ABSTRACT
This study examined the effect of audit quality on value relevance of deposit money banks’ financial report in Nigeria. The study employed ex post facto research design. Data for analysis was gotten from the published financial reports of 12 listed deposit money banks spanning a period of 5 years (2015 to 2019). The Ordinary Least Square (OLS) method using Multiple regression model was used to analyze the data generated with the aid of Statistical Package for the Social Sciences (SPSS Version 21). Findings from the study revealed that audit fee has a positive significant effect on value relevance of reported earnings per share of the listed deposit money banks in Nigeria. Further findings revealed that audit firm size has a positive insignificant effect on value relevance of reported earnings per share of the listed deposit money banks in Nigeria and finally, it was revealed that audit tenure has a negative insignificant effect on value relevance of reported earnings per share of the listed deposit money banks in Nigeria. Based on the findings the study recommends that, deposit money banks should endevour to balance the costs of audit by paying prudent fee for audit services such that it will not impede or influence the external auditors judgement on the reported financial figures in order to minimize the risk of reduced independence. Such practices if not considered that lead to audit risk of poor judgement that might distort the value relevance of financial reports of the banks thus; lead to a situation where investors base there judgement on reported earnings figures that are inappropriate. Also, deposit money banks should not maintain the services of a particular audit firm over a long period of time as this impedes the quality of audit service offered as a result of the familiarity is developed between the audit firm and client overtime.
TABLE OF
CONTENTS
Cover Page i
Title Page ii
Declaration iii
Dedication iv
Certification v
Acknowledgement vi
Table of Content vii
Abstract x
CHAPTER
ONE: INTRODUCTION
1.1 Background to the Study
1 1.2 Statement of the Problem 4
1.3 Objectives of the Study 6
1.4 Research Questions 6
1.5
Research Hypotheses
7
1.6
Significance of the Study
7
1.7 Scope
of the Study
8
1.8
Limitation of the Study 9
1.9
Operational Definition of Term 9
CHAPTER
TWO: REVIEW OF RELATED LITERATURE
2.1Conceptual Review 11
2.1.1Concept
of audit quality 11
2.1.2
Determinant of audit quality
13
2.1.2.1
Audit fee 13
2.1.2.2
Audit tenure 15
2.1.2.3
Audit firm size 16
2.1.3
The debate on audit quality measures 17
2.1.4
Value relevance of financial report 20
2.1.5
Audit quality and value relevance of financial report 20
2.1.6
Financial reporting 21
2.1.7
Overview of the Nigerian banking sector
24
2.2
Theoretical Review 25
2.2.1
Agency theory 25
2.2.2
Signaling theory 28
2.2.3
Stewardship theory 30
2.2.4
The policeman theory 31
2.3
Empirical Review 32
2.4
Summary of Empirical Review 52
2.5 Gap in Literature 62
CHAPTER THREE: METHODOLOGY
3.1
Research Design
64
3.2
Area of the Study 64
3.3
Population of the Study
64
3.4Sample Size and Sampling Technique 64
3.5
Sources of Data 65
3.6 Data Analysis Technique 65
3.7 Definition of Variables 66
3.7.1 Independent variables 66
3.7.2
Dependent Variables 66
3.8 Model Specification 66
CHAPTER
FOUR: DATA PRESENTATION, ANALYSIS AND DISCUSSION ON FINDINGS
4.1 Data Presentation 68
4.2 Data Analysis 68
4.2.1 Data Validity Test 68
4.2.2 Descriptive statistics 70
4.2.3 Correlation analysis 71
4.2.4 Regression of
the estimated model summary 72
4.2.5 Test of hypothesis 74
4.3 Discussion on
Findings 75
CHAPTER
5: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Findings 77
5.2 Conclusion 77
5.3 Recommendations 78
5.4 Contribution to
Knowledge 79
5.5 Areas of Further
Research 79
References 81
Appendices 89
CHAPTER 1
INTRODUCTION
1.1 BACKGROUND TO THE
STUDY
The
Nigerian business environment has been perceived in some quarters as not too conducive
to investors; both local and foreign (Okolie, 2014). Adjudged reasons for this
assertion include the inability of financial reports to meet the needs of this
group of users (Okolie, 2014). The prevalence of fraud, excessive earnings
management and other financial crimes in the country has reduced the level of
confidence reposed in these financial statements; and inability of these
statements to perform their requisite functions as such adjudged to be of no
value relevant for investment decision making(Chadegani, 2011). In the light of
the cost of frauds to the business and the offender, it is important to develop
strategies to prevent or detect business fraud, taking a cursory look at the
risk factors associated with business, giving due attention to the motives
attached with it and establishing how to effectively manage it on a daily basis
(Akinjobi & Omowumi, 2010). Hence, the auditors are looked upon as ‘messiahs’
in correcting this anomaly, and thereby directly, or indirectly reposing the
confidence of investors in the financial reports of firms as the financial
reports are adjudged to be of value relevant when the perceived audit quality
on those report is high (Chadegani, 2011).
The
demand for external audit services originated from the agency issues which
arise out of the separation of ownership and control of firms. Firms are
invariably owned by disparate shareholders but the daily operations of the
firms are controlled by professional managers; who may or may not hold
significant shareholdings in the firm. This means that the shareholders of the
firm have a residual claim on the firm’s resources and that the managers of the
firm will have to communicate their stewardship of the firm’s resources to
shareholders; normally through the periodic issue of a set of financial
statements (Securities and Exchange Commission, 2000). In order to ensure that
the financial information published by firms are reliable and of value
relevance to users, it is normally required that the statements are certified
by an auditor - an objective and rigorous third party who performs independent
examinations that give financial statements credibility with users
(Akinjobi&Omowumi, 2010).
Audit
is playing an important role in developing and enhancing the global economy and
business firms. Investor confidence is fundamental to the successful operation
of the world's financial markets in line with decision making by managers. When
making decisions about capital allocation, investors need to be assured that
financial information they are given is credible and reliable. The quality of
audits and audit opinions expressed on financial reports are crucial to
achieving a sustained investor‘s confidence and providing accounting
informations that of value relevance. Independent auditors play a vital role in
enhancing the reliability of financial information by attesting to the
trustworthiness of the financial statements (Temitope, Segun, Olayinka & Olubunkunola
2013).
It
has been advocated by auditing scholars that the main aim of an audit
assignment is to produce a quality report. The emphasis here is on ‘value
relevant reports’, hence, it is presumed that the major role of the auditor is
the production of a quality report that are of value relevance; achieved
through strict adherence to the principles of high audit quality. Chadegani (2011)
asserted that audit quality is used by investors as a market assessment tool that
there is probability that a given auditor will both detect material
misstatements in the client’s financial statements and report the material
misstatements in order for the financial report not be misleading. This
probability depends upon the broad concept of an auditor’s professional
conduct, which includes factors such as objectivity, due professionalism and
conflict of interest (Mgbame, Eragbhe & Osazuwa, 2012).
In
essence, auditing is used to provide the needed assurance for investors when
relying on audited financial statements. 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 thus
making the reports of value relevance to investors (Adeyemi & Fagbemi,
2010). Effective and perceived qualities (usually designated as apparent
quality) are necessary for auditing to produce beneficial effects as a
monitoring device.
In
underdeveloped countries like Nigeria, the efficient practices of the auditors in
their responsibilities have not yet developed very well (Muluneh 2007). World
Bank (2007) also reported that most of the external auditors in Nigeria complain
audit quality in the country was very low. This raises the question of what
audit quality is and the factors that determines audit quality. However, the
concept of audit quality has proved difficult to define with certainty. It is
not immediately or directly observable and is difficult to measure (Power, 2007).
Moreover, audit markets’ participants have conflicting roles and different
expectations that lead to different interpretations of audit quality (Sutton,
2013). As a result, different people tend to have different definitions and
ways of measuring it, which suggests ambiguity and subjectivity in the term
audit quality(Watkins, Hillison & Morecroft, 2004).
Following,
the above mostly used definition of audit quality, numerous studies were
conducted in developed as well as developing economies in varying magnitude to
examine the variables that influence the quality of auditing (Craswell, Francis
& Taylor 1995; Becker, Defoud , Jiambalvo, & Subramanyam 1998; Dehkordi
& Makarem 2011) and number of factors were discovered. Most of the studies
showed that audit quality can be influenced by the type of audit firm, audit
independence, audit size, audit tenure, audit rotation and audit fee.
It
is therefore, based on these tenets, that this study examined the effect of
audit quality on value relevance of Nigerian deposit money banks’ financial
report. Having established that the contribution of the auditor is basically
through the production of reports that are of value relevance, we investigate
the factors that could influence the achievement of high audit quality and its’
effect on the value relevance of deposit money banks’ financial report in
Nigeria.
1.2 STATEMENT OF THE
PROBLEM
The
spate of audit failure in the world, especially the Nigerian banking failure of
2005, has brought great disappointment to users of financial report. The bane
of the problem has been linked to long term of audit firm tenure which has also
been linked with creative accounting that further affects the quality of
financial reports thus making them less value relevant. In Nigeria audit
setting, the challenge of audit tenure and audit quality reporting has not
attracted much empirical study beyond mere anecdotal opinions (Mgbame, Eragbhe
& Osazuwa, 2012). In view of these studies, auditor tenure has become the
focus of much debate. Should a firm replace its auditors on a regular basis, or
should the auditor be allowed to build a long term relation with the client?
The
production of a quality audit report is perceived to foster engendered
confidence in financial reports by the users of those reports. Investors in
particular tend to place better trust in financial statements that are audited;
as the expected independence of the auditor boosts the assurance that important
investment decisions can be made on the thrust of those statements which is
adjudged to be of value relevance. The increased confidence of these set of
financial users tend to attract the inflow of capital which has the long-run
effect of creating growth and development in the business environment as a
report of the reported market figures that those intending investors are
interested in (Adeyemi & Fagbemi, 2010). However, inefficiencies on the
part of management could lead to ‘structured financial statements’. These
financial statements ordinarily do not show the true state of affairs and
financial position of the organization and hence, could jeopardize the
decisions of prospective investors. Adverse results on investment would reduce
the credibility of the financial statements; which would in turn reduce the
level of capital flow, thereby deteriorating the state of the business
environment (Securities and Exchange Commission, 2000). These are all issues
that the corporate world is faced with in regards to the quality of audit
function. The onus therefore rests on the auditors to address these issues
through efficient and effective execution of the audit assignment, and the
resultant production of a quality report that are of value relevance.
There
are many studies carried out by research on the audit quality in Nigeria. for
example Amahalu and Ezechukwu (2017) ascertained the determinants of audit
quality with a focus on selected Deposit Money Banks listed on the floor of
Nigeria Stock Exchange from 2010-2015. The variables used includes audit fee,
audit tenure and audit firm size. Consequently, Adeyemi, Akhalumeh, Agweda,
Ogunkuade (2017) carried out research in order to investigate the factors
affecting audit quality in Nigeria. The variables includes audit independence,
audit fee and audit tenure. Similarly Augustine, Chijioke, Adeyemi, Obehionye and
Ehi (2017) examined determinants of audit quality in Nigerians business
environment. The determinants includes audit tenure, audit fee and audit firm
size. There is limited study that have linked these audit quality determinants
to value relevance of the commercial banks’ financial reports which breeds a
methodological and empirical gap. The study intends to fill in the gap by
including drawing up a model that takes into consideration audit quality and
value relevance of Nigerian commercial banks’ financial report. Hence, this
study investigates the effect of audit quality on value relevance of DMB’
financial report in Nigeria.
1.3 OBJECTIVES OF THE STUDY
The
main objective of the study is to examine the effect of audit quality on value
relevance of deposit money banks’ financial report in Nigeria. Other specific
objectives include to:
i.
Examine the effect of audit fee on value
relevance of deposit money banks’ financial report in Nigeria.
ii.
Determine the effect of audit firm size on
value relevance of deposit money banks’ financial report in Nigeria.
iii.
Examine the effect of audit tenure on value
relevance of deposit money banks’ financial report in Nigeria.
1.4 RESEARCH QUESTIONS
The
following questions are to guide the study:
i.
To what extent does audit fee affect the
value relevance of deposit money banks financial report in Nigeria?
ii.
What is the effect of audit firm size on the
value relevance of deposit money banks financial report in Nigeria?
iii.
What is the effect of audit tenure on the
value relevance of deposit money banks financial report in Nigeria?
1.5 RESEARCH
HYPOTHESES
The following hypotheses stated are tested.
H01: Audit fee
has no significant effect on the value relevance of deposit money banks
financial report in Nigeria.
H02: Audit
firm size has no significant effect on the value relevance of deposit money
banks financial report in Nigeria.
H03: Audit
tenure has no significant effect on the value relevance of deposit money banks financial report in Nigeria.
1.6 SIGNIFICANCE OF
THE STUDY
The study is significant to the following group of people;
banks, investors, auditors and researchers.
Banks: The findings of this
work will enlighten banks on major determinants of audit quality in banking
industry and how it affects the value relevance of their financial report.
Audit quality being the major determinants of investors confidence, is very
important to banks and other business firms for the purpose of increasing the
number of investors as audit quality is perceived to instill confidence in investors
on the reported accounting figures. More so, the findings of this work will
educate banks in making decision on the type of audit firm to consult and how
it can guarantee investors’ confidence.
Investors: Investors
are the stakeholders as well as the shareholders of every corporate organization.
Investors need to be confident before making their decision on whether to
invest in a particular organization or not. However, the quality of financial
reporting of the major determinant of investors decision making. Also, the
determinant of financial reporting quality is based on the perceived quality of
audit. Therefore, the findings of this study will enlighten investors on how
audit fee, audit firm size and audit tenure can affect the value relevance of
financial report. Thereby, making them to rely on the financial statement
during investment decision.
Auditors: The study
findings may be of great value to auditors towards enhancing accountability as
well as quality of financial reporting. The findings will auditors how lack of
audit quality can affect corporate image thereby affecting investors’
confidence negatively. The findings on the importance of audit quality will
help auditors to be diligent in discharging their duties and avoid any form of
compromise knowing that the investors depends on their report when making
investment decision.
Academicians and Scholars: The study
will also provide empirical findings that may be of importance to researchers
and students in the areas of Finance, Accounting and Audit. These findings may
be used to improve understanding of the determinants of audit quality of
commercial banks. Additionally, the study may result in an improved
understanding on the determinants of audit quality of commercial banks. The
study findings will be an addition to existing literature on audit fee, audit
tenure, audit independence and their effect on audit quality.
1.7 SCOPE OF THE STUDY
The
study investigates the effect of audit quality on value relevance of deposit
money banks financial report in Nigeria. The study will be carried out using
only deposit money banks that are listed on Nigeria stock exchange for the
period of five years ranging from 2015 to 2019. The reason for the choice of
listed deposit money banks is in line with high regulations embedded in listing
requirement as firms that are listed are exposed to more regulations with thus
posit a better environment for quality of audit services. The reason for the
period (2015-2019) is because of the resurgence in economic revolution
championed by monetary policies drive as ascribed by the new CBN policy
orchestrated by the Mohammad Buhari administration which has attracted the
interest of diverse investors into the business of deposit money banking as the
leading institution in this economic policy drive.
1.8
LIMITATIONS OF THE STUDY
The
current research is restricted only to the listed deposit banks. Furthermore,
this research was mainly conducted based on the secondary data collection. The
other data collection methods like survey had not been considered. As a result
they may not be 100% accurate. In addition to these, data representing the
period of 2015 to 2019 were used for the study.
The
research has compiled a large database of listed deposit money banks accounting
data that demonstrate what can be done even with the limitations of currently
available data.
More
so, the methodology did not capture other variables like; audit independence, audit
switch and joint audit that are proxy for audit quality. This thus makes it
impossible for a more holistic conclusion to be drawn as shown in the R2
value in the study model.
1.9 OPERATIONAL DEFINITION OF TERMS
Audit fee: The
amount of fee paid by a client is capable of determining the quality of audit
being offered. That in most cases audit fee that appears to be too small does
not give the audit firm enough resource to employ competent audit staff that
will carryout the audit function whereas audit fee that is too high might
warrant an induced casual relationship between the audit client and firm that
will impede the judgment of the auditor thus audit firm should be at par with
the required services such that it will not affect the quality of audit. This
study will use the reported audit fee of the commercial banks as a reflection
of audit quality.
Audit firm size: The size
of an audit firm is seen as a surrogate for audit quality, meaning that larger
audit firms have a bigger reputation to safeguard and therefore will ensure a
more independent quality audit service.
Audit tenure: Auditor
Tenure is defined in this study as the length of the auditor-client
relationship. It is the number of years an audit firm is engaged with a client.
A rather too long association between the auditor and his client may constitute
a threat to independence as personal ties and familiarity may develop between
the parties, which may lead to less vigilance on the part of the auditor and
even to an obliging attitude of the latter towards the top managers of the
company thus deteriorate the quality of audit service offered.
Value relevance: Value
relevance implies the ability of the financial information contained in the
financial statements to explain market measures. Value relevance can be
analyzed by examining the relationship between market value of equity (stock
price) with accounting data such as earnings per share.
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