AUDIT FIRM ATTRIBUTES AND REAL EARNINGS MANAGEMENT IN QUOTED NIGERIA COMMERCIAL BANK
ABSTRACT
The examine audit firm attributes and real earnings management: evidence from quoted Nigeria commercial banks. Quantitative analyses were implemented involving a sample of 72 non-financial firms with 360 firm-year observations for a 11 year period (2012-2023). Data was obtained from the annual reports of these companies as well as from Thompson Reuters and Bloomberg databases. The Panel Corrected Standard Error was used to test the model studied. The finding shows that audit size prevents managers' activities in earnings manipulations. Also, the result establishes that the audit tenure independence presence on the audit fee control managers' opportunistic behaviour while audit expertise was monitors in curtailing earnings manipulation practice. The findings shall give insight to financial analysts, investors, and regulators on the importance of AC in enhancing the quality of the financial report, also show the role of the audit committee characteristics to deter real earnings manipulations. The result shows a negative and significant relationship between audit fee and real earnings management. Finally, the result shows a positive and significant relationship between auditor independence and real earnings management. The study recommends that auditor size should be increase in order to enhance real earnings management. The following were recommended; auditor tenure be increase in order to deal with issues of real earnings management, audit expertise should be strengthen in order to deal with real earnings management, audit fee should be increased to enhance real earnings management and audit independence should be strengthen to enhance real earnings management.
TABLE OF CONTENTS
TITLE PAGE - - - - - - - - ii
DECLARATION - - - - - - - - iii
CERTIFICATION - - - - - - - - iv
DEDICATION - - - - - - - - v
ACKNOWLEDGEMENTS - - - - - - - vi
CHAPTER ONE: INTRODUCTION
1.1 Background to the Study - - - - - - 1
1.2 Statement of the Problem - - - - - - 4
1.3 Objective of the Study - - - - - - 4
1.4 Research Questions- - - - - - - - 5
1.5 Statement of the Hypotheses - - - - - 5
1.6 Significance of Study - - - - - - - 6
1.7 Scope of the Study - - - - - - - 6
1.8 Operational - - - - - - - - 7
CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction - - - - - - - - 8
2.2 Conceptual Review - - - - - - - 8
2.3 Theoretical Framework - - - - - - - 30
2.4 Empirical Studies - - - - - - - - 38
CHAPTER THREE: RESEARCH METHODS
3.1 Research Design - - - - - - - 45
3.2 Population of the Study - - - - - - - 45
3.3 Sample Size - - - - - - - - 45
3.4 Sampling Technique - - - - - - - 46
3.5 Method of Data Collection - - - - - - 46
3.6 Technique for Data Analysis - - - - - - 46
3.7 Model Specification and Variable Definition - - - - 46
3.8 Measurement of Variables - - - - - - 48
CHAPTER FOUR: PRESENTATION AND ANALYSIS OF DATA
4.1 Presentation of Data - - - - - - - 51
4.2 Discussion of Findings - - - - - - 54
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary - - - - - - - - 58
5.2 Conclusion - - - - - - - 59
5.3 Recommendations - - - - - - - 60
5.4 Contributions to Knowledge - - - - - - 61
5.5 Suggestions for Further Studies - - - - 62
References - - - - - - - - 63
Appendix I List of Sampled Companies - - - - 72
Appendix II Detailed Regression Output - - - - 74
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The modern auditing profession is developing to support the growth of the economy and allied sectors, much like any other enterprise. More specifically, the demand for the practice of modern auditing increased when ownership and management began to diverge throughout the eighteenth century industrial revolution. The trend of globalization and the growth of the stock market serve as further catalysts for the advancement of the industry. Large corporations operate in both their own nations and other nations in the globalised world. Similarly, the purpose of auditing, as a function of corporate governance, is to increase the "credibility of the audited object" and foster confidence in the financial reports that are given to stakeholders. Furthermore, auditing is important to the financial system since it protects investors from managers' opportunistic actions and offers assurance services. Like in any other profession, one way auditors are compensated for performing this role is through the audit fee.
Verman et al. (2024) posits that auditing is seen vital for three reasons: firstly, it functions as a monitoring tool; secondly, it equips investors with the knowledge required to make more informed decisions; and thirdly, it acts as insurance against material misstatements. Controlling profits corporate management use techniques that purposefully falsify financial reporting in order to fulfill preset goals or get particular financial results (Bassiouny, Soliman, & Ragab, 2016). These activities include dishonest conduct that violate accounting regulations and accounting decisions that are acceptable and compatible with generally accepted accounting standards (GAAP). Charles and Maccarthy (2023) note that managers may inflate results for a variety of reasons, such as satisfying analyst expectations, earning bonuses, and avoiding debt covenant violations. Typical strategies involve the manipulation of accruals, postponing the acknowledgment of expenses, and expediting the acknowledgment of revenue. Although limiting profits can be done legally, engaging in excessive or unethical actions might mislead investors and compromise the accuracy of financial reporting.
Audit quality is the ability of the auditing process to reliably and effectively detect and reveal significant financial statement frauds. Ajekwe and Ibiamke (2017) state that in addition to the accuracy and thoroughness of their examination of a company's financial records, it also involves the auditor's knowledge, objectivity, and adherence to professional norms. When high-quality audits provide stakeholders with the assurance that financial statements are free from fraud or significant errors, the credibility and usefulness of financial reporting are enhanced (Okpara et al., 2023). Some of the factors that could impact the quality of an audit are the auditor's competency, the audit company's resources, and the regulatory environment in which the audit is conducted.
In turn, earnings are made up of cash items and accruals, with accruals being primarily under management control. These days, earnings management is the term used to describe the manager's capacity to manipulate accruals to make the company appear more successful than it actually is and to improve the firm's ability to forecast future earnings. In other words, since most investors and managers believe that firms with a proper profitability than similar companies, managers strive to achieve consistent and predictable results by choosing acceptable accounting procedures. Agency theory, on the other hand, suggests that managers might be driven to manipulate profits in order to further their own goals. Gaining the trust of individuals who are interested in investing is definitely necessary in order to guide their investments, and in order to accomplish this, investors need data that enables them to make profitable investments. People consider a variety of variables while making judgments, including accounting earnings and its components’ for moving from an underdeveloped to a developed economy is investment.
1.2 Statement of the Problem
The reliability of financial statements and the standard of financial reporting are essential to the maintenance of investor confidence and the efficient functioning of the capital markets. However, the ongoing use of profits management strategies, which could mislead stakeholders and distort financial judgment, poses a severe threat to this dependability. One of the most important responsibilities of a company's managers is to provide financial reports and data that creditors, other potential customers, and current and future investors use to make financing and investment decisions. These financial reports contain accounting earnings that are analyzed by different stakeholders to assess the management performance of the reporting entity as a whole, the profitability of the company, and any prospective earnings difficulties. Managers occasionally utilise their discretion in selecting which accounting decisions to make in order to manipulate the amount of earnings that are reported in order to achieve personal advantages at the expense of stakeholders, given the significance of accounting profits. Consequently, the corpus of research that has already been done connects earnings management to deliberate manipulation of financial statements through the use of judgment in transaction structuring, either to satisfy contractual obligations based on accounting figures or to deceive stakeholders about the firm's true economic picture.Owing to conflicting empirical results regarding the phenomenon under investigation, the relationship between audit firm characteristics and real earning management is still up for debate among academics.Some studies report a positive relationship ( Charles &Maccarthy, 2023; Oladapo, 2024).While other researchers report a negative relationship (Al-Qadasia et al., 2023; Lee & Moore, 2023; Okpara et al., 2023; Verman et al., 2024; Wahab et al., 2023). The mixed results of prior studies show that there a need for further examination of the subject matter.
1.3 Research Questions
The following research questions have been stated to address the problem;
I. To what extent does audit firm size affect real earnings management?
II. What is the relationship between auditor tenure and real earnings management?
III. How does audit expertse affect real earnings management?
IV. To what extent does audit fee affect real earnings management?
V. What is the relationship between audit independence and real earnings management?
1.4 Objectives of the Study
The broad objective of the study will be to examine audit firm attributes and real earnings management: evidence from quoted Nigeria commercial banks. The specific objectives of the study will be to:
I. examine the relationship between audit firm size and real earnings management;
II. investigate relationship between audit tenure and real earnings management;
III. ascertain the relationship between audit expertise and real earnings management;
IV. investigate the relationship between audit fee and real earnings management; and
V. examine the relationship between audit independence and real earnings management.
1.5 Hypotheses of the Study
The following hypotheses have been stated in null form
Ho1: There is no significant relationship between audit firm size and real earnings management.
Ho2: There is no significant relationship between audit tenure and real earnings management.
Ho3: There is no significant relationship between audit expertise and real earnings management.
Ho4: There is no significant relationship between audit fee and real earnings management.
Ho5: There is no significant relationship between auditor independence and real earnings management.
1.6 Scope of the Study
The topic of the study is audit firm attributes and real earnings management: evidence from quoted Nigeria commercial banks. This study uses commercial banks in Nigeria because there few studies that have been carried using banks. The independent variables of the study are auditor size, auditor tenure, audit expertise and audit fee while real earnings management the dependent variable. The study will be conducted in Nigeria and the study covers a period from 2012 -2023. The choice of 2012 is that adoption of International Financial Reporting Standard (IFRS) in Nigeria.
1.7 Significance of the Study
Corporate Managers and Boards: Corporate managers and boards may potentially benefit from the research's findings. Both the importance of using certified auditors and the potential consequences of using profits management strategies can be made clearer by the study. The awareness of this could discourage such conduct and promote ethical financial reporting practices in companies, fostering a climate of transparency and accountability.
Academic Researchers: Additionally, by providing a complete analysis in a range of foreign scenarios, the study contributes to the body of knowledge previously known on the relationship between earnings management and audit quality. Our understanding of this vital area of accounting and auditing can be furthered by academic researchers by building on these findings and looking into similar topics. This study looks into how audit quality affects earnings management strategies in an effort to improve financial reporting's overall transparency and integrity.
Investors: Investors can benefit from the research's explanation of how audit quality can improve the reliability and clarity of financial statements. By making more educated decisions based on a better understanding of the relationship between audit quality and earnings management strategies, investors can reduce the risk associated with investing in firms that engage in aggressive earnings manipulation.
Regulatory Bodies and Accounting Standard-Setters: The study's findings will have important implications for individuals in charge of setting accounting standards and for regulatory bodies. The study's data can be used to inform the creation of legislation, regulations, and auditing standards aimed at enhancing audit quality and promoting superior financial reporting. Regulators and standard-setters can prevent earnings management by proactively addressing the part audit quality plays in compromising the integrity of financial data.
Auditing Firms: This study will help auditing companies by providing them with a better understanding of the particular audit methods, methodology, and approaches that work well for identifying and discouraging earnings management practices. By using this information, auditing firms can increase the quality of their audits, which will strengthen their position in the market and improve their reputation and client satisfaction.
1.8 Operational Definitions of Terms
1. Real Earnings Management: Real earning management refers to deviations from standard operating procedures that are driven by managers' intention to deceive some stakeholders—at the very least—into thinking that specific financial reporting objectives have been fulfilled during regular business operations.
2. Generally Accepted Accounting Principles (GAAP): The guidelines that accountants follow while recording and reporting a company's financial information are known as generally accepted accounting principles, or GAAP. Accurate, honest, and consistent financial reporting is made possible in part by GAAP. This facilitates the understanding and comparison of a company's financial status by creditors, investors, and other stakeholders.
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