INVESTIGATION ON COMPLIANCE OF AUDITORS ON PROFESSIONAL ETHICS

AND STANDARDS

A CASE STUDY OF DELOITTE COMPANY

PRESENTED BY:

1. DAVID MULLI NZUKI D33/22115/2007

2. MOHAMED YUSUF KASSIM D33/21959/2008

3. KIRUGUMI JOHN NDUNG’U D33/20866/2008

4. KIRIYO COLLINS D33/20471/2007

PRESENTED TO:

MR. BARASA – SUPERVISOR

A project presented in partial fulfillment for the requirement of the award of Degree

Programme in Bachelor of Commerce of the University of Nairobi

FEBRUARY 2011

DECLARATION

We the undersigned do declare that this project is our original work and that any part should not

be reproduced without our permission.

1. DAVID MULLI NZUKI D33/22115/2007

__________________

2. MOHAMED YUSUF KASSIM D33/21959/2008

__________________

3. KIRUGUMI JOHN NDUNG’U D33/20866/2008

__________________

4. KIRIYO COLLINS D33/20471/2007

__________________

By supervisor

This project has been submitted with approval as University of Nairobi supervisor.

Sign _________________________ Date ________________________

TABLE OF CONTENTS

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

The explanatory foreword to the ISA International Standards on Auditing describes audit as the

independent examination of and expression of an opinion on the financial statements of an

enterprise by an appointed auditor in pursuance of that appointment and in compliance with any

relevant statutory obligation. The purpose of an audit is not to provide additional information

but rather it is intended to provide the users of the accounts with assurance that the information

provided/presented to them is reliable. The word ‘audit’ when used will mean the independent

investigation into the quality of published accounting information.

The overriding objectives of auditing include to enable the auditor to express an opinion whether

the financial statements are prepared, in all material respects, in accordance with an identified

financial reporting framework. (Financial reporting framework refers to the international

accounting standards, provisions of the companies Act and other relevant statutes and

legislation). The auditor expresses an opinion as to whether the financial statements give a true

and fair view of the financial position and performance of the company.

In executing effective auditing functions, auditing is a profession that is guided by code of

conduct fully described in audit standards and ethics. According to Gunz P et al (2006), the

classic view of the profession is of a class of occupations that involves the application of

knowledge and skills beyond the capacity of laypeople to Professional Ethics in Formal

Organizations understand. We therefore must cede to the professional the right to decide how

best to act in our interest. When we consult physicians or surgeons and they recommend

intervention, we are aware that most intervention has side effects or other risks, such that even

the most innocent of surgical procedures can lead to the deaths of even the apparently healthiest

of patients.

Professionals, then, are required to act always in their client’s best interests, and – because their

clients are not competent to tell them what to do or judge whether they are competent to do it –

their actions as professionals can only, the argument goes, be judged by their fellow

professionals. This is the origin of the concept of professional autonomy, of professions as self-

governing occupations. Laypeople cannot decide what gets taught in medical, law or engineering

schools; only physicians, lawyers and engineers can do that. Equally, only professionals can

decide whether and when their neophytes are qualified to practice. (Gunz et al, 2004).

This presents a somewhat uncritical view of professions which has been challenged by

ethnographers observing how professionals are trained and work (e.g. Becker, 1961) or critical

theorists (e.g. Johnson, 1972; Saks, 1983). While the debate about autonomy and the professions

themselves is important, it is not our primary focus. Here, we are concerned with autonomy at

the individual level of analysis in respect to compliance with professional ethics and standards in

auditing. In this respect, autonomy is significant not because it is a consequence of public trust,

but as a reflection of control over work and its outcomes. The stronger the profession, the more

control individual professionals have over work performance, since, it is argued, they alone

know enough to be able to evaluate it properly, and are committed to ensuring that performance

lives up to basic standards ( Funnell, W. (1994)

The obligation to prioritize the client’s best interests also finds expression within codes of ethics

that are prepared by the self-regulating professions. One interpretation of these codes is that they

are a reflection of the altruism of the profession: its primary objective is to serve its clients

specifically and society in general. Another, more cynical perspective sees the code as a

defensive tactic adopted by professions to fend off interference with their autonomy (Daniels,

1975). Here codes are seen as a means of maintaining a monopoly and regulating competition

between members rather than upholding client best interest or that of the public, and their

enforcement may be biased in terms of the private good of the profession (Fisher, Gunz, &

McCutcheon, 2001). For example, Daniels describes the role of codes as ‘‘part of the ideology,

designed for public relations and justification for the status and prestige which professions

assume vis-a` -vis lowly occupations’’ (Daniels, 1973) or, more pointedly, ‘‘every established

and rising profession has such a code to which it can point. The membership anticipates that the

ethical code is the equivalent of folding money, so to speak, or a certified check cashable into

confidence that a client may feel when he puts himself into the hands of a practitioner. For the

newer professions, formation of professional codes may be viewed as part of a defensive

strategy. The occupation ‘proves’ that it is a profession by presenting its credentials (i.e. the code

of ethics)’’ (Daniels, 1973).

These are some of the arguments underpinning professionals’ claims for retaining autonomy or

independence in respect to professional ethics and standards in auditing. And while it is easier to

identify independence in certain professions than others, it remains at the heart of our

expectations of all those who practice these arts. And this leads us directly to a discussion of how

such expectations might be met. Here, it is useful to examine rules and regulations of conduct

that govern the behavior of an accountant. According to ICPAK, the auditor gives credibility to

financial statements and to do this he must be credible himself. To be credible, the auditor must

possess and be seen to possess certain qualities which include integrity, competence,

confidentiality and independence.

1.2 Statement of the problem

For many years, it has been observed that there have been increasing businesses scandals that

erupt linked to apparent enthusiasm with which professional auditors, in both professional

service firms (PSFs) and employed by the corporations themselves, facilitated the unethical

behavior underpinning those events. The behavior of many auditing executives has been a focal

point at which many clients have noted with concern unreliability in auditing firms with which

their financial statements are not a true reflection of their businesses. This has been observed to

be against the code of conduct in auditing firms as ethics and standards are not observed.

1.3 Purpose of the study

This study was designed to investigate level of compliance of auditors with professional ethics

and standards. It sought to find out whether auditors adhere to set standards or ethics in the

auditing profession.

1.4 Objective of the study

The objective of the study was to determine the level of practice of auditors to

professional ethics and standards.

1.5 Research questions 1. Do auditors practice professional ethics and standards?

2. What challenges do auditors face in complying with professional ethics and standards?

3. What solutions do auditors use to counter existing challenges in complying with

professional ethics and standards?

1.6 Significance of the study

In the course of investigating level of compliance of auditors with professional ethics and

standards, this study will be depicting series of merits suitable in restoring and reinforcing trust

in the auditing profession. Auditing firms, corporate firms, organizations, businesses as well as

individuals will benefit at great length. This study would therefore depict limits to level of

competence among auditors and the ability to observe set standards which are a measure of trust

for clients seeking auditing services.

1.7 Limitations of the study

In carrying out this study, the following limitations were encountered: There was lack of co-

operation to avail information from members of the sales force that arose from fear of being

victimized by the management. Allocation of time to respond to the instruments of data

collection was also challenging for respondents and the researcher. On the other hand, the

researcher found it challenging to get data from the management team as they considered the

study with high suspicion. This limited data collection.

1.8 Scope of the study

This study was exclusively based on collection of data from Deloitte firm which is located in

Nairobi. The study articulated level of compliance of auditors to professional ethics and

standards based on auditing standards. Data was collected for a period of two weeks from

auditing personnel.

CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction

In this chapter, the concept of auditing is discussed in respect to auditing standards and ethics as

described by different authors. The chapter depicts motivation of different authors in the realms

of auditing, data collection methods used as well as tools used to collect such data and

accompanying findings. The chapter culminates on the relevance of such findings to the current

study.

2.2 Main Review

Delaney and Coe (2008) did a study as to whether ethics should be incorporated into accounting

programs. They stated that most CPA firms rely on colleges and universities to teach ethical

behavior. Their study examined the effectiveness of ethics instruction delivered via a

combination of lecture and active learning methods. Specifically, the impact of ethics instruction

on behavior in business settings is investigated. Though similar studies have addressed this issue,

their study tests the effectiveness of a particular curriculum in a post-Enron environment. Further

a new instrument to measure moral reasoning ability in work situations was introduced.

Consequently, their study explored as to whether or not accelerated ethics instruction imbedded

in an existing accounting course positively impacts moral reasoning in business settings.

A quasi-experimental design was used for their study. One group served as a control group, while

another received the ethics instruction treatment. The non-equivalent control group design was

appropriate for this study because students were not randomly assigned to control and treatment

group within the same class. This design ensured that students within particular class were

treated equally since they were exposed to the same curriculum. All groups were given a pre- and

post-test. Other data was collected via a separate survey administered at the same time as the

post-test. This data included the participant’s age, gender, and year in school. Further, the

Participants were asked to indicate whether or not they previously received any form of ethics

instruction.

The study’s findings suggest that those who received ethics instructions scored higher on the

accounting moral reasoning test; while those who did not participate in the ethics intervention

had lower scores on the accounting moral reasoning test.

Additionally, a new instrument to measure moral reasoning ability in work situations was

introduced. The results indicate that ethics instruction is effective in increasing moral reasoning

ability (MRA), particularly in upper level accounting courses such as accounting information

systems (AIS) and auditing.

There were several limitations to this study that should be noted when considering its results.

First, the number of subjects was relatively small, and the study included students from only two

institutions in the Midwest. Future research should consider introducing an intervention at

More schools so as to yield a wide spectrum of students from across the country. Another

potential limitation is that the principal investigators of the study conducted the instruction. It

may not be appropriate to assume that other instructors would obtain the same results under

similar circumstances.

More research is needed to determine the most effective content and duration of ethics

instruction. In this study, a relatively short amount of class time was devoted to ethics

instruction, yet statistically significant results were obtained. Others have used different

instructional techniques that also appear to be beneficial. It would be valuable to determine if a

stand-alone accounting ethics course yields equal or better results, than simply incorporating

ethics instruction in existing accounting classes. Additionally, longitudinal studies of accounting

students and practitioners should be conducted. If ethics instruction does in fact impact a

Student’s MRA, can this effect be sustained throughout one’s career? If so, would practitioner

ethics instruction on an ongoing basis be necessary? These are important questions that need to

be addressed possibly through longitudinal studies that track the accounting careers of

accounting professionals. In this study we did not attempt to determine which particular teaching

methods (active or passive) have the greatest effect on MRA. While, the ethics curriculum tested

shows promise, future research also should focus on determining which techniques (e.g., active

versus passive) are most effective.

Gunz and Gunz (2006) did a study on professional ethics in formal organization. They stated that

the independent professional was something of a vanishing species, and professional practice

was increasingly carried out within non-professional organizations (organizations not managed

nor largely staffed by fellow professionals). The more disquieting aspects of the business

scandals that erupted in the US in the early years of this century was the apparent enthusiasm

with which professionals, legal and accounting, in both professional service firms (PSFs) and

employed by the corporations themselves, facilitated the unethical behavior underpinning those

events.

Clearly, the regularity with which ethical scandals erupt suggests that the dispositional argument

is unlikely to provide more than part of the story. They concentrated on the situational, by

asking; is there something about the situations in which professionals find themselves that causes

them to betray the trust society places in them? Clearly, some people are more susceptible to

these pressures than others, and it is entirely possible that some of this variance in susceptibility

can be traced to personality (i.e. disposition). These dispositional issues are, however, beyond the

scope of the present chapter.

Their study used an ideal–typical model of employed professionals to distinguish between the

different types of behavior. Some recent empirical evidence was used that suggested that it might

indeed be the case that professional’s judgment in certain situations is swayed by the nature of

their role in their organization. Finally, they explored questions of generalizability across what

kinds of professional experience might these findings be applicable.

They focused explicitly on conflicts or dilemmas that involve an ethical dimension, for both

theoretical and practical reasons. Theoretically, ethical dilemmas are interesting because they are

situations in which conflict between professional and organizational demands clash most

identifiably, evidently and strongly. They therefore provide a strong test of the organizational–

Professional conflict (OPC) hypothesis: if we are to see the impact of clashing demands

anywhere, we should see it here. In practical terms, the turn-of-the-century North American

business scandals are witness to the significance of ethical dilemmas. Indeed, if we return to the

foreshadowing by Daniels that we described above as ‘‘chilling’’, we subsequently observe

senior Catholic clergy failing to report sexual offences by priests to parishioners or police, or the

NASA space shuttle Challenger disaster arguably stemming from the unwillingness or perceived

inability of the relevant professionals to assert their professional ethical independence.

By ‘‘ethical dilemma’’, they meant an ethical conflict that has no easy resolution. It is a situation

in which the professional ‘‘must choose between two or more relevant, but contradictory, ethical

directives, or when every alternative results in an undesirable outcome for one or more persons’’

The way in which professionals handle ethical dilemmas has special significance in an

employment context. Just as professionals have unique status in society, so they have status in

corporations, and the language surrounding this status is often couched in terms of their ethics

training and the responsibilities that place them on a different footing within the organization

from managers in general.

Their findings were that there was no much evidence that professionals employed in NPOs do

indeed experience much organizational professional conflict (OPC). Perhaps most professionals

go through much of their professional life in non professional organization (NPOs) without

encountering the kind of ethical dilemmas that put them in a situation in which they could find

themselves pushed into behaving unethically. Alternatively, it might be that the training of these

professionals is such that they are able to deal with ethical dilemmas as their profession expects

them to and without undue difficulty.

Onumah, Simpson and Babonyire (2009) conducted a study about the audit expectation gap:

‘examination views on auditors’ report from Ghana’, which has been the subject of research in

many countries and in different forms. However, such research of the nature and dimensions of

the gap has been limited, if done at all, in the developing countries of West Africa. Their study

assessed its existence and investigates the factors that have been influencing it.

the expectation gap could be viewed from two angles: the society’s expectations (whether

reasonable or otherwise) and the performance of auditors (what auditors are to do compared with

what they are perceived to be doing).This position identifies two components of the gap: 1. The

reasonableness gap (the gap between what society expects auditors to achieve and what the

auditors can reasonably be expected to accomplish) and 2. The performance gap (the gap

between what society can reasonably expect auditors to accomplish and what auditors are

perceived to achieve).

Therefore, the critical issue that revolves around the expectation gap debate relates to the

different and inconsistent meanings attributed to the definition of an audit by financial statements

users, the public, jurors and the audit profession. The definition that appears to have gained

general preference is the one which refers to the gap as the difference between what the public

and users of financial statements perceive the role of auditors to be and what the audit profession

claims as expected of the auditors during the conduct of an audit. This is so because it is very

important to distinguish between the audit profession’s expectations of an audit on the one hand

and the auditor’s perception of an audit on the other hand this distinction is particularly important

because the appropriate evaluation of the expectation gap should contrast the views of financial

statements users to those of the audit profession, rather than the views of auditors who practice

based on their understanding of the profession’s expectations.

A survey strategy was employed in this study where questionnaires were administered to

sampled financial statements user groups and auditors to elicit and examine their views on

financial statements audits. The respondents included accountants from all the 32 companies

listed on the Ghana Stock Exchange as at December 2007, 76 shareholders, 20 practicing audit

firms (including the big four audit firms in the country: KPMG, Deloitte, Ernst & Young and

Price Waterhouse Coopers, which are all international firms), 24 lenders/bank credit officers, 50

lawyers and 50 other members of the general public above the contractual age of 21.

Judgmental sampling was used as a basis for the selection of the sample size for both the auditors

and the financial statements users, since the aim was to include all those persons related to the

phenomenon. Respondents were categorized into two broad groups: auditors and aggregate

financial statements users. The independent sample test of equality of means was used to

compare the mean responses of auditors and those of financial statements users on the three

broad areas covered in this study.

Findings were that Ghanaian financial statements users will generally hold auditors responsible

for duties not imposed on them by accounting and auditing standards. Particularly, lawyers and

shareholders are more likely to attribute a higher degree of responsibility to the auditor for the

prevention and detection of all frauds and errors. Again, users of financial statements generally

are likely to assign significantly different interpretations to the level of assurance auditors’

reports provided on such financial statements. The resulting effect may be different degrees of

confidence and reliance on such assurance. Thus, overdependence and/or under dependence

could consequently arise among users.

The findings of this study provide yet another call to placing the issue of perceived differences in

perception between auditors and financial statements users on the agenda of corporate

accounting and reporting for discussion. Particularly, the apparent significant differences in the

beliefs of the financial statements users group may have several implications for business and

commerce. Sub-optimal decisions may result from the nature of reliance placed on auditors’

assurance reports.

The findings of this study may have some limitations. In the first place, the generalization value

of the results could be low as a limited number of financial statements users were covered.

Therefore, the views expressed may not be conclusive of those of all players in the business

environment of the different sectors of the Ghanaian economy.

Secondly, the socio-cultural characteristics of the Ghanaian business environment could affect

the validity of the results for international comparison as the questions were designed along the

lines of studies conducted in different economic environments.

Thirdly, this study concentrated on audit assurance based on financial statements. Yet, financial

information includes other statements such as forecasts and prospective financial information. It

is recommended that future research be conducted, examining the expectation gap in the context

of both historical financial statements audits and other financial information assurances (possibly

that on financial forecast). This could provide valuable insights and other dimensions supportive

of a holistic approach to proposals for addressing the expectation gap problem. Notwithstanding

these limitations, the findings could be treated as part of a larger body of research contributing

towards the understanding of similar subject matters pertaining to audit and audit outcome

expectations.

The originality or value of this study is that although the validity of the results of this for

international comparison may be limited by the number of financial statements users covered and

the socio-cultural characteristics of the Ghanaian business environment, it should be recognized

as one of the few to investigate the existence and nature of the expectation gap in the context of a

developing country in the West African sub region. It thus adds the literature and points to the

need for the adoption of multidisciplinary measures by the accounting profession and financial

statements users with the view to eliminating or at the least minimizing its persistence and

escalation among the various relevant players.

Gendron, Cooper and Townley (2000) conducted a study; in the name of accountability state

auditing, independence and new public management. The article investigated the role of the state

auditor in Alberta. An analysis of the Office of the Auditor General of Alberta's annual reports

shows that the role of the Office has significantly changed to promote and encourage the

implementation in the public sector of a particular type of accountability informed by new public

management. The authors argue that the Office has increased its power to influence politicians

and public servants about the merits of its specific understanding of what accountability should

be. However, as the Office becomes more powerful, it also becomes more vulnerable to

complaints about a lack of independence from the executive. Indeed, the Office is now so closely

associated with new public management that we believe that it is difficult for the Office to

sustain the claim that it is able to provide independent assessments of public-sector

administration.

The researcher’s methodology is to adopt an approach of predicated on the study of texts, which

we conceive of in a broad sense, comprising elements such as the office’s formal reports and

ideas that auditors expressed when being interviewed. More specifically the researcher examined

all the annual reports that have been issued since the inception of the examined all the annual

repots that have been issued since the inception of the office.

The first one pertaining to the government’s fiscal year ended on March 31, 1979, and the latest

one at the time of our study for the year ended on March 31, 1997) the researcher supplemented

the documentary evidence with an open ended interview with two senior members of the office.

The discussion was loosely structured and centered on the “history” of efficiency auditing at the

office. The interview which was conducted in Sanrary 1998 and lasted three hours was tape –

recorded and transcribed. He also interviewed senior managers in government ministries in

which the role of the office was discussed. The researcher supplemented this documentary

evidence with an open-ended interview with two senior members of the Office. The discussion

was loosely structured and centered on the ``history'' of efficiency auditing at the Office. The

interview, which was conducted in January 1998 and lasted three hours, was tape recorded and

transcribed. They also interviewed senior managers in government ministries in which the role of

the Office was discussed.

The researcher’s comparative analysis of annual reports indicates that the office is now a strong

advocate of the performance accountability framework. Its claims are powerful because they

resonate with dominating discourses and influence the beliefs of what accountability is, and

should be. In other words the office possessing legitimacy and knowledge in the way accounts

should be provided, has been able to play an active in aligning governmental discourse with

organizational practices. The state auditor participates in the social construction of the values of

the accountability system in which he/she acts.

The research findings are incorporated into four dimensions which include; Office mission, Audit

criteria, Nature of recommendations and rhetorical style.

1. Mission

The 1980 report suggests that a primary responsibility of the Office is ‘examining and expressing

an opinion on, and thereby lending credibility to, the financial statements and supporting

information prepared by administrators and tabled in the Legislative Assembly as evidence of

their stewardship'' . (Office of the Auditor General of Alberta, 1980, p. 82).Compliance

with rules and laws was therefore considered to be an important part of the Office’s work.

However, the Office did not constrain itself to regularity auditing. It had a further significant

responsibility, namely, to detect and report efficiency problems in systems (Office of the Auditor

General of Alberta, 1980.)

2 Audit criteria

A fundamental task of state auditors is to detect and report problems. ``Problems'' are determined

by comparing the subject matter that is audited to audit criteria, which are the ``benchmarks

against which auditors compare what they find in order to draw conclusions'' (CCAF, 1996, p.

286). Audit criteria for state auditors are the largely un-codified set of standards as to what

constitutes ``good'' administrative practices. The criteria against which the object audited is

evaluated have to be described in the auditor's report (CICA, 2000, Para. 5025.70). Describing

criteria facilitates understanding and education so that the government and public servants will

respond ``appropriately'' to the auditor’s problematization and recommendations. Since the

creation of the Office, annual reports have always contained passages aimed at educating readers

about

3. Nature of recommendations

In comparing the recommendations made by the Office over time, we found that the nature of the

recommendations has significantly changed towards the performance-accountability framework.

The 1980 recommendations mainly focused on typical control issues, such as designing and

improving procedures to make sure that all revenues are collected, that all payments are justified,

and that fixed assets are appropriately safeguarded. Other recommendations emphasized general

efficiency issues, such as improving the managerial competence of middle and senior managers.

4. Rhetorical style

For any knowledge claim (such as the Office's recommendations) to be accepted by a wider

audience, proponents have to translate it into convincing arguments that have social legitimacy.

Persuasiveness in arguing therefore matters to state auditors. There have been significant changes

to the rhetorical style of the Auditor General's reports. In the first reports, the Office uses a quasi-

objective and scientific style of writing, as if auditors believed that it is more persuasive to argue

in a way in which facts speak for themselves. In contrast, the Office now relies on a range of

more proactive tactics to convince the government and public servants to adopt and implement

the performance accountability framework

5. The efficiency criteria used by the Office.

Democracies have instituted a complex legislative and administrative machinery to insulate the

state auditor from outside pressures, especially those that may arise from the executive. This

machinery, however, is never perfect. The nature of state auditing is inevitably paradoxical.

Although efficiency auditing is predicated on best practices, the state auditor has to maintain a

certain distance Vis a Vis these criteria if he/she wants to comply with society accepted norms of

independence. This is the challenge that state auditors have to overcome in order for their

auditors to contribute to the functioning of democracy.

Professional conduct in a non professional environment is governed by the ethical standards and

working under due care. Transparency therefore will be addressed through independence and

accountability of the auditor hence reducing the performance or expectation gap. Therefore

adoption of ethics through the various literature learning methods highlighted in the study creates

a platform that will enable to arguably investigate whether auditors comply with professional

ethics and standards.

CHAPTER THREE

RESEARCH DESIGN AND METHODOLOGY

3.1 Introduction

This chapter explains series of procedures and instruments used in collecting data. It describes

research design, selection of the target population, sampling design, data collection instruments

and data presentation methods.

3.2 Research Design

This study adopted a descriptive case study type of research design that was used to establish the

link between variables. Kerlinger (1973) describes exposit-facto research design as a systematic,

empirical inquiry into which the scientist does not have direct control of independent variables as

their manifestation has already occurred or because they inherently cannot be manipulated.

Inferences about relationships between variables are made, from concomitant variations of

independent and dependent variables. The current research design was chosen because the study

was not confined to the collection and description of the data, but sought to investigate and

establish the existence of certain relationships among the variables under investigation. Hence,

the design was selected to satisfy this aspect of the study. This method was appropriate for

collecting primary data on compliance of auditors on professional ethics and standards with

reference to Deloitte Limited Company.

3.3 Target population

Target population in a research is the total number of the individuals in a group that the

researcher intended to work with. The target population therefore is the overall number that can

be worked on in a research, Saleemi (1997). However, according to Drucker, (1985) a target

population, or target group is the primary group of people that a researcher is aiming at appealing

to. A target population can be people of a certain age group, gender, marital status and so on.

Therefore from the two perspectives, the target population is a group that the researcher is

willing to manipulate, so as to get the information needed. It also implies from the Saleemi’s

perspective that it should be a total group unlike the Druckers perspective that it has smaller

groupings, for example, gender, age, color. The purpose of the target population is to show the

number of the larger group that the researcher intended to manipulate so as to get the required

information. In this research the study population was 90 employees. The study population was

drawn from audit department that comprised of senior audit officers and junior audit officers as

distributed in the table below.

Table 3.1 Target population

Category of Staff Target Population Percentage of populationSenior audit staff 36 40Junior audit staff 54 60Total 90 100

Source: Authors (2011)

3.4 Sampling design and procedure

Sampling is that part of statistical practice concerned with the selection of individual

observations intended to yield some knowledge about a population of concern, especially for the

purposes of statistical inference.

In collecting data, stratified random sampling method was most appropriate in this study. The

reason for using the stratified random sampling design was because it focused on important sub-

populations and ignored irrelevant ones. It allows the use of different sampling techniques for

different subpopulations, improves the accuracy/efficiency of estimation, and permits greater

balancing of statistical power of tests of differences between strata by sampling equal numbers

from strata varying widely in size. Each subgroup of the population represented a stratum, and

the researcher provided a random sample drawn from the two categories. The resulting sample

population was a third (1/3) of the target population in each group as illustrated in the table

below.

Table 3.2 Sample Size

Category of Staff Target Population Sample Size Sample PercentageSenior audit staff 36 12 40Junior auditors 54 18 60Total 90 30 100

Source: Authors (2011)

3.5 Data Collection Instruments

3.5.1 Questionnaire

Questionnaires were used to collect data. A questionnaire is a research instrument consisting of a

series of questions and other prompts for the purpose of gathering information from respondents.

Usually, a questionnaire consists of a number of questions that the respondent has to answer in a

set format Leung, (2001). However, according to Saleemi, (1998) a questionnaire is a series of

questions asked to individuals to obtain statistically useful information about a given topic. The

major purpose of the questionnaire is data collection.

Questionnaire is a basic data collection instrument. This method is very practicable because of

the nature of work of respondents for assurance of their safety, trust and confidentiality.

Questionnaires were administered personally and a follow up was made to ensure that responses

were obtained from respondents. Closed ended questions were used because they were easier to

analyze and administer, due to their restricted nature of the questions, and the uniformity that is

enforced in giving limited options for the answers. Open ended questions were also included in

the questionnaire as they permitted the interviewee to give in-depth information to their

response, as well as give their personal opinion on a matter. Questionnaires are relatively cheap

and easy to administer as compared to other collection tools.

3.6 Data Collection Procedures

Letter of introduction bearing permission to carry out the study was first sought from University

administration. The researchers then visited Deloitte headquarters and presented the letter of

introduction to the head of public relations who made arrangement procedures and appointments

for meeting the target group. On the second day of visit, the researchers picked appointment

orders where they proceeded to the audit department. In the department, 36 senior audit officers

were identified and sampled to get a sample of 12 and respective questionnaires were handed to

them. On the third day, 54 junior audit officers were identified and 18 was desirable sample and

respective questionnaires were handed to them.

3.7 Data Analysis

According to Perttinger, (2001); data analysis is a process of gathering, modeling, and

transforming data with the goal of highlighting useful information, suggesting conclusions, and

supporting decision making. However, Tony, (2003) indicated that data analysis is the process of

breaking a complex information or substance into smaller parts to gain a better understanding.

Therefore from the Perttingers definition data analysis is the process of manipulating information

for the final decision making, while from the Toney’s view, it’s the process of breaking complex

information for better understanding. The purpose of the data analysis however, is to prepare the

crude data into interpretable designs. Data was analyzed using statistical methods, that is, use of

tables, charts, frequencies and percentages. It is envisaged that these comparative methods were

the best since the data was qualitative and quantitative in nature.

CHAPTER FOUR

DATA ANALYSIS AND PRESENTATION

4.0 Introduction

This chapter presents the findings of the study based on research objectives. It consists of

statistics generated through data analysis. The analyzed data is presented in form of frequency

tables. By administering questionnaires to senior auditors (those with managerial positions), out

of 12 questionnaires distributed, 8 were fully filled and returned which represented 66% of the

questionnaires distributed. On the other hand, out of 18 questionnaires distributed for junior

officers, 13 were fully filled and returned which represented 72% of the questionnaires sent to

junior officers. Therefore out of 30 questionnaires distributed, 21 were fully filled and returned

which represented 70% of the questionnaires sent to senior and junior auditors, which was

considered acceptable for data analysis.

4.1 Demographic information of respondents

Demographi

c

information

Senior

auditors

Junior auditors

No. % No. %

Gender Male 7 88 5 38Female 1 12 8 62Total 8 100 13 100

Age 20-25 years 0 0 3 2326-35 years 2 25 8 6236-45 years 6 75 2 15Above 46 years 0 0 0 0Total 8 100 13 100

Highest education qualification Certificate 0 0 0 0Diploma 1 12 1 8Degree 5 63 12 92Master 2 25 0 0Doctorate 0 0 0 0Total 8 100 13 100

From the table above, it was observed that majority of senior auditors were male as represented

by 88% while among junior auditors, majority of them were female as represented by 62%. On

age, majority of senior auditors were aged between 36-45 years while among junior auditors,

majority were aged between 26-35 years as represented by 62%. Findings on the education levels

of respondents showed that among senior auditors, majority of them were degree holders as

represented by 63% while majority of junior auditors were also degree holders as represented by

92%.

4.2 Professional information of respondents

Professional

information

Senior

auditors

Junior auditors

No. % No. %Monthly income (Kshs) Below 30,000 0 0 0 0

30,001-60,000 5 63 12 9260,000-90,000 2 25 1 8Above 90,000 1 12 0 0Total 8 100 13 100

Salary satisfaction Yes 4 50 5 38No 4 50 7 54Not sure 0 0 1 8Total 8 100 13 100

Reasons for salary

satisfaction

Commensurate to position

held

1 12.5 1 8

Meets financial needs 4 50 2 15High cost of living 2 25 5 38Heavy workload 1 12.5 4 24High market rates 0 0 2 15Total 8 100 13 100

Basing on the findings in the table above, it was observed that majority of senior auditors and

junior auditors represented by 63% and 92% respectively had monthly earnings of between Kshs.

30,000-60,000. Some senior auditors represented by 25% had monthly income of between Kshs.

60,000 and 90,000 as compared to 8% of junior auditors in the same category.

It was also observed that 50% of senior auditors were satisfied with their incomes while 50% of

them were not satisfied with their salaries. Reasons given were varying but majority represented

by 50% reckoned that their salaries only meet their financial needs while 12.5% observed that

the salaries were commensurate to position held and 12.5% also observed that heavy their

salaries were not proportionate to the heavy workload they do. For junior auditors, 54%

observed that they were not satisfactory with their salaries while 38% noted that they were

satisfactory with their salaries. Those who were not satisfied with their salaries cited high cost of

living as possible reason.

4.3 Practice of professional ethics and standards

General

application

of the Code

Senior

auditors

Junior auditors

No. % No. %

Integrity Very good 3 38 7 54Good 5 62 6 46Average 0 0 0 0Poor 0 0 0 0Very poor 0 0 0 0Total 8 100 13 100

Objectivity Very good 3 38 7 54Good 5 62 6 46Average 0 0 0 0Poor 0 0 0 0Very poor 0 0 0 0Total 8 100 13 100

Professional Competence and due care Very good 4 50 8 62Good 3 38 5 38Average 1 12 0 0Poor 0 0 0 0Very poor 0 0 0 0Total 8 100 13 100

Confidentiality Very good 2 25 8 62Good 4 50 4 31Average 2 25 1 7Poor 0 0 0 0Very poor 0 0 0 0

Total 8 100 13 100Professional behavior Very good 4 50 8 62

Good 1 12 4 31Average 3 38 1 7Poor 0 0 0 0Very poor 0 0 0 0Total 8 100 13 100

Practice of professional ethics and standards required information from auditors on their

integrity, objectivity, professional competence and due care, confidentiality and professional

behavior. From such yardsticks, it was observed that senior and junior auditors rated themselves

differently on general application of the code of auditing as described in the figures below.

Basing on the findings, it can be noted that there was no auditor in both categories who was

implemented the general application of the code poorly, very poorly or below the expectation as

observed in the figures below.

Figure 4.3.1 Level of observation on integrity

On integrity, majority of senior auditors represented by 62% were good at observing the code

while majority of junior auditors represented by 54% were very good as illustrated in the figure

above.

Figure 4.3.2 Level of observation on objectivity

On objectivity, majority of senior auditors represented by 62% were good at observing the code

while majority of junior auditors represented by 54% were very good as illustrated in the figure

above.

Figure 4.3.3 Level of observation on Professional Competence and due care

On professional competence and due care, 50% of senior auditors were very good at the code

while 62% of junior auditors were very good at the code also as illustrated in the figure above.

Figure 4.3.4 Level of observation of the code on confidentiality

On confidentiality, it was observed that, 50% of senior auditors were very good at the code while

62% of junior auditors were very good at the code also as illustrated in the figure above.

Figure 4.3.5 Level of observation of the code on professional behavior

On professional behavior, 50% of senior auditors were very good at the code while 62% of junior

auditors were very good at the code also as illustrated in the figure above.

4.4 Threats and safeguards

Threats and

safeguards

Senior

auditors

Junior auditors

No. % No. %Self interests High 2 25 1 7

Moderate 4 50 5 38Low 2 25 7 54Total 8 100 13 100

Self – review threats High 1 12 2 15Moderate 5 63 4 31Low 2 25 7 54Total 8 100 13 100

Advocacy threats High 2 25 0 0Moderate 3 37.5 6 46

Low 3 37.5 7 54Total 8 100 13 100

Familiarity threats High 1 12 1 7Moderate 5 63 6 46.5Low 2 25 6 46.5Total 8 100 13 100

Intimidation threats High 2 25 3 23Moderate 4 50 2 15Low 2 25 8 62Total 8 100 13 100

Threats in auditing are manifested through self-interests, self-review, advocacy, familiarity and

intimidation. These indicators of threats to auditing were subjected to senior and junior auditors

where different levels of based on their occurrence were recorded. From the table above, it was

observed that among senior auditors 50% of them were threatened highly by self threats in the

course of compliance to auditing code while 54% of junior auditors experienced low self interest

threats.

On self-review threats, majority of senior auditors represented by 63% faced the threat

moderately while majority of junior auditors represented by 54% the threat was low. On the other

hand, equal numbers of senior auditors represented by 37.5% each were threatened moderately

and lowly by advocacy threats while the threat of advocacy of 54% of junior auditors was low.

Familiarity threats were observed to affect 63% of senior auditors moderately and 46.5% each

for moderate and low level threat for junior auditors. On the other hand, moderate intimidation

threats were among senior auditors represented by 50% while there were low intimidation threats

for 62% of junior auditors.

4.5 Frequency of differences in ethical requirements performed in another country

Frequency of Senior auditors Junior auditors No. % No. %

differences in ethical requirements

Never 4 50 11 85Less often 2 25 2 15Most often 2 25 0 0Total 8 100 13 100

In the table above, information on whether there were conflicts in ethical requirements in

auditing performed in other countries where the code was slightly different from the Kenyan

breed was sought where auditors responded differently. It was observed that majority of auditors

had never performed auditing in another country as represented by 50% and 85% among senior

auditors and junior respectively and could not compare threats that arise from such scenario.

However, those who had performed auditing in another country experienced equally less often

and most often for senior auditors as represented by 25% each while 15% of junior auditors

faced less often of such differences.

4.6 Frequency of disagreement with management

Frequency of

disagreement

Senior

auditors

Junior auditors

No. % No. %Acceptability of accounting policies

selected

Never 1 12.5 4 31Less often 7 87.5 8 62Most often 0 0 1 7Total 8 100 13 100

The method of policy application Never 2 25 5 38.5Less often 6 75 5 38.5Most often 0 0 3 23Total 8 100 13 100

Adequacy of valuations and

disclosure in the financial statements

Never 2 25 7 54Less often 6 75 6 46Most often 0 0 0 0Total 8 100 13 100

Compliance of financial statements

with relevant regulations and

Never 4 50 6 46Less often 4 50 7 54Most often 0 0 0 0

statutory requirements Total 8 100 13 100

The information in the table above is further represented in the figure below.

Fig 4.6.1 Frequency of disagreement with management

From the figure above, majority of senior auditors represented by 87.5% experienced less often

disagreement with management on acceptability of accounting policies selected as compared to

62% of junior auditors. On the other hand, 75% of senior auditors experienced less often

disagreement with management on the method of policy application as compared to 38.5% of

junior auditors. Majority of senior auditors represented by 75% had less often disagreement with

management on adequacy of valuations and disclosure in the financial statements as compared to

54% of junior auditors who had never experienced disagreement with management. Finally, 50%

each of senior auditors had never and less often experienced each disagreement with the

management on compliance of financial statements with relevant regulations and statutory

requirements while 54% of junior auditors had less often disagreement.

4.7 Complaints received from clients

Complaints

received from

clients

Senior auditors Junior auditors No. % No. %

Yes 1 12.5 4 31No 7 87.5 6 46Not sure 0 0 3 23Total 8 100 13 100

The information in the table above is represented in the figure below.

Fig 4.7 Complaints from clients

From the figure above, it can be observed that majority of senior auditors represented by 87.5%

had not received complaints from clients who they had prepared auditing reports as compared to

46% of junior auditors. However, 12.5% of senior auditors had received complaints from their

esteemed clients as compared to 31% of junior auditors.

4.8 Typical law suite received filed by a client

Typical law suite

filed by a client

Senior auditors Junior auditors No. % No. %

Yes 0 0 0 0No 8 100 10 77Not sure 0 0 3 23Total 8 100 13 100

From the table above, no senior auditor had received law suite filed by client as compared to

77% of junior auditors.

4.9 Ever acted as a group auditor

Ever acted as a

group auditor

Senior auditors Junior auditors No. % No. %

Yes 1 12.5 4 31No 7 87.5 8 62Not sure 0 0 1 7Total 8 100 13 100

Based on the findings above, majority of senior auditors have never acted as group auditors as

compared to 62% of junior auditors.

4.10 Administrative measures of ensuring compliance to professional ethics and standards

in auditing

Administrative measures Respondents Percentage Training and updating of employees on the standards 11 52Recruitment of qualified staff 4 19Regular review of staff welfare 6 29Total 21 100

The information in the table above is represented in the figure below.

Fig 4.10 Administrative measures of ensuring compliance to professional ethics and

standards in auditing

From the figure above, majority of auditors observed that the company trains and updates

employees on the standards of auditing as represented by 52% followed by 29% who observed

that there are regular reviews of staff welfare and 19% observed that the company is recruiting

qualified staff.

CHAPTER FIVE

DISCUSSION, CONCLUSION AND RECOMMENDATIONS

5.0 Introduction

This chapter consists of discussions of major findings, conclusion and recommendations.

Discussions of major findings are based on findings in chapter four and include implications

arising from such findings. Conclusions comprise of summary of findings and recommendations

emanate from views the findings.

5.1 Discussion of findings

Investigation on compliance of auditors on professional ethics and standards sought to answer

questions concerning level of compliance by auditors of Deloitte Company Limited. The study

sought to answer whether auditors practiced professional ethics and standards. The second

research question to be answered was to find challenges which auditors face in complying with

professional ethics and standards and finally to seek solutions used to counter existing challenges

in complying with professional ethics and standards.

5.1.1 Practice of professional ethics and standards in Deloitte Company Limited.

Determining level of practice of professional ethics in recent times requires careful selection of

indicators. The indicators chosen by this study included level of integrity of auditors, objectivity,

professional competence, confidentiality and professional behavior of auditors. These indicators

form the general application of the code as recognized by ICPAK.

Basing on the findings of the studied against the indicators of determining level of compliance of

auditors, it was noted that majority of senior auditors and junior auditors observed the

implementation of the code on integrity, objectivity, professional competence, confidentiality and

professional behavior. This implied that all auditors were aware of the code and thus

implemented as required. However, the implementation was more pronounced among senior

auditors who would then pass on to their juniors in the course of administration.

5.1.2 Challenges faced by auditors in implementing professional ethics and standards of

auditing

Challenges faced by auditors in implementing professional ethics and standards of auditing were

interpreted by the study as threats in auditing. Threats in auditing are manifested through self-

interests, self-review, advocacy, familiarity and intimidation.

From the findings, it was observed that majority of senior auditors and junior auditors faced

almost similar threats with little variation depending on responsibility for each auditor. On self-

review threats, majority of senior auditors while majority of junior auditors faced low threats.

This implied that senior auditors were more accountable to the clients than junior auditors who

were delegated duties to perform.

Concerning familiarity threats, it was observed that senior auditors were affected moderately and

junior auditors faced low level of the threat. The implication of this threat is similar to that of

self-review threat where senior auditors were more accountable to the clients on general report

writing of the audit than junior auditors who were delegated specific duties to perform and thus

were not exposed to full auditing of clients accounts.

On the other hand, there was significant numbers of senior auditors as each were threatened

moderately and lowly by advocacy threats while the threat for majority of junior was low. This

also implied that the threat was evident among auditors although they had ways of reducing such

threats.

Finally, moderate intimidation threats were among senior auditors while there were low

intimidation threats for junior auditors. These findings implied that intimidation threats were

more felt by senior auditors because of the nature of administrative functions they perform and

were exposed to rivalry among other administrators and auditing firms which would initiate

intimidation.

Consequently, threats to implementing auditing standards were manifested through frequency of

disagreement with management. Frequency of disagreement with management was determined

in terms of acceptability of accounting policies selected, the method of policy application,

adequacy of valuations and disclosure in the financial statements and compliance of financial

statements with relevant regulations and statutory requirements. Through such, it was observed

that majority of senior auditors experienced less often disagreement with management on

acceptability of accounting policies selected and method of policy application as compared to

junior auditors. This implied that senior auditors had the sole responsibility of determining

accounting policies selected for auditing and thus were accountable among themselves as

compared to junior auditors who would question the methods selected as they were not

consulted. This scenario was observed on adequacy of valuations and disclosure in the financial

statements where senior auditors had full knowledge of the reports prepared than junior auditors.

On compliance of financial statements with relevant regulations and statutory requirements, it

was observed that majority of senior auditors were at higher risk of facing such challenge than

junior auditors who were recipients of instructions from their senior auditors.

Threats of implementing auditing code were evident on responses concerning salaries of the

auditors. Salaries determine motivation level of employees and so auditors are part. In this case it

was observed that half of senior auditors and junior auditors were not satisfied with their salaries.

This is a threat to implementing the auditing standards and ethics as such auditors could be prone

to other illegal means for meeting their financial requirements especially corruption which is a

threat to professional behavior, confidentiality and integrity.

Threats observed above are real among these auditors as significant number of auditors has

received complaints from clients that led to no typical law suit filed against by a client. This

implies that the threats were not that serious however significant were sought between

management level and their clients.

5.1.3 Solutions used to counter existing challenges in complying with professional ethics

and standards.

Majority of senior and junior auditors observed that the company trains and updates employees

on the standards of auditing with a significant number who observed that there are regular

reviews of staff welfare least observed that the company is recruiting qualified staff. This implies

that the company is aware of the need of implementing auditing standards and ethics by

employing staff who are aware of the standards and ethics in auditing.

5.2 Conclusion

Based on the findings of this study, it can be concluded that Deloitte Company observes

compliance of professional ethics and standards in auditing. This has been noted as majority of

senior auditors and junior auditors observed the implementation of the code on integrity,

objectivity, professional competence, confidentiality and professional behavior. Basing on the

findings, it can be noted that there was no auditor in both categories who implemented the

general application of the code poorly, very poorly or below the expectation of the ICPAK or

ISA.

However, it can noted that the good implementation of professional ethics and standards in

auditing among Deloitte Company auditors faces threats that might jeopardize its efforts in

observing compliance of professional ethics and standards. Such threats were noted to emanate

from type of work environment and include self-interests, self-review, advocacy, familiarity and

intimidation threats. Other were noted to include employee welfare especially salaries.

Consequently, threats to implementing auditing standards were manifested through frequency of

disagreement with management. Frequency of disagreement with management was determined

in terms of acceptability of accounting policies selected, the method of policy application,

adequacy of valuations and disclosure in the financial statements and compliance of financial

statements with relevant regulations and statutory requirements.

These threats are deemed to significantly compromise integrity and ability to observe the

auditing standards among auditors if they go unchecked. Although the efforts by the company to

regularly train and update the auditors on the standards and employing qualified auditors might

be surpassed by the need to improve welfare of employees especially on salaries which if

pursued by auditors might be detrimental to compliance of ethics and standards of auditing.

5.3 Recommendations

1. The management of Deloitte Company should put the employee welfare on board by

reviewing regularly salaries of auditors.

2. The management should assign duties effectively to increase on efficiency of auditors

and make junior auditors fully aware of the standards in auditing. This could be done by

exposing all auditors to reports prepared so that they can appreciate different standards

applied to prepare heterogeneous reports.

REFERENCES

Delaney J and Coe M (2008); Does Ethics Instruction make a difference, Unpublishedmanuscript.

Funnell, W. (1994), ``Independence and the State Auditor in Britain: a constitutionalkeystone or a case of reified imagery?'', Abacus, Vol. 30 No. 2, pp. 175-95.

Gunz, H. P., & Gunz, S. P. (1994a). Ethical implications of the employment relationship forprofessional lawyers. University of British Columbia Law Review, 28, 123–139.

Gendron, Cooper and Townley (2000); In the name of accountability, http//www.emerald-library.com/ft

Gunz, S. P. (1991). The new corporate counsel. Canada: Carswell.

Gunz, H. P., & Gunz, S. P. (2002). The lawyer’s response to organizational professionalconflict: An empirical study of the ethical decision making of in house counsel.American Business Law Journal, 39, 241–287.

Gunz, H. P., & Gunz, S. P. (2004). When is a professional not a professional? Unpublishedmanuscript.

Onumah, Simpson and Babonyire (2009); The Audit Expectation Gap-Examining views onauditors reports from Ghana; http//www.emerald-library.com/ft

Saleemi ND, (1997); Simplified Management, 2nd Edition, Pergamon Press New York USA

Sarbanes – Oxley’s Act of 2002, New York, USA

APPENDICES

Appendix I – Letter of Authorization

Appendix II –Questionnaire

QUESTIONNAIRE

A: Demographic information

1. What is your gender? Male Female

2. What is your age?

20- 25 years 26-35 years 36-45 years Above 46 years

3. What is your highest education qualification?

Certificate Diploma Degree Master Doctorate

B: Professional information

4. What is your current position in this firm? ________________________________

5. What are your roles?

a) ____________________________________________________________________

_

b) ____________________________________________________________________

_

6. What is your current remuneration?

Below Kshs 10,000 Kshs 10,001-20,000 Kshs 20,001-30,000

Above Kshs 30,000 Other (specify) Kshs __________

7. Are you contended with the current salary?

Yes No Not sure

8. Justify the answer in question 7 above.

a) ____________________________________________________________________

_

b) ____________________________________________________________________

_

C: General Application of the Code

9. Rate the following ethics and standards according to level of practice.

a) Integrity

Very good Good Average Poor Very poor

b) Objectivity

Very good Good Average Poor Very poor

c) Professional Competence and due care

Very good Good Average Poor Very poor

d) Confidentiality

Very good Good Average Poor Very poor

e) Professional behavior

Very good Good Average Poor Very poor

D. THREATS AND SAFEGUARDS

10. Compliance with the fundamental principles may potentially be threatened by a broad

range of circumstances. Rate these threats according to occurrence frequency

(a) Self-interest threats

High Moderate Low

(b) Self-review threats

High Moderate Low

(c) Advocacy threats

High Moderate Low

(d) Familiarity threats

High Moderate Low

(e) Intimidation threats

High Moderate Low

11. Other than the above threats or conflicts, how often have you come across differences in

ethical requirements when performing services in another country

Never less often most often

12. How often have you experienced disagreement with management in terms of;

(a) Acceptability of accounting policies selected

Never less often most often

(b) The method of policy application

Never less often most often

(c) Adequacy of valuations and disclosure in the financial statements

Never less often most often

(d) Compliance of financial statements with relevant regulations and statutory

requirements

Never less often most often

13. Have you ever received complaints from your esteemed clients concerning auditing

reports you prepared?

Yes No Not sure

14. Have you ever received a typical law suite filed by a client involving a claim that you did

not discover financial statement fraud because of negligence in the conduct of an audit

Yes No Not sure

15. Have you ever acted as a group auditor

Yes No Not sure

16. If yes in above, when you decided to use the work of related auditor in group financial

statement, how was their professional standards in terms of;

(a) Independence

Very good Good Average Poor Very poor

(b) Professional competence

Very good Good Average Poor Very poor

(c) Quality control process in the context of their work performed

Very good Good Average Poor Very poor

17. What are administrative measures taken by this company in ensuring compliance to

professional ethics and standards in auditing?

_____________________________________________________________________

_____________________________________________________________________