This review of extant literature on auditing, with specific reference to its practice in Nigeria, takes up various publications, both in online and in physical form, for investigation, debate, and discussion. Specific subjects handled in the review include (a) the origin and development of auditing, (b) the role of auditors in public and private enterprises, (c) qualities of auditors, (d) auditing of public sector organisations, (e) the role of auditing in performance management, (f) the development of the auditing profession in Nigeria, and (g) the current status of public sector auditing in Nigeria.
A number of publications, mostly in the form of books and journal articles have been studied for this review. The issues studied have been taken up sequentially to facilitate logical flow of thought and discussion.
1. Origin and Development of Auditing
Some elements of accounting are to be found in the narratives of the earliest of civilisations; even in those where the recorded word was hardly known. Accounting in such times occurred orally. Stewards responsible for assets and operations would produce to their masters the details of the wealth they were entrusted with. The master was expected to listen to the recital of such details and question the stewards as he felt necessary. With the master "hearing" the details of the account, the word auditor came to mean a person who satisfies himself regarding the truth of the accounting activities of another person.
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The development of writing led to the construction and maintenance of written records and extended the realm of accounting beyond mere listening to recitals by accountants. The practice of checking accounting records was well established in ancient Egypt. The Romans and Greeks had quite comprehensive systems for public accounts. The Greeks took accounting very seriously and Greek literature abounds with references to charges of embezzlement against men in public life.
It needs to be appreciated that accounting and auditing in those days were not just simple and crude processes, but also cumbersome because of the use of Roman numerals. The development of Indo-Arabic notation and the invention of double entry book keeping in 1494 by the Italian Mathematician Luca Pacioli spurred the growth of accounting and auditing in personal and public life. The first society of accountants, the original precursor to modern day accounting bodies like the IASB, was formed in Venice in 1581. It is of interest to know that prospective accountants in those times needed to undergo training (serve articles) for six years.
The development of joint stock companies and the enormous growth in business and trade during the Industrial Revolution during the 18th and 19th centuries led to the practice of appointment of auditors as agents of shareholders. The first British organisation of accountants was chartered in Edinburgh in 1854. The Institute of Chartered Accountants in England and Wales was founded in 1880.
Accountancy and auditing have grown enormously during the last century, both in theory and in practice. The exponential growth of business and trade after the closure of the Second World War have led to an ever increasing importance of the role of auditors in modern day economic and business life. Auditors are now routinely called upon to fulfil a number of functions in public and private corporations and in governmental organisations, the most important of which is possibly the auditing of periodically produced accounts and financial statements of organisations. Whilst auditors play an instrumental role in the private sector with regard to safeguarding of shareholder wealth, their role in the functioning of governments and in public sector undertakings is also increasing and assuming newer dimensions with every passing day. Audits serve important economic purposes and play critical roles in serving public interest by strengthening accountability and reinforcing confidence and trust in financial reporting. Audits help in enhancement of economic prosperity by expanding the number, value, and variety of transactions that people are ready to enter into.
Recent years have however witnessed global demands for improvement in audit quality in light of the occurrence of numerous corporate scandals like those that took place in Enron and WorldCom. It is important, in this respect, to understand the contours of the agency theory in audit and thereby realise the meaning and implications of an audit to stakeholders like shareholders, regulators, other individuals and organisations. An agency relationship occurs when an owner or a principal engages another person as an agent to perform a service on his or her behalf. The performance of this service automatically leads to delegation of certain decision making authorities to agents. Whilst such delegation helps in the promotion of an efficient and productive economic environment, it also requires the principal to place trust in agents to act in their best interests. A simple agency model however suggests that principals, because of self interest and information asymmetries, lack reasons to trust their agents and seek to allay their concerns by implementing mechanism for alignment of interests of agents and principals and lessen the possibility of information asymmetry and opportunistic behaviour.
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Agents are quite likely to have motives that are different from principals. They are likely to be influenced by issues like financial reward, opportunities in labour markets, and relationships with parties that do not concern their principals. Such influences and differing interests can lead to the formation of biases in information flows between principals and agents. Simple agency models assume that agents are not trustworthy and are likely to improve their circumstances at the cost of their principals if they can do so. Auditors function as agents to principals and such a relationship gives rise to concerns about trust and confidence that exist between shareholders and directors, and directors and employees. Such concerns also prompt questions about who will audit the work of the auditors.
Agents should be trustworthy and should not need incentives to align their interests or monitoring mechanisms like audit or regulation. The simple agency model however suggests that agents are likely to be untrustworthy and will have their own motives and interests to consider. Auditors for example may be averse to risk and introduce processes for risk management that limit the scope of their activity and in caveats in their submissions that may well frustrate their principals. The independence of auditors from the management of companies is seen to be important to shareholders for achievement of audit quality. With most audits requiring close working relationships between managements and auditors, shareholders have often questioned the independence of auditors.
Recent decades have seen extensive development, especially in the advanced western economies, in the area of setting of standards. It is pertinent to note, in this context, that accounting systems of individual countries, whilst resting on some common assumptions have evolved on their own and in many circumstances significantly differently from each other. The accounting systems of the UK and the USA, whilst similar in many aspects, also have many noticeable differences. Such national accounting systems are governed by the standards set by local accounting bodies. The accounts of business firms in the United States are for example prepared in line with the standards elaborated by US GAAP. The financial statements of most West European nations were similarly prepared in line with the standards established by their local accounting bodies and auditors needed to take account of the stipulations of such standards, whilst certifying financial statements. The last decade has seen the emergence and increasing dominance of the International Accounting Standards Board (IASB), an independent UK based accounting body. The standards set by the IASB have now been adopted by more than 100 nations and continuous efforts are on to bring about convergence between the standards set by the IASB and US GAAP.
2. Role of Auditors
The role of auditors is currently the subject of much debate and discussion, in the UK, in Europe and USA, in Nigeria and across the globe. The occurrence of a number of financial failures has raised questions about the role, the functioning, and the independence of auditors in public and private organisations. Numerous studies reveal significant differences between public expectations from audits and what members of auditing professions believe that auditors should do. The large expectation gap is leading to lower credibility of auditors and reduction of the prestige and status associated with audit work.
The proper working of a market economy depends significantly on confidence in auditing financial statements. Members of the public expect auditors to assume roles for protection of various groups like shareholders, suppliers, banks, pensioners, and employees by specifically reassuring them about (a) the accuracy and validity of financial statements, (b) the solvency or going concern status of companies, (c) the existence and level of frauds, (d) the adherence by organisations towards their legal obligations and (e) the behaviour of organisations with respect to societal and environmental matters.
Audits have historically and traditionally been associated with frauds and their detection. Surveys have found that an overwhelming majority of the people feel that auditors should be responsible for active search and detection of fraud. Auditors on the other hand were until a few years ago categorical in their opinion that prevention or detection of fraud was not their primary responsibility. Legislation in the EU in the 1980s has however made it imperative for auditors to plan, perform and assess their work in such a manner that they can reasonably expect to detect material misstatements in financial and accounting statements, whether caused by fraud or otherwise. Organisations are routinely subjected to two important types of audit, namely statutory audit and internal audit. Statutory auditors represent independent external auditors who are appointed by owners or shareholders to audit the financial statements of organisations for certain periods, or verify the financial positions of organisations on specific dates. Statutory auditors, even though appointed by shareholders, work very closely with organisational managements and provide their opinions on the truth and fairness of prepared financial statements.
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Internal auditors on the other hand are organisational employees who are appointed by managements to audit various aspects of organisational operations. Internal auditors nowadays work in close coordination with the board of directors of organisations and help in ensuring achievement of strategic organisational goals in reliable and ethical ways. Such auditors assess and enhance organisational systems for compliance, control and assessment of risks; they provide information to managements on operational and financial areas that need attention and improvement.
3. Qualities of Auditors
Auditors, by the very nature of their jobs engage in functions that are complex, call for significant knowledge and professional expertise, and require very high degrees of probity, conduct and integrity. All auditors, internal or external, are required to assess complex financial statements and analyse operations with numerous ramifications. Such auditors must essentially have very high levels of professional knowledge and competence. Most accounting bodies require auditors to undergo extensive educational and on-job training and engage in constant upgrading of their skills.
Auditors are required to comment on numerous operational and financial aspects of the working of organisations. They function as agents of owners or shareholders and are often required to provide reports and other output that could essentially be very critical of organisational managements. It is thus imperative for all auditors to act independently and adhere to their given briefs. Recent years have seen the occurrence of numerous financial scams, which could possibly have been prevented by greater diligence and independence of auditors in their work. The collapse of Enron led to a number of allegations against Arthur Anderson, the auditors of the company and then the largest accounting firm in the world. Whilst Arthur Anderson closed down in the wake of the Enron disaster, other major auditing firms have also from time to time been implicated in organisational and accounting frauds. Two senior officials of PriceWaterhouseCoopers very recently had to experience police custody in the wake of charges of professional neglect that led to the occurrence of a huge fraud at Satyam Corporation, an Indian software company with global operations.
4. Auditing of Public Sector Organisations
The public sector and governmental working represent traditional principal agent relationships. Officials who work in such organisations act as agents and need to regularly account to their principals for their utilisation and management of organisational resources and the degree to which the objectives of the public have been met. Audit functions very obviously reduce the risks that are common to principal-agent relationships. Principals depend upon auditors to provide independent and objective assessments of the accuracy of accounting by agents, and report on the utilisation of resources by agents. Such need for public sector auditing comes about because of a number of factors like (a) conflict of interest between principal and agents, (b) physical remoteness of operations from the direct oversight of principals, (c) complexity of activity and (d) consequences of errors.
Auditing in the public sector has broadened in recent years in its focus from individual transactions to programme operations and control systems. Government auditing has become fundamental to strong governance of the public sector and adds substantial value through its roles of foresight, oversight, and insight, as the success of governments is primarily measured by its capacity to successfully deliver services, and to carry out programmes fairly and appropriately. Government auditors need to be competent and to be authorised to assess the integrity, efficiency, and effectiveness of financial operations and programmes.
Government auditors help decision makers in the exercise of their oversight by assessing whether government bodies are working in the manner they are supposed to, are complying with legal and regulatory requirements, and are spending funds for necessary purposes. Government auditing helps governance of government departments and public sector through the verification of reports of various programmes and agencies. Oversight audits add to public accountability by providing information on performance to principals, both inside and outside the organisation being audited.
Oversight includes the role of government auditors to spot and deter corruption, including troublesome and abusive acts, as well as misuse of power by government officials. Auditors assess the efficacy of internal control structures in order to reduce conditions conducive to corruption. Oversight includes both detection and deterrence. Detection involves the identification of inappropriate, unproductive, unlawful, deceitful or abusive actions that have already taken place and the procurement of evidence to sustain decisions regarding disciplinary action or criminal prosecutions. Detection efforts can be of various types, including both proactive and reactive processes. Deterrence on the other hand is ensured by assessment controls for current or future activities, assessment of organisational risks, review of proposed alterations to existing laws and regulations, and review of contracts for possible conflict of interest.
Government auditors provide insight to help decision makers by evaluating good and bad programmes, sharing best practices, benchmarking data, and viewing organisations, both horizontally and vertically, in order to locate opportunities for adapting or reengineering management practices. Audit functions assist in institutionalisation of organisational learning by arranging for real time feedback to policies. Audits can improve insight by providing details about problems, responsibilities and recommendations. Such information can help stakeholders in rethinking both problems and programmes and improve operational performance and capacity.
Auditors can help organisations by increasing organisational foresight. Identification of trends and focusing of attention on emergent challenges can help governments to take proactive measures and handle challenges before they assume critical dimensions. Auditors can help in identifying challenges from demographic developments, economic circumstances, or altering security threats. Auditors can also identify opportunities and risks from altering science and technology. Risk based auditing can focus organisational attention on management of risks and in deterring unacceptable hazards.
Government auditors, irrespective of their appointment by the executive or by the legislature, can recognise and provide details of corruption or abuse of authority. Whilst such obligations from government auditors are but expected, the application of institutional theory reveals the many different pressures under which such professionals function. Institutional theory deals with deep and resilient dimensions of social structure. It concerns the processes through which structures and associated issues like rules and routines become established as guidelines for social behaviour. Various dimensions of institutional theory clarify how such elements are created and adopted and how they later fall into disuse. Institutional theory has now become a widely accepted perspective for interpretation and understanding of organisational processes of change and continuity. Such theory suggests that the understanding of the essence of interaction between various governance parties, and how such parties use symbolic actions to maintain their form, is necessary for understanding of the numerous auditing issues that are influenced by the governance structure of organisations. A key idea of institutional theory concerns the shaping of organisations by institutional environments. Different ideas and practices become legitimate and accepted over time. With the institutionalisation of such ideas, they assume the status of rules. The acceptance of such ideas by powerful social bodies, like the state and professions, usually forms an important component of the institutionalisation process.
Organisational management and control mechanisms like auditing thus tend to conform to social expectations and influence the audit process. In many cases this leads to pressure on auditing independence and the needs of auditors to conform to institutional expectations rather than to auditing norms and guidelines.
5. Auditing and Performance Management
The relevance of auditing in governmental organisations is strongly associated with its impact on governmental performance. Constructive and imaginative auditing processes are, in the contemporary era, transforming auditing from a safeguarding and certificatory process to an instrument for assessment and improvement of organisational performance. In North America governmental audit helps in improving performance management in five specific ways.
Performance audits provide managements with important recommendations for improvement of programme performance. Auditors, through the auditing of the performance management systems of government entities, help managements and elected officials to understand and enhance the system, as well as make better use of it for improvement of performance and responsibility.
Auditors assess the dependability and significance of performance information and the ways and means in which such information is communicated. Such actions help in the building of confidence in performance information and leads managers and others to make better use of such information.
Auditors frequently assist managements to find improved performance measures. Surveys of citizens by auditors provide valuable information to public officials and help in bringing about appropriate changes in programme implementation.
Auditors assist and encourage managements in writing, and through other means, to better performance management. They also serve as important arms-length advisors in improvement of performance management.
Audit offices have strong pools of skills in quantitative and performance analysis. Such skills are often used to improve performance of government departments.
Each of the areas elaborated above are complex in nature and comprise of various ways in which auditors can bring about improvements to organisational performance. It is important to note that whilst observations and assessments of auditors can help organisations to improve their performance, their role is essentially advisory in nature. Auditors act as expert and impartial third parties for the benefit of managements or elected officials. They do not by themselves engage in performance improvement activities.
6. Development of Auditing Profession in Nigeria
Nigeria, along with many other African nations, was subjected to the rigorous of colonialism for hundreds of years and became free of British colonialism just about half a century ago.
The majority of legal and governance institutions in the country are understandably British in nature. The country's accounting profession is by and large controlled by the Institute of Chartered Accountants of Nigeria (ICAN), a body that is modelled on the ICAEW. The ICAN conducts examinations for students in Nigeria to become chartered accountants and provides licences to its members to engage in the auditing profession.
Whilst the Nigerian accounting profession is modelled on the lines of the British accounting fraternity, its development during the last 50 years has been much slower than that of most West European and North American nations. Nigeria has faced years of military rule and despotic government heads. Whilst the country is currently run by an elected government, years of political unrest have slowed its economic and social progress. The slow pace of economic growth is reflected in the pace of growth of the accounting and auditing profession. Whilst the country has two accounting bodies, little work has taken place in the area of accounting standards and in the development of viable accounting and auditing processes. Much of accounting is done with the use of old accounting standards and very few new standards have been introduced.
This situation is however undergoing a change and the ICAN is in the process of issuing a number of standards. The table detailed below shows the new standards issued by the ICAN in recent years.
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
NIGERIAN STANDARDS ON AUDITING (NSA) SO FAR ISSUED BY ICAN
NAME OF STANDARD/STATEMENT
QUALITY CONTROL FOR FIRMS THAT PERFORM AUDITS AND REVIEWS OF HISTORICAL FINANCIAL INFORMATION, AND OTHER ASSURANCE AND RELATED SERVICES ENGAGEMENTS
NAME OF STANDARD/STATEMENT
OBJECTIVE AND GENERAL PRINCIPLES GOVERNING AN AUDIT OF FINANCIAL STATEMENTS
TERMS OF AUDIT ENGAGEMENTS
QUALITY CONTROL FOR AUDIT WORK
QUALITY CONTROL FOR AUDITS OF HISTORICAL FINANCIAL INFORMATION
THE AUDITOR'S RESPONSIBILITY TO CONSIDER FRAUD IN AN AUDIT OF FINANCIAL STATEMENTS
CONSIDERATION OF LAWS AND REGULATIONS IN AN AUDIT OF FINANCIAL STATEMENTS
COMMUNICATION OF AUDIT MATTERS WITH THOSE CHARGED WITH GOVERNANCE
PLANNING AN AUDIT OF FINANCIAL STATEMENTS
UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT
THE AUDITOR'S PROCEDURES IN RESPONSE TO ASSESSED RISKS
AUDIT CONSIDERATION RELATING TO ENTITIES USING SERVICE ORGANISATIONS
AUDIT EVIDENCE - ADDITIONAL CONSIDERATIONS FOR SPECIFIC ITEMS
INITIAL ENGAGEMENTS - OPENING BALANCES
AUDIT SAMPLING AND OTHER MEANS OF TESTING
AUDIT OF ACCOUNTING ESTIMATES
AUDITING FAIR VALUE MEASUREMENTS AND DISCLOSURES
USING THE WORK OF ANOTHER AUDITOR
CONSIDERING THE WORK OF INTERNAL AUDIT
USING THE WORK OF AN EXPERT
THE INDEPENDENT AUDITOR'S REPORT ON A COMPLETE SET OF GENERAL PURPOSE FINANCIAL STATEMENTS
MODIFICATIONS TO THE INDEPENDENT AUDITOR'S REPORT
NOTE TO TABLE; ISA-INTERNATIONAL STANDARDS ON AUDITING; ISQC- INTERNATIONALSTANDARS ON QUALITY CONTROL; NSQC- NIGERIAN STANDARDS ON QUALITY CONTROL: NSA-NIGERIAN STANDARDS ON AUDITING
Recent years have however witnessed a number of accounting scandals in Nigeria. Accounting irregularities and improprieties in organisations like Wema Bank, Finbank and Springbank have been widely reported. Such scandals have also been reported in the local operations of well known multinational organisations, whose local country heads have been subsequently replaced by expatriates. The weakness of corporate governance is said to be closely associated with lack of audit quality.
7. Current Status of Public Sector Auditing in Nigeria
Governmental auditing is controlled by the supreme audit association, which is headed by the Auditor General. The SAI is accountable to the legislature but takes directives from the presidency in issues concerning the audit of government accounts and agencies.
The SAI is divided into four departments
The ministerial department handles audits of accounts of ministries and government agencies and all financial statements.
The extra ministerial department handles the audited accounts of various government companies and corporations.
The project monitoring and evaluation department handles audits dealing with performance and value for money. Such audits involve the assessment of the economy and effectiveness of government programmes and projects.
The revenue audit department handles the auditing of revenues that are accruable to the Nigerian government. The SAIs management is audited by a senior internal auditor.
The activities and scope of independence of the SAI is derived from the audit act of 1958. The organisation is required to forward its report to both houses of legislature every year.
Governmental auditing in Nigeria is presently operating in the shade of enormous public sector corruption. The country ranks very high in the list of corrupt nations and numerous studies have pointed out incidences of corruption involving the working of government departments and public sector companies. Such allegations and instances of corruption have taken their toll of the auditing profession and government auditors in Nigeria are associated with corruption. Numerous media articles have pointed out the connivance of auditors in numerous acts of corruption by officials of government departments and public sector undertakings. An examination of the website of the ICAN does not reveal any specific code of ethics or conduct for members of the institute.