Audit Quality and Earnings Management of Listed Oil Marketing Companies in Nigeria

Abstract

We investigate the impact of audit quality on earnings management (EM) of 8 oil marketing companies listed on the Nigerian Stock Exchange (NSE) from 2004 to 2013.We focus on oil marketing companies because of the alleged large scale financial misrepresentations associated with the Nigerian oil sector. We expect a significant negative relationship between audit quality and EM which is represented by discretionary accruals estimated by the modified Jones Model.  We use audit firm size, auditor industry specialization and auditor tenure as proxies for audit quality. Contrary to expectations, our results reveal that both audit firm size and auditor industry specialization have negative but insignificant impact on EM of the sampled companies. We, however, find evidence of a significant negative impact of auditor tenure on EM which is consistent with our a priori expectations.  We  recommend  the removal of the restriction placed on the tenure of auditors to a maximum of nine consecutive years by the Securities and Exchange Commission (SEC) because of its potential to constrain earnings management practices of Nigerian listed companies.

Keywords: Audit Quality, Earnings Management,  Oil Marketing Companies, Nigeria.