+234 813 0686 500
+234 809 3423 853
info@grossarchive.com

THE EFFECT OF AUDITORS’ CHOICE ON ACCRUAL EARNINGS MANAGEMENT IN NIGERIAN COMPANIES

  • Type:Project
  • Chapters:5
  • Pages:105
  • Methodology:Panel Data Regression
  • Reference:YES
  • Format:Microsoft Word
(Accounting Project Topics & Materials)
THE EFFECT OF AUDITORS’ CHOICE ON ACCRUAL EARNINGS MANAGEMENT IN NIGERIAN COMPANIES
CHAPTER ONE

1.1    INTRODUCTION
Audit is a key contributor to financial stability and to re-establishing trust and market confidence. Auditors are entrusted by law with conducting statutory audits and fulfil  an  important  role  in  offering  an opinion(reasonable assurance) on  whether  the  financial  statements  are stated  truly and  fairly (Quick, R. 2012). This assurance help to reduce the risk of misstatement, subsequently, reduce the costs of business failures. (Mansi, Maxwell and Miller 2004) identify two roles of an auditor: the information role and the insurance role. As an information intermediary, an auditor is a person who independently and effectively verifies the correctness of company’s financial statements before they are published. As an insurance provider, on the other hand, an auditor is a person who is legally accountable for damages to financial statement users. Auditors therefore carry out primary responsibility for promoting transparency in financial reporting processes that in turn generate high quality financial statements. In other words, auditors are one of the key drivers that help promote the transparency of the stock markets.
Earnings management is a popular subject in the accounting literature and there many slightly different definitions used for it. The earnings management definition used in this study is that of (Healy and Wahlen 1999) who state that Earning management occurs when management use judgment in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of the company or to influence contractual outcomes that depend on reported accounting numbers.” (Koh et al. 2008) examine earnings management as the propensity of firms to meet or exceed analysts’ expectations in the periods following the Sarbanes Oxley Act. The study finds that managers are less likely to employ accrual based earnings management techniques in the periods following the accounting frauds of the late 1990s and early 2000s. Furthermore, the findings indicate that meeting or exceeding the analyst forecast in the post-Sarbanes Oxley period is more positively associated with future cash flows. This suggests that the decrease in accrual based earnings management techniques has improved the quality of firms’ earnings, as they are more reflective of future performance.
As mentioned above, the choice of auditor has played an important proxy of difficult-to-observe audit quality in different aspects. Previous theoretical and empirical research has generally established that audit has economic value, even in the absence of a mandated audit requirement (Sundem, Dukes, & Elliott,1996). The value of information and audits.( Coopers & Lybrand.). The decision to have an auditor, the selection between different auditors, and the decision to switch auditors are complex choices. Prior research has partially explained auditor choice by using agency theory (DeFond, M. L., & Subramanyam, K. R. 1998). Auditor changes and discretionary accruals. The demand for audit of companies’ accounts is created by the agency problems which are related to the separation of corporate ownership from control (Gerayli, Yanesari & Ma’atoofi, 2011). The agency problem arises from the existence of asymmetric information in the principal – agent contracts (Jensen, & Messier,2000). Theory of the firm: Managerial behavior, agency costs and ownership structure. Findings Show that the existence of information asymmetry between corporate management and company shareholders greatly enhances the easy perpetration of earnings management practice. The audit of a company’s accounts is a monitoring or control apparatus that minimizes information asymmetry and protects the interests of the principal.
1.2 Background of study
Theoretical and empirical research has generally established that an audit has
economic value, even in the absence of a mandated audit requirement (Sundem, Dukes, & Elliott,1996),the value of information and audits.( Coopers & Lybrand).  The decision to have an audit, the selection of an audit firm, and the decision to occasionally switch auditors are all complex choices.  Prior research has used agency theory to partially explain auditor choice and auditor switches (Defond,(1992). The association between changes in client firm agency costs and auditor switching.  In the most narrow sense, the basic role of the audit is to improve the quality of financial statements and extensive literature has found that a high quality audit reduces the incidence of earnings management (Becker, DeFond,  Jiambalvo, and  Subramanyam 1998).  On the other hand, some researchers have suggested that demand for quality auditing is multifaceted and depends on more than just a cost of capital argument (Knechel 2001, 2002; Abdel-khalik 1993; Wallace 1981).  For example, an audit can help managers improve the efficiency of a firm or remove information asymmetries related to internal reporting.  Some firms may place more value on these potential gains that might accrue from the improvement of external financial reporting, especially for firms that are small and/or not public traded. Prior research on audit quality has tended to focus on the differences between Big 5 (Big five) audit firms and smaller audit firms.  (DeAngelo, L. E. 1981), Auditor size and audit quality, argued that the Big five provide better quality audits because they have more reputational and legal risk.4  We know from prior research that audits by the Big Six are associated with higher fees , lower levels of discretionary accruals lower litigation rates , higher rates of compliance with GAAP (Krishnan and Schaur,2000), higher earnings response coefficients , more informative signals of financial distress (Lennox, 1999), and less mispricing of IPOs .  While these attributes are considered to be manifestations of audit quality, other research has been less successful at finding quality differences among the large firms, e.g., 9  see the extensive literature on specialization (Craswell, Francis, and Taylor (1995).
1.3    Statement of the Research Problem
Earnings management can be beneficial or harmful for the firm’s value based on how managers employ it. In general, earnings management consists of both positive and negative earnings management. Positive earnings management is the use of earnings management in a way that benefits firm value. Meanwhile, negative earnings management is the use of earnings management for private benefit that can be harmful to the firm’s value. In Nigeria, corporate scandals are publicly known and has resulted in misleading financial reports. There is therefore a concern about the quality of accounting income and its relationship with the quality of the auditing process, which has been observed to increase over time following the periodical clusters of business failures, frauds, and litigations. The issue is whether these corporate collapses are not the outcome of poor audit quality and the inability of the audit function to arrest Earnings Management.
Consequently, the study examine whether audit choice can significantly minimize the negative consequences of earnings management of quoted companies in Nigeria. The study attempts to ascertain and establish whether audit quality exhibits significant impact and relationships with the amount of discretionary accruals of quoted companies in Nigeria.
Against this backdrop, the following research questions will be addressed;
To what extent does audit opinion affect earnings management proxy by discretionary accrual in Nigerian quoted companies?
What is the relationship between audit tenure and earnings management proxy by discretionary accrual in Nigerian quoted companies?
To what extent does audit firms type influence earnings management proxy by discretionary accrual in Nigerian quoted companies?
What is the relationship between audit fee and earnings management proxy by discretionary accrual in Nigerian quoted companies?
Objectives of the Study
The broad objective of this study is to investigate the effect of auditors’ choice on accrual earnings management in Nigerian quoted companies. Specifically, the objectives of this study include to:
examine the extent to which audit opinion affect earnings management proxy by discretionary accrual in Nigerian quoted companies,
determine the impact of audit tenure on earnings management proxy by discretionary accrual in Nigerian quoted companies,
Ascertain the extent to which audit firms type influence earnings management proxy by discretionary accrual in Nigerian quoted companies, and
Investigate the relationship between audit fee and earnings management proxy by discretionary accrual in Nigerian quoted companies.
Research Hypotheses
For the purpose of this study, null hypotheses will be stated and formulated. The following hypotheses seek to answer the research questions stated above.
H01:    There is no significant relationship between audit opinion and earnings management proxy by discretionary accrual in Nigerian quoted companies.
H02:    There is no significant relationship between audit tenure and earnings management proxy by discretionary accrual in Nigerian quoted companies.
H03:    There is no significant relationship between Big 4 audit firms and earnings management proxy by discretionary accrual in Nigerian quoted companies.
H04:    There is no significant relationship between audit fee and earnings management proxy by discretionary accrual in Nigerian quoted companies.
1.6 Scope of the Study
The focus of this study is to examine the effect of auditors’ choice on accrual earnings management in Nigerian quoted companies. To achieve the objective of this study, the research covered manufacturing and service sectors. Further, the manufacturing sector consists of different companies such as agro-allied, food and beverage, breweries, pharmaceuticals and building materials or construction. The service sector comprises of banks, insurance, transportation and telecommunication companies. In this regard, fifty(50) companies will be randomly selected from two industries in the Nigerian Stock Exchange (NSE) for the period of 2011-2016.
1.7    Significance of the Study
The significance of the study will be benefited to the banking sector, academician and to the whole society in general.
It will also assist auditors in carrying out their operation in an orderly and efficient manner.It will also assist them in identifying the appropriate system for adoption in order to curb / curtail fraudulent malpractice in banking sector and to be familiar with the banking sector in Nigeria.    
Finally, professional will find the material useful in their fields because of the fact in it and management will take this material as a judicious material that will help them in making important business decisions.
1.8 Limitations of the Study
    The major limitation of the study as it is with several studies in developing economy is data accessibility and accuracy. Also, there is the challenge of inappropriate measurement of variables. The subject of auditors’ choice and accrual earnings management is one that is bedeviled with several measurement indices in literature due to its qualitative nature. Different perceptions exist as to what the indices for auditors’ choice should be.

Share This

Details

Type Project
Department Accounting
Project ID ACC1626
Price ₦3,000 ($9)
Chapters 5 Chapters
No of Pages 105 Pages
Methodology Panel Data Regression
Reference YES
Format Microsoft Word

500
Leave a comment...

    Details

    Type Project
    Department Accounting
    Project ID ACC1626
    Price ₦3,000 ($9)
    Chapters 5 Chapters
    No of Pages 105 Pages
    Methodology Panel Data Regression
    Reference YES
    Format Microsoft Word

    Related Works

    CHAPTER ONE 1.1 INTRODUCTION Audit is a key contributor to financial stability and to re-establishing trust and market confidence. Auditors are entrusted by law with conducting statutory audits and fulfil an important role in offering an opinion(reasonable... Continue Reading
    AUDITOR CHOICE AND (ACCRUALS) OR EARNINGS MANAGEMENT ABSTRACT The study examines the relationship between auditor’s choice and earnings management in Companies quoted in the Nigeria stock exchange. Earning management occurs when management use judgment in financial reporting and in structuring transactions to alter financial reports to either... Continue Reading
    in Edo State ABSTRACT The project work on “Accrual Accounting as Determinant for Performance Evaluation in the Organization” examines alternative accrual accounting rules from an incentive and control perspective for a range of common... Continue Reading
    THE PROBLEMS ENCOUNTERED BY EXTERNAL AUDITORS IN AUDITING NIGERIAN COMPANIES (A CASE STUDY OF AKINTOLA WILLIAMS AND CO. CHARTERED ACCOUNTANT, ENUGU) ABSTRACT This work is a partial fulfillment of the requirement for the award of Higher National Diploma in Accountancy. It is also designed in such a way as to help readers understand the problems... Continue Reading
    THE PROBLEMS ENCOUNTERED BY EXTERNAL AUDITORS IN AUDITING NIGERIAN COMPANIES (A CASE STUDY OF AKINTOLA WILLIAMS AND CO. CHARTERED ACCOUNTANT, ENUGU) ABSTRACT This work is a partial fulfillment of the requirement for the award of Higher National Diploma in Accountancy. It is also designed in such a way as to help readers understand the problems... Continue Reading
    ABSTRACT This study is motivated by a desire to examine earnings per share and market value of companies. In light of the empirical review and other discussions, a number of questions arose as to whether there significant relationship between earnings per share and market value. Using the... Continue Reading
    (A case study of Leadway Assurance Company. Plc. Kaduna TABLE OF CONTENTS Title page    -        -        -        -        -        -        -        -        -        -        i... Continue Reading
    CHAPTER ONE 1.1INTRODUCTION  Concern about corporate governance has developed historically in response to major crises of confidence, fraud and market failure and with it development of advances in our thinking about the socio economic role and contribution of corporate entities (Nerd berg 2007). In recent times the perverseness of corporate... Continue Reading
    ABSTRACT This study examined earnings management and corporate governance in the banking sector. In light of the empirical review and other discussions, a number of questions arose as to whether there is relationship between earnings management and corporate governance mechanisms. Using the... Continue Reading
    ABSTRACT This study examined earnings management and market value of firms in Nigeria. In light of the empirical review and other discussions, a number of questions arose as to whether there is relationship between earnings management and market value of firms in Nigeria. Using the Ordinary... Continue Reading