Abstract
The objective of this study is to investigate the effect of regulatory changes on financial reporting quality and audit fees and to further test whether this effect was moderated by firm characteristics (i.e. abnormal audit fees, political connections and overlapping directorship) in Nigeria. This study utilized the data of 90 companies listed on the Nigerian stock exchange over the period 2008–2013. Using Generalized Method of Moments (GMM) technique that takes into account the endogeneity nature of financial reporting quality and audit fees model, the results indicated that financial reporting quality improved in the regulatory changes period. However, abnormal audit fees, political connection and overlapping directorship deteriorated the effect. Accordingly, future regulatory reforms must be cognizant of these factors. Even though there are abundant empirical studies on financial regulatory changes and their effects on financial reporting quality, this study provides additional insights into the regulatory change literature by investigating how firm characteristics (abnormal audit fees, political connection and overlapping directorship) moderate the effect of regulatory changes particularly in Nigeria, one of the less developed and underresearched capital markets in the world. Further, the findings of this study are robust with respect to the issues of unobserved heterogeneity and endogeneity, which previous studies had failed to consider.
Highlights
A close relationship exists between corporate entity collapse and poor financial reporting practices resulting from governance failure
The objective of this study is to investigate the effect of regulatory changes on financial reporting quality and audit fees and to further test whether this effect was moderated by firm characteristics in Nigeria
Endogeneity problem arising from unobserved heterogeneity, simultaneity, and measurement error could provide a possible explanation for the mixed findings (Roberts & Whited, 2012)
Summary
A close relationship exists between corporate entity collapse and poor financial reporting practices resulting from governance failure. This argument is substantiated in light of reported cases like Enron, WorldCom, Global Crossing and a host of others too numerous to mention. Two important reforms that have gained international prominence are the convergence to single financial reporting standards and the detailed prescriptive guidelines contained in the Sarbanes Oxley Act 2002 issued in the wake of Enron saga. Both reforms show significant regulatory changes in the history of accounting and audit practises around the world
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