Over the past decade, increased instigation as well as criticism of auditors has left little room for doubt that auditors are facing a liability and credibility crises in their profession. The reputation of accountancy profession comes under question for the reliability of their services (Adhikari, 2011).
Similarly, failure of business in which deficiencies of financial reporting and corporate disclosure have figured prominently are not new phenomena however, high profile cases of recent past such as Enron, Worldcom, Global crossing, Adelphia communication and most recently, Royal Ahold and Health South together with a host of small-scale example worldwide such as Cadbury, Oceanic bank and Intercontinental Bank Plc. in Nigeria, have drawn for greater attention to this area.
At the same, there has been evidence of an increased frequency of re-stated financial statements. All these have had a negative cumulative impact on the way informed opinions views the quality of financial reporting. This loss of credibility has been wide spread across capital market.
A key factor in the scale of the problems was the unprecedented high level of share price in many markets. Maintaining these price levels was a top management objective and when it became clear that the supposed level and trend of profitability justifying the level has not existed, the fall in share prices was accentuated by a major re-rating of the shares.
This impacted share in similar companies (ICAN Study Pack, 2009:252). Be that as it may, the quest over the year has been how confidence and credibility in audit and financial reporting (both in internal and external auditing) can be improved and sustained.
Adequate literature review has shown that effectives of the audit process, the auditor’s personal qualities and skills as well as the discipline from the audit profession have significant relationship with the achievement of public confidence and credibility. For instance, independence is fundamental to the credibility of auditors’ reports. Those reports would not be credible, and investors and creditors would have little confidence in them. If auditors were not independent in both fact and appearance. To be credible, an audit opinion must be based on an objective and disintegrated assessment (Olagungu, 2011).
It is on the basis of the issue raised above that this research work aims a presenting confidence and credibility in audit report as reliable approaches to maintaining and improving audit competence.
Meanwhile, the next literature review will include the overview of the concept of credibility and confidence in audit reports, the factors responsible for loss of credibility and confidence, the drivers and indicators of audit quality as well as suggestion to improve credibility and public confidence in audit reports.
- Overview of the Concept of Credibility and Public Confidence in Audit Reports
Credibility in this usage means that the financial statements can be believed, that is, they can be relied upon by outsiders, such as trade creditors, bankers, stockholders, government and other interested third parties (www.crfonline.org/cro/cro-11.html).
On the other hand, confidence according to the Oxford Advanced Learner’s Dictionary of English, 5th edition, is defined as “the feeling that you can trust, believe in and be sure about the abilities or good qualities of something or somebody”.
Again, the public relates to the stakeholders of the professional accountant who have varying interest uses and expectations from the financial statement prepared by directors of the company. The stakeholder of the professional accountant includes and is not limited to the following.
- The general public
- Shareholders-potential and existing
- Government at various level
- The international community
- Donor agencies
- Multilateral institutions
- The institute
- Regulatory authorities
(ICAN Study Pack 2009:133)
The basic objective for preparing financial statement is to provide information useful for making economic decisions. The functions of auditing is to lend credibility to the financial provide information useful for making economic decisions. The functions of audition are to land credibility to the financial statements.
According to Olagunju , for an audit to credible, and reliable, it must be performed by someone who is independent and can be influence by position and power which will affect its own position. In the work of Olagungu , he recommended that for auditors to remain strictly independent and credible, they should not allowed to provide audit clients, with any other advisory or non audit services in order to safe guard the audition from self review threat.
To this end, the over view of the concept of credibility and confidence has shown that the concept has relationship with many factors exerting influence on its achievements.
2.3 Factors Responsible for Loss of Confidence and of the Cause of Loss of Public Confidence and Credibility include:
- Window dressing or creative accounting: Okolie [2007:187] defined the term as all action taken to hide unpalatable facts about the company from its creditors, bankers, and general public. Some of such action include frequent revaluation of land and building, inflation of stock values, lower depreciation charges, capitalization of revenue expenditures liked repairs and maintenance expense upon the above manipulation, the company obtains an unqualified audit report despite the truth that the trues financial position has been hidden for years from the investing public being and the various stakeholders of the company.
b. Corporate governance failure: ICAN STUDY PACK [2009:240] provide a list of factors responsible for many of the corporate governance failure:
i. poorly designed remuneration package
ii. Excessive use of share options among top management
iii. When trading failed to earn the targets of earnings manipulation of accounts set in.
This case was very apparent in the case of companies like Ahold, Enron, WorldCom and zerox.
c. Auditors compromising fundamental principles:
Most times because of the closeness or familiarity between the auditors and clients the risk of losing big clients, auditors favour their client and themselves during financial auditing and reporting to the disadvantage of the investors. Such principle usually breached includes independence, objectivity and integrity.