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Auditor Size And Audit Quality Evidence From Nigeria


This study was carried out to examine the evidence of auditor size and audit quality in Nigeria. The study was prompted as a result of inability of audit to prevent the occurrence of fraud and material misstatement in the bank’s financial reports. Thus, this study is aimed at assessing the effect of audit quality on the corporate performance of selected banks in Nigeria. Specifically, the study examined the effect of auditor size on return on asset of Nigerian banks; determined the extent audit committee independence affect return on equity of Nigerian banks and ascertained the effect of audit committee on the profit margin of Nigerian banks. Three research questions and hypotheses were formulated in line with the objectives of this study. The population of the study consists of sixteen deposit money banks quoted on the Nigerian Stock Exchange. Data for the study were extracted through the financial statement of the banks from 2008 to 2017 and was tested with regression statistical tool using the Scientific Package for Social Sciences (SPSS) Version 20. Based on the data analyzed, the study found that firm size has significant effects on return on assets of quoted Nigerian banks; also that audit committee independent has significant affect return on equity of quoted Nigerian banks. Another finding is that audit committee size has significantly affects profit margin of quoted Nigerian banks. Based on this, the study recommended among others that companies should make use of the services of audit firms with unquestionable track records of audit quality and reputation; hence the debate on audit quality is not a settled matter.



Table of contents



1.1     Background of the study

1.2     Statement of the problem

1.3     Objectives of the study

1.4     Research questions

1.5     Significance of the study

1.6     Scope of the study

1.7     Limitation of the study

1.8     Organization of Study


2.1     Conceptual Review

2.2     Theoretical Framework

2.3     Empirical Review


3.1     Research Design

3.2     Sample Size and Sampling technique

3.3     Method of Data Analysis

3.4     Decision Rule

3.5     Model Specification and Variable Measurement

3.6     Variable Measurement


4.1     Data analysis

4.2     Discussion of Findings


5.1     Summary of Findings

5.2     Conclusions

5.3     Recommendations




1.1     Background of the study

There is a large body of literature that examines the relationship between auditor size (e.g., the number of clients, and total audit fees) and audit quality. The prior theoretical literature generally argues that larger auditors (in terms of client portfolio size and personal wealth) exhibit higher audit quality.

The Audit quality can be defined in two dimensions: first, detecting misstatements and errors in financial statement and second, reporting these material misstatements and errors (Matoke & Omwenga, 2016). Due to the fact that these characteristics are largely unobservable, different proxies have been used by researchers like; Bogale (2016); Hassan (2015); Yi-Fang, Lee-Wen, and Min-Ning (2015) to measure audit quality like: audit size, audit hours, audit fees, reputation, litigation rate and discretionary accruals (Krishnan & Schauer, 2000).

Audit quality is subject to many direct and indirect influences. In tandem with the stakeholder theory (Khan, 2006), perceptions of audit quality vary amongst stakeholders depending on their level of direct involvement in audits and on the perspective through which they assess audit quality. In recent times, a series of well-publicized cases of accounting improprieties in Nigeria has captured the attention of investors and regulators alike. The search for mechanisms to ensure reliable, high quality financial reporting has largely focused on the structure of audit quality (Adeyemi & Fagbemi, 2010).

The spate of audit failures in the world has brought a great deal of disappointment to investors and other corporate financial reporting stakeholders. Longevity of audit firm tenure has also been linked with fraudulent financial reporting (Adeyemi, Okpala & Dabor, 2012). If empirical studies are not carried out with respect to specific environmental factors the problem of poor audit quality may be exacerbated with likely grave consequences for the selected banks.  Although, various researchers have carried out study on this area such as the following: Adeyemi and Fagbemi, (2010) Audit quality, corporate governance and firm characteristics in Nigeria; Musa & Shehu, (2014) in his study investigates the impact of audit quality on financial performance of quoted firms in Nigeria. Gholamreza & Samira, (2015)  the relationship between auditing quality and the profitability in the companies accepted in Tehran’s securities exchange market; Matoke and Omwenga, (2016) Audit quality and financial performance of companies listed in Nairobi Securities; Amahalu and Ezechukwu, (2017) ascertain the determinants of audit quality with a focus on selected Deposit Money Banks listed on the floor of Nigeria Stock Exchange from 2010-2015; Egbunike and Abiahu (2017) The effect of audit firm characteristics on financial performance of money deposit banks in Nigeria.

Empirical studies generally also find that large auditors exhibit higher audit quality. One strand of research examines the difference in audit quality between big N auditors and non-big N auditors. A large number of studies use a variety of audit-quality proxies and find evidence suggesting that Big N auditors provide higher-quality audits (e.g., Palmrose 1988; Becker et al. 1998; Khurana and Raman 2004; Behn et al. 2008). However Louis (2005), who studies the effect of auditor choice on acquirers’ stock price around merger announcements, finds that acquirers audited by non-Big 4 accounting firms outperform those audited by big 4 firms.

Another strand of research studies the effect of auditor merger on audit quality and finds that audit quality increases after a merger. However, the empirical studies on the relation between auditor size and audit quality are confounded by a number of factors. One potential issue associated with prior research on big N auditors is endogeneity. Since the selection of auditors by clients is non-random, the difference in audit quality documented in prior research may reflect only the difference in the characteristics of an audit firm’s client portfolio. The study by Lawrence et al. (2011) employs propensity-score and attribute-based matching models, and finds that differences in audit quality between Big 4 and non-Big 4 auditors largely reflect client characteristics and, more specifically, client size. The competence of an audit partner is another factor in audit quality. Dopuch and Simunic (1980a, b) argue that auditors in large audit firms are more competent than those in small firms because large audit firms are better able to recruit graduates from leading universities, hire reputable specialists, and offer better training to their staff. The superior audit quality supplied by large audit firms may, therefore, be attributed to the superior competence of their partners.

Audit quality plays an important role in maintaining an efficient market environment; an independent quality audit underpins confidence in the credibility and integrity of financial statements which is essential for well functioning markets and enhanced financial performance.

External audits performed in accordance with high quality auditing standards can promote the implementation of accounting standards by reporting entities and help ensure that their financial statements are reliable, transparent and useful. Sound audits can help reinforce strong corporate governance, risk management and internal control at firms, thus contributing to financial performance (Internal Audits Board, 2011).


1.2     Statement of the problem

The bank credit scam in Nigeria despite the introduction of audit committees brought to the fore the inherent weakness of audit committees and the motivation for a clearer understanding of audit committee’s efficacy. The scam also provided at least evidence to support concerns about the adequacies of monitoring provided by audit committees and provided the concerns that have been expressed on whether audit committees are functioning to maximize shareholders‟ value or increase corporate performance. Furthermore, banks default and distress have hampered their performance significantly and diminished investors‟ confidence in the banks, thereby casting doubt as to the efficacy of the audit committee functions.

However, despite all these studies on audit quality, a gap exists in the literature pertaining to the auditor, audit quality and financial performance, the study discovered from the ongoing review of previous researchers, that majority of the studies were done outside Nigeria, there exist location gap.

Owing to the problem of the study, this study sought to assess the effect of auditor size and audit quality on the corporate performance of selected banks in Nigeria.


1.3     Objectives of the study

  • Main objective

The main objective of the study is to examine auditor size and audit quality evidence from Nigeria.

  • Specific objectives

Therefore the following specific objectives are set out below:

  1. To examine the effect of auditor size on return on equity of Nigerian banks.
  2. To determine whether audit committee independence affect return on equity of Nigerian banks.
  3. To ascertain the effect of audit committee on the profit margin of Nigerian banks.


1.4     Research questions

  1. What is the effect of auditor size on return on equity of Nigerian banks?
  2. Does audit committee independence affect return on equity of Nigerian banks?
  3. What is the effect of audit committee on the profit margin of Nigerian banks?


1.5     Significance of the study

The critical role banks play in money creation in the economy makes the study of their performance a necessity. This study  attempts to provide empirical evidence about auditor size and audit quality on  performance, financial standard compliances and investors’ confidence of Deposit Money Banks thereby generating interesting literature to the regulators of the financial market, other self-regulatory organizations (SROs), Accounting Bodies, Corporate Affairs Commission (CAC), policy makers and the investing public. If an audit committee discharges its statutory duties diligently, bank performance could be enhanced and the probability of default would be less or even zero, implying that the banking public deposits are safe. Moreover, customers‟ deposits determine the extent of banks profitability and the sustainability of the banks. Hence, banking failures usually leave the banking public in the crises of the recovery of their deposits, inaccessibility to credit, and loss of confidence in the system. Therefore, the findings of this study contribute to the banking public, in that, the study examines how audit committee impacts on the performance of the banks and the financial standards compliances in Nigeria. Thus, it reveals the ability of the audit committee to monitor and control the management in the routine operations with regard compliance with the rules and standards in achieving the banks objectives, which in turn implies the safety of the banking public and influence their confidence in the banks. Management of the banks could also find this study useful as it investigates the outcome of their stewardship (performance) in relation to the audit committee functions, which points to them some possible areas of additional efforts. Also, regulators such as the Cooperate Affairs Commission (CAC), Securities and Exchange Commission (SEC) and Central Bank of Nigeria (CBN) could also find this study useful as the study analyzes the consequences of their series of intervention in the banks through the mechanisms of corporate governance. Thus, the results of this study provide empirical evidence on the effectiveness or otherwise of the audit committee and its attributes with regard to performance, compliances and confidence of the investors.

Shareholders as owners, who are usually concerned with maximization of their wealth, could also find this study useful because audit committee function will decrease agency cost, improve corporate governance, affect performance and improve shareholders‟ value. Researchers and students would also find this study useful because they are usually interested in understanding how the mechanisms of corporate governance affect corporate operations, activities and performance. The study therefore provides the academic audience a further opportunity to stimulate and trigger thoughts on further research and by extension increase the frontiers of knowledge.


1.6     Scope of the study

This study is carried out on auditor size and audit quality evidence from Nigeria. This study will focus on banks in Nigeria. These banks include; Access Bank, Diamond Bank, Eco Bank, Fidelity Bank Nigeria, First Bank Nigeria, First city monument Bank, Guaranty Trust Bank, Skye Bank, Stanbic IBTC Bank Nigeria Limited, Standard Chartered Bank, Sterling Bank, Union Bank on Nigeria, United Bank for Africa, Unity Bank PLC, Wema Bank and Zenith Bank plc.


1.7     Limitation of the study

The following limitations were anticipated in this study:

  1. Since the study was only carried out in only one province, the results may not be generalisable to the whole country. The researcher collected data on his own without research assistants.
  2. Financial constraints were also anticipated in the current study. Although the researcher received assistance from the bursary, it was not possible to carry out the study at national level.
  3. The researcher is a full time employee so time to carry out the study was limited.

1.8     Organization of Study

The study is organized into five chapters. Chapter one deals with the study’s introduction and gives a background to the study. Chapter two reviews related and relevant literature. The chapter three gives the research methodology while the chapter four gives the study’s analysis and interpretation of data. The study concludes with chapter five which deals on the summary, conclusion and recommendation.


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