AUDITORS' LIABILITIES TO ORGANIZATIONS AND SOCIETIES IN GENERAL A CASE STUDY OF ENUGU AND ANAMBRA STATE RESPECTIVELY

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The origin of auditing is rooted in the separation of ownership from control in business organizations. This fundamental principle was instituted to protect the interests of owners by ensuring that financial statements are justifiable and credible. The separation of ownership from management necessitates that those entrusted with financial and economic resources present their financial reports to the owners (Jensen & Meckling, 1976). As noted by DesJardine et al. (2023), shareholders occupy a privileged position to place formal demands on companies and their executives, making the need for independent financial verification all the more critical.

The reports presented by managers might contain errors, omissions, and frauds, or may even fail to disclose relevant information. For these reasons, owners may hold reservations about the credibility of managers' reports. The agency problem that arises from ownership-control separation creates an inherent conflict of interest between principals (owners) and agents (managers), necessitating independent oversight mechanisms (Bari et al., 2023). Akpan and Akai (2022) observed that corporate governance frameworks, particularly audit oversight, exist primarily to resolve this principal-agent tension and restore accountability in financial reporting.

For the owners to be satisfied, and for managers to be justified in maintaining their integrity, it becomes necessary to engage an independent party one not involved with either the owners or management to examine the reports and express an opinion as to their truth and fairness. The independent party's duty encompasses not just the mere examination of accounts, but the collection of all relevant information necessary to satisfy the requirements of the Companies and Allied Matters Act (CAMA) 2020, which updated and superseded the earlier Companies and Allied Matters Decree (CAMD) of 1990. This legislation now provides a more robust framework for auditor duties and liabilities (CAMA, 2020).

These independent professionals, known as auditors or professional accountants, go to considerable lengths to ensure that financial statements contain no material errors, omissions, or frauds and where such exist, to detect and report them. This constitutes their statutory duties and liabilities to the organizations that engage them. Nwanyanwu (2023) emphasized that audit quality practices are central to financial reporting integrity in Nigeria, with auditor independence, technical training, and engagement performance serving as key determinants of reliable financial reports. Similarly, Soyemi et al. (2024) underscored the importance of auditor independence in identifying fraud and errors, concluding that this independence is fundamental to enhancing overall audit quality.

In the past, investors relied solely on the advice given to them by financial consultants rather than analyzing financial statements themselves. Today, there has been a great shift in that direction. Shareholders, creditors, government agencies, employees, and the general public now focus on financial statements as one of their most reliable instruments for assessing the viability or otherwise of companies. The interested parties in financial statements include:

1. Owners or shareholders of companies

2. Creditors and debenture holders

3. Employees of organizations

4. Government agencies

5. Accountants, and

6. The general public

This expanded stakeholder interest reflects the growing recognition that audited financial statements serve as a public good. Li and Wang (2023) warned that poor audit quality can damage stakeholder trust and tarnish the image of audit firms, making it imperative that auditors uphold the highest professional standards. The panacea to the problem of misleading financial statements lies in appointing independent auditors to investigate accounts and reports. It is therefore the responsibility of auditors to ensure that they discharge their duties according to the law, exercising reasonable care and skill to enable them to form an unbiased opinion based on their findings.

Auditors bear liability under different branches of law: common law, civil law, and criminal law. Under CAMA 2020, specific provisions govern the appointment, duties, powers, and liability of auditors for negligence, replacing the older CAMD 1990 framework and introducing more contemporary accountability standards aligned with global best practices (CAMA, 2020; Revised Nigerian Company Law, 2020).

1.2 STATEMENT OF THE PROBLEM

The liability of an auditor appointed by owners or shareholders is to ensure that financial statements prepared from the books and records of an enterprise portray the actual financial position of that entity. It is also the auditor's liability to report whether the financial statements show a true and fair view and comply with relevant laws. Bari et al. (2023) argued that strong audit systems are essential for increasing corporate accountability and strengthening stakeholder trust. However, the persistent incidence of business failures and financial scandals even in organizations with appointed auditors raises fundamental questions about whether auditors are effectively discharging these responsibilities.

In Nigeria, this concern is particularly acute. The Financial Institutions Training Centre (FITC) reported in 2024 that Nigerian banks lost over ₦42.6 billion in the second quarter of 2024 alone, highlighting systemic weaknesses in internal control and audit oversight (FITC, 2024). These losses bring into sharp focus the effectiveness of audit quality in combating financial wrongdoing. Furthermore, according to the Office of the Auditor-General of the Federation (2023), over ₦969 billion in public funds were either mismanaged or could not be properly accounted for between 2021 and 2023 across several Ministries, Departments, and Agencies (MDAs) in Nigeria.

Section 359(3) of CAMA 2020 requires audit committees to oversee financial reporting, ensure compliance, and maintain independent oversight (Akpan & Akai, 2022). Despite this legislative mandate, Akinleye and Odunlade (2024) identified persisting challenges in Nigeria's audit landscape, including lack of expertise, insufficient independence, and weak compliance with standards. These concerns suggest that the mere appointment of auditors is insufficient to guarantee organizational integrity, and that additional structural and regulatory interventions may be necessary.

The question arises as to the cause of such anomalies: whether some auditors lack adequate qualifications before going into practice, whether they are unduly influenced by management for selfish interests, whether they exercise sufficient independence, or whether they are insufficiently remunerated. Anto and Yusran (2023) observed that independence threats impair the audit function by limiting auditors' ability to hold agents accountable and convey assurance that fiduciary duties have been properly discharged.

The Financial Reporting Council of Nigeria (Amendment) Act 2023 further underscored these accountability concerns by giving express authority to the Directorate of Inspection and Monitoring to ensure compliance with auditing, accounting, and corporate governance standards (Financial Reporting Council of Nigeria, 2023). This study is therefore commissioned to investigate the causes of the aforementioned problems, seek workable solutions, and offer recommendations based on empirical findings from Enugu and Anambra states.

1.3 OBJECTIVES OF THE STUDY

Given the perception that some auditors do not discharge their responsibilities as required by law, and that some company directors and staff may sometimes prepare faulty financial statements thereby misleading owners of businesses and the public and contributing to business failures the objectives of this study, among others, are:

1. To evaluate the performance of auditors in carrying out their statutory duties.

2. To identify the duties and rights of auditors under the law, particularly under CAMA 2020 and the Financial Reporting Council of Nigeria (Amendment) Act 2023.

3. To determine the extent of independence that auditors exercise in their duties.

4. To ascertain the perception of auditors vis-à-vis their liabilities and the relevant punishments.

5. To evaluate the appropriate penalties that can be meted out to erring auditors.

1.4 SIGNIFICANCE OF THE STUDY

This study is primarily designed to identify the duties and rights of auditors in relation to financial statements prepared by the directors of companies. It will also help to clarify the penalties applicable to auditors who may deliberately or recklessly give a false impression on the financial statements they audit. Gul et al. (2023) established that independent audit committee members improve the credibility of financial statements and protect stakeholder interests a finding that reinforces the importance of this study's focus on auditor accountability.

Furthermore, the findings of this study will be beneficial to shareholders and other potential investors who rely on reports issued by auditors. Auditors will be made more aware of the extent to which business owners, government agencies, and society at large place trust in them, thereby encouraging the maintenance of professional integrity. Ogbu et al. (2024) noted that independent auditors ensure high-quality financial statements by safeguarding shareholder interests, a responsibility that is central to the confidence investors place in capital markets.

This study is also significant because it addresses the Nigerian context specifically a business environment in which audit effectiveness continues to face regulatory, structural, and ethical challenges (Akinleye & Odunlade, 2024). By examining cases in Enugu and Anambra states, the research contributes empirical evidence to the existing literature on auditor liabilities in developing economies, thereby filling a notable gap in the body of knowledge.

1.5 SCOPE AND LIMITATIONS OF THE STUDY

This study is primarily directed at company auditors, owners or shareholders of business organizations, senior employees of various organizations, government-owned companies, and society in general.

The study was designed to encompass different categories of business organizations including manufacturing industries, financial institutions, and trading concerns established throughout Nigeria. However, owing to constraints of time and financial resources, it has been narrowed to organizations in Enugu and Anambra states.

A possible limitation is the uncooperative attitude of some company employees who may be unwilling to provide information out of fear of implication. However, it is the researcher's opinion that with adequate assurances of confidentiality, such a hindrance can be minimized.

1.6 HYPOTHESIS

It is the general belief and the starting premise of this study that with the appointment of an auditor in any business organization, the objective(s) of that organization may be achieved. The purpose of this study is to establish whether that belief is true or false. The following hypothetical factors underpin the inquiry:

i. Auditors are specifically trained to assist business organizations with a view to achieving their objectives.

ii. Auditors are statutorily required to work independently.

iii. Auditors appreciate the extent of reliance placed on them by business owners, government, and society.

iv. Penalties exist for any auditor who deviates from statutory responsibilities.

Hypotheses are formulated as follows:

H₀: Business organizations achieve their objective(s) when an auditor is engaged.

H₁: Business organizations do not achieve their objective(s) when an auditor is engaged.

If the null hypothesis (H₀) is upheld from data collected, the alternative hypothesis (H₁) is rejected. Where the null hypothesis is rejected, the alternative hypothesis is accepted. In either case, the prospects of statutory auditors engaged with business organizations will be further analyzed in subsequent studies.

1.7 DEFINITION OF TERMS

LIABILITY

Liability is something for which one is legally responsible. In the context of auditing, it refers to the legal obligations and professional responsibilities that auditors owe to their clients, third parties, and the public at large (CAMA, 2020).

AUDITOR

An auditor is a person who examines the financial statements of an organization with a view to expressing an independent opinion as to whether those statements give a true and fair view and comply with relevant statutory requirements. Audit quality widely regarded as a cornerstone of corporate governance is defined as the ability of auditors to detect and report material misstatements in financial statements (DeAngelo, 1981; Kashere Journal of Management Sciences, 2025).

FINANCIAL STATEMENT

A financial statement is a summary of the financial transactions of an organization for a given period, prepared from the documents and records of a financial nature of that organization. High-quality financial statements provide a true and fair view of a company's financial position, which is essential for stakeholders including investors, creditors, and regulators (Francis, 2004).

SHAREHOLDERS

Shareholders are the owners of business organizations. They occupy a privileged position to place formal demands on companies and their executives and to divest ownership to penalize management when their demands are not met (DesJardine et al., 2023).

FRAUD

Fraud exists when officers of a given organization collude among themselves or with third parties to misappropriate the cash or other assets of that organization. Fraud represents a material misstatement requiring auditor detection and reporting (Ezejiofor, Orakwue & Ezenwoke, 2022).

AUDIT INDEPENDENCE

Audit independence refers to the auditor's ability to remain objective and free from client influence. Long client tenure may compromise auditors' objectivity due to over-identification with agents' interests, while non-audit services also pose independence risks if auditors prioritize commercial considerations over their principals' needs (Anto & Yusran, 2023).

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