Economics and Business

ISSN 2256-0394 (online)

2024, 38, 34–53
https://doi.org/10.7250/eb-2024-0003
Published by RTU Press

INFLUENCE OF AUDIT FIRM ATTRIBUTES ON EARNINGS

MANAGEMENT AND AUDIT QUALITY OF LISTED
NIGERIA MANUFACTURING FIRMS
Adebayo OLAGUNJU1, Ebenezer Foluso OLUWAKAYODE2,
Oluwatimileyin Esther ADENLE3* and Omololu Adex BAMIGBOYE4
1–4
Department of Accounting, Faculty of Management Sciences, Osun State University,
Osogbo, Nigeria
*Corresponding author’s e-mail: [email protected]

Received 16.11.2023; accepted 26.03.2024

Abstract. The influence of audit attributes on earnings management and audit

quality was examined in this study. A causal research design was employed in
this study. The study population comprises all the quoted manufacturing firms
in Nigeria, of which 30 were purposively selected as a sample size from the
manufacturing sector covering a period of 12 years ranging from 2010–2021.
The data utilized for this study were obtained from the annual reports of the
selected firms. Descriptive statistics and panel regression analysis were used to
analyse the data. Audit attributes were measured with audit opinion, audit
switching and audit tenure, whereas the dependent variables were proxy by
discretionary accruals and audit fees. The outcome of the analysis discovered
that audit opinion, audit switching and audit tenure all have negative and
significant relationships with discretionary accrual evidenced by t-statistics
(−2.36, −2.06, −3.24) and p-values of (0.018, 0.004, 0.002) correspondingly.
Audit opinion also has a positive significant connection with audit fees.
Likewise, audit switching and audit tenure have negative and significant
relationships with audit fees, and they are all evidenced by t-statistics of (2.01,
−2.70, −2.80) and p-values of (0.004, 0.007, 0.005), respectively. The study
concludes that audit attributes are important in determining the extent of earnings
management and audit report quality. The study recommends that companies
should ensure that the auditor is not biased in his opinion because this will affect
the quality of the audit report. Audit tenure and audit switching should also be
done as when due.

Keywords: Audit fees, audit opinion, audit quality, discretionary accruals,

earnings quality.

JEL Classification: M420

INTRODUCTION

Earnings quality is described as the inverse of earnings management (EM)

which indicates that increased earnings management results in decreased earnings
quality. Earnings management describes an account of manipulation that usually
©2024 The Authors.
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occurs because of the management ability to deceive investors into reaping some
advantages (Sun, 2012). The ability of the audit report to reveal and detect the extent
of such manipulations indicates the quality of the firm audit. Audit quality pertains
to an auditor’s capacity, prospect, and readiness to identify, report, as well as
disclose any errors or frauds occurring within an accounting system (Triani, 2020).
It encompasses activities aimed at ensuring the likelihood of achieving the pertinent
objective of obtaining reasonable assurance from financial reports that are free from
material misstatements. A high-quality audit report indicates that the audit team has
exercised sound judgment in evaluating the evidence they have gathered. Adeyemi
and Fagbemi (2010) further emphasized in their research that one of the functions
of auditing is to mitigate potential losses resulting from dishonest actions (earnings
management activities) by managers in financial reporting while also reducing
information asymmetry. Ultimately, auditing plays a crucial role in providing
assurance to investors.
Nevertheless, auditors are required to demonstrate professionalism in fulfilling
their responsibilities. The demand for external auditors arises from agency glitches
that stem from the control and separation of ownership. When auditors fail to detect
instances of fraud or employ inadequate audit procedures, it often results in low-
quality audits (Laili, 2021). Additionally, low-quality audits diminish investors'
trust. The widespread occurrence of fraud, earnings management activities, and
financial crimes has led to a decrease in the level of confidence and reliance on
companies' financial statements and overall financial reporting. In their respective
studies, Syamsu et al. (2023) and Abdillah et al. (2019) highlight the influence of
audit traits on audit quality. These audit characteristics encompass various factors,
including education, experience, professional qualifications, auditors'
independence, audit tenure, switching of audit firms, audit fees, timeliness of audit
reports, audit opinions, joint audits, and rotation of audit firms. Each component of
audit characteristics has the potential to influence the quality of an audit. In a study
by Dond et al. (2002), it was noted that potential factors influencing the quality of
audit can be categorized into two groups: demand-related elements (firm
characteristics) and supply-related elements (audit traits), based on circumstantial
evidence. The factors associated with firm characteristics that have the potential to
influence audit quality include firm size, board composition, profitability,
ownership structure, and capital structure, among others. On the other hand, the
factors related to audit characteristics that can affect the quality of an audit include
the auditor's independence, audit opinion, size and expertise in the audit industry,
auditors' reputation, audit tenure, and auditor rotation.
Moreover, in industrialized nations such as the USA, Spain, and the United
Kingdom, the presence of various laws and regulations governing firms makes
high-quality financial reporting a necessity. Palalangan et al. (2019) suggest that
due to past cases of fraud committed by auditors, which resulted in a loss of public
trust in audit firms, significant emphasis is placed on the ability of audit firms to
deliver quality audit reports and the factors determining audit quality. In a study
conducted on selected firms in Spain, González-Díaz et al. (2015) established that
audit quality declines with an extension of audit tenure, particularly after the
completion of the auditor's five-year tenure. However, this contrasts with the results

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obtained from a study conducted in India, which revealed that longer audit tenure
improves the quality of audits among Indian companies (Jadiyappa et al., 2021).
In Nigeria, audit firms have faced penalties for apparent low-quality audit
practices since the demise of numerous prominent banks because of corporate
scandals (Aryan, 2015). In response to these events, the Financial Reporting
Council of Nigeria (FRCN) has implemented various new auditing standards and
regulations. They also maintain an official list of registered accountants and
auditors, which they regularly update. The primary objective of these measures is
to restore public trust in audit firms, which has been eroded by past fraudulent cases.
Additionally, the FRCN is empowered to enforce compliance with these standards
and has the authority to penalize accountants and audit firms found to be in violation
(Okechukwu & Ene, 2023).
According to Arens et al. (2016), the audit quality processes carried out by
auditors primarily aim to protect the clients of audit firms. Therefore, adherence to
auditing standards and quality control procedures by audit firms is crucial to ensure
high-quality audits. Poor audit practices can give rise to various issues, such as
falsified audit reports, non-compliance with audit rotation and audit compliance
rules, lack of auditor independence, and biased judgments by auditors. In their
study, Dabor A. & Dabor E. (2015) found that falsified audit reports were one of
the reasons for bank failures in Nigeria. They observed that while the banks were
not performing well in reality, the auditors declared healthy audit reports, thus
misleading the public. When the auditor liases with the director to conceal earnings
management activities, the audit report quality will be low.
In addition, the quality of an audit is significantly influenced by audit
characteristics, and any deficiencies in these characteristics can lead to a reduction
in audit quality, most of the causes of the deficiencies occur as a result of the
capacity of the auditor to conceal the real state of the firm’s financial report. Several
authors have conducted research on the impact of audit characteristics on audit
quality and earnings management. Studies by authors such as Ali & Aulia (2015),
Augustini et al. (2013), Helmi (2021), Imegi & Oladutire (2018), James & Izein
(2014), Krismiaji & Sumayyah (2023), Martani et al. (2021), Okechukwu & Ene
(2022), Syamsu et al. (2023), and Tobi et al. (2016) have explored this relationship.
While some of these researchers have reported significant results indicating the
influence of audit traits on the quality of audit and earnings management, others
have found no significant effect. The inconsistency and contradiction in the findings
regarding the connection between audit features and audit quality, as well as
earnings management, highlight some gaps in research in this area. It is widely
acknowledged that any alteration, falsification, or bias in an audit report does not
indicate a quality audit and also indicates that earnings management activities have
occurred in the financial report (Krismiaji & Sumayyah, 2023). Some studies
suggesting no relationship between audit characteristics, audit quality and earnings
management may have produced contradictory results due to differences in data
analysis methods, sample sizes, and research design techniques. To obtain reliable
and robust results, this study will employ both discretionary accruals as a measure
of earnings management while audit fees will be used to measure audit quality.
More so, by utilizing both discretionary accruals and audit fees as measures of

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earnings management and audit quality, this study aims to address the gap in
existing research on audit characteristics, audit quality and earnings management.
Previous studies on this topic have typically relied on audit quality without
considering the effect earnings management has on audit attributes. Discretionary
accrual can also be used as a measure of audit quality. This study focused on looking
at the influence of audit attributes focusing on the earnings management and audit
quality angles. This study focuses on both, with only a limited number of
researchers employing both discretionary accruals and audit fees simultaneously.
Therefore, the inclusion of both measures in this study will contribute to filling this
gap and provide a more comprehensive understanding of the connection between
audit characteristics, audit quality and earnings management.
Moreover, In Nigeria, there has been a limited number of reviews exploring the
effect of audit traits on earnings management and audit quality, specifically in non-
financial firms, as most of the research in this area has predominantly focused on
the banking industry. This study intends to contribute to the existing body of
knowledge by examining the impact of audit characteristics on the quality of audit
or on earnings management in listed non-financial firms in Nigeria focusing
specifically on the manufacturing sector. The audit characteristics under
investigation include audit opinion, switching, and tenure. The quality of the audit,
on the other hand, will be measured using audit fees, whereas earnings management
will be proxy by discretionary accruals. The outcomes of this study will have
practical implications for audit practitioners, non-financial firms, the government,
and researchers alike.

Objectives of the Study

Aligned with the study's context, this research purposes to examine the effect
of audit attributes (audit opinion, audit switching and audit tenure) on earnings
management and audit quality of listed non-financial firms. The specific objectives
are:
i. to examine the influence of audit attributes on discretionary accruals of
quoted Nigeria manufacturing firms;
ii. to investigate the connection between audit attributes on audit fees of quoted
Nigeria manufacturing firms.
Research Hypotheses
H1: There is no connection between audit attributes and discretionary accrual of
quoted Nigeria manufacturing firms.
H2: There is no relationship between audit attributes and audit fees of quoted
Nigeria manufacturing firms.

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1. LITERATURE REVIEW

1.1. Conceptual Review

Audit Attributes
According to Syamsu et al. (2023), auditors with extensive knowledge,
professional expertise, and educational background are most likely to ensure high
audit quality (AQ). Defond (2002) also supports this notion, as his research
indicates that both audit attributes and firm characteristics play a significant role in
determining AQ. Audit firm characteristics encompass factors such as auditor
independence, audit tenure, joint audit, audit opinion, audit firm size and audit
switching or rotation. In this study, audit opinion, audit switching, and audit tenure
were employed as proxies for audit attributes. Other researchers, such as Kautsar &
Bety (2023) and Okechukwu & Ene (2022), have also utilized audit rotation,
opinion and tenure as measures for audit attributes in their studies.

Audit Opinion
An audit, typically conducted by an independent external auditor, holds
significant importance, and stakeholders should respond effectively to the auditor's
opinion (Krismiaji & Sumayyah, 2023). The audit opinion serves as a crucial
indicator of audit quality. It is a formal statement provided by the auditor in a
written report, expressing their professional judgment regarding the fairness and
accuracy of a company's financial statements. Limited research has focused on audit
opinion within the field of auditing, but one notable study by Krismiaji and
Sumayyah (2023) revealed a positive and noteworthy connection between audit
opinion and earnings management (EM). A high-quality audit opinion offers
reasonable assurance that the financial reports are free from material misstatements,
while a low-quality audit suggests that it was not conducted in agreement with
professional auditing principles or that the financial statements contain significant
inaccuracies.

Audit Switching
Audit switching refers to the practice of appointing an audit firm for a fixed
duration, typically around 5 years, after which the firm must relinquish its position.
The purpose of audit switching is twofold. Firstly, it aims to reduce the undue
influence and control that directors may exert over auditors by threatening to
replace them if their demands are not met. Secondly, it seeks to prevent close
relationships between auditors and clients, which could potentially lead to
accounting misstatements and fraudulent activities. Firth et al. (2012) suggested
that companies subjected to mandatory audit partner rotation have the tendency to
receive modified audit opinions compared to those without rotation, particularly in
developing areas. They find that this effect is limited to specific geographical
contexts. Kalanjati et al. (2019) support this perspective, asserting that the number
of audit partner rotations is positively connected with AQ and also helps to reduce
EM activities. However, Paputungan & Kaluge (2018) present a contrasting view,
suggesting that audit switching does not impact audit quality.

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Audit Tenure
Audit tenure denotes the length of the period of auditor-client association
between an external auditor and a firm. It is a factor that influences audit quality.
According to Andriani et al. (2020a), audit quality is typically enhanced with longer
audit tenure. A study conducted by Jadiyappa et al. (2021) in India also supports
this finding, demonstrating that lengthier audit tenure is linked with a higher level
of improvement in audit quality. Okechukwu & Ene (2022), in their study on the
consumer goods sector in Nigeria, similarly confirm that audit tenure has a
significant and positive connection with AQ. The more familiar the auditor
becomes with the company, the greater the improvement in AQ. On the other hand,
Abedalqader et al. (2011) and Gonzalez-Diaz et al. (2015) suggest that AQ tends to
decline when audit tenure extends beyond a certain period, particularly due to
discretionary accruals. The study conducted by Gonzalez-Diaz et al. (2015) on
NGOs in Spain reveals that this decline is observed after the initial 5 years of quality
improvement.

Audit Quality
Coffie et al. (2018) opined that AQ is crucial to stakeholders and it ensures that
the financial statement is credible enough. Deffond & Zhang (2014) opined that
there are various measures used by researchers to measure the quality of audits; the
measures are classified into output-based audit quality measures (direct measure)
and the input-based audit quality measures (indirect measure). The output-based
measure uses the discretionary accrual measure, which doubles as a measure of both
AQ and EM, while the input-based measure uses audit fees (Rajgopal et al., 2018).
Some of the researchers who have reviewed the effect of audit firm characteristics
are Detzen & Gold (2021) and Wakil et al. (2020).

Audit Attributes and Earnings Management

The relationship between audit traits and EM is vital because audit quality can
influence the likelihood of discretionary accruals occurring. Discretionary accruals
refer to estimated amounts recorded in a company's financial statements that result
from management's discretionary choices in areas such as accounting estimates,
policies, and judgments. High-quality audits help reduce the probability of material
misstatements in financial reports (Doyle et al., 2007). Some empirical evidence
indicates a negative and noteworthy relationship between audit characteristics and
discretionary accruals. Additionally, firms that undergo high-quality audits, as
measured by factors such as audit tenure, audit opinion, and audit switching, tend
to exhibit subordinate levels of discretionary accruals (DA) compared to those with
lower-quality audits (Lobo & Zhou, 2001). Some of the researchers who have
utilized discretionary accruals as a proxy for earnings management include
Krismiaji & Sumayyah (2023), while Okechukwu & Ene (2022), Hamideh et al.
(2013), and Widyaningsih et al. (2019) used it as a measure of AQ.

Audit Attributes and Audit Quality

This study utilized audit fees as a measure of audit quality. Audit fees are the
compensation paid to auditors for their services, which involve expressing a

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judgement on the financial reports prepared by the management. According to

Raigopal et al. (2021), higher audit fees can potentially compromise auditor
independence and may also discourage auditors from ending the engagement after
the agreed-upon five-year period. The level of audit fees can also impact audit
switching and audit opinions. This perspective is supported by the findings of
Eshleman & Guo (2013), as well as the studies conducted by Amrulloh & Amalia
(2020), and Prabhawanti & Widhiyani (2018), all of which indicate that higher audit
fees are related with better and higher-quality audits. Other researchers, such as
Abdul-Rahman et al. (2017), and Ibrahim & Ali (2018), have also identified a
significant connection between audit characteristics and audit fees (reflecting AQ).
Empirical reviews have shown mixed results, with some research showing a
positive connection between audit fees and audit tenure, while others observe a
negative connection between audit fees and audit switching. This may be ascribed
to increased competition among audit firms seeking to attract new clients, leading
to lower fees for clients who switch auditors (Gul et al., 2010). Ultimately, higher
audit fees can influence the auditors' opinions.

1.2. Theoretical Framework

To gain a more comprehensive and expansive comprehension of the concept of
AQ and EM concepts, it is essential to establish a connection between the study and
an existing theory. Nonetheless, the underpinning theories are as follows.

Agency Theory
The concept of agency theory proposes that the presence of agency costs, which
result from conflicting interests between the principal and the agent, stems from the
segregation of control and ownership within a firm (Adenle et al., 2022). This
theory was proposed by Stephen Ross and Barry Mitnick in 1973, agency theory
offers a context for understanding the dynamics of audits. Jensen and Meckling
(1976) opined that audits serve as a means to enhance the trust of financial statement
users, particularly shareholders, in the dependability of the financial evidence
produced by companies. This is achieved through the mitigation of information
asymmetry arising from earnings management practices (Imen & Anis, 2021).
Information asymmetry is one of the factors that give rise to agency costs, reflecting
the unequal access to information between the principal and the agents, who are
typically the managers inside the organization (Olagunju et al., 2021). It is crucial
for firms to ensure that conflicts of interest between managers and auditors are
minimized, as such conflicts can compromise the objectivity of the auditor and
hinder their ability to provide impartial judgments or issue valid audit opinions for
the firm.

The Stakeholder Theory

This theory, initially proposed by Edward Freeman in 1984, challenges the
notion of shareholder wealth maximization as the primary objective of a firm and
instead advocates for stakeholder wealth maximization. To enhance audit quality,
the principal is inclined to engage a larger audit firm (Kautsar & Bety, 2023).
Stakeholder theory emerged as a response to criticisms and shortcomings of the

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shareholder theory, which predominantly prioritized the interests of shareholders

(Olorede et al., 2022). The independence of auditors holds great significance within
the stakeholder theory, particularly in terms of the reliance placed on audit opinions
by stakeholders. The audit opinion plays a vital role in the policymaking procedure.
If an auditor lacks independence, the identification of discretionary accruals
becomes compromised, leading to misleading audit opinions. Consequently,
investors may incur financial losses from their investments, undermining the
external auditor's fiduciary responsibility (Okechukwu & Ene, 2022).

1.3. Empirical Review

Audit Attributes and Earnings Management
Krismiaji & Sumayyah (2023) examined the effects of audit traits on audit
quality and the interactive effect of the association between audit opinions and EM
of Indonesian firms during the period of 2016–2020. A generalized least squares
regression model was used to analyze the data. The outcome of the study revealed
that the opinions of auditors were positively related to EM. It also showed that audit
quality has an interactive negative significant influence on EM and audit opinion.
Also, Jiang et al. (2019) reviewed the influence of Big N auditors and audit
quality: New evidence from quasi- experiments in the United States quasi-sector
between the years 1974 and 2000. The study utilized the ordinary least squares
method of analysis; the outcome of the study revealed discretionary accruals and
financial statement discrepancy scores, which will improve the switching of audit
firms.
The study of Hamideh et al., (2013) investigated the connection between audit
attributes and AQ of 91 quoted Iranian firms ranging in the period of 2007 to 2011.
The study employed a panel data approach. From the study, audit tenure, switching,
audit size, and audit expertise have noteworthy influence on discretionary accrual.

Audit Attributes and Audit Quality

Salman & Setyaningrum (2023) reviewed the influence of audit attributes on
the AQ of 267 listed Indonesian firms from 2016 to 2020. Logic regression analysis
was used to analyse the data gathered for this study. The outcome of the study
revealed that audit firm size and audit period have a positive, significant effect on
AQ, whereas audit switching does not have any effect on AQ.
Okechukwu & Ene (2022) examined the length to which auditor’s
independence, audit tenure and audit rotation affect the AQ of quoted consumer
goods companies in Nigeria. An ex-post facto research design was used for the
study. Also, 8 out of 20 consumer goods firms listed on the Nigerian Stock
Exchange were purposively sampled for this study. The period of study ranges from
2012–2021. The outcome of the result obtained from the multiple regression
analysis method utilized for this study revealed that audit rotation has a positive and
significant effect on AQ, whereas audit tenure indicates the absence of a significant
connection with AQ.
Hussein et al. (2020) reviewed the impact of audit team characteristics on AQ
in Libya that were professed to have an effect on AQ. A survey approach was used
in the study. The survey was conducted on 251 external Chartered firm auditors in

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Libya. Multiple regression analysis was used to analyze the data gathered for the
purpose of the study. From the study, audit features are positively and significantly
associated with AQ.
Babatolu et al. (2016) reviewed the influence of audit attributes on the AQ of 7
purposively selected Nigerian banks. The study utilized the ordinary least square
regression method. The findings indicate that a positive significant relationship
exists between the audit firm rotation and AQ, while a negative significant
connection exists between audit tenure and AQ. Firm size and leverage also have
positive and negative strong correlations with AQ correspondingly.

2. METHODOLOGY

This study employed a causal research design to fulfil its research objectives.
To gather the required datum, secondary data was collected from the financial
statements and published annual reports of selected non-financial firms, as well as
from the Nigerian Exchange Group (NGX) Fact-book. The population of the study
comprises all the quoted manufacturing on the NGX. A purposive sampling
technique was utilised to select 30 non-financial firms as a sample size from the
Nigeria manufacturing sector, covering a 12-year period from 2010 to 2021. The
30 manufacturing firms were selected based on the availability of data for the
12-year period. The manufacturing sector was selected because it is one of the most
vibrant sectors of the Nigerian economy. The sampling technique utilized was
random sampling. In order to achieve the specified objectives, both inferential and
descriptive statistics were employed in this research. The inferential statistics
included correlation analysis and panel regression analysis.

Table 1. Classification of manufacturing firms in Nigeria

S/n Sector Sample Percentage

1. Consumer goods 10 33.3
2. Industrial sector 8 26.7
3. Natural resources 3 10
4. Conglomerate 3 10
5. Healthcare 2 6.7
6. Agricultural 4 13.3
Total 30 100

2.1. Measurement of Variables

Dependent Variables
Audit fees (input-based audit quality measure) and discretionary accruals
(output-based audit quality measure) were used to proxy audit quality. Audit fees
are measured as the natural log of the audit fees paid by each firm (Ibrahim & Ali,
2018). Whereas discretionary accrual is measured with derivatives. While
measuring discretionary accrual, Kothari et al. (2005) argued for the need to include
the first lag of the return on asset (ROA) in the adapted Jones model given as:

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𝑇𝑇𝑇𝑇𝑖𝑖𝑖𝑖 1 ∆𝑅𝑅𝑅𝑅𝑅𝑅𝑖𝑖𝑖𝑖 − ∆𝑅𝑅𝑅𝑅𝑅𝑅𝑖𝑖𝑖𝑖 𝑃𝑃𝑃𝑃𝑃𝑃𝑖𝑖𝑖𝑖

= δ1 � � + δ2 � � + δ3 � � + 𝑅𝑅𝑅𝑅𝑅𝑅𝑖𝑖𝑖𝑖−1
𝐴𝐴𝑡𝑡−1 𝐴𝐴𝑡𝑡−1 𝐴𝐴𝑡𝑡−1 𝐴𝐴𝑡𝑡−1
+ μ𝑖𝑖𝑖𝑖 . (1)
The total accrual is obtained as:
𝑇𝑇𝑇𝑇𝑖𝑖𝑖𝑖 = 𝑁𝑁𝑁𝑁𝑖𝑖𝑖𝑖 − 𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖𝑖𝑖 , (2)
where
𝑇𝑇𝑇𝑇𝑖𝑖𝑖𝑖 – total accrual of Firm i in year t;
𝐴𝐴𝑡𝑡−1 – the first lag of total asset of Firm i in year t;
∆𝑅𝑅𝑅𝑅𝑅𝑅𝑖𝑖𝑖𝑖 – difference between contemporaneous revenue and previous year revenue
for Firm i;
∆𝑅𝑅𝑅𝑅𝑅𝑅𝑖𝑖𝑖𝑖 – difference between contemporaneous account receivables and previous
year account receivables for Firm i;
𝑃𝑃𝑃𝑃𝑃𝑃𝑖𝑖𝑖𝑖 PPE of Firm i at time t;
μ𝑖𝑖𝑖𝑖 – the residual of the model;
δ1 , δ2 , and δ3 – the parameters of the model;
𝑁𝑁𝑁𝑁𝑖𝑖𝑖𝑖 – net income of Firm i at time t;
𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖𝑖𝑖 – net cash flow of Firm i from operation at time t;
𝑅𝑅𝑅𝑅𝑅𝑅𝑖𝑖𝑖𝑖−1– immediate past year return on assets.
Independent Variables
The characteristics of the audit were represented by three factors: audit opinion,
audit switching, and audit tenure. The audit opinion was evaluated using a binary
variable. If a company’s financial statements received a qualified opinion or
disclaimer (modified opinion), the variable was allotted a value of 0. Conversely, if
the firm accepted an unqualified opinion, the variable was assigned a value of 1
(Krismiaji & Sumayyah, 2023). Audit tenure was determined by the extent of the
auditor-client affiliation. If the relationship lasted for three years or less, the variable
was assigned a value of 1. Otherwise, it was assigned a value of 0 (Martani et al.,
2021). Audit switching was represented by a dummy variable, where a value of 1
indicated that the client firm had changed its audit firm, while a value of 0 indicated
no such change. Additionally, two control variables were included: board
independence and firm size. Board independence was measured as the percentage
of non-executive directors out of the total number of directors (Bakare, 2019), while
firm size was estimated as the natural logarithm of total assets (Olagunju et al.,
2021).

2.2. Model Specification

Model 1 represents the regression equation utilised in this study:

Model 1: Audit Attributes and Discretionary Accrual

𝐷𝐷𝐷𝐷𝐷𝐷𝑖𝑖𝑖𝑖 = β0 + β1 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝑖𝑖𝑖𝑖 + β2 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝑖𝑖𝑖𝑖 + β3 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝑖𝑖𝑖𝑖 + β4 𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝑖𝑖𝑖𝑖 +
β5 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝑖𝑖𝑖𝑖 + μ𝑖𝑖𝑖𝑖 (3)

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Model 2: Audit Characteristics and Audit Fees

𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝑖𝑖𝑖𝑖 = β0 + β1 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝑖𝑖𝑖𝑖 + β2 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝑖𝑖𝑖𝑖 + β3 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝑖𝑖𝑖𝑖 + β4 𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝑖𝑖𝑖𝑖
+ β5 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝑖𝑖𝑖𝑖 + μ𝑖𝑖𝑖𝑖 (4)

An explanation of the variables is as follows:

DAR – Discretionary Accrual;
AUDOP – Audit Opinion;
AUDSWT – Audit Switching;
AUDTEN – Audit Tenure;
BIND – Board Independence;
FSIZE – Firm Size;
AUDFE – Audit Fees;
β0 – constant parameter;
β0 − β5 − Regression coefficient of independent and control variables;
it – time coefficient;
μ – error term.

3. RESULTS

Table 2 reveals that the mean, median, stand dev., max and min. values are
0.295, 0.096, 0.726, 3.994, and −2.036, respectively, for discretionary accruals,
whereas audit fees have a mean, median, stand. dev., max and min values of −0.036,
−0.052, 0.201, 0.735, and −0.809, correspondingly. The dependent variables audit
opinion and audit switching has a mean, median stand. dev, max and min values of
0.0306, 0.172, 0, 1, 0 and 0.119, 0, 0.324, 1, 0, respectively. Similarly, audit tenure
also has a mean, median, max and min values of 0.758, 1, 1, 0. The board size and
firm size mean, median, max and min are 68.153, 70.5, 93.33, 25, and 0.624, 7.348,
11.572, 5.127, correspondingly.

Table 2. Descriptive Statistics

STATS AUDFE DAR AUDOP AUDSW AUDTEN BIND FS

Mean 0.295 –0.036 0.0306 0.119 0.758 68.153 0.624
Median 0.096 –0.052 0 0 1 70.5 7.348
Max 3.994 0.735 1 1 1 93.33 11.572
Min −2.036 –0.809 0 0 0 25 5.127
Stan. DV 0.726 0.201 0.172 0.324 0.429 13.14 1.435
Skewness 3.912 0.548 5.455 2.3468 −1.206 −0.68 1.095
Kurtosis 19.577 6.338 30.758 6.508 2.456 3.186 3.812
N 360 360 360 360 360 360 360
Source: Authors’ Computation, 2023

All the variables in this study displayed positive skewness, revealing that their
distribution was skewed to the right except for audit tenure and board independence
that has negative skewness. The kurtosis analysis also revealed that all the variables
kurtosis values exceed three except audit tenure; this implies that only audit tenure
had a platykurtic distribution.

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Correlation Analysis

Table 3. Estimated Matrix of Correlations

Variables AUDFE DAR AUDOP AUDS AUDTEN BIND FS

AUDFE 1.000
DER 0.023 1.000
AUDOP 0.205* −0.042 1.000
AUDS −0.058 0.0418 0.183* 1.000
AUDTEN −0.130 –0.117* −0.239 −0.512* 1.000
BIND 0.191* 0.126* 0.054 0.0561 –0.056 1.000
FS −0.664* 0.051 0.050 0.039 0.068 0.039 1.000
Source: Author’s Computation, 2023

The outcome of the correlation analysis discovered that audit fees have a very
weak correlation of 0.023 with DAR, audit opinion also has a weak positive
correlation of 0.205 with audit fees while it also has a negative correlation with
DAR evidence with a co-efficient of −0.042. Audit switching has a weak negative
connection with audit fees and a weak positive correlation with discretionary
accruals support with coefficients values of −0.058 and 0.0418, respectively. Also,
audit tenure has a weak and negative correlation with both audit fees and
discretionary accruals with values of −0.130 and −0.117, respectively. In contrary,
board independence has a weak and positive connection with both audit fees and
discretionary accrual. However, firm size has a moderate correlation of −0.664 and
weak association of 0.051 with audit fees and discretionary accruals, respectively.

Diagnostics Tests Analysis

Table 4. Estimated Variance Inflation

Estimated variance inflation factor for Objective 1

VIF 1/VIF
AUDOP 1.07 0.7124
AUDSW 1.37 0.732
AUDTEN 1.40 0.935
BIND 1.02 0.979
FS 1.02 0.983
MEAN VIF 1.18
Source: Author’s Computation, 2023

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The pre-estimation diagnostic test for multi-collinearity shows an estimated

value with the highest VIF of 1.40 recorded by audit tenure. Both the VIF and 1/VIF
values are below 10 and 1, respectively; this indicates an absence of multi-
collinearity amongst the explanatory variables.

Table 5. Post-Estimation Test Outcomes

Diagnostic test Type of testP-value Remarks

Absence of
Heteroscedasticity Breusch–Pagan 0.5202
heteroscedasticity
Panel regression is
F-tests F-tests 0.000
preferred to pooled OLS
Source: Author’s Computation, 2023

Hypotheses testing

H1: There is no connection between audit characteristics and discretionary accrual

of listed non-financial firms

Table 6. Test of Hypothesis 1

Variables Coefficient Std. error T-statistics Prob.

C 0.107 0.085 −1.25 0.210
AUDOP 0.148 0.063 −2.36 0.018
AUDSW −0.226 0.038 −2.06 0.004
AUDTEN 0.0021 0.0008 −3.14 0.002
BIND 0.002 0.0008 2.62 0.009
FS 0.009 0.007 0.12 0.906
R-square 0.545
F-statistics 4.08
Prob > F 0.0013
Source: Author’s Computation, 2023

The first hypothesis was tested, and the results showed that audit characteristics
account for 54.5 % of the variation in discretionary accruals (DAR), indicating that
other variables not included in the model explain 45.5 % of the variation. The
model's fitness was evaluated using the F-statistics of 4.08 and a p-value of 0.013.
Furthermore, the relationship between audit opinion and audit switching with
discretionary accruals was found to be negative and significant. This was supported
by the t-statistics and p-values of −2.36, 0.018 and −2.06, 0.004, respectively. By
these the null hypothesis is rejected, whereas the alternate hypothesis showing that
significant connection exists is accepted.
Additionally, audit tenure was established to have a negative and noteworthy
relationship with discretionary accruals, whereas board independence had a positive
and significant relationship. The t-statistics and p-values were −3.14 and 0.002 for
audit tenure, and 2.62 and 0.009 for board independence, respectively. These
findings suggest that the quality of audits tends to decline when the auditor-client

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relationship extends beyond a certain period, particularly due to discretionary

accruals. Furthermore, the quality of board independence can influence the AQ of
the selected Nigerian manufacturing firms. On the other hand, firm size fails to
have significant effect on EM, as indicated by the t-statistic of 0.12 and a p-value
of 0.906.

H2: There is no relationship between audit attributes and audit fees of listed non-
financial firms.

Table 7. Test of Hypothesis 2

Variables Coefficient Std. error T-statistics Prob.

C 1.554 0.305 5.10 0.000
AUDOP 0.196 0.221 2.01 0.004
AUDSW −0.359 0.133 −2.70 0.007
AUDTEN −0.285 0.102 −2.80 0.005
BIND 0.0017 0.003 −0.60 0.548
FS 0.117 0.026 −4.50 0.000
R-square 0.57
F-statistics 6.64
Prob > F 0.000
Source: Author’s Computation, 2023.

The testing of H2 resulted in an R-square value of 57 %, indicating that 57 %

of the difference in audit fees is expounded by audit attributes. However, 43 % of
the variation is attributed to other variables not included in the model. The model's
fitness was evaluated using the F-statistic of 6.64 and a p-value of 0.000.
Furthermore, the study found that audit opinion has a positive and significant
relationship with audit fees, as evidenced by the t-statistics of 2.01 and a p-value of
0.004. On the other hand, audit switching and audit tenure were found to have
negative and significant relationships with audit fees. The t-statistics for audit
switching and audit tenure were −2.70 and −2.80, with corresponding p-values of
0.007 and 0.005. These results suggest that the hypothesis stating that there is no
significant connection between audit attributes and audit fees should be rejected. It
is evident that audit opinion, audit switching, and audit tenure have a noteworthy
influence on the audit fees of Nigerian manufacturing firms. Moreover, board
independence was found to have a t-statistic of −0.60 and a p-value of 0.548,
indicating that it does not have a noteworthy impact on audit fees. Conversely, the
firm size was found to have a negative and significant influence on audit fees,
supported by a t-statistics of −4.50 and a p-value of 0.000.

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4. DISCUSSIONS

Relationships between audit attributes (audit opinion, audit switching and

audit tenure) and discretionary accruals of quoted Nigerian manufacturing
firms.
AQ holds great importance for stakeholders as it ensures that firms have
trustworthy financial statements. Discretionary accruals serve as a measure of EM,
capturing activities in which auditors and directors manipulate earnings by
adjusting transactions in line with principles, standards, and regulations. The
outcomes of this study demonstrate a significant connection between audit
characteristics, represented by audit opinion, audit switching and audit tenure, and
AQ as measured by discretionary accruals. This relationship is supported by t-
statistics of −2.36, −2.06, −3.14 and corresponding p-values of 0.018, 0.004, and
0.002, respectively. There is a significant negative connection between audit
opinion, audit switching, and discretionary accruals. This indicates that when
auditors provide higher-quality audit opinions, managers or directors are less able
to involve in discretionary activities, resulting in improved audit quality. Similarly,
when audit rotation occurs more frequently within a firm, there is a reduced level
of overfamiliarity between the auditor and the firm's directors, which decreases the
directors' inclination to engage in discretionary activities, thereby enhancing the
audit quality. These findings contradict the results of a study conducted by
Krismiaji & Sumayyah (2023), who established a positive and momentous
relationship between audit opinion and EM.
However, the outcomes of previous studies by Sule & Aronmwan (2013)
supported the outcomes of this study, indicating a negative and significant
connection between the audit switching and discretionary accrual. The studies
conducted by Jiang et al. (2019) and Okechukwu & Ene (2022) present a contrasting
view, suggesting that high extent of audit switching has a positive association with
discretionary accruals. Similarly, the studies conducted by Paputungan & Kaluge
(2018) and Salman & Setyaningrum (2023) did not find a significant relationship
between audit switching and discretionary accruals. In addition, a negative and
significant relationship exists between the audit tenure and discretionary accruals,
indicating that the audit quality tends to decline when the audit tenure exceeds the
expected period, particularly due to discretionary accruals. This finding aligns with
the studies conducted by Abedalqader et al. (2011), Okpanachi (2019), Babatolu et
al. (2016), and Gonzalez-Diaz et al. (2015) who also observed a negative and
significant association between the audit tenure and discretionary accruals.
However, in contrast, the study conducted by Hamideh et al. (2013) failed to find a
significant relationship between auditors' tenure and discretionary accruals.
Likewise, the board independence was found to have a significant and positive
influence on EM, while the firm size did not have a significant influence on EM.

Relationship between audit attributes (audit opinion, audit switching and

audit tenure) and audit fees of quoted Nigerian manufacturing firms.
A good audit report reflects the application of high-quality judgment by the
audit team in assessing the obtained evidence. Another crucial element of the

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quality of audit report is audit fees. The study discovered that there is a positive and
noteworthy connection between the audit opinion and audit fees, supported by t-
statistics and a p-value of 2.01 and 0.004, correspondingly. This suggests that
higher-quality audits are linked to higher audit fees. Firms that are eager to pay
higher audit fees are more likely to involve the services of reputable auditors, for
instance the Big 4 audit firms, to conduct their financial statement audits. Raigopal
et al. (2021) and Krismiaji & Sumayyah (2023) also discovered a noteworthy
relationship between audit fees and audit characteristics. Furthermore, both audit
switching and audit tenure were found to have a negative and significant
relationship with audit fees, as indicated by the t-statistics and p-values of –2.70,
–2.80 and 0.007, 0.005, respectively. This suggests that if the audit fees are set at a
moderate and appropriate level, the audit firm will not encounter difficulties in
resigning at the end of the agreed-upon five-year period. When audit fees are
moderate (or low), the audit firm is more likely to comply with the audit rotation
regulations, and such rotation enhances the audit quality by mitigating the risk of
close relationships between auditors and clients that could potentially lead to
accounting misstatements and fraud.
Also, a shorter tenure of the auditor reduces the likelihood of the auditor being
influenced by the directors, thereby enhancing the audit quality. This finding aligns
with the results of previous studies conducted by Sule & Aronmwan (2013),
Raigopal et al. (2021), and Setyaningrum (2023), all of which stated that a
significant connection exists between audit switching, audit fees and audit tenure.
In contrast, the studies conducted by Babatolu et al. (2016), Jiang et al. (2019), and
Okechukwu & Ene (2022) suggested that audit switching and audit tenure have a
positive and noteworthy influence on AQ. Salman & Setyaningrum (2023) fail to
find relationship between the audit rotation and AQ. Likewise, the study revealed
that board independence does not exert a significant influence on audit fees, while
the firm size has a significant influence on audit fees.

CONCLUSION

This study investigated the effects of audit attributes on earnings management

and AQ. Discretionary accruals and audit fees were employed as indicators of
earnings management and AQ, while audit opinion, audit switching, and audit
tenure were utilized to assess audit characteristics. The findings revealed that audit
characteristics have significant effects on the earnings management and audit
quality of the Nigerian manufacturing firms. Thus, this study concludes that audit
opinion, audit tenure, and audit switching are crucial factors influencing the quality
of audit reports.
The study provides several recommendations based on its findings. Firstly, it
suggests that firms should ensure that auditors maintain impartiality in their
opinions to preserve the quality of audit reports. When auditors exhibit bias in their
judgment, it can create opportunities for directors to engage in discretionary accrual
activities. Additionally, excessively high audit fees may hinder auditors from
making accurate judgments regarding the financial statements. Furthermore, this
study recommends that audit tenure and audit switching should be carried out

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promptly. Auditors should not exceed the specified audit tenure, and appropriate
rotations of auditors should be implemented. This is important because an excessive
level of familiarity between auditors and directors can influence the auditor's
judgment of the financial statements, subsequently impacting the quality of the
audit report, and it can also lead to earnings management activities.

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AUTHORS’ SHORT BIOGRAPHIES

Adebayo Olagunju is a professor of Accounting in the Department of Accounting at Osun State

University, Osogbo, Osun State Nigeria. He specialises in financial management and auditing. He
is a professional qualified chartered accountant and a member of the Institute of Chartered
Accountants in Nigeria (ICAN). He is a passionate researcher. His research interests are accounting,
financial management and auditing. He has published several papers, which have contributed greatly
to the body of knowledge in accounting.
E-mail: [email protected]

Ebenezer Foluso Oluwakayode is a lecturer in the Department of Accounting at Osun State

University, Osogbo, Osun State Nigeria. He has vast experience in taxation and auditing. He
specialises in taxation and auditing. He is a fervent researcher and a member of the Chartered
Institute of Taxation in Nigeria. He received his Master’s degree (research) in Accounting from the
University of Lagos and is currently pursuing a PhD. His research interests are taxation and auditing.
He has published several scholarly papers which have contributed greatly to the body of knowledge
in accounting.
E-mail: [email protected]

Oluwatimileyin Esther Adenle is a passionate researcher and a professional chartered accountant

who is a qualified member of the Institute of Chartered Accountants in Nigeria. She holds a Master’s
degree (research) in Accounting from the Osun State University and is currently pursuing a PhD.
She is an Assistant Lecturer in the Department of Accounting at the Osun State University, Osogbo,
Osun State. She specialises in financial management and auditing. She is a passionate researcher;
her research interests are financial management and auditing. She has published several scholarly
papers which have contributed greatly to the body of knowledge in accounting.
E-mail: [email protected]
ORCID iD: https://orcid.org/0000-0002-5914-1882

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Omololu Adex Bamigboye is a lecturer in the Department of Accounting at Osun State University,
Osogbo, Osun State Nigeria. He holds a PhD degree in Accounting from Obafemi Awolowo
University, Ile Ife, Osun State. He has vast experience in taxation and auditing. He specialises in
taxation and auditing. His research interests are taxation and auditing. He has published several
scholarly papers which have contributed greatly to the body of knowledge in accounting.
E-mail: [email protected]

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