The Impact Of Audit Quality Attributes On The Financial Reporting Quality Of Listed Food And Beverages Firms In Nigeria
1.1 Background to the Study
Financial statements audit is a monitoring mechanism that helps reduce information asymmetry and protect the interests of the principals, especially, stockholders and potential investors, by providing reasonable assurance that financial statements prepared by managements are free from material misstatements and intentional errors (Watts and Zimmerman, 1986).
This monitoring function of external auditors is critical to the quality of financial reports and the level of confidence by the users of accounting information. In this context, Wright and Wright (1997) posit that audited financial statements are the joint product of the auditor-client negotiation process.
Therefore, audit quality is at the heart of the integrity of the audit process. That is, maintaining the integrity of the independent audit functions about financial reporting is mandatory for auditors and required by the laws and regulations of the accounting profession. However, recent accounting and audit scandals at companies such as Adelphia, Tyco International, Enron, Cadbury, and WorldCom have eroded public confidence in the independence of the accounting profession and the quality of audit services.
Audit quality describes how well an audit detects and reports material misstatements (including intentional and unintentional errors) of financial statements, reduces information asymmetry between management and stockholders and helps protect the interests of stockholders (Chen, Elder, & Liu, 2005). High audit quality is therefore associated with high information quality of financial statement because financial statements audited by high quality auditors should be less likely to contain material misstatements and unethical accounting practices.
In response to the global accounting and audit scandals by accounting regulatory bodies around the world headed by the International Federation of Accountants (IFAC), stringent.
Regulations are established and enforced, and the existing ones are reviewed. These include International Auditing and Assurance Standards Board (IAASB), International Standards on Auditing (ISA), International Ethics Standards Board for Accountants (IESBA), International Standards on Assurance Engagements (ISAE), International Standards on Review Engagements (ISRE), International Standards on Related Services (ISRS), International Standards on Quality Control (ISQC), International Auditing Practice Notes (IAPN), and Consultation Papers (IAASB, 2013).
According to IFAC (2013), through its auditing operational arm (IAASB), global financial stability is supported through high quality reporting, which could be achieve through high quality audits that can help foster trust in the quality of reporting. It also highlights the importance of audit quality and its relevance to all stakeholders in the financial reporting supply chain. With this in mind, the IAASB developed the Framework for Audit Quality that describes in a holistic manner, the different elements that create the environment for audit quality at the engagement, firm, and national levels, as well as relevant interactions and contextual factors.
It is worth noting that the mission of IFAC and its organs is to serve the public interest by: contributing to the development of high-quality standards and guidance; facilitating the adoption and implementation of high-quality standards and guidance; contributing to the development of strong professional accountancy organizations and accounting firms, and to high quality practices by professional accountants, and promoting the value of professional accountants worldwide; and speaking out on public interest issues. Similarly, in efforts to restore public confidence in accounting and audit services, individual countries particularly United State of America (US) and European Union (EU) has also respondents significantly. For instance, in US Sarbanes-Oxley (SOX) act of 2002 was enacted to address the issues of audit quality by increasing the independence of outside auditors who review the accuracy of corporate financial standard. Moreover, SOX created a new agency, the Public Company.
In view of this, the opponents of audit rotation suggest that the loss of experience with the audit client due to rotation reduces audit quality (Myers, Myers, & Omer, 2003). Similarly, Dopuch, King, and Schwartz (2001) reported that rotation discourages auditors from intentionally biasing their audit opinions in favor of management, despite incentives to compromise their independence, which affects financial reporting quality negatively. On the other hand, the long association between a client and the auditor may lead to closer identification of the auditor with the interests of the client and could lead to impaired auditor independence. Thus, mandatory auditor rotation could enhance auditor independence.
Moreover, the economic view of audit quality, suggests that auditor independence and audit quality could be impaired in the early years of auditor tenure because auditors could be more accommodating to the client to extract future quasi-rents to recover losses incurred due to low-balling. Thus, restricting auditor tenure could exacerbate auditor independence rather than enhancing it.
Moreover, prior research on financial reporting quality has linked audit delays and quality of financial reporting, because audit delays can cause delay in annual accounting disclosures. Delayed earnings announcements generally cause less market reaction than early announcements due to lack of timeliness or even negative reactions as they are likely to contain bad news (Alkhatib&Marji, 2012).
According to Abdulla (1996), the shorter the time between the end of the accounting year and the publication date of the year’s financial statements, the greater the benefits that can be derived therefore.
Another factor affecting the quality of audit is audit remuneration (audit and non audit fees) in relation to auditor independence. It is argued that audit remuneration can strengthen the auditor’s economic bond with the client, their by increasing the auditor’s incentives to acquiesce to client pressure, including pressure to allow earnings management which reduces the quality of financial reporting (Simunic1984, and Beck et al,1988a). On the other hand, audit remuneration can also increase the auditor’s investment in reputational capital which The auditor is not likely to jeopardize or satisfy the demand of any one client, and thus increase the quality of audit and financial reporting as well (Arrunda, 1999).
Some of the major motivating factors for this research effort are the brazen concern associated with the rot in the financial reporting quality in Nigeria, and the recent adoption of International Financial Reporting Standard (IFRS). This made Nigeria to be a member of IFAC, where all the international accounting and auditing regulations are applicable to the Nigerian accountants and auditors. Recently, emphases have been on the effect of the type of audit firm that review and approve organizations financial reports, audit firm rotation, audit fees and audit delay on financial reporting quality in Nigeria.
1.2 Statement of the Problem
The issue of efficient financial management has become topical in the last two decades. A series of financial scandals that happened both at national and international level have raised a lot of questions on the capacity of auditing firms globally. World financial scandals such as Enron, World Com, Barings, Parmalat, Cadbury Nigeria Plc have raised concern on the role of external auditors in providing security against financial fraud and deliberate misrepresentation of financial reports. However, one of the major issues that are of concern in the public domain has been the incessant problems that have bedeviled the major firms in Nigeria. In recent times, financial crime has become more pervasive and the probability of corporate fraud occurring has become more severe. These aspects of business failure have put greater responsibility on financial experts particularly auditors to improve their capability in order to identify at the right time the symptoms and fraud so as to nip in the bud any case of corporate failure.
There is also a theoretical debate as regard the effect of the audit firm size on financial reporting quality. Sawan and Alsaqqa (2012) have argued that the type of audit firm. Employed by a firm to review its financial report enhances financial reporting quality.
They further asserted that the big four counterparts in all of the financial reporting issues present to them and that the size of the audit firm is positively associated with audit quality. Such superiority is seen in terms of resources and audit technology.
There is high intellectual argument as to which is best audit size that will produce higher total infraction precision among the two options.
Therefore, this study predicts that the use of big4 auditors could enhance the quality of accounting information, due to high technology and manpower with diverse knowledge associated with them. Despite the arguments regarding audit firm size and financial reporting quality around the world, there are absent of empirical studies that investigated such issues in the listed food and beverages firms in Nigeria, which this study attempts to investigate.
Understanding and identifying the time to submit audit report may be important to the financial reporting quality. This is because the more the time between the end of financial year and the date the financial statement is made available were shorter the better the benefit of the audited financial reports. By convention financial reports must be available to stakeholders in time so that they can use the information to take important decisions that will move the company forward. The timely release of financial report may be impeded by a number of factors.
It may be caused by the time taken by auditors to review and approve financial reports. Available information from financial reports has shown a mean audit delay of about 180 days for the last 10 years.
In Nigeria, it is important to note that the Regulatory agencies have responded by compelling companies to comply with stringent corporate governance codes to ensure sound and efficient financial reporting in Nigeria.
Despite the interventions of the regulatory authorities, the challenges of ensuring credibility in financial reporting and auditing are still prevalent. It therefore becomes pertinent to investigate some of these factors that can affect financial reporting quality in order to enhance the relevance of audit and assurance functions in Nigeria. Food and beverages firms are considered in this study due to the little or absent of empirical studies on audit quality and financial reporting quality, which calls for the investigation of the sector.
1.3 Research Questions
To guide and achieve the research objectives certain fundamental questions are raised. The study seeks to answer to the following research questions:
- What is the effect of audit firm size on the financial reporting quality of listed food and beverages firms in Nigeria?
- How does audit rotation affect the financial reporting quality of listed food and beverages firms in Nigeria?
- What is the relationship between audit delay and the financial reporting quality of listed food and beverages firms in Nigeria?
- How does audit remuneration affect the financial reporting quality of listed food and beverages firms in Nigeria?
1.4 Objective of the Study
The major objective of the study is to assess the impact of audit quality attributes on the financial reporting quality of listed food and beverages firms in Nigeria. Other specific objectives are;
- To examine the effect of audit firm size on the financial reporting quality of listed food and beverages firms in Nigeria.
- To investigate the effect of auditor rotation on the financial reporting quality of listed food and beverages firms in Nigeria.
- To assess the effect of audit delay on the financial reporting quality of listed food and beverages firms in Nigeria.
- To examine the effect of auditor remuneration on the financial reporting quality of listed food and beverages firms in Nigeria
1.5 Hypothesis of the Study
In line with the objectives of this study, the following hypotheses are formulated in null form:
H01: Audit Firm Size has no significant effect on the financial reporting quality of listed food and beverages firms in Nigeria.
H02: Auditor Rotation has no significant effect on the financial reporting quality of listed food and beverages firms in Nigeria.
H03: Audit delay has no significant effect on the financial reporting quality of listed food and beverages firms in Nigeria.
H04: Auditor Remuneration has no significant effect on the financial reporting quality of listed food and beverages firms in Nigeria
1.6 Significant of the Study
The financial scandals and corporate failures are proven to have had a detrimental effect on the public‟s perception of external audit. More disturbingly, O‟Malley (1993) asserted that external audit quality is threatening the survival of accounting firms and indeed it has the power to destroy the quality of financial reporting as a whole. This study is significant in providing empirical evidence that could ensure the credibility and integrity of accounting and auditing profession in Nigeria. The study is significant to accountants and auditors, Managers, Regulators and Standard Setters, Potential and Existing Investors and Researchers.
The study is expected to be useful in the following ways:
- It will add value to the literature of audit quality in Nigeria. This is important since auditors perform the function of reviewing and approving firms financial reports.
- The study will also offer important input to serve as a strong base for the audit profession to establish policies relating to type of audit firm, audit rotation, audit delay and audit firms fees. This is important because most of the issues in this area are based on anecdotal evidence, particularly in Nigerian context since evidence regarding these issues has been relatively limited. The study therefore hopes not only to help enrich the literature, but also provides important quantitative information for policy formulation
- The study will educate shareholders of food and beverages company in Nigeria to know the implications of retaining an auditor for a longer period without rotating of even changing the audit firm and the consequences thereof
- The Nigerian Stock Exchange and the Securities and Exchange Commission (SEC) would find the outcome of the study beneficial as it will highlight the existence, nature and extent of the relationship between external audit attributes and financial reporting quality in organizations.
1.7 Scope of the Study
This study examined the attributes of audit quality in relation to financial reporting quality, and is restricted to food and beverages firms listed on the floor of the Nigerian Stock Exchange (NSE) as at the end of 2017 accounting period. The period is chosen because it is the period immediately after the economic meltdown in Nigeria, and is also the period when the companies in Nigeria undergo both structural and operational reforms. These changes have affected their volume of activities and the nature of audit firms they engaged. This suggests that accounting and audit should refocus towards same direction to avoid instances of material, intentional and unintentional errors and misstatements in the financial statements, which impair the quality of financial reporting.
Therefore, financial reporting quality in this study refers to earnings quality (earnings with less level of discretionary accruals, which is associated with earnings managements). Audit quality attributes on the other hand, is the audit firm size, audit rotation, timeliness of audit(audit delay), and audit remuneration. The study covers the period of six years (2008-2013).
Summary, Conclusion and Recommendation
This study examined the impact of audit quality attributes on financial reporting quality of listed food and beverages firms in Nigeria. The study covers the auditor size, auditor rotation, and audit delay and auditor remunerations as attributes of audit quality. The study employs secondary sources of data from the financial statements for the period of six years (2008–2013). Random Effects Regression technique of data analysis was used in the analysis of data. The study found a significant positive relationship between audit quality attributes and financial reporting quality during the period under review. The study show audit quality attributes explained about 70% of the total variation in the financial reporting quality during the period.
Specifically, the study found that auditor size, audit delay and auditor remuneration have significant positive impacts on the quality of financial reporting of the sample firms at 99% confidence level. On the other hand, the study revealed that auditor rotation has no significant impact on the financial reporting quality of the sample firms during the period under review.
In line with the findings of this research, the study concludes that audit quality attributes are significant in improving the financial reporting quality of the listed food and beverages companies in Nigeria during the period covered by the study. That is, audit attributes examine in this research has significantly improved the financial reporting quality of listed food and beverages firms in Nigeria. The study specifically concludes that the size of the auditor has significant positive effects on the quality of financial reporting. That is, engaging the services of the big 4 auditors could minimize earnings management and improve the quality of firms‟ financial reporting of food and beverages firms in Nigeria. Similarly, the study concludes that, audit delay has significant positive effect on financial reporting quality of the sample firms; implying that longer period of audit yield a higher quality reporting in the sample firms. The study also concludes that auditor remuneration has significant positive impact on the financial reporting quality of food and beverages firms in Nigeria during the period covered by the study. However, the study concludes that, auditor rotation has no significant effect on the financial reporting quality of the listed food and beverages firms in Nigeria during the period under review.
Emanating from the findings and conclusions of this study, the following recommendations are considered necessary:
- Regulators of the listed companies in Nigeria should emphasize and encourage the use of audit quality attributes examined in this study; especially the auditor size, audit delay and auditor remunerations. This is with a view to improve the quality of the reports by mitigating earnings management and other unethical corporate practices, which affect the quality of reporting and going-concern of an entity.
- Auditors should be adequately remunerated; as this could give them sufficient resources to conduct a thorough audit capable of uncovering material misstatements and errors in the financial statements, hence higher quality reports.
- The regulators and other stakeholders should allow a sufficient time frame for the audit exercise as this appears to be significant in improving financial reporting quality.
- Regulatory agencies around the world should not emphasize auditor rotation as it appears insignificance in providing higher quality reports in the listed food and beverages firms in Nigeria.
- The regulators and the managements of listed companies in Nigeria should emphasize and employs the services of large reputable audit firms (big 4) as it appears to be positively related with financial reporting quality.
- Lastly, the study recommends that managers of the food and beverages firms in Nigeria should subscribe to acceptable ethical standards in discharging their duties and responsibilities, so as to enhance the credibility of their financial reports and safeguard their entities from going-concern threats.
5.4 Limitation of the Study
The generalization of the findings of this study is limited to food and beverages companies listed on the floor of Nigerian stock exchange market. This is because other firms have their own peculiarities that may render the findings from the food and beverages not relevant to them. Moreover, the study is restricted to only audit quality attributes examined in this study, but audit quality has a lot of attributes which are not covered in this study. Another limitation of this study is that the study used quantitative methodology, complimenting a survey of opinions from the stakeholders about the audit quality and financial reporting quality could have increase the robustness of the results and findings.
The Impact Of Audit Quality Attributes On The Financial Reporting Quality Of Listed Food And Beverages Firms In Nigeria
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