The Effect of Audit Quality on Accruals Earnings Management in Nigerian Listed Firms

Abstract

Earnings manipulation studies are of utmost importance to both the shareholders and stakeholders because of its effect in investment and management decisions. The practices are directly affecting the quality of financial reporting and increase information asymmetry between the management and shareholders. Thus, Audit Quality is one of the tool academicians use in measuring the level of earning practices in the organizations. However, this study investigated the possible effect of audit quality towards the change of earnings management level among the Nigerian listed firms. The study used all the public listed firms in the main flow of the Nigerian Stock Exchange (NSE) as a population from the year 2012 until 2017. Sixty-three selected companies were selected as a sample based on the filtration criteria of the study. The financial data was obtained from the Thompson Reuters DataStream, and the corporate governance data was from the annual reports and accounts of the companies. Audit quality and accrual model was used to test the relationship between the study variable. The study applied multiple regression to test the model. It was revealed from the regression that audit quality is negatively significant with accrual earnings management. This finding is indicating that any increases in the unit of audit fees will decrease the earnings management of the selected firms. Thus, the finding is supporting agency theory and is contrary to the assumption of creative accounting theory. The result of this study will assist the relevant authorities in decision making and policy setting towards the best practices of the Nigerian listed firms.

Residual audit fee and real income smoothing: evidence from quoted non-financial firms in Nigeria

“…Mustapha et al. (2019), found evidence that a unit increase in audit fee reduces earnings management among manufacturing firms.…”

“…LASSET as previously defined is the natural logarithm of total assets. It has been utilised in the study by Gandía and Huguet (2021) and Mustapha et al. (2019).…”

“…(2019). LEV is a financial indicator which is the ratio of total debt to total assets which have been employed in Mustapha et al. (2019) and Gandía and Huguet (2021).…”

“…LASSET as previously defined is the natural logarithm of total assets. It has been utilised in the study by Gand ıa and Huguet (2021) and Mustapha et al (2019). LEV is a financial indicator which is the ratio of total debt to Residual audit fee and real income smoothing total assets which have been employed in Mustapha et al (2019) and Gand ıa and Huguet (2021).…”

“…Thus, the current study uses a two-stage approach; first, applying the modified RAF model to determine the abnormal audit fee and using the residual of the model for estimations in two other models. This technique deviates from that employed by Mustapha et al. (2019) that used the natural logarithm of audit fees to proxy audit quality.…”