Latest

whatsapp (+234)07060722008
email sales@graciousnaija.com

Tuesday 12 September 2017

AUDIT QUALITY AND EARNINGS MANAGEMENT OF LISTED CHEMICAL AND PAINTS FIRMS IN NIGERIA

MSC Project Topics in Accounting and Finance

ABSTRACT 
This study examines the relationship between audit quality and earnings management in the Nigerian chemical and paints sector over a period of seven years (2006-2012).The management of earnings was measured using Discretionary Accruals (a modified Jones model). Generalized Least squares technique was used to estimate the regression coefficients of the data obtained from the eight (8) listed chemical and paints firms using STATA 10. The results show that, audit firm size has a significant negative impact on the earnings management of the firms. The study also found that chemical and paints firms that engage the services of big-4 auditors engage less in earnings management, which implies that the bigger the audit firms, the lower these chemical and paints firms engage in earnings management. The results also suggested that audit firm sizehelps in constraining earnings management in chemical and paints firms, in the sense that it has significant effect on earnings management. The study recommends among others that, Nigerian chemical and paints sector in conjunction with audit firms, professional accounting bodies and standard setters should continue to improve on the quality of their audits, by setting effective quality control, standards and policies that will help enhance audit quality; reduce the audit firm tenure and engage only the audit firms that have the appropriate expertise in an industry, as these may have significant impact on reducing earnings management in the Nigerian chemical and paints sector.


CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The last decade has witnessed several accounting scandals and corporate failures that were blamed on earnings management practices of firms globally, which audit function was not able to detect. Earnings management involves managers‟ manipulation of the external reporting process and structuring transactions to alter financial reports to either mislead some shareholders about the underlying economic performance of the company or to influence contractual outcomes that depend on reported accounting numbers (Healy & Wahlen, 1999). As a result of this practice, which went undetected or unreported by external auditors, the United States alone recorded ten largest bankruptcies in 2002, including the two largest in world history, namely World Comand Enron (Albrecht, Albrecht & Albrecht, 2004). In Nigeria, Cadbury Nig. Plc and African Petroleum are exemplar cases. The increasing incidence of corporate scandals or failures associated with earnings management has led to loss of public confidence in the quality of reported accounting earnings and the audit function generally. Accordingly, earnings management has become a matter of great concern to regulators, practitioners as well as accounting researchers (Okolie, 2014) due to the perverse consequences it has on corporate survival.
Hlioui and Zehri (2012), Cohen and Zarowin (2010), Zang (2007) and Roychowdhury (2006) explain that managers exercise their discretion not only via choice of accounting estimates and methods (accrual-based earnings management) but also through operational decisions (real activities manipulation). Real activities manipulation is an alternative tool of earnings management through changing operating activities and decisions (opportunistic reduction of discretionary expenses, overproduction, and offering price discounts to boost current-period sales). Separately, Graham, Harvey and Rajgopal (2005) suggested that given the stigma associated with accrual management, earnings manipulations are now more likely to be achieved through real economic actions because accrual-based earnings management is more likely to draw auditor or regulatory scrutiny than real decisions such as those related to product pricing, production, and expenditures on research and development or advertising.
It is argued that if shareholders have perfect informationabout managers‟ actions, there would be no information asymmetry between thetwo parties. Information asymmetry exists when perfect information is absent,which is the assumption of agency theory and since informationasymmetry exists, stockholders have difficulty detecting earnings management (Fama, 1980). Though, it is argued that businesses adopt some level of discretion in their decision because no firm adopts a hundred percent rule based accounting systems when reporting their economic performances and financial position. In fact, Bello (2002) is of the opinion that itisunimaginable to have accounting systems that are totally rule based without room for occasional judgments.
A considerable number of studies that include Okolie (2014), Okolie, Izedonmi and Enofe (2013), Zgarni, Hlioui and Zehri (2012),Chi; Mehmet and Emin (2012),Ahmadzade, Hassanzadeh, Pooryegane and Ebrahimi (2012), Lisic and Pevzner(2011), Francis and Yu
(2009), Rusmin (2010),Roger, Frank, Erik and Ann (2003), Zhou and Elder (2003), and Gaver and Paterson(2001)have found that quality of audit is one of the constraining factors that limit managements‟ manipulation of accounting numbers. Watts and Zimmerman (1986) show that auditing is a valuable form of monitoring used by firms to reduce agency costs. The value of auditing arises, because auditing reduces the misreporting of financial information. The value of auditing on constraining managerial discretion, however, is expected to vary with the quality of the auditor. Becker, DeFond Jiambalvo and Subramanyam(1998) and Heninger (2001) report evidence consistent with the external auditor acting as a constraint on earnings management, with the effectiveness of the constraint depending on audit quality.
The demand for auditing arises from the auditor‟s monitoring role in theprincipal-agent relationship (Eilifsen & Messier, 2000). The performance quality of this monitoring function may vary. Audit qualitydescribes how well an audit detects and reports material misstatements of financialstatements, reduces the effect of information asymmetry between management and shareholdersand therefore helps protect the interests of stockholders. High audit quality shouldbe associated with high information quality of financial statements becausefinancial statements audited by high quality auditors may be less likely to contain material misstatements. From an agency theory perspective, audit is a monitoringmechanism that provides reasonable assurance that financial statements are free ofmaterial misstatements and therefore protects the interests of shareholders. Whenthe interests of management conflict with the interests of shareholders,management may not act in the best interests of shareholders. A high level of audit quality is therefore expected to result in lower levels of earnings management.
Literature has documented a number of attributes that explain audit quality and how the combined effect of the attributes could help checkmate managers‟ excessive earnings management practice. Of the numerous attributes identified in the literature, size of audit firm, independence and specialization of auditors seemed to stand out. Size of an audit firm is considered critical to its ability to assemble well qualified and highly experienced auditors to engage in different aspects of audit functions. Such a firm is more likely to engage in a wide range of audit assignments for different companies in view of its economies scope and scale. In line with these postulations, Francis, Maydew and Spales (1999) have documented evidence showing that the Big-4 audit firms provide a more significant constrain on earnings management than other audit firms. Thus, the size of an audit firm affects the extent to which it constraints earnings management practice.
In theory, a company’s auditors are appointed independently by its shareholders, to whom they report. In practice however, auditors are chosen by the company’s bosses, to whom they all too often become beholden (The Economist, 2002). Hence, auditors might be more inclined to allow aggressive and opportunistic reporting of accruals, resulting in lower quality audits and thus increase in earnings management. This places a question mark on the independence of an auditor. In addition to auditor size and auditor independence, auditors‟ industry specialization is considered to be an important attribute of audit quality as it impacts the earnings management of firms. Studies have shown that client firms with industry specialists are associated with higher quality of financial reporting (Balsam, Krishnan and Yand,2003; Krishnan, 2003).Like large auditors such as the Big 4 invest in brand name capital, industry specialists to make investments in industry specific accounting technology to differentiate themselves from other auditors (Craswell, Franci& Taylor1995)

The high-profile corporate scandals of 2008 through to 2009 in Nigeria has continued to raise a lot of concern about the integrity of financial and auditing reporting systems in the country. Some corporate organizations in the banking and manufacturing sub-sectors that were never suspected to have problem were found to be living in past glory due to excessive earnings management practices. The ugly practices which were later discovered to have been on for sometime went undetected or unreported by auditors. The experience has since left its perils in the mind of shareholders, prospective investors, regulators and financial analysts. The chemical and paints industry in Nigeria is considered one of the most susceptible sub-sectors of the country to earnings management. This is due to the ongoing effort by both government and industrialists to develop the industry as priority area of industrial investment and a support toward government housing policy for Nigerians. The sub-sector has undergone various levels of transformation from them anual based processes to more technologically advanced production methods. In view of the renewed interest in the industry owing to its recent impressive performance and high level of activities, it is imperative to examine its earnings management practices and how it is affected by audit quality.

MSC Project Topics in Accounting and Finance

AUDIT QUALITY AND EARNINGS MANAGEMENT OF LISTED CHEMICAL AND PAINTS FIRMS IN NIGERIA

Department: Accounting and Finance (M.Sc)
Format: MS Word
Chapters: 1 - 5, Preliminary Pages, Abstract, References, Questionnaire.
Delivery: Email
No. of Pages: 93

NB: The Complete Thesis is well written and ready to use. 

Price: 20,000 NGN
In Stock


No comments:

Post a Comment

Add Comment