1.1 Introduction
Audit quality is capable of influencing corporate performance, through mitigation of risks and significant misstatements. The lower risk of misstatements consequently, increases the confidence of capital market investors in financial reports which also lowers the cost of capital and increases the market valuation of the firm (Heil, 2012). Users of audited financial statements therefore believe that the information it contains are completely free from material bias and so depend on it to allocate scarce economic resources with expectations of commensurate returns. Audit of financial statements reduces information asymmetry in a firm and protects the interests of stakeholders through provision of assurance on the correctness, truthfulness and fairness of the financial statements prepared by management (Alaswad et al., 2016; Tyokoso et al., 2017).
As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Research hypothesis and questions, Limitations of the Study and Definition of technical terms.
1.2 Background of Study
Since the audit forum was established, one of its key aims has been to promote confidence in financial reporting. The statutory audit can reinforce confidence because auditors are expected to provide an external, objective opinion on the preparation and presentation of financial statements. Auditors need to be independent in the opinions they express, while the work they have to do to form their opinions is highly dependent on, and the real world and may become particularly challenging in some national environments.
Financial statements are prepared to provide useful information in making business and economic decisions (Dogan, Coskun & Celik, 2007). This information is important for the users, as they use the statements to assess the financial condition and performance of the related companies (Ahmed & Hossain, 2010). Farouk and Hassan (2014) stated that the financial statement audit is a monitoring mechanism that helps reduce information asymmetry and protect the interests of the various stakeholders by providing reasonable assurance that the management’s financial statements are free from material misstatements. Okaro, Okafor & Ofoegbu (2015) posit that quality audit promotes the credibility of financial statements.
According to International Auditing and Assurance Standards Board (IAASB); there have been a number of attempts to define “audit quality” in the past. However, none has resulted in a definition that has achieved universal recognition and acceptance. Audit quality is, in essence, a complex and multi-related concept.
The processes and tasks that a quality audit involves can be managed using a wide variety of software and self-assessment tools. Some of these relate specially to quality in terms of fitness for purpose and conformance to standards, while others relate to quality costs or, more accurately, to the cost of poor quality. In analyzing quality costs, a cost of quality audit can be applied across any financial institution rather than just to assembly processes.
Audit quality is ultimately about the purpose of the audit. The measure of audit quality is whether the auditor has given an appropriate audit opinion, as evidenced, perhaps, by the absence of audit failures. This view emphasizes audit judgment. It is predicated on the assumption that auditors will detect material misstatements through the application of judgment and process and that they will report them. A measure of audit quality is whether auditors have done all that is required of them.
According to Koh, Choi and Woo (2014) most companies and managers lack the accounting knowledge and resource to create a suitable financial statement. In fact, many banks rely on the auditor to make the financial statement and take advice from the auditor before making any accounting decision. Therefore, auditors indirectly affect the financial statement prior to doing their job (Ilaboya & Ohiokha, 2014). In this circumstance, companies have a high level of reliance on auditors when they make an accounting decision or make a financial statement. A high level of reliance on the auditor implies that the auditor highly affects the quality of the financial statements (Koh, Choi& Woo, 2014). Insufficient or inappropriate audit evidence may lead to wrong calculations and this may affect the quality of the report (Ilaboya & Ohiokha, 2014).
Evans & Parker, (2008) describe auditing as one of the most powerful safety monitoring techniques and ‘an effective way to avoid instance and significant slowing deteriorating conditions’, especially when the auditing focuses not just on compliance but effectiveness.
Financial performance is a subjective measure of how well a firm can use assets from its primary mode of business and generate revenues. It is also used as a general measure of a firm’s overall financial health over a given period of time, and can be used to compare similar firms across the same industry or to compare industries or sectors in aggregation. There are many different ways to measure financial performance, but all measures should be taken in aggregation. Such as revenue from operations, operating income or cash flow from operations can be used, as well as total unit sales. Furthermore, the analyst or investor may wish to look deeper into the financial statements and look for margin growth rates or any declining debt. There are different stakeholders in deposit banks, including trade creditors, public users, investors, employees and management. Each group has its own interest in tracking financial performance of banks. Analysts learn about financial performance from data published also known as annual report.
Banks are economic institutions that facilitate economic growth and development by mobilizing savings from the surplus unit and channeling them to deficit unit for productive investments. They also provide the payment and settlement system and implement monetary policy of government; it is on this strength that Sanusi (2012) considers banks in the financial system as the central nervous system of the economy.
Therefore, in Nigeria where the research was carried out, the activities that was conducted is to know the Effect of Audit Quality on Financial Performance on Nigeria Deposit Banks.
1.3 Statement of Problems
Investigation revealed that the audit failure in the world, especially in Nigeria, has brought great disappointment to the user of financial report. The problem has been traced to long-term of audit firm tenure which has been traced to creative accounting. In Nigeria audit setting, the challenge of audit tenure and audit quality reporting has not attracted much testable study beyond mere anecdotal opinions Mgbame, et al (2012). In view of these studies, auditor tenure has become the focus of much debate. The production of audit quality report is seen to foster confidence in financial reports by the users of those reports. Investors in particular tend to place better trust in financial statements that are audited; as the expected independence of the auditor boots the assurance that important investment decisions can be made on those statements. The increased confidence of these set of financial users tend to attract the inflow of capital which has the long-run effect of creating growth and development in the business environment.
However, lack of efficiency on the part of management could lead to disorganized financial statements. These financial statements ordinarily do not show the true state of affairs and financial position of the deposit banks and hence, could threaten the decisions of the prospective investors. Unfavorable results on investment would reduce the credibility of the financial statements; which would in turn reduce the level of capital flow, thereby de-generating the state of the business environment. The burden therefore rests on the auditors to address these issues through efficient and effective execution of the audit assignment, and the outcome production of a quality report. The study therefore investigates the factors that could affect the quality of the audit assignment, and analyzes the existence and degree of relationships between these factors and the achievement of high audit quality in the Nigeria deposit banks (International Journal of Academic Research in Accounting, Finance and Management Sciences).
1.4 Aim and Objectives of Study
The aim of the study is to ascertain the effects of audit quality on financial performance of deposit banks in the Nigeria. In achieving this aim, the following specific objectives were laid out as follows:
- To determine the effect of audit quality on Return on Assets of deposit banks in Nigeria.
- To ascertain the effect of audit quality on Earnings per Share of deposit banks in Nigeria.
- To determine the effect of audit quality on net profit margin of deposit banks in Nigeria.
- To determine the influence of audit quality on Dividend per Share of deposit banks in Nigeria.
1.5 Research Questions
The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:
- To what extent does audit quality affect Return On Assets of listed deposit banks in Nigeria?
- To what extent does audit quality affect Earnings Per Share of Nigeria banks?
- To what extent does audit quality affect net profit margin on listed deposit banks in Nigeria?
- To what extent is the influence of audit quality on Dividend Per Share on deposit banks in Nigeria?
1.6 Research Hypothesis
In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.
- H01: Audit quality has no significant effect on Return on Assets of deposit banks in Nigeria.
- H02: There is no significant relationship between audit quality and Earnings Per Share of deposit banks in Nigeria
- H03: Audit quality has no significant effect on net profit margin of deposit banks in Nigeria
- H04: Audit quality has no significant effect on dividend per share of deposit banks in Nigeria.
1.7 Significance of Study
This study will enlighten bankers, government, investors and researchers on the effect of audit quality on financial performance of deposit banks in Nigeria. It helps bank operators and officials on what to focus on in order to grow the financial performance of various institutions.
This study also encourages government to develop appropriate capacities and put in place adequate structures to guide and monitor excellent performance and safety of the financial system. It serves as knowledge to researchers on financial analysis and enable the researcher show that return on assets, earnings per share, working capital, net profit margin and dividend per share constitutes major determinants of the financial performance of deposit banks.
The findings of this research guides investors on key parameters to be adequately considered in undertaking investments prepositions in financial institutions.
1.8 Scope of Study
The scope of the research is focused on the Effect of Audit Quality on Financial Performance of Nigeria Deposit Banks and their activities for the period (2005-2014).
The study made use of secondary data. Also this study shall be limited to investigating the relationship between Audit Quality (independent variable) and the dependent variable (Financial Performance).
The study shall cover five (5) quoted banks in the Nigeria stock exchange from a population of twenty (20) banks in Nigeria as at the time of this work. The selected quoted banks under study are: Diamond Bank of Nigeria; Zenith Bank Plc, Guarantee Trust Bank (GTB), Wema Bank PLC and United Bank for Africa (UBA).
1.9 Limitations of the Study
During the course of this study, many things militated against its completion, some of which are:
- Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
- Establishment Policies: Establishment policies posed a serious limitation as most staffs are not ready to release information needed for this project work. There were lots of information needed from the staffs of this establishment to enhance the study which took them time to release or they did not release at all for security purposes, hence the scope was reduced.
- Research material: availability of research material is a major setback to the scope of the study.
- Frequent power failure: This made the researcher append more money on fuel to ensure sustainable power.
- Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
1.10 Operationalization of Variables
Y=f(X)
Y=Dependent variable and
X=Independent variable
Y will represent financial performance of deposit banks.
X will represent audit quality.
Which means Financial Performance is a function of Audit Quality. Financial performance will either increase or decrease depending on the performance of the deposit banks.
Mathematically, it is represented as;
FPDB=f (AQ).
All the sub-variables can be written in small x
X=f (x1, x2, x3, x4)
x1= audit report lag
x2= audit fees
x3= audit tenure
x4= audit firm size
Y=f (y1, y2, y3, y4, y5)
y1= return on assets
y2= earnings per share
y3= net profit margin
y4= dividend per share
y1 (FPDB) = f (x1) ROA————-eqn 1
y2 (FPDB) = f (x2) EPS————–eqn 2
y3 (FPDB) = f(x3) NPM————-eqn 3
y4 (FPDB) = f(x4) DPS————–eqn 4
Where;
ROA means Return on Assets
EPS means Earnings Per Share
NPM means Net Profit Margin
DPS means Dividend Per Share
FPDB means Financial Performance of Deposit Banks
1.11 Operational Definition of Terms
Audit Quality: It is the process of systematic examination of a quality system carried out by an internal or external quality auditor or an audit team. It is an important part of an organization’s quality management.
Financial Performance: It is a subjective measure of how well a firm can use assets from its primary mode of business and generate revenues. This term is also used as a general measure of a firm’s overall financial health over a given period of time, and can be used to compare similar firms across the same industry or industries in aggregation. Return on Assets (ROA): Is a financial ratio that shows the percentage of profit a company or bank earns in relation to its overall resources. It is commonly defined as a net income divided by total assets.
Mathematically;
ROA= Net Income/Total Assets.
Earnings per share (EPS): is the portion of a company’s profit allocated to each share of common stock. It serves as an indicator of a company’s profitability. The balance sheet and income statement are used to find the weighted average number of common shares, dividends paid on preferred stock (if any), and the net income or earnings.
Mathematically; it can be calculated as:
EPS = Net Income – Preferred Dividends/Weighted Average common Shares.
Net Profit Margin: it is the percentage of revenue remaining after all operating expenses, interest, taxes and preferred stock dividends have been deducted from a company’s total revenue.
Mathematically;
Net profit margin (NPM) = Net profit/total revenue
Net profit = total revenue – total expenses
Dividend Per-Share: It is the sum of declared dividends issued by a company for every ordinary share outstanding. The figure is calculated by dividing the total dividends paid out by a business, including interim dividends, over a period of time by the number of outstanding ordinary shares issued.
Mathematically; Dividend per share (DPS) = total dividend/number of ordinary shares outstanding for the period.
