Abstract
Hinged on the quest for quality financial information, this study examined the influence of audit quality on restricting the incidence of accrual-based earnings management among 30 quoted non-financial firms in Nigeria, an emerging country which provides a rich institutional background and cultural setting different from developed nations. Secondary data were gathered from annual reports and audited financial statements for 11 years from 2008-2018. These firms were selected using stratified sampling technique. Thereafter, panel ordinary least square technique was used to estimate specified model for the study. While the descriptive statistics revealed the absence of accrualbased manipulation of earnings among quoted non-financial firms in Nigeria, the multivariate fixed effects ordinary least square depicted that audit quality variables adopted are mutually and statistically significant in explaining 49 percent changes in earnings management. Further, audit tenure and auditor independence exhibited positive and significant relationship, while total assets as the control variable, displayed a negative and significant influence on earnings management. Surprisingly, the size of audit firm appeared positive but statistically insignificant. Consequently, the relevant authorities and policy makers should not only sustain but improve on the current practice of audit engagement partner and/or auditor switch after certain years of continuous engagement to enhance their independence and reduce client-auditor engagement periods to avoid familiarity threat.
Highlights
Among the many concepts in the accounting literature which have refused to quit the scene of research studies, and may not leave soon, earnings management is predominant
This paper seeks to contribute to the on-going debate on the influence of audit quality on constraining managers’ opportunistic behaviour in reporting earnings correctly
The findings emanating from this study clearly provide empirical evidence that the audit quality will deter the management’s tendencies to stage-manage report earnings
Summary
Among the many concepts in the accounting literature which have refused to quit the scene of research studies, and may not leave soon, earnings management is predominant. These incidences of earnings manipulation in emerging country like Nigeria provide excellent research motivation as to its existence and how it can be restricted, or at best, contained to barest minimum These trends are worrisome, especially at they relates to the international professional practice of Big audit firms, dotted as custodian of excellent audit practice. The liberty with which managers and those charged with the governance of entities, in particular the corporate sectors who manipulate items of revenue and income in the financials is alarming, but unprecedented. Other reasons relate to the management’s opportunistic tendencies to manipulate earnings including avoiding reporting losses (Charoenwong & Jiraporn, 2009); meeting targeted EPS (Jordan, Clark & Hames, 2010) and decreasing income volatility (Hijazi & Al-Thuneibat, 2015)
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