CHAPTER ONE

Introduction

1.1. Background of the study

Financial reporting quality is critical not just for end-users, but also for the economy as a whole
because it has an emotional influence on the financial and investment choices which prompted
the curiosity to make findings on the "effect of audit firm characteristics on the quality of
financial reporting among listed nigerian deposit money banks". Providing accurate, timely, and
reliable information to all global users of accounting information is the goal of financial
reporting. The financial report is still one of the most reliable and distinctive sources of
accounting data for stakeholders and outside consumers. Financial statements must be accurate,
reliable, and informative in order to have an impact on economic decisions (Shen & Hsiang-Lin,
2007). As a result, the Eron case has already established audit attributes as one of the factors
influencing the quality of financial reporting at different financial institutions around the globe.
Financial reporting's effectiveness in giving investors the information they need for their various
purposes has been seriously questioned in light of recent corporate scandals involving the
falsification of financial reports in Africa by some blue-chip companies like Enron, Xerox,
Worldcom, and Tyco. Financial reporting manipulation and poor audit quality have resulted in a
number of business scandals involving organizations in Nigeria, including Cadbury Plc, the
defunct Lever Brothers Plc, Oceanic Bank Plc, and African Petroleum Plc. In the end, this
resulted in the loss of invested money, traumatizing the financial industry. These corporate
scandals' bizarre nature may indicate that both internal and external corporate governance
measures failed.

According to the International Accounting Standard Board (IASB, 2018; Alwardat, 2019), the
objective of financial reporting is to provide quality-embedded financial information about
reporting entities to assist in decision-making because doing so will direct capital providers and
other interest groups to make the right investments and other related economic and financing
decisions to increase overall market efficiency (Herath, & Albarqi, 2017; IASB, 2018). Yet, the
management (Farouk, 2014), who may be subjective in its recognition, measurement, and
allocation of values to some elements of expenditure and revenue in the financial statements,
determines the appropriate accounting policies that support the preparation of financial reports.
This could negate the usefulness of the given information in terms of its sufficiency, fairness,
and completeness (Aifuwa, Embele & Saidu, 2018; Alwardat, 2019; Mstoi, 2020). External audit
is essential to creating reliable financial reporting since it is a statutory and supervisory need, as
well as a procedure that is highly relevant to the general public for both internal and external
users of financial information (International Auditing and Assurance Standards Board- IAASB,
2014; Ibrahim & Ali, 2018; Itoro & Daferighe, 2019). Earnings management is the practice of
using discretion in financial reporting to skew contractual results or businesses' economic
performance and deceive various stakeholder groups (Healy & Wahlen, 1999). Investors' trust in
financial reports and their ability to carry out their essential responsibilities have been
significantly decreased as a result of fraudulent financial reporting methods, anomalous earnings
management, and other financial reporting wrongdoings (Ogoun & Perelayefa, 2020).

External audit can help to lessen information asymmetry, one of the market flaws that causes
agency crisis. External audit was viewed by Jensen and Meckling (1976) as an essential
monitoring and control method for balancing the competing interests of business managers and
shareholders. To protect their brand names, goodwill, and reputation while reducing the risk of
false financial reporting, reputable and large audit firms seek high quality financial reports from
management (DeAngelo, 1981; Khalil & Ozkan, 2016). Notably, fraudsters frequently focused
on strategies to conceal oversights involving well-known misappropriations or financial crises by
heavily relying on audited reports from a variety of stakeholders. This has a propensity to have a
negative impact on businesses' operational outcomes, which could lower total company
outcomes and FRQ (Olaoye, Akinleye, Olaoye & Adebayo, 2020). Particularly, decreased audit
quality is typically brought on by reliance brought on by large fee income to audit company from
client companies, which results in economic ties between the auditors and clients' management
who may pressure auditors to comply with management's demands, thereby compromising their
independence (Akhidime, 2019). Although more recent provisions of the Nigerian Code of
Corporate Governance (NCCG, 2018) give the audit committee the authority to carefully
monitor an organization's financial reporting process, there has been a discrepancy between what
is reported and what is actually happening as a result of non-compliance with this provision. Due
to external auditors' compliant behavior, accountants, company management, and directors have
also been discovered to collaborate to manipulate companies' financial accounts (Oboh &
Ajibolade, 2018).

A study on audit quality and FRQ in Nigeria is necessary since cases of FRQ issues are still
common despite the extensive research in this field. Moreover, audit quality has received greater
attention from rich nations than from developing nations like Nigeria (Soyemi, Olufemi &
Adeyemi, 2020). The impact of audit characteristics on the caliber of financial reporting in
advanced economies has been the subject of numerous studies, including those by Rabbab'ah,
Al-Sir, & Alzoubi (2017), Mwangi (2018), Bratten, Causholli, & Omer (2019), Eyenubo,
Mohamed, & Ali (2017, & Kalabeke, Sadiq, & Keong (2019), The time period covered by some
of the earlier research in Nigeria has a gap, with confirmed contradicting and mashed-up
observations, but very few scholars have examined the study on the impact of audit features on
financial reporting quality. For example, Umaru (2014) examined the effect of audit attributes
and financial reporting quality of quoted food and beverage firms in Nigeria, and Usman Aliyu
(2014) examined the effect of audit attributes and financial reporting quality of listed building
materials firms in Nigeria, and the period covered (2002-2011) and (2008-2013). The
introduction of the Treasury Single Account (TSA) by the Central Coalition, which had a
significant impact on the operations of several banking institutions that rely heavily on
Government Agencies as clients, is one action that may be considered out of date given that it
took place between 2016 and 2017. Other actions that may be considered out of date are those
that occurred between those years.

It is done in recognition of the aforementioned and with the intention of fixing several flaws
discovered in the listed deposit money banks of Nigeria's financial reporting quality from 2013
to 2022. As a result, the study's main goal is to examine the implications of audit attributes on
the financial reporting quality of Nigeria's listed DMBs, with specific goals of looking into the
impact of audit committee independence, audit committee expertise, and audit tenure on the
financial reporting quality of Nigeria's listed DMBs.

1.2. Statement of the problem

In Nigeria without exception, financial reporting quality has been an issue for academic discuss
with numerous postulations as what are the appropriate mix of audit characteristics that are likely
to help in ensuring financial reporting quality. To guaranty this, the FRC of Nigeria (2019)
recommends that audit committee characteristics should be appropriately sized with respect to
skill set, cognate experience, competency, gender diversity and devotion of sufficient time to
assure that the corporate objectives are not vitiated. Doing these will ensure that agency conflict
is minimized to the barest minimum and at the same time attract capable hands on the board with
requisite skill and characteristics set in consonance with the resource dependence theory
(Pugliese, Minichilli & Zattoni, 2014). Similarly, Alqatamin (2018) is of the view that
appropriate size, devotion of adequate time and gender diversity of audit committee and their
characteristics will enhance reporting quality of a firm’s financial information.

There are droughts of research on effect of audit on financial reporting quality. As the studies
that tried to look at audit characteristics centered it on its effect with performance (Orjinta &
Ikueze, 2018) while leaving financial reporting quality unattended to. Even the few existing ones
were characterized with inconsistent results and contradictions and therefore found mixed
results. To mention a few of them are: studies of Baxter and Cotter (2009), Davidson,
GodwinStewart, and Kent (2005), and Abbott, Parker, and Peters (2004) whose results were
mixed. On the other hand Kabiru and Usman (2021), Kantudu and Samaila (2015), found
negative result between audit financial expertise and financial reporting quality while Syofyan,
Septiari, Dwita, Rahmi and Ntim (2021) found no evidence to support the effect of audit
characteristics and Felo, Krishnamurthy and Solieri (2003) found no relationship between audit
characteristics and financial reporting quality.

Thus, it is clear from the foregoing findings that the existing literature has prompted more
research to support the direction of the relationship between audit characteristics features and the
quality of financial reporting. Some previous research results have shown contradictions in the
variables that affect financial reporting quality in some countries, so this study used these
variables as predictors of financial reporting quality in Nigeria and expanded the scope of
research by examining all quoted banking firms because little is known about study in Nigeria
that has studied banking industry.
Many studies have focused on just two to four years of data, and this hasn't produced a
satisfactory answer. It's possible that by conducting this investigation over a longer period of
time, we could gain more accurate results. This is the gap that we hope to fill with our research.
Consequently, this study seeks to examine the effect of audit characteristics on financial
reporting quality that emanates from listed money deposited banks in Nigeria using 10 years
(2013-2022).

1.3. Research Questions

The following research questions will be addressed in the course of this study:

i. What are the effects of audit firm size on financial reporting quality?

ii. What are the effects of audit fees on financial reporting quality?

iii. What are the effects of auditor’s tenure on financial reporting quality?

1.4. Objective of the study

The specific objectives of this study are to: -

i. To ascertain the effects of audit firm size on the quality of financial reporting in Nigerian

deposit money banks;

ii. To ascertain the effects of audit fees on the quality of financial reporting in Nigerian

deposit money banks; and

iii. To ascertain the effects of auditor’s tenure on the quality of financial reporting in

Nigerian deposit money banks.

1.5. Hypotheses of the study

The Hypotheses stated in their null form will be tested in the course of this study:

H1: Audit Firm size does not have significant effect on the quality of financial reporting in

Nigeria deposit money banks.

H2: Audit fees does not have an effect on the quality of financial reporting in Nigerian deposit

money banks.

H3: Auditor's tenure does not have significant effect on the quality of financial reporting in

Nigerian deposit money banks.

1.6. Significance of the study

The link between the principle and agent can be utilized to illustrate the significance of the

auditor. The shareholders (the principal) are one of the interested parties for whom the directors

(the agents) prepare the financial statements. The demand for external audits is to confirm the

veracity of the management's claims. Hence, it is anticipated that this study will offer insightful

information on enhancing the caliber of financial reporting. This study adds to the body of

knowledge on auditing by offering more concrete evidence of the effects of audit company

characteristics, such as audit fees, audit firm size, and auditor tenure, on the caliber of financial

reports in Nigerian deposit money institutions. As this study also provides information on the

correlation between audit fees, auditor tenure, and audit firm size, it will be helpful to

stakeholders in the Nigerian Stock Exchange (NSE). This work will also be helpful to

researchers who are conducting research on the qualities of financial reporting and audit firm

characteristics.

The importance of this work also hinges on its anticipated applications. The study's practical

implications include encouraging Nigerian banks to be aware of the global paradigm change

away from tangible resources and with financial reporting quality explained in relation to a

number of other factors by providing solid empirical data. In a market where auditing has been

mandated for corporate organizations, it is predicted that this will increase Nigerian banks'
competitiveness. Consequently, by employing Nigerian listed deposit money institutions to

explore the potential effects of audit firm features on the caliber of financial reporting, this study

will advance and add to the body of knowledge.

1.7. Scope of the study

The evaluation of audit firm characteristics on the caliber of financial reporting in Nigeria forms

the basis of this study. As a result, information on deposit money banks in Nigeria will be sought

in order to respond to the issues and inquiries brought up in this research project. The study's

focus is on deposit money banks that are listed on the Nigerian Stock Exchange's trading floor

(NSE). Ten (5) deposit money banks were chosen from the deposit money banks listed on the

Nigeria Stock Exchange in light of this. The sample size for this study, which covers a ten-year

period from 2013 to 2022, is represented by the ten (5) deposit money banks that are specified.

To ensure that the financial data was fair, reasonable, trustworthy, and current, a ten (5) year

timeframe will be selected.

As the base year for the investigation, 2013 was selected. This results from the fact that by the

beginning of the year, the banking industry had undergone significant changes in terms of the

structure, size, and ownership of banks as a result of the adoption of the Code of Corporate

Governance into the Banking Sector. The previous year also saw a general banking system

consolidation, which ushered in a number of reforms to the banking industry, including the

recapitalization reform. In light of this, the year 2013 was chosen to demonstrate the integration

of the various banking activities of merging banks and how they fared after their merger.

1.8. Operational definition of terms

 Audit: The term "audit" typically refers to an examination of financial statements. A

financial audit is an independent review and assessment of an organization's financial

statements to ensure that they fairly and accurately reflect the transactions they purport to

represent. Employees of the organization may conduct the audit internally, or an

independent Certified Public Accounting (CPA) firm may do so externally.

 Financial reports: For businesses and investors, financial reporting is an essential

procedure since it offers significant data that illustrates financial performance over time.

To ensure fair commerce, compensation, and financial activity, governmental and

commercial regulatory organizations also keep an eye on financial reporting. Normally,

you keep track of financial transactions on a few key statements that others can review.

 Financial institutions: A corporation engaged in the business of handling financial and

monetary activities, such as deposits, loans, investments, and currency exchange, is

referred to as a financial institution (FI). Banks, trust companies, insurance companies,

brokerage firms, and investment dealers are just a few examples of the diverse business

operations that make up the financial institutions industry.

 Stock exchange: The buying and selling of shares of publicly traded corporations takes

place in a centralized setting called a stock exchange. The only trading assets on stock

exchanges, as opposed to other exchanges, are stocks, bonds, and exchange traded

products (ETPs).

 International accounting standard board: The IASB is an impartial body of

professionals having the right combination of recent practical experience in developing

accounting standards, in creating, auditing, or using financial reports, as well as in

 accounting education. It is also necessary to have a wide geographic diversity. The

complete selection criteria for the IASB are detailed in the IFRS Foundation Constitution,

and the geographical distribution is indicated on each profile.

 Shareholders: Someone who holds at least one share of a company's stock or unit in a

mutual fund is referred to as a shareholder. The firm is primarily owned by its

shareholders, who also have specific rights and obligations. Under this ownership

structure, they can benefit from a company's success.

 Audit tenure: "The number of periods-years an audit firm, an auditor audits a customer,

or the number of years a corporation hires the same auditor" are all examples of audit

tenure. There are long and short audit periods, which make up the audit tenure.

 Audit committee: An organization's board of directors' audit committee is tasked with

overseeing the financial reporting process, choosing the independent auditor, and

receiving both internal and external audit results.

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CHAPTER TWO

LITERATURE REVIEW

2.0. This chapter reviews conceptual, theoretical, and empirical research on how audit firm

features affect the caliber of financial reporting by Nigerian deposit money institutions. The

theoretical review was covered in the second portion after the conceptual review. The fourth

section contains the study's empirical review, with the third section concentrating on the

theoretical foundation. The final component, section five, covered the gap in the body of

literature.

2.1. CONCEPTUAL FRAMEWORK

This section's goal is to define and explain the fundamentals of the study-related ideas.
2.1.1 Financial Reporting Quality (FRQ)

According to Unuagbon and Oziegbe (2016), Ibrahim (2017), Nnenna & Ugwoke (2019), a

financial report is a typical account of a company, person, or entity's financial operations that

includes all pertinent financial information about the same presented in an orderly and

understandable manner. It serves as a tool for communication that can be used by various parties

to make decisions (Olowokure, Tanko, & Nyor, 2016; Teguh, & Zaenal, 2020). The third and

final stage of the accounting process, reporting, offers various stakeholders the chance to make

informed investment, control, and regulatory decisions by providing high-quality financial

reporting information about the reporting company (Al-Dmour, Abbod & Al Qadi, 2018, Herath

& Albarqi, 2017; Tang, Chen, & Lin, 2016). Since excellent financial reporting is a crucial

component of financial reports, their value is based on it (Enofe, Edemenya & Osunbor, 2015;

Shakhatreh, Alsmadi & Alkhataybeh, 2020). (Alwardat, 2019). The clarity and transparency with

which each transaction is handled in the financial statement, as well as the strict adherence to the

law and the entity's accounting regulations, are used to evaluate the process' quality (Nnenna &

Ugwoke, 2019). It also depends on each of its elements, such as the company's transaction

disclosure, the accounting techniques used, the understanding of the judgements made, and

information surrounding the selection (Ajape, Omolehinwa & Adeyemi, 2018).

Quality financial reporting is one that is full and apparently clear designed not to misinform or

misguide users (Aifuwa, Embele & Saidu, 2018). High-quality financial reporting is necessary as

it contributes to national public finance by enhancing companies income tax assessment and

collection (Babatunde & Adeniyi, 2019). In Nigeria, the Securities and Exchange Commission

(SEC), Central Bank of Nigeria (CBN), Nigerian Insurance Commission (NAICOM) and

Pension Commission (PENCOM) are vested with the obligation of financial reporting
regulationand communication of up-to-date and credible financial information to users. Also,

enacted into law in the year 2011, the Financial Reporting Council of Nigeria (FRCN), is duty-

bound to ensure the improvement, dependability and quality of financial statements towards

restoration, protection and heightening of public trust in them (Kibiya, Che-Ahmad & Amran,

2016).

Providing information on economic entities, primarily of a financial character, that is useful for

making economic decisions is the primary goal of financial reporting (IASB, 2018; Van Beest

2019). Financial reporting includes data on the management's stewardship, the entity's assets,

liabilities, equity, revenue and costs (including gains and losses), contributions from and

distributions to owners, as well as cash flows (Van Beest, 2019). This data is typically presented

in the form of annual financial statements, which may include notes to the accounts, an income

statement, an income statement of comprehensive income, a statement of cash flows, and a

statement of changes in equity (IASB, 2018, 2019). These reports are subjected to auditing by

outside auditors in order to increase dependability and confidence in the eyes of the users. The

quality of audited financial reports being used in our business environment, however, has come

under significant question in light of the current wave of financial scandals. Hence, there is a lot

of study interest in the idea of quality financial reporting.

The Conceptual Framework for Financial Reporting aids in defining the aspects of financial

reporting quality, despite the fact that there is no universally agreed-upon definition of this

concept in the academic literature (Cohen, Krishnamoorthy, & Wright, 2014; McDaniel, Martin,

& Maines, 2022). The financial statements give "information on the entity's economic resources

and the claims against the reporting entity" and "information about the effects of transactions and

other events that modify a reporting entity's economic resources and claims," according the
conceptual framework (FASB 2010). Consequently, the purpose of financial statements is to

provide trustworthy information so that users may make decisions. Also, it is designed to shed

light on the underlying economic situation and shift of a corporation. Financial statements should

be able to display pertinent, reliable, comparable, and understandable information, according to

Kamaruzaman (2019). So, it is helpful to critically examine the many justifications offered for

the various evaluations and hypotheses put forward in the yearly disclosure (Jonas & Blanchet,

2020). According to the IASB (2013), persons who utilize financial information should have no

trouble comprehending the information given. The complete disclosure of the yearly reports and

a higher level of openness are key to achieving this. The accuracy of financial reporting

promotes transparency and results in annual reports that are reliable thanks to sufficient

reporting. Economic disclosure is still the best way for outsiders to tie economic data to an

organization's financial health in order to oversee management decisions and help with economic

decision-making (Warren & Reeve, 2014). Full disclosure is defined by the CBN (2019) as "the

mandatory financial operational and management information that financial institutions should

lay bare as they deliver their periodic accounts to the relevant authorities as well as to members

of the public." Several scholars have examined the accuracy of business information reporting.

Take Ofoegbu & Okoye (2016), Naser & Nuseibeh (2013), Chau & Gray (2022), Joshi &

Ramadhan (2022), Ho & Wong (2011), and Owusu - Ansah (2018) as examples: These

investigations varied in terms of research settings, disclosed guide structure, explanation and

description of the predictor variables, and arithmetical breakdown. The basic conclusions on the

amount of corporate compliance and the relationships between disclosure level and various

company traits are still nebulous. Gayon, Kelton, Mercer, and Yohn (2016) assert that it's crucial

to comprehend the connection between audit quality and financial reporting quality. According
to these authors, audit quality captures the level of assurance that the auditor obtained enough

suitable evidence that the financial statements faithfully represent the firm's underlying

economics, whereas financial reporting quality captures the extent to which the financial

statements capture the company's underlying economic position and performance. These

definitions emphasize the distinction between financial reporting quality and audit quality as two

distinct but connected concepts.

2.1.3. Audit Quality

In order to reduce the knowledge gap on accounting figures and reduce the residual loss brought

on by managers' opportunism in the accounting process, auditing is primarily one of the tools

available (Ogbodo, Akabuogu & Nzube, 2018; Usifoh, Adegbie & Salawu, 2019). Auditing for

quality is essential. Professional auditors, auditing procedures, and audit findings make up the

structure of audit quality. Researchers concur that a quality audit can be completed when the

expressed auditor's view is trustworthy and supported by sufficient and appropriate audit

evidence gathered by an engagement team with the necessary features. These qualities include

exhibiting appropriate values, morals, and manners; displaying sufficient knowledge and

experience; allocating enough time to complete the audit task; applying a thorough audit process

and quality control methods; delivering helpful and timely reports; and appropriately

collaborating with a variety of stakeholders (Oladejo, Olowookere & Yinus, 2020; Chae, Nakano

& Fujitani, 2020).

The term "audit quality" has been conceptualized in a number of ways, but no definition has ever

received widespread acceptance and acceptance over time (IAASB, 2014; CAQ, 2016, Ajape,

Alade & Agbaje, 2021). One of the most illuminating definitions of audit quality is predicated on
the technical ability of the auditor to identify any significant flaws and demonstrate

independence to ensure that they are corrected and disclosed in the audit report (Ibrahim & Ali,

2018; Zalata, Elhazar & McLaughlin, 2020; Oladejo, Olowookere & Yinus, 2020).

Audit quality is affected by the audit process's input, steps, and findings (Assad & Alshurideh,

2020; Husain, 2020). The accuracy of the financial statements' audit assures that they accurately

reflect the economic circumstances, characteristics, and accounting procedures of the

organization (Onaolapo, Ajulo & Onifade, 2017). Higher audit quality is assumed to suggest

more guarantee of good FRQ (DeFond & Zhang, 2014), yet audit quality is generally defined by

adherence to professional auditing standards, but investors place a greater emphasis on the

qualities of the engagement team conducting the audit (Christensen, Glover, Omer &Shelley,

2016). Because investors place such a high value on auditor qualities, extra input-related

disclosures may be helpful to financial statement users in assessing audit quality (Christensen,

Glover, Omer & Shelley, 2016).

2.1.4 Audit Fees

Some studies, notably those looking at the relationship between audit quality and size, have

considered audit fee as a significant component of audit quality (for instance, Francis, 2018; Hay

& Davis, 2017; DeAngelo, 2019). The selection of qualified auditors is likewise linked to higher

audit fees (Hay & Davis, 2014). Some clients prefer working with major audit companies in spite

of the higher audit charge. Customers are confident that big audit companies have better

monitoring and bonding to get better audit quality (Hay & Davis, 2014). Large audit firms hire

better professionals than smaller firms do in terms of the auditor's skill and expertise, including

technical knowledge and ongoing education. So, it is projected that auditor specialty (and audit
quality) will increase with increasing audit firm size, resulting in increased audit fees (DeAngelo,

2020).

The amount of compensation that auditors earn for their expert services, known as audit fees,

depends on a variety of criteria, including the complexity of the services provided, the level of

skill, and many more. According to Sukrisno Agoes (2012), an audit fee is one that is

"determined, among other things, by the risk of the assignment, the complexity of the services

provided, the level of expertise necessary to carry out the services, the cost structure of the firm

in question, and other professional considerations." The cost of external audits (also known as

audit fees) is the sum paid to external auditors for their services. The amount of time it takes to

perform the task and the value of the services rendered to the client or company are factors in

determining how much is paid for the services. The cost of an external audit, or the audit charge,

varies significantly, according to DeAngelo (2020). Al-Shammari et al. (in Fachriyah, 2018)

claim that the price of external audits may also be seen as a function of the amount of work

completed by auditors or the cost per hour and the needed level of service.

Hoitash et al. (2017) discovered that there is likely to be an obvious reciprocal concession that

would lower the quality of the audited statements when auditors bargain with management on the

tariff fees paid relating to their work. According to Elder (2019), audit fees should accurately

reflect the value of the work that auditors complete, particularly their audits. There is a sizable

body of literature devoted to comprehending audit price. Simunic created a model of the method

by which audit fees are established in 1980, and since then, other writers have continued to offer

empirical findings that demonstrate the components that contribute to the establishment of audit

fees. Some of those contributions that are pertinent to this study are reviewed in this section

(Moutinho, 2021). The quantity of fees for audit services that a client firm pays to its audit firm
should, in theory, reflect the volume of audit work that latter must carry out during the auditing

process. This level of work's definition reflects the auditor's evaluation of the process's

complexity and intended level of risk. In other words, after taking into account all other factors,

an auditor typically acts on the type, scope, and timing of audit procedures, which naturally

affect the total amount of required fees, in order to reduce the risk of issuing a clean opinion

when the client's financial statements contain materially relevant distortions (Moutinho,2021).

Also, the risk of future losses for the audit company resulting from the engagement with that

particular customer is taken into account when determining whether to increase audit efforts

(e.g., Bell, Doogar, & Solomon, 2018; Choi, Kim, & Simunic, 2018; Simunic & Stein, 2016).

These losses include the price of legal action, fines from regulatory bodies, and harm to

reputation and image. Evidence from the real world shows that audit companies change the fees

they are required to charge when there is a perception of a high amount of liability exposure

(Simunic & Stein, 2016). The legal systems of the various nations where audit firms conduct

their business have an impact on audit fees (Choi, Kim, & Simunic, 2018); as a result of rising

litigation expenses, large audit firms have shunned engagements with high-risk customers (Jones

& Raghunandan, 2018).

2.1.5 Audit Firm Size

As a proxy for audit quality, an audit firm's size has been employed; i.e., big audit companies are

more likely to provide independent, high-quality audit services since they have a good reputation

to uphold. Bigger audit firms are more equipped than smaller audit firms to handle major

corporate audits with more financial resources, research facilities, higher technology, and more

talented staff. Smaller firms offer more individualized services because of their smaller client
portfolios, but are expected to give in to management demands, whereas larger firms can

withstand management pressure thanks to their larger customer portfolios (Mahdi & Ali, 2019).

Since auditor independence is reflected in part by the audit firm's size, it is a crucial factor. As a

result, smaller businesses have a greater need for retaining auditor independence than larger

businesses.

According to the premise that bigger firms produce higher-quality audits than their smaller

counterparts, firm size has garnered the most attention in the auditing literature. Also, numerous

studies have uncovered evidence that suggests that company size affects audit quality, with

quality increasing as firm size grows (Lawrence et al, 2019; Rusmin, 2020; Choi et al, 2021;

Francis & Yu 2019; Abu Bakar et al., 2015; Ferguson & Stokes 2022; Becker et al., 2018;

Davidson & Neu, 2018; DeAngelo, 2020).

There is reason to believe that one explanation for this phenomenon is that larger firms have

more and better resources than smaller firms, that they have better research facilities, that they

can conduct the most rigorous tests, and that their technological capability is such that they can

generally accomplish much more than their smaller counterparts (Reisch, 2020). Behn(2018)

claim that in the case where one category of auditor increases the reporting reliability of earnings

in comparison to the other type, analysts of the superior type clients should be able to make more

accurate forecasts of future earnings than those analysts of the non-superior type clients. In a

more recent study, Behn (2018) added analyst forecast accuracy as a proxy for audit quality. If

we accept this line of thinking, Behn (2018) discovered that analysts of Big 4 clients have higher

forecast accuracy than analysts of non-Big 4 companies.

When opposed to auditors working on a smaller scale, big-scale auditors are better at providing

an audit's quality and offering their opinions on current issues. For a sample of not-for-profit

organizations, Schauer (2022) looked at the relationship between auditor size and audit quality.

Generally Accepted Accounting Principles (GAAP) reporting standards compliance was used as

the basis for their audit quality measurement. The Big 4, Large Non-Big 4, and Little Non-Big 4

classes of auditors were split up. According to their research, compliance grew as one proceeded

from the tiny non-Big four to the large non-big four and then from the large non-big four to the

Big Four. Using a more constant gauge of audit company size—the number of experts it employs

—they also examined the correlation between auditor size and audit quality. Their conclusions

were further supported by this test.

The chances are that a larger audit firm will finish an audit assignment faster and more precisely

than a smaller audit firm will depend on the size of the audit business's partners, audit staff,

facilities, and worldwide affiliations. For instance, Ng and Tai (2014) made the argument that

larger audit firms should anticipate to finish audits more quickly than smaller firms since they

have more people and experience examining listed businesses. Due to the availability of the

proper caliber of employees and resources, the large audit firms are also anticipated to be more

comprehensive in their audit assignment.

Regarding the influence of various audit firm sizes on audit quality, the vast majority of oil

companies and audit firms concurred that Big Four firms are superior to their non-Big Four

counterparts in all of the reputation issues brought to their attention and that the size of the audit

firm is positively correlated with audit quality. Such superiority is evident in terms of resources

and audit technology, as well as the ensuing drive to work as competently as feasible.
2.1.6 Audit Tenure

The duration of the engagement between the auditor and the client is known as the audit tenure

(Hartadi, 2020). Often, the question of auditor independence and tenure is related. Ghosh and

Moon's 2013 research demonstrates that audit quality rises as audit tenure rises. This conclusion,

however, conflicts with those of a study conducted by Indah (2020), which found that as the

length of the auditor-client connection lengthens, the quality of the audit may also decline

because an excessively long auditor-client relationship compromises the independence of the

auditor. Moreover, the audit quality degrades as the client-auditor relationship deepens (Deis &

Giroux, 2022). Carey and Simnett (2016) also discovered that in Australia, long audit partner

tenure is related with a lesser inclination to give a going-concern report, which supports this

finding. The study using going-concern reports in the US, however, indicates that audit reporting

problems are substantially more common in the initial years of the auditor-client relationship

(Geiger & Raghunandan, 2022). According to Chen et al. (2018), the quality of financial

reporting is influenced by the term of the audit firm and audit partners.

Regarding the impact of auditor tenure on audit quality, there are two conflicting points of view.

One claims that as the relationship between the auditor and the client grows, the auditor may

form a tight bond with the client and become more likely to side with management, lowering the

quality of the audit. This viewpoint encourages the turnover of audit partners. The other

argument is that as an auditor's tenure increases, they become more knowledgeable about their

clients' businesses and grow as professionals, leading to improved audit quality. Long-tenured

auditors do not often result in lower audit quality, according to the literature on the subject.
Investigations on audit tenure have revealed both short and long audit tenures. Studies in this

area have shown that the shorter the auditor's tenure, the less the auditor knows about their

clients. Lower audit quality is anticipated as a result. In contrast, a prolonged audit tenure may

result in a decline in the auditor's level of professionalism, lowering the audit's overall quality.

On the other side, a longer audit tenure increases the likelihood of finding errors utilizing

technical expertise and advanced knowledge. Yet, the relationship between the auditor and the

client may lessen independence and can lessen the likelihood of inaccurate reporting. So, short

audit tenures run the danger of the auditors having less technical expertise. As a result, the audit

tenure may also have an impact on the quality of the audit report. A clear audit report's release

may be necessary from the client's standpoint in order to keep the auditor for the following

month. As a result, the sort of audit report that auditors provide may change if they are aware

that their clients are considering moving (Vanstraelen, 2020).

2.1.7. Audit Firm Characteristics

The research focuses on audit features such as an auditor's independence, tenure, fees, joint

audits, and audit firm size. The management of a company and outside parties with stakes in the

company are connected through auditors (Porter, Simon, and Hatherley, 2019). They claim that

auditors have a responsibility to determine whether or not the financial statements created by

management present an accurate and fair assessment of the entity's financial situation and

performance. The following describes these traits.

 Audit Firm Tenure

Audit firm tenure is linked with auditor's technical ability and objectivity in identify

misstatements and errors and reporting about them in his report. It has been argued before
 that short audit tenure affect auditors‟ ability to identify misstatements and errors while

long tenures affect auditors‟ objectivity and independence. Raghunandan (2022) found

out that audits performed by audit firms with a short term relationship with clients had

more audit failures than those performed with audit firms which had long term audit

tenures.

 Auditor Independence

According to Dictionary of International Accounting Terms (2018) auditor independence

infers a state of impartiality required of auditors who should have no personal or financial

involvement with a client. Louwers (2017) expresses independence as a mental attitude

and physical appearance which portrays the auditor as being uninfluenced by others in

judgment and decision. This can be sustained by avoiding financial connection that

makes it appear that the wealth of the auditor depends on the outcome of the audit and

management connections that makes the auditor appear as if he is involved in

management decisions.

 Audit Fees

According to Ilechukwu (2017), the audit fee is the service price for the official

assignment of an audit. It also denotes the costs associated with reviewing financial

statements from the most recent fiscal year and paying for annual audits (Afesha, 2015).

According to CAMA's Section 361, the directors may choose the auditors' compensation.

However, in other circumstances, the compensation shall be determined by the company

at the annual general meeting or in such a manner as the business may determine

(Nwakaego, Ikechukwu, & Benedict, 2019). It further stipulates that under no

circumstances may the audit fee from a customer equal 25% or more of the gross practice
 income of an audit company or the gross earned income of a member (Dabor & Nosa,

2014; Chinedu, Nwoha & Udeh, 2020).

Saidu and Danjuma (2018) investigated the effect of audit fee on FRQ of listed insurance

companies in Nigeria and discovered that audit charge has a favorable and significant

impact on FRQ. According to AbdulMalik and Che-Ahmad (2016), who looked into how

audit fees affected FRQ in Nigeria, audit fees have a negative, considerable impact on

discretionary accruals. In this study, the audit charge is calculated using the natural log of

the audit fees paid by the company in order to ensure data normality. According to the

report, the audit charge has no discernible effect on the FRQ of listed Nigerian

companies.

 Joint Audit

Joint auditors technique is suggested in recent literature to promote objective financial

reporting. According to some academics, a company's financial profits will increase if

joint auditors are appointed. An intriguing characteristic of (voluntary) collaborative

audits is that they foster greater choice diversity among auditors, potentially raising the

degree of earnings quality above that under the conventional Big 4/non-Big 4 dichotomy.

The highest-quality financial reports are produced by audits carried out by two Big 4

audit firms, according to DeAngelo's (2020) framework, whereas the lowest-quality

financial reports are generated when a single non-Big 4 audit company is in charge of the

audit engagement. These two extreme classes would then be followed by combinations of

Big 4 and non-Big 4 audit firms, by single Big 4 auditors, and by combinations of non-

big audit firms (Francis et al. 2019; and Zerni 2010). According to DeAngelo's (2020)

framework, joint audits are always seen as having higher quality reports than audits by
 single Big 4 auditors because all joint audit pairs in our sample include either two Big 4

audit firms or a Big 4 and a non-Big 4 audit firm.

 Audit Firm Size

If an audit company belongs to the "Big 4", that is the most popular and thoroughly

investigated indicator of audit characteristics (DeFond and Francis, 2005; and Carcello,

2015). Several studies have different reasons for proposing this particular theory.

According to DeAngelo (2020), these larger audit companies are less likely to be under

customer pressure to "look the other way" in the event that they uncover accounting

errors since they are less financially dependent on the fees from any one client.

 Audit Quality

Initially, auditing was created as a way to close the information vacuum surrounding

accounting figures and reduce any residual loss brought on by managers' opportunism

throughout the accounting process (Ogbodo, Akabuogu & Nzube, 2018; Usifoh, Adegbie

& Salawu, 2019). Hence, quality audit is essential. The components of audit quality are

audit professionals, audit procedures, and audit findings. According to researchers, a

quality audit can be completed when the expressed auditor's view is trustworthy and

supported by sufficient and appropriate audit evidence gathered by an engagement team

with the necessary features. These qualities include the display of appropriate values,

morals, and mannerism; the demonstration of adequate knowledge and experience; the

allocation of adequate time to carry out the audit task; the application of a thorough audit

process and quality control methods; the delivery of useful and timely reports; and

appropriate collaboration with a variety of stakeholders (Oladejo, Olowookere & Yinus,

2020; Chae, Nakano & Fujitani, 2020).

 There have been various attempts to define "audit quality," but as of late, no definition

has received widespread acceptance and recognition (IAASB, 2014; CAQ, 2016, Ajape,

Alade & Agbaje, 2021). The technical ability of the auditor to identify any significant

flaws and their independence to enforce their rectification and publication in the audit

report form the basis of one of the most instructive definitions of audit quality (Ibrahim &

Ali, 2018; Zalata, Elhazar & McLaughlin, 2020; Oladejo, Olowookere & Yinus, 2020).

The audit process's input, steps, and conclusions/outcomes all have an impact on the

audit's quality (Assad & Alshurideh, 2020; Husain, 2020). The integrity of the audit

assures that the financial statements appropriately reflect the economic circumstances,

characteristics, and financial reporting framework of the organization (Onaolapo, Ajulo

& Onifade, 2017). While it is believed that greater audit quality will result in higher

assurance of high FRQ (DeFond & Zhang, 2014), audit quality is primarily determined

by adherence to professional auditing standards, whereas investors place more emphasis

on the qualities of the engagement team conducting the audit (Christensen, Glover, Omer

&Shelley, 2016). Further input-related disclosures may be helpful to financial statement

users in judging audit quality because investors place such a high value on auditor

qualities (Christensen, Glover, Omer & Shelley, 2016).

2.1.8. Audit firm characteristics and development of hypotheses

 Audit firm size and financial reporting

Quality Bigger audit companies are known for having a stellar reputation and are always

ready to uphold it by chastising customers who make financial reporting mistakes that put

themselves at risk of legal action. According to DeAngelo (2020), the effectiveness of an

audit is determined by how well the auditors are able to identify and report substantial
 inaccuracies in the clients' reporting systems. The availability of cutting-edge technology

and the required knowledge makes it possible to identify and report the mistake. Due to

their capacity to identify aggressive profits management strategies, higher quality

auditors' customers are consequently associated with lower anomalous accruals than

clients audited by low-quality auditors (Khalil & Ozkan, 2016).

Lopes (2018) demonstrated a strong indirect influence of audit size on earnings

management using data from the Portuguese business environment from 2013 to 2015.

This suggests that clients of larger audit firms have higher-quality financial reporting than

clients of smaller businesses. This result supported the study's findings, according to

Okolie (2014). However, Yaşar (2013) found no correlation between audit quality and

earnings management among 290 Turkish companies. Findings by Inua and Okoh also

supported this conclusion (2018).

 Audit firm tenure and financial reporting quality

According to Myers et al. (2003), the length of time the client retains an audit firm is

measured in years. The body of literature on the subject is far from being in agreement.

Silvestre et al. (2018) and Ardhani et al. (2019) expressed the opinion that an auditor who

has been on the job for a long time may lose their independence and integrity. According

to DeAngelo (1981), this will reduce audit quality and could result in an incorrect audit

opinion. Bamahros et al. (2015) used data from 525 companies for the financial year

2009 to analyze the relationship between nonaudit services, audit firm duration, and

earnings management. Longer audit tenure was found to be indirectly related to earnings

management. Several research claimed that the size of the audit firm had a direct impact

on how earnings were managed. Soyemi et al. (2020) established a direct correlation
 between auditor tenure and earnings management, which in turn degrades the integrity of

financial reporting, using data from 30 listed non-financial enterprises in Nigeria for the

period 2008-2018. This result is also in line with other earlier research, including that of

Ngoc et al. (2017) and Inua and Okoh (2018). At 6 Nigerian banks from 2005 to 2014,

Olabisi et al. (2017) looked into the connection between audit quality and earnings

management. The results indicated a weakly negative but not statistically significant

correlation between the two variables.

 Audit fees and financial reporting quality

The firm would need to compensate the auditors with equivalent professional fees for

their efforts if it wanted the users of financial reports to have confidence in the results of

any audit process. Audit fee is also assumed to ensure prompt and successful audit

activities, broader coverage, and higher-quality reporting (Gaynor et al., 2016).

According to Choi et al(2018) .'s investigation of 3,184 publicly traded retail companies

in the US, audit fees and earnings management are directly related. This suggests that

increased audit costs reduce the quality of financial reporting by raising the extent of

earnings management. Studies by Donatella et al., Inua and Okoh (2018), Akintayo and

Salman (2018), and Inua and Okoh (2018) also supported this conclusion (2019).

Research by Onaolapo et al. (2017) and Hussaini et al. (2018) found a correlation

between audit fees and audit quality that is favorable. Nevertheless, Mohammed and

Ibrahim (2018) found no evidence of a substantial correlation between the two factors.

 Joint audit and financial reporting quality

When two or more audit firms are working together to complete a firm's audit

assignment, this is referred to as a joint audit. This could happen when specialized
knowledge and professional experience are required to carry out an audit activity

successfully.

Corporate governance literature frequently cites DeAngelo's (2020) framework for joint

audit. It states that the type and size of the hired audit firms have an impact on the quality

of the audit. The quality of the report will therefore be higher than the audit conducted by

a single audit firm where two or more firms are engaged by the company. This is so that

objective financial reporting can be encouraged via joint audit. According to the

framework, an audit engagement completed by two of the "Big 4" companies will be of

higher quality than one completed by other audit firms.

In contrary to DeAngelo's claim, there is a chance that a joint audit engagement will have

a negative impact on the accuracy of financial reporting. According to Umaru (2014),

competition between two audit firms involved in the same audit assignment may result in

ineffective staff cooperation, which may ultimately result in a subpar audit. Accounting

standards-setting organizations (both national and international) offer a number of ways

to handle a certain financial statement item. The effectiveness of the exercise could be

impacted by the joint auditors' unwillingness to cooperate on the choice of accounting

standards to use in an audit engagement.

Between 2001 and 2010, Umaru (2014) looked at the impact of audit firms'

characteristics on the financial reporting quality of seven Nigerian listed building

materials companies. The OLS regression's findings showed that joint audit improved the

accuracy of financial reporting. Nevertheless, results from a different study by Holm and

Thinggaard (2012) on listed non-financial companies in Denmark showed that there was

a negligible correlation between joint audit and audit quality. This shows that joint audit
 does not have an efficient mechanism to prevent earnings management from occurring in

organizations. The research of Olabisi et al. also corroborated this conclusion (2017).

2.2 Theoretical Review

The primary ideas typically used in the literature to explain and analyze the impact of audit firm

features on the caliber of financial reporting are presented in this subsection. They consist of:

2.2.1 Stewardship Theory

In instead of or in addition to the agency theory, the idea of stewardship is offered. Stewardship

theory provides a non-economic foundation for understanding relationships, in contrast to agency

theory, which places an emphasis on control and conflict (Sundaramuthy & Lewis, 2003).

Stewardship theory contends that directors behave as stewards and are willing to act for the

greater benefit of their company rather than for themselves, contrary to agency theory's assertion

that they should look out for their own financial interests. Working to achieve business goals

allows directors to fulfill their personal requirements (Sundaramuthy & Lewis 2003; Kluvers &

Tippett, 2011) In order to uphold their duties as stewards, they are concerned about acting

morally (Stout, 2003). According to stewardship theory, those who serve on boards and audit

committees may be driven by ideals like fairness, equity, and care for other people's well-being.

The goals of the firm are so deeply entwined with those of the directors that these take

precedence over their own, and they frequently consider themselves as capable custodians of the

company's affairs (Hernandez, 2012; Schillemans & Basuioc, 2015). They should not be

considered strange for doing so because it is required of them as professionals to set their own

interests aside and carry out their tasks with dedication and integrity (Keay, 2017). Stewardship

theory, which differs from agency theory in that it considers boards, audit committees, and
managers to be stewards whose actions are naturally in line with their leaders' goals when they

are appointed, makes this assumption (Pastoriza & Arinio, 2008).

2.2.2 The Theory of Inspired Confidence

The Theory of Inspired Confidence, originally known as the Theory of Reasonable Expectations,

was created by University of Amsterdam professor Theodore Limperg in 2016. According to the

theory, the value of the auditor's report comes from his or her expertise as a qualified, impartial

professional. According to this dynamic paradigm, the expectations of the business community

about the role of auditors vary as the business community itself does (Millichamp & Taylor,

2012). According to Limperg, auditors should not fall short of the reasonable expectations of

people who utilize their reports in order to ensure that their work is guided by those expectations.

Furthermore, auditors shouldn't try to exceed those expectations beyond what their work actually

justifies.

The supply and demand for auditing services are the main topics of this theory. Financial reports

serve as a physical representation of the accountability connection; however, as external parties

are unable to check for bias or serious misstatements in financial reports, an independent,

trustworthy audit is now required. The provision of audit services should live up to community

expectations and satisfy public confidence that results from the audit, as the general function of

audit is derived from the requirement for independent examination and an expert opinion based

on findings; due to the trust society places in an independent auditor's opinion. Although audit

benefits those who utilize financial statements, it can be inferred that the social value of audit

would end if society lost faith in audit opinions. In order to fulfill his responsibility to investigate

business procedures and give a trustworthy opinion on the financial statements, the auditor
should maintain proper business practices to preserve his independence from the company being

audited.

The auditors' theory of inspired confidence provides a connection between users' demands for

credible and accurate financial information and the audit processes' ability to satisfy those

demands. It takes into account how these requirements of the general public (stakeholders) and

the audit procedures have evolved over time. Auditor and accountants are expected to be aware

of the public's continued expectation of a low rate of audit failures. As a result, the auditors must

plan and carry out their audit in a way that will reduce the possibility of overlooked substantial

misstatements. The accountant owes it to his clients to carry out their business in a way that

maintains their trust.

2.2.3 The Credibility Theory

According to this theory, giving financial statements credibility is a crucial component of

auditing and a basic service auditors offer to clients. A company's financial records and

management's stewardship are more trustworthy in the eyes of users thanks to audited financial

statements, which improves the quality of their decision-making for things like investments and

new contracts. This is necessary for stakeholders to trust the financial statements. A reduction in

the "information asymmetry" between stakeholders and management would result from the

confidence the financial statements received. For example, credit limitations offered by suppliers

might be affected by stakeholder decisions.

2.2.4 The Entity Theory

The company entity is regarded as existing independently and even possessing a personality of

its own. According to the entity theory, which is based on the equation that says assets are equal
to equity plus liabilities, if a company is solvent, the value of creditors' rights can be determined

independently of other valuations, while the value of stockholders' rights is determined by the

value of the assets that were initially invested along with the value of reinvested earnings and

subsequent revaluations. Yet, rather than being owners of specific assets, the stockholders' rights

to dividends and a portion of the net assets following liquidation are rights as equity holders. The

assets represent the firm's rights to certain goods and services or other benefits, whereas the

liabilities are specific responsibilities of the company (Hendriksen, 2012).

2.2.5 Stakeholder Theory

From the agency theory, the stakeholder theory developed. Any contemporary organization is

viewed by the agency theory as an amalgamation of the interactions between the principals and

their agents. The agents are the managers, who are typically the experts in charge of the day-to-

day operations of the business. The principals are the shareholders, who are the owners of the

entity. Analysts have noted that this relationship produces information asymmetry, favoring

managers in terms of information. In order to offer an opinion on the entity's financial accounts,

the auditor is necessary to conduct an independent examination of the entity's business. This

necessitates the necessity for proper monitoring, which has highlighted the responsibility of the

auditor. The auditor's stated opinion serves as the foundation for "trust" and "confidence" in the

financial statements.

The agency idea naturally leads to the stakeholder theory. According to the notion, every entity

is the result of the interactions of more than only the principals and their agents. Everyone with a

stake in the entity's operations will interact in these interactions, including the host community,

creditors, bankers, the government, and others. This increases the need for information from the
entity, which in turn increases the pressure on the auditor to assure the financial statements'

representativeness (Jones & Wicks, 1999; Donaldson & Preston, 1995; Jones, 1995; Freeman,

1984).

2.2.6 Agency Theory

Barry Mitnick and Stephen Ross introduced this hypothesis for the first time in 1973. In modern

company, agency theorists support separating ownership from control to avoid conflicts of

interest between managers and stakeholders. Yet Michael C. Jensen and William Meckling's

work on the theory is the one that has received the most citations. The link between the principal

(owners) and the agent is the foundation of the agency theory (managers). The context for the

application of the Agency theory is provided by the separation of ownership and management in

contemporary businesses. Shareholders, who are typically not active in the operation of their

companies, make up a large portion of the ownership of modern organizations. In these

situations, a representative is chosen to oversee the company's daily activities. This separation of

ownership and control raises the possibility of conflicts between agents' and principles' interests,

which results in expenses related to resolving these disputes. (Eisenhardt, 1989; Jensen &

Meckling, 1976)

According to the agency theory, managers are urged to properly compile financial statements to

detail the return generated by the companies in order to assure the success of an audit process.

According to Jensen & Meckling (1976), in agency theory, agents have access to more

knowledge than principals have. This information asymmetry makes it difficult for principals to

determine if their agents are effectively representing their interests. An assumption of agency

theory, according to Sarens and Abdolmohhamadi (2007), is that principals and agents will act

rationally to maximize their wealth. This leads to the moral hazard problem. According to Jensen
& Meckling (1976), moral hazard is a circumstance in which agents may be faced with the

choice of working against the interests of their principals in order to maximize their own income.

Principals are unable to assess whether an agent's activities are in the firm's best interests since

they do not have access to all the facts at the time the agent makes a choice. Principals and

agents participate in contracting to attain optimality, including the implementation of monitoring

procedures like auditing, to lessen the possibility of the moral hazard.

According to Watts (1998), auditing is viewed as a bonding expense paid to a third party by

agents to satisfy the principal's need for accountability. The cost of auditing is borne by

principals, just like any other operating expense, in order to safeguard their financial interests.

Defond (1992) talks about how crucial it is to keep ownership and control separate. According to

him, the more dispersed an organization's ownership is, the more the owners and managers'

views vary and the more the principals have to watch over and oversee the conduct of their

agents. Hence, as ownership spreads wider, so does the need for monitoring. So, in more

dispersed ownership structures, several auditing mechanisms should keep an eye on the agent's

behavior.

According to Louise (2005), the principal-agent connection as shown in agency theory is vital to

understand how the job of an auditor has evolved. Louise (2005) claims that audits serve as a

basic purpose in generating confidence and reinforcing trust in financial information. Agents are

chosen by principals, who also give them some decision-making power. The principals put their

trust in their agents to operate in their best interests by doing this. Principals may, however, lack

confidence in their agents due to knowledge asymmetries between them and their agents' varied

motivations, in which case they may need to put in place measures, like the audit, to bolster this
confidence. Hence, agency theory is a valuable economic theory of accountability that aids in

explaining how audit quality has evolved.

The dominant theory in accounting and audit (Hermanson et al., 2012; Tricker, 2012; Beasley et

al., 2009; Cohen et al., 2008), agency theory (Andrew, 2013; Fama & Jensen, 1983), proposes

contractual mechanisms, such as corporate governance, are put in place to monitor management

to address the separation in ownership and control. According to the agency view, management

is seen as self-centered individuals that act opportunistically and prioritize their own interests

over those they represent, even when doing so is in owners' best interests (Jensen & Meckling,

1976). In order to stop this behavior, two mechanisms are identified: contractual mechanisms

that align management goals with the principal; and information systems that are implemented to

lessen information asymmetry between owners and management. The latter can also prevent

opportunistic behavior by making management aware that they cannot fool the monitors (Cohen

et al., 2008; Eisenhardt, 1989). According to the agency perspective, a monitor's primary and

essential qualities are independence from management and expertise.

2.3. Empirical review

According to Booker (2011), a short audit tenure length improves the auditor's independence and

has a considerable positive correlation with the caliber of financial reporting. Isenmila and Elijah

(2012) claimed that Nigerian corporate enterprises had engaged in earnings management

(fraudulent financial reporting) through the carelessness of audit tenure, endangering the

confidence of investors and the legitimacy of public financials in the eyes of society at large.

Wines (2014) investigates the connection between auditor independence and non-audit services

in regard to the accuracy of financial reporting in Australia. He discovers that non-audit fees are
associated with a lower chance of certification. The study draws the conclusion that non-audit

services reduce auditor independence and, consequently, the caliber of financial reporting.

In order to determine whether an auditor is independent, Frankel, Johnson, and Nelson (2012)

looked at the relationship between audit fees, non-audit services (using non-audit fees), and

earnings management using discretionary accruals. They looked at a sample of US companies

and discovered a correlation between the size of discretionary accruals and non-audit fees as well

as minor earnings surprises. According to their findings about total audit fees, there is no

connection between total audit fees and earnings management. Moreover, audit fees have a

strong negative correlation with earnings management, indicating that clients that pay substantial

non-audit fees relative to overall fees impair the independence of the auditor. They come to the

conclusion that clients who pay significant non-audit fees to their auditors are more inclined to

manage earnings through accruals.

Francis and Ke (2013); Reynolds and Francis (2014) discovered that audit fees do have a

negative association with the quality of earnings, which raises the standard of financial reporting.

In contrast, Gul et al. (20013) examined the relationship between audit fees and discretionary

accruals in a sample of Australian businesses. Their findings revealed a favorable correlation

between audit fees and the quality of financial reporting (discretionary accruals). The idea that

audit fees undermine independence is refuted by them. According to some of the researchers

conducting these studies, audit fees represent additional audit work, which raises the level of

audit quality and are therefore utilized as a measure of audit quality.

Audit partner tenure and audit quality were studied by Chijoke, Emmanuel, and Nosakhare in

2012. They examined the connection between an auditor's tenure and audit quality using the
Binary Logit Model estimation technique. Despite the fact that the variable was not significant,

their findings show a negative correlation between the length of an auditor's tenure and the

quality of the audit. With the exception of Returns on Assets, which had a favorable effect, the

other explanatory factors (ROA, Board Independence, Director Ownership, and Board size)

taken into account along with auditor tenure were found to be adversely associated to audit

quality.

On the one hand, Aliyu, Musa, and Zachariah (2015) looked at the relationship between audit

quality and Nigerian earnings management. For the years 2006 to 2013, they made use of a

sample of listed banks. They demonstrated that audit fees are strongly and favorably related to

abnormal loan loss provisions. This demonstrates how the reliance on money of auditors

increases the rate of earnings management practice in Nigerian banks. On the other side, Eriabie

and Dabor (2017) investigated the connection between Nigerian earnings management and audit

quality. During the years 2005 and 2010, they used a sample of 18 listed banks. Their research

shows that audit quality and earnings management are mutually exclusive. This is supported by

Ndubuisi and Ezechukwu's (2017) research on the factors influencing audit quality in Nigerian

banks. They demonstrated that higher audit costs are highly likely to improve audit quality.

Okolie (2014) looked at the impact of auditor independence on managing earnings. They employ

57 Nigerian publicly traded firms as a sample, covering the years 2006 to 2011. According to the

findings, audit fees are negatively significant and associated with discretionary accruals.
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Afesha, T., (2015). Audit Fee Determinants and Audit Quality in Ethiopian Commercial Banks.

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Ajape, K. M., Agbaje, A. A. & Uthman, A. B. (2016). The relationship between inventory

management and profitability of Nigerian consumer goods companies. UNILAG Journal of

Business, 2(1),110-118.

Al-Dmour, A. H., Abbod, M., & Al Qadi, N. S. (2018). The impact of the quality of financial

reporting on non-financial business performance and the role of organizations demographic'

attributes (type, size and experience). Academy of Accounting and Financial Studies Journal,

22(1), 1-18.

Behn. U (2018). Changes in internal auditing during the time of the major US accounting

scandals. International Journal Auditing. 9: 117-127.

Booker. A, (2011). The value relevance of value relevance literature for financial accountant

standard setting: another view. Journal of accounting and economics, 31, 77-104.

Chau & Gray (2022). “Determinants and market consequences of auditor dismissals after

accounting restatements”. The Accounting Review 89(3), 1051–1082

Cohen, Krishnamoorthy, & Wright, (2014). “Corporate governance, firm characteristics and

earnings management in an emerging economy”. Jamar, 11(1), 43-64

DeAngelo. L (2020). The value relevance of value relevance literature for financial accountant

standard setting: another view. Journal of accounting and economics, 31, 77-104

DeFond and Zhang (2014). “Audit research after Sarbanes-oxley”, Auditing: A Journal of

Practice & Theory, 24: 5-30.

Deis & Giroux, (2022). Valuation Implications of Reliability Differences: The Case of

NonPension Post Retirements Obligations. The Accounting Review, (72): 351-383.

Elijah, B.O (2012). Audit quality practices and financial reporting in Nigeria. International

Journal of Academic Research in Accounting, Finance and Management Sciences 7(2): 145 –

155. doi.org/10.6007/IJARAFMS/v7.12/2879

Enofe, A. O., Edemenya, C. C., & Osunbor, E. O. (2015). The effect of accounting ethics on

quality of financial reports in Nigeria. Research Journal of Finance and Accounting, 6(12), 123-

130.

Financial Accounting Standards Board (FASB) (2020). Statement of Financial Accounting

Concepts No.2 Qualitative Characteristics of Accounting Information. Stamford, CT.

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Herath, S. K., & Albarqi, N. (2017). Financial reporting quality: A literature review international

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CHAPTER THREE

3.1. Area of study

The study will be carried out amongst banks in Oshogbo. This study will be carried out using the
data provided by the selected deposited money banks (Guarantee trust bank, United bank for
Africa, Wema bank, Union bank, and First bank).

This study will be limited to Audit firm characteristics as an Independent variable and financial
reporting quality as dependent variable. The area of this study is to investigate and evaluate the
effect of audit firm characteristics on the quality of financial reporting among listed nigerian
deposit money banks. The analysis to be made in this research will be based on data made
available to the researcher by the various banks online/physically.

3.2. Research design

The longitudinal (panel) design was used for this study because it is a good technique for

evaluating variables in time order. In this case, the effect of the independent variables (audit

tenure, audit fees, and audit firm size) on the given dependent variable (financial reporting
quality) was measured among quoted Nigerian deposit money banks over a period of thirteen

(10) years, from 2013 to 2022.

The panel design allows researchers to determine the time order of the variables based on logical

considerations, which further supports the choice's applicability. In addition to being ideal for a

developing country like Nigeria, this is sufficient to capture any behavioral changes that may

have occurred, as opposed to the cross-sectional design method that is often used in most

research in this field, whether in developed and developing nations.

3.3. Population, Sample Size, and Sampling Technique

The population of the study comprises of all the thirty-one (31) commercial banks listed on the

Nigerian Stock Exchange currently in operation in the Nigerian banking industry.

Purposive sampling technique was used in this study to select the samples. All thirty-one banks

in the population frame are identified individually and then, the company must have been quoted

on NSE prior to the period of this study.

A total of ten (5) deposit money banks listed on the floor of the Nigeria Stock Exchange as at 31 st

March, 20121 were then selected after applying purposive sampling technique. The banks

selected were Guarantee trust bank plc, United bank for Africa plc, Wema bank plc, Union bank

plc, and First bank plc in which the financial reports of each of the sample element will be

evaluated.

3.4. Sources and collection of Data

This study will make use of secondary data precisely. The data will be sourced from publication

of the Nigeria Stock Exchange (NSE) and the annual report and accounts of the selected listed
deposit money banks as well as their respective notes to the accounts for the period of ten (10)

years from 2013 to 2022.

.3.5 Research instrument

The research instrument that would be adopted by the researcher is the collection of financial

data of the selected banks from 2013 to 2022 through stock exchange market and analyzed

through the use of regression analysis with a model of FRQ = f (AUDF, AUDFSZ, TEN). The

secondary data will be gathered from relevant publication, sites and articles on the financial

reports of the listed money deposited banks.

3.5.1 Validation of the research instrument.

The validity of test reveals the degree to which a measuring instrument measures what it is

intended to measure Norland (1990). He stated that the accuracy and significance of inferences

are based on research results. The validity of the research instrument is determined by the

amount of build in error in measurement.

Regression model validation. In cross- splitting validation, one part of the data will be used in

order to estimate the model coefficients while the rest of the data from the dataset will be used

for model prediction accuracy. The algorithm named DUPLEX is always a good choice when

you want to divide the prediction and estimation datasets when there is no valuable variable that

can be used as a base for splitting the data.

3.6. Model of Specification

The primary statistical approach used in this study will be regression analysis (Fogler & Nutt,

1975) to determine the impact of the auditor's tenure, audit fees, and audit firm size on the
caliber of financial reporting. It is anticipated that the aforementioned independent factors and

financial reporting quality will have a positive association.

The model is therefore specified as follows:

FRQ = f (AUDF, AUDFSZ, TEN) ……. (3.1)

Financial leverage serves as the study's control variable because it is contended in the relevant

literature section that financial leverage affects the caliber of information that a corporation

releases.

Therefore, equation (3.1) becomes

FRQ = f (AUDF, AFSZ, TEN, LEV) ……. (3.2)

The relationship can then be expressed in econometric form,

FRQit = β0 + β1AUDFSZit + β2AUDFit +β3TENit +β4LEVit+ Ɛit …… (3.3)

Where

FRQ = Financial Reporting Quality

i = entity of each bank at time (t)

t = the t-th year (time series annual data)

Ɛit = Error term

β0 = Regression Constant

AFSZ = Audit firm size

AUDF = Audit fees

TEN = Auditor’s tenure

LEV = Leverage

3.6.7 Measurement of Variables

The length of the auditor's employment, audit fees, audit firm size, and financial reporting

quality are the study project's variables. The dependent variable is financial reporting quality,

while the independent variables are the auditor's tenure, audit fees, and audit firm size. We will

evaluate the influence of the independent factors — auditor tenure, audit fees, and audit firm size

— on the dependent variable, which is financial reporting quality.

The modified Jones model (Dechow, Sloan, and Sweeney, 1995), one of the models used to

assess the quality of earnings, was employed to quantify the dependent variable's financial

reporting quality (earnings management). The division of accruals into nondiscretionary

(normal) and discretionary (abnormal) components is based on accounting fundamentals. The

quality of profits is determined by the anomalous component's absolute value. The quality of

profits decreases as the absolute value of discretionary accrual increases (Dechow et. al., 1995).

Total Accruals (TA) = Net profit after tax (NPAT) – Net cash flow from operations (CFO)

To estimate abnormal accruals (DAji,t) for company i in year t (2018), the following cross-

sectional regression is performed

TA it/ Ai,t-1 = β 1t[1/Ai,t-1] + β2t[ΔREV-ΔARit/ Ai,t-1] + β3t [PPE it/ Ai,t-1] + ROAit ε i,t (3.7)

Where:
TA i,t = total accruals in year t for company i;

Δ REVi,t = revenues in year t less revenues in year t-1 for company i scaled by total assets at t-1;

PPE i,t = gross property, plant and equipment in year t for company i scaled by total assets at t-1;

Ai,t-1= total assets in year t-1 for company i;

ROAi,t= Return assets in year tfor company i;

εi,t = the residual of company i for time t;

In order to predict company-specific normal accruals (NAi,t) for firm I in year t (2022) as a

percentage of lagged total assets, the aforementioned model's industry-year (2022) specific

parameter estimations were employed.; that is,

NA it/ Ai,t-1 = β 1t[1/Ai,t-1] + β2t[(ΔREV it -ΔAR it)/ Ai,t-1] + β3t [PPE it/ Ai,t-1] +ROAit (3.8)

Where:

AR i,t = company i’s accounts receivables in year t.

Abnormal accruals (AAi,t) for company i in year t are:

DACj = (TA it/ Ai,t-1)– (NA it/ Ai,t-1)

The absolute value of abnormal accruals (│DAJi,t│) is the measure of earnings quality with

lower values indicating higher earnings quality.

The measurement of others variables are summarized in the table below:

Table 3. 1: Summary of Variables

Variable Name Symbol Type Explanation Expectation

 Audit Fee AUDF Independent Natural log of the audit Positive
fee that the client
company paid to the
audit firm

Auditor firm AFSZ Independent given a score of 1 if the Positive

size audit firm is one of the
Big 4 and a score of 0
otherwise. KPMG,
PWC, Deloitte, and
Erst & Young are the
"big 4."

Audit firm TEN Independent based on how many positive

Tenure years a single auditor
has continuously
audited a client
company

Financial LEV Control measured as the Positive

Leverage percentage of equity to
total debt

Source: Author’s Compilation, 2022.

3.8. Data analysis techniques

The data will be analyzed through regression analysis through pooled OLS. Diagnostic test,
Ramsey and wooldridged reset test method will be adopted to test the formulated hypotheses,
because it enhances concise and clear information about the data.

3.8.1. Approach to study objectives

The objective of this study is to ascertain the effects of audit firm size on the quality of financial

reporting, ascertain the effects of audit fees on the quality of financial reporting, and to ascertain

the effects of auditor’s tenure on the quality of financial reporting in Nigerian deposit money

banks. This is to know if there's correlation between the dependent variable and independent

variables. The aforementioned techniques and model will be used to determine that.
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Review, 70, 193-225.

Fogler, H. R. and R. Nutt: 1975, ‘A Note on Social Responsibility and Stock Valuation’,

Academy of Management Journal 18(1), 155–160.

Norland-Tilburg, E. V. (1990). Controlling error in evaluation instruments. Journal of Extension,

[On-line], 28(2).