Journal of Critical Reviews

ISSN- 2394-5125 Vol 7, Issue 9, 2020

THE IMPACT OF AUDIT QUALITY ON THE FINANCIAL PERFORMANCE OF LISTED

COMPANIES NIGERIA
Abdullahi Bala Ado1, Norfadzilah Rashid2*, Umar Aliyu Mustapha3,
Lateef Saheed Ademola4
1School of Accounting, Finance and Quantitative Studies, Universiti Sultan Zainal Abidin, Malaysia. [email protected]
2*School of Accounting, Finance and Quantitative Studies, Universiti Sultan Zainal Abidin, Malaysia.

[email protected]
3School of Accounting, Finance and Quantitative Studies, Universiti Sultan Zainal Abidin, Malaysia. [email protected]
4School of Accounting, Finance and Quantitative Studies, Universiti Sultan Zainal Abidin, Malaysia. [email protected]

Received: 07.03.2020 Revised: 09.04.2020 Accepted: 11.05.2020

Abstract
The major corporate failures and other related collapses which occurred around the globe and in Nigeria have raised fears about the
reliability of the financial reporting practices by listed companies in Nigeria. This agitated a number of regulatory and professional
institutions to advocate for reforms that will enhance transparency in financial reporting and thus increase performance as well as audit
quality. Therefore, this study offers proof on the direct influence of audit quality on the financial performance of listed companies
Nigeria. We employ 84 companies listed on the NSE with 756 samples for the period of nine years which is from 2010 to 2018 based on
panel data approach. Furthermore, the research used secondary approach to retrieve data from Thompson Reuters DataStream as well
as the financial statement of the listed companies. This present study employs multiple regression to examine the model. The results
reveal that audit fee shows a positively and insignificant relationship with ROA. This implies that if there is decrease in the amount paid
to auditors for audit services, then financial performance of listed companies in Nigeria will increase. Consistent with the agency theory,
auditor size displays a significant positive relationship with ROA. This positive figure implies that a percentage increase in firms audited
by Big4, then financial performance (ROA) will also increase. Auditor independence is also seen to be positive and statistically
significantly related to the ROA. Finally, auditor independence is found to be more powerful than auditor size on the financial
performance. The result of this research will assist the management as well as the executives of the listed companies in Nigeria to put
more effort on independence of an auditor. The study also propose that the executives should engage the services provided by audit
firms whose integrity and character is unquestionable. It will also assist policy makers and relevant authorities in decision making.
Keywords: Audit Quality, Financial Performance, Independence, Report, Firms.

© 2020 by Advance Scientific Research. This is an open-access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/)
DOI: http://dx.doi.org/10.31838/jcr.07.09.07

INTRODUCTION undependable auditors. The audit market identifies independent

Audit quality act as an essential element in maintaining the auditors and size to be of superior quality than rewards paid to
financial performance of the companies; an objective quality auditors by firms with greater enhancements or decreases in the
audit forms the basis for confidence on the integrity and share prices accordingly. Taking into account the of independent
credibility of financial reports which is extremely important for an audit as well as the quality plays a significant role in
efficient-functioning markets and also improved the financial preserving a well-functioning market environment, that install
performance. However, external audits carried out in compliance confidence in the veracity and reliability of financial reports
with superiority auditing principles can strengthen the required for an efficient markets (Ugwunta, Ugwuanyi, & Ngwa,
application of accounting principles by relevant entities and 2018). The direct effect of audit quality attributes on the financial
assist in ensuring that their financial reports are useful, performance of firms has been given major concern by
transparent and reliable. An independent audits would assist in researchers. In this present study, audit quality attributes are
reinforcing a strong internal control mechanism, risk measured by three major components audit fee, auditor size and
management and corporate governance codes in companies, audit independence and return on asset (ROA) which is the
thereby contributing to the financial performance (Hassan & measurement for financial performance.
Farouk, 2014).
It is within this background that the present study tends to
Financial statement audit is said to be a control mechanism put explore the impact of the audit quality on the financial
in place for safeguarding the shareholder interests and reducing performance of listed companies Nigeria. The main objective of
information asymmetry in other to guarantee that the audited this present study is to examine the extent of association
financial reports are considered free from material distortion between the determinants of audit quality with the financial
(Irungu, 2013). Furthermore, auditors assist in minimize the performance. The study is stirred by the recent concerns about
chances of engaging in material misstatements by guaranteeing current state of audit quality practice by firms in Nigeria, where
that financial reports are developed in compliance with the many companies collapsed due to the absent of well efficient
stipulated principles. Lesser risks of engaging in misstatements audit quality practice measures by the firms in Nigeria such as
build up trust in capital markets, which as a result reduces the the case of “Nigerian Enron” popularly known as the Cadbury
cost of capital for companies (Hoti, Ismajli, Ahmeti, & Dërmaku, Nigeria Plc which happen in 2006, then the Afribank Nigeria Plc,
2012). the Intercontinental Bank Plc, Union Bank Plc, Oceanic Bank Plc
in 2009 and many more. However, it is evident that this has been
A financial report that is being audited by reputable auditor a very big issue of great concern to investors in the Nigerian
notifies the participant in the market that the financial reports capital Market. The remaining part of this paper is designed as
are more credible and reliable than the ones audited by follows. The first section of this study provides the introductory

Journal of critical reviews 37

 THE IMPACT OF AUDIT QUALITY ON THE FINANCIAL PERFORMANCE OF LISTED COMPANIES NIGERIA

part of the study, the second section when further to reviews the Big 6 auditors tents to deliver more better quality audit than
prior literature and also develops the relevant hypotheses, the the non-Big 6 auditors, which is backed by a group of
next is the third section which offers the methodology and the comprehensive empirical research. Comprix and Huang, (2015)
model developed in this study, followed by the discussion of the examine whether the big 4 auditors provides better quality audit
study results from the fourth section and finally, it ends with the in terms auditor size. They found that the non-big 4 auditors are
fifth section. less likely to restrain the managers' discreet use of the
discretionary accruals.
LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT
Financial performance of listed companies on the Capital Market Auditors are presumed to be independent at all ramification
plays a major role, it is also viewed as a platform for pulling during the course of carrying out their audit assignment. This is
capital as well as reducing the companies cost of capital. A importance to ensure the stakeholders interest will be properly
company that possess a very high-pitched financial performance protected, (Dakhlallh, Rashid, Wan Abdullah, & Al Shehab, 2020).
will as a matter of fact create a good status with the investors. At The objectivity of professional auditor guarantees fairness and
the same time, capital market, managers and also investors rely also imposes confidence as well as trust in the ultimate users of
on the audited financial reports in other to make decision on the the financial reports. DeAngelo (1981), describes independence
business efficiency of companies (Thu et al., 2020). Therefore, of an auditor as the provisional likelihood that the appointed
higher quality of financial reports will positively impact the auditor might exposed any material distortion in financial
company’s financial performance. Financial performance is said reports provided that this material distortion was previously
to be a multi-faceted concept (Santos & Brito, 2012). There are determined. Chia-Ah and Karlsson, (2010), they stated that the
many approaches adopted by many researchers in the fears to objectivity are in many cases very important and
measurement of financial performance. In in this research, the therefore challenge the effectiveness of the auditors in executing
financial performance will be measured according to profitability an unbiased auditing services. Zureigat, (2011) studied the
of the company. Profitability is always being measured as the impact of financial structure amongst the Jordanian quoted
proportion of income before tax to shareholder’s equity (Chen & companies on audit quality. Employing a total sample of 198
Chen, 2011). Profitability is being measured in different ways, firms, using the logistic regression analysis, the outcome from
such as the Return on assets (ROA), Price Earnings Ratio (PER) the study displays a positive and statistically significant
as well as Return on equity (ROE). This study adopted ROA, as association between the financial structure and the audit quality
the main measurement of the financial performance. attributes. Also, Hassan and Farouk (2014) examine the effect of
audit quality and the financial performance of listed cement
There is an important part of literature that is devoted to companies in Nigeria. The result from their study revealed that
understanding the issue regarding audit pricing. In the 1980, auditor independence has major effects on performance of listed
Simunic established a demonstrative model of the process in cement companies in Nigeria. In light of the above-mentioned,
which the fees paid for audit services are specified, and from that the following hypothesis are formulated
time several scholars have persistently carried out forth
observed outcomes that display the factors correspond to the H1: There is a significant positive association between audit fees
proper approtment of the audit fees (Moutinho, 2012). and financial performance of listed companies Nigeria.
Hypothetically, the amount paid by client for audit services to the H2: There is a significant positive association between auditor
audit firm imitates the degree to which audit services the latter size and financial performance of listed companies Nigeria.
has to accomplish within the auditing circle. Stanley, (2011) H3: There is a significant positive association between auditor
examines the relationship between profitability and observed independence and financial performance of listed companies
auditor remuneration using data collected from US public listed Nigeria.
company engagements for seven years. The result displays a
transposed link between the audit fee and clients’ working METHODOLOGY
performance while audit quality is jeopardized in the long run. The target population of this present study consist of 169
The more the amount paid as audit fees implies that the auditors companies that are listed on the board of Nigerian Stock
offer more professional auditing services to the clients as against Exchange (NSE) as of December 2018. From this population, 56
the payment of lower amount for audit fees. However, several companies, involving of 504 firm-year observations which are
studies employ audit fees as the proxy for measuring the quality from the financial services sector have been eliminated, leaving a
of audit because of the fact that quality in audit is invisible (Bliss, total of 113 companies with 1,017 firm-year observations. Also,
Gul, & Majid, 2011). Finally, this study employee audit fees as one 18 firms encompassing of 162 firm-year observations (15.93%)
of the measurement for audit quality which is also consistent have been eliminated as a result of the fact that they are delisted
with the research carried out by (Bliss et al., 2011; S. U. Hassan & by the Nigerian Stock Exchange in 2018. From the outstanding
Farouk, 2014; Moutinho, 2012; Mustapha, Mohd Rashid, Lateef, & firms, 11 of the firms with 99 firm-year observations (9.73%) did
Bala, 2019; Stanley, 2011). not in any way disclose complete information. However, a final
sample of 84 firms, consisting of 756 firm-year observations
In audit quality literature, the size (big 4 and Non-big 4) of the (74.34%) were engaged. The period of this present study covers
audit firm is commonly employed as the measurement of audit 9 years from (2010 to 2018). The selection of this period is due
quality. This measurement was also discussed from the different to number financial related cases where many companies
context of the study, (Rashid, Noor, Mastuki, & Bardai, 2015). collapsed in Nigeria. This present study uses the secondary data
Considering the fact that larger auditors (firms) have a better to generate data from the annual financial statement of the
reputation compared to smaller auditors and for the reason that companies that form part of the Nigerian Stock Exchange and
large auditors have more to lose if their clients overstate, large Thomson Reuters DataStream Professional for the studied years.
auditors have more grounds to issue clean reports(DeAngelo,
1981). Capital market responds more positively as soon as firm 1) Model Specification and Variable Measurement
switches to a Big4 audit firm. Literature offers evidence of a The result of the panel data regression analysis represents an
higher earning response coefficient (ERC) for the clients of Big4 equation that exclusively best forecast a specific dependent
audit firms when compared with the clients of the non-Big4 audit variable from a group of independent variables. This approach is
firms (Mollik & Bepari, 2014). A number of studies have considered in situation were the independent variables were
examined whether the auditor brand name as proxy by auditor found to be associated with each other as well as the dependent
size (Big 6/5/4), is related with financial performance (Bala, variable. The equation from the regression analysis is said to be
Amran, & Shaari, 2018). However, DeAngelo (1981) claims that predicted as follow:

Journal of critical reviews 38

 THE IMPACT OF AUDIT QUALITY ON THE FINANCIAL PERFORMANCE OF LISTED COMPANIES NIGERIA

Where: ROA = Financial Performance, α 0 = Constant, AUDTF =

ROA = α0 + β1 AUDTF + β2 AUDSZ + β3 AUDIN + β4 Audit Fee, AUDSZ = Auditor Size, AUDIN = Auditor Independence,
FMGRH + β5 FMAGE + ε FMGRH = Firm Growth, FMAGE = Firm Age, and ε it = the Error
term.

Table 1: Summary of Variable Measurement

S/N VARIABLES MEASUREMENTS PROXIES SOURCES
Dependent Variable:
1. Financial Measured as the proportion of income before tax to shareholder’s ROA (Chen & Chen, 2011)
Performance equity

Independent Variables:
Audit Quality:
1. Audit Fee The Logarithmic transformation of Naira-value remunerated to AUDTF (Hanlon, Krishnan, & Mills,
the auditor for the audit services. 2012)

2. Auditor Size A dummy variable, that is coded “1” if the company is audited by a AUDSZ (Inaam, Khmoussi, &
Big4 and “0” otherwise. Fatma, 2012)
3. Auditor The natural log of audit fees is employed as the reverse measure AUDIN Gerayli et al., (2011)
Independence of audit independent. Higher (small) amount of audit fees entails
poor (good) auditor independence
Control Variables:
1. Firm Growth Measured as change in the sales apportioned by previous sales FMGRH (Collins, Pungaliya, & Vijh,
2017; Huang, Lao, &
McPhee, 2017)
2. Firm Age Measured as the Number of years of observation minus of years of FMAGE (Gao & Huang, 2016;
listing Kouaib & Jarboui, 2017)

RESULTS AND DISCUSSION value of 0.587 with minimum and the maximum values of 0 and
1) Descriptive Statistics 1. This implies that 50% of listed companies in Nigeria
Table 2 below indicates the outcome for descriptive statistic patronized the services offered by the Big4 auditors.
taken from the studied variables incorporated into the model.
Table 2 disclosed that the mean value for ROA in Nigerian Listed AUDIN has an aggregate mean value of 2.027 with the minimum
Companies is 0.054 and the minimum as well as maximum ROA and maximum values of 0.009 and 7.274, respectively. FMGRH
are -0.707 and 0.524, respectively. Indicating a positive has an aggregate mean value of 0.150 with the minimum and
performance on the companies. It further indicates that AUDTF maximum values of -0.192 and 1.822 respectively. Finally,
with a mean value 32.063 and the minimum as well as the FMAGE with an estimated mean value of 22 years with the
maximum values of 0.29 and 1442 paid for audit services by the minimum and maximum values of 2 to 53 years, correspondingly.
Listed companies in Nigeria. Also, AUDSZ has an aggregate mean

Table 2: Descriptive Statistics

Note: ROA= Return on Asset; AUDTF= Audit Fee; AUDSZ= Auditor Size; AUDIN= Auditor Independence; FMGRH= Firm Growth; FMAGE=
Firm Age

2) Correlation Matrix display that the AUDIN possess a positive and statistically
According to Pallant (2011), he stated that the correlation significant correlation with the ROA at 1% level significant.
analysis is very important in portraying the direction and Therefore, this offers a signal on the course of the association
strength of the undeviating association amongst studied between AUDIN as well as the ROA in the regression model.
variables. Joseph (2010) also proposed that the correlation value AUDTF and AUDSZ were also discovered to be positively and
of 0 indicates no relationship, whereas the correlation 1.0 statistically significantly associated with ROA also at 1% level
implies an excellent relationship. This is in consistent with the significant each. Table 3 shows FMGRH to be negatively and
revelation of Hair, Black, Babin, Anderson, and Tatham (2010) analytically significantly associated with the ROA at 5%
which posited that the correlation matrix ought not to exceed significant level. Lastly, FMAGE is also found to be positively and
0.70 to guarantee that the multicolinearity problem is not in significantly associated with the ROA at 5% level significant.
existence in this study. The correlation analysis from the table 3

Journal of critical reviews 39

 THE IMPACT OF AUDIT QUALITY ON THE FINANCIAL PERFORMANCE OF LISTED COMPANIES NIGERIA

Table 3: Correlation Statistics

ROA AUDTF AUDSZ AUDIN FMGRH FMAGE
ROA 1.000
AUDTF 0.275** 1.000
AUDSZ 0.193** 0.175* 1.000
AUDIN 0.403** 0.614* 0.347** 1.000
FMGRH -0.081* 0.029 0.018 -0.003 1.000
FMAGE 0.071* 0.151* 0.212** 0.325** 0.037 1.000

Note: ROA= Return on Asset; AUDTF= Audit Fee; AUDSZ= Table 4 below reveals the result of the multicolinearity issue as
Auditor Size; AUDIN= Auditor Independence; FMGRH= Firm tolerance values and variance inflation factor (VIF) values for all
Growth; FMAGE= Firm Age the independent variables is less than 1 and also less than 10
**. Correlation is significant at the 0.01 level (2-tailed). which signifies that the independent variables in this study are
*. Correlation is significant at the 0.05 level (2-tailed). within the normal range. It is accordingly presumed that the
present study is free from multicollinearity.

Table 4: Collinearity Diagnostics

Variables Collinearity Statistics
Tolerance VIF
AUDTF 0.526 1.90
AUDSZ 0.618 1.62
AUDIN 0.867 1.15
FMAGE 0.879 1.14
FMGRH 0.996 1.00
Mean VIF 1.36
Note: AUDTF= Audit Fee; AUDSZ= Auditor Size; AUDIN= Auditor Independence; FMGRH= Firm Growth; FMAGE= Firm Age

3) Regression Results auditor independence and the two control variables which are
In the study, the linear regression analysis is being employed as a the firm growth, firm age for 84 companies listed on the NSE.
statistical procedure to explore the relationships that arise Table 5 below discloses the analysis of results for linear
amongst a particular dependent variable and from a group of regression model.
three independent variables involving audit fee, auditor size,

Table 5: The Relationship between Return on Asset and Audit Quality

ROA Coef. Std. Err. t-value P> [t] VIF 1/VIF
AUDTF 0.000 0.000 1.12 0.263 1.90 0.526
AUDSZ 0.014 0.007 2.03* 0.043 1.62 0.618
AUDIN 0.023 0.003 8.14*** 0.000 1.15 0.867
FMGRH -0.038 0.016 -2.42** 0.016 1.00 0.996
FMAGE -0.000 0.000 -1.95* 0.052 1.14 0.879
CONS 0.014 0.008 1.82* 0.070
F (5,750) 32.57
Prob > F 0.000
R2 0.178
Adj R2 0.173
Linktest (Hatsq) 0.539
Ovtest (F) 1.91
Prob > F 0.126
Mean VIF 1.36
Number of Obs 756 756 756 756 756 756
Note: ROA= Return on Asset; AUDTF= Audit Fee; AUDSZ= Auditor Size; AUDIN= Auditor Independence;
FMGRH= Firm Growth; FMAGE= Firm Age

As disclosed in Table 5, the R2 from the regression model is Generally, the results in Table 5 revealed that the four variables
0.178. This further indicates that the model explains 17.84% of from this study were revealed to be statistically significant with
the disparity in financial performance as being measured using financial performance predictor variable (as being measured
ROA. However, this is being regarded as a satisfactory result. The using ROA). AUDTF shows a positively but statistically
STATA (version 14) shows the adjusted R2 value in the table insignificant relationship with the ROA. This is seen from table 5
above. In a situation where the sample is small, R2 value is a which reveals a regression coefficient as well as a p-value of
relatively optimistic overestimation of the real population value >0.000 and 0.263. This display that AUDTF is positively and
(Tabachnick & Fidell, 2007). R2 signifies that 0.178 percent of the statistically insignificantly related to the ROA. This positive figure
difference from the dependent variable is discussed as a result of denotes that a percentage decrease in the amount paid to
differences in the independent variables within the study. This auditors for audit services, then there is possibility for financial
also indicates that the deviation in financial performance, as performance of the listed companies in Nigeria will also increase.
being measured using ROA, is statistically justified by the The outcome is similar to that discovered in a study by Moutinho,
regression equation. The outcomes from Table 5 also exhibit that (2012) who studied the effect of audit fees and the firm
the model is statistically significant (p<0.0l) signifying the performance. They discovered a positively and statistically
strength of the model employed. insignificant relationship between audit fee and the ROA.

Journal of critical reviews 40

 THE IMPACT OF AUDIT QUALITY ON THE FINANCIAL PERFORMANCE OF LISTED COMPANIES NIGERIA

AUDSZ display a statistically significant and a positive 121–129.

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be adversely and statistically significantly associated to the ROA. Shehab, H. J. (2020). Audit committee and Tobin’s Q as a
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