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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