auditors characteristics and audit quality: a study of listed

AUDITORS CHARACTERISTICS AND AUDIT QUALITY: A STUDY OF LISTED

DEPOSIT MONEY BANKS IN NIGERIA

BY

ALIU MOMODU MOHAMMED

Department of Accountancy

School of Business Studies,

Auchi Polytechnic Auchi.

[email protected]

Phone: 08057625441, 07033295427

OKPANACHI JOSHUA (Associate. Professor)

Department of Accounting,

Faculty of Arts and Social Sciences,

Nigerian Defense academy, Kaduna.

Phone: 08035557958

Abstract

Considering the magnitude of users’ that rely on the outcome of an audit service in making

investment decisions, a high-quality audit service is often envisaged. However, the issue of what

constitutes a high quality audit function and the possible rudiments that determine or influence the

eventual outcome of an audit assignment have been a trending discuss among accounting scholars,

researchers and like minds. The secondary source of data was employed for the study using a

population of all the money deposit banks listed on the floor of the Nigerian Stock Exchange (NSE)

over the period 2009 – 2014. The descriptive statistical method was use for analysing the

dependent variable and independent variables. It was discovered that auditor independence is

positively and significantly related with audit quality listed deposit money banks. in Nigerian.

Since, the experience of the auditor plays a significant role in enhancing audit quality; the

experience of an auditor should be drafted as one of the criteria for negotiating auditor

remuneration as this will motivate them not to compromise.

1. Introduction

The audit quality is often considered one of the most important topics in the audit

profession (Abeer, Ali, Al-Sharif, Almalki, & Jallad, 2015). However, the issue of what constitutes

a high quality audit function and the possible rudiments that determine or influence the eventual

outcome of an audit assignment have been a trending discuss among accounting scholars,

researchers and like minds. The reasons are not far-fetched. Most developing countries, like

Nigeria, has had its fair share of the consequences of perceived poor quality audit function since

after the collapse of several high-profile banks due to corporate scandals. Therewith, the

confidence of most stakeholders was shaken as investors became distrustful in the reliability of the

financial markets and companies' financial information (Aryan, 2015; Suyono, 2012). Reports had

it that majority of failed banks in Nigeria had wonderful audited financial reports; and went

bankrupt few months after declaring huge profits (Dabor & Dabor, 2015). Hence, the need to

ensure and sustain high audit quality function in the banking sector remains vital and valid.

Based on anecdotal evidences, the possible influencers of audit quality can be grouped into

two categories; the supply-related factors and demand-related factors. The demand side (auditee

characteristics) includes client firm size, profitability, board-related characteristics, ownership and

capital structure, among others. The supply-related factors (auditors’ characteristics) include

mailto:[email protected]

auditor’s independence, audit firm size, audit tenure, auditor rotation, auditors’ reputation, audit

industry expertise, among others). The latter group is the focus of this paper.

Studies by Nigerian authors on the effects of both the demand and the supply-related

variables on audit quality abounds, they include, but not limited to the following: audit firm

rotation, non-audit service, multiple directorship (Adeyemi, Okpala & Dabor, 2012); audit tenure,

board independence, and ownership structure (Enofe, Mgbame Okunega & Ediae, 2013); audit

firm rotation (Omoye & Aronmwan, 2013); audit firm reputation (Aronmwan, Ashafoke &

Mgbame, 2013); board independence, audit firm size and ownership structure (Enofe, Mgbame,

Aderin & Ehi-Oshio, 2013); auditor’s independence, audit firm size, audit tenure (Ilaboya &

Ohiokha, 2014); auditors independence, auditors experience, audit tenure, audit report lag (Monye-

Emina & Jeroh, 2014); auditor independence, auditor experience and auditor accountability

(Enofe, Mgbame Efayena & Edegware, 2014); board structure, corporate characteristics

(Akhidime, 2015); and audit fee, audit firm rotation, audit firm tenure (Babatolu, Aigienohuwa &

Uniamikogbo, 2016). However, evidences from majority of these studies revealed the presence of

conflicting findings which is an indication that the issues involving audit quality determinants

remain far from been settled empirically.

In the quest to reconcile the varying outcomes in extant studies, this paper adds to the body

of existing knowledge by examining the relationship between audit firm characteristics (auditor

independence, auditor tenure, auditor rotation, auditor experience) and audit quality in Nigerian

listed commercial banks. The paper is deemed relevant owing to the fact that its subject matter is

fundamental to financial reporting integrity which is vital in guiding investment decisions. More

so, since poor management and audit function was jointly earmarked as among the causes of the

crises experienced by most Nigeria banks in the last decade, a study of this nature will provide a

basis for improvement on the latter in order to forestall the reoccurrence of such ugly past

experience in the sector.

Research Questions

In line with the background, the paper answered the following research questions:

i. How does audit firm tenure affect audit quality in the Nigerian listed banks?

ii. What is the relationship between audit firm rotation and audit quality in the Nigerian listed

banks?

iii. To what extent does auditor independence affect audit quality in the Nigerian listed banks?

iv. What is the relationship between auditors experience and audit quality in the Nigerian listed

banks?

Hypotheses

In the light of the above, the following null hypotheses were tested in the course of the study:

HO: There is no significant relationship between audit firm tenure and audit quality in the Nigerian

listed banks.

HO: There is no significant relationship between audit firm rotation and audit quality in the

Nigerian listed banks.

HO: There is no significant relationship between auditor independence and audit quality in the


HO: There is no significant relationship between auditors experience and audit quality in the


2. Literature Review and Theoretical Framework

Numerous studies exist in literature that examined the relationship between client and

auditor-related characteristics and audit quality. For example, Adeniyi and Mieseigha (2013)

investigated the relationship between audit tenure and audit quality in Nigeria using Binary Logit

Model estimation technique. They found that a negative relationship exists between auditor tenure

and audit quality, though the variable was not significant. In agreement with the findings of

Adeniyi and Mieseigha (2013), Enofe, et al (2013a) also assessed the determinants of audit quality

in Nigerian business environment and also found that audit tenure showed a negative insignificant

relationship with audit quality, while the other variables they studies such as audit firm size, board

independence and ownership structure were all positively related to audit quality.

Enofe, et al (2013b) in their argument that auditors’ independence plays a pivotal role in

enhancing the audit quality in the organization evaluated the relationship between audit quality

and auditors’ independence in Nigeria. They adopted a cross sectional analysis of companies listed

on the Nigerian Stock Exchange was carried out. They measured audit quality by the fees charged

by the audit firms, while audit tenure, board independence, and ownership structure made up the

independent variables. Using the ordinary least square (OLS) regression analysis, their results

indicated that as auditors’ independence increase, the quality of the audit also improves and as the

independence of the board and the ownership structure increases, the quality of the audit reduces.

Omoye and Aronmwan (2013) examined the impact of audit firm rotation on the audit

quality of 15 banks in the Nigerian-banking sector for the period 2005-2011. Using cross-sectional

pool data on a binary logit regression model, it was found that audit firm rotation causes a

significant negative impact on audit quality. No control variable was included in the estimation. In

a related study, Aronmwan, Ashafoke and Mgbame (2013) examined the relationship between

audit firm reputation and audit quality in Nigerian listed companies. Using the Ordinary Least

Square estimation technique, they found that a positive significant relationship exists between

audit firm reputation and audit quality. All the control variables they employed such as audit

committee independence, expertise, company size and leverage showed positive relationship with

audit quality, except audit committee size which showed inverse relationship.

Hamideh, et al, (2013) examined the relationship between auditor’s characteristics and

audit quality of a sample of 91 non-financial companies listed in the Tehran Stock Exchange, Iran

between 2007 and 2011. They adopted the modified Jones model in estimating Discretionary

accruals which they have been used to determine the audit quality. Adopting a panel data approach,

they found that there is no significant relationship between auditors tenure and audit quality. They

also confirmed a significant association between audit expertise and audit quality was confirmed.

Monye-Emina & Jeroh (2014) examined the determinants of audit report credibility (audit

quality) in Nigerian Insurance sector using secondary data on selected insurance companies quoted

on the floor of the Nigerian stock Exchange up to 2013. They employed the Ordinary Least Square

(OLS) regression technique and found that auditors’ independence, auditors experience and audit

report lag has positive relationship with the credibility of audit report, while auditors’ tenure has a

negative relationship with audit report credibility.

Ilaboya and Ohiokha (2014) examined the impact of audit firms’ characteristics on audit

quality of food and beverages companies listed on the Nigerian Stock Exchange market between

2007 and 2012. They measured audit quality with a dichotomous variable of 1 if a firm is audited

by any of the big 4 audit firms and 0 if otherwise. Using secondary data and logistic regression

technique, they found that there exist a positive relationship between firm size, board independence

and audit quality whereas there is an inverse association between auditors’ independence, audit

firm size, audit tenure and audit quality.

Enofe, et al., (2014) examined the impact of audit firm characteristics and auditing quality

in Nigeria. Basically, they examined the link between auditing quality and auditor independence,

auditor experience, auditor accountability. Their study adopted a primary data method using a

sample of 210 respondents which included finance directors, auditors, shareholders, and financial

analysts. They found that auditor independence and auditor accountability have a significant

relationship with audit quality; while auditor experience did not have a significant relationship

with audit quality.

Okaro and Okafor (2014) investigated the relationship between corporate board

effectiveness and external audit quality in Nigeria. They employed four board characteristics

(frequency of meetings, board size, proportion of non- executive directors on the board and share

ownership by members of the board) as proxies for measurement of board effectiveness. They

sampled the opinion of 52 professional accountants using questionnaire and analyzed using

inferential statistics. Their findings suggest that board effectiveness is positively associated with

external audit quality. There were also no significant differences in the perceptions of respondents

on the relationship between board effectiveness and audit quality according to gender, job type

and experience.

Jiang, Wang and Philip (2015) examine the impact of engaging a Big4 audit firm on audit

quality in US quasi sector between 1974 and 2000. They included many control variables including

firm age, loss, profitability, sales growth, leverage and investments. Using the ordinary least

squares estimation approach, they found evidence that audit quality, which they measured as

signed and unsigned discretionary accruals and the financial statement divergence scores,

improves for firms switching from non-big4 to Big4 auditors.

Akhidime (2015) examined how board structure and corporate characteristics of Nigeria

banks affect their audit quality. They sampled a total of 19 banks out of the population of the 25

Nigerian banks over a five- year period. The result of their binary logistic regression analysis

confirmed that non-executive, independent directors and director’s share ownership impacted

positively on the audit quality of the sample banks.

Babatolu, Aigienohuwa and Uniamikogbo (2016) examined the effect of auditor’s

independence on audit quality in selected money deposit banks in Nigeria. Their sample size was

streamlined to seven (7) banks through purposive sampling technique. Using the ordinary least

square (OLS) regression technique, their findings showed that there is a positive relationship

between audit fee, audit firm rotation and audit quality, while a negative relationship exists

between audit firm tenure and audit quality. Their two control variables (company size and

leverage) showed significant positive and negative strong association with audit quality

respectively.

In order to obtain a clearer and broader understanding of the audit quality concept, there is

need to link the study to an existing theory. There are several theories that explain the demand for

audit services. Some of them are well known in research and are more based on perceptions.

However, the theory underpinning this study is the Stakeholder Theory. The stakeholder theory as

propagated by Freeman (1984) is a theory of organizational management and business ethics that

addresses morals and values in managing an organization’. In this theory, the concept

“stakeholders” refers to managers, shareholders or other users of financial reports which are

influenced, either directly or indirectly by the actions of the auditor. Information disclosure is an

obligation and the right of the stakeholders. Stakeholders are groups, which are influenced by the

corporate activities or which can affect the corporation. The organization’s survival in the long run

requires stakeholders support and approval. Hence, organizations have the moral justification to

issue high quality audited financial report to their stakeholders in order to gain their confidence

and support. This would go a long way in strengthening their stewardship role and also reduce

agency problem.

3. Methodology

The study takes an empirical approach classified under descriptive study design. The

secondary source of data was employed for the study using a population of all the money deposit

banks listed on the floor of the Nigerian Stock Exchange (NSE) over the period 2009 – 2014 (i.e

6 financial years). There are twenty (20) money deposit banks quoted in the financial sub-sector

of the NSE (Babatolu, et al, 2016). Further, Ogolo (1996) opine that where a population is known

and is of similar characteristics, at least 50 percent of it constitutes a researchable sample. Hence,

thirteen (13) listed banks were selected using purposive sampling technique which amounted to

62% of the population (see appendix for list of sample banks). The selected banks met certain

criteria prior to selection; they have adopted and implemented IFRS as at year end 31/12/2012,

they have no changes in their fiscal year during 2009 to 2014, they have been active on the Nigerian

Stock Exchange since 2009; and they have complete data to measure in all the variables required

for the study. Finally, the data was computed using EXCEL 2007 software and analyzed with

EVIEWS 8 statistical software.

In line with most audit quality studies such as Ilaboya and Ohiokha (2014), the study used

the panel binary probit technique in testing hypothesized relationship between the audit committee

characteristics and audit quality. This is due to the dichotomous nature of our measure of audit

quality which is equals one if firm i is audited by a Big 4 auditor at year t and zero otherwise.

Consequently, the following regression model, as re-modified from Babatolu et al (2016), is

estimated in a bid to arriving at some empirical findings and conclusion under the study:

AUDQ =ƒ (AUDIND; AUDTEN; AUDROT, AUDEXP)………………………… Equ (1)

Apart from the four (4) independent variables included in the study (as shown above in equ

one); three (3) other variables that according to previous accounting literatures could influence

audit quality were also included as control variables. First, board independence was included as

previous studies (e.g. Mgbame et al, 2012) have linked high audit quality with companies whose

boards committees are independent. Company size and profitability were also included because

big and high profitable companies have more at stake, and would do much to save their face and

prevent scandals.

Consequently, by incorporating the three (3) aforementioned control variables, the model

goes this way:

AUDQ=ƒ(AUDIND; AUDTEN; AUDROT, AUDEXP, BODIND, CSIZE,

PAT)………………………………………………………………………………… Equ (2)

Econometrically, we have:

AUDQit = β0 + β1AUDINDit + β2AUDTENit + β3AUDROTit + β4AUDEXPit + β5BODINDit +

β6CSIZEit + β7PATit + µt……………………………………………………………Equ (3)

Where:

β0 = Intercept

β1-7 = Unknown Coefficient of the variables

AUDQit = Audit Quality (dependent variable)

Independent Variables

AUDINDit = Auditor Independence of bank i in year t.

AUDTEN = Auditor Tenure of bank i in year t

AUDROTit = Auditor Rotation of bank i in year t

AUDEXPit = Auditor Experience of bank i in year t

Control Variables

BODINDit = Board Independence of bank i in year t

CSIZEit = Company Size of bank i in year t

PATit = Profitability of bank i in year t

µt = Stochastic error term

*The operationalisation of each of the variable as well as the apriori expectations are shown in the

Table below:

Table 3.1 Measurement of the Variables

s/n VARIABLE DEFINITION MEASUREMENT SOURCE

1. AUDQ Audit Quality Measured using Audit firm

Reputation = If audited by the

Big four ‘1’ and ‘0’ if

otherwise

Enofe et al (2013a);

Ilaboya & Ohiokha

(2014)

2. AUDIND Auditor’s

Independence

Natural log of audit fees paid

by the company

Okolie (2014)

3. AUDTEN Audit Tenure Length of auditor- auditee

relationship ‘1’ if

3 years, zero if otherwise

Ilaboya & Ohiokha

(2014)

4. AUDROT Audit Firm

Rotation

‘1’ if there is audit firm rotation

in bank i in year t; zero if

otherwise.

Babatolu et al (2016)

5. AUDEXP Auditors

Experience

measured by the number of

years the audit firm has been

operating

Monye-Emina &

Jeroh (2014)

6. BODIND Board

Independence

Ratio of non-executive

directors to the

company’s board size

Ilaboya & Ohiokha

(2014)

7. CSIZE Company’s Size Natural Log of company’s total

assets

Babatolu et al (2016)

8. PAT Profitability Proxied using Profit After Tax Akihidime (2015)

Source: Researchers Compilation, 2016.

4. Data Analysis and Interpretation

Descriptive Statistics

The descriptive statistics for the dependent variable and independent variables are reported in

table 4.1 below:

Table 4.1 Descriptive Statistics AUDQ AUDIND AUDTEN AUDEXP AUDROT BODIND CSIZE PAT

Mean 0.948718 10.42390 0.294872 41.08974 0.294872 0.670510 9.394433 5799325.

Median 1.000000 9.903488 0.000000 35.00000 0.000000 0.696681 9.019412 1252016.

Maximum 1.000000 15.52026 1.000000 61.00000 1.000000 0.988901 15.04627 81427615

Minimum 0.000000 7.903100 0.000000 11.00000 0.000000 0.112834 7.286246 -491584.0

Std. Dev. 0.222000 2.001322 0.458936 13.63741 0.458936 0.211088 1.549490 12046518

Skewness -4.068667 0.388818 0.899714 0.060470 0.899714 -0.768831 1.980560 3.956500

Kurtosis 17.55405 2.125373 1.809486 2.020601 1.809486 3.260032 7.147708 22.29072

Jarque-Bera 903.6193 4.451492 15.12962 3.165012 15.12962 7.904069 106.9054 1412.929

Probability 0.000000 0.107987 0.000518 0.205460 0.000518 0.019216 0.000000 0.000000

Observations 78 78 78 78 78 78 78 78

Source: Eviews 8 Output, 2016

In table 4.1, the variable AUDQ has a standard deviation of 0.2220 which did not disperse

too much away from the mean value of 0.948718. The average value of AUDQ indicates that about

95% of the sample firms are audited by the Big4. Also observed, AUDTEN has a mean value of

0.294872 and a maximum value of 1.000000. The standard deviation of 0.458936 is considerably

low and suggests that audit tenure across the sampled banks exhibit considerable clustering around

the mean. The average number of years of operation of the audit firms is 41 years (AUDEXP =

41.08974). BODIND showed a mean value of 0.6705 implying that the average ratio of

independent board of directors is about 67 percent for the sample banks. All the standard deviation

values are considerable clustered around the mean values which suggest a minimal variation or

dispersion from the mean values. The Jarque Bera statistics have fairly high values and the

corresponding probability values showed a larger proportion of significant variables which is an

indication that the data are normally distributed. Excluding AUDQ and BODIND, all other are

positively skewed.

Table 4.2 Correlation Analysis Result

Covariance Analysis: Ordinary

Date: 03/10/16 Time: 10:58

Sample: 2009 2014

Included observations: 78

Observations AUDQ AUDIND AUDTEN AUDEXP AUDROT BODIND CSIZE PAT

AUDQ 1.000

AUDIND 0.201 1.000

AUDTEN -0.105 0.082 1.000

AUDEXP 0.323** -0.089 -0.125 1.000

AUDROT -0.105 0.034 -0.172 0.019 1.000

BODIND -0.154 -0.060 -0.011 -0.218 -0.015 1.000

CSIZE 0.048 0.149 -0.058 -0.050 0.236* 0.175 1.000

PAT 0.079 0.404** -0.137 -0.008 0.157 0.121 0.096 1.000

*. Correlation is significant at the 0.05 level (2-tailed).

**. Correlation is significant at the 0.01 level (2-tailed).

Source: Researcher’s Computation, 2016

One of the basic regression assumptions is the test for multicollinearity. The covariance

analysis presented in table 4.2 dealt with that. As observed, AUDTEN and BODIND appear to be

negatively associated with AUDQ as shown by their correlation coefficients of -0.105 and -0.154

respectively. The other independent variables are positively associated with AUDQ. However,

only AUDEXP was statistically significant at 1%; while the association between AUDIND and

PAT is also significant at 1%. Company size and audit rotation are also positively correlated and

significant at 5%. There was no high correlation coefficient in the results which is one of the

indicators of the problem of multicollinearity. According to Hair, Black, Babin, Anderson and

Tatham (2011) a simple correlation not exceeding 0.90 between the independent variables should

not be considered harmful. The highest coefficient value here is 0.404. Hence, it could be argued

that multicollinearity problem did not occur in the series prior to the estimation carried out.

Table 4.3 Binary Probit Regression Result Dependent Variable: AUDQ

Method: ML - Binary Probit (Quadratic hill climbing)

Date: 03/10/16 Time: 10:52

Sample: 2009 2014


Convergence achieved after 13 iterations Variable Coefficient Std. Error z-Statistic Prob. AUDIND 0.811262 0.319073 2.542558 0.0110*

AUDTEN -2.137971 1.068014 -2.001820 0.0453*

AUDROT -2.425460 1.018137 -2.382253 0.0172*

AUDEXP 0.054220 0.024938 2.174169 0.0297*

BODIND -5.938776 2.482239 -2.392507 0.0167*

CSIZE 0.557866 0.314305 1.774919 0.0759

PAT 1.80E-07 1.06E-07 1.691103 0.0908

C -6.809042 4.182642 -1.627929 0.1035 McFadden R-squared 0.569939 Mean dependent var 0.948718

S.D. dependent var 0.222000 S.E. of regression 0.164659

Akaike info criterion 0.379108 Sum squared resid 1.897884

Schwarz criterion 0.620821 Log likelihood -6.785193

Hannan-Quinn criter. 0.475870 Deviance 13.57039

Restr. Deviance 31.55459 Restr. log likelihood -15.77729

LR statistic 17.98420 Avg. log likelihood -0.086990

Prob(LR statistic) 0.012041 Obs with Dep=0 4 Total obs 78

Obs with Dep=1 74

*. Variable significant at the 0.05 level (2-tailed)

Source: Researcher’s Computation via Eviews 8.1, 2016

Interpretation and Discussion

Table 4.3 shows the outcome binary probit regression model as specified for this study. As

shown in the table, the McFadden R-squared value which portrays the combined explanatory effect

of all the independent variables on the dependent variable (AUDQ) shows an explanatory power

of 56.99% (i.e. 0.569939 x 100). This implies that that the independent variables take together

accounted for about 57% of the systematic variation in the dependent variable (AUDQ) leaving

about 43% unaccounted for in the model which the error term took care of. In terms of the overall

significance level of the model, the result shows that the model passed the significance test at 5%

with LR statistic and corresponding probability value of 17.98 and 0.012 respectively. Thus, the

independent variables, taken together, are capable of explaining the variations in the dependent

(AUDQ).

On the basis of the individual significance level of the variables (Z-statistics) and the

directions (via coefficient values) of their relationships with the dependent (AUDQ), it could be

observed that auditor independence (AUDIND) has a positive significant relationship with audit

quality (AUDQ) proxied here as using Big4 dichotomy. This is because the z-Statistics value of

2.543 and probability value of 0.011 are significant at 0.05 levels. Hence, a unit increase in

AUDIND will cause a significant increase in AUDQ by up to 0.811 units. Further, audit tenure

(AUDTEN) showed an inverse significant relationship with audit quality (AUDQ). Similarly, audit

firm rotation (AUDROT) also showed negative relationship with audit quality (AUDQ) at 5%

level of significance (p-value < 0.05). The relationship between auditor experience (AUDEXP)

and audit quality (AUDQ) is positive and statistically significant with a z-Stat and p-value of 2.174

and 0.0297 respectively. Board independence (BODIND) and company size (CSIZE) showed

negative and positive sign respectively; however, only the former passed the significant test at 5%.

The last control variable (PAT) is also positively associated with audit quality (AUDQ) but was

not significant at 5%.

In line with the results, it appears that the variable of AUDIND, with a significant positive

sign, concurs with our apriori expectation because the basic assumption is that auditor’s lack of

independence increases the likelihood that the auditor may likely not report a discovered breach

which gives room for greater earnings management, lower earnings quality and implicationally,

poor audit quality. This result corroborates the findings from the earlier studies of Ilaboya &

Ohiokha (2014) as well as Babatolu et al (2016). The results also show that audit tenure

(AUDTEN) and audit quality (AUDQ) moves in opposite direction; thus, the higher audit tenure,

the lower the audit quality. Again, this inverse relationship tallies with our apriori expectation. The

previous findings of Monye-Emina & Jeroh, (2014); Enofe et al (2013b) and Ilaboya & Ohiokha

(2014) aligned with this view with the latter suggesting that longer audit tenure likely reduces the

quality of audit as the imminent familiarity that comes thereof might increase the chances of the

auditor engaging in non-audit services.

The negative relationship between audit firm rotation (AUDROT) and audit quality

(AUDQ) is not in line with our expectation. It also contradicts the results from extant studies such

as Babatolu et al (2016) who opine that regular rotation of auditors assists in checkmating some

of the threats to the independence of an auditor and thereby enhancing the audit quality. However,

our finding is in tandem with Salleh and Jasmani (2015) who find that previous audit partners often

have an influence on the selection of the new audit partner, while auditors who rotate back prefer

to choose partners with whom they have close cordial relationships which would lead to no or

limited audit quality improvement. Further, the result of auditor experience (AUDEXP) agrees

with theoretical expectation. This is because, apart from not wanting to dent age-long pedigrees,

experienced auditors have increased chances of detecting errors and misstatements (Al-Khaddash,

Al-Nawas & Ramadan, 2013).

The control variables, company size (CSIZE) and profitability (proxied as profit after tax),

were positively related to audit quality in conformity with theory, but were not statistically

significant at 5% level. The remaining control variable, board independence (BODIND) showed

an inverse relationship which violates the expectation of the study and also negates tprevious

findings such as that of Ilaboya & Ohiokha (2014). Researchers such as Mgbame et al, (2012) have

linked audit quality with the boards of directors, suggesting that companies that have higher

proportion of independent board committees are expected to ensure the quality of audit is high.

5. Conclusion and Recommendations This paper assessed the relationship between audit firm characteristics and audit quality in

Nigerian listed banks. Based on the outcomes of the result, it can be concluded that the higher the

auditor independence and experience; company size and profitability; the higher the audit quality.

More so, it can further be concluded that increases in auditor tenure, rotation and board

independence; have the likelihood of decreasing the quality of audit in Nigerian listed banks.

Hence, in terms of auditor characteristics and audit quality in Nigerian listed banks, the most

variables of interest are auditor independence, experience, rotation, tenure and board

independence; while company size and profitability were not of crucial importance within the

period studied.

The following recommendations are proffered in line with the findings:

1. Since, the experience of the auditor plays a significant role in enhancing audit quality; the

experience of an auditor should be drafted as one of the criteria for negotiating auditor

remuneration as this will motivate them not to compromise. Similarly, upcoming auditors

should acquire higher level of specialty in auditing by participating in different trainings and

seminars which will add to the auditors more experience to his field and increase his/her

qualification.

2. The CBN and other regulatory bodies should always monitor the activities of the audit firms,

in ensuring that their independence is not jeopardized which could give room for increased

earning management and poor quality audit.

3. Since higher tenure reduces audit quality, relevant bodies should ensure short audit tenure

through proper rotation of auditors which would help checkmate some hindrances to the

independence of an auditor, thereby enhancing the audit quality. More so, the outgoing auditor

should have little or no impact in the engagement of the new auditor in order to ensure a level

playing ground.

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Appendix Dependent Variable: AUDQ

Method: ML - Binary Logit (Quadratic hill climbing)

Date: 03/10/16 Time: 10:49

Sample: 2009 2014


Convergence achieved after 13 iterations Variable Coefficient Std. Error z-Statistic Prob. AUDIND 1.460522 0.481747 3.031721 0.0024

AUDTEN -4.309299 2.481840 -1.736332 0.0825

AUDROT -4.669317 2.011292 -2.321552 0.0203

AUDEXP 0.102154 0.048467 2.107721 0.0351

BODIND -10.84267 4.438302 -2.442977 0.0146

CSIZE 0.971212 0.480830 2.019864 0.0434

PAT 3.55E-07 2.25E-07 1.578965 0.1143






Restr. deviance 31.55459 Restr. log likelihood -15.77729



Obs with Dep=1 74

Dependent Variable: AUDQ

Method: ML - Binary Probit (Quadratic hill climbing)

Date: 03/10/16 Time: 10:52

Sample: 2009 2014


Convergence achieved after 13 iterations Variable Coefficient Std. Error z-Statistic Prob. AUDIND 0.811262 0.319073 2.542558 0.0110

AUDTEN -2.137971 1.068014 -2.001820 0.0453

AUDROT -2.425460 1.018137 -2.382253 0.0172

AUDEXP 0.054220 0.024938 2.174169 0.0297

BODIND -5.938776 2.482239 -2.392507 0.0167

CSIZE 0.557866 0.314305 1.774919 0.0759

PAT 1.80E-07 1.06E-07 1.691103 0.0908






Restr. deviance 31.55459 Restr. log likelihood -15.77729



Obs with Dep=1 74

AUDQ AUDIND AUDTEN AUDEXP AUDROT BODIND CSIZE PAT

Mean 0.948718 10.42390 0.294872 41.08974 0.294872 0.670510 9.394433 5799325.

Median 1.000000 9.903488 0.000000 35.00000 0.000000 0.696681 9.019412 1252016.

Maximum 1.000000 15.52026 1.000000 61.00000 1.000000 0.988901 15.04627 81427615

Minimum 0.000000 7.903100 0.000000 11.00000 0.000000 0.112834 7.286246 -491584.0

Std. Dev. 0.222000 2.001322 0.458936 13.63741 0.458936 0.211088 1.549490 12046518

Skewness -4.068667 0.388818 0.899714 0.060470 0.899714 -0.768831 1.980560 3.956500

Kurtosis 17.55405 2.125373 1.809486 2.020601 1.809486 3.260032 7.147708 22.29072

Jarque-Bera 903.6193 4.451492 15.12962 3.165012 15.12962 7.904069 106.9054 1412.929

Probability 0.000000 0.107987 0.000518 0.205460 0.000518 0.019216 0.000000 0.000000

Sum 74.00000 813.0641 23.00000 3205.000 23.00000 52.29974 732.7658 4.52E+08

Sum Sq. Dev. 3.794872 308.4074 16.21795 14320.37 16.21795 3.430993 184.8707 1.12E+16

Observations 78 78 78 78 78 78 78 78

Covariance Analysis: Ordinary

Date: 03/10/16 Time: 10:58

Sample: 2009 2014

Included observations: 78 Correlation

Probability

Observations AUDQ AUDIND AUDTEN AUDEXP AUDROT BODIND CSIZE PAT

AUDQ 1.000000

----- 78

AUDIND 0.200865 1.000000

0.0778 ----- 78 78

AUDTEN -0.104590 0.082213 1.000000

0.3621 0.4743 -----

78 78 78

AUDEXP 0.323265 -0.089259 -0.124635 1.000000

0.0039 0.4371 0.2769 -----

78 78 78 78

AUDROT -0.104590 0.033543 -0.171542 0.018542 1.000000

0.3621 0.7706 0.1332 0.8720 -----

78 78 78 78 78

BODIND -0.154282 -0.060098 -0.011328 -0.218414 -0.015256 1.000000

0.1774 0.6012 0.9216 0.0547 0.8945 -----

78 78 78 78 78 78

CSIZE 0.048054 0.148715 -0.058451 -0.050174 0.236134 0.174839 1.000000

0.6761 0.1938 0.6112 0.6627 0.0374 0.1258 -----

78 78 78 78 78 78 78

PAT 0.078558 0.404341 -0.136946 -0.008385 0.156837 0.120560 0.096320 1.000000

0.4942 0.0002 0.2319 0.9419 0.1703 0.2931 0.4015 -----

78 78 78 78 78 78 78 78

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