ABSTRACT
Efficient financial management in the corporate world has become topical in the last two decades as a result of series of financial scandals that happened both at national and international levels. This has raised a lot of questions on the capacity of auditing firms globally and raised concern on the role of an external auditor 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 public companies in Nigeria in spite of the annual independent audit exercises. This study examined the impact of audit attributes on the financial reporting quality of quoted food and beverages firms in Nigeria. Secondary data from annual reports and accounts was employed. The correlational research design was used in a sample of fifteen (15) firms for a period of six years (2008-2013). Random Effect (GLS) regression technique for data analysis was used. The study found a significant positive relationship between audit attributes and financial reporting quality during the period under review. Specifically, the study found that auditor size, audit delay and auditor remuneration have a significant positive impact on the quality of financial report of the sample firms. The study on the other hand found that auditor rotation has no significant impact on the financial reporting quality of the sample firms. The study recommends that the regulators (SEC) of the listed companies in Nigeria should emphasize and encourage the use of audit quality attributes; especially the auditor size, audit delay and auditor remunerations. The study also recommends that managers of the food and beverages firms in Nigeria should improve compliance with the 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.
MSC Project Topics in Accounting and Finance
AUDIT ATTRIBUTES AND FINANCIAL REPORTING QUALITY OF QUOTED FOOD AND BEVERAGES FIRMS IN NIGERIA
Department: Accounting and Finance (M.Sc)
Efficient financial management in the corporate world has become topical in the last two decades as a result of series of financial scandals that happened both at national and international levels. This has raised a lot of questions on the capacity of auditing firms globally and raised concern on the role of an external auditor 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 public companies in Nigeria in spite of the annual independent audit exercises. This study examined the impact of audit attributes on the financial reporting quality of quoted food and beverages firms in Nigeria. Secondary data from annual reports and accounts was employed. The correlational research design was used in a sample of fifteen (15) firms for a period of six years (2008-2013). Random Effect (GLS) regression technique for data analysis was used. The study found a significant positive relationship between audit attributes and financial reporting quality during the period under review. Specifically, the study found that auditor size, audit delay and auditor remuneration have a significant positive impact on the quality of financial report of the sample firms. The study on the other hand found that auditor rotation has no significant impact on the financial reporting quality of the sample firms. The study recommends that the regulators (SEC) of the listed companies in Nigeria should emphasize and encourage the use of audit quality attributes; especially the auditor size, audit delay and auditor remunerations. The study also recommends that managers of the food and beverages firms in Nigeria should improve compliance with the 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.
CHAPTER ONE
INTRODUCTION
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 statements 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 Qualitythat 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 Accounting Oversight Board (PCAOB), charged with overseeing,
regulating, inspecting and disciplining accounting firms in their roles as
auditors of public companies (SOX, 2002).
The
general focus of IFAC and SOX is basically on the quality of auditing in order
safeguard the integrity of financial reporting and the accounting profession as
a whole. The major audit attributes covered in SOX and IAASB‟s framework of
audit quality include the audit independence (through audit and non-audit
fees), audit rotation, audit competence and experience, and timely audit
process. It is therefore concluded by the regulators that high quality audits
provide a number of benefits to institutions, financial systems and existing
and potential investors. Similarly, external audits performed in accordance
with the best world practices and ethical standards are critical to the
appropriate implementation of investment, credit and similar decisions.
However,
not only accounting regulators and professional bodies responded to the gross
loss of confidence in accounting and auditing profession associated with poor
quality audit, researchers also joined the struggle to investigate the factors
associated with audit that distort the financial reporting quality. For
instance,DeAngelo (1981) and Shockley (1981) proposed that audit firm size is
positively associated with audit quality, and that, larger audit firms are
viewed as more independent than smaller firms. That is, larger audit firms are
perceived to be more likely to resolve audit conflicts in favor of the audit
firm‟s position and thus high quality financial reporting.In essence, larger
audit firms are more likely to resist client management pressures than smaller
audit firms in auditor-client negotiation over financial reporting issues (Chen
et al., 2005). As such audit quality studies indicate that, when accounting
firm size is used as the indicator of audit quality, higher audit quality is
associated with less information asymmetry and higher information quality. On
the other hand, a large body of research has studied the issue of auditor
rotation, primarily by testing whether proxies for earnings quality (financial
reporting quality) or audit quality improve or deteriorate with long-term
auditor-client relationships. 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 therefrom.
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 (Simunic 1984, 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.
MSC Project Topics in Accounting and Finance
AUDIT ATTRIBUTES AND FINANCIAL REPORTING QUALITY OF QUOTED FOOD AND BEVERAGES FIRMS IN NIGERIA
Department: Accounting and Finance (M.Sc)
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Chapters: 1 - 5, Preliminary Pages, Abstract, References, Appendix.
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