Corporate management dilemma: the nexus between audit firm industry specialization, audit effort, and audit quality

  • 22 Views
  • 6 Downloads

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License

Type of the article: Research Article

Abstract
To defend its stewardship role to business owners, management often employs audit firm industry specialists to validate the reporting system’s authenticity. While auditing, these specialist auditors may expend additional effort to achieve audit quality. However, the direction of the association between audit firm industry specialization, audit effort, and audit quality is unknown. Therefore, this research analyzes the nexus between audit industry specialization, audit effort, and audit quality in Nigerian banks between 2011 and 2023. Audit firm industry specialization is proxied using a binary variable, where 1 represents an audit firm with a market share above 30 percent and 0 otherwise. Audit effort is proxied by audit report lag, defined as the cumulative number of days from the fiscal year-end to the day the auditor signs off the financial statements. Finally, audit quality is proxied by using a discretionary accrual model. The study utilized the panel vector autoregression model to examine the annual data of 11 banks. The findings in the three models indicate that in the first model, prior audit effort influences the current audit effort (coef = 0.226, p <0.05), while in the second model, both previous experience of specialization (coef = 0.872, p < 0.05) and audit effort (coef = 0.362, p < 0.05) influence the current audit firm industry specialization. Finally, in the third model, audit firm industry specialization drives high audit quality (coef = 0.069, p <0.05). The study concludes that corporate management appointment of specialist audit firms can result in extended audit report lag but with a positive effect on audit quality.

view full abstract hide full abstract
    • Figure 1. Graph of stability condition
    • Figure 2. Impulse response function
    • Table 1. Diagnostic tests
    • Table 2. Panel unit root test
    • Table 3. Descriptive statistics and correlation matrix of the causal relationship between audit firm industry specialization, audit effort, and audit quality
    • Table 4. Lag order selection and estimation
    • Table 5. Baseline panel VAR model
    • Table 6. Granger causality test
    • Table 7. Stability condition analysis
    • Table 8. Forecast-error variance decomposition
    • Table 9. Results of the simultaneous equation model
    • Conceptualization
      Tajudeen John Ayoola
    • Data curation
      Tajudeen John Ayoola, Eghosa Godwin Inneh, Lawrence Ogechukwu Obokoh
    • Formal Analysis
      Tajudeen John Ayoola, Eghosa Godwin Inneh, Lawrence Ogechukwu Obokoh
    • Investigation
      Tajudeen John Ayoola, Eghosa Godwin Inneh
    • Methodology
      Tajudeen John Ayoola, Eghosa Godwin Inneh, Lawrence Ogechukwu Obokoh
    • Project administration
      Tajudeen John Ayoola, Eghosa Godwin Inneh, Lawrence Ogechukwu Obokoh
    • Software
      Tajudeen John Ayoola, Eghosa Godwin Inneh, Lawrence Ogechukwu Obokoh
    • Supervision
      Tajudeen John Ayoola, Lawrence Ogechukwu Obokoh
    • Validation
      Tajudeen John Ayoola, Eghosa Godwin Inneh
    • Visualization
      Tajudeen John Ayoola, Eghosa Godwin Inneh, Lawrence Ogechukwu Obokoh
    • Writing – original draft
      Tajudeen John Ayoola, Eghosa Godwin Inneh, Lawrence Ogechukwu Obokoh
    • Writing – review & editing
      Tajudeen John Ayoola, Eghosa Godwin Inneh, Lawrence Ogechukwu Obokoh
Related Articles

  • The relationship between corporate social responsibility and earnings management: accounting for endogeneity

    Hyunjung Choi , Byungchul ChoiORCID , Jungyoon ByunORCID doi: http://dx.doi.org/10.21511/imfi.15(4).2018.06
    Investment Management and Financial Innovations Volume 15, 2018         Issue #4         pp. 69-84 Views: 5032 Downloads: 626 TO CITE АНОТАЦІЯ

    This study examines the relationship between corporate social responsibility (CSR) and earnings management after controlling for endogeneity of CSR. Using a sample of non-financial firms listed on Korean Securities Market between 2002 and 2010, this study finds that ignoring endogeneity biases the estimated relation between CSR and earnings management. Specifically, the results show that the negative and significant relation between CSR commitment and discretionary accruals reported in the previous studies becomes insignificant. However, the negative and significant relation between CSR commitment and real activities manipulation remains significant even when the endogeneity of CSR commitment is taken into account. Therefore, this study provides evidence that proactive CSR engagement significantly affects firm’s practice of real activities manipulation, while it does not affect its practice of discretionary accruals. These results indicate that CSR commitment leads managers to be more responsible in management of operational activities than in accruals management.

  • The association between foreign directors and opportunistic financial reporting

    JungHwa SuhORCID Researcher ID, Ho-Young LeeORCID Researcher ID, Hansol LeeORCID Researcher ID doi: http://dx.doi.org/10.21511/imfi.15(4).2018.08
    Investment Management and Financial Innovations Volume 15, 2018         Issue #4         pp. 98-112 Views: 3358 Downloads: 307 TO CITE АНОТАЦІЯ

    This study examines the effect of foreign directors in the board of directors on the monitoring function by analyzing the association between foreign directors and opportunistic financial reporting. The authors address this question by examining the effect of the foreign directors in the board on firms’ discretionary accruals and book-tax difference. The researchers analyze by using Korean firm data for the years 2001–2014 as Korea is one of the few countries that nepotism is strong within the board, providing the ideal setting to analyze the effect of foreign directors on the monitoring function of the board. The authors find that foreign directors have a positive effect on the monitoring function of the board, as discretionary accruals and book-tax differences of firms with foreign directors are lower than those without foreign directors. Further, the researchers find that the positive effect of foreign directors on the monitoring function is more pronounced if foreign directors are independent directors or expertise in accounting or finance. Overall, the findings support the view that foreign directors in the board increase the board diversity, which increases the independence of the board and so the monitoring function.

  • The effect of investor sentiment on the means of earnings management

    Sorah ParkORCID doi: http://dx.doi.org/10.21511/imfi.15(1).2018.02
    Investment Management and Financial Innovations Volume 15, 2018         Issue #1         pp. 10-17 Views: 1672 Downloads: 592 TO CITE АНОТАЦІЯ

    Prior research has shown that a firm’s tendency to meet or beat earning targets is greater during bad economic times than good times. The paper extends this line of research by investigating which means of earnings management is used in different states of economy. A sample of non-financial companies listed on Korea Securities Market from 2003 to 2011 is used for empirical tests. The findings of this study are summarized as follows. The magnitude of discretionary accruals is negatively related to investment sentiment, indicating that firms tend to use positive discretionary accruals to manipulate reported income upward when the sentiment is pessimistic. However, the real activity based earnings management is not significantly associated with the state of economy. Collectively, this study contributes to behavioral finance and accounting literature by suggesting that managers use discretionary portion of accruals, but do not change their real operating activities, in order to meet or beat earnings targets in economic downturn.

Download Preview
Close
Investment Management and Financial Innovations
Investment Management and Financial Innovations