Effect of audit attributes on earnings management among listed Deposit Money Banks (DMBs) in Nigeria

Abstract

This study investigates the effect of audit attributes on earnings management among listed Deposit Money Banks (DMBs) in Nigeria, focusing on total audit fees, audit independence, audit firm tenure, and audit firm size. Utilizing a sample of 14 listed DMBs over a seven-year period (2018–2024), the study employs an ex-post facto research design and Ordinary Least Squares (OLS) regression to analyze 98 firm-year observations. Earnings management is measured through discretionary loan loss provisions, derived using a modified Jones model, while audit attributes are proxied by total audit fees (natural logarithm), audit independence (ratio of non-audit to total fees), audit firm tenure (years of engagement), and audit firm size (Big 4 vs. non-Big 4). The findings reveal a significant positive relationship between total audit fees and audit firm tenure with earnings management, suggesting that higher fees and longer tenure may compromise auditor independence, thereby enabling earnings manipulation. Conversely, audit independence and audit firm size exhibit a negative but statistically insignificant relationship with earnings management, indicating that larger, reputable audit firms may enhance audit quality but lack significant impact in this context. Grounded in agency and signaling theories, the study highlights the critical role of audit attributes in mitigating information asymmetry and managerial opportunism. These findings have significant policy implications for regulatory bodies like the Central Bank of Nigeria (CBN) and the Securities and Exchange Commission (SEC), recommending stricter regulations on nonaudit services, mandatory auditor rotation, and the engagement of reputable audit firms to enhance financial reporting quality. The study contributes to the academic discourse by providing empirical evidence specific to Nigeria’s banking sector, addressing gaps in the literature regarding the interplay of audit attributes and earnings management in a developing economy.