The Effect of Audit Quality on the Financial Performance of Nigeria Deposit Banks
Chapter One
Objective of the Study
The main objective of this study is to ascertain the effects of audit quality on financial performance of deposit banks in the Nigeria. The specific objectives include to:
- determine the effect of audit quality on Return On Assets of deposit banks in Nigeria.
- ascertain the effect of audit quality on Earnings Per Share of deposit banks in Nigeria.
- determine the effect of audit quality on net profit margin of deposit banks in Nigeria.
- determine the influence of audit quality on Dividend Per Share of deposit banks in Nigeria.
CHAPTER TWO
LITERATURE REVIEW
Literature Review
Research studies examine the effect of audit quality on the financial performance. Some of these studies used audit firm size, auditor experience, audit fees, auditor rotation and auditor independence as proxies for audit quality (e.g., Woodland and Reynolds 2003; Nam 2011; Miettinen 2011; Bouaziz 2012; Anderson and Verma 2012; Farouk and Hassan 2014; Tobi et al. 2016; Matoke and Omwenga 2016). (Nam 2011) examines the association between audit fees as a measure for auditor independence and audit quality of firms in New Zealand. The study discovered that the condition of non-audit services by the auditors of a firm compromises the auditor’s independence. (Farouk and Hassan 2014) investigate the effect of audit quality on the financial performance of quoted cement firms in Nigeria. They aimed at determining the impact of auditor independence and audit firm size as proxies for audit quality on financial performance using multiple regression analysis. Findings show that audit firm size and auditor independence have significant impacts. However, auditor independence is more influential than auditor size on firm financial performance. (Matoke and Omwenga 2016) test the relationship between audit quality and financial performance through the proxies of auditor independence, auditor size, audit team attributes, auditor experience and net profit margin of listed firms in Kenya. The study analyzed data by applying multiple linear regression analysis. This investigation found that the effect of audit quality on financial performance is positive and significant and the higher the degree of auditor independence, the more likely the firm is to have higher profitability. (Woodland and Reynolds 2003) inspect the relationship between indirect measures of audit quality and financial statement analysis using multivariate regression analysis. They discovered that there is no proof that auditor size, tenure or industry specializations associate with audit quality. (Miettinen 2011) studies the association between audit quality and financial performance. Audit quality was measured using auditor size. The outcome of the study proves that audit quality has a direct effect and a mediated effect through audit size on financial performance. (Bouaziz 2012) studied the association among auditor size and financial performance on a sample of 26 Tunisian firms registered on the Tunis Stock Exchange. The outcome shows that auditor size has a substantial impact on the financial performance of firms concerning Return on Assets ROA and Return on Equity ROE. The study by (Anderson and Verma 2012) examined the relationship between auditor size, auditor tenure, and auditing firm rotation. The data they gathered from 2,148 listed Asian firms shows that big audit firms offer high-quality audit because big audit firms are considered more conservative than non-big audit firms. According to (DeAngelo 1981) auditor independence is the restricted possibility that the auditor will reveal any misstatement in financial statements.
CONCEPTUAL REVIEW
Audit Quality
The various changes in accounting, financial reporting and auditing were all designed to provide protection to investors. This is being achieved by imposing a duty of accountability upon the managers of a company (Crowther & Jatana, 2005). More precisely, the role of auditing is to reduce information asymmetry on accounting numbers, and to minimize the residual loss resulting from managers’ opportunism in financial reporting. Effective and perceived qualities (usually designated as apparent quality) are necessary for auditing to produce beneficial effects as a monitoring device. The perceived audit quality by financial statements users is at least as important as the effective audit quality. Conceptually, Agency theory recognizes auditing as one of the main monitoring mechanisms to regulate conflicts of interest and cut agency costs (Adeyemi & Fagbemi, 2010).
According to DeAngelo (1981), audit quality is defined as the competency and independence of auditors in detecting and reporting material misstatement. Zehri and Shabou (2011) asserted that high quality auditors are more likely to discover questionable accounting practices by clients and report material irregularities and misstatements compared with low quality auditors. Due to this, a higher audit quality is able to better constrain earnings management, and in turn enhance the quality of financial reports (Ching, Teh, San & Hoe, 2015). Previous research in the related literature has employed various measures as proxies of audit quality. Several studies have indicated that a higher quality of auditing mitigates accruals based earnings management (Okolie, 2014; Soliman and Ragab, 2014; Gerayli, Yanesari and Ma’atoofi, 2011; Becker, DeFond, Jiambalvo, & Subramanyam, 1998). This study used audit firm size, audit fees, and audit partner as audit quality measures.
CHAPTER THREE
RESEARCH METHODOLOGY
Research Design
This research work adopted an ex-post facto research design. This is because it seeks to establish cause-effect relationship and the researcher has no control over the variable under study.
Sample Size and Sampling technique
The population size will serve as the sample size since the population size is small. The researcher decides to analyze all the population size since the population size is manageable. Below is the list of selected banks; Access Bank, Diamond Bank, Eco Bank, Fidelity Bank Nigeria, First Bank Nigeria, First city monument Bank, Guaranty Trust Bank, Skye Bank, Stanbic IBTC Bank Nigeria Limited, Standard Chartered Bank, Sterling Bank, Union Bank on Nigeria, United Bank for Africa, Unity Bank PLC, Wema Bank and Zenith Bank plc.
CHAPTER FOUR
DATA ANALYSIS
Table 1: Descriptive Statistics
CHAPTER FIVE
SUMMARY OF FFINDINGS, CONCLUSISON AND RECOMMENDATIONS
Summary of Findings
Based on the data analyzed, the following findings were drawn:
- Firm size has significant effects on return on assets of quoted Nigerian banks.
- Audit committee independent has significant affect return on equity of quoted Nigerian banks.
- Audit committee size has significant affects profit margin of quoted Nigerian banks.
Conclusions
This research work investigates the effect of audit quality on the financial performance of deposit money banks in Nigeria. The study attempted to provide empirical evidence of this effect within the Nigerian context. Findings from the study revealed that there is a significant positive effect between audit quality financial performance indices. The control variables; audit committee independence, audit reputation and firm size were found to be positively related to financial performance except audit committee size which is negative.
Recommendations
Based on the findings of the study, the researcher recommends the followings:
- Financial institutions should make use of the services of audit firms with unquestionable track records of audit quality and reputation; hence the debate on audit quality is not a settled matter.
- Audit firms who have a solid reputation will be less likely to employ auditors who will be willing to compromise their stand; the audit firm itself would not like to engage in any activity that will soil its name.
- The management of the deposit money banks in Nigeria should employ the services of one of the big audit firms and where this is not possible, management should go for an audit firm whose character and integrity is beyond question.
REFERENCES
- Abbott, L. J., Park, Y. & Parker, S. (2000). The effects of audit committee activities and independence on corporate fraud, Managerial Finance, 26(11), 55-67.
- Adeyemi, S. B., & Okpala, O. (2011). The impact of audit independence on financial reporting: Evidence from Nigeria. Business and Management Review, 1(4), 9-25.
- Amahalu. N &Ezechukwu B., (2017). Determinants of audit quality: evidence from deposit money banks listed on Nigeria stock exchange. International journal of academic research in accounting, finance and management sciences 7(2) April 2017, pp. 117–130 E-ISSN: 2225-8329, P-ISSN: 2308-0337 © 2017 HRMARS www.hrmars.com
- Barbadillo, E., Gomez-Aguilar, N., & Carrera, N. (2009). Does mandatory audit firm rotation enhance auditor independence? Evidence from Spain. Auditing: A Journal of Practice & Theory, 28(1), 113-135.
- Beasley, M.S. (1996). ‘‘Board of director composition and financial statement fraud’’, Accounting Review 71(4): 443–465
- Beasley, M. S., Carcello J. V., Hermanson D. R., & Lapides P.D. (2000). Fraudulent financial reporting: consideration of industry traits and corporate governance mechanisms’’, Accounting horizons 14(4): 441–454.
- Becker, C., DeFond, M., Jiambalvo, J., &Subramanyam, K. R. (1998). The effect of audit quality on earnings management. Contemporary accounting research, 15(1), 1–24.
- Beasley, M. S., Carcello, J. V., Hermanson, D.R. & Neal, T.L. (2009). The audit committee oversight process. Contemporary Accounting Research 26 (1):65-122.
- Cameran, M., Prencipe, A., & Trombetta, M. (2014). Mandatory Audit Firm Rotation and Audit Quality. European Accounting Review, (ahead-ofprint), 1-24.
