ABSTRACT
This research was carried out in order to investigate the factors affecting audit quality in Nigeria. The primary data were supplied by 430 respondents across several stakeholders in the fields of financial reporting and auditing. The secondary data were generated from the financial statements of forty annual reports of companies quoted on the Nigerian Stock Exchange. The test of hypotheses and other analysis of data were done using SPSS, version 17. The tests revealed that among others, multiple directorship is the most significant in affecting audit quality in Nigeria. In addition, it is found that provision of non-audit service would likely have a significant effect on the audit quality in Nigeria. However, the study did not find audit firm rotation to be a significant factor for enhancing audit quality in Nigeria. The study recommends efforts should be made to strengthen audit quality if the quality of financial reporting was to be improved. Also, regulatory authorities should ensure that the same firm do not render audit services and offer management advisory services in the same company simultaneously.
Keywords: audit quality; financial reporting quality; multiple directorship, Nigeria, audit committee.
BACKGROUND TO THE STUDY
Board of directors are responsible for accounting for the daily activities in organisations and rendering proper stewardship on how the financial resources of the shareholders were managed. Towards this end, shareholders, at Annual General Meetings, appoint an external auditor to provide assurance services that the financial statements prepared by Management represent the underlying financial transactions of the organization for the period covered. The reality facing stakeholders of financial reporting is that corporate financial reporting failures have been on the increase, especially in the past decade.
Window dressed accounts raised concerns in the USA with the collapse of the energy corporation ENRON in 2001. The company filed for bankruptcy after adjusting its accounts. WorldCom, Global Crossing and Rank Xerox are other companies in the USA with similar problem. In Italy, Parmalat failed in 2003 when it engaged in accounting scandals worth 8 billion Euros (Demaki, 2011; Norwani, et al., 2011)). In New Zealand, Allied Nationwide Finance failed in September 2010 while NZF Money became bankrupt in January, 2011 (Lianne, 2011). Nigeria has had its own share of financial reporting failures with the problems in Cadbury Nigeria Plc. in 2006; Afribank Nigeria Plc faced problem of financial reporting in 2009; Intercontinental Bank Plc. (2009).
Countries all around the world have set codes of best practice as guidelines to address governance and financial reporting anomalies: Cadbury Report was produced in United Kingdom, Sarbanes Oxley in United States,
The Dey Report in Canada, the Vienot Report in France, the Olivencia Report in Spain, the King’s Report in
South Africa, Principles and Guidelines on Corporate Governance in New Zealand and the Cromme Code in
Germany. The goal of these regulations was to improve firms’ corporate governance environments (Bhagat and Bolton, 2009).
In Nigeria, the Regulatory authorities have responded by compelling companies to comply with stringent corporate governance codes. Idornigie (2010) reports that Nigeria have multiplicity of codes of corporate governance with distinctive dissimilarities namely:
i.Security and Exchange Commission (SEC) code of corporate governance (2003) addressed to public companies listed in the Nigeria Stock Exchange (NSE). The code was reviewed in 2011;
ii.Central Bank of Nigeria (CBN) Code (2006) for banks established under the provision of the Bank and Other Financial Institutions Act (BOFIA);
iii.National Insurance Commission (NAICOM) Code (2009), directed at all insurance, reinsurance, broking and loss adjusting companies in Nigeria; and
iv.Pension Commission (PENCOM) Code (2008), for all licensed pension fund operators.
Despite the interventions of the regulatory authorities, the challenges of ensuring credibility in financial reporting and auditing are still prevalent. It therefore becomes pertinent to investigate the factors affecting audit quality in order to enhance the relevance of audit and assurance functions. Nigeria is currently experiencing a paucity of research in this direction. This study is expected to broaden extant literature and provide essential findings to assist stakeholders of financial reporting and auditing in the country in formulating and administering relevant and pragmatic policies to enhance corporate financial reporting.