AUDIT PARTNER TENURE AND AUDIT QUALITY: THE NIGERIA EXPERIENCES
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
Background to the Study
Statement of the Research Problem
Objectives of the Study
Hypotheses of the Study
Scope of the Study
Significance of the Study
CHAPTER TWO: LITERATURE REVIEW
Audit Tenure: Concept And Issues
Meaning of Audit Quality
Audit Quality in Nigeria
Audit Firm Tenure and Auditor Reporting Quality
Empirical Studies on Audit Partner Tenure and Audit Quality
CHAPTER THREE: RESEARCH METHODOLOGY
The Population and Sampling
Sample and Sampling Technique
Sources of Data
Measurement of Variables
Method of Data Analysis
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.2 Descriptive Statistics
4.3 Correlations Analysis
4.4 Test of Hypotheses
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
Summary of Findings
BACKGROUND TO THE STUDY
Audit involves performing procedures to obtain evidence about amounts and disclosures in the financial statements so as to evaluate the appropriateness of accounting estimates made by management (KPMG, 2008). The Audit quality therefore, is a basic ingredient in enhancing the credibility of financial statements to users of accounting information.
Consequently, studies (Fairchild, 2008; Coate, Florence and Kral 2002) note that audits add credibility to the financial information by providing an independent verification of management-provided financial reports, thus reducing investors information risk. Financial reporting credibility is partly reflected in the confidence of users in audited financial reports (Watkins, Hillison, and Morecroft. 2004). As noted by Levitt (2000), the perception of audit quality plays a critical role in maintaining systematic confidence in the integrity of financial reporting. The higher the perceived audit quality, the more credible the financial statements. This will consequently improve user’s confidence in those financial statements. Concerns about audit quality have gained increased ascendancy especially as a result of the spectacular financial reporting scandals in major corporations, such as Enron, WorldCom and other companies.
The aftermath of these scandals has led to the identification of a perceived “expectation gap” in the audit quality as many users of audited financial statements have different expectations of the audit function from what it actually delivers (Beattie, Brandt and Fearnley, 1999). Therefore, there has been a call for sweeping changes in the auditing profession to ensure improved audit quality (Auditing Profession 2002).
However, the non quantitative nature of “audit quality” as a variable has necessitated the existence of a plethora of proxies and indicators for its measurement (Cameran, Prencipe and Trombette 2007). De Angelo (1991) defined audit quality as the probability that an auditor will both discover and truthfully report material errors, misrepresentation and omissions detected in a clients accounting system. This probability depends upon the broad concept of an auditor’s professional conduct, which includes factors as objectivity, due professionalism and conflict of interest. Some studies (Francis 2004, and Geiger & Raghunandan, 2002) measure audit quality in terms of audit or reporting failure, based on the idea that audit quality is inversely related to audit or reporting failures. Other studies (Nagy, 2005; Myers, Omer & Myers, 2003) use earnings as a surrogate for audit quality. The implicit assumption is that high audit quality implies high earnings quality (Johnson, Khurana and Reynolds. 2002). Wallace (1980) notes that a measure of audit quality is the audit’s ability to reduce noise, bias and improve the fineness in accounting information. Researchers have also used estimated discretionary accruals as a surrogate for audit quality (Dechow & Dicheve, 2002; and Krushman, 2003) assuming that higher estimated discretionary accruals reflect lower earnings quality and thus lower audit quality. Knechel and Vanstraelen (2007) note that audit quality is measured by the propensity of the auditor to issue a going concern opinion (GCO) after controlling for other factors that might affect this decision. Finally, Modrich, Jackson and Roebuck (2007) note that true audit quality is when the audit does not result in a type 1 error: a failing company being given an unqualified report or a type 11 error: a non-failing company being given a qualified report.
All of the divergences with regards to the appropriate measure of audit quality may be seen to reflect the need by researches to monitor and provide indices amenable to control so as to make inferences on the audit quality, as the need to monitor necessarily should be preceded by the ability to define. Consequently, studies (Arrunada and Paz-Ares, 1997; Healey and Kim, 2003; Brody and Moscove, 1998) have attempted to identify possible control variables for the state of audit quality. In the light of these studies, auditor tenure has become the focus of much debate. The resulting dilemma is that the firm is faced with the decision of whether to replace its auditors after a period of time or to build and maintain a long-term relationship with the audit firm. The outcome is at polarity with conflicting findings. While some researchers have identified the need and have provided justification for auditor rotation (Healy and Kim, 2003; Ebimobowei and Oyadonghan 2011; Geiger and Raghunandan 2002) others argue on positive effects of tenure on audit quality (Ghosh and Moon, 2005; Adeyemi and Okpala 2011; Defond and Francis, 2005).
This study aims to provide empirical evidence from Nigeria as regard Audit Partner Tenure and Audit Quality.
STATEMENT OF THE RESEARCH PROBLEM
Several studies (Arrunada and Paz-Ares, 1997; Healey and Kim, 2003; Brody and Moscove, 1998; Dopuch, King and Schwartiz, 2001; Myers et al 2003) have attempted to evaluate possible explanatory variables for the state of audit quality. In the light of these studies, auditor tenure has become the focus of much debate. Should a firm replace its auditors on a regular basis, or should the auditor be allowed to build a long-term relationship with the client?
Studies on the impact of auditor tenure on audit quality are at polarity. A considerable number of these studies (Healy and Kim, 2003; AICPA, 1992; Carcello and Nagy, 2004) consider rotation of audit firms as a way of improving audit quality. This is because familiarity with the client has the effect of reducing the fresh point of view auditors have in the early years of engagement. The Sarbanes-Oxley Act of 2002 consolidates this view as it requires rotation of the lead audit partner every five years so that the engagement can be viewed “with fresh and skeptical eyes.” The argument basically is that longer auditor- tenure tends to result in an opportunity cost of auditor independence. Conversely, other studies (Ghosh and Moon,2005; Defond and Francis,2005; Jenkins and Velury,2008) also argue that longer auditor tenure improves audit quality as auditors may need time to gain expertise in the business they audit and acquire client-specific knowledge over time. This implies that audit quality is lower during the early years of the Auditor- Client relationship, and audit quality increases with length of auditor-tenure due to the reduction in information asymmetry between auditor and client (Azizkhani, Monroe and Shailer 2006).
However, in the Nigerian audit setting, the challenge of auditor tenure and client relationship though still budding has not attracted much analytical attention and empirical studies beyond mere anecdotal opinions. Consequently, there has been a dearth of research in this area and inadequate empirical evidence from Nigeria.
Against this backdrop, the following research questions are raised:
Is there relationship between tenure of auditor and audit quality in selected quoted companies?
Is there relationship between board size and audit quality in selected quoted companies?
Is there relationship between Return on Assets and audit quality in selected quoted companies?
OBJECTIVES OF THE STUDY
The objective of this study to empirically examine the relationship between audit partner tenure and audit quality in Nigeria.
The specify objectives are:
To examine the relationship between audit tenure and audit quality in Nigeria.
To determine the relationship between board size and audit quality in Nigeria.
To verify the relationship between Return on Assets and audit quality in Nigeria.
HYPOTHESES OF THE STUDY
The hypotheses formulated for this study are:
Ho: There is no significant relationship between audit tenure and audit quality in Nigeria.
H1: There is a significant relationship between audit tenure and audit quality in Nigeria.
Ho: There is no significant relationship between board size and audit quality in Nigeria.
H1: There is a significant relationship between board size and audit quality in Nigeria.
Ho: There is no relationship between Return on Assets and audit quality in Nigeria.
H1: There is a relationship between Return on Assets and audit quality in Nigeria.
SCOPE OF THE STUDY
This research work is to empirically examine the relationship between audit partner tenure and audit quality in Nigeria. The population of the study is the entire quoted companies in the Nigeria Stock Exchange, while the sample size will be restricted to ten (10) companies of the entire quoted companies using the simple random sampling technique.
The length of period covered by the study was five (5) years (2007 – 2011).
Geographically, the study will be conducted in Benin City, Edo State.
SIGNIFICANCE OF THE STUDY
This study will be important and beneficial to stakeholders of corporate firms on the impact of audit partner tenure and audit quality in Nigeria.
The study will assist the government and regulatory agencies on the proper conduct of audit partner tenure and audit quality in Nigeria.
The study will help to restore the lost confidence of the public as regard the audit tenure and audit quality in Nigeria.
The study will assist both academic and other future researchers in this similar subject matter will find it a useful source of learning and research.
These are the available avenues through which the researcher availed of in sourcing and gathering data. The data for this study will be obtained from secondary source. This includes the annual report/ financial statement of some selected banks, internet, articles and journals
Data collected will be analyzed statistically in this study, hence ordinary least squares regression techniques and other statistical test will be use to analyze the data.
Auditing Profession Act (APA, 2002): Number 26 of 2002. Pretoria: Government Printer.
Beattie, V and Brandt, R and Fearnley S. (1999): Perceptions of auditor independence: UK evidence. Journal of international accounting, Auditing and taxation 8(1):67-107.
Cameran, M. Prencipe, A. and Trombetta, M. (2007): ‘Earnings management, audit tenure and auditor changes: Does mandatory auditor rotation improve audit quality?’ University Bocconi, Milan, Italy and Instituto of Empresa Business School.
Coate, C. J., Florence, R., and Kral, K. l. (2002). Financial statement audits, a game of chicken? Journal of Business Ethics, 41: 1 – 11.
DeAngelo, L. E. (1981). Auditor independence, low-balling and disclosure regulations. Journal of Accounting and Economics, 3 (August), 113-127
Dechow, P. M., and Dichev, I. (2002). The quality of accruals and earnings: The role of accrual estimation errors. The Accounting Review, 77 (1): 35-59.
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