesis is rejected. Below is the formulated hypothesis.

Hypothesis One

HO:   Conflicts of interest does not influence the auditors independence

HI:    Conflict of interest influences the auditors independence.

Hypothesis Two

HO:   Conflicts of interest does not cause bias judgment and decisions by an auditor

HI:    Conflict of interest can cause bias judgment and decisions by an auditor.

1.4   Objectives of the Study

The main objective of this research is to examine specifically the impact of conflict of interest on auditors’ independence.

The specific research objectives are:

1.     to assess the impact of interest influences on the auditors’ independence.

ii.     to evaluate whether the conflict of interest can cause bias judgment and decisions by an auditor.

1.5   Scope of Study

The scope of this research was limited to price Water House Coopers, which is one of the largest professional service providers globally.

1.6   Significance of the Study

This study will help reveal the conflicts of interest of auditors, its impact on auditors’ independence and its findings and recommendations will be of benefit to:

a.     Auditors: The auditors will benefit from this study in the sense that it reveals the conflicts of interest which will be an advantage to them in carrying out their audit work.

b.     Individuals who may wish to be auditors in future. This study will serve as guidelines for them in the course of carrying out their audit exercise.

c.     Organizations that hire auditors high-lightening them on the rules governing the independence of auditors.

1.7   Limitations of the Study

So many limitations were met during the process of this research work. The first among others was getting information relevant to the research combining and relating the research work. Another limitation are:

Finance: There was also the challenge of inadequate finance faced by the researcher to carry on adequate research in respect of the aforementioned topic.

Time: There was often time consuming in sourcing for research materials and other relevant information. This, in addition to the above mentioned was a great challenge to the researcher.

1.8   Definition of Terms

Accountability: It is the obligation stewards or agents to provide relevant and reliable information relating to resources over which they have control and which have effects on others.

Accounting Principles: These are principles according to which the amounts of all items in a company’s account are to be determined.

Audit Opinion: This is an opinion expressed by an auditor upon financial statements,

Statement of Financial Position: This shows the assets, liabilities and capital of an organization at a particular data.

Statement of Comprehensive Income: This is a financial statement of an enterprises or income and expenditure.

Auditors Attitude: It is a combination of education, experience and judgement which provides a frame of mind, a point of view toward his work, that enables and auditor to appraise his problems accurately.

Audit Services: Fee based services provided by the qualities to provide reasonable assurance that the company’s financial statements are fairly presented.
Auditor: The external professional charged with the task of attesting to the fair presentation of company financial statements.

Auditor Independence: The expected relationship between the auditor and client in order to receive reasonable assurance that the judgement made by the auditor are free age any influence by the client or other parties.

Conflict of Interest: The perceived or actual state of an individual where the judgements and opinions are developed to promote the interests of the individual rather than the other interested stakeholders.

Non-Audit Services: Free based services performed by the auditing firm which are not related to the audit engagement.

Auditors Report: A report made by an auditor upon financial statements.

Financial Statements: The statement of financial position, statement of comprehensive income, statement of cash flows or total recognized gains and losses, notes and other statements and explanatory material all of which are identified in the auditors reports as being part of the financial statement.

Fraud: The use of deception to obtain an unjust illegal financial advantage or intentional misinterpretation by one or more individuals among management, employees, auditors or other parties.  

True and Fair View: The accounting standards obtained a legal opinion that stated true
and fair view which is to be adhered to by auditors.

Low-Balling: The reduction in audit fees by an auditor, so as to protect or establish the relationship between the auditor and clients and to build the relationship that could become profitable later.

Objectives Assessment: An opinion or a judgement about the financial statements of a company, that is made by an auditor, and is free from influence of personal feelings, from clients and other parties.

Audit Evidence: The information obtained in arriving on the condition on which he bases his opinion about the financial statements of a company.

Audit Fees: The combined and total fees generated by the auditor for providing service to the client.

Institution Provisions: This include auditing standard and auditing guidelines, the statements issued by profession accounting bodies setting up basic principles, procedures and ethics to be adopted by members in the conduct of audit and how they should be applied. 

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