International Science Index


Effects of Audit Quality and Corporate Governance on Earnings Management of Quoted Deposit Money Banks in Nigeria


The stakeholders’ pressure on corporate managers to maintain firm’s profitability has created economic incentives for management to engage in earnings management practices. Therefore, this study examines the effects of audit quality and corporate governance on earnings management of quoted deposit money banks (DMBs) in Nigeria. This study specifically investigates the influence of audit tenure, audit fee, board independence, and board size on earnings management of DMBs. Explanatory research design was employed in carrying out the study while secondary data were sourced from the annual reports and accounts of all the 15 quoted DMBs in Nigerian Stock Exchange as at December 31, 2015 for a period of 10 years covering from 2006 to 2015. The data obtained for the study were analyzed using panel regression analysis approach. The findings reveal that board independence has a negative significant effect on earnings management at a 5% level of significance (p=0.002), while audit fee has a positive significant effect on earnings management at a 5% level of significance (p=0.013) and audit tenure has a negative significant effect on earnings management of DMBs at a 5% level of significance (p=0.003). Surprisingly, board size was statistically not significant at a 5% level of significance (p=0.086). The study concludes that high audit quality and sound corporate governance could improve the earnings quality of DMBs. Hence, the study recommends that the authorities saddled with the responsibility of banking supervision in Nigeria such the Securities and Exchange Commission (SEC) and CBN to advise the National Assembly in Nigeria to pass into law the three years professional requirement for audit tenure.

[1] Adeyemi, S. B. & Fagbemi, T. O. (2010). Audit quality, corporate governance and firm characteristics in Nigeria, International Journal of Business and Management, 5 (5), 169 – 179.
[2] Al-Fayoumi, N., Abuzayed, B. & Alexander, D. (2010). “Ownership structure and earnings management in emerging markets: The case of Jordan”. International Research Journal of Finance and Economics, 38, 28-47.
[3] Aliyu, M. D., Musa, A.U., & Zachariah, P. (2015). Impact of audit quality on earnings management of listed deposit money banks in Nigeria. Journal of Accounting and Finance Management, 1(4), 1-16.
[4] Alves, S. M. (2011). The effect of the board structure on earnings management: Evidence from Portugal. Journal of Financial Reporting and Accounting, 9(2), 141-160.
[5] Baltagi, B. H. (2005). Econometric analysis of panel data. John Wiley & Sons Publisher: Chichester.
[6] Becker, C. L., Defond, M. L., Jiambalvo, J. & Subramanyam, K. R. (1998). The effect of audit quality on earnings management. Contemporary Accounting Research, 15(1), 1 –24.
[7] Bello, A. (2010). “Corporate governance and accounting ethics in Nigeria”. Proceedings of the international conference in management (ICM 2011), 1591-1608. Available at SSRN: (Accessed: December 15, 2016).
[8] Bhat, V. N. (1996). “Banks and income smoothing: An empirical analysis”. Applied Financial Economics, 8(1), 78-100.
[9] Ching, C. P., Teh, B. H., San, O. T. & Hoe, H. Y. (2015). The relationship among audit quality, earnings management and financial performance of Malaysian public listed companies. International Journal of Economics and Management, 9(1), 211-229.
[10] DeAngelo, L. E. (1981). Auditor size and audit quality. Journal of Accounting and Economics, 3 (3), 183 – 199.
[11] Dechow, P., Sloan, R. & Sweeney, A. (1995). Causes and consequences of earnings manipulations: An analysis of firm’s subject to enforcement actions by SEC, Contemporary Accounting Research, 13, 1 – 36.
[12] Farouk, M. A. & Hassan, S. U. (2014). Impact of audit quality and financial performance of quoted cement firms in Nigeria. International Journal of Accounting and Taxation, 2(2), 01-22.
[13] Gerayli, M. S., Yanesari, A. M. & Ma’atoofi, A. R. (2011). Impact of audit quality on earnings management: Evidence from Iran. International Research Journal of Finance and Economics, 66, 78-86.
[14] Gujarati, D. N. (2004). Basic econometrics. (4th Edition). London: McGraw-Hill.
[15] Gul, F.A., Yu, S., Fung, K & Jaggi, B. (2009). Earnings quality: some evidence on the role of auditor tenure and auditors’ industry expertise. Journal of Accounting & Economics in Press, 2(4), 65-76.
[16] Healy, P. M., & Wahlen, J. M (1999). A review of the earnings management literature and its implications for standard setting, Accounting Horizons, 13, 365 – 383.
[17] IAASB (2011). Audit quality: An IAASB perspective, International Auditing and Assurance Standards Board, New York.
[18] Investopedia, (2016). What is earnings management? Retrieved from http// on 4/12/2016.
[19] Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360.
[20] Jones, J. (1991). Earnings management during import relief investigations, Journal of Accounting Research, 29 (2), 193 – 228.
[21] Lin, J. W., & Hwang, M.I. (2010). Audit Quality, corporate governance and earnings management: A meta-analysis. International Journal of Auditing. 14, 57-77.
[22] Odia, J.O. (2007). Creative accounting and its implications for financial reporting in Nigeria. Nigeria Journal of Business Administration, 8 (1 & 2), 81-94.
[23] Okolie, A. O. (2014). Audit quality and earnings response coefficients of quoted companies in Nigeria. Journal of Applied Finance and Banking, 4(2), 139-161.
[24] Okolie, A. O. (2014). Accrual – based earnings management, corporate policies and managerial Decisions of Quoted Companies in Nigeria, Research Journal of Finance and Accounting, 5(2), 1 – 14.
[25] Okolie, A. O. & Agboma, D. J. (2008). The impact of environmental dynamics on the accounting profession in Nigeria. Journal of Business Administration and Management., 3(1), 70 – 75.
[26] Okolie, A. O., Izedonmi, F. O., & Enofe, A. O. (2013). Audit quality and accrual – based earnings management of quoted companies in Nigeria. Journal of Economics and Finance, 2(2), 7-16.
[27] Okolie, A. O. & Izedonmi, F. I. O. (2014). The impact of audit quality on the share prices of quoted companies in Nigeria. Research Journal of Finance and Accounting, 5(8), 45-63.
[28] Omoye, A. S. & Eriki, P. O. (2014). Corporate governance determinants of earnings management: Evidence from Nigerian quoted companies. Mediterranean Journal of Social Sciences, 5(23), 553-565.
[29] Peasnell, K. V., Pope, P. F., & Young, S. (2005). “Board monitoring and earnings management: Do outside directors influence abnormal accruals?”. Journal of Business Finance & Accounting, 32, 1311-1346.
[30] Saunders, M., Lewis, P. & Thornhill, A. (2007). Research methods for business students, fourth edition, Prentice Hall.
[31] Schipper, K. (1989). “Earnings Management”. Accounting Horizons, 3, 91-106.
[32] Scott, W. R. (2003). Financial Accounting Theory. (3rd ed.). Toronto: Prentice Hall.
[33] Solabomi, O. A. & Uwuigbe, U. (2013). “Effects of corporate governance on corporate social and environmental disclosure among listed firms in Nigeria”, European Journal of Business and Social Sciences, 2(5), 76-92.
[34] Spohr, J. (2005). Essays on earnings management. Working Paper Swedish School of Economics and Business Administration.
[35] Sun, L. & Rath, S. (2009). An empirical analysis of earnings management in Australia. International Journal of Human and Social Sciences, 4(15), 150- 167.
[36] Uwuigbe, U., Peter, D. S., & Oyeniyi, A. (2014). The effects of corporate governance mechanisms on earnings management of listed firms in Nigeria. Accounting and Management Information Systems, 13(1), 159–174.
[37] Wells, J. (2005). Principles of fraud examination (1st ed), Hboken, NJ: John Wiley and Sons, Inc., New York.
[38] Xie, B., Davidson, W. N., & DaDalt, P. J. (2003). Earnings management and corporate governance: The role of the board and the audit committee. Journal of Corporate Finance, 9(3), 295–316.