Audit Quality and Accrual – Based Earnings Management of Quoted Companies in Nigeria

Abstract

This study examines the impact/relationship between audit quality and earnings management represented by companies' discretionary accruals manipulations in Nigeria. Archival data were extracted from annual reports of 57 quoted companies in Nigeria between 2006 and 2011. Audit Firm Size, Audit Fees, Auditor Tenure and Audit Client Importance served as audit quality proxies. The amount of Discretionary Accruals (DAC) was used to measure earnings Management. The results showed that audit quality was significant and negatively related to the amount of DAC of quoted companies in Nigeria. It is recommended in this study that professional accountancy bodies, the Financial Reporting Council of Nigeria and the Nigerian National Assembly should issue authoritative audit quality codes in which auditors' tenure should not exceed three years; companies should improve their earnings quality only through sales growth, and cost control strategies. Also companies in Nigeria should present distinct statements of earnings quality while auditors should conduct earnings quality assessment and issue Integrated Audit Quality Assurance Report by adapting or adopting current best practices statutorily backed by earnings monitoring of companies in Nigeria.