THE IMPACT OF BIG 4 AUDIT FIRMS ON THE PERFORMANCE OF LISTED FIRMS IN NIGERIA (A CASE STUDY OF LAGOS STATE)

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Financial report is one of the most useful information sources for investors, lenders and other creditors in making decisions (IASB 2010). Especially, the financial reports audited by the Big-4 audit firms (Deloitte, KPMG, EY and PWC), that are guaranteed by the perennial reputation and commitment to the quality of audit services (Frankel et al. 2011, Hope et al., 2013). The information from the financial report can reflect the financial health and the nature of a business. Using this information the investors can estimate, analyze and decide to invest effectively. In order to ensure the stock-market to operate in a fair, transparent, and effective way the financial report of each firm must be open, explicit, full, true and timely. In which, timeliness is one of the qualitative characteristics that enhance the usefulness of information that is relevant and faithfully represented (IASB, FASB 2010, QC21). Within this study, authors focus on the timeliness aspect in the financial report publishing after the audit, in the other word, the timeliness of audit report. The timeliness of financial report is also considered as one of the efficient competitive factors in business that a firm should pay attention to. It’s clearly that a timely financial report of a firm can attract attention of investors and more or less it creates goodwill of financial report users. There are many researches showing the importance of timeliness in qualifying the financial report. Timeliness in an important tool in financial information as it received attentions from the accounting regulators and listing authorities worldwide (Abdelsalam & Street, 2007). The timeliness of financial report can reduce the risk of insider trading, information leaks, and rumours on the stock market (Owusu-Ansah, 2011). Al-Ajmi (2008) suggests that the information on financial report should be published in short periods of time; otherwise some values may be lost. Especially, for the developing economies (for example, Vietnam) the timely financial report supply of listed companies is very important, because of the fact that sources of information such as newspapers, conferences, specialists in analyzing, forecasting are under the appropriate development level (Karim & Ahmed, 2015).

Because of the above reasons, in recent years, factors affecting the timeliness of financial report have attracted the attention of local and international researchers. These factors have been considered under various conditions, regular factors such as the audit firm for the listed companies (Big 4 audit firms), the size of audit firm, and factors related to firm characteristics management are also widely used. In this paper, the authors study the effect of audit firms (Big 4 audit firms) and the firm performance (measured by accounting values with ROE and ROA indexes) on the timeliness of financial report of firms listed on the stock market (SM) in Nigeria. Our study contributes to the financial reporting and corporate governance literature by providing empirical evidence of the impact of audit firm and firm performance. Our results suggest that the audit firm’s reputation and firm performance measured by ROE index positively affect the performance of listed firms.

1.2 STATEMENT OF PROBLEM

Audit quality plays an important role in maintaining an efficient market environment; an independent quality audit underpins confidence in the credibility and integrity of financial statements which is essential for well functioning markets and enhanced financial performance. External audits performed in accordance with high quality auditing standards can promote the implementation of accounting standards by reporting entities and help ensure that their financial statements are reliable, transparent and useful. Sound audits can help reinforce strong corporate governance, risk management and internal control at firms, thus contributing to (Internal Audits Board, 2011). 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 rooted in the real world and may become challenging in some business environments in Nigeria. It is against this background that this research work is carried out. The purpose of this study therefore is to determine the impact of big 4 audit firms on the performance of listed firms in Nigeria. There have been concerns about audit quality in the present environment, where severe failures have come to light, for example; Enron scandal of 2001; Parmalat in 2003; Cadbury Nigeria Plc in 2006 and Afribank Nigeria Plc in 2009 (Ajani, 2012; Miettinen, 2011). It has been found that the perceived reliability of audited financial information has declined. In contrast, the perceived relevance of audited financial information has increased. The effect of audit quality on performance has recently received attention from researchers in the western world. Studies have shown that big 4 audit firms have an impact on the performance of an organization (Beasley, 1996; Heil, 2012; Miettinen, 2011). While these studies provide evidence from vibrant capital markets, very little research on the relationship between audit quality and the performance of organizations has been conducted in countries where capital markets are less developed. Thus, it is evident that there is a need for research on big 4 audit firm and the performance of listed organizations in Nigeria.

1.3 AIMS OF THE STUDY

The major purpose of this study is to examine the impact of big 4 audit firms on the performance of listed firms in Nigeria. Other general objectives of the study are:

1. To examine how Big 4 status influences the audit fees paid by the listed companies.
2. To examine the financial literacy of audit committee members and its influence on audit quality.
3. To examine the impact of big 4 audit firms on the performance of listed firms in Nigeria.
4. To examine the factors affecting big 4 audit firms and audit quality.
5. To examine the relationship between big 4 audit firms and performance of listed companies in Nigeria.
6. To examine the measures recommended to enhance audit quality in listed firms by big 4 audit firms.

1.4 RESEARCH QUESTIONS

1. How does Big 4 status influence the audit fees paid by the listed companies?
2. How is the financial literacy of audit committee members and its influence on audit quality?
3. What are the impacts of big 4 audit firms on the performance of listed firms in Nigeria?
4. What are the factors affecting big 4 audit firms and audit quality?
5. What is the relationship between big 4 audit firms and performance of listed companies in Nigeria?
6. What are the measures recommended to enhance audit quality in listed firms by big 4 audit firms?

1.5 RESEARCH HYPOTHESES

H₀: Big 4 Auditing firms has no significant impact on the performance of listed companies in Nigeria.

H₁: Big 4 Auditing firms has a significant impact on the performance of listed companies in Nigeria

1.6 SIGNIFICANCE OF THE STUDY

The need for studies on the impact of big 4 audit firms and performance of listed firms is important in a country like Nigeria where organizations are striving to gain credibility among local and global investors. While previous researches have focused on the relationship between audit quality and financial performance in developed countries, there has been relatively little empirical work on this relationship in developing countries. This topic is significant for business management, shareholder and the overall financial community because of the best use of assets comes from internal auditing from its responsibilities especially after financial crisis all over the world that makes internal auditing significant in monitoring and evaluation of management performance. This study keeps track of developments and trends in the field of auditing Whether in the field of professional standards or practices and modern methods and try to apply this Development in Nigeria

1.7    SCOPE OF THE STUDY 

The study is based on the impact of big 4 audit firms on the performance of listed firms in Nigeria, a case study of Lagos state.

1.8 LIMITATION OF STUDY

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).

Time constraint– The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8 DEFINITION OF TERMS

Audit: An audit is a systematic process of objectively obtaining and evaluating the accounts or financial records of a governmental, business, or other entity. Whereas some businesses rely on audits conducted by employees—these are called internal audits— others utilize external or independent auditors to handle this task (some businesses rely on both types of audits in some combination).