Audit Characteristics, Board Independence and Financial Reporting Quality of Listed Deposit Money Banks in Nigeria
CHAPTER ONE
Objective of the Study
The study aims to achieve the following specific objectives:
- To examine the impact of audit characteristics on the financial reporting quality of listed Deposit Money Banks in Nigeria.
- To analyze the effect of board independence on the financial reporting quality of listed Deposit Money Banks in Nigeria.
- To investigate the combined influence of audit characteristics and board independence on financial reporting quality.
- To provide recommendations on improving financial reporting quality through enhanced corporate governance practices.
CHAPTER TWO
LITERATURE REVIEW
Conceptual Review
Audit Quality
Audit quality refers to the extent to which audits are performed in compliance with established professional standards, leading to reliable financial statements that reflect the true financial position of an organization. According to Bahram (2021), audit quality is fundamental to maintaining trust in the financial reporting process, particularly in emerging economies. It encompasses several dimensions, including auditor independence, competence, and adherence to ethical standards. High-quality audits help mitigate risks associated with misrepresentation and ensure that financial statements meet stakeholders’ expectations.
Key attributes of audit quality include the independence of auditors, their technical expertise, and the robustness of the audit process. Abubakar and Ahmad (2023) emphasize that independence is critical, as it enables auditors to provide unbiased opinions on financial statements. In addition, the level of professional scepticism exercised by auditors during the audit process plays a significant role in detecting material misstatements and reducing the risk of fraudulent reporting. Other attributes include effective communication between auditors and management, timely issuance of audit reports, and compliance with international audit standards. These attributes collectively ensure the reliability and credibility of audited financial reports, enhancing stakeholder confidence.
Indicators of audit quality are essential for assessing the effectiveness of the audit process. These indicators include the quality of audit documentation, the accuracy of auditor judgments, and the degree of compliance with regulatory requirements. Fielder (2021) suggests that meeting or exceeding stakeholder expectations, such as issuing timely and relevant audit reports, is also a significant indicator. Furthermore, the use of modern audit technologies and adherence to continuous professional development programs are considered positive markers of audit quality. Audit firms with a reputation for excellence often exhibit these indicators, which help differentiate them in competitive markets.
Despite the importance of audit quality, several challenges hinder its attainment, particularly in Nigerian deposit money banks (DMBs). Dandago and Rufai (2024) highlight systemic issues such as inadequate regulatory oversight, insufficient training for auditors, and the prevalence of conflict of interest in auditor-client relationships. The pressure to meet tight deadlines and cost constraints often compromises the thoroughness of the audit process. In some cases, auditors may also face undue influence from powerful clients, undermining their independence and objectivity. These challenges underscore the need for reforms aimed at strengthening the regulatory framework and enhancing the professional competence of auditors.
CHAPTER THREE
METHODOLOGY
Research Design
Research design refers to the overall strategy used to integrate the different components of a study in a coherent and logical manner. This ensures that the research questions are effectively addressed and that the research findings are reliable. In this study, a correlational research design was adopted. Correlational research is used to determine the relationship between two or more variables, without manipulating them. It is particularly useful in identifying patterns, associations, and trends among variables that naturally occur (Saunders, Lewis & Thornhill, 2019). Given the nature of the study, which seeks to explore the relationships between audit characteristics, board independence, and financial reporting quality in Nigerian Deposit Money Banks (DMBs), the correlational design was deemed appropriate as it enables the assessment of these variables in their natural setting. This approach allows for the analysis of how audit characteristics and board independence may influence the financial reporting quality of DMBs without the need for experimental control, making it a viable option for understanding existing relationships within the Nigerian banking sector.
CHAPTER FOUR
RESULTS AND DISCUSSION
Results
The results for the financial reporting quality (FRQ) variable reveal several important insights into the financial reporting practices of Nigerian deposit money banks over the period from 2013 to 2023. With a mean value of 84.64, the banks under investigation demonstrated a relatively high level of financial reporting quality on average. This suggests that, over the period, the banks maintained rigorous reporting standards and adhered to the required regulatory frameworks and accounting standards. The high mean value is indicative of the commitment to transparency and accuracy in financial statements, which is crucial for enhancing investor trust, ensuring regulatory compliance, and fostering the stability of the financial sector.
The consistency of the FRQ values is further underscored by the median of 85.00, which is almost identical to the mean. This close alignment between the mean and median suggests that the financial reporting quality across the banks did not exhibit significant skew or extreme outliers. Most of the data points are clustered around the middle, indicating that the majority of the years considered experienced a stable and high standard of financial reporting. The absence of significant deviations highlights the consistency in the application of audit standards and financial reporting practices across the sample period.
The maximum value of 91.00 reflects an exceptional year in terms of financial reporting quality, possibly driven by improvements in governance, audit practices, or adherence to new regulations that were enforced during that time. It suggests that during certain periods, the banks may have implemented best practices in financial reporting, leading to highly accurate and transparent disclosures. Conversely, the minimum value of 74.00 reveals a potential dip in reporting quality, which could have been influenced by challenges such as regulatory uncertainties, internal management issues, or external economic pressures. This dip, however, remains within a reasonable range, suggesting that the banks were able to maintain an overall high standard of reporting despite occasional setbacks.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
Summary of Findings
The purpose of this study was to explore the impact of audit characteristics and corporate governance mechanisms on the financial reporting quality (FRQ) of listed Deposit Money Banks (DMBs) in Nigeria. The research utilized several statistical techniques, including regression analysis, correlation analysis, and Granger causality tests, to examine the relationships between key variables such as audit independence (AIN), audit firm size (AFS), audit tenure (AT), board independence (BI), and their influence on financial reporting quality.
The first hypothesis posited that audit characteristics (such as audit independence, audit firm size, and audit tenure) significantly impact the financial reporting quality of listed DMBs in Nigeria. The regression results revealed that audit independence (AIN) had a significant positive effect on FRQ, with a coefficient of 167.0967 and a p-value of 0.0240. This suggests that greater auditor independence is associated with higher financial reporting quality. This finding aligns with the literature, notably Abubakar and Ahmad (2023), who emphasized the importance of auditor independence in ensuring the reliability and transparency of financial reports. Auditor independence enhances objectivity and reduces the risk of manipulation or bias in the preparation of financial statements, thus improving the quality of financial reporting.
In contrast, audit firm size (AFS) and audit tenure (AT) did not show statistically significant relationships with FRQ. The coefficients for both variables were found to be relatively small, and the p-values were above the 5% significance level. This outcome suggests that in the context of Nigerian DMBs, audit firm size and tenure do not appear to have a substantial impact on the quality of financial reporting. While larger audit firms may be expected to have better resources and a more stringent review process, this study did not find compelling evidence to support the hypothesis that larger firms provide significantly higher-quality audits compared to smaller firms. The lack of significance for audit tenure may also reflect the fact that a longer tenure does not necessarily improve the quality of audits if other factors such as auditor independence and expertise are not adequately addressed.
Conclusion
The results from the hypotheses tested in this study provide valuable insights into the factors influencing the quality of financial reporting (FRQ) of listed Deposit Money Banks (DMBs) in Nigeria. The analysis revealed that audit independence significantly impacts financial reporting quality, supporting the idea that auditor independence plays a crucial role in ensuring the accuracy and transparency of financial statements. This finding aligns with previous literature that emphasizes the importance of independence in reducing the risk of biased financial reporting.
Conversely, audit firm size and audit tenure were found to have a limited impact on financial reporting quality in the context of Nigerian DMBs. This suggests that relying solely on the size or tenure of the audit firm may not be sufficient to guarantee high-quality audits. Instead, emphasis should be placed on the competence and independence of auditors to ensure robust financial reporting.
Recommendations
Based on the findings, the following recommendations were proposed:
- Strengthen Auditor Independence: The study found that auditor independence had a significant impact on financial reporting quality. Therefore, regulators and policymakers should prioritize initiatives that strengthen auditor independence in Nigeria’s banking sector. This could include implementing stricter regulations regarding the appointment and rotation of auditors, as well as ensuring that external auditors are not influenced by internal management. Measures such as enforcing longer mandatory cooling-off periods between audits by the same firm or individual could further mitigate conflicts of interest.
- Enhance Board Independence and Governance Practices: Although board independence did not show a direct significant effect on financial reporting quality, the study suggests that corporate governance mechanisms play a crucial role in ensuring the reliability of financial reporting. To enhance the effectiveness of board independence, banks should consider improving the diversity, expertise, and qualifications of their board members, especially those serving on audit committees. This could lead to more rigorous oversight of financial reporting and a more transparent decision-making process.
Suggestions for Further Studies
Future research could expand the scope of this study by including a broader range of industries, allowing for comparisons across different sectors to determine if the findings hold true beyond the banking sector. A larger sample size would also enhance the reliability of the results and provide a more comprehensive view of the factors influencing financial reporting quality. Additionally, future studies could examine the role of other corporate governance mechanisms, such as the composition of audit committees or executive compensation structures, in shaping financial reporting practices. Longitudinal studies could also offer insights into how changes in regulatory frameworks or economic conditions affect financial reporting quality over time. Finally, qualitative research, such as interviews or case studies, could provide a deeper understanding of the mechanisms through which audit characteristics and board independence impact financial reporting in Nigerian banks.
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