Effect of audit report on annual financial reporting quality of organization

CHAPTER ONE

INTRODUCTION

1.0 BACKGROUND TO THE STUDY

In the wake of the financial crisis of 2007–2009 and the failure of a number of global corporate entities, investors, analysts and regulators continue to wonder exactly what happened, what could have prevented it, and what measures can be taken to ensure it doesn’t happen again. With companies collapsing on the heels of annual financial reports that sounded no alarm bells for current or potential investors, it’s understandable that the quality of financial reporting is coming under scrutiny. While there are numerous discussions and activities underway around auditing standards, judgments, estimates and other technical reporting components, audit committees may find it valuable to consider the connection between audit report and the quality of financial reporting. If sound and relevant financial reporting is one of the direct results of a quality audit report – and I believe that it is – then the immediate questions to ask may be: what does “audit report” mean? Will current audit reform proposals improve the quality of audit reports? And how can the audit committee help the process?

Financial reports are of great concern to corporate stakeholders especially in investment decisions (Lin & Hwang, 2010). Several studies (Kibiya, Che-ahmad, & Amran, 2016; Umaru, 2014; Yusuf, 2013) have investigated the effects of various board attributes and audit quality variables on Financial Reporting Quality, empirical evidence of their effects is relatively fluctuating. Financial reporting is seen as communicating information on the activities of companies to the users of accounting information; and the quality of financial reporting is a function of the quality of accounting standards and the compatible regulatory enforcement of the standards (Kantudu & Samaila, 2015). 

A reliable audit report is imperative in corporate organizations where the retention of public confidence remains of utmost importance.  In this regard, the auditors are the essential fulcrum upon which the concepts of objectivity, fairness coupled with independence and integrity of financial reporting rest.  This assertion, notwithstanding, it suffices to say that reports from statutory auditors are still challenged.  Financial scandal is an undesirable occurrence that had threatened the going concern status of many corporate organisations in Nigeria.  In spite of frequent development in technology such as computer assisted audit technique, internet, automated accounting system etc, financial scandals in both public and private organisations still top the headlines of Nigerian newspapers on daily basis.

The auditor's report is a disclaimer thereof, issued by either an internal auditor or an independent external auditor as a result of an internal or external audit or public]], among others) as an assurance service in order for the user to make decisions based on the results of the audit.

An auditor's report is considered an essential tool when reporting financial information to users, particularly in business. Since many third-party users prefer, or even require financial information to be certified by an independent external auditor, many shareholders rely on auditor reports to certify their information in order to attract investors, obtain loans, and improve public appearance. Some have even stated that financial information without an auditor's report is "essentially worthless" for investing purposes.

Stakeholders too often see the audit report as a relatively discrete document when, in fact, the processes and controls that ensure the broader integrity of the audit report comprise much more than the audit opinion itself. These processes and controls range from the company’s collection and recording of financial information to the actual audit, through to the issuance of the annual financial report. As a result, the quality of financial reporting – so critical to investor confidence and transparency is directly dependent o