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ASSESSING AUDITOR INDEPENDENCE AND AUDIT QUALITY IN THE CAMEROON OIL SECTOR

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ASSESSING AUDITOR INDEPENDENCE AND AUDIT QUALITY IN THE CAMEROON OIL SECTOR

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

The oil industry is a fundamental and essential part of Cameroon's economy, making a substantial contribution to its gross domestic product (GDP) and government income. Transparency, accountability, and accurate financial reporting are essential in the sector to maintain investor confidence and promote sustainable economic growth due to its significance. Audits are essential in this process since they offer an impartial evaluation of financial accounts, guaranteeing their accuracy and reliability in reflecting the company's financial status (Peterson et al., 2022). The legitimacy of the audit process relies on the crucial aspect of auditor independence. An impartial auditor can assess a company's financial statements without any biases or personal interests, which is crucial for maintaining the trust of stakeholders (Clarks, 2019). Audit quality refers to the effectiveness of the audit process in identifying and reporting any significant errors or abnormalities. High-quality audits guarantee the reliability of financial statements, hence improving transparency and accountability in the sector (Wellington, 2019).

The financial statements of an organisation serve as a crucial tool for evaluating the operational performance, profitability, and continuity of the establishment. They also enable the broader business community and interested stakeholders to assess these aspects. Business entities are required to produce financial statements that offer unbiased and dependable information. These statements are crucial for third parties and other interested entities when making important decisions, such as investing or selling shares in target companies. Ivungu et al. (2019) argue that business organisations must possess dependable and credible financial records in order to make enduring judgements. This statement emphasises the need of having dependable and credible financial statements. Financial statements are the main tool used to help people make investment decisions and other business-related choices. Ambiguous and inefficient financial reporting can have a detrimental impact on how customers view a company's present financial standing (Simon, 2018). The autonomy of auditors is anticipated to impact the calibre of the financial accounts they evaluate (Daniels, 2021). The auditor's independence is of utmost importance in ensuring the credibility, integrity, and general quality of financial accounts, especially in a developing country such as Cameroon.

Booker (2019) states that the worth of auditing services is contingent upon the underlying notion that certified public accountants maintain independence from their customers. Auditor independence refers to the ability to maintain an impartial perspective when conducting audit tests, analysing the findings, and validating the audit report. Auditor independence enhances the efficiency of the audit by guaranteeing that the auditor organises and executes the audit in an unbiased manner. According to Fernando and Elder (2020), researchers contend that auditing serves three distinct purposes: overseeing managers' actions, improving the information environment, and serving as a safeguard against business failures. Corporate failures like Enron and WorldCom had a role in undermining the autonomy of auditors. When auditors neglect to report or detect inaccurate information on financial statements, it can undermine the effectiveness of the audit and perhaps harm the firm's reputation (Beattie and Brandt, 2018). 

Auditor independence is the fundamental basis of the auditing profession (Abu Bakar and Ahmad, 2019). According to the Independence Standard Board (2017), auditor independence refers to the absence of any influences or factors that could undermine an auditor's ability to make impartial audit decisions, or that could reasonably be expected to do so. The expression of opinion by an independent auditor enhances investor confidence in the reporting system, leading to greater efficiency in capital markets (Naslmosavi & Saat, 2023). The importance of auditors' independence in reducing information asymmetry between entity owners and their agents has been well recognised (John and Chukwumerije, 2018; Mardiah and Erlina, 2020; Panda and Leepsa, 2017). Auditors' independence guarantees that the auditor will provide unbiased and accurate comments regarding the financial accounts prepared by the management. Ndubuisi, Okeke, and Chinyere (2017) suggest that auditors' independence is characterised by an impartial mindset when reporting financial statements, however other researchers contend that independence is the defining characteristic of the profession (Albeksh, 2017). According to Ali and Nesrine (2017), auditors' independence is determined by two characteristics: actual independence and perceived independence.

Moreover, Tepalagul and Lin (2018), Patrick et al. (2017), and Salawu (2017) have expressed the view that the primary factors jeopardising auditors' independence include the significance of the client, the provision of non-audit services, the length of time the auditor has been serving the client, and the customer's association with audit companies. Chen, Li, and Chi (2017) and Rickett, Maggina, and Alam (2017) proposed that the auditor-client connection has the potential to undermine the independence of auditors. Furthermore, Kyriakou and Dimitras (2018) and Quick and Schmidt (2018) identified audit tenure as a factor that poses a risk to the independence of auditors. Furthermore, according to Alnawaiseh and Mahmoud (2017), auditors' independence might be compromised by many dangers, such as self-interest, self-review, advocacy, familiarity, and intimidation.

John and Chukwumerije (2018) conducted empirical research in Nigeria to investigate the perception of accountants regarding the factors that influence auditor's independence. Their study provided evidence of a significant relationship between auditor's independence and variables such as audit firm size, market competition, audit tenure, audit fees, and non-audit services. According to Albeksh (2017), independence can be classified into objective and personal aspects. The objective elements include the scale of the audit, competitiveness in the audit market, the length of time the audit firm has been in business, and the provision of non-audit services. The personal factors include qualifications, integrity, secretariat, as well as objectivity and independence.

Contrary to the perspectives of Kyriakou and Dimitras (2018) regarding the requirement for audit firm rotation, Aschauer and Quick (2018) found no substantial impact of audit rotation on auditor independence. Their research revealed that required audit rotation did not exert any substantial adverse impact on the perceived level of auditor's independence. Nevertheless, they concur with Tepalagul and Lin (2017) that the offering of non-audit services can compromise the independence of auditors. As stated by Roy and Saha (2019), auditors' independence refers to the absence of any personal interest on the part of the auditor in the auditing engagement. This ensures that the auditor is not influenced by any biases that could compromise the dependability and credibility of the financial statements, which are crucial for decision making. Auditors' independence is crucial as it has the potential to affect the quality of reporting (Tepalagul and Lin, 2017).

The oil business in Cameroon, which is controlled by both domestic and foreign companies, encounters distinctive obstacles such as intricate financial transactions, regulatory compliance concerns, and a significant susceptibility to corruption. Efficient auditing is crucial to successfully traverse these issues and guarantee that organisations function in a clear and responsible way. Nevertheless, there have been raised concerns over the autonomy of auditors and the calibre of audits, underscoring the necessity for a comprehensive investigation into these matters. This study aims to offer valuable insights into the obstacles and possibilities for improving auditor independence and audit quality in the oil sector of Cameroon. Ultimately, this will contribute to the production of more dependable financial reports and increase stakeholder confidence.

1.2 Statement of the problem

Although the significance of auditor independence and audit quality is crucial, there is a lack of study explicitly addressing these matters in relation to the oil business in Cameroon. This study seeks to fill this void by evaluating the present condition of auditor autonomy and the standard of audit in this industry.

The quality of an audit is contingent upon the independence of the auditor, as suggested by Aren, Elder, Randal, Beasley, and Mark (2017). The effectiveness of auditing is greatly influenced by the public's impression of the auditors' independence. Ediae (2019) also conveyed the similar idea, stating that when the level of auditor's independence rises, there is a corresponding improvement in the quality of the audit. According to the American Securities and Exchange Commission (2017), auditor independence is characterised as a state of mind that involves objectivity and the absence of bias. In recent times, the integrity of auditors' independence, which is crucial for ensuring high-quality audits, appears to have been compromised. This is evident from the fact that several companies, whose financial statements were audited and had unqualified reports, subsequently experienced collapses due to the revelation that their financial statements were significantly misrepresented (Deirdre, 2017). Auditor independence, a crucial factor in determining the quality of audits, was identified as one of the primary reasons behind the corporate failures that resulted in the collapse of previously robust companies. The repercussions of these failures contributed to the global economic downturn in the mid-2000s (Enofe, 2017). This resulted in the users being indifferent and perplexed about the responsibilities auditors should have in order to protect not only their profession but also to establish and regain the trust of investors, with the aim of minimising the gap between what is expected from audits and what actually occurs, which emerged following the failure of these companies. The investigations into the collapse of the companies found that their failings were linked to the auditors' lack of ability to demonstrate their professional competence and independence (Enofe, 2017). The bankruptcy of these companies resulted in the depletion of shareholders' capital and exacerbated the divide between owners and management. Similarly, creditors and other sources of funds lost confidence in receiving reimbursement for their investments that were lost (Enofe, 2017; Nbgame, 2020). Users of financial accounts are questioning if auditors have colluded with corporate management or are severely lacking in competence to fulfil their legal obligations. Recent research have revealed four factors that pose a risk to auditor independence: customer importance, non-audit services (NAS), auditor tenure, and the client's affiliation with CPA firms. This study attempts to evaluate the independence of auditors and the quality of audits in the oil sector of Cameroon.

Objectives of the study

The primary objective of this study is to critically examine assess auditor independence and audit quality in the Cameroon oil sector. Specific objectives of this study are to:

To investigate the relationship that exists between Auditor Independence and Audit Quality in the Cameroon Oil Sector

To investigate the relationship that exists between client importance and audit quality in the Cameroon Oil Sector

To investigate the relationship that exists between audit firm size and audit quality in the Cameroon Oil Sector

To determine the relationship that exists between audit firm tenure and audit quality in the Cameroon Oil Sector

To ascertain the relationship that exist between non-audit service and audit quality in the Cameroon Oil Sector

1.4 Research Questions

The following research questions which are in line with the objectives of this study will be answered in this study:

What is the relationship that exists between Auditor Independence and Audit Quality in the Cameroon Oil Sector?

What is the relationship that exists between client importance and audit quality in the Cameroon Oil Sector?

What is the relationship that exists between audit firm size and audit quality in the Cameroon Oil Sector?

What is the relationship that exists between audit firm tenure and audit quality in the Cameroon Oil Sector?

What is the relationship that exist between non-audit service and audit quality in the Cameroon Oil Sector?

1.5 Research Hypotheses

To determine the effectiveness of this study, the following research null hypotheses will be formulated to guide the study and it will be tested at 0.05% levels of significance.:

Ho: There is no significant relationship between Auditor Independence and Audit Quality in the Cameroon Oil Sector.

Ha: There is significant relationship between Auditor Independence and Audit Quality in the Cameroon Oil Sector.

1.6 Significance of the study

The importance of this study resides in its capacity to better audit procedures and regulatory frameworks in the Cameroon oil sector, promote financial transparency and accountability, and contribute to larger economic and investment results. It will function as a fundamental reference point for stakeholders, policymakers, researchers, and scholars.

Auditor independence is essential to ensure impartial and objective audit opinions. Evaluating this autonomy is crucial in guaranteeing the accuracy and dependability of financial statements within the oil industry. This is of utmost importance for investors, regulators, and other stakeholders who heavily rely on these reports to make informed decisions.

Moreover, the oil industry is frequently distinguished by substantial earnings and intricate financial dealings. Top-notch audits and autonomous supervision are crucial in order to avert financial misrepresentation and bolster transparency, which is vital for upholding public and investor confidence. The research can assist in identifying and resolving potential conflicts of interest and biases that may result in corruption or fraud by assessing auditor independence and quality. Maintaining the independence of auditors helps to reduce these risks and promotes ethical financial practices.

In addition, the oil sector is subject to rigorous regulatory restrictions. The research can evaluate the extent to which auditors are complying with these norms and standards, offering valuable insights into the efficiency of existing compliance processes and pinpointing areas that require enhancement. The study aims to create standards for optimal practices in terms of auditor independence and audit quality within the oil sector of Cameroon. These standards can provide guidance for enhancing and restructuring auditing methods, both within the specific sector and in more general settings. Unbiased and superior audits enhance investor trust in financial statements and business governance. This level of confidence has the potential to draw investment to the oil industry, thereby bolstering its expansion and advancement.

Moreover, The study's findings can provide policymakers and regulatory authorities with valuable insights into the efficacy of existing legislation and practices concerning auditor independence. This can result in the creation of more resilient rules and structures to guarantee elevated audit requirements.

Research on auditor independence and audit quality in Cameroon's oil sector ultimately enhances the existing global knowledge on these subjects. It enhances the comprehension of how auditing processes influence industries in developing nations, providing insights that could be relevant in comparable situations. The study offers significant insights for individuals pursuing studies, conducting research, or working in the domain of auditing and accounting. This case study can be used to gain insights into the practical consequences of auditor independence and audit quality in a crucial industry.

1.7 Scope of the study

Broadly, this study focus is to critically examine assess auditor independence and audit quality in the Cameroon oil sector. Specifically, this study seeks to investigate the relationship that exists between Auditor Independence and Audit Quality in the Cameroon Oil Sector, investigate the relationship that exists between client importance and audit quality in the Cameroon Oil Sector and investigate the relationship that exists between audit firm size and audit quality in the Cameroon Oil Sector. 

Further, this study will focus on determining the relationship that exists between audit firm tenure and audit quality in the Cameroon Oil Sector and it also seeks to ascertain the relationship that exist between non-audit service and audit quality in the Cameroon Oil Sector.

 The study is carried out in Cameroon. 

1.8 Limitations of the study

As is common in any human endeavour, the researchers faced many minor constraints during the investigation. The main limitation was the lack of extensive literature on the subject, due to the limited availability of data about the evaluation of auditor independence and audit quality in the oil sector of Cameroon. Hence, a significant allocation of time and exertion was necessary to ascertain the appropriate materials, books, or information and gather data. 

Furthermore, this study is constrained by its small sample size and narrow geographic scope, focusing just on Cameroon. Therefore, the conclusions of this study cannot be extended to other situations, thus requiring further investigation. 

Moreover, the researcher's restrictions were primarily due to financial constraints, as they are a student without any source of income to sustain themselves. The exorbitant transportation charges at the research location posed a challenge in covering the expenses for transportation fees.

Furthermore, the researcher faced a time constraint due to the need to do this research while still fulfilling the obligations of attending lectures and participating in other educational activities.

1.9 Definition of terms

Audit: Audit is the examination or inspection of various books of accounts by an auditor followed by physical checking of inventory to make sure that all departments are following documented system of recording transactions. It is done to ascertain the accuracy of financial statements provided by the organization.

Corporate governance: Corporate governance is the structure of rules, practices, and processes used to direct and manage a company. A company's board of directors is the primary force influencing corporate governance.

Accountability: Accountability is the practice of being held to a certain standard of excellence. It is the idea that an individual is responsible for their actions and, if that individual chooses unfavorable actions, they will face consequences.


This material content is developed to serve as a GUIDE for students to conduct academic research



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