Journal of Applied Finance & Banking

Audit Quality and Earnings Response Coefficients of Quoted Companies in Nigeria

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• Abstract

  This study examines whether Audit Quality has any impact or relationship with earnings response coefficients of companies in Nigeria. Pursuant to this objective, archival data were extracted from annual reports of 57 companies quoted on the Nigerian Stock Exchange (NSE) between 2006 and 2011. Audit Quality was estimated using Audit Firm Size, Audit Fees, Auditor Tenure and Auditor Client Importance. Earnings Response Coefficients model was applied to measure unexpected earnings (UE) as the actual earnings disclosed minus a measure of investors’ prior expectation of earnings scaled by the market price. The result of the test showed that Audit Quality exerts significant impact on the ERC of quoted companies in Nigeria. In order to improve the quality of audit and minimize earnings manipulations in Nigeria, we recommend that professional accountancy bodies, the Financial Reporting Council of Nigeria and the National Assembly should issue authoritative codes for audit quality; companies should improve their earnings quality only through sales growth, cost control and cost reduction strategies; 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.