Impact of Auditor’s Independence on Earnings Management of Listed Deposit Money Banks in Nigeria

Abstract

This research investigates the impact of auditor’s independence on earnings management in listed deposit money banks in Nigeria. Utilizing a correlational research design, the study explores the relationships between auditors’ independence, measured by audit firm specialization, audit fee, and audit firm size, and earnings management, proxied by accrued earnings. Secondary data from the annual reports and accounts of twelve selected banks over ten years (2013-2022) were analyzed using fixed effect estimation. The findings reveal that audit fee, audit size, and audit tenure positively influence earnings management. The positive coefficients suggest that higher audit fees, larger audit sizes, and longer audit tenures are associated with increased discretionary accruals. However, non-significant p-values caution against accepting these associations at the 5% level. The coefficient of determination (R2) indicates that the chosen variables collectively explain 27.26% of earnings management, offering some explanatory power to the model. In conclusion, the study recommends listed deposit money banks to prioritize engagement with Big 4 Audit Firms and carefully consider audit fee structures. Regulatory bodies, particularly the Central Bank of Nigeria, are advised to enhance surveillance, particularly in the realm of auditor remunerations. The research underscores the need for caution in interpreting the identified associations and highlights avenues for future research, including incorporating control variables and addressing potential endogeneity concerns for a more nuanced understanding of the relationship.