THE EFFECT OF AUDIT QUALITY ON FINANCIAL PERFORMANCE OF NIGERIA DEPOSIT BANKS
Abstract
This study examined the impact of audit quality on the financial performance of Nigerian depository banks for the period 2005-2015 (11 years). Specifically, the study assessed the impact of audit report delays, audit fees, audit duration, and audit firm size on the financial performance of listed custodians in Nigeria. The study used secondary data from annual bank statements for 11 years (2005-2015). Ordinary least-squares regression was used to empirically describe and predict the relationship between audit quality variables and the financial performance of financial institutions.
Additionally, this study used an ordinary least-squares regression model. Results from the ordinary least-squares regression model show that audit report delay, audit firm tenure, and audit firm size have a significant positive impact on the financial performance of listed custodians in Nigeria. It shows an insignificant relationship between audit fees and earnings per share. to financial performance. Regression results showed that audit quality variables, including control variables, explained approximately 73% of the overall variation in the financial performance of the listed custodians in Nigeria during the study period.
The theory adopted in this study is the justification theory.
The study concludes that audit report delays, audit firm tenure and audit firm size have a significant positive impact on the financial performance of listed custodian banks in Nigeria. This means that audit report delays, audit tenure, and audit firm size improved the financial performance of Nigerian deposit-taking banks during the study period. The study recommends that:
Efforts should be made in creating environment that would improve the sustainability of audit quality not only in publicly quoted companies but be extended to private companies for enthronement of good corporate governance practices; The relationships between management and shareholders have to be characterized by transparency and fairness; The quality of audit should be maintained and improved upon by keeping audit objectives such as:
financial control mechanisms, implementation of acts, rules and regulations.
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Since the audit forum was established, one of its key aims has been to promote confidence in financial reporting. The statutory audit can reinforce confidence because auditors are expected to provide an external, objective opinion on the preparation and presentation of financial statements. Auditors need to be independent in the opinions they express, while the work they have to do to form their opinions is highly dependent on, and the real world and may become particularly challenging in some national environments.
Financial statements are prepared to provide useful information in making business and economic decisions (Dogan, Coskun & Celik, 2007). This information is important to users who use statements to assess the financial situation and performance of affiliates (Ahmed & Hossain, 2010). Farouk and Hassan (2014) found that auditing is a surveillance mechanism that helps reduce information asymmetry and protect interests.
According to DeAngelo (1981), audit quality is defined as: The possibility of certain auditors detecting and reporting violations of the client’s accounting system. The likelihood of detecting a violation depends on the auditor’s technical ability to detect material misstatement, and the likelihood of reporting an error depends on the auditor’s independence.
According to Koh, Choi, and Woo (2014), most firms and managers lack the accounting knowledge and resources to prepare proper financial statements. In fact, many banks rely on auditors to prepare their financial statements and seek their advice before making accounting decisions. Therefore, auditors indirectly influence the financial statements before doing their job (Ilaboya & Ohiokha, 2014). Under these circumstances, companies rely heavily on auditors to make accounting decisions and prepare financial statements. A high level of trust in auditors means that auditors have a strong influence on the quality of financial statements (Koh, Choi & Woo, 2014). Insufficient or inadequate audit evidence can lead to inaccurate calculations and affect report quality (Ilaboya & Ohiokha, 2014).
According to KPMG, there is no universal definition of the term. A quality external assurance service includes, at a minimum, a rigorous inspection with an appropriate level of professional skepticism performed in accordance with applicable standards. Auditing can also be used for security purposes. Evans & Parker (2008) argue that auditing is one of the most powerful security monitoring techniques, especially when auditing focuses not only on compliance but also on effectiveness. It’s an effective way to slow things down.”
Financial performance is a subjective measure of how well a company is able to utilize assets from its core business and generate revenue. It is also used as a general measure of a company’s overall financial health over time and can be used to compare similar companies in the same industry or to compare industries and sectors in aggregate form.
There are many ways to measure financial performance, but all measurements must be aggregated to obtain them. Operating profit, operating profit or cash flow from operating activities, and total sales are available. Additionally, analysts and investors may want to take a closer look at the financial statements for earnings growth and debt reduction.
Deposit banks have various stakeholders such as commercial creditors, general users, investors, employees and management. Each group has a unique interest in tracking the bank’s financial performance. Analysts learn about financial performance through public data, also known as annual reports. Banks are economic institutions that promote economic growth and development by mobilizing savings from surplus units and directing them to deficit units for productive investment. It also provides payment systems and implements government monetary policies. Because of this strength, Sanusi (2012) views banks as the economic central nervous system in the financial system.
1.2 Problem Description
The failure of financial reporting in the world, especially in Nigeria, has caused great disappointment for users of financial reporting. The problem stems from the long tenure of accounting firms due to creative accounting. In the Nigerian audit environment, the challenges of audit duration and audit quality reporting have not attracted much verifiable research beyond mere anecdotal opinion.Mgbame, et al. (2012). In light of these studies, the tenure of accountants has been the focus of much debate. The creation of assurance quality reports is intended to increase the user’s confidence in these reports in financial reporting. Investors in particular tend to do this.
However, lack of efficiency on the part of management can lead to disorganized deals. These financial statements are generally not indicative of the custodian’s true financial position and may jeopardize the decision-making of potential investors. Unfavorable investment results reduce the credibility of annual accounts. As a result, the flow of capital will decrease and the conditions of the business environment will deteriorate. Therefore, auditors need to address these issues through efficient and effective performance of audit work and preparation of quality reports. This study therefore examines the factors that may affect the quality of audit work and analyzes the existence and extent of links between these factors and the achievement of high audit quality in Nigerian depository banks ( International Journal of Academic Research in Accounting, Finance and Management Sciences). ). In theory, auditors are expected to be independent of the senior management of the entity being audited. However, many factors seem to affect the independence of auditors, including familiarity, the threat of auditor turnover, and the provision of business her advisory services. Concerns have been raised about conflicts of interest between the auditor’s statutory role and the other services they provide to clients (UK House of Common Treasury Committee, 2008).
1.3 Purpose of the survey
The primary objective of this study is to determine the impact of audit quality on the financial performance of custodian banks in Nigeria. Specific goals are:
Me. Determine the impact of audit quality on the return on assets of a custodian bank in Nigeria.
ii Determine the impact of audit quality on his earnings per share of the Nigerian custodian bank.
iii. Determine the impact of audit quality on the net profit margins of Nigerian depository banks. IV. Determine the impact of audit quality on dividends per share for custodian banks in Nigeria.
1.4 Research question
I. To what extent does audit quality affect the return on assets of a Nigerian listed custodian bank?
II. How Does Audit Quality Affect Nigerian Bank Earnings Per Share?
III. To what extent does audit quality affect net profit margins for listed custodian banks in Nigeria?
IV. What is the impact of audit quality on Nigerian custodian bank dividends per share? 1.5 Hypotheses
H01:
Audit quality does not have a significant impact on the return on assets of a Nigerian custodian bank.
H02:
In Nigeria, there is no significant correlation between audit quality and the custodian’s earnings per share.
H03:
Audit quality has no significant impact on Nigeria deposit bank net profit margins
H04:
The quality of the audit has no material impact on his dividend per share for the Nigerian bank of custody.
1.6 Scope of investigation
This study examines the impact of audit quality on Nigerian depository banks’ financial performance and activity over the period (2005-2014). Secondary data were used in this study. The study also examined audit quality (independent variable)
1.7 Importance of research
This study will educate bankers, governments, investors and researchers on the impact of audit quality on the financial performance of custodians in Nigeria.
It helps bank operators and officials know what to focus on to improve the financial performance of various institutions. The study also encourages governments to develop appropriate capacities and put in place appropriate structures to manage and oversee the good performance and security of the financial system. This serves as the knowledge of financial analysts to help them understand that return on investment, earnings per share, working capital, net earnings margin, and dividend per share are important determinants of a depository bank’s financial performance. Allows you to show that The results of this study provide guidance on key parameters that investors should appropriately consider when making investment decisions for financial institutions.
1.8 Operationalization of variables
Y=f(X)
Y = dependent variable and
X = independent variable
Y represents the financial performance of the deposit bank.
X represents audit quality.
This means that financial performance is a function of audit quality. Financial performance increases or decreases depending on the performance of the custodian.
Mathematically it is represented as:
FPDB=f(AQ). All sub-variables can be written with small x
X=f(x1,x2,x3,x4)
x1= monitoring report delay
x2=examination fee
x3=test period
x4=size of audit firm
EPS = Net Income – Preferred Dividends/Common Stock Weighted Average.
Net Profit Margin:
This is the percentage of revenue remaining after deducting all operating expenses, interest, taxes, and dividends on preferred shares from the company’s total revenue.
mathematically;
Net Profit Margin (NPM) = Net Profit/Total Sales
Net Income = Total Income – Total Expenses
Dividend per share:
This is the sum of declared dividends paid by a company for each outstanding ordinary share. This figure is calculated by dividing the total dividends paid by the company over a period of time, including interim dividends, by the number of common shares outstanding.
This is an important metric for investors, as the amount a company pays out in dividends translates directly into shareholder income, and dividends per share represent the return of dividend payments from share ownership over time to investors. It’s the simplest number you can use to calculate. mathematically;
Dividends per share (DPS) = total dividends/number of shares of common stock outstanding during the period.
Leave a Comment