EFFECTS OF AUDIT QUALITY ON EARNINGS MANAGEMENT OF LISTED OIL MARKETING COMPANIES IN NIGERIA

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Department of Administration

ABSTRACT

This study examined the effect of audit quality proxied by audit firm size, auditor industry specialization, auditor tenure, client importance and audit committee financial expertise on earnings management represented by discretionary accruals of listed oil marketing companies in Nigeria. The study also examined the effect of the interaction between audit committee financial expertise and auditor industry specialization on earnings management of sampled firms. To achieve these objectives, the study used nine listed oil marketing companies that had consistently published their audited annual financial reports from 2009 to 2014, and analyzed the data using multiple regression technique. The dataset was first analyzed using pooled-OLS regression technique. However, in view of the panel nature of the dataset, it was further analyzed using fixed and random effects regression models while Hausman specification test was conducted to choose the preferred result among the two regression results. Result of the Hausman specification test suggests that the fixed effect regression model is most appropriate for the dataset. The result of the fixed effect regression analysis revealed that audit firm size, auditor industry specialization, client importance and audit committee financial expertise are positively associated with earnings management at less than 5% significance level respectively. In contrast, auditor tenure and the interaction between audit committee financial expertise and auditor industry specialization were negative and significantly associated with earnings management of firms at less than 5% significance level respectively. Overall, the study concluded that audit quality attributes of audit firm size, auditor industry specialization, auditor tenure, client importance, audit committee financial expertise and the interaction between audit committee financial expertise and auditor industry specialization had significant effect on earnings management of listed oil marketing companies in Nigeria. In view of the results, the study recommended among others auditor tenure of three years and above in order to check earnings management of firms in Nigeria. Also, auditor industry specialization should be encouraged by regulators such as SEC as the interaction between audit committee financial expertise and auditor industry specialization mitigates earnings management of firms in Nigeria. In addition, regulatory agencies such as SEC should make a policy that compels companies to disclose both audit and non-audit fees in their audited annual financial reports to enable users determine the level of audit client importance and the reliance to place on the auditor‟s report.


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