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Journal of Critical Reviews THE IMPACT OF AUDIT QUALITY ON THE FINANCIAL

PERFORMANCE OF LISTED COMPANIES NIGERIA

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 Journal of Critical Reviews
ISSN- 2394-5125 Vol 7, Issue 9, 2020

THE IMPACT OF AUDIT QUALITY ON THE FINANCIAL PERFORMANCE OF LISTED

COMPANIES NIGERIA
Abdullahi Bala Ado1, Norfadzilah Rashid2*, Umar Aliyu Mustapha3,
Lateef Saheed Ademola4
1School of Accounting, Finance and Quantitative Studies, Universiti Sultan Zainal Abidin, Malaysia. abdallahkmata@yahoo.com
2*School of Accounting, Finance and Quantitative Studies, Universiti Sultan Zainal Abidin, Malaysia.

nikmfadzilah@unisza.edu.my
3School of Accounting, Finance and Quantitative Studies, Universiti Sultan Zainal Abidin, Malaysia. umaraliyu2011@gmail.com
4School of Accounting, Finance and Quantitative Studies, Universiti Sultan Zainal Abidin, Malaysia. latsad4real@yahoo.com

Received: 07.03.2020 Revised: 09.04.2020 Accepted: 11.05.2020

Abstract
The major corporate failures and other related collapses which occurred around the globe and in Nigeria have raised fears about the
reliability of the financial reporting practices by listed companies in Nigeria. This agitated a number of regulatory and professional
institutions to advocate for reforms that will enhance transparency in financial reporting and thus increase performance as well as audit
quality. Therefore, this study offers proof on the direct influence of audit quality on the financial performance of listed companies
Nigeria. We employ 84 companies listed on the NSE with 756 samples for the period of nine years which is from 2010 to 2018 based on
panel data approach. Furthermore, the research used secondary approach to retrieve data from Thompson Reuters DataStream as well
as the financial statement of the listed companies. This present study employs multiple regression to examine the model. The results
reveal that audit fee shows a positively and insignificant relationship with ROA. This implies that if there is decrease in the amount paid
to auditors for audit services, then financial performance of listed companies in Nigeria will increase. Consistent with the agency theory,
auditor size displays a significant positive relationship with ROA. This positive figure implies that a percentage increase in firms audited
by Big4, then financial performance (ROA) will also increase. Auditor independence is also seen to be positive and statistically
significantly related to the ROA. Finally, auditor independence is found to be more powerful than auditor size on the financial
performance. The result of this research will assist the management as well as the executives of the listed companies in Nigeria to put
more effort on independence of an auditor. The study also propose that the executives should engage the services provided by audit
firms whose integrity and character is unquestionable. It will also assist policy makers and relevant authorities in decision making.
Keywords: Audit Quality, Financial Performance, Independence, Report, Firms.

© 2020 by Advance Scientific Research. This is an open-access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/)
DOI: http://dx.doi.org/10.31838/jcr.07.09.07

INTRODUCTION undependable auditors. The audit market identifies independent

Audit quality act as an essential element in maintaining the
financial performance of the companies; an objective quality
audit forms the basis for confidence on the integrity and
credibility of financial reports which is extremely important for
efficient-functioning markets and also improved the financial
performance. However, external audits carried out in compliance
with superiority auditing principles can strengthen the
application of accounting principles by relevant entities and
assist in ensuring that their financial reports are useful,
transparent and reliable. An independent audits would assist in
reinforcing a strong internal control mechanism, risk
management and corporate governance codes in companies,
thereby contributing to the financial performance (Hassan &
Farouk, 2014).
Financial statement audit is said to be a control mechanism put
in place for safeguarding the shareholder interests and reducing
information asymmetry in other to guarantee that the audited
financial reports are considered free from material distortion
(Irungu, 2013). Furthermore, auditors assist in minimize the
chances of engaging in material misstatements by guaranteeing
that financial reports are developed in compliance with the
stipulated principles. Lesser risks of engaging in misstatements
build up trust in capital markets, which as a result reduces the
cost of capital for companies (Hoti, Ismajli, Ahmeti, & Dërmaku,
2012).
A financial report that is being audited by reputable auditor
notifies the participant in the market that the financial reports
are more credible and reliable than the ones audited by
auditors and size to be of superior quality than rewards paid to
auditors by firms with greater enhancements or decreases in the
share prices accordingly. Taking into account the of independent
an audit as well as the quality plays a significant role in
preserving a well-functioning market environment, that install
confidence in the veracity and reliability of financial reports
required for an efficient markets (Ugwunta, Ugwuanyi, & Ngwa,
2018). The direct effect of audit quality attributes on the financial
performance of firms has been given major concern by
researchers. In this present study, audit quality attributes are
measured by three major components audit fee, auditor size and
audit independence and return on asset (ROA) which is the
measurement for financial performance.
It is within this background that the present study tends to
explore the impact of the audit quality on the financial
performance of listed companies Nigeria. The main objective of
this present study is to examine the extent of association
between the determinants of audit quality with the financial
performance. The study is stirred by the recent concerns about
current state of audit quality practice by firms in Nigeria, where
many companies collapsed due to the absent of well efficient
audit quality practice measures by the firms in Nigeria such as
the case of “Nigerian Enron” popularly known as the Cadbury
Nigeria Plc which happen in 2006, then the Afribank Nigeria Plc,
the Intercontinental Bank Plc, Union Bank Plc, Oceanic Bank Plc
in 2009 and many more. However, it is evident that this has been
a very big issue of great concern to investors in the Nigerian
capital Market. The remaining part of this paper is designed as
follows. The first section of this study provides the introductory

Journal of critical reviews 37

 THE IMPACT OF AUDIT QUALITY ON THE FINANCIAL PERFORMANCE OF LISTED COMPANIES NIGERIA
part of the study, the second section when further to reviews
prior literature and also develops the relevant hypotheses, the
next is the third section which offers the methodology and the
model developed in this study, followed by the discussion of the
study results from the fourth section and finally, it ends with the
fifth section.
LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT
Financial performance of listed companies on the Capital Market
plays a major role, it is also viewed as a platform for pulling
capital as well as reducing the companies cost of capital. A
company that possess a very high-pitched financial performance
will as a matter of fact create a good status with the investors. At
the same time, capital market, managers and also investors rely
on the audited financial reports in other to make decision on the
business efficiency of companies (Thu et al., 2020). Therefore,
higher quality of financial reports will positively impact the
company’s financial performance. Financial performance is said
to be a multi-faceted concept (Santos & Brito, 2012). There are
many approaches adopted by many researchers in the
measurement of financial performance. In in this research, the
financial performance will be measured according to profitability
of the company. Profitability is always being measured as the
proportion of income before tax to shareholder’s equity (Chen &
Chen, 2011). Profitability is being measured in different ways,
such as the Return on assets (ROA), Price Earnings Ratio (PER)
as well as Return on equity (ROE). This study adopted ROA, as
the main measurement of the financial performance.
There is an important part of literature that is devoted to
understanding the issue regarding audit pricing. In the 1980,
Simunic established a demonstrative model of the process in
which the fees paid for audit services are specified, and from that
time several scholars have persistently carried out forth
observed outcomes that display the factors correspond to the
proper approtment of the audit fees (Moutinho, 2012).
Hypothetically, the amount paid by client for audit services to the
audit firm imitates the degree to which audit services the latter
has to accomplish within the auditing circle. Stanley, (2011)
examines the relationship between profitability and observed
auditor remuneration using data collected from US public listed
company engagements for seven years. The result displays a
transposed link between the audit fee and clients’ working
performance while audit quality is jeopardized in the long run.
The more the amount paid as audit fees implies that the auditors
offer more professional auditing services to the clients as against
the payment of lower amount for audit fees. However, several
studies employ audit fees as the proxy for measuring the quality
of audit because of the fact that quality in audit is invisible (Bliss,
Gul, & Majid, 2011). Finally, this study employee audit fees as one
of the measurement for audit quality which is also consistent
with the research carried out by (Bliss et al., 2011; S. U. Hassan &
Farouk, 2014; Moutinho, 2012; Mustapha, Mohd Rashid, Lateef, &
Bala, 2019; Stanley, 2011).
In audit quality literature, the size (big 4 and Non-big 4) of the
audit firm is commonly employed as the measurement of audit
quality. This measurement was also discussed from the different
context of the study, (Rashid, Noor, Mastuki, & Bardai, 2015).
Considering the fact that larger auditors (firms) have a better
reputation compared to smaller auditors and for the reason that
large auditors have more to lose if their clients overstate, large
auditors have more grounds to issue clean reports(DeAngelo,
1981). Capital market responds more positively as soon as firm
switches to a Big4 audit firm. Literature offers evidence of a
higher earning response coefficient (ERC) for the clients of Big4
audit firms when compared with the clients of the non-Big4 audit
firms (Mollik & Bepari, 2014). A number of studies have
examined whether the auditor brand name as proxy by auditor
size (Big 6/5/4), is related with financial performance (Bala,
Amran, & Shaari, 2018). However, DeAngelo (1981) claims that
Journal of critical reviews
the Big 6 auditors tents to deliver more better quality audit than
the non-Big 6 auditors, which is backed by a group of
comprehensive empirical research. Comprix and Huang, (2015)
examine whether the big 4 auditors provides better quality audit
in terms auditor size. They found that the non-big 4 auditors are
less likely to restrain the managers' discreet use of the
discretionary accruals.
Auditors are presumed to be independent at all ramification
during the course of carrying out their audit assignment. This is
importance to ensure the stakeholders interest will be properly
protected, (Dakhlallh, Rashid, Wan Abdullah, & Al Shehab, 2020).
The objectivity of professional auditor guarantees fairness and
also imposes confidence as well as trust in the ultimate users of
the financial reports. DeAngelo (1981), describes independence
of an auditor as the provisional likelihood that the appointed
auditor might exposed any material distortion in financial
reports provided that this material distortion was previously
determined. Chia-Ah and Karlsson, (2010), they stated that the
fears to objectivity are in many cases very important and
therefore challenge the effectiveness of the auditors in executing
an unbiased auditing services. Zureigat, (2011) studied the
impact of financial structure amongst the Jordanian quoted
companies on audit quality. Employing a total sample of 198
firms, using the logistic regression analysis, the outcome from
the study displays a positive and statistically significant
association between the financial structure and the audit quality
attributes. Also, Hassan and Farouk (2014) examine the effect of
audit quality and the financial performance of listed cement
companies in Nigeria. The result from their study revealed that
auditor independence has major effects on performance of listed
cement companies in Nigeria. In light of the above-mentioned,
the following hypothesis are formulated
H1: There is a significant positive association between audit fees
and financial performance of listed companies Nigeria.
H2: There is a significant positive association between auditor
size and financial performance of listed companies Nigeria.
H3: There is a significant positive association between auditor
independence and financial performance of listed companies
Nigeria.
METHODOLOGY
The target population of this present study consist of 169
companies that are listed on the board of Nigerian Stock
Exchange (NSE) as of December 2018. From this population, 56
companies, involving of 504 firm-year observations which are
from the financial services sector have been eliminated, leaving a
total of 113 companies with 1,017 firm-year observations. Also,
18 firms encompassing of 162 firm-year observations (15.93%)
have been eliminated as a result of the fact that they are delisted
by the Nigerian Stock Exchange in 2018. From the outstanding
firms, 11 of the firms with 99 firm-year observations (9.73%) did
not in any way disclose complete information. However, a final
sample of 84 firms, consisting of 756 firm-year observations
(74.34%) were engaged. The period of this present study covers
9 years from (2010 to 2018). The selection of this period is due
to number financial related cases where many companies
collapsed in Nigeria. This present study uses the secondary data
to generate data from the annual financial statement of the
companies that form part of the Nigerian Stock Exchange and
Thomson Reuters DataStream Professional for the studied years.
1) Model Specification and Variable Measurement
The result of the panel data regression analysis represents an
equation that exclusively best forecast a specific dependent
variable from a group of independent variables. This approach is
considered in situation were the independent variables were
found to be associated with each other as well as the dependent
variable. The equation from the regression analysis is said to be
predicted as follow:
38
 THE IMPACT OF AUDIT QUALITY ON THE FINANCIAL PERFORMANCE OF LISTED COMPANIES NIGERIA

Where: ROA = Financial Performance, α 0 = Constant, AUDTF =

ROA = α0 + β1 AUDTF + β2 AUDSZ + β3 AUDIN + β4 Audit Fee, AUDSZ = Auditor Size, AUDIN = Auditor Independence,
FMGRH + β5 FMAGE + ε FMGRH = Firm Growth, FMAGE = Firm Age, and ε it = the Error
term.

Table 1: Summary of Variable Measurement

S/N VARIABLES MEASUREMENTS PROXIES SOURCES
Dependent Variable:
1. Financial Measured as the proportion of income before tax to shareholder’s ROA (Chen & Chen, 2011)
Performance equity

Independent Variables:
Audit Quality:
1. Audit Fee The Logarithmic transformation of Naira-value remunerated to AUDTF (Hanlon, Krishnan, & Mills,
the auditor for the audit services. 2012)

2. Auditor Size A dummy variable, that is coded “1” if the company is audited by a AUDSZ (Inaam, Khmoussi, &
Big4 and “0” otherwise. Fatma, 2012)
3. Auditor The natural log of audit fees is employed as the reverse measure AUDIN Gerayli et al., (2011)
Independence of audit independent. Higher (small) amount of audit fees entails
poor (good) auditor independence
Control Variables:
1. Firm Growth Measured as change in the sales apportioned by previous sales FMGRH (Collins, Pungaliya, & Vijh,
2017; Huang, Lao, &
McPhee, 2017)
2. Firm Age Measured as the Number of years of observation minus of years of FMAGE (Gao & Huang, 2016;
listing Kouaib & Jarboui, 2017)

RESULTS AND DISCUSSION
1) Descriptive Statistics
Table 2 below indicates the outcome for descriptive statistic
taken from the studied variables incorporated into the model.
Table 2 disclosed that the mean value for ROA in Nigerian Listed
Companies is 0.054 and the minimum as well as maximum ROA
are -0.707 and 0.524, respectively. Indicating a positive
performance on the companies. It further indicates that AUDTF
with a mean value 32.063 and the minimum as well as the
maximum values of 0.29 and 1442 paid for audit services by the
Listed companies in Nigeria. Also, AUDSZ has an aggregate mean
value of 0.587 with minimum and the maximum values of 0 and
1. This implies that 50% of listed companies in Nigeria
patronized the services offered by the Big4 auditors.
AUDIN has an aggregate mean value of 2.027 with the minimum
and maximum values of 0.009 and 7.274, respectively. FMGRH
has an aggregate mean value of 0.150 with the minimum and
maximum values of -0.192 and 1.822 respectively. Finally,
FMAGE with an estimated mean value of 22 years with the
minimum and maximum values of 2 to 53 years, correspondingly.

Table 2: Descriptive Statistics

Note: ROA= Return on Asset; AUDTF= Audit Fee; AUDSZ= Auditor Size; AUDIN= Auditor Independence; FMGRH= Firm Growth; FMAGE=
Firm Age

2) Correlation Matrix
According to Pallant (2011), he stated that the correlation
analysis is very important in portraying the direction and
strength of the undeviating association amongst studied
variables. Joseph (2010) also proposed that the correlation value
of 0 indicates no relationship, whereas the correlation 1.0
implies an excellent relationship. This is in consistent with the
revelation of Hair, Black, Babin, Anderson, and Tatham (2010)
which posited that the correlation matrix ought not to exceed
0.70 to guarantee that the multicolinearity problem is not in
existence in this study. The correlation analysis from the table 3
display that the AUDIN possess a positive and statistically
significant correlation with the ROA at 1% level significant.
Therefore, this offers a signal on the course of the association
between AUDIN as well as the ROA in the regression model.
AUDTF and AUDSZ were also discovered to be positively and
statistically significantly associated with ROA also at 1% level
significant each. Table 3 shows FMGRH to be negatively and
analytically significantly associated with the ROA at 5%
significant level. Lastly, FMAGE is also found to be positively and
significantly associated with the ROA at 5% level significant.

Journal of critical reviews 39

 THE IMPACT OF AUDIT QUALITY ON THE FINANCIAL PERFORMANCE OF LISTED COMPANIES NIGERIA

Table 3: Correlation Statistics

ROA AUDTF AUDSZ AUDIN FMGRH FMAGE
ROA 1.000
AUDTF 0.275** 1.000
AUDSZ 0.193** 0.175* 1.000
AUDIN 0.403** 0.614* 0.347** 1.000
FMGRH -0.081* 0.029 0.018 -0.003 1.000
FMAGE 0.071* 0.151* 0.212** 0.325** 0.037 1.000

Note: ROA= Return on Asset; AUDTF= Audit Fee; AUDSZ=
Auditor Size; AUDIN= Auditor Independence; FMGRH= Firm
Growth; FMAGE= Firm Age
**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).
Table 4 below reveals the result of the multicolinearity issue as
tolerance values and variance inflation factor (VIF) values for all
the independent variables is less than 1 and also less than 10
which signifies that the independent variables in this study are
within the normal range. It is accordingly presumed that the
present study is free from multicollinearity.

Table 4: Collinearity Diagnostics

Variables Collinearity Statistics
Tolerance VIF
AUDTF 0.526 1.90
AUDSZ 0.618 1.62
AUDIN 0.867 1.15
FMAGE 0.879 1.14
FMGRH 0.996 1.00
Mean VIF 1.36
Note: AUDTF= Audit Fee; AUDSZ= Auditor Size; AUDIN= Auditor Independence; FMGRH= Firm Growth; FMAGE= Firm Age

3) Regression Results
In the study, the linear regression analysis is being employed as a
statistical procedure to explore the relationships that arise
amongst a particular dependent variable and from a group of
three independent variables involving audit fee, auditor size,
auditor independence and the two control variables which are
the firm growth, firm age for 84 companies listed on the NSE.
Table 5 below discloses the analysis of results for linear
regression model.

Table 5: The Relationship between Return on Asset and Audit Quality

ROA Coef. Std. Err. t-value P> [t] VIF 1/VIF
AUDTF 0.000 0.000 1.12 0.263 1.90 0.526
AUDSZ 0.014 0.007 2.03* 0.043 1.62 0.618
AUDIN 0.023 0.003 8.14*** 0.000 1.15 0.867
FMGRH -0.038 0.016 -2.42** 0.016 1.00 0.996
FMAGE -0.000 0.000 -1.95* 0.052 1.14 0.879
CONS 0.014 0.008 1.82* 0.070
F (5,750) 32.57
Prob > F 0.000
R2 0.178
Adj R2 0.173
Linktest (Hatsq) 0.539
Ovtest (F) 1.91
Prob > F 0.126
Mean VIF 1.36
Number of Obs 756 756 756 756 756 756
Note: ROA= Return on Asset; AUDTF= Audit Fee; AUDSZ= Auditor Size; AUDIN= Auditor Independence;
FMGRH= Firm Growth; FMAGE= Firm Age

As disclosed in Table 5, the R2 from the regression model is
0.178. This further indicates that the model explains 17.84% of
the disparity in financial performance as being measured using
ROA. However, this is being regarded as a satisfactory result. The
STATA (version 14) shows the adjusted R2 value in the table
above. In a situation where the sample is small, R2 value is a
relatively optimistic overestimation of the real population value
(Tabachnick & Fidell, 2007). R2 signifies that 0.178 percent of the
difference from the dependent variable is discussed as a result of
differences in the independent variables within the study. This
also indicates that the deviation in financial performance, as
being measured using ROA, is statistically justified by the
regression equation. The outcomes from Table 5 also exhibit that
the model is statistically significant (p<0.0l) signifying the
strength of the model employed.
Generally, the results in Table 5 revealed that the four variables
from this study were revealed to be statistically significant with
financial performance predictor variable (as being measured
using ROA). AUDTF shows a positively but statistically
insignificant relationship with the ROA. This is seen from table 5
which reveals a regression coefficient as well as a p-value of
>0.000 and 0.263. This display that AUDTF is positively and
statistically insignificantly related to the ROA. This positive figure
denotes that a percentage decrease in the amount paid to
auditors for audit services, then there is possibility for financial
performance of the listed companies in Nigeria will also increase.
The outcome is similar to that discovered in a study by Moutinho,
(2012) who studied the effect of audit fees and the firm
performance. They discovered a positively and statistically
insignificant relationship between audit fee and the ROA.

Journal of critical reviews 40

 THE IMPACT OF AUDIT QUALITY ON THE FINANCIAL PERFORMANCE OF LISTED COMPANIES NIGERIA
AUDSZ display a statistically significant and a positive
relationship with the ROA, having the regression coefficient as
well as p-value of >0.014 as well as 0.043, respectively.
However, this clearly exhibits that AUDSZ is positive and
statistically significantly related to the ROA at 1% significant. The
positive figure entails that a percentage increase in firms audited
by Big4, then financial performance (ROA) would also increase in
the same value. This is in line with the result found in Hassan and
Farouk, (2014), they explore the impact of audit quality and the
financial performance of listed Cement Companies in Nigeria.
Table 5 display that AUDIN is positively and statistically
significantly related to the ROA. This confirms the findings of
(Hassan & Farouk, 2014). FMGRH and FMAGE were also found to
be adversely and statistically significantly associated to the ROA.
This shows that FMGRH and FMAGE have no any significant
relationship with the financial performance of listed companies
in Nigeria.
CONCLUSIONS
The main research objective which is to explore the effect of
Audit Quality on the Financial Performance of the Listed
Companies Nigeria. The study tent to investigates the association
between the three independent variables (Audit Fee, Auditor Size
and the Auditor Independence) with a specific dependent
variable which is return on asset (ROA). Pursuant to the result of
the balanced panel data analysis, two of the studied variables
namely Auditor Size and the Auditor Independence were
established to be positively and significant associated with the
financial performance as being measured using return on asset
(ROA). The other variable AUDTF is found to be positively and
insignificant with ROA. Our findings is similar with that of agency
theory which suggest that the more firms audited by Big4 the
better the financial performance of that companies. It might be
practically difficult to influence the judgement of Big 4 auditors
to go in contradiction of the established rules of auditing
practices due to the fact that they have a reputation to protect.
Furthermore, a positive relationship was found between auditor
independence and the financial performance which entails that
audit services rises depending on the amount paid as audit fees
and also gives rise to more monitoring and commitment on the
part of the auditors, in so doing reducing the tendency of a
business to suffer from losses by way of excessive squandering of
funds by the management and failure to observed the specified
accounting standards. Audit fees do not in any way undermine
auditor objectivity, which is normally being seen to lessen an
auditor’s will to dispute management attempts to take full
benefit of the information irregularities in the agent principal
relationship. On the other hand, the findings further suggest that
fees paid to auditors for audit services offers auditors a great
sense of commitment and the determination in other to make
sure that the firm receives the quality for money by offering the
firm the optimum audit service possible. In view of the foregoing
findings, this study offers profound knowledge to regulators and
policymakers about the significance of audit quality in enhancing
financial performance.
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