International Journal of Business and Economics Research

2014; 3(5): 187-195

Published online October 30, 2014 (http://www.sciencepublishinggroup.com/j/ijber)
doi: 10.11648/j.ijber.20140305.14
ISSN: 2328-7543 (Print); ISSN: 2328-756X (Online)

Audit firm characteristics and audit quality in Nigeria

Ilaboya Ofuan James1, *, Ohiokha Friday Izien2
1
Department of Accounting, Faculty of Management Sciences, University of Benin, Benin City, Nigeria
2
Department of Accounting, Auchi Polytechnic, Auchi, Edo State, Nigeria

Email address:
[email protected] (Ilaboya O. J.), [email protected] (Ilaboya O. J.)

To cite this article:

Ilaboya Ofuan James Ohiokha Friday Izien. Audit Firm Characteristics and Audit Quality in Nigeria. International Journal of Business and
Economics Research. Vol. 3, No. 5, 2014, pp. 187-195. doi: 10.11648/j.ijber.20140305.14

Abstract: This study examines the impact of audit firms’ characteristics on audit quality. We proxy the dependent variable
(audit quality) using the usual dichotomous variable of 1 if big 4 audit firm and 0 if otherwise. Data for the study were sourced
from the financial statements of 18 food and beverage companies listed on the Nigerian Stock Exchange market within the
period studied (2007-2012). The multivariate regression technique with emphasis on Logit and Probit method was used to
estimate our model for the study. The choice of this approach was basically influenced by the dichotomous nature of our
dependent variable and the fact that our data is both time series and cross-sectional. The findings indicate that there is a
positive relationship between firm size, board independence and audit quality whereas there is a negative relationship between
auditor’s independence, audit firm size, audit tenure and audit quality. The study suggests the need for the Nigerian Financial
Reporting Council and other regulatory bodies in line with best practices to look critically into the three years professional
requirements for auditors.
Keywords: Audit Quality, Audit Tenure, Audit Independence, Board Independence

independence, auditor tenure, audit firm size, audit fee,

1. Introduction auditor enterprise, audit company type. (Abedalgader
At the thrust of the functioning of the capital market is the Ibrahim & Baker, 2010)
role of the external audit as both owners(shareholders) and Auditors express their audit opinions on a financial
the professional managers would want to rely on the report statement presented to them based on audit evidence. The
of the external auditor in furthering their sometimes objective of an audit, therefore, is to plan and perform the
divergent interest arising from agency relationship that audit to obtain appropriate audit evidence that is sufficient to
exists(Barbadillo & Aguilar, 2008) High-quality external support the opinion expressed in the auditor’s report.
audit has became an important policy issue following Insufficient or inappropriate audit evidence may lead to
corporate scandals such as Enron, WorldCom, Global wrong conclusions and this may affect the quality of the
crossing, Cendant, Sunbeam(United States); BCCI, report. Hence, the issue of audit quality has received
Independent Insurance, Equitable Life, Maxwell(United increased attention due to highly publicized audit failures
Kingdom);Metallgesellscheft(Germany),and Lever Brothers, culminating in corporate scandals, corporate fraud, corporate
African Petroleum, Cadbury, Savanna Bank, Wema and failure. This concern motivated the current study of the
Intercontinental Bank (Nigeria). relationship between firm characteristics and audit quality.
The seemingly persistent bank failures in Nigeria have The issues above raise some fundamental questions: is audit
raised some fundamental issues on the quality of audit and tenure, audit firm type, auditor independence, audit firm size
the independence of the external auditor amidst others. In and audit fee factors that map into the auditor-client
particular, regulators have often expressed their concern that relationship and thus influences audit quality?
the length of the auditor-client relationship (or auditor tenure) Against the above backdrop, the main objective of this
and executives association with auditors could impair auditor study is to examine the relationship between audit firm
independence and thus audit quality (Daris, Soo &Trompeter, characteristics and audit quality in Nigeria, using Nigerian
2003). The quality of an audit depends simultaneously on listed companies as a reference point.
several audit firm features such as auditor specialty, auditor The study reveals that there is a positive relationship
 International Journal of Business and Economics Research 2014; 3(5): 187-195 188

between company size, board independence and audit quality and administration. Each of the 19 factors included one
while there exists a negative relationship between audit measure (or item).The first UK study to examine audit
independence, audit firm size and audit quality. While issues quality attributes was undertaken by Beatie and Fearnley
of firm characteristics and audit quality cannot be said to be (1995). They investigated finance directors of 210 listed UK
novel in Nigeria, there exists conflicting reports on the companies to identify the importance of 29 desirable auditor
relationship between explanatory variables and audit quality. characteristics. An exploratory factor analysis was used to
Therefore, this study extends and contributes to extant identify five main factors: integrity of the firm, the technical
empirical literature with a view to resolving the competence of the firm, the quality of the working
inconsistency. relationship with audit partner, the reputation of the firm and
The remainder of the paper is structured as follows: in the technical competence of the audit partner.
section 2, conceptual framework on audit quality and prior In relation to the quality of auditing, Geiger and
empirical studies were considered, in section 3, data Raghunandan (2002) surveyed 117 US corporations with
estimation technique was addressed. Section 4 focused on significant liquidity issues between 1996 and 1998 and
the estimation result and discussion of findings. The final observed the chance of restrictions on going concern
section addressed conclusion and policy implications. opinions to be lower in the first year of the assignment based
on a higher reporting error rate of the auditor, based on
2. Literature Review sanctions by the Stock Exchange Commission (SEC).
Factors that affect audit quality are various. The researches
2.1. Concept of Audit Quality on audit quality focus on empirical analysis and the results
indicate that audit tenure, audit firm size, auditor
Audit quality according to DeAngelo (1981, p.186), “is independence, etc. Have an impact on audit quality;
market-assessed joint probability that a given auditor will Since audit quality is not observable or quantifiable, various
both (a) discover a breach in the client accounting system proxies are used in prior studies. One commonly used proxy is
and (b) report the breach.” Jackson, Moldrich and Roebuck earnings quality, which is in turn measured using discretionary
(2008) view the quality of audits from actual and perceived accruals as a proxy for audit quality (see Balsam, et al 2003)
quality. Actual quality shows levels of risk of material errors Carey and Simnett (2005) used the type of audit opinion as a
in financial statements that can be reduced by the auditor. proxy for audit quality in examining the relationship between
Perceived quality indicates the level of confidence of users in the length of partner tenure and the propensity for audit
financial statement and the auditor’s effectiveness in partners to issue a modified audit opinion. Adeniyi and
reducing material misstatement in financial statements Mieseigha (2013) and Enofe, Mgbame and Enabosi (2013)
prepared by management. Titman and Trueman (1986) see measured audit quality by the likelihood that a sampled
audit quality as the accuracy of the information reported by company employs the services of any of the big four audit
auditors. DeAngelo definition captures attribute critically to firms. A dummy value of 1 is used or ‘0’ if otherwise.
the role played by auditors in financial statement preparation.
Thus, audit quality combines the ability of an auditor to 2.2. Audit Tenure and Audit Quality
detect a breach (auditor competence) and a willingness to
report such a breach (auditor independence). Prior studies have shown that audit tenure has a significant
Financial Reporting Council (2006b) considers five factors influence on audit quality. This effect was either positive or
that influence audit quality to includes: audit firm culture, negative. Watts and Zimmerman (1983) found that the longer
skills and personal qualities of audit partners and staff, the the auditor tenure, the more dependence on clients. Auditor’s
effectiveness of the audit process, and the reliability and objectivity and independence will be destroyed and hence,
usefulness of audit reporting, amongst factor that are audit quality reduces. Copley and Doucet (1993) opined that
exogenous to the auditors. Earlier studies used observable the longer the period of engagement, the higher the risk of
outcomes as proxies for audit quality this includes; audit lower audit quality. This was supported by the findings in:
opinions, auditors’ selection and change, decisions, financial (Arrunada & Paz-Ares, 1998, Dopuch, King &Schwarts
statements outcomes and analysts forecast. Francis (2004) 2001, Ebrahim, 2001,). Walker, Lewis and Casterella (2001)
reviewed 25 years of empirical researches and found that also investigated the link between the length of the audit
difference exists in the audit quality which can be concluded engagement and audit failures and found that auditor rotation
by examining different auditors. Moizer (1998) examines the may not necessarily improve audit quality. Carcello and
issue of audit quality from a behavourial perspective, typically Nagy (2004) explored the association of changing the auditor
identifying attributes that are perceived by financial statement and audit quality from the point of view of fraudulent
preparers, auditors and users that are related to audit quality. reporting. They found no significant relationships intended
He found out that the big audit firms provide quality service. of the long-term tenure of the auditors. They concluded that
Sutton and Lampe (1990) used a group of experts with mandatory changes of auditors might have a negative impact
practicing auditors to develop and evaluate a model of audit on audit quality.
quality. Their model included 19 attributes of audit quality Abedalgader, Ibrahim and Baker (2010) investigated by
that they classified into three categories; planning, fieldwork using discretionary accruals as proxy for audit quality against
auditor’s tenure and firm size in Jordan and found that
189 Ilaboya Ofuan James and Ohiokha Friday Izien: Audit Firm Characteristics and Audit Quality in Nigeria

auditor’s tenure is negatively related to audit quality. Adeniyi (Windsor & Warning-Rasmussen, 2009 and Alim, Trisni, &
and Mieseigha (2013) investigated the relationship between Lilik, 2007). It therefore follows that auditor independence is
audit partners tenure and audit quality. Their result reveals directly proportional to audit quality.
that there is a negative relationship between auditor tenure
and audit quality. Summer (1998) analysed the hypothesis 3. Methodology
that audit tenure will promote audit quality; and concluded
that tenure rotation might have an unfavourable effects on 3.1. Theoretical Framework and Model Specification
audit quality for firms reporting in short term rather than
long term engagements as the incentives for building a A framework for the analysis of the relationship between
reputation for honesty. Johnson, Khurama and audit firm characteristics and audit quality is the stakeholder
Reynolds(2002) proxied audit quality by audit tenure as theory. The stakeholder theory, originally defined by
auditor who have served the client’s for longer terms would Freeman (1984,p.120)‘is a theory of organizational
know their client’s internal control and accounting system management and business ethics that addresses morals and
better and would be easier for the auditors to fight earnings values in managing an organization’. In this theory, the
management behaviour and other irregularities in client’s concept “stakeholders” refers to managers, shareholders or
financial reporting process. Ghosh and Moon (2003) found other users of financial reports which are influenced, either
that investors and information intermediaries perceive directly or indirectly by the actions of the auditor. A
auditor’s tenure as improving audit quality. Myers, Myers fundamental characteristic of stakeholder theory is therefore
and Omar (2003) found that higher earnings quality with to attempt to identify individuals and groups that states,
longer audit tenure. Nashwa (2004) investigated the organizations and companies are accountable to. This has
relationship between long-term auditor-client relationship also been part of the theory’s challenge (Anheier, 2005).
and found that risk increase early in the auditor client- According to Australian Accounting Standard Board
relationship and declines overtime. Barbadillo and Aguilar (AASB) (2011), variations in stakeholders’ perspective of
(2000) investigated the relationship between auditor tenure audit quality suggest that no single element should be assured
and audit quality and suggested that auditors tend to be more as having the dominant influence on audit quality explained in
dependent in the first years of the auditing engagement. this study as “audit tenure”, “auditor independence, audit firm
size and auditor expertise”. This means that a broader and
2.3. Audit Firm Size and Audit Quality deeper understanding of the complexities of the issue needs to
be addressed through investigating the impact of these
DeAngelo (1981) found that auditors with more clients variables more holistically in line with the response Divergent
have more to lose by failing to report a discovered breach in Stakeholders theory (Freeman, 1984). This requires that
a particular client’s records when incumbent auditors earn different stakeholders should carefully analyzed their actions
client-specific quasi-rents. Since then many researchers so as to determine the effects of their actions and their impact
support this conclusion (Teoh& Wong, 1993, Francis on the perspectives of audit quality reason been that audits
&Krishman, 1999, Reynolds & Francis, 2000). Bae and Lee provide assurance to shareholders, managers, investors,
(2013) concluded that audit firm size is positively associated creditors and other stakeholders, thus, providing confidence on
with audit quality measured by discretionary accruals and the financial reporting.
modified opinions. Also audit firm size is positively
associated with audit fees. However, Imhoff (1988) was 3.2. Model Specification
against DeAngelo’s conclusion; he found that from analyst’s
point of view, there is no difference in audit quality between Flowing from the extant empirical literature and the above
top-eight audit firms and non-top-eight firms. theoretical frame-work, audit tenure is seen to impact audit
quality (Nashwa, 2004; Adeniyi, et al, 2013). Therefore, the
2.4. Auditor Independence and Audit Quality relationship between audit tenure and audit quality can be
represented as;
DeAngelo (1981) relates the probability of detection to
auditor competence and probability of revelation is AUDQUL=ƒ(AUDTEN) (1)
associated with auditor independence. Due to larger client
portfolios, big auditors can exert more pressures on In the same vein auditors’ independence is believed to
management. Large international accounting firms have influence the quality of audit (DeAngelo, 1981,Nelson et al
established brand reputation and had motives to maintain it 2002, Alim, et al, 2007 Windsor & Warring-Rasmusson
by providing high-quality audit. Lack of financial affiliation 2009).). Therefore, the relationship between auditor
with clients makes bigger auditors more independent. independence and audit quality can be expressed as;
(Jeong& Rho, 2004). This independence provides big AUDQUAL = ƒ(AUDIND) (2)
auditors with stronger negotiation stance with their chart
compared with smaller audit firms (Nelson, Elliott &Tarpley, Supposing audit quality depends on audit firm size, even
2002). Other prior studies that have shown that auditor though a mixed relationship has been identified. While some
independence affects audit quality positively, include reported positive relationship (e.g DeAngelo 1981, Teoh &
 International Journal of Business and Economics Research 2014; 3(5): 187-195 190

Wong 1993, Francis & Rishman 1999 and Beynolds & Combining the three equations, we have
Francis 2000).others believe that a negative relationship
exists( Imhoff, 1998 Abedalgader et al 2010 Bae & Llee, AUDQUL=ƒ(AUDTEN; AUDIND; AUDSIZE) (4)
2013). Therefore, the relationship can be represented as: Introducing two control variables of company size and
AUDQUL=ƒ(AUDSIZE) (3) board independence, we have:

AUDQUL = ƒ(AUDTEN; AUDIND;AUDSIZE;COYSIZEBODIND) (5)

In econometric form:

AUDQULit = α0 + α1 AUDTENit + α 2 AUDINDit + α3 AUDSIZEit + α 4COYSIZEit + α5 BODINDit + µit (6)

Where:
AUDQUL Audit Quality.
AUDTEN Audit tenure
AUDIND Auditor independence
AUDSIZE Audit firm size
COYSIZE Company size
BODIND Board independence
µ Error term
α 1 ,..., α 5 Unknown coefficient of the variables. It is presumptively expected α 1 ,...,α 5 > 0
The variables in the model are operationalised in Table 1 below

Table 1. Measures of variables

S/N Variables Definition Type Measurement Authors

If audited by the Big four ‘1’ and ‘0’ if Adeniyi(2013,)Enofe et al
1. AUDQUL Audit Quality Dependent
otherwise (2013)
Length of auditor- client relationship ‘1’ if Bafqi et al (2013)Ebrahim
2. AUDTEN Audit Tenure Independent
3 years and ‘0’ if otherwise (2001)
A measure of auditor’s
3. AUDIND Independent Ratio of audit feeto company’s revenue Adeniyi et al 2013
independence
4. AUDSIZE Audit firm size Independent Natural log of audit fees Bafqi at al(2013)
Natural log of company’s total non-current
5. COYSIZE Company’s size Independent (Control) Bafqi et al (2013)
assets
Board of Director’s Ratio of non-executive directors to the
6. BODIND independent (Control) Enofe et at (2013)
independence company’s board size

Source: Researcher’s Computation, 2014

(1967) model was used scientifically to determine the sample

4. Data Source and Estimation size of 18 companies with relevant data. The study used the
Technique panel binary logit and probit technique due to the
dichotomous nature of the dependent variable. Prior to the
The population of the study comprises the entire estimation, we carried out the usual regression diagnostic
companies quoted on the food and beverages sector of the tests of auto-correlation, normality and heteroscedaticity.
Nigerian Stock Exchange as at 31st December, 2012. Yamane
4.1. Estimation Result and Discussion

Table 2. Descriptive Statistics.

Audqual Audind Audfsize Compsize Bdind Audten

Mean 0.482517 0.086910 182.7286 71823.99 0.463210 0.902098
Median 0.000000 0.001349 4.200000 3562.000 0.400000 1.000000
Maximum 1.000000 3.607552 5350.000 2482159. 2.500000 1.000000
Minimum 0.000000 2.58E-06 0.240000 11.000000 0.125000 0.000000
Std. Dev 0.501451 0.451513 837.0577 309047.9 0.333422 0.298227
Skewness 0.069973 6.028356 5.010992 6.311460 2.860022 -2.706070
Kurtosis 1.004896 41.15592 27.31556 46.15292 15.10674 8.322813
Jarque-Bera 23.83348 9540.712 4121.299 12044.85 1068.282 343.3405
Probability 0.000007 0.000000 0.000000 0.000000 0.000000 0.000000
Sum 69.00000 12.42812 26130.19 10270831 66.23900 129.0000
Sum Sq.Dev 35.70629 28.94867 99494512 1.36E+13 15.78614 12.62937
Observations 143 143 143 143 143 143

Source: Researchers’ Computation, 2014

191 Ilaboya Ofuan James and Ohiokha Friday Izien: Audit Firm Characteristics and Audit Quality in Nigeria

Table 2 presents the descriptive statistics. As observed, deviation of (837.0577) which suggests a considerable
AUDQUAL has a mean value of (0.482517) and a maximum variation or dispersion from the mean value of (182.7286).
value of (1.000000). The standard deviation of (0.501451) is The COMPSIZE variable has a mean value of (71823.99)
considerably low and suggests that audit quality across the and a maximum value of (2482159) and a minimum value of
sample size exhibits considerable clustering around the mean. (1 1.00000). The standard deviation of (309047.9) shows a
Audit independence has maximum and minimum values of significant dispersion from the mean. The other variables
(3.607552) and (2.58E-06) respectively with a mean value of BDIND and AUDTEN exhibited considerable clustering
(0.0869 10). The standard deviation of (0.451513) shows no around the mean. The Jarque Bera statistics revealed fairly
significant deviation from the mean. The variable of large values which indicates that the data satisfy normality as
AUDFSIZE has maximum and minimum values of well as the absence of outliers in the series.
(5350.000) and (0.240000) respectively with a standard
Table 3. Result of the Correlation Analysis

Correlation
t-Statistic
Probability Audqual Audind Audfsize Compsize Bdind Audten
AUDQUAL 1.000000
AUDIND -0.132665 1.000000
-1.589361 -----
0.1142 -----
AUDFSIZE -0.202617 0.505185 1.000000
-2.456902 6.950939 -----
0.0152 0.0000 -----
COMPSIZE 0.115824 -0.043600 0.270872 1.000000
1.384650 -0.518210 3.341339 -----
0.1683 0.6051 0.0011 -----
BDIND 0.160550 0.076492 0.045071 -0.108050 1.000000
1.931485 0.910963 0.535734 -1.290576 -----
0.0554 0.3639 0.5930 0.1990 -----
AUDTEN -0.152798 0.062420 0.065843 0.026156 0.069996 1.000000
-1.835939 0.742644 0.783548 0.310686 0.833206 -----
0.0685 0.4589 0.4346 0.7565 0.4061 -----

Source: Researchers’ Computation, 2014

To address the basic regression assumptions, we tested for the centered VIF of the variables were all less than 10.
multicollinearity using covariance analysis as presented in
Table 2. The results show a combination of positive and Table 4. Result of the Variance Inflation Factors
negative relationship among the variables. While positive Coefficient Uncentered Centered
relationship can be seen between company size and audit Variable Variance VIF VIF
quality, board independence and audit quality, there appears C 0.018486 11.71220 NA
AUDIND 0.011014 1.465364 1.412655
to be a negative relationship between audit committee
AUDFSIZE 3.45E-09 1.595392 1.522335
independence, audit firm size and audit quality. COMPSIZE 1.91E-14 1.210779 1.148320
The test of multicollinearity was further strengthened BDIND 0.014641 3.014233 1.023982
using the variance inflation factor test. From the results as AUDTEN 0.018057 10.32051 1.010399
presented in Table 3, it was observed that none of the Source: Researchers’ Computation, 2014
variables tested indicates the presence of multicollinearity as
Table 5. Result of the Heteroskedasticity Test

Heteroskedasticity Test: Breusch-Pagan-Godfrey

F-statistic 1.290284 Prob. F(5,136) 0.2717
Obs*R-squared 6.430978 Prob. Chi-Square(5) 0.2665
Scaled explained SS 18.79480 Prob. Chi-Square(5) 0.0021
Variable Coefficient Std. Error t-Statistic Prob.
C 0.233589 0.104680 2.231455 0.0273
AUDIND 0.007329 0.016669 0.439667 0.6609
AUDFSIZE -5.95E-06 6.67E-06 -0.892722 0.3736
COMPSIZE -4.31E-08 2.46E-08 -1.750049 0.0824
BDIND -0.029045 0.043890 -0.661774 0.5092
AUDTEN -0.143522 0.106364 -1.349352 0.1795
R-squared 0.045289 Mean dependent var 0.087250
Adjusted R-squared 0.010189 S.D. dependent var 0.222665
 International Journal of Business and Economics Research 2014; 3(5): 187-195 192

Heteroskedasticity Test: Breusch-Pagan-Godfrey

S.E. of regression 0.221528 Akaike info criterion -0.135203
Sum squared resid 6.674137 Schwarz criterion -0.010309
Log likelihood 15.59941 Hannan-Quinn criter. -0.084451
F-statistic 1.290284 Durbin-Watson stat 1.937463
Prob(F-statistic) 0.271682

Source: Researchers’ Computation, 2014

The Breusch-Pagan-Godfrey test of heteroskeclacity was Using the Breusch-Godfrey serial correlation (LM) test,
conducted to test the serial correlation of the error term. The the null hypothesis of no serial correlation was accepted. The
result of the study as presented in Table 4 shows the absence Durbin-Watson statistic of (1.9981e2) in Table 4/5 indicates
of heteroskedasticity. Hence, we accepted the null hypothesis the absence of serial correlation since the DW statistic is
of homoskedastic error term. This means the error variance is substantially close to (2.00).
not serially correlated.
Table 6. Result of the Breusch-Godfrey Serial Correlation LM Test

Breusch-Godfrey Serial Correlation LM Test:

F-statistic 0.869674 Prob. F(2,133) 0.4215
Obs*R-squared 1.833075 Prob. Chi-Square(2) 0.3999
Variable Coefficient Std. Error t-Statistic Prob.
C -0.008641 0.148497 -0.058192 0.9537
AUDIND 0.018730 0.090302 0.207415 0.8360
AUDFSIZE -8.05E-07 5.63E-05 -0.014293 0.9886
COMPSIZE 2.75E-09 7.69E-08 0.035784 0.9715
BDIND 0.020707 0.101189 0.204640 0.8382
AUDTEN 0.002760 0.079074 0.034901 0.9722
AR(1) -0.038343 0.085348 -0.449257 0.6540
RESID(-1) 0.003046 0.124806 0.024409 0.9806
RESID(-2) 0.132277 0.111050 1.191152 0.2357
R-squared 0.012909 Mean dependent var -8.89E-12
Adjusted R-squared -0.046465 S.D. dependent var 0.296427
S.E. of regression 0.303236 Akaike info criterion 0.512672
Sum squared resid 12.22962 Schwarz criterion 0.700013
Log likelihood -27.39968 Hannan-Quinn criter. 0.588799
F-statistic 0.217418 Durbin-Watson stat 1.998142
Prob(F-statistic) 0.987346

Source: Researchers’ Computation, 2014

Table 7. Result of the Binary Probit

Variable Coefficient Std. Error z-Statistic Prob.

C 0.005869 0.406136 0.014450 0.9885
AUDIND 0.796364 0.855346 0.931043 0.3518
AUDFSIZE -0.003554 0.001928 -1.843365 0.0653
COMPSIZE 6.42E-06 3.30E-06 1.946339 0.0516
BDIND 1.275612 0.464750 2.744730 0.0061
AUDTEN -0.764762 0.393304 -1.944456 0.0518
McFadden R-squared 0.183181 Mean dependent var 0.482517
S.D. dependent var 0.501451 S.E. of regression 0.457024
Akaike info criterion 1.215269 Sum squared resid 28.61536
Schwarz criterion 1.339584 Log likelihood -80.89170
Hannan-Quinn criter. 1.265784 Deviance 161.7834
Restr. deviance 198.0652 Restr. log likelihood -99.03262
LR statistic 36.28183 Avg. log likelihood -0.565676
Prob(LR statistic) 0.000001
Obs with Dep=0 74 Total obs 143
Obs with Dep=1 69

Source: Researchers’ Computation, 2014

The results of the binary probit are presented in Table 6. insignificant. More specifically, the variable of board
The McFadden R-squared value of (0.183181) shows independence was found to be statistically significant and
explanatory power of 18.3%. On the basis of the positive with a robust coefficient of (1.2756 12) and a
performance of the individual variables, it was discovered significant z-statistic of (2.744730). The implication of this is
that about three variables appear to be statistically that board independence has the likelihood of influencing
193 Ilaboya Ofuan James and Ohiokha Friday Izien: Audit Firm Characteristics and Audit Quality in Nigeria

audit quality. That means an independent board is likely to Soo and Trompeter, (2003) and Carcello and Nagy (2004).
enhance quality audit in any organization. This is because the Audit firm size was also found to be negative though
oversight function of the board is likely to be forceful with statistically insignificant. This means a large audit firm is
an independent board. In the same vein, the control variable more likely to produce lesser quality audit. This is liken to
of company size is seen to be significant and positive. The produce lesser quality audit. This is likened to the ‘too big to
implication of this is that with larger company size, the fail” syndrome of Nigeria banks which saw the demise of
quality of audit is likely to increase. Bigger companies are large banks such as Intercontinental, Oceanic, to mention a
likely to attract more professionals that will positively affect few. The case of Arthur Anderson is still fresh in our memory;
the reporting quality of the organization and by extension, therefore, the negative relationship between the size of the
quality audit. The variable of audit tenure was negative and audit firm and audit quality is not unexpected. This finding
statistically significant having reported a t-value of disagreed with the findings of previous studies (e.g. Teoh &
(1.944456) and a robust coefficient of (-0.764762). This Wong, 1993, Francis & Krishman, 1999, Reynolds & Francis,
means audit tenure is more likely to have a negative effect on 2000). The variable of audit independence was positive but
audit quality. The implication of this is that the long run not statistically significant. This means the independence of
relationship is likely to threaten the independence of the the auditor is likely to increase audit quality. This position is
auditor and by extension audit quality. The result is consistent with Alim, Trisni and Lilik (2007), Windson,
consistent with the negative relationship reported by Davis, Warring and Rasmussen (2009).
Table 8. Result of the Binary Logit

Variable Coefficient Std. Error z-Statistic Prob.

C 0.015959 0.667699 0.023901 0.9809
AUDIND 1.319205 1.481738 0.890309 0.3733
AUDFSIZE -0.006015 0.003274 -1.836955 0.0662
COMPSIZE 1.07E-05 5.62E-06 1.911654 0.0559
BDIND 2.035709 0.764445 2.662990 0.0077
AUDTEN -1.225878 0.646257 -1.896890 0.0578
McFadden R-squared 0.181354 Mean dependent var 0.482517
S.D. dependent var 0.501451 S.E. of regression 0.457279
Akaike info criterion 1.217799 Sum squared resid 28.64730
Schwarz criterion 1.342114 Log likelihood -81.07265
Hannan-Quinn criter. 1.268315 Deviance 162.1453
Restr. deviance 198.0652 Restr. log likelihood -99.03262
LR statistic 35.91993 Avg. log likelihood -0.566942
Prob(LR statistic) 0.000001
Obs with Dep=0 74 Total obs 143
Obs with Dep=1 69

Source: Researchers’ Computation, 2014

The result of the binary logit is not significantly different attracted to the big audit firms. Audit independence was also
from the result of the binary probit. The McFadden R- found to be statistically insignificant in the binary logit with
squared value of the binary logit is estimated to be (0.81354) a t-value of (0.02390).
which means an explanatory power of (0.18 1354). The
variable of board independence has a positive coefficient of
(2.035709) which is considered very robust. The z-statistic is 5. Summary of Findings, Conclusion and
(2.662990) which is statistically significant. This means Recommendations
board independence has the likelihood of increasing the
quality of audit in an organization that appears to be the 5.1. Summary of Findings
same result reported in the binary probit presentation. Based on the result the following summary of findings is
Similarly, audit tenure was found to be significant with a provided:
coefficient of (- 0.764762) though negative but significant 1. Board independence has the likelihood of influencing
with a probability value of (0.005). This means longer audit audit quality.
tenure may likely reduce the quality of audit. The result is 2. Firm size has the likelihood to increase the quality of
consistent with the binary probit which also reported audit
negative relationship between audit tenure and audit quality. 3. Audit tenure has the likelihood to reduce the quality of
The variable of audit firm size was found to be negative with audit
a coefficient of (-0.006015) and a z-statistic of (-1.836965) 4. Audit firm size has likelihood to reduce audit quality
which is considered not significant. As mentioned earlier, it 5. Auditor independence is positively associated with
means larger audit firms have the likelihood of delivering firms’ audit quality but not statistically significant
lesser quality audit. This is probably the result of divided
attention as a result of the larger number of clients being
 International Journal of Business and Economics Research 2014; 3(5): 187-195 194

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quality while audit independence increases audit quality. University of Cadizi Spain.

[9] Beattice, V. &Fearnley, S. (1995). The importance of audit

Recommendations firm characteristics and the drivers of auditor change in UK
listed companies, Accounting and Business Research, 25(2),
Against the backdrop of the findings, we advanced the 227 – 239.
following recommendations
[10] Bolanle, A. B., Olanrewaju, A. S., &Muyideen, A. A. (2012).
1. Firms in Nigerian should ensure that their boards are Corporate social responsibility and profitability of Nigeria’s
independent as this is likely to enhance audit quality. banks: A casual relationship. Research Journal of Finance
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Suggestions for Further Studies
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[17] Dopuch, N. D., King, R. R., & Schwartz, R. (2001).An

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