Audit Firms Attributes And Income Smoothing Among Listed Deposit Money Bank In Nigeria

Project and Seminar Material for Accountancy / Accounting

Audit Firms Attributes And Income Smoothing Among Listed Deposit Money Bank In Nigeria (Charles)

Abstract

The study analyze audit firms attributes and income smoothing among listed Deposit Money Bank In Nigeria. The study specifically sought to evaluate the effect of Audit Firm Size on loan loss provision of listed Deposit Money Bank In Nigeria; evaluate the effect of Non-audit Service Fees on loan loss provision of listed Deposit Money Bank In Nigeria; evaluate the effect of Audit Tenure on loan loss provision of listed Deposit Money Bank In Nigeria; and evaluate the effect of Joint Audit on loan loss provision of listed Deposit Money Bank In Nigeria. The study covered 10yrs from 2010 – 2019. Data were collected from the annual reports of the selected banks. Further, the ex-post facto research design was used and emphases were laid on banks’ data. The study adopted panel data multiple regression estimation technique while data were analyzed through the Eviews-9 statistical package for data analysis. The study reported that, Audit Firm Size (AFS) exerted a negative significant effect on INSM of listed deposit money banks in Nigeria. Meanwhile, Non-audit Service Fees (NASF) and Audit Tenure (ATN) exerted a positive significant effect on INSM of listed deposit money banks in Nigeria. However, Joint Audit (JOA) exerted a negative yet minimal effect on ISMN of quoted banks in Nigeria in. Hence, the paper concludes that, external audit attributes have mixed effects on ISMN tendencies of bank managers in Nigeria. As such, bank owners must ensure that they engage the services of credible auditing firms with track records of delivering reports that show the actual situation of the bank. Meanwhile, the Financial Reporting Council (FRC) should have stiffer penalty for bank managers/auditing firms caught engaging in the act of ISMN.

Table of Content

Title Page
Certification
Dedication
Acknowledgement
Table of Content
List of Tables
Abstract

Chapter One:

Introduction

1.1 Background of the Study
1.2 Statement of the Problem
1.3 Objective of the Study
1.4 Research Questions
1.5 Research Hypothesis
1.6 Significance of the Study
1.7 Scope of the Study
1.8 Limitation of the Study
1.9 Definition of Terms
1.10 Organisations of the Study

Chapter Two:

Review of Literature

2.1 Conceptual Framework
2.2 Theoretical Framework
2.3 Empirical Review

Chapter Three:

Research Methodology

3.1 Introduction
3.2 Research Design
3.3 Population of the Study
3.4 Sample Size
3.5 Method of Data Analysis
3.6 Model Specification

Chapter Four:

Data Presentation and Analysis

4.1 Introduction
4.2 Results/Findings
4.3 Test of Hypotheses
4.4 Discussion of Findings

Chapter Five:

Summary, Conclusion and Recommendation

5.1 Summary
5.2 Conclusion
5.3 Recommendation
References
APPENDIX
QUESTIONNAIRE

Chapter One

Introduction

1.1 Background of the Study

The concept of audit quality and income /earnings smoothing remains one of the most debatable construct since the fall of the high profile giant companies at the dawn of the century in the west (Enron, WorldCom) coupled with the audit failures as in the case of Enron, WorldCom, ImClone Systems Incorporation Global Crossing, and Tyco International. Evidently, academics traced the falls to the ISMN of some managers. To further this, Friska (2019) documents that, to restrain the rise in vicious corporate collapses and to assure the integrity of auditors, audit quality codes of best practice should be developed. As such, it is therefore paramount to examine the concept of external audit quality since the audits quality/opinions.

Sequel to the above, the Company and Allied Matters Act (CAMA) of 2004 in Nigeria stressed the need for quoted companies to use the services of external auditors. As espoused by Egolum (2021), external auditors help to reduce audit quality issues. Similarly, Madhuri and Vaidya (2022) defined an external audit is one of the main forms of audits wherein an auditor/auditors work over the financial reports to check that the company is functioning in the right manner. Consequently, the hallmark of external audit quality is targeted at ensuring that the probability of material misstatements is kept to a manageable level. Various measures of external audit quality as espoused in the studies of Egolum (2021); Obaidat (2017); Hohenfels (2016); Apandi (2018) include audit firm size, audit fee, audit tenure, and joint audit. Specifically, audit firm size accounts for the size of the external auditing firm. It is a known fact that, firms audited by the big4s (Deloitte, PWC, Ernst & Young and KPMG) are less likely to be engaged in ISMN than firms audited by small auditing since the former has stronger available capital and research institutes, as well as superior technology and more talented staff to conduct large-scale company audits (Khaled, & Zalailah, 2020). Again, audit fee (remuneration) be it audit and non-audit services fees affect ISMN. Furthermore, audit tenure otherwise known as audit rotation in this case accounts for as the agreed period of engagement between the client and the external auditor. Meanwhile, joint audit is where two different audit firms jointly form an opinion of a client’s financial statements of which they are also jointly liable for the issued audit opinion (Apandi, 2018). Consequently, a firm’s ability to smoothen its income/earning is dependent on its external audit attributes.

The term ISMN according to Ozili and Outa (2019), is a vital earnings management technique that can be either “artificial” or “absolute,” with real smoothing involving decisions that affect cash-flow and dissipate firm value at obvious costs. Also, ISMN refers to changing of expenses and revenue for the purpose of presenting deceitful imprint that a firm has stable earnings. ISMN/profit flattening is a profit manipulation approach adopted by management (Bora, & Saha, 2016). Justifiably, managers are forced to manage the results to prove good performance records to shareholders and other financial statement users. Hence, if ISMN can only be curbed, if external audit quality is considered (Ndubuisi, & Ezechukwu,, 2017). Little wonder why Obaidat (2017) noted that high audit quality should be associated with high information quality of financial statements because financial statements audited by highquality auditors should be less likely to contain material misstatements and consequently reduce earnings management.

The rationalization which informed the study is borne out of the fact that, despite the fact that the audit quality and ISMN has gotten huge scholarly attention since the collapse of giant accounting firms in the worlds in early, even till date, accounting scholars are yet to come up with a universal measure of both constructs. Arguably, two views on how audit quality should be measured. The first viewpoint hold to use direct measures like bankruptcy, financial reporting compliance with GAAP, desk review, quality control review and Security and Exchange Commission performance meanwhile the second perspective use indirect measures like audit fees, auditor tenure, audit size, industry expertise, economic dependence, reputation and cost of capital. In the case of ISMN, diverse parameters such as loan loss provision-LLP, small profit, discretionary accrual, understatement of liabilities, overstatements of assets amongst others have been used.

More so, two streams also exist within the confine of the individual measures of external audit quality. For example, it has been argued that firms with larger sizes i.e. firms audited by the big4s (Deloitte, PWC, Ernst & Young and KPMG) are less likely to be engaged in income smoothing than firms audited by small auditing firms (Khaled, & Zalailah, 2020). Again, large fees are paid to non-audit services, make auditors more economically dependent on their clients (Kimeli, 2016). However, another school of thought hold that, the tendency to smooth income is not a function of the non-audit fee but a product of other factors such as the disposition of the auditor. More so, the higher the auditor tenure, the higher the tendency for the auditor to be engages in ISMN (Hohenfels, 2016). Alternatively, shorter auditor tenure reduce INSM tendencies of managers (Olarinoye & Ahmad, 2016). Lastly, Joint audit has the capacity to reduce ISMN but not in all cases. This is because joint audit could reduce big audit firms and allowing small audit firms to collaborate with big audit firms, resulting in the emergence of new generation of big audit firm. However, extant empirical studies on the subject matter in the Nigerian context are relatively few. Hence; this study seek to examine audit firms attributes and income smoothing among listed Deposit Money Bank In Nigeria.

1.2 Statement of the Problem

Despite regulatory efforts to enhance transparency and accountability in financial reporting, income smoothing remains a prevalent concern among listed DMBs in Nigeria (Uadiale, 2009). Audit firms play a critical role in ensuring the reliability and accuracy of financial statements by providing independent assurance on the fairness of their presentation (DeAngelo, 1981). However, the attributes of audit firms, such as size, reputation, and industry specialization, may influence their ability to detect and deter income smoothing practices among DMBs (Francis, 1984).

Furthermore, the Nigerian banking sector has experienced significant regulatory changes and market dynamics in recent years, including the adoption of International Financial Reporting Standards (IFRS) and increased competition (Onaolapo et al., 2020). These changes may have implications for the effectiveness of audit firm oversight and the prevalence of income smoothing practices among DMBs.

1.3 Objective of the Study

The general aim of this study is to examine audit firms attributes and income smoothing among listed Deposit Money Bank In Nigeria. The study focuses on loan loss provision(LLP) as a decomposing factor of income smoothing among listed Deposit Money Bank In Nigeria. Other specifical objectives includes:

Evaluate the effect of Audit Firm Size on loan loss provision of listed Deposit Money Bank In Nigeria.
Evaluate the effect of Non-audit Service Fees on loan loss provision of listed Deposit Money Bank In Nigeria.
Evaluate the effect of Audit Tenure on loan loss provision of listed Deposit Money Bank In Nigeria.
Evaluate the effect of Joint Audit on loan loss provision of listed Deposit Money Bank In Nigeria.

1.4 Research Question

The following questions will guild this study;

Does Audit Firm Size have a significant effect on loan loss provision of listed Deposit Money Bank In Nigeria.
Does Non-audit Service Fees have a significant effect on loan loss provision of listed Deposit Money Bank In Nigeria.
Does Audit Tenure have a significant effect on loan loss provision of listed Deposit Money Bank In Nigeria.
Does Joint Audit have a significant effect on loan loss provision of listed Deposit Money Bank In Nigeria.

1.5 Research Hypothesis

Ho1: Audit Firm Size has no significant effect on loan loss provision of listed Deposit Money Bank In Nigeria.
Ho2: Non-audit Service Fees has no significant effect on loan loss provision of listed Deposit Money Bank In Nigeria.
Ho3: Audit Tenure has no significant effect on loan loss provision of listed Deposit Money Bank In Nigeria.
Ho4: Joint Audit has no significant effect on loan loss provision of listed Deposit Money Bank In Nigeria.

1.6 Significance of the Study

This study will address the gap in the literature by examining the relationship between audit firm attributes and income smoothing among listed DMBs in Nigeria. By identifying the key factors that influence income smoothing and assessing the effectiveness of audit firm oversight, the findings of this research will provide valuable insights for policymakers, regulators, investors, and stakeholders in the Nigerian banking sector. Moreover, the study contributes to the broader understanding of financial reporting practices and corporate governance in emerging markets.

1.7 Scope of the Study

The general focus of this study boarders on audit firms attributes and income smoothing among listed Deposit Money Bank In Nigeria. The study covers a period of ten (10) years spanning from 2010 to 2019.

1.8 Limitation of the Study

Like in every human endeavour, the researcher encountered slight constraints while carrying out the study. Insufficient funds tend to impede the efficiency of the researcher in sourcing for the relevant materials, literature, or information and in the process of data collection, which is why the researcher resorted to a limited choice of sample size. More so, the researcher simultaneously engaged in this study with other academic work. As a result, the amount of time spent on research will be reduced.

1.9 Definition of Terms

Audit Firm Attributes:

Audit firm attributes refer to the characteristics or qualities of audit firms that may influence their effectiveness in providing independent assurance on the fairness and accuracy of financial statements.

Income Smoothing:

Income smoothing refers to the deliberate manipulation of financial statements by deposit money banks (DMBs) to reduce the variability or fluctuations in reported earnings over time, with the intention of presenting a more stable and predictable pattern of profitability.

1.10 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, definition of terms etc.
Chapter two highlight the theoretical framework on which the study is based, thus the review of related literature.
Chapter three deals on the research design and methodology adopted in the study.
Chapter four concentrate on the data collection and analysis and presentation of finding.
Chapter five gives summary, conclusion, and recommendations made of the study.

Chapter Five

Summary, Conclusion and Recommendations

5.1 Introduction

This chapter presents the summary, conclusions and recommendations of the study. These are presented in line with the objectives and findings of the study.

5.2 Summary of the Study

The study was undertaken to study audit firms attributes and income smoothing among listed Deposit Money Bank In Nigeria. Three (3) specific objectives and hypotheses were postulated to test the relationship between the variables of the study. The study covered 10years period from 2010 to 2019. The study used a sample of five first tier deposit money banks listed on the NSE as at 31 December 2020.

5.3 Conclusion

Arising from the widespread failure in financial disclosure, there has been an intense desire of regulatory bodies to improve financial information quality by ensuring that the likelihood of ISMN is reduced to its barest minimum. It is on this premise that the present study seeks to examine the effects of external audit attributes on ISMN in listed deposit money banks in Nigeria. Further, the ex-post facto research design was used and emphases were laid on banks’ data from 2010 to 2019- that is a period of ten (10) years in all. The study adopted panel data multiple regression estimation technique while data were analyzed through the Eviews-9 statistical package for data analysis. Following the results obtained and discussed in earlier sections and in relation to the critical review of past literatures, it is pertinent to conclude that, on the overall, external audit attributes have mixed effects on ISMN tendencies of bank managers in Nigeria in the periods under investigation.

5.4 Recommendations

Bank owners must ensure that they engage the services of credible auditing firms with track records of delivering reports that show the actual situation of the bank. Meanwhile, the FRC should have stiffer penalty for bank managers/auditing firms caught engaging in the act of ISMN.
Owners and other stakeholders of deposit money banks should strictly adhere to the corporate governance code with regards to the use of external audit services are promptly paid in order to ensure that they oversee the operations, financial and non- financial affairs of the directors and management in their best interest.
Serious attention should be given to issues that tend to improve compliance to audit tenure system in Nigeria.
Less effort should be geared towards engaging policies that will discourage joint audit practices since joint auditing will likely lead to reduce ISMN behavior of bank managers as evidenced from the study.