SECTION ONE 1.

0 Introduction
1.1

Background Of The study

Users of financial statements need relevant and sufficient information to assist them in evaluating alternative investment options. Part of the information required is expected to be provided in the financial statements of corporate bodies. Statutory auditors are expected to audit the financial statements prepared by directors of enterprises and express an independent opinion on them. Auditors independence is one of the most inportant issues in accounting practise today. Independence increases the effectiveness of the audit by providing assurance that the auditor will plan and carry out the audit objectively. High quality audits enhance the reliability of the financial reporting process and facilitate optimal allocation of capital by investors and other users. Credibility is given to financial statements because of the auditors independence. The nature of auditors work requires him to be free and independent from the influence of any party so that he can objectively form his opinion on the financial records examined. He should not be tossed and blown by winds from the client. Recent scene in the global environment especially the bankrupcy of many large corporations with clean auditors reports has called to question the validity of financial statements of these
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corporations. The major accountability breakdowns at Enron and WorldCom, and other failures in recent years such as Qwest, Tyco, Adelphia, Global Crossing,Waste Management, Micro Strategy, Superior Federal Savings Bank, Xerox, Cadbury Plc in Nigeria etc and the collapse of some of these corporate giants especially Enron, which resulted from shoddy accounting practices and manipulation of accounting information has shook investors confidence. The fact that these financial statements were audited and certified to be true and fair positions of the companies by qualified audit firms pose questions about the independence of the auditors and the quality of audit. This led to several reforms to enhance auditor independence and audit quality and to restore investor confidence in the nations capital markets.The accountants rule of ethical conduct on integrity, objectivity and independence requires that members objectivity must be beyond question if he is to report as an auditor. The objectivity can only be assured if the member is and is seen to be independent. The auditors reports tend to give credibility to the financial statements, the question that emanates from all these issues are: whether such credibility can be assured when there is a long- term auditor client relationships, whether there is potential negative effects of long- term relationships between auditors and their clients and whether mandatory auditor rotation should be required as a safeguard to ensure and/or demonstrate that auditor independence is not compromised.
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Some view long- term relationships between the auditors and their clients as a threat to auditor independence (Ryan et al, 2001). Others assert that rotation of auditors would lead to higher quality audits since the successor (incoming) auditors would review the work of the predecessors (outgoing), thereby checking and motivating the predecessors. Also, others believe that long-term relationships help the auditors to better understand the unique business transactions and identify key audit risks, resulting in higher quality audits (AICPA, 1992; Johnson et al. 2002). Requiring audit firm rotation by limiting the number of consecutive years that a particular audit firm can audit a listed/public company has been discussed as one of the means of improving auditor independence and reducing the likelihood of audit failures( AICPA s Cohen Report, 1978). Rotation of audit firm is not a new concept; it has been introduced and implemented in several countries such as Spain, Israel, Italy and Brazil (Catanach and Walker, 1999). Several debates have taken place concerning audit firm rotation in the hearings of Sarbanes- Oxley Act as a way of enhancing independence of auditor. The America Congress also recognized that the issue of audit firm rotation needed attention and requested the Controller General to study the potential effects of mandatory rotation on the firm. With these awakening of interests in the concept of audit firm rotation; there is need for an empirical study to

investigate whether periodic rotation of audit firms affects the perceptions of external auditors independence and audit quality. 1.2 Statement of the Research Problem Over the recent years, accounting practitioners and academicians have debated the pros and cons of longterm auditor client relationships. Questionable accounting practices and the recent audit failures have had a serious impact on the publics perception of auditors. Losses suffered by investors and damages done to the credibility of the accounting profession have prompted regulators to adopt additional measures to restore investors confidence in the financial reporting system. One of such measure suggested was mandatory rotation of audit firms. This study is aimed at investigating the perception of Chartered Accountants in Nigeria on the issue of mandatory rotation of audit firms, especially with respect to auditor independence, audit quality, and likely problems associated with its introduction.

1.3 Objective of the Study

The general objective of the study is to investigate the Chartered Accountants perceptions of mandatory audit firm rotation. The specific objectives include: 1. To ascertain Chartered Accountants perceptions of the effect of mandatory audit firms rotation on auditors independence. 2. To ascertain Chartered Accountants perceptions of the implication of mandatory audit firms rotation on audit quality 3. To determine Chartered Accountants perceptions of likely problems of introduction of mandatory audit firms rotation in Nigeria. 1.4 Research Questions

The following questions are formulated to achieve the stated objectives of the study: 1) How does the Chartered Accountants perceive the effect of mandatory audit firm rotation on auditors independence? 2) What is the Chartered Accountants perception of the effect of mandatory audit firms rotation on audit quality? 3) What are the likely problems of introduction of mandatory rotation of auditors from the view point of Chartered Accountants in Nigeria? 1.5 Research Hypotheses
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The hypotheses addressed in this study are formulated as follows: Hypothesis 1 H0: The Nigerian Chartered Accountants perception of the effect of mandatory audit firm rotation on auditor independence is not positive. H1: The Nigerian Chartered Accountants perception of the effect of mandatory audit firm rotation on auditor independence is positive. Hypothesis 2 H0: The Nigerian Chartered Accountants perception of the effect of mandatory audit rotation on audit quality is not positive. H1: The Nigerian Chartered Accountants perception of the effect of mandatory audit rotation on audit quality is positive. Hypothesis 3 H0: Nigerian Chartered Accountants do not strongly believe there are problems associated with the introduction of mandatory rotation of auditors in Nigeria H1: Nigerian Chartered Accountants strongly believe there are problems associated with introduction of mandatory rotation of auditors in Nigeria.

1.6 Scope of Study

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There have been much discussion regarding the contributoty factors behind the recent global bankrupcy of many large corporations and the lessons to be learned. These discussions have focused on a wide range of issues: the quality and the extent of corporate reporting, the role and responsibilities committes, of executive audit and nonexecutive Corporate directors, Governance audit and

mandatory

rotation,

regulatory bodies. This paper focuses on the perceptions of effect of mandatory audit firm rotation on auditor independence and audit quality and likely problems associated with the introduction of mandatory rotation of auditors in Nigeria. 1.7 Significance of the Study The findings of this study may be of value to the following group of people: 1) Board of Directors In establishing policies about rotating the external auditors. 2) Audit Committees To know the cons and prons of the impact of mandatory audit firm rotation and to recommend as such to the board of directors.

3) The Accounting Profession and Regulators As the delibrate on the benefits of auditor rotation, continue to deliberate upon the appropriate corporate governance principles and codes required for companies in Nigeria. 4) Financial Statement Users To know if mandatory audit firm requirement have any benefit or not. 5) Standard Setting Bodies Such as the SEC (Securities and Exchange Commission), CBN (Central Bank Of Nigeria) will be able to discover whether there is benefit or not in making mandatory audit firm rotation a requirement. 1.8 Definition of Terms Mandatory Rotation: Mandatory Audit firm rotation is defined as the imposition of a limit on the period of years in which a particular public accounting firm may be the auditor of record for a particular public company (Sarbanes-Oxley Act, 2002). The concept of mandatory auditor rotation is that a companys auditors should provide services for a defined period only, after which they should be replaced by a different firm of auditors. Auditors Independence : Independence is an attitude of mind

characterized by integrity, objectivity and professional approach to work

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(Okaro & Okafor, 2009). Mautz and Sharaf (1961) developed a concept of independence with two components: Practitioner-independence and Profession-independence. Practioner- independence is a state of mind and equates to the notion of the integrity and objectivity of the individaul auditor. Professionindependence is the apparent independence of auditors, as a professional group to the public. The appearance of independence can be evaluated at two levels; The users perception of the individual auditors ability to be independent in particular unique circumstances and; the general public accountants as professional group. Audit Quality : the quality of an audit is related to: whether an auditors will discover an error in the financial statement and; whether an auditor will report the error in the audit report DeAngelo (1981).

SECTION TWO 2.0 2.1 Review of Related Literature External Auditor

Where ownership is separated from control, there is often the need to have an independent body of persons who are to verify the records of stewardship prepared and rendered by those in fiduciary capacity to resource owners. Such reports will lack credibility if not verified by an independent expert. As required by the Companies and Allied Matters Act 1990, external auditors are required to examine these financial statements not only to determine whether they represent a true and fair view of the state of affairs of the entity and are free of any material misstatements, but also to ascertain whether they conform to the generally accepted accounting principles (GAAP), other relevant legislation and standards, and whether there are errors, misstatements or fraud in those accounts. This attestation function by external auditors gives credibility to financial statements prepared by directors and enhances public confidence in the integrity of financial statements of publicly traded companies. The duty to engage an external auditor by any company is statutory (CAMA, 1990). In the selection of external auditor, the company is free to select any accounting firm to carry out the audit as specified in CAMA, 1990.

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The appointment of extenal auditors is done by the body of shareholders, usually on the recommendation of the board of directors who selects

extenal auditors and recommends to the shareholders for approval as it deems fit. Such appointments are usually for the financial year of the company, but if the audit firm offers itself for reappointment at the end of the financial year for another year and the shareholders consider its services satisfactory, they may re-appoint the external auditors for another year. Section 362-366 of CAMA (1990) provided that apart from the expiration of the auditors one-year tenure and not withstanding any terms in any agreement between the auditors and the client, an auditor can be removed by an ordinary resolution passed by the shareholders at the general meeting of the company called for that purpose. Where the existing auditor appointment is not renew, any proposed incoming auditor must ensure that the previous auditor has validly vacated office. The client must state the reason for the change of the external auditors and must give the existing auditor the permission to discuss the clients affairs with the new auditor; The proposed auditor is required to decline the nomination if the client refuses to do this in line with provision of the Institute of Chartered Acoountants of Nigerian Rules of Professional Conduct, section 4, subsection 10-114). Auditors who remain with clients for significant periods may develop inappropriate relationship which may compromise independence.

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A model of appointment of auditors that has a fixed term referred to as auditors rotation has been proposed.
2.2

Mandatory Audit Firm Rotation

public confidence in the integrity of financial statements of publicly traded companies is enhanced by the audit process and independence of the auditor from the audit client. Major failures in corporate financial reporting in recent years, including accountability breakdowns and auditor failures at Enron, WorldCom, waste management and others have prompted regulators to question whether auditor are independent in performing audit services (U.S. Conference Board, 2003). How to rebuild the confidence of the investing public remains the most critical challenge currently facing the global accounting profession. One strategy for getting the crucible together by the accountancy profession is the contentious issue of mandatory auditor rotation that has been proposed by members and critics of the the profession who contend that long-term relationship between auditors and clients lead to cozy relationship that present conflict of interest. Mandatory Audit firm rotation is a concept that limit the number of consecutive years that a particular audit firm can audit a public company. Mandatory Audit firm rotation is defined as the imposition of a limit on the period of years in which a particular public accounting firm may be the auditor of record for a particular public company (Sarbanes-Oxley Act,
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2002). The concept of mandatory auditor rotation is that a companys auditor should provide services for a defined period only, after which they should be replaced by a different firm of auditors. The ultimate question about mandatory audit firm rotation is whether such a policy enhances independence and audit quality. Regulators and the business press have shown interest in considering whether long-term relationships between companies and their auditors create a level of closeness that impairs auditor independence and reduces audit quality. The debate of the propriety of mandatory rotation of external auditors by companies assumed greater prominence following the Enron saga of 2001 and the enactment of Sarbanes- Oxley Act 2002 by the USA Congress. In Nigeria currently, the National Insurance Commission (NAICOM) as part of its strategic efforts to rebuild and sustain the waning confidence of stakeholders in insurance, has required that external auditors appointments shall be for a maximum period of five years, this is to preclude a situation where the external auditors become very familiar with employees of the organization that the resultant attestation exercise is not well done. This mandatory rotation of external auditors rule has been adopted by the Central Bank of Nigeria for all banks. The apex bank has made mandatory rotation of auditors every five years a rule for financial institutions in Nigeria. The view is that if employees of the audit firm get very acquainted
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or too familiar with the staff of client companies, many transactions may be taken for granted and not properly verified and this would likely impact the quality of audit negatively. The advocator of mandatory rotation believe that audit firms should be rotated every three to five years such that employees of both entities would not get too acquainted, objectivity would be maintained and the audit exercise would be thorough as to be able to add credibility to the stewardship report of directors. On the issue of mandatory rotation of firms, the Sarbanes-Oxley Act 2002 only provided for the rotation of both the Lead and Reviewing audit partners, but did not provide for statutory rotation of audit firms. The Act as part of quality control measures designed to enhance the objectivity and independence of auditors provided for change of personnel within audit firms. It specifically provided that both the Lead and Reviewing audit partners must be rotated at least every five years. The Institute of Chartered Acoountants of Nigerian Rules of Professional Conduct for Members also provided for an orderly rotation of senior personnel and audit engagement partners serving on the audit engagement. The Act provides that no audit engagement partner should remain in charge of an audit for a period exceeding seven consecutive years. In Nigeria, firms of Chartered Accountants adhere to the practice of rotationg personnel and engagement partners periodically in line with the ICANs position.
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2.3

Mandatory

Audit

Firm

Rotation

and

Auditors

Independence A breakdown in auditor independence can result in an audit failure and adversely affect those parties who rely on the fair presentation of the financial statements. There has been much discussions and conjecture regarding the potential positive impact of auditor rotation on objectivity and independence. The improvement of auditor objectivity and

independence has been argured to be a primary reason for the introduction of mandatory rotation of auditors. Long-term audit

relationships can become too comfortable, with auditors identifying too closely with management and losing their professional scepticism . Auditors might smooth over problems due to the financial rewards of maintaining a long-term relationship with a client. Regulators and the

business press have shown interest in considering whether long-term relationships between companies and their auditors create a level of closeness that impairs auditors independent. Long-term relationships may result in a troublesome degree of closeness between management and the auditor, Enron and Andersen its long-time audit firm, provide a graphic example. When a contentious issue arises, this close relationship may create a conflict of interest for the auditor that can adversely affect the audit process. Mandatory audit firm rotation would enhance auditors
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independence, this belief was put forward by a variety of individuals and committees. How can an audit firm remain independent when it has established long-term personal and professional relationships with a company by auditing that company for many years, some 10, 20 or 30 years? (Barbara et al, 2005). In 2002 when the Enron collapse was still fresh , CalPers publicaly asked the US Security and Exchange Commission to adopt a package of financial market reforms, and listed a series of proactive efforts of its own, one of which would be to oppose shareholder approval of any auditor that has been ratained by a company for more than five years (SEC, 2003). At this time question were every where about whether Andersen, the independent public auditor of Enron was indeed independent of its client. CalPers thought that auditor rotation would prevent that sort of problem in the future. In Nigeria, (Okaro, 2004) pointed out that mandatory rotation of auditors is one of the

recommendations that have been made in various fora aimed at ensuring that Nigerian auditors are not only independent in theory but also in practice. The US Commission on Public Trust and Private Enterprises (2003) recommended that audit committe should consider rotation of auditors as a means of enhancing auditor independence and building shareholder confidence in the integrity of the firms finanacial statements. Ensuriing auditor independence has been a long term objective of good corporate governance and some have questioned whether public auditors
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can truly be independence from the public companies that pay thier audit fees. GAO (2003), pointed that the Sarbanes-Oxley Act 2002 changes that requires audit partner rotation, but does not require audit firm rotation have already remediated the closeness problem to a certain extent. The Sarbanes-Oxley Act 2002 stance which conform with section 476 of the ICAN Rule of Professional Conduct for members represent a very persuasive position on the matter (Asein, 2007). section 476 of the ICAN Rule of Professional Conduct for members issued in 1997 states in part there is a concern that a long involvement by a single individaul or audit team with an audit client could lead to the formulation of a close relationship which could be perceived to be a threat to objectivity and independence. Section 4.77 of the Rule requires audit partner rotation but not audit firm rotation by providing that no audit engaged partner should remain in charge of such an audit for a period exceeding seven consecutive years. 2.4 Mandatory Audit Firm Rotation and the Perception of Auditors Independence The profession maintains that auditors must be independent in fact and independent in appearance. Okaro & Okafor (2009) put it this way an accountant is enjoined in carrying out his assignment not only to be independent, but must also be seen to be independent, He should not be involved in any relationship that may enable members of the public to
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question his objective/independence. In light of recent events, the media and other factors have hightened the awareness of the issue of independence. These has created a perception problem that maintaining independence in appearance has become difficult for some firm. The perception of auditor independence as it relate to mandatory audit firm rotation is the idea that audit firm rotation will incrementally strengthen independence in appearance. It is utmost importance to the profession that the general public maintains confidence in the independence of auditors. Public confidence would be impaired by evidence that independence was actually lacking, and might also be impaired by the existence of circumstances , which reasonable people might believe to be likely to influence independence. Researchers have raised questions about how the capital markets and investors current perceptions of auditor independence would be affected by mandatory audit firm rotation. Some believed that the perception of auditor independence held by capital markets and institutional investors would be affected by requiring mandatory audit firm rotation , while other believed the perception of auditor independence would not increase. Even if there are no reviewed evidence to show that rotation improves independence, the perception of independence is arguably just as important. The perception of

independence is as important as actual independence. It is not enough that financial statements be accurate, the public must also percieve them
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as being accurate SEC (2000). The public faith in the reliability of a companys financial statements depend on the public perceptions of the outside auditor as an independent professional. If investor were to view the auditor as an advocate for corporate client, the value of audit function itself might be lost. The US Senate Subcommittee on Reports, Accounting and Management has argued that mandatory auditor rotation adds substance to the publics perception of independence( U.S. Senate, 1976). If this holds true, it would follow that more confidence may be placed in the opinions expressed by auditors (Petty & Cuganesan, 1996). Most support for this view comes from articles and Press comment, the

arguments are not based upon detailed empirical study. Shockley (1981) in his empirical study on the topic, showed no evidence of a significant relationship between tenure and the perception of auditor independence. 2.5 Mandatory Rotation Of Auditors and Audit Quality Operationally, the primary audit quality question is whether such a policy will lead to more-independent auditors performing better audits by either detecting or reporting material misstatements in the financial statements, or whether the constant rotation of audit firms will result in inferior audit performance. Some individuals believe that under mandatory audit firm rotation, the auditor might be less likely to succumb to management pressure to accept questionable accounting practices because the
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incentive to keep the client is gone and another audit firm would be looking at the firms work in the future. Others believed that audit quality may also be increased through a change in auditors because a new auditor would provide a fresh look at the entitys financial reporting practices and accounting policies. Okaro & Okafor (2009) suggested the introduction of mandatory rotation of auditors as one of the means of curtailling incidence of audit failures in Nigeria. Three related conditions affect issues of audit quality and audit firm rotation: Closeness to client management; Lack of attention to detail due to staleness and redundancy; and Eagerness to please the client (Barbara et al, 2005). The major perceived benefit of mandatory rotation apart from better perception of auditor independence is an improvement in audit quality due to the aviodance of over- farmiliarity with the client and its management and the opportunity for a fresh approach to the audit. Those who support mandatory audit firm rotation contend that pressures faced by the incumbent auditor to retain the audit client coupled with the auditors comfort level with management developed over time can adversely affect the auditors actions to appropriately deal with financial reporting issues that materially affect the companys financial statements, but proponents of mandatory audit firm rotation cite that pressures to retain the client can adversely affect the auditors decision to deal appropriately with audit issues, when the clients management is not in
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support of the auditors position on what is required. Those in support also believe that mandatory audit firm rotation would serve as an incentive for the auditor to take the appropriate action since the auditor would know that his tenure as auditor is for a limited term. Some argured that long term audit relationships may result in ineffective audits. (Brody & Moscove, 1998) pointed that the auditors may be come less rigorous due to learned confidence in the client and over reliance on prior years work papers which may create a tendency to anticipate results rather than keeping alert to subtle but important changes in client

circumstrances. Nally (2002) supports regular partner rotation, but said mandatory rotation of audit firms will hurt the quality of audits. 2.6 Mandatory Audit Rotation and Perception of Audit Quality

Audit quality comprises actual and perceived quality (Taylor, 2005). Actual quality is the degree to which the risk of reporting a material error in the financial accounts is reduced, while perceived quality is how effective users of financial statements believe the auditor is at reducing material misstatements. Higher perceived audit quality may then help promote investment in audited clients. Even if research has generally not found significant positive effects of firm rotation on audit quality, could rotation be effective in increasing perceived audit quality?

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2.7 Likely Problems Of Introducttion of Mandatory Rotation Of Auditors In Nigeria The expected problems of mandatory rotation is on the quality of audit work, the cost of audits, cost of management time, lack of specialized knowledge, problem of chioce due to inadequate audit firms of sufficient size and quality to support a system of mandatory rotation. Asein (2007) listed the following to be possible problems of mandatory rotation: Increased cost of audit, growth of monopoly, impact on provision of nonaudit services and impact on long-term corporate strategy. The AICPA statement of position regarding mandatory rotation of audit firms of publicly held companies (1992) concluded that mandatory rotation should not be introduced based largely on empirical evidence that demonstrated that there is a higher instance of audit failures in the early years of an engagement. In the course of an audit, the audit team accumulates extensive knowledge of the clients business, systems and personnel. Under mandatory rotation system this knowledge may be lost at each change of audit firm. The new auditors lack of knowledge of the companys operations, information systems that support the financial statements, and financial reporting practices and the time needed to acquire that knowledge increase the risk of an auditor not detecting financial reporting issues that could materially affect the companys financial statements in the initial years of the new auditors tenure. If
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audit firm were to be continually rotated, the valuable knowledge and insight that each audit firm gained would simply vanish and the detrimental effect on audit quality would be repeated on a regular basis, under such a system, the major victim of forced rotation would be the companys shareholders and the investing public ( Nally, 2002). It is common knowledge that a major requirement of audit exercise is adequate knowledge of the business of the client, a critical issue in audit effectiveness is the knowledge of the business (Asein, 2007). GAO ( 2003) concluded that mandatory auditors rotation may not be the most efficient way to enhance auditor independence and audit quality, considering the additional costs and the loss of institutional knowledge of a public companys previous auditor. Those who oppose audit firm rotation contend that mandatory audit firm rotation will increase costs incurred by both the audit firms and the companies, and conclude that the increased risk of an audit failure and the added costs of audit firm rotation outweigh the value of a periodic fresh look by a new firm. The cost related to regular switching of auditors may be unacceptably high and outweigh the potential of benefits of mandatory rotation. On costs, GAO (2003) survey found that nearly all large public accounting firms estimated that initial year costs under mandatory audit firm rotation would increase by more than 20% over
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subsequent year costs to acquire the necessary understanding of the new client and its business. The key empirical study quantifying the inrcrease in cost was carried out by Ridyard & de Bolle (1991) in which a survey of European audit firms revealed that start up cost were estimsted at 15% of all costs for a new client in which the audit firm had industry experience and 25 % when the audit firm had no industry experience. On costs, GAO (2003) survey found that nearly all large public accounting firms estimated that initial year costs under mandatory audit firm rotation would increase by more than 20% over subsequent year costs to acquire the necessary understanding of the new client and its business. Asein (2007) opines that to regularly change external auditors/audit firms as it is being canvassed will have a significant implications for the cost of audit. Each time the external auditor is changed, the cost of acquiring knowledge of the business sufficient to enable the auditors identify and understand those issues that may have a significant impact on the financial statements as required by the International Standards On Auditing (ISA) 310: Knowledge of Business, will be significant both in terms of time and money he said. Conversely, those in support believe that the value of the fresh look to protect shareholders,

creditors, and other parties who rely on the financial statements outweigh the added costs associated with mandatory audit firm rotation. Okaro &
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Okafor (2009) for instance argured that mandatory rotation is inexpensive to implement compared with other audit quality control measures. James Copeland the CEO of Deloitte and Touche representing the AICPA in a speech before the US Senate Committee on Banking, Housing, and Urban Affairs, indicates that rotation would increase start-up costs for auditors (Copeland, 2002). However, The U. S. Conference Board (2003) believes that the cost of implementing rotation of auditors will be significantly less than the costs endured by investors in the capital market resulting in the loss of investor confidence in reponse to inaccurate financial statements. Certain researchers have considered the implicit cost of the client management time employed in selecting new auditors and familiarising them with the companys business, operations and system. This concern about the over increased cost of management has been expressed in the AICPA Report of (1992) and the review of economic consequences of mandatory rotation by Arrunada and Paz-Ares( 1995). Where there are specialised industries only few audit firms may have partners and staff with specialised knowledge of these industries and business due to mandatory rotation of audit firm businesse may be forced to rotate an auditor without this specialised knowledge. Petty and Cuganesan (1996) argured this to be vulnerable to a reduction in audit quality. Arrunada and Paz-Ares( 1997) further expanded this argurement by pointing out that
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audit firm will have little incentive to invest in specialised industries with few clients as they will not be able to capture an adequate portion of the market to recover the investment. Mandatory rotation will also have implications for the provision of nonaudit services which are often assigned based on core competence, track record and even brand name of practicing firms. Are there sufficient firms in Nigeria to sustain the scope for making choice of firms for non-audit jobs? Given that the big four handle the bulk of the large puplicly held companies, will rotation involve only these four firms? Are the non- Big four firms able or willing to handle large audits? . Previous evidence suggests that the Big four will gain greater market share if rotation is mandatory which will lead to a less competitive environment without addressing the related policy issues, and less competition will probably lead to substaintially higher audit fees (Barbara et al, 2005).

SECTION THREE 3.0 Methodology

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3.1 Research Method The survey design research method was used in carrying out this study. Questions were developed to secure specific kinds of data via structured questionnaires that were capable of providing explanation to the phenomenon under study to a significant level of accuracy. 3.2 Sources of Data This study relied on both primary and secondary sources of data. The primary data were those got through questionnaire administration to the participants. The Secondary data were gotten from review of books, journal, internet and reports of various panels and committees. 3.3 Target Population A survey of the 27,100 total members of the Institute of Chartered Accountants of Nigeria was carried out through fieldwork questionnaire administration and study. The total number was obtained from the ICAN Presidents 2008/2009 stewardship report to members of the institute at the 44th Annual General Meeting of the institute held on the 1st of June, 2009 at the shell Hall of Muson Centre, Onikan, Lagos.

3.4 Sample Size In every study, the researcher is expected to draw a sample size from the population where the population is relatively large. It is difficult for the
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researcher to work with a total population of 27,100 Chartered Accountants. In view of this, the researcher used Yaro Yamanes formula to determine the sample size for this study thus: n=N/1+N(e) n = sample size, N = Population size and e = error-limit (0.05). n = 27,100/ 1 +27,100(0.05)2 n = 27,100/ 68.75 Sample Size (n) = 394 approximately. 3.5 Sampling Techniques
2

Where;

Convenient sampling method was used to draw the sample of 394 Chartered Accountants randomly from the population.This is because the researcher believed the Chartered Accountants possessed the same knowledge of the subject area. 3.6 Data Collection Questionnaire was used as data collection instrument. The questionnaire contains nine statements. Statements 13 relates to the effects of mandatory audit firm rotation on auditors independence, Statements 46 relates to the effects of mandatory audit firm rotation on audit quality, statements 7-9 relates to likely problems of introduction of mandatory auditors rotation in Nigeria. A five-point Likert rating scale was used to measure each Chartered Accountants perception/agreement to each statement thus: Strongly agreed (5), Agreed (4), Undecided or Neutral (3) , Disagreed (2) and Strongly Disagreed (1). Also a question was
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included to sort for the opinion of the respondents on whether mandatory audit firm rotation should be introduced in Nigeria. The only demographic data requested was the post qualification years of experience, the gender and the industry where the respondents work. The questionnaire was administered and collected through a research assistant during ICAN 39th Annual Chartered Accountants Conference at Abuja and personally at the 44th Induction Ceremony of New ICAN Members in Lagos. 3.7 Validity and Reliability To ensure the content validity of the instrument for data collection, the survey questions were developed based on a careful review of academic and regulatory literature report in this subject area. The questionnaire was pre-tested with two chartered accountants who gave feedback and suggestions on improving the clarity of the questionnaire for the final version. After comments from the pre-test groups, we made minor adjustments to the content of the questionnaire and submitted it to the seminar supervisor for vetting, correction and suggestions to be sure that the questions were capable of soliciting responses that proffer answers to the research problems. To ensure the instrument reliability, Collection of data covered qualified members of ICAN. 3.8 Method of Data Analysis :

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The data collected was analyzed in tables using sum of frequencies. The mean of the responses were reported as an acceptable descriptive measure in order to facilitate computations necessary for conclusions to be expressed. The mean responses for each of the questionnaire items were computed and compared with the mean of the five pointsLikert scale which is 3 calculated thus; {5+4+3+2+1} 5. The results

useful for testing the hypotheses were computed with the use of t-test statistics. 3.9 Description of T-test Statistics T-test is a parametric statistic that can be adopted to test the significance between means differences based on the student t- distribution (Asike, 1991). For our purpose the following formular was applied: T = x- S/n-1 Where; T = t- value calculated, X = mean score for each response, = the cut-off point for high perception/ strong believe (i.e. True mean of the population), S = the sample standard deviation, n = number of respondents, and n-1 represents the degree of freedom.

Determination of the t-Critical Value:

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At 5% level of significance and (n 2) degree of freedom, the one- tailed t-distribution critical value is 1.645. Decision rule: the decision rule is to accept the HO and reject the H1 if the calculated ttest value is less than the the critical or t-test table value (one tailed); otherwise reject the HO and accept the H1.

SECTION FOUR 4.0 Data Analysis and Test of Hypothesis

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4.1 Data Analysis Two hundred and ninety nine (299) complete and valid responses were received representing 75.89% of the total questionnaire. The data analysis is divided into section A and section B. Section A covers the demographic information, while section B covers responses from the participants. 4.1.1 Section A This section covers the analysis of the demographic distribution of the collected responses. Table 4.1.1 provides demographic information on respondents. As indicated in the table majority 52.17% work in audit/ accounting practicing firms. In addition, participants working in all the sectors have significant years of accounting/ auditing related experience, with 73.91% having over 5 years or more accounting related work experience. The demographic information indicates that the respondents possess the characteristics necessary to make informed judgments on issues address in this study.

Table 4.1.1 Demographic Composition of Respondents Current work position: Number Audit /Accounting firm 156 Financial institution 51
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Academic institution Public sector Other companies Total Accounting Work experience: 20 years and above 10 years to 20 years 5 years to 10 years Less than 5 years Total

23 31 38 299 18 43 160 78 299

Gender:

Male Female Total Sources: Field Survey (2009)

4.1.2 Section B

257 42 299

The focus of the data analysis here is establishing whether Chartered Accountants perception of the effect of mandatory audit firm rotation on auditor independence and audit quality is positive and whether the Accountants strongly believe there are problems associated with the introduction of mandatory audit firm rotation. Likert- five point rating scale was used to measure the Chartered Accountants perception and believe to each of the statements relating to auditors independence, audit quality and likely problems of mandatory audit firm rotation in Nigeria. Lower rating by the Chartered Accountants to each of these statements were considered to be negative perception/weak believe; while high rating were considered to be positive perception/strong believe. The
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following tables show the results of the analysis of the responses and the computed mean and standard deviation of the responses. Table 4.1.2.1: Tabulation of Chartered Accountants Perception of the Effect of Mandatory Audit Firm Rotation on Auditor Independence . Likert rating 5 4 3 2 1 Total Mean Std. dev
Questionnaire item 1 Questionnaire item 2 questionnaire Item 3 117 96 131 129 139 117 7 12 7 28 14 23 18 37 21 299 299 299 4.000 3.812 4.050 1.155 1.279 1.184

Source: Field Survey (2009). Table 4.1.2.2: Tabulation of Chartered Accountants Perception of the Effect of Mandatory Audit Firm Rotation on Audit Quality Mean Std. Likert rating 5 4 3 2 1 Total dev
questionnaire Item 4 questionnaire Item 5 questionnaire Item 6 96 41 85 49 16 7 13 45 131 39 57 71 43 299 299 299 3.394 2.525 3.608 1.152 1.371 1.434

103 101

Source: Field Survey (2009).

Table 4.1.2.3: Tabulation of Chartered Accountants Believe of Problems Associated with the Introduction of Audit Firm Rotation in Nigeria Likert rating 5 4 3 2 1 Total Mean Std. dev
questionnaire Item 7 questionnaire Item 8 questionnaire Item 9 77 98 37 147 103 99 7 17 13 47 42 97 21 39 53 299 299 299 3.709 3.598 2.899 1.209 1.402 1.362

Source: Field Survey (2009). Table 4.1.3: Tabulation of Chartered Accountants Opinion on Introduction of Audit Firm Rotation in Nigeria Opinion YES NO Total Number of Accountants 103
34

196

299

Percentages

34.45%

65.55%

100%

Source: Field Survey (2009). 4.2 DISCUSSION OF FINDINGS Statements 1-3 relate to the chartered accountants perception of auditor independence as it relates to mandatory audit firm rotation. The mean response to (statement 1) shows that majority of the respondents agreed that rotation would decrease managements ability to influence the auditors. The mean response to (statement 2) shows that high proportion of the respondents also agreed that rotation will increase the potential of auditors to be more vocal in disagreeing with management on issues that need to be straightened. The mean responses to (statement 3) show that majority of the respondents agreed that mandatory rotation/ audit term limit would increase auditors

independence in audit process. Statements 4-6 sought to determine the chartered accountants perceptions of audit quality as it relates to mandatory auditor rotation. Statement 4 asserted that frequent auditor changes will increase the potential for detection of material misstatement/manipulation by the auditor. The mean responses shows that a higher proportion of the respondents agreed with this statement. The responses to statement 5 (frequent auditor changes will increase the auditors potential to gain

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adequate knowledge of the clients industry and business practices) indicate that majority of the respondents disagreed with this statement. On the other hand the mean responses to statement 6 indicated that the chartered accountants believed that mandatory rotation of audit firm will increase audit quality. Responses to Statements 7 and 8 shows that majority of the chartered accountants believed that there would be problems associated with the introduction of mandatory audit firm rotation in Nigeria such as Increased audit costs, growth of monopoly, loss of client firms industry/business practices and cost of management time in identifying a new accounting firm and familiarizing the firm with the clients business. Statement 9 sought to determine whether the chartered accountants agreed that the problems associated with mandatory audit firm rotation will outweigh the potential benefits. Majority of the participants disagreed with this statement. A substantial proportion of the respondents (65.55%) agreed that audit firm rotation should be required in Nigeria, 35.5% disagreed with the opinion that mandatory audit firm rotation should be introduced in Nigeria. 4.3 TEST OF HYPOTHESIS

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In testing all the hypotheses the T-test for each of the questionnaire items were calculated and compared with the T-table value {df =298 (i.e. 299-1), one- tailed test} at 0.005 level of significance which is 1.645. 4.3.1 Hypothesis 1: H0: The Nigerian Chartered Accountants perception of the effect of mandatory audit firm rotation on auditor independence is not positive. H1: The Nigerian Chartered Accountants perception of the effect of mandatory audit firm rotation on auditor independence is positive. Recalling that 3 is the cut off for positive perception, the hypothesis is restated as H0: X < 3: H1: X 3. The table below shows the summary of the results of analysis of the mean of the Chartered Accountants perception and t-test calculated. Table 4.3.1 Summary of Perception of the Effect of Mandatory Audit Firm Rotation on Auditor Independence Results (Mean, t-Value calculated and t-table value)
Mean Perception Questionnaire items Item 1 Item 2 Item 3 t- value =x- 1 14.937 10.968 15.302 t-table (one-tailed) 1.645 1.645 1.645 @ s/n- 0.05 4.000 3.812 4.050

Source: Field Survey (2009). The mean perception to all the statements concerning the effect of mandatory audit firm rotation on auditor independence were more than the cut-off mean. Also the t-value calculated for all the three satatements
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are greater than the t-table value, thus leading to the rejection of the null hypothesis that the Chartered Accountants perception of the effect of mandatory audit firm rotation on auditor independence is not positive. 4.3.2 Hypothesis 2 H0: The Nigerian Chartered Accountants perception of the effect of mandatory audit rotation on audit quality is not positive. H1: The Nigerian Chartered Accountants perception of the effect of mandatory audit rotation on audit quality is positive. Recalling also that 3 is the cut off for positive perception, the hypothesis is restated as H0: X < 3: H1: X 3. The table below shows the summary of the results of analysis of the mean of the Chartered Accountants perception and t-test calculated. Table 4.3.2 Summary of Perception of the Effect of Mandatory Audit Firm Rotation on Audit Quality Results (Mean, t-Value calculated and t-table value)
Mean Perception Questionnaire items Item 4 Item 5 Item 6 t- value =x- 1 4.459 -5.977 7.325 t-table s/n- (one-tailed) 3.394 2.525 3.608 1.645 1.645 1.645

Source: Field Survey (2009). The mean perception of the Accountants to statements 4 and 6 are

greater than the cut-off mean. However, the mean of the Accountants perception to statement 5 is less than the cut- off mean. Also the t-value calculated for statements 4 and 6 are greater than the t-table value. This
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lead to the rejection of the null hypothesis that the Chartered Accountants perception of the effect of mandatory audit firm rotation on audit quality is not positive in these cases. For statement 5, the t- value calculated is less than the t-table value. The null hypothesis was accepted in this case. 4.3.3 Hypothesis 3 H0: Nigerian Chartered Accountants do not strongly believe there are problems associated with introduction of mandatory rotation of auditors in Nigeria. H1: Nigerian Chartered Accountants strongly believe there are problems associated with the introduction of mandatory rotation of auditors in Nigeria. Recall also that 3 is the cut off for strong believe, the hypothesis is restated as H0: X < 3: H1: X 3. The results of analysis of the mean of the Chartered Accountants believe and t-test calculated is shown below. Table 4.3.3 Summary of Chattered Accountants Believe of Problems Associated With Introduction of Mandatory Rotation of Auditors Results (Mean, t-Value calculated and t-table value)
Mean Perception Questionnaire items item 7 item 8 t- value =x- 1 10.122 7.370 t-table s/n- (one-tailed) 3.709 3.598 1.645 1.645

Source: Field Survey (2009).

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The mean perception of the Chartered Accountants to statements 7 and 8 are greater than the cut-off mean. Also the t-value calculated were greater than the t-table value. The null hypothesis that Nigerian Chartered Accountants do not strongly believe there are problems associated with introduction of mandatory rotation of auditors in Nigeria was therefore rejected.

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SECTION FIVE 5.0 Summary of Findings, Conclusion and Recommendations

5.1

Summary of Findings The statistical results of the study show the following findings:

The chartered accountants perceived that rotation can enhance auditor independence. The chartered accountants perceived that rotation would decrease managements ability to influence the auditor.

Majority of the Chartered accountants believed that mandatory rotation can leads to higher quality audits.

The chartered accountants perceived that rotation would increase the auditors potential to detect material misstatement and manipulation.

The Chartered Accountants do not perceive that mandatory audit firm rotation would increase the auditors potential to gain adequate knowledge of the clients entity.

The Chartered Accountants believed there are problems that would be associated with mandatory audit firm rotation introduction in Nigeria.

The Chartered Accountants disagreed that the problems of periodic rotation of audit firms would likely exceed the benefits.

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Majority of the chartered accountants agreed that audit firm rotation should be required in Nigeria. 5.2 Conclusion

Based on the results of this study, the following conclusions were made:

The Nigerian Chartered Accountants perceived that rotation will increase auditor independence.This support the thoery that audit firm rotation enhances perception of auditor independence. Other findings also support mandatory rotation and suggest that rotation puts auditors in a stronger position to resist management pressure and be more objective (Brody and Moscove, 1998). Prior researchers have noted that independence appears to deteriorate with longer auditor tenure and support the thoery that audit firm rotation enhances perception of auditor independence. GAO (2003) study cited that 65% of fortune 1000 companies agreed that the perceptions of auditor independence would increase under mandatory audit firm rotation.

Nigerian Chartered Accountants perceived that rotation will increase audit quality in terms of providing opportunity for a fresh look/ fresh approach to the audit and auditors potential to detect material misstatement or manipulation. This were consistent with the position

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that changing auditors would actually improve quality by providing a fresh look (Brody and Moscove, 1998).

Problems such as increased costs, lost of client knowledge and lack of chioce of audit firms can be associated with the introduction of mandatory audit firm rotation rule in Nigeria.

The Chartered Accountants surveyed support mandatory rotation of audit firm introduction in Nigeria.

5.3 Recommendations Auditor rotation appears to enhance perception of auditor

independence, for this reason publicly traded companies that have used the same auditor for years should consider adopting a rotation policy.

The study recommends that the effectiveness of alternative corporate governance provisions such as partners rotation, peerreview mechanism, role of non-executive directors and audit Committee should be monitored while the regulatory agencies continue to study the pros and cons of mandatory audit firm rotation as an option to improve the accuracy and reliability of the financial reporting system.

The study also recommends that ICAN ( The Institute of Chartered Accountants of Nigeria) management should always carry its
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members along in any policy issue like mandatory rotation of audit firm. While ICAN as a body is saying No to mandatory rotation on the excuse that it does not accord with International best practice, its members or rank and file are saying Yes to it.

This study covered only perceived auditor independence and audit quality analyzed through questionnaires, further empirical research is recommended to investigate the effect of mandatory auditors rotation on actual auditor independence and audit quality through the employment of analytic modalities such as informative and statistical documents), perhaps using the Nigerian banking sector where mandatory rotation has been introduced as a case study.

This study was limited to the perceptions of Chartered Accountants (ICAN members) the study of the perception of other groups is recommended.

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