Implications of Audit Quality on Agency Conflicts: Evidence from Nigeria
##plugins.themes.bootstrap3.article.main##
##plugins.themes.bootstrap3.article.sidebar##
Published
Jun 15, 2023
Copyright Information
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
Abstract
This study examined the link between audit quality and agency costs in Nigeria corporate environment. Specifically, the study examined the way audit quality represented by audit firm size affect agency conflicts represented by asset utilization rate, and whether timeliness of the audit report alters the nexus between audit quality and agency conflicts in Nigeria. The data were collected from seventy-three (73) listed non-financial firms who consistently published their annual reports between 2010 and 2019 out of the one hundred and twelve (112) non-financial firms listed on the Nigerian Stock Exchange as of 31st December 2020. Descriptive statistics tools of mean and standard deviation as well as correlation analysis were used for preliminary analysis while fixed effect panel regression was used for the multivariate analysis. Feasible generalize least square was used to estimate the model for robustness check in addition to the use Tobin’s Q as alternative proxy for agency conflicts. The results were obtained by controlling for firm size, firm performance, and firm age. The results of the study revealed a significant negative impact of audit quality on agency costs implying that firms audit by big four have significantly lower agency costs compared to firms audited by other audit firms. Further analysis of the results shows that the positive effect of audit report lag overwhelms the negative influence of audit firm size on agency costs suggesting that using big 4-audit firm would not mitigate agency conflict if the audit report lag is higher. These findings are robust to alternate estimation technique and proxy for agency costs. This study therefore recommends that firms should not only patronize big 4-audit firm to mitigate agency conflict, they must ensure timely audit report.
Metrics
Metrics Loading ...
##plugins.themes.bootstrap3.article.details##
Keywords
Agency CostsAudit QualityAudit Report TimelinessTobin’s QPanel Regression
References
• Afuwape, G. (2018). NSE suspends six from trading. Retrieved 26 July 2021 from https://insidebusiness.ng/nse-suspends-six-from-trading/
• Akway, I.D, and Ramadan, M. M. (2019). The role of audit quality in reducing agency costs and cost of equity capital: An empirical study on companies listed in the Egyptian Stock Exchange. Alexandria Journal of Accounting Research, 3(2), 1-45.
• Al-Mousawi, R.J., andAl-Thuneibat, A. (2011). The effect of audit quality on the earnings management activities. Dirasat: Administrative Sciences, 38(2), 614-628.
• Alluwia, F. and Sarun, A. (2018). Female directors, mechanisms for corporate governance and agency cost. International Business Education Journal 11(1), 1-15.
• Alzoubi, E. S. S. (2016). Audit quality and earnings management: evidence from Jordan. Journal of Applied Accounting Research, 17(2), 170-189.
• Amelinda, R. and Setyawan, I. R. (2020). Agency conflict control on corporate values in companies with the best GCG period 2008-2014. Advances in Social Science, Education and Humanities Research, 478, 121-127.
• Ang, J. S., Cole, R. A., and Lin, J. W. (2000). Agency costs and ownership structure. The Journal of Finance, 55(1), 81–106.
• Appolos, N. N., and Ademola, A. (2020). Financial reporting quality and shareholders’ wealth maximization: Evidence from listed companies in Nigeria. European Journal of Accounting, Auditing and Finance Research, 8(6), 1-14.
• Aras, G., and Furtuna, O.K. (2015). Does governance efficiency affect equity agency costs? Evidence from Borsa Istanbul. Emerging Markets Finance and Trade, 51(2), 84–100.
• Arrow, K. (1985). The economics of agency. In Pratt, J. and Zeckhauster, R. J. (Eds), Principals and agents: the structure of business (pp. 37-51). Boston: Harvard Business School Press.
• Ayunitha, A., Sulastri, H. W., Fauzi, M. I., Prabowo, M. A., and Nugraha, N. M. S. (2020). Does the good corporate governance approach affect agency cost? Solid State Technology, 63(4), 3760–3770.
• Bae, C., and Woo, Y. (2015). The effect of audit report lag and management discretionary report lag on analyst forecasts: Evidence from Korea. Investment Management and Financial Innovations, 12(1), 318-329.
• Barros, L. A. B. C., Bergmann, D. R., Castro, F. H. and Di Miceli da Silveira, A. (2020). Endogeneity in panel data regressions: methodological guidance for corporate finance researchers. Rev. Bras. Gest. Neg. São Paulo, 22, 437-461.
• Beaver, W. (1989). Financial reporting: An accounting revolution. New Jersey: Prentice-Hall International, Inc.
• Beshkooh, M., Soumehsarei, B., Mahmoudi, V., and Kazebabrizi, F. (2013). The Relationship between Audit Quality and Agency Cost. Journal of Basic and Applied Scientific Research, 3(2), 516-525.
• Cai, C., Hiller, D., Tian, D., and Wu, Q. (2015). Do audit committees reduce the agency costs of ownership structure? Pacific-Basin Finance Journal, 35(A), 225–240. doi:10.1016/j.pacfin.2015.01.002
• Charles, J., Stanley, C., and Charlotte, H. (2010). The imp act of audit quality on earnings management to achieve user reference points in EPS. Journal of Applied Business Research, 26(1), 19–30.
• Chen, X.C., and Yur-Austin, J.Y. (2007). Re-measuring agency costs: The effectiveness of block holders. Quarterly Review of Economics and Finance, 47, 588–601.
• Chen, H., Chen, J., Lobo, G., and Wang, Y. (2011). Effects of audit quality on earnings management and cost of equity capital: Evidence from China. Contemporary Accounting Research, 28(3), 892–920.
• Chi, C., Lisic, L., and Pevzner, M. (2011). Is enhanced audit quality associated with greater real earnings management? Accounting Horizons, 25(2), 315–335.
• Diamond, D.W., and Verrecchia, R. E. (1991). Disclosure, liquidity, and the cost of capital. Journal of Finance, 46, 1325–1359.
• Eisenhardt, K. M. (1989). Agency theory: An assessment and review. Academy of Management Review, 14(1), 57-74.
• Faisal, F., Abd Majid, M.S., and Sakir, A. (2020). Agency conflicts, firm value, and monitoring mechanisms: An empirical evidence from Indonesia. Cogent Economics and Finance, 8(1), 1-24. https://doi.org/10.1080/23322039.2020.1822018
• Fama, F. (1980). Agency problems and the theory of the firm. Journal of Political Economy, 88(2), 288–307.
• Gajevszky, A. (2015). Assessing financial reporting quality: Evidence from Romania. Audit financiar, XIII (1), 69-80
• Habbash, M., and Alghamdi, S. (2016). Audit quality and earnings management in less developed economies: The case of Saudi Arabia. Journal of Management and Governance, 1-23. doi:10.1007/s10997-016-9347-3
• Hair, J. F., Black, W. C., Babin, B. J., Anderson, R. E., and Tatham, R. L. (2006). Multivariate data analysis. Upper Saddle River, NJ: Pearson Prentice Hall.
• Henry, D. (2010). Agency costs, ownership structure and corporate governance compliance: A private contracting perspective. Pacific-Basin Finance Journal, 18(1), 24-46. https://doi.org/10.1016/j.pacfin.2009.05.004
• Houge, M. N., Ahmed, K., and Zijl, T. (2017). Audit quality, earnings management, and cost of equity capital: Evidence from India. International Journal of Auditing, 21 (2), 177 189. https://english.mubasher.info/markets/EGX
• Holtz, L., and SarloNeto, A. (2014). Effects of board of directors’ characteristics on the quality of accounting information in Brazil. Revista Contabilidade and Financas, 25(66), 255- 266.
• Hussain, A., Aslam, H. M. S. I., Noor, U., Zafar, S., Saleem, A., and Hani, U. (2020). Impact of corporate political connections and audit quality on agency cost: Evidence from Pakistan. International Journal of Management, 11(8), 1533–1549. https://doi.org/10.34218/IJM.11.8.2020.138
• Ibekwe, I. (2021). Blockholding and agency cost: evidence from Nigeria. International Journal of Emerging Markets, (preprint). https://doi.org/10.1108/IJOEM-08-2018-0445
• Jensen, M., and Meckling, W. (1976). The theory of the firm: Managerial behaviour, agency costs and ownership structure. Journal of Financial Economics, 3, 305–360.
• Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. The American Economic Review, 76(2), 323-329.
• Jurkus, A. F., Park, J. C. and Woodward, L. S. (2011). Women in top management and agency costs. Journal of Business Research, 64(24). https://doi.prg/10.1016/j.busres.2009.12.010
• Kanagaretnam, A. (2010). Auditor reputation and earnings management: International evidence from banking industry. Journal of Banking and Finance, 34(10), 2318–2337.
• Kennedy, P. (2008). A guide to econometrics (6th ed.). Malden: Blackwell Publishing.
• Khan, A., Khan, A., Mihret, D. G., Mihret, D. G., Muttakin, M. B., and Muttakin, M. B. (2016). Corporate political connections, agency costs and audit quality. International Journal of Ac-counting and Information Management, 24(4), 357-374.
• Lai, S. M., and Liu, C. L. (2018). The effect of auditor characteristics on the value of diversification. AUDITING: A Journal of Practice & Theory (2018) 37 (1): 115–137.
• Loderer, C., and Waelchli, U. (2010). Firm age and performance. MPRA Paper 26450, University Library of Munich, Germany.
• Lin, J., and Hwang, M. (2010). Audit quality, corporate governance, and earnings management: A metanalysis. International Journal of Auditing, 10, 1099–1123.
• Luo, J., Li, X., and Chen, H. (2018). Annual report readability and corporate agency costs. China Journal of Accounting Research, 11, 187-212
• Musa, I. (2020). NSE cautions investors on Thomas Wyatt over deficient filling. Retrieved 26 July 2021 from https://insidebusiness.ng/9896/nse-cautions-investors-on-thomas-wyatt-over-deficient-trading/
• Nguye, A., Doan, D., and Nguyen, L. (2020). Corporate Governance and Agency Cost: Empirical Evidence from Vietnam. Risk and Financial management, 13, 1-15
• Okaro, S. C., and Okafor, G. O. (2013). Drivers of audit failure in Nigeria: Evidence from Cadbury Nigeria PLC. Research Journal of Finance and Accounting, 4(6), 14-17.
• Piot, C. (2001). Agency costs and audit quality: Evidence from France. European Accounting Review, 10(3), 461-499.http://dx.doi.org/10.1080/713764630
• Rashid, A. (2015). Revisiting agency theory: Evidence of board independence and agencycost from Bangladesh. Journal of Business Ethics, 130(1), 181–198.
• Ross, S. (1973). The economic theory of agency: The principal’s problem. The AmericanEconomic Review, 63(2), 134-139. https://www.jstor.org/stable/1817064
• Sitanggang, R. P., Karbhari, Y., Matemilola, B. T., and Ariff, M. (2019). Audit quality and real earnings management: Evidence from the UK manufacturing sector. International Journal of Managerial Finance, 16(2), 165-181.
• Spence, M. and Zeckhauser, R. (1971). Insurance, information and individual action. American Economic Review, 61, 380-387.
• Tuan, T. M., Nha, P. V., Long, T. P., and Phuong, T. T. (2019). Impact of agency costs on firm performance: Evidence from Vietnam. Organizations and Markets in Emerging Economics, 10(2), 294-309. doi:DOI: https://doi.org/10.15388/omee.2019.10.15
• Umobong, A., and Agburuga, U. T. (2019). Agency cost of equity and growth rate in relation to returns on capital employed and high and low leveraged firms in Nigeria. International Journal of Economics, Business and Management Studies, 6(2), 318–337. https://doi.org/10.20448/802.62.318.337
• Watts, R.L., andZimmerman,J. L. (1983). Positive Accounting Theory. New Jersey: Prentice Hall.
• Wellalage, N.H., and Locke, S. (2011). Agency costs, ownership structure and corporate governance mechanisms: A case study in New Zealand unlisted small companies. International Research Journal of Finance and Economics, 78, 178–192.
• Zhang, L., Zhang, Z., Jia, M., and Ren, Y. (2020). A tiger with wings: CEO–board surname ties and agency costs. Journal of Business Research, 118(2020), 271-285.
• Zulvia, Y., and Serly, V. (2020). Capital structure, ownership structure, and firm size: It’s Implication on agency cost (A Study in Indonesia Manufacturing Company). Advances in Economics, Business and Management Research, 124, 873–882.
• Akway, I.D, and Ramadan, M. M. (2019). The role of audit quality in reducing agency costs and cost of equity capital: An empirical study on companies listed in the Egyptian Stock Exchange. Alexandria Journal of Accounting Research, 3(2), 1-45.
• Al-Mousawi, R.J., andAl-Thuneibat, A. (2011). The effect of audit quality on the earnings management activities. Dirasat: Administrative Sciences, 38(2), 614-628.
• Alluwia, F. and Sarun, A. (2018). Female directors, mechanisms for corporate governance and agency cost. International Business Education Journal 11(1), 1-15.
• Alzoubi, E. S. S. (2016). Audit quality and earnings management: evidence from Jordan. Journal of Applied Accounting Research, 17(2), 170-189.
• Amelinda, R. and Setyawan, I. R. (2020). Agency conflict control on corporate values in companies with the best GCG period 2008-2014. Advances in Social Science, Education and Humanities Research, 478, 121-127.
• Ang, J. S., Cole, R. A., and Lin, J. W. (2000). Agency costs and ownership structure. The Journal of Finance, 55(1), 81–106.
• Appolos, N. N., and Ademola, A. (2020). Financial reporting quality and shareholders’ wealth maximization: Evidence from listed companies in Nigeria. European Journal of Accounting, Auditing and Finance Research, 8(6), 1-14.
• Aras, G., and Furtuna, O.K. (2015). Does governance efficiency affect equity agency costs? Evidence from Borsa Istanbul. Emerging Markets Finance and Trade, 51(2), 84–100.
• Arrow, K. (1985). The economics of agency. In Pratt, J. and Zeckhauster, R. J. (Eds), Principals and agents: the structure of business (pp. 37-51). Boston: Harvard Business School Press.
• Ayunitha, A., Sulastri, H. W., Fauzi, M. I., Prabowo, M. A., and Nugraha, N. M. S. (2020). Does the good corporate governance approach affect agency cost? Solid State Technology, 63(4), 3760–3770.
• Bae, C., and Woo, Y. (2015). The effect of audit report lag and management discretionary report lag on analyst forecasts: Evidence from Korea. Investment Management and Financial Innovations, 12(1), 318-329.
• Barros, L. A. B. C., Bergmann, D. R., Castro, F. H. and Di Miceli da Silveira, A. (2020). Endogeneity in panel data regressions: methodological guidance for corporate finance researchers. Rev. Bras. Gest. Neg. São Paulo, 22, 437-461.
• Beaver, W. (1989). Financial reporting: An accounting revolution. New Jersey: Prentice-Hall International, Inc.
• Beshkooh, M., Soumehsarei, B., Mahmoudi, V., and Kazebabrizi, F. (2013). The Relationship between Audit Quality and Agency Cost. Journal of Basic and Applied Scientific Research, 3(2), 516-525.
• Cai, C., Hiller, D., Tian, D., and Wu, Q. (2015). Do audit committees reduce the agency costs of ownership structure? Pacific-Basin Finance Journal, 35(A), 225–240. doi:10.1016/j.pacfin.2015.01.002
• Charles, J., Stanley, C., and Charlotte, H. (2010). The imp act of audit quality on earnings management to achieve user reference points in EPS. Journal of Applied Business Research, 26(1), 19–30.
• Chen, X.C., and Yur-Austin, J.Y. (2007). Re-measuring agency costs: The effectiveness of block holders. Quarterly Review of Economics and Finance, 47, 588–601.
• Chen, H., Chen, J., Lobo, G., and Wang, Y. (2011). Effects of audit quality on earnings management and cost of equity capital: Evidence from China. Contemporary Accounting Research, 28(3), 892–920.
• Chi, C., Lisic, L., and Pevzner, M. (2011). Is enhanced audit quality associated with greater real earnings management? Accounting Horizons, 25(2), 315–335.
• Diamond, D.W., and Verrecchia, R. E. (1991). Disclosure, liquidity, and the cost of capital. Journal of Finance, 46, 1325–1359.
• Eisenhardt, K. M. (1989). Agency theory: An assessment and review. Academy of Management Review, 14(1), 57-74.
• Faisal, F., Abd Majid, M.S., and Sakir, A. (2020). Agency conflicts, firm value, and monitoring mechanisms: An empirical evidence from Indonesia. Cogent Economics and Finance, 8(1), 1-24. https://doi.org/10.1080/23322039.2020.1822018
• Fama, F. (1980). Agency problems and the theory of the firm. Journal of Political Economy, 88(2), 288–307.
• Gajevszky, A. (2015). Assessing financial reporting quality: Evidence from Romania. Audit financiar, XIII (1), 69-80
• Habbash, M., and Alghamdi, S. (2016). Audit quality and earnings management in less developed economies: The case of Saudi Arabia. Journal of Management and Governance, 1-23. doi:10.1007/s10997-016-9347-3
• Hair, J. F., Black, W. C., Babin, B. J., Anderson, R. E., and Tatham, R. L. (2006). Multivariate data analysis. Upper Saddle River, NJ: Pearson Prentice Hall.
• Henry, D. (2010). Agency costs, ownership structure and corporate governance compliance: A private contracting perspective. Pacific-Basin Finance Journal, 18(1), 24-46. https://doi.org/10.1016/j.pacfin.2009.05.004
• Houge, M. N., Ahmed, K., and Zijl, T. (2017). Audit quality, earnings management, and cost of equity capital: Evidence from India. International Journal of Auditing, 21 (2), 177 189. https://english.mubasher.info/markets/EGX
• Holtz, L., and SarloNeto, A. (2014). Effects of board of directors’ characteristics on the quality of accounting information in Brazil. Revista Contabilidade and Financas, 25(66), 255- 266.
• Hussain, A., Aslam, H. M. S. I., Noor, U., Zafar, S., Saleem, A., and Hani, U. (2020). Impact of corporate political connections and audit quality on agency cost: Evidence from Pakistan. International Journal of Management, 11(8), 1533–1549. https://doi.org/10.34218/IJM.11.8.2020.138
• Ibekwe, I. (2021). Blockholding and agency cost: evidence from Nigeria. International Journal of Emerging Markets, (preprint). https://doi.org/10.1108/IJOEM-08-2018-0445
• Jensen, M., and Meckling, W. (1976). The theory of the firm: Managerial behaviour, agency costs and ownership structure. Journal of Financial Economics, 3, 305–360.
• Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. The American Economic Review, 76(2), 323-329.
• Jurkus, A. F., Park, J. C. and Woodward, L. S. (2011). Women in top management and agency costs. Journal of Business Research, 64(24). https://doi.prg/10.1016/j.busres.2009.12.010
• Kanagaretnam, A. (2010). Auditor reputation and earnings management: International evidence from banking industry. Journal of Banking and Finance, 34(10), 2318–2337.
• Kennedy, P. (2008). A guide to econometrics (6th ed.). Malden: Blackwell Publishing.
• Khan, A., Khan, A., Mihret, D. G., Mihret, D. G., Muttakin, M. B., and Muttakin, M. B. (2016). Corporate political connections, agency costs and audit quality. International Journal of Ac-counting and Information Management, 24(4), 357-374.
• Lai, S. M., and Liu, C. L. (2018). The effect of auditor characteristics on the value of diversification. AUDITING: A Journal of Practice & Theory (2018) 37 (1): 115–137.
• Loderer, C., and Waelchli, U. (2010). Firm age and performance. MPRA Paper 26450, University Library of Munich, Germany.
• Lin, J., and Hwang, M. (2010). Audit quality, corporate governance, and earnings management: A metanalysis. International Journal of Auditing, 10, 1099–1123.
• Luo, J., Li, X., and Chen, H. (2018). Annual report readability and corporate agency costs. China Journal of Accounting Research, 11, 187-212
• Musa, I. (2020). NSE cautions investors on Thomas Wyatt over deficient filling. Retrieved 26 July 2021 from https://insidebusiness.ng/9896/nse-cautions-investors-on-thomas-wyatt-over-deficient-trading/
• Nguye, A., Doan, D., and Nguyen, L. (2020). Corporate Governance and Agency Cost: Empirical Evidence from Vietnam. Risk and Financial management, 13, 1-15
• Okaro, S. C., and Okafor, G. O. (2013). Drivers of audit failure in Nigeria: Evidence from Cadbury Nigeria PLC. Research Journal of Finance and Accounting, 4(6), 14-17.
• Piot, C. (2001). Agency costs and audit quality: Evidence from France. European Accounting Review, 10(3), 461-499.http://dx.doi.org/10.1080/713764630
• Rashid, A. (2015). Revisiting agency theory: Evidence of board independence and agencycost from Bangladesh. Journal of Business Ethics, 130(1), 181–198.
• Ross, S. (1973). The economic theory of agency: The principal’s problem. The AmericanEconomic Review, 63(2), 134-139. https://www.jstor.org/stable/1817064
• Sitanggang, R. P., Karbhari, Y., Matemilola, B. T., and Ariff, M. (2019). Audit quality and real earnings management: Evidence from the UK manufacturing sector. International Journal of Managerial Finance, 16(2), 165-181.
• Spence, M. and Zeckhauser, R. (1971). Insurance, information and individual action. American Economic Review, 61, 380-387.
• Tuan, T. M., Nha, P. V., Long, T. P., and Phuong, T. T. (2019). Impact of agency costs on firm performance: Evidence from Vietnam. Organizations and Markets in Emerging Economics, 10(2), 294-309. doi:DOI: https://doi.org/10.15388/omee.2019.10.15
• Umobong, A., and Agburuga, U. T. (2019). Agency cost of equity and growth rate in relation to returns on capital employed and high and low leveraged firms in Nigeria. International Journal of Economics, Business and Management Studies, 6(2), 318–337. https://doi.org/10.20448/802.62.318.337
• Watts, R.L., andZimmerman,J. L. (1983). Positive Accounting Theory. New Jersey: Prentice Hall.
• Wellalage, N.H., and Locke, S. (2011). Agency costs, ownership structure and corporate governance mechanisms: A case study in New Zealand unlisted small companies. International Research Journal of Finance and Economics, 78, 178–192.
• Zhang, L., Zhang, Z., Jia, M., and Ren, Y. (2020). A tiger with wings: CEO–board surname ties and agency costs. Journal of Business Research, 118(2020), 271-285.
• Zulvia, Y., and Serly, V. (2020). Capital structure, ownership structure, and firm size: It’s Implication on agency cost (A Study in Indonesia Manufacturing Company). Advances in Economics, Business and Management Research, 124, 873–882.
How to Cite
Olowookere, Johnson Kolawole, Quadri Adebayo Lawal, and Akeem Adetunji Siyanbola. 2023. “Implications of Audit Quality on Agency Conflicts: Evidence from Nigeria”. Studies in Business and Economics 26 (1):5-27. https://doi.org/10.29117/sbe.2023.0139.
Section
Articles