IMPACT OF AUDIT QUALITY ON FINANCIAL PERFORMANCE OF LISTED DEPOSIT MONEY BANKS IN NIGERIA
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We examined the effect of audit quality, represented by audit firmsize,auditortenure,clientimportanceandauditorspecializationontheperformance,representedbyTobinsQ,oflistedDepositMoneyBanks (DMBs) in Nigeria. Secondary data extracted from annual report andaccountsofof8DMBswasanalyzedusingpanelmultipleregressiontechnique. Result of Hausman specification test suggests that the OrdinaryLeastSquare(OLS)regressionresultwasmostappropriateforthedataset.TheregressionresultindicatesthatauditortenurehassignificantpositiveeffectonTobinsQofDMBsinNigeria.Incontrast,clientimportancehasasignificantnegativerelationshipwithTobinsQwhileauditfirmsizeandauditorspecialization respectively have insignificant positive and negative effect onTobins Q of DMBs in Nigeria. Based on the result, the study recommendsamongothersauditortenureofthreeyearsandaboveforNigeriancompaniesas it is capable of enhancing the performance of Deposit Money Banks inNigeria.
TABLE OF CONTENTS
COVER PAGE
TITLE PAGE
APPROVAL PAGE
DEDICATION
ACKNOWLEDGEMENT
ABSTRACT
CHAPTER ONE
- INTRODUCTION
- Background of the Study
- Statement of the problem
- Aim and objectives of the study
- Research questions
- Statement of hypothesis
- Scope of the study
- Significance of the study
- OperationalDefinitionofTerms
CHAPTER TWO
LITERATURE REVIEW
- Theoreticalframework
- Conceptualframeworkauditquality
- Empiricalreviews
CHAPTER THREE
RESEARCH METHODS
- Researchdesign
- Populationofthestudy
- Sample And Sampling Techniques
- Data Collection and Analysis
- Dataanalysis
CHAPTER FOUR
4.0 ResultsandDiscussion
4.1 Results
4.2 Discussion
CHAPTER FIVE
- Conclusion
- Recommendation
- References
CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Increaseinbusinesscomplexityhasnecessitatedseparationofmanagementfromownership.Thisdivorce of management from ownership in moderncorporationshasmadestewardshipaccountinginevitable.Managers,undertheagencyarrangement,areresponsiblefor runningtheaffairsofthecompanyon behalf of the owners. However, due to ostensibleinformationasymmetryandconflictofinterest,ownersrequiremechanismsthatcompelmanagerstosafeguardtheinterests ofdiversestakeholders(Farouk&Hassan,2014)inthefirm.Externalauditisoneofthemeasuresthatarebelievedtocheckthese managerialexcesses.
Audit of financial statements reduces informationasymmetry in a firm and protects the interests ofstakeholders through provision of assurance on thecorrectness,truthfulnessandfairnessofthefinancialstatementspreparedbymanagement.Thisisinviewofthefactthathighquality auditisexpectedtodetectmaterial misstatements, errors, and losseswhichresults from managerial opportunism in the quest toincrease their economic largesse at the expense ofotherstakeholdersofthefirm(Alaswad&Stanišić,2016;Tyokoso,Sabari,Dogarawa&Hassan,2017).
Auditoffinancialstatementsisthereforeanimportantpartoftheregulatoryandsupervisoryframeworkwhichisofsignificantpublic interest.Theextenttowhichauditlendscredencetothereliabilityoffinancialstatementsinturndependsonthequalityofauditservices rendered(Smii,2016).Auditqualityis the joint probability that the auditor detects andreportsquestionableaccountingpracticesofthefirm(Tyokoso&Tsegba,2016).Auditqualityisthereforecapableofinfluencing corporateperformance,throughmitigationofrisksandsignificantmisstatements.Thelowerriskofmisstatementsconsequently, increasestheconfidenceofcapitalmarketinvestorsinfinancialreportswhichalsolowers the cost of capital and increases the marketvaluation of the firm (Heil, 2012). Users of auditedfinancialstatementsthereforebelievethattheinformationitcontainsarecompletelyfreefrommaterial bias and so depend on it to allocate scarceeconomic resourceswithexpectationsofcommensuratereturns.Investorconfidenceisthereforeassociatedwiththeleveloftruthfulandfair presentationoffinancialstatementswhichinturnisaproductofauditquality(Okolie&Izedonmi,2014)
Consequently, audit quality and its association withperformanceoffirmsisamajorconcernofresearchers in accounting literature. The importanceof a study of the relationship between audit qualityandtheperformanceoflistedfirmsinNigeriacannotbe over emphasized in view of the fact that manyNigerian firms are struggling to regain credibilityamidstnationalandinternationalinvestors(Farouk&Hassan, 2014).This need has sparked academicdebate on the relationship between audit quality andperformanceoffirmsinNigeriarecently.Thoughtheliterature is awash with many studies, most of themfrombothNigeriaandforeignliteraturedocumentedmixedandinconsistentevidencebetweenauditquality and firm performance (Farouk & Hassan,2014;Ching,Teh,San&Hoe,2016;Smii,2016).
Inaddition,therearerelativelyfewstudiesinNigeriathat examine the relationship between audit qualityand performance of listed firms even though somecompaniesinNigeriasuchasDMBshavebeenaccused of inflating performance amidst clean auditreports from highly reputable audit firms in Nigeria.Thiscallstoquestionthequalityofauditservicesandreported performance of listed Nigerian companies.Moreso,someoftherecentstudiesinNigeriawhichinvestigates the relationship between audit qualityandperformanceoffirmssuchasFaroukandHassan(2014)proxiedfirmperformancebyaccountingmeasuressuchasROA.How ever,theuseofaccounting- based measures of firm performance inpreviousstudiesonauditqualityandfirmperformanceiserroneousandsorenderstheresultsofsuch studies doubtful. This is because audit qualityhasnodirecteffectontheaccountingbasedperformanceoflistedfirmsbutcapitalmarket-basedperformance according to the signaling theory ofaudit.
Inaddition,giventhefactthatmanyreportedcasesofcorporate scandals in Nigeria involve DMBs, thecredibilityofauditedfinancialstatementsinthebankingsectorbecomesdoubtful.Itisthereforeimperative to examine the effect
ofauditquality ontheperformance(proxiedbyamarket-basedperformancemeasure,TobinsQ)ofbanksinNigeriatorestorethelostpublicconfidenceinfinancialstatements of listed companies which is capable ofimpacting negatively on the market performance ofbanksandNigeriancompaniesgenerally.
Despitethesegaps,previousstudiessuch as FaroukandHassan(2014),OkolieandIzedonmi(2014),andModum,UgwokeandOnyeanu(2013)havenotaddressed the subject matter especially within thecontextofDepositMoneyBanks(DMBs)inNigeria.This study therefore examines the effect of auditqualityontheperformanceofDepositMoneyBanksin Nigeria to fill the gaps in the local literature.Consequently,thestudyhypothesizedthatauditquality proxied by audit tenure, client importance,auditor industry specialization and audit firm sizehavenosignificanteffectontheperformance(proxiedbyTobinsQ)oflistedDepositMoneyBanksin Nigeria.
1.2 Statement of the Problem
The audit failure in the world, especially in Nigeria, has brought great disappointment to the user of financial report. The problem has been traced to long-term of audit firm tenure which has been traced to creative accounting. In Nigeria audit setting, the challenge of audit tenure and audit quality reporting has not attracted much testable study beyond mere anecdotal opinions Mgbame, et al (2012). In view of these studies, auditor tenure has become the focus of much debate. The production of audit quality report is seen to foster 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 boots the assurance that important investment decisions can be made on those statements. 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.
However, lack of efficiency on the part of management could lead to disorganized financial statements. These financial statements ordinarily do not show the true state of affairs and financial position of the deposit banks and hence, could threaten the decisions of the prospective investors. Unfavorable results on investment would reduce the credibility of the financial statements; which would in turn reduce the level of capital flow, thereby de-generating the state of the business environment. The burden therefore rests on the auditors to address these issues through efficient and effective execution of the audit assignment, and the outcome production of a quality report. The study therefore investigates the factors that could affect the quality of the audit assignment, and analyzes the existence and degree of relationships between these factors and the achievement of high audit quality in the Nigeria deposit banks (International Journal of Academic Research in Accounting, Finance and Management Sciences).
Theoretically, the auditor is expected to be independent of the management staff of the company being audited. However, a number of factors like familiarity, threat of replacement of an auditor and the provision of management advisory services appear to impair auditor’s independence. Concerns have been expressed about the conflict of interest between the statutory role of the auditor and the other services it may undertake for a client (UK House of Common Treasury Committee, 2008).
1.3 Aim and Objectives of the Study
The main aim 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.
- To ascertain the effect of audit quality on Earnings Per Share of deposit banks in Nigeria.
iii. To determine the effect of audit quality on net profit margin of deposit banks in Nigeria.
iv. To determine the influence of audit quality on Dividend Per Share of deposit banks in Nigeria.
1.4 Research Questions
I. To what extent does audit quality affect Return on Assets of listed deposit banks in Nigeria?
II. To what extent does audit quality affect Earnings Per Share of Nigeria banks?
III. To what extent does audit quality affect net profit margin on listed deposit banks in Nigeria?
IV. To what extent is the influence of audit quality on Dividend Per Share on deposit banks in Nigeria?
1.5 Hypotheses
H01: Audit quality has no significant effect on Return On Assets of deposit banks in Nigeria.
H02: There is no significant relationship between audit quality and Earnings Per Share of deposit banks in Nigeria
H03: Audit quality has no significant effect on net profit margin of deposit banks in Nigeria
H04: Audit quality has no significant effect on dividend per share of deposit banks in Nigeria.
1.6 Scope of the Study
This study covers on the effect of audit quality on financial performance of Nigeria deposit banks and their activities for the period (2005-2014). The study made use of secondary data. Also this study shall be limited to investigating the relationship between Audit Quality (independent variable) and the dependent variable (Financial Performance).
1.7 Significance of Study
This study will enlighten bankers, government, investors and researchers on the effect of audit quality on financial performance of deposit banks in Nigeria.
It helps bank operators and officials on what to focus on in order to grow the financial performance of various institutions. This study also encourages government to develop appropriate capacities and put in place adequate structures to guide and monitor excellent performance and safety of the financial system. It serves as knowledge to researchers on financial analysis and enable the researcher show that return on assets, earnings per share, working capital, net profit margin and dividend per share constitutes major determinants of the financial performance of deposit banks. The findings of this research guides investors on key parameters to be adequately considered in undertaking investments prepositions in financial institutions.
1.9 Operational Definition of Terms
Audit quality: it is the process of systematic examination of a quality system carried out by an internal or external quality auditor or an audit team. It is an important part of an organization’s quality management.
Quality audits are performed at predefined time intervals and ensure that the institution has clearly defined internal system monitoring procedures linked to effective action. This can help determine if the organization complies with the defined quality system processes and can involve procedural or results-based assessment criteria.
Financial performance: it is a subjective measure of how well a firm can use assets from its primary mode of business and generate revenues. This term is also used as a general measure of a firm’s overall financial health over a given period of time, and can be used to compare similar firms across the same industry or industries in aggregation. Items such as revenue from operations, operating income or cash flow from operations can be used, as well as total unit sales.
Return on assets (ROA): is a financial ratio that shows the percentage of profit a company or bank earns in relation to its overall resources. It is commonly defined as a net income divided by total assets. Net income is derived from the income statement of the bank or company and is the profit after tax. The assets are read from the balance sheet and include cash and cash-equivalent items such as receivables, inventories, capital equipment as depreciated, and the value of property such as patents. ROA is a ratio but usually presented as a percentage.
Mathematically;
ROA= Net Income/Total Assets.
Earnings per share (EPS): is the portion of a company’s profit allocated to each share of common stock. It serves as an indicator of a company’s profitability. The balance sheet and income statement are used to find the weighted average number of common shares, dividends paid on preferred stock (if any), and the net income or earnings.
Mathematically; it can be calculated as:
EPS = Net Income - Preferred Dividends/Weighted Average common Shares.
Net profit margin: it is the percentage of revenue remaining after all operating expenses, interest, taxes and preferred stock dividends have been deducted from a company’s total revenue.
Mathematically;
Net profit margin (NPM) = Net profit/total revenue
Net profit = total revenue - total expenses
Dividend per share: it is the sum of declared dividends issued by a company for every ordinary share outstanding. The figure is calculated by dividing the total dividends paid out by a business, including interim dividends, over a period of time by the number of outstanding ordinary shares issued.
It is an important metric to investors because the amount a firm pays out in dividends directly translates to income for the shareholder, and the dividend per share is the most straightforward figure an investor can use to calculate his/her dividend payments from owning shares of a stock over time.
Mathematically;
Dividend per share (DPS) = total dividend/number of ordinary shares outstanding for the period
CHAPTER FIVE
Conclusion/Recommendations
5.1 Conclusion
Thestudyexaminedtheeffectofauditqualityonfinancial performance of listed Deposit moneyBanksinNigeria.Theresultofregressionanalysisshowsthat ATandCIhavesignificanteffect on TQ of listed Deposit Money Banks inNigeriawhileFSandASwerefoundto havenosignificanteffectonTQofthefirmsunderstudy.The study therefore concludes that audit tenureandclientimportanceplayaprominentroleinthedeterminationofTQofNigerianfirms.
5.2 Recommendations
Basedonthefindingsofthestudy,thefollowingrecommendationsweremade:
- The study recommends auditor tenure ofthree years and above for NigeriancompaniesasitiscapableofenhancingtheperformanceofDepositMoneyBanksinNigeria.
- PubliccompaniesinNigeriashoulddiscloseallpaymentsmadetotheexternalauditorsinceclient importancehasasignificantinfluenceontheperformanceofDepositMoneyBanksinNigeria.
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